24 September 2011

Yes Bank: Focusing on liability ::CLSA

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Focusing on liability
Presenting at IF, Mr. Rajat Monga (CFO, Yes Bank) highlighted that over
the next five years, strengthening of the liability franchise will be bank’s
biggest focus area. This will be achieved through expansion in branches
as well as launch of new products in the CASA segment. The bank targets
30% Cagr in loans over FY11-15, but growth will be more broad-based
with share of retail and SME lending rising. Bank has been able to sustain
high asset quality standards and as per management, recent trends do
not indicate a material sign of deterioration.
Liability is #1 priority under Version 2 of growth plans
Management highlighted that under the bank’s growth strategy for the next
five years, strengthening of liability franchise will get the highest attention.
Bank plans to improve the share of low cost CASA deposits by expanding
branches and relationships with the corporate and retail clients. In the current
account segment, bank plans to focus on 12 sectors and also scale-up its
market share in transaction banking. In the savings account segment, bank
plans to grow through corporate salary account relationships, focus on high
net worth clients and non-resident Indians. Management believes that the
CASA efficiency of branches is at an inflexion point and a significant
improvement is likely as the branch network reaches 350-400 (as on Jun-11
the branch network was at 255).
Healthy and broad-based asset growth
The bank targets to deliver 30% Cagr in loans over FY11-15 with loan book
reaching Rs1tn. Loan book will get more broad-based with share of branchbanking
loans (SME and retail) rising from current level of 12%, while the
share of large corporate lending is likely to decline from 65%. Fee income will
remain a key component of total income and the bank is focusing to increase
the share of transaction banking fees and higher cross-selling to clients.
Asset quality holding-up
Management highlighted that in spite a strong 54% Cagr in loans over past
three years, its stressed assets are among the lowest (gross NPA at 17bps of
loans and restructured loans of 26bps). Moreover, coverage ratios are also
among the highest. The rise in interest rates and some slowdown in the
economy have not severely impacted the quality of loans. In order to support
growth in lending to SME and retail clients and maintain strong asset quality,
bank plans to make further investment in risk management departments.

JPMorgan, GVK - Hancock transaction: A good deal, we believe, provided promoter 'assertion' comes true

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 The Hancock deal structure. GVK Coal Developers (GVKCD), a GVK
group company (and step down subsidiary of GVKNRPL), has stated it
plans to acquire coal resources of ~7.9bn MT (as per JORC, 5800-
6000Kcal/kg) from Hancock Prospecting, in Galilee Basin, Queensland,
Australia. GVK Coal Infrastructure, a step down subsidiary of GVKNRPL
will have 100% ownership of (a) the proposed 495km rail project
connecting to Abbot Point, and (b) the proposed port expansion project (to
60MTPA) at Abbot Point. The listed GVKPIL will own 10% of GVKCD,
with an option to raise its stake to 49%. They will have an option to take a
‘lead role’ in GVK Coal Infra Pte Ltd (which owns the rail and port
project), on mutually agreed terms with GVKNRPL. GVKPIL will also
have an option to enter into LT coal purchase contracts of up to 20MTPA.
Please see figure on deal structure (Figure 1).
 Deal funding: The cost of acquisition is around US$1.26bn, payable in a
phased manner to the Hancock Group with US$500mn (tied up, 3month
Libor+500bps) payable at Closing (~end-Sep-11). Of the balance amounts,
US$200mn will be paid one year from Closing and US$560mn will be paid
on financial close for the project (anticipated to be in 2012) but in any event,
no later than three years from Closing. GVKPIL is to provide a Corporate
Guarantee for 49% of the outstanding facility amount and pledge shares of
its energy and transportation subsidiaries.
 Risks for GVKPIL: In a conference call held on Saturday, management
clarified that GVKPIL’s liability is limited to their equity exposure in
GVKCD, i.e. 10%. The investment by GVKPIL does not obligate it to
commit equity for development of assets in future, which could have
resulted in dilution in the listed company. The Corporate Guarantee to the
extent of 49% provided by GVKPIL is a security against acquisition lending
taken at group level. With GVKP IN market cap of ~US$575mn, the
guarantee is less than 1x (US$1.26bn*0.49=US$617mn). GVKPIL will have
to bear a quarterly interest obligation of just US$0.7mn initially
(=US$500mn payment via debt at closing*5.5% interest rate*10% GVKP’s
share*1/4 for each quarter).
 A good deal, we believe, provided the Promoter 'assertion' comes true:
Mr. GV Sanjay Reddy, Vice Chairman, asserted that there is a significant
amount of interest from financial investors, coal traders, IPPs and
infrastructure companies to pick up a minority stake in the coal/rail and port
development projects. As per management, Phase-I for development of
30MTPA production capacity at Alpha (capex of ~US$5bn), and rail + port
infrastructure (~US$5bn) will require total capex of US$10bn. The
Promoter ‘assertion’ is that they will be able to raise at least US$1bn
over the next 3-6 months from interested parties in GVKCD.
 BOTTOMLINE: Subject to promoter’s ability to raise equity in the coal
projects to part fund the acquisition and kick start development, we see the
overall deal in a positive light for GVK Power and Infrastructure.

Upgrade IT services:: Credit Suisse,

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● We go 270 bp overweight on the IT services sector with TCS and
Infosys, funding it by reducing our Overweight on
staples/discretionary by selling some of ITC and Bajaj Auto.
● With risk aversion at levels similar to the ‘Lehman moment’ (Fig.
1), we continue to believe it is time to selectively add risk to the
portfolio. However, given the macro uncertainty, we also believe it
is prudent to limit the amount of risk.
● IT services stocks have underperformed significantly since
November 2010 and are now available at a significant 17%
discount to long-term multiples (Fig. 2). During this period a
portfolio of ‘safe stocks’ (Stocks of safety, 8 August 2011) has
outperformed the Nifty by more than 30% (Fig. 3).
● In his note today, CS analyst Anantha Narayan argues: (1) current
valuations discount very modest long-term revenue growth even
after assuming a 750 bp margin contraction (10-12% FY15-21E
for both TCS and Infy), (2) 15% revenue growth is easily
sustainable given low penetration of offshore services in global IT,
and (3) big IT companies can maintain 20%-plus EBIT margins.


we continue to believe it is time to selectively add risk to the portfolio
(Time for some selective risk-taking, 5 September 2011). However,
given the macro uncertainty, we also believe it is prudent to limit the
amount of risk. We therefore go 270 bp overweight on the IT services
sector with TCS and Infosys, funding it by reducing our Overweight on
staples by selling some of ITC and Bajaj Auto.
The India technology sector has underperformed significantly since
November 2010 and is now available at a significant 17% discount to
its long-term multiples (Fig. 2). During this period a portfolio of ‘safe
stocks’ (Stocks of safety, 8 August 2011) has outperformed the Nifty
by more than 30% (Fig. 3).
In his note today, CS analyst Anantha Narayan sets the buy
argument: (1) current valuations discount a very modest long-term
revenue growth even after assuming a 750 bp margin contraction (10-
12% FY15-21E for both TCS and Infy), (2) 15% revenue growth is
easily sustainable given low penetration of offshore services in global
IT, and (3) the big IT companies can maintain 20%-plus EBIT margins.
He therefore believes under a base-case scenario of a sub-par US
economy, IT services stocks provide upside, and even if a recession
does unfold, the underperformance may not be material.

Credit Suisse- Utilities:: Rising instances of payment delays from SEBs is concerning

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● Since the initiation of power sector reforms, introduced through
the Electricity Act, in 2003, until recently there have been very few
instances of delayed payments from SEBs to power gencos/
transcos. But, over the past year, such instances have increased.
● Important among those are TN delaying payment of Rs12 bn to
wind power producers, expanding receivables’ cycle for Powergrid
and the recent delay in payment of Rs4.8 bn by the Haryana SEB
to NTPC.
● Certainly, the payment security mechanism introduced through the
tripartiate agreement, escrow account and curtailment of power
supply to erring SEBs has worked so far; but we are concerned
about increasing instances of SEBs delaying payments as this
could create a cascading impact on the power sector value chain.
● While some SEBs have finally started to hike power tariffs, we
believe the quantum of these hikes are inadequate to eliminate
SEB losses. We continue to maintain our negative view for the
sector led by the risk from deteriorating SEB finances and the
structural risk emanating from domestic fuel deficits.
Valuation metrics
Company Ticker Rating Price Year P/E (x) P/B (x)
Local Target T T+1 T+2 T+1
Adani Power ADAN.BO N 86 108 03/11 10.7 5.2 2.5
JPVL JAPR.BO N 33 42 03/10 47.1 18.1 2.2
KSK KSKE.BO O 105 166 03/10 29.1 16.6 1.6
Lanco LAIN.BO N 18 26 03/10 11.6 9.5 0.9
NTPC NTPC.BO N 172 186 03/10 15.9 14.4 2.1
NHPC NHPC.NS N 24 27 03/10 15.1 13.6 1.2
Reliance Power RPOL.BO U 79 110 03/10 29.7 35.0 1.3
Tata Power TTPW.BO N 984 1,217 03/10 12.2 10.2 1.6
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM
Source: Company data, Credit Suisse estimates
Instances of delayed payments from SEBs are rising …
Since the initiation of power sector reforms, introduced through the
Electricity Act, in 2003, until recently there have been very few
instances of delayed payments from SEBs to the power generating/
transmitting companies.
However, over the past year, instances of delayed payments by the
SEBs have been increasing as evident from the following instances:
• As per media reports, the Tamil Nadu SEB has delayed payments
of Rs12 bn to several wind power producers in Tamil Nadu during
August 2010 to May 2011. On behalf of the aggrieved wind power
producers, the Indian Wind Power Association has written to the
Prime Minister seeking relief in this matter.
• According to Powergrid’s recent annual report, its receivables cycle
has been extending since the beginning of FY12 (an aberration
from the trend witnessed until FY11). Powergrid used to realise its
receivables within 30 days until FY11, but, recently, discoms of
Delhi, Tamil Nadu, Bihar and some North Eastern states are
availing 60 days grace period for clearing their dues (allowed under
the CERC regulations). More importantly, discoms of Delhi, Daman
& Diu and certain North Eastern states have now delayed payments
beyond the available credit period of 60 days.
• A recent media report suggests that the Haryana SEBs have
delayed payments of Rs4.8 bn to NTPC for the period of August-
September 2011. NTPC has now issued a final notice to the SEBs
asking them to clear its dues by 4 October 2011, failing which it
would recover its payment under the provisions of Tripartiate
Agreement (TPA) or curtail its power supplies.
… although the gencos’ entitlement to curtail power
supply/invoke TPA/escrow mechanisms have worked well
so far
In order to secure payments to the generating companies, SEBs are
currently required to open and maintain revolving letters of credit (LC)
equal to 105% of their average monthly billing over the past 12
months. While SEBs are offered 2% discount on their dues if they
make a payment within 30 days of billing; a delay in payment over 60
days of billing entitles the central power generating companies to
curtail power supply by 5% (10% for payment delayed over 75 days).
Non-payment of dues within 90 days of billing entitles the central
power generating companies (such as NTPC) to recover its dues from
the ‘central plan assistance’ account of the respective state
government with the RBI. Private sector generating companies have
similar arrangements through an escrow mechanism.
Power tariff hikes though welcome are inadequate, need to
accelerate SEB reforms
We are concerned about increasing instances of delayed payments by
the SEBs as delay in payments to the genco/transcos could have a
cascading impact on the entire power sector value chain. While some
SEBs have finally started to raise power tariffs (Figure 1), which is a
welcome step towards power distribution reforms, we believe the
quantum of these hikes are inadequate in comparison to the tariff
hikes required to eliminate SEB losses.
Figure 1: Summary of tariff hikes taken versus required for top six cash
loss-making SEBs
(based on FY09 Cash losses AT&C Tariff hike required to Tariffs hiked
audited numbers) (Rs bn) losses (%) eliminate cash losses recently
Rajasthan (73) 30% 102% 20%
Uttar Pradesh (72) 40% 33% 13%*
Tamil Nadu (66) 15% 41% 9%^
Madhya Pradesh (44) 61% 37% 6%
Maharashtra (26) 31% 3% 3%#
Jammu & Kashmir (14) 69% 142% 38%
*Tariff hiked in FY10, ^hiked in FY11, #hike proposed.
Source: PFC, Media reports, Credit Suisse estimates
While most power distribution sector reforms are currently focussed
on cutting AT&C losses, as highlighted in our detailed report dated
April 2011, SEB risk high for merchant projects, we believe that tariff
hikes are a must for SEB reforms. We estimate SEB losses to reach
about US$20bn by FY15 even after assuming a 5% tariff hike (on all
India basis) and 1% AT&C loss reduction annually over FY09-17. Led
by the risk from deteriorating SEB finances and the structural risk
emanating from domestic fuel deficits, we continue to maintain our
negative view for the India Power utilities sector



India Strategy: IF 2011 – What to look for?CLSA

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IF 2011 – What to look for?
IF 2011 will see a large contingent of 17 Indian corporates, representing
US$325bn in market cap. The Indian market has underperformed peers
YTD due to concerns on the investment slowdown and the messy political
scenario. Consumption has, for most part, remained strong, but are
surprises around the corner? The longer-term story for the domesticdriven
India market remains strong and the insights from meetings will
help discern winners and losers.
Consumption growth is unaffected, for now
Despite the inflationary pressures, c.12%+ wage inflation has propped-up
consumption demand. Little wonder that consumption plays like Hindustan
Unilever, ITC, noted for their pricing power, have been large outperformers.
Indeed pricing power will be the key, as consumer markets will inevitably feel
the impact of a slower growth trajectory and moderation in hiring
momentum; The outperformance of the Bharti Airtel stock reflects optimism
that India's leading mobile service operator Bharti will benefit from the
cessation of price wars in the industry. As chairman of Reliance Comm, Mr
Ambani’s perspective on this issue should not be missed. An interesting
laggard in the consumption space has been United Spirits but we believe that
concerns on higher raw material prices are well priced in. Hear about
potential cost improvement measures likely playing out in 2HFY12 from the
horse’ mouth.
Investment slowdown is clearly visible
One of the key reasons for Indian markets underperformed peers over the
last 12 months has been concerns on investment slowdown. Environmental
clearances / raw material availability issues have been the primary reason.
IDFC, one of the leading infrastructure financiers has been impacted but
continues to guide for a robust 15-20% loan growth, hear them out to know
why. Project delays have impacted growth outlook for Jindal Steel & Power,
however, Tata Steel and Adani Power have seen a relatively better execution.
Adani group also operates a large port with sufficient land parcel in one of
India’s most prosperous state Gujarat and will be a beneficiary of the
proposed land acquisition bill.
Private sector banks face much less asset quality pressures
We have four among the largest private sector banks viz. ICICI Bank, HDFC
Bank, Axis Bank and Yes Bank presenting at the forum. Slowing economic
growth will likely impact credit growth and asset quality. However, we believe
that the higher CASA ratio private sector banks are much better placed to
defend margins. Also, we believe that the asset concerns not as much as that
for public sector banks.
Don’t miss the big daddies
Reliance Industries – the largest Indian corporate has been an underperformer
due to concerns on lower gas production at KG-D6 as well as regulatory
pressures. We believe that the worst now behind. DLF– the largest property
company is all set to offload certain non-core assets to make balance sheet
leaner. Tata Consultancy – the largest IT services company has now become
the margin and growth leader in the sector but currently impacted due to the
slowdown in the developed world.

BHEL: TG bulk tender - aggressive bids: CLSA

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TG bulk tender - aggressive bids
BGR-Hitachi has emerged as the L1 bidder for NTPC’s 9x800MW TG bulk
tender and should get orders for two projects (4-5 units). Its adjusted bid
(~Rs10m/MW) appears aggressive when compared with BHEL’s earlier
TG bid for NTPC’s Barh project (~Rs11m/MW) and Bharat Forge-Alstom’s
bid for NTPC’s 660MW TG tender. BHEL can get order for one project (2-3
units) if it matches BGR’s price. Either L&T or JSW-Toshiba will be the L3
in that case, and should get the order for the remaining one project. L&T
and BGR are confident of earning double digit Ebitda margins on these
projects. BGR’s claim appears unrealistic, given low local manufacturing.
BGR may get 4-5 units; BHEL is L2; L&T or JSW Energy is L3
BGR has emerged as the L1 bidder for NTPC’s 9x800MW TG set bulk tender,
quoting a price (adjusted for technical and commercial differences) of
~Rs73bn (Rs10.1m/MW). BHEL will be considered the L2 bidder and awarded
one project (two or three units; Rs16-25bn), if it agrees to match the L1 bid.
It seems there is some confusion on whether L&T or JSW-Toshiba is L3 and
who will get the order for the remaining one project.
Bidding for TG is aggressive; bidders do not think so…
BGR’s bid is ~10% lower than BHEL’s bid for NTPC’s Barh project
(~Rs11m/MW); it is also lower than Bharat Forge-Alstom’s (L1) bid for NTPC’s
11x660MW TG tender. BGR management believes that the company can still
generate 10% PBT margin (implying at least 15% Ebitda margin) on the
project. L&T is also confident of earning double digit Ebitda margin. L&T will
have higher local manufacturing compared to BGR and thus lower costs. L&T’s
target appears achievable; that of BGR looks unrealistic.
BHEL’s margins on the TG project could be lower than usual
Given that equipment order flow has slowed down over the last few months,
we expect BHEL to match the L1 bid and take the order for 2-3 units. If L&T’s
target of 12% margins is achievable, we believe BHEL should be able to earn
15-18% margins, lower than our estimate of 18.6% margins for FY12. This
will be to partly compensated by sensible bidding for the boiler tender
(Doosan L1; Rs16.4m/MW; c.5% higher than BHEL’s earlier boiler bid for the
1,600MW Krishnapatnam plant). We believe that BGR’s bids will be more
sensible going forward (like L&T who had bid aggressively to get a foothold in
the market and has been bidding sensibly thereafter). BGR’s manufacturing
facility is largely debt funded and it cannot afford to continue bidding
aggressively. BHEL has substantial competitive advantages in terms of
economies of scale and high localisation (which are accepted by competitors
as well) and will continue to get margin premium over competitors.

Bharat Forge: Risks rising :CLSA

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Risks rising
Bharat Forge is exposed to the cyclical CV markets in India, Europe and
the US, creating the risk of a slowdown in top line growth. While the
company has diversified its revenue base, restructured overseas
businesses and reduced leverage since the previous downturn, the risk of
earnings disappointments remains elevated. We have cut our FY12-13
EPS by 13-26% to reflect more a cautious outlook for the overseas
subsidiaries and the standalone business. While we admire Bharat Forge
for its core manufacturing capabilities and diversified business model,
risks remain to the downside for now. Downgrade to U-PF from BUY.
Revenue base exposed to risky end markets
In FY11, 42% of Bharat Forge’s revenues came from subsidiaries with a bulk
of this coming from operations in Europe, the US and China. While these did
not contribute meaningfully to profits (9% of FY11 Ebitda), these businesses
had seen deeply negative profits during the last downturn (Ebitda margin was
-6.7% in FY10). Even within the profitable standalone business, 38% of FY11
revenues came from exports to the US and Europe, while the domestic
business remains geared to the domestic CV market.
Previous experience suggest vulnerability to cycles
Bharat Forge’s experience in previous downturns suggests that the business is
cyclical. The standalone PBT (pre-exceptional) declined 52% in FY00-02 and
44% in FY07-10, coinciding with downturns in the Indian or US CV markets.
The overseas businesses, which were acquired in 2004-06, saw Ebitda shrink
from Rs1.82bn in FY08 to a loss Rs0.98bn in FY10.
Less exposed now but still vulnerable
Three key changes within the company prevent Bharat Forge from being as
vulnerable as the last downturn: lower gearing, restructuring in overseas
subsidiaries and a growing non-auto business. As such, the company should
not see a repeat of FY09-10, while the new power and capital goods ventures
create medium term potential. However, earnings risks remain elevated given
high dependence on cyclical end markets.
Downgrade earnings; U-PF from BUY earlier
We have downgraded our estimates for the overseas businesses, expecting a
breakeven performance for FY12 but a loss for FY13 as the European
businesses struggle. We have also trimmed forecasts for the standalone
business for FY13 to reflect more moderate growth in the auto business (7%
cut in PAT). This drives a 13-26% decline in consolidated EPS. We have
downgraded our valuation to Rs280 (7x EV/Ebitda, 13x PE; ex-JVs). While the
stock has underperformed the CNX Midcap by 7% in YTD, the risk to earnings
will likely continue to overhang the stock. We downgrade to U-PF from BUY.

HDFC Bank: Balancing growth and quality ::CLSA

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Balancing growth and quality
Presenting at IF, Mr. Aditya Puri (MD, HDFC Bank) and Mr. P Sukthankar
(ED) highlighted that credit growth is showing mixed signs- while some
segments are seeing moderation (capex and auto), demand for mortgage
and working capital is holding-up well. RBI may raise policy rates by
25bps and in a high interest rate scenario CASA growth is a challenge
however, bank sees limited risk to margins. Asset quality is holding-up
well and bank’s exposure to infrastructure sectors is low and selective.
Mixed trends in credit demand
The management highlighted that the credit demand trends have been mixed
from different sectors. Sectors where demand has held up are a) working
capital- partly due to high inflation, b) smaller capex (like brown-field), and c)
mortgages (especially non-metros). Segments impacted most from a credit
demand perspective are a) large brown-field capex, b) green-field capex and
c) infra projects. On the retail side, demand for auto and CV/ CE loans has
softened. Sectors where credit demand has picked-up are mostly risky
sectors such as unsecured loans and SME; most banks are risk averse and
not willing to lend to these sectors, but HDFC Bank believes that there are
profitable lending opportunities in these segments. Management expects
sector credit growth to be 17-18% and expects deposit growth for the sector
to match credit growth.
Stable margins, but moderate fee growth
Management expects that the RBI to raise the policy rates by another 25bps
in the next monetary policy review in order to contain inflationary pressures.
CASA growth is becoming a challenge as high interest rates are (1) inducing
conversion of savings deposits into term deposits and (2) forcing corporate to
hold lower current account balances. HDFC Bank expects to maintain margins
near current levels supported by high CASA ratio and balanced ALM. Slower
credit offtake tends to impact fee growth also, but HDFC Bank is better
positioned due to higher share of transaction banking linked fees.
No significant stress on asset quality
Management highlighted that recent trends do not indicate potential of sharp
rise in stressed assets- hike in interest rates and slowdown in economy have
not yet impacted bank’s asset quality. While there are pockets of risk in the
infrastructure sector, HDFC Bank has a lower exposure. Bank also carries high
coverage levels against NPLs (83% in Jun-11) and has created additional
contingent provisions which will help to keep credit costs low even as fresh
slippages rise from the current levels that are near cyclical lows.

India Banking Bits week of September 19-23, 2011:: Citi

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India Banking Bits
September 19, 2011
 In News Today — Axis seals Enam deal with revised structure; SBI may clock profit
over Rs100bn this fiscal; Interview with DK Mehrotra, Acting Chairman, LIC; Loan rates
to pinch this festive season, SBI to pass rate hike in 2-3 weeks; Lending rates to rise,
albeit with a lag; Rate hike on expected lines, say bankers.
 Axis seals Enam deal with revised structure — Axis’s board on Friday approved a
revised deal structure mandated by the RBI. While Axis Bank has stuck to an all-stock
deal as proposed in November last year, it will now sell the business to its arm, Axis
Securities and Sales, for Rs2.74bn in cash. The amount represents the book value of
Enam’s financial services business. (Business Standard, September 17)
 SBI may clock profit over Rs100bn this fiscal — Country's largest lender State Bank
of India profit in the current fiscal is likely to exceed Rs100bn on the back of increased
business and sustained effort to contain bad assets. "The bank is making all-round
effort to achieve Rs100bn profit during the year," senior officials of the bank said. The
bank also expects Net Interest Margins (NIM) to be robust at over 3.5% during 2011-12
on the back of a rising lending rate. (Business Standard, September 19)
 Interview with DK Mehrotra, Acting Chairman, LIC — Life Insurance Corporation of
India, the country's largest insurer, has shifted focus to traditional products from unitlinked
insurance plans (Ulips) over the past two years, said acting chairman DK
Mehrotra . In an interview with Shilpy Sinha , Mehrotra said that the Corporation, which
is now trying to reach out to the younger generation, will witness improvement in sales,
going forward.(Economic Times, September 19)
 Loan rates to pinch this festive season, SBI to pass rate hike in 2-3 weeks —
State Bank of India to pass on policy rate hike to consumers in two-three weeks. A day
after the RBI raised the key policy rate by 25bps the country’s largest lender State Bank
of India (SBI) said it will pass on the increase to consumers in two-three weeks by
increasing its base rate. Another government-owned lender Bank of Maharashtra said it
will raise its base rate from October 1. (Business Standard, September 18)
 Lending rates to rise, albeit with a lag — With the Reserve Bank of India (RBI)
raising key policy rates by 25 basis points to 8.25 per cent on Friday, bankers said they
would follow suit, though adding the transmission may come with a lag. Bankers also
said high interest rates may lower credit growth further this financial year. State Bank of
India (SBI), the country’s largest lender, would increase the base rate, though that may
not happen immediately. (Business Standard, September 19)
 Rate hike on expected lines, say bankers — The RBI’s repo rate hike is on expected
lines, which will be transmitted to borrowers sooner or later. However, some bankers
feel that with inflation not getting moderated at all, the central bank might be coming
out with few more rate hikes in the future. Though lending rates are expected to go up
again, public sector Canara Bank will not transmit the burden to borrowers immediately.
(Business Line, September 17)


Industry
New panel comprising LIC, IIFCL and IDFC to ease infrastructure
funding
A proposed panel comprising LIC, state-run non-life insurance companies, IIFCL
and IDFC will get to appraise and lend to infrastructure projects, a finance ministry
official told ET. According to an IIFCL official, the panel will become operational in
two weeks. "Banks can sell us their existing infrastructure portfolios and further
agreements can be signed for new projects," the official said. (Economic Tiimes,
September 17)
After Ulips, traditional plans come under Irda scanner
After unit-linked insurance policies (Ulips), the Insurance Regulatory and
Development Authority (Irda) is set to crack the whip on traditional plans as well.
According to Irda sources, the regulator is wary of the low life risk covers associated
with some traditional policies and is planning to introduce a minimum death benefit
at five times the annual premium. (Business Standard, September 19)
MFIs in a quandary as clients refuse to repay loans
Desperate to collect dues of nearly Rs70bn which were held up with the clients for
almost a year, the microfinance institutions (MFIs) in Andhra Pradesh have now
doubled efforts to get back their money. There are many clients of various MFIs -
who have loan dues amounting up to over Rs40,000 to different MFIs — who insist
that they did not have the capacity to repay. (Business Line, September 19)
Govt panel to look into banks' capital needs
The government has formed a committee to look into the capital requirements of
public sector banks in the light of the Basel-III norms, which the banks will start
implementing from 2013. The finance ministry on Saturday reiterated that the
government is committed to seeing its banks are well capitalised. (Business
Standard, September 18)
Bankers take the digital path to financial inclusion
PJ Nayak, MD and country head, Morgan Stanley, has called for a bigger role for
non-banking institutions in fostering financial inclusion, saying it would result in a
more diverse financial ecosystem. Nayak believes that projecting banks as the
central thrust of financial inclusion may not really work. (Financial Express,
September 19)
SEBI's decision to revise penalty upsets traders
Brokers fear that the move will adversely impact participation of investors in the
derivatives segment. Investors may have to cut their outstanding positions thereby
affecting liquidity in the system, as brokers would be compelled to demand more
margins to avoid being subjected to penalty. (Economic Times, September 19)


Old private banks factor in hike ahead of RBI announcement
Old private banks such as Catholic Syrian Bank, Tamilnad Mercantile Bank and City
Union Bank seem to have hiked their base rate recently. So, a hike in the rate post
the RBI's announcement of a hike in the repo rate today, did not leave the chiefs of
these banks speechless, nor made them say ‘we will take cue from the bigger
players in the industry,' as they did in the past. (Business Line, September 17)
Bond yields inch up on RBI's hawkish tone
Yields on the 10-year benchmark 7.80% government bonds closed three basis
points higher at 8.36% Friday, compared with yesterday’s close of 8.33%. “Markets
had already priced in the rate rise and, hence, did not react much,” said a treasury
official of a Chennai-based public sector bank. The lack of fresh supply from bond
auctions kept the yields from hardening further. (Business Standard, September 17)
Banks / Financial Institutions
LIC wants to buy over 10% in a company
Life Insurance Corporation of India (LIC) has asked the sector regulator to allow a
single fund from its portfolio to hold more than 10% of a company, so that it can buy
more equity in a falling market. "We have reached the 10% ceiling and so we keep
churning the portfolio, depending upon the market conditions. We have written to
the regulator to increase the headroom," said DK Mehrotra, the acting chairman of
LIC. (Economic Times, September 19)
IOB seeks Rs40.16bn capital support for 3 years
Indian Overseas Bank (IOB) has sought capital support of Rs40.16bn from the
Govt. to fund its business growth for the three-year period beginning 2011-12. Of
this Rs40.16bn, IOB has pegged the requirement for this fiscal at Rs12-Rs14bn.
Although necessary enabling resolutions are in place to raise equity capital from
public, the bank is not looking to come out with any follow-on public offering (FPO)
this fiscal, Mr Narendra said. (Business Line, September 18)
Srei Infra raises lending rate 75 bps
Srei Infrastructure Finance Ltd has hiked its benchmark lending rate by 75 basis
points to 17.5 per cent with immediate effect. The company’s Asset Liability
Management Committee took the decision to raise interest rates after reviewing the
trend of increasing interest rates to curb inflation, said a press statement from Srei.
(Business Line, September 17)
ICICI Lombard eyes art insurance
ICICI Lombard General Insurance Company is eyeing the ‘relatively small and
untapped' Indian art insurance market to expand its product portfolio. The Indian art
market has seen a 500 per cent jump in sales in the last five years, according to a
company presentation. Art insurance, among others, covers any damage arising
from natural disasters, including floods and terrorism, transportation and restoration
of the art work. (Business Line, September 19)


Sidbi to unveil Rs8.5bn VC funds to support SMEs
Small Industries Development Bank of India, or Sidbi, plans to launch three venture
capital funds worth 8.5bn this fiscal to support small and medium enterprises. "The
domestic market for SMEs is buoyant. The funds will support the growth story,"
Sidbi managing director S Muhnot told newsmen in Kolkata. (Economic Times,
September 17)
Karur Vysya Bank on expansion mode
Karur Vysya Bank has added 10 branches and 50 ATMs to its network, to take the
total branch network to 386 and ATMs to 583. It is aiming to have a network of 400
branches and 600 ATMs by end-September. Mr R. Gopalan, Secretary, Department
of Economic Affairs, Ministry of Finance, inaugurated the Delhi – Connaught Circus
branch. (Business Line, September 19)
Opinion
High prices to force home loan growth dip: National Housing Bank
Housing finance watchdog National Housing Bank (NHB) has said demand for
home loans will slow down in the next few months due to high property prices.
"Housing loans can be a bit sluggish because buyers feel there is no way of getting
properties at a reasonable price, (and) they are postponing their purchases," NHB
chairman and managing director RV Verma told reporters here over the weekend.
(Economic Times, September 19)
New banks need to attune with national priorities: FM
With just 40% of India’s population having bank accounts, finance minister on
Saturday exhorted banks to do more for financial inclusion. Speaking at the FE Best
Banks Awards ceremony, Mukherjee said he expected “the new banks which are
going to come would be in a position to effectively compete with existing players
and attune themselves with national priorities”. (Financial Express, September 19)
RBI may hike lending rates further, says Exim Bank CMD
This was 12th rate hike by the apex bank in the past 18 months. “This may not be
the last time that we are seeing a rate hike, the cycle may continue because of the
rising inflation. Industry must also adjust to this high tide level,” said T C A
Ranganathan, chairman and managing director, Exim Bank, speaking on the
sidelines of an ICC meet here. (Business Standard, September 19)
Non-life insurance sector to reach Rs900bn by 2015
The non-life insurance industry is expected to grow by over 18 per cent by 2015 to
become a Rs900bn sector from the current level of Rs470bn, the Associated
Chambers of Commerce and Industry of India (Assocham) has estimated. The
growth forecast is being attributed to strong demands and growth of consumer base
in motoring and healthcare, growth of services and small and medium enterprises.
(Business Standard, September 19)


Splitting the chair in PSU Banks
The Reserve Bank of India’s (RBI) proposal to split the post of chairman and
managing director in pblic sector banks (PSB) is in line with the recommendations
of HR committee on PSBs, 2010, appointed by the government, which this author
had the privilege to chair. There are arguments for and against the proposal.
(Economic Times, September 17)
RBI right in sticking to its guns
As expected by many observers and the markets, the RBI has raised the policy
rates by 25bps to deal with the phenomenon of intractable inflation. After the index
of industrial production for July 2011 showed a deceleration in the year-on-year
growth from 8.8% in June to 3.3%, both industry and government put pressure on
the RBI to declare a pause in its rate hikes, despite the near double-digit inflation
prevailing in the economy. (Business Line, September 17)
The rate hikes have backfired
The RBI's mid-quarter review justifies, as usual with clarity, the decision to raise the
repo rate last Friday. Modest as the hike may be, it signals the apex bank's intention
to continue its hawkish stance. Banks are aware that the borrowing sentiment isn't
exactly buoyant, given the hikes in lending rates so far. They are worried about the
likely fall-out of those hikes on existing exposures. (Business Line, September 17)




Weekly Review Report - September 24, 2011 :Angel Broking

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Pessimism is back - 4700, a hope for the Bulls
Sensex (16162) / Nifty (4868)
We had stated in our previous report that indices are likely to
face a "Horizontal Line" resistance at 17300 / 5177 level.
Also, we mentioned that the "Spinning Top" formation
mentioned in our earlier reports will remain intact until the high
of 17212 / 5169 has not been violated. Last week, markets
opened on a pessimistic note; but during the mid week, markets
showed some signs of breaking above the mentioned resistance
zone. However, concerns of a Greek default and the Fed's
statement that there are significant risks to growth, caused panic
across global indices. This pessimism dragged our benchmark
indices lower to break short- term support of 16374 / 4911
level. The Sensex ended with a massive loss of 4.56%, whereas
the Nifty lost 4.26% vis-à-vis the previous week.
Pattern Formation
�� The "Spinning Top" formation mentioned in our earlier
reports is still intact as the high of 17212 / 5169 has not been
violated.
�� The Daily chart depicts a "Symmetrical Triangle" pattern
breakdown on closing basis with higher volumes.
Future Outlook
Looking at the Weekly chart, it can be concluded that indices
have failed to cross the major resistance zone due to a
combination of the "Horizontal Line" resistance and the "Spinning
Top" formation. Consequently, indices drifted lower due to
immense selling pressure near their resistance zone which
ultimately resulted in the breakdown of a "Symmetrical Triangle"
pattern. This pattern indicates that indices are likely to head
towards the recent bottom of 15765 / 4720 level. Selling
pressure is likely to intensify on violation of this important point;
and if indices manage to sustain below 15765 / 4720,
then they are likely to drift towards the next support levels of
15650 - 15330 / 4675 - 4540. While the view is clearly negative
considering the Weekly charts, the Daily candle suggests
the probability of a temporary pullback rally towards
16490 - 16620 / 4960 - 5000 only if indices manage to cross
and sustain above Friday's high of 16368 / 4930 level.
Traders are suggested to trade with strict stop losses as volatility
is expected to increase in the coming week due to expiry of
derivative contracts.



NOT MUCH OF CALL WRITING VISIBLE; GO LONG IN NIFTY AROUND 4800
Nifty spot closed at 4868 this week, against a close of 5084 last week. The Put-Call Ratio decreased from 1.51 to 1.27 levels and the
annualized Cost of Carry is positive 3.69%. The Open Interest of Nifty Futures increased by 8.80%.
Put-Call Ratio Analysis Implied Volatility Analysis
There has been significant decline in PCR-OI from 1.51 levels
to 1.27 levels. This is mainly due to unwinding of puts in strikes
ranging from 5100 to 4700. We have also witnessed substantial
built-up in calls ranging from 4900 to 5200. Unwinding in
puts is combination of those who bought puts in anticipation of
fall and also writers squaring off due to significant fall. But call
built-up is mainly selling though the quantum of this built-up is
not significant.
Implied volatility (IV) has increased from 26.97% to 31.07%. It
made high of 32.75% in Thursdays fall. Interestingly the rise in
call IV's from 23.55% to 28.81% is more than the rise of IV's in
puts from 30.11% to 33.06%. Implied volatility has substantially
increased in counters like GTL, PANTALOONR, GVKPIL,
GMRINFRA and UCOBANK. Counters where it has declined
are ONGC, NHPC, PNB, RECLTD and ALOKTEXT.
Nifty futures of current month have closed with premium of
2.95 points against last week's discount of 3.35 points. Next
month futures are trading at a healthy premium of 18.20 points.
Positive CoC is maintained despite fall in market is due to cash
base selling. Stocks where CoC is positive are RUCHISOYA,
GTL, ABIRLANUVO, BGRENERGY and SRTRANSFIN. Stocks with
negative CoC are ABAN, ASHOKLEY, TATACOMM, PNB and
TATASTEEL.
Total open interest of market has decreased from `1,39,079/-
crores to `1,38,479/- crores. Stock futures open interest has
increased from `30,214/- crores to `30,711/- crores. In
frontline stocks, significant open interest got added in LT,
HDFCBANK, SESAGOA, ICICIBANK and BHARTIARTL. Counters
which saw decline in open interest were ONGC, NTPC,
RPOWER, CAIRN and MARUTI.

India by the Numbers (September 2011) ::UBS

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Overview and Summary
Weak currency reflects global events, credit squeeze ahead
Rupee is sliding (c.7% viz dollar since start of the year) – how to regard it? Ostensibly, the weaker rupee reflects global
events: European policy paralysis, credit downgrades, drying up of global QE all of which combine to promote the US
dollar. The stronger dollar has forced us to change our INR forecasts to 47 and 44 by 2011 y/e and 2012 y/e respectively.
But there’s more. For a current account deficit economy currency weakness is a key part of the process by which credit is
squeezed further. The reason is that a drain in external funds almost always produces a credit squeeze and interest
rate spike despite the authority’s ability to cushion it. Faced with this prospect further monetary tightening seems
redundant, the question is how soon the easing?
Short term, pressures acting against the rupee remain in place. Economic growth is weak and should weaken further.
The cost of capital is high and cost inflation remains a problem for corporate profitability. Bank lending is slowing and so
is investment. Inflation is still high and this holds back appreciation. The whole thrust of policy has been anti-inflationary,
so high yields have matched inflation (p22-24). The economy is set up to be very vulnerable to any negative global
event (trade or capital). The currency is starting to reflect this.
Things to watch
Looking ahead there are two areas to watch. First, the chance of generic outflows of foreign capital. Watch official FX
reserves and short rates in response to global events. The current account deficit (p14) makes Indian financial markets
vulnerable to a drain in foreign funds, but the good news is any drain should be cushioned by a rundown in official FX
reserves. Official reserves are high relative to external debt: external debt of $305bn of which $65bn is short term.
Official FX reserves of $280bn cover 90% of the total). In other words local factors do not argue for a snowball-effect,
but the process of containing any drain would initially involve tighter credit conditions and an interest rate spike,
thereafter easier money policy should contain the after-effects.
Second, there is a knock-on impact of the weaker rupee on local inflation, if oil prices do not fall further. And that is the
key proviso. The chart below shows the lag between rupee-denominated oil inflation and WPI. There is some inflation
relief in the immediate quarter ahead - we think WPI can slow c.2%. But what’s worrying investors short term is: what if
oil prices don’t drop further and a weaker currency boosts local WPI inflation? A simple calculation suggests that rupee
oil inflation (currently averaging 42%) has further room to slow if the exchange rate holds at 48 – ie negligible impact.
An INR of 50 or beyond mechanically boosts rupee oil inflation - blue line in chart below. But ultimately, any global
event pushing INR beyond 50 could also push oil prices down more too so these are temporary concerns.


Gross Domestic Product
􀁑 What the numbers say: Overall real GDP has been slowing for the last 4 quarters to 7.7% in Jun-11. Investment
bounced but remains generally weak (7.9% Jun), industry up 5.1%. Consumption is strong but slipping (6.3% Jun
from 8.1% Mar). Services has held up (10% in Jun, up from 8.7% Mar).
􀁑 What they mean: The capex/industrial-driven recovery in GDP finds a slower speed while profits weather the high
commodity prices. There is a stronger consumption flavour to economic growth, but even consumption is restrained to
a degree by the high interest rates and upcoming credit slowdown.
􀁑 12-month outlook: Weaker. In 2011-12 we expect real GDP growth to slow to 7.2% with H2 seeing the slowest
momentum (sub 7%). We expect global growth to slow this year. We think growth in real investment and
consumption can slow to 7.6% (from 8.6%) and 5.7% (from 8.6% respectively.


Consumption
􀁑 What the numbers say: Private consumption in Jun-11 slowed to 6.3% but remains pretty robust. Consumer credit is
up 17%YoY and our UBS retail sale index (compiled from bottom up retail product vendors) still up at 13%YoY.
Freight indicators are mixed (rail freight strong: air weak). Auto sales growth weakening. Financial indicators of
transactions activity like real cash in circulation or M1 are slower (ie high interest rates a restraint).
􀁑 What they mean: There is a strong demographic story and agri-incomes have been boosted by higher food prices. But
consumption is moderating as rates stay high and banks run up against lending constraints.
􀁑 12-month outlook: Weaker. After a rapid run-up in consumption last year (8.6% real growth) we see slowdown to
7.6% in 2011-12 due to the higher oil price impact on company investment, wages and discretionary income. But this
is a short-term pause. The bigger question is: are global investors willing to fund Indian banks to sustain the great
Indian consumption story at previous growth rates? And how long will it take for the advent of multi-product retailing
to change the pace of these consumer trends? (our UBS retail index is product-based not store-based)


Government
􀁑 What the numbers say: Monthly fiscal position stopped improving due to drop in tax revenue. For 2011-12 the
government expects deficit to be Rs 4.1tn (equivalent to 4.6% GDP, from Rs4tn, 5.1% GDP in 2010-11). From a
funding angle they need Rs3.4tn net domestic borrow. But there are risks. These numbers heavily rely on subsidy
cut (from 2.1% of GDP to 1.6%) and divestment proceeds of Rs400bn. The harder work of meaningfully improving
the tax/GDP through GST and freeing up diesel prices has been delayed again.
􀁑 What they mean: Diesel prices were hiked in June. But another hike is probably required to meet budget numbers.
Otherwise, absent a dramatic drop in oil prices we suspect the budget could miss by 0.5% of GDP, ie another Rs400bn
required. Rating upgrade probably requires GST/fuel tariff reform.
􀁑 12-month outlook: Neutral/negative. The main risks to budget arithmetic are: rising oil prices and disappointing
divestment proceeds. Currently excess government securities holdings of banks are at 3% of deposits (chart 6 p20).
The system can probably absorb another Rs400bn with negligible rise in this ratio. More difficult to ascertain is the
rise in state bond issues given State Electricity Board losses.


Investment
􀁑 What the numbers say: Real investment growth bounced to 7.9% in Jun-11from 0.4% in Mar-11. Infrastructure
indicators have held up a bit better. Although from chart 1 it looks like a rerun of the 2008-09 capex drop what’s
different this time is the lesser drop in profitability and stronger funding availability – so far!
􀁑 What they mean: Investment is mainly a private sector phenomenon and is suffering a lull due to slower company
earnings momentum and a reduced government contracting of projects. Uncertainty has been high during the anticorruption
drives, amid State elections.
􀁑 12-month outlook: Step down ahead. We expect only 5.7% real investment growth 2011-12 and 32-35%
investment to GDP ratio. Bank lending is about to be squeezed by the global credit squeeze. Fiscal constraints mean
there is very limited ability for the government to offset the private sector capex slowdown with its own spending,
though it can push forward various infrastructure projects and boost order-books. Also key is to monitor profits,
foreign capital flows and changes to FDI rules such as those allowing foreign investors into multi-product retailing or
other sectors in the upcoming free trade agreement (FTA) with EU.


Industrial Production
􀁑 What the numbers say: IP growth slumped to 3.3% in July, averaging 6% over the last 3 months. Capital goods
production particularly in ‘heavy’ industries (chart 1, 9, 10) has been a drag, but in some industries there is a bounce.
Intermediate goods output sinks to negative growth, consumer goods going soft (chart 2).
􀁑 What they mean: The recent lull in infrastructure execution due to political events has dampened activity. Higher
cost inflation plus tighter credit conditions have all eaten into profitability. We suspect controlling costs is what
temporarily depresses industrial activity growth. Watch profits for signs of change. Our lead economic indicator (LEI)
for IP is still flat in March – chart 6.
􀁑 12-month outlook: ‘V’ shape ahead. IP faces a further period of weakness, possibly a downspike depending on the
shape of the global slowdown and severity of upcoming drain in foreign capital. Even in a benign view the struggle to
contain costs in any global slowdown could keep conditions weak in H2. Our LEI says too early for IP recovery.


Balance of Payments
􀁑 What the numbers say: Monthly trade deficit widened in Aug reflecting higher oil and non-oil imports. Imports up
39%YoY, exports up 44%, starting to come off their high base. Quarterly current a/c improved only a bit due to slow
remittances and jump in imports of financial/business services leapt. Inward foreign capital diminishing.
􀁑 What they mean: The problem ahead is slower exports as global demand slows. This year should see some cyclical
deterioration in trade gap. Foreign capital remains adequate, but a drain appears increasingly likely in H2.
􀁑 12-month outlook: Negative. Much depends on how much OECD really does slow and the severity of any foreign
capital withdrawl. Our basic call is for slower export growth 20% below imports at 22%. Then the trade gap widens to
$132bn in 2011-12 from $105bn. If services, transfers and income rise only modestly from $86bn to $96bn then the
current account can be flat at c. $45bn ($44bn in 2010-11). The risk is a more serious OECD slowdown, but that could
also reduce oil prices and subdue oil imports (currently we assume $105 bbl for OPEC basket of oils in 2011-12).


Trade Direction
􀁑 What the numbers say: Exports have held up well and remain strong. Imports after a period of sluggishness have
leapt up.
􀁑 What they mean: Data breakdown is not available, but the latest import spike could be a mix of oil and non-oil
(possibly pent up import demand for infrastructure materials after the anti-corruption-related pause). Demand for
Indian exports from EM and developed has been strong in 2010-11. This year, 2011-12 may be more challenging as
global growth slows.
􀁑 12-month outlook: Soft. Probably uneven trajectory ahead. Despite a slowdown in global demand, we expect export
growth to average 20% (down from 38%). Meanwhile, we expect imports to display more erratic growth of around
22% - a slower domestic economy is a restraint on imports.


Trade by Category
􀁑 What the numbers say: Imports of capital goods have remained fairly subdued in this recovery – reflecting low FDI
and the short capex burst. Exports of manufactured goods (mainly engineering/chemicals) have done
disproportionately well in the recent OECD recovery. (Engineering exports: trspt equipment, rubber manuf'td prdts,
residual engineering items, project goods, semi-finished iron & steel, metal manufactures, machine tools, machinery
& instruments, iron, steel bars, rods. Chems & related: caster oil, cosmetics, drugs/pharma, dyes, inorganic/organic
agri, manmade fabric, paints etc, platic& linoleum, residual chems)
􀁑 What they mean: The latest import spike looks like it could be a mix of oil and non-oil (possibly pent up import
demand for infrastructure materials after the anti-corruption-related pause). Demand for Indian exports has been
strong in 2010-11. This year, 2011-12 could see a cyclical slowdown.
􀁑 12-month outlook: Soft. Expect some reversal of the trade balance improvement, but limited by still slow capex
cycle in India and longer term rise in ratio of manufactured exports to capital goods imports. Main speed limiters are:
the tightening in China, EU funding crisis and moderation to G3 demand 6-12m ahead. Exports could still manage
20%. A very positive sign is the emergent stronger manufactured goods balance



Exchange Rate
􀁑 What the numbers say: FX reserves have slipped with the recent bout of dollar strength. This can continue. In tradeweighted
terms, the rupee tracks the Rs/$ rate. (chart 4). Meanwhile local inflation has pushed up the real exchange
rate much more (chart 1).
􀁑 What they mean: Local financial markets would be hit by any FX drain. Dollar strength can persist or extend given:
(1) policy paralysis in West, (2) no new QE due to inflation and (3) slower global growth. India policymakers have
little scope to cut rates or boost spending this time round so a slower stage of Indian growth can trigger INR weaker.
􀁑 12-month outlook: Weakness then appreciation. Near-term there is a serious risk of a downspike in INR past 50
(weaker INR), but over the year we expect a lesser depreciation. We change our forecasts to a depreciation to 47 by
end-2011, then appreciation to 44 in 2012.


Money and Credit
􀁑 What the numbers say: M3 & adjusted money base growth are steady at c.17%. Bank lending has run up against
balance sheet constraints (high L/D ratio) and so credit growth has peaked and in a slowdown (chart 11). Impact of
FX drain not apparent.
􀁑 What they mean: Credit growth is very vulnerable to sharp slowdown beyond deposits. This contrasts with
today’s picture of credit growth still 3-4% higher than deposit growth (charts 10-11) prompting banks to offer more
debt notes and rebuild their capital bases. FX reserves have dropped a bit and could be run down on any external drain
in funds. In these conditions RBI remains the marginal supplier of domestic funds to the system to support bank
lending.
􀁑 12-month outlook: Near-term risk of squeeze. Near-term the balance of payments is a negative drain on interbank
funds and there is a risk of a serious squeeze if global conditions deteriorate or there is a freezing-up in global credit
conditions. In these conditions the RBI should be expected to inject (as now) to avoid a more serious spike in local
rates and drop in credit growth. 10-15% for bank lending is looking increasingly likely.


Interest Rates
􀁑 What the numbers say: So far RBI has hiked CRR by 100bp to 6% and the LAF interest rate corridor by 350bps. The
key policy rate: Repo is at 8.25%. After the tax-payment squeeze in March, market yields have dropped. CP and
interbank rates have declined c. 100bp to around 9%. But that is the full extent of the easing in credit conditions. OIS
rates are feeling for a decline, but for now are stopped out by yesterday’s inflation.
􀁑 What they mean: Credit demand has slowed - reflected in lower market yields. Policy rates have been hiked
alongside the rise in global commodity prices. But until either inflation capitulates or credit suffers an external-driven
blow market yields & OIS appear stuck at current levels.
􀁑 12-month outlook: Tightening over, easing ahead. Given the factors driving dollar strength are likely to remain in
place, short-term we think the system is vulnerable to an external drain. Policy response should be to inject funds to
alleviate the scramble created by a rundown in FX reserves, with possible rate cuts to cushion the squeeze in credit.


Inflation
􀁑 What the numbers say: CPI indices have slowed and converged on 8%. Food, services and finished consumer goods
inflation - all categories are slowing. But WPI still holds up (9.8% Jul) because of hikes in fuel and electricity.
Importantly global commodity prices/inflation (as defined by CRB) have peaked for now.
􀁑 What they mean: We believe inflation facing consumer (CPI) is around 8% and absent a recession, industrial
inflation (WPI) basically fluctuates in a 7-10% range. Currently, we are near top of that range as lagged impact of
suppressed inflation pops through. Although WPI and CPI still point in opposite directions, the key to WPI is global
commodity inflation, and this looks to have peaked. We think Oct is the earliest WPI can start to slow.
􀁑 12-month outlook: Down. By Mar-12 we expect CPI at 7%, WPI at 7.7% (after rising to 10% in interim). We
assume UBS’ $104 bbl average for global crude. Slow inflation arguments: (i) slower food inflation (chart 3), (ii)
restraining credit policy plus lower economic growth, (iii) slower CRB and rising chance of globally induced credit
squeeze.



Asset Prices
􀁑 What the numbers say: Profitability and sales are in modest slowdown. Costs have been boosted by higher global
commodity prices and wage inflation. Monetary policy has tightened in line with commodity prices so aggregate
demand is also sinking. There needs to be more active cost-control by corporate India and this restrains growth.
􀁑 What they mean: More difficult conditions for corporate profitability partly explain slower investment growth. The
main risk in the immediate month ahead is of a more intense credit slowdown with an up-spike in market interest rates.
􀁑 12-month outlook: ‘V’ shape. On a benign economic view (ie no G3 recession) then the main question remains will
corporate profits & sales growth (in general) be able to retain the average rates of growth last seen pre-global slump?
i.e. 2004-7 – a period of time when oil prices rose at 20-30% pa throughout. But if there is a re-run of 2008 credit
conditions then the additional issue is one of timing.
















Indian men: The new fairer sex? ::CLSA

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Indian men: The new fairer sex?
The recast of Indian film actors from ‘angry young men’ to the recent, ‘cool urban
yupees’ has opened a plethora of opportunity for Indian marketers. Till a decade
back, men’s grooming segment was officially limited to just shaving products.
Emami’s launch of Fair & Handsome in 2005 marks the beginning for this segment
and even today, men’s fairness market is <10% of overall fairness market,
highlighting the potential. The marketers too have realized the opportunity and
have been expanding the basket from a basic product like soaps and shampoos to
high-end personal care indicating that the segment could just be at a tipping point.
Men’s grooming, a rapidly growing segment…
q Men’s grooming segment, which has been almost non-existent beyond shaving, till
around a decade back, has recently witnessed rapid growth rates.
q The segment today includes skin products, fairness creams, shampoos, bathing,
cleansing etc.
q Interestingly, while these new generation products have been seeing rapid growth,
the traditional portfolio has also been growing strongly.
q For example, with the launch of low priced ‘Gillette Guard’ shaving razor, P&G has
added 11m new consumers in India in the last 8-9 months.
… even while men seem to be important consumer elsewhere
q While men have been important consumers for products of daily use (eg. Lux
soaps), despite marketers targeting these products at women.
q … but even in specialized products such as anti aging and fairness creams, the
proportion of males using women’s products has been fairly high
q For example, 25-30% of the users of Fair & Lovely (for women) are men. Similarly,
in top four cities, 13% of men apparently use Pond’s Age Miracle.
q Male consumers form around 20% of the Kaya Skin Clinic’s customer base and
normally carry higher ticket size than women.
It all started with the success of fairness cream
q Realizing the potential, Emami forayed into men’s fairness cream with the launch of
‘Fair & Handsome’ in 2005 when the category was almost nonexistent.
q HUL countered this with launch of ‘Fair & Lovely – Menz Active’ in 2006; Elder
Healthcare too launched its brand ‘Fairone – man’ in the same year.
q Even while the above products were positioned at the mass-end of the market, the
action at the top-end began in 2007 with Nivea entering the segment followed by
Garnier in 2009. 2010 saw launch of Vaseline for men by HUL
q Emami’s first mover advantage is also visible in the market shares of >65%
followed by HUL (15%), Garnier (10%), Nivea (~5%) etc.
More launches to follow to exploit this opportunity
q In 2010, reportedly, men's skin category grew over 45% in top cities cf. 22% for
women…
q … which has excited the FMCG marketers who are now introducing more and more
male focused products and are also giving higher push to their brands.
q For example, HUL launched an entire range of products including face wash, shower
gels, body & face lotions etc in 2010 under the brand Vaseline.
q P&G too launched an entire portfolio of products under Olay brand (cleanser,
moisturizer, creams, toners etc.) as well as under Gillette brand (creams, face
wash) in May-2011.
q Even ITC has recently extended its Fiama Di Wills brand to shower gel and bathing
bar exclusively for men.
q We believe that the firms would explore more such opportunities, would expand
distribution and would straddle the pyramid to capture this consumer, who was
been ignored for ages.
q And this clearly highlights that the Indian consumption story still provides
tremendous opportunity with growing aspirations, rising incomes etc. and FMCG
marketers too are playing their role to the fullest.


Fair & Lovely was first ever fairness cream introduced in India
India has been a very important fairness market for the FMCG marketers.
Unilever’s popular brand, Fair & Lovely was first tried and tested in India in
the year 1978. The product was positioned for Indian women consumer,
which is the case even today. It was not only a runaway success locally in
India, but was also one of the few indigenous brands contributed to Unilever’s
global portfolio by its Indian arm, Hindustan Unilever. And today, the product
is sold in over 30 countries.


There were limited products which were targeted at males in the past and
that was true for even a basic product like soap – so while a soap was used
by both men and women, it was always advertised by marketers with female
brand ambassador targeting women consumers. There were certain bold
marketers who targeted men consumers but met limited success as products
seemed to be clearly ahead of time.


A classic example is Godrej Consumer’s ‘Cinthol’ soap which was launched in
1952 and despite becoming a popular brand, failed to gain significant market
shares.


Men too were consumers of Fair & Lovely, in the hiding though
In the past, the protagonist of most Indian films was always the ‘angry young
man’, which also contributed to marketers’ inability to expand the men’s
grooming segment beyond shaving. This however did not deter male
consumers from using some of the female focused products, which were
against the on-screen image. An interesting example of this was, Fair &
Lovely, which was reportedly used by as much as 25-30% male consumers in
the year 2000.


2005 saw Indian film super Star in a different avatar…
Lux, HUL’s popular soap brand in India has historically been promoted by
popular Indian film actresses. But to celebrate Lux’s 75th anniversary, HUL
brought in Indian film superstar, Shah Rukh Khan to celebrate the success of
its iconic brand in a television ad where he was seen in a bathtub.
While the company continued to position its soap targeting female
consumers, and did not change the strategy, this ad coincided with the
introduction of the word “Metrosexual” into popular lexicon.


… the same year also saw launch of men’s fairness cream
Emami realized the opportunity and launched a fairness product under the
brand, ‘Fair & Handsome’ in Oct-2005 targeting Indian men, at a time when
category was nonexistent. Emami’s ads focused on educating the customer as
to why a fairness cream meant for women was inadequate for the male skin.
The product was targeted at the mass-end and Emami had aggressively spent
behind the brand and the product was well received by consumers.








Sept 24: News headlines: CLSA

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News headlines: Corporate
􀂉 SBI has announced that it has doubled its Medium Term Note
(MTN) program to US$10bn to fund overseas business. (BS)
􀂉 L&T has secured a Rs7bn contract from Petroleum Development
Oman to set up a 3mmscmd greenfield gas treatment plant. (BS)
􀂉 M&M has announced that it will raise tractor prices by 1.5% soon
due to the spiraling input costs. (BS)
􀂉 SAIL has drawn up plans to invest Rs143bn in FY12 in capacity
building in order to expand its capacity to 21.4MTPA by March
2012. (BS)
News headlines: Economic and political
􀂉 Food inflation has fallen to 8.84% in the week ended September
10 from 9.47% in the previous week. (BS)
􀂉 Reserve Bank of India (RBI) has tightened disclosure norms for
NBFCs under which they will have to make disclosures more
frequently about their lending and deposit activities. (BS)
􀂉 The Coal Ministry has said that it plans to set up a coal regulator
by the end of this fiscal. (FE)
News headlines: Corporate
􀂉 Indian Oil Corp plans to raise its borrowing limit by Rs300bn to
Rs1.1tn as it expects borrowings to rise sharply due to high underrecovery
on sales of diesel, kerosene and domestic LPG. (BS)

􀂉 IVRCL has announced that it has secured new orders worth
Rs22bn. (BS)
􀂉 Nissan has drawn up plans to enhance the capacity of its
Orgadam facility near Chennai from the current 200,000 units to
400,000 units by next year. (BS)
􀂉 Telenor has said that it will invest up to Rs155bn in Indian
operations in joint venture with Unitech Wireless. (BS)
􀂉 Essar Energy has said that it has been allocated coal from the
Amelia coal block in Madhya Pradesh for fuel supplies to the firm’s
1,200MW Mahan-I power project. (BS)
􀂉 ABB has secured a US$71m order from SAIL for supply of a highvoltage
sub-station package to SAIL’s Bhilai plant. (BS)
􀂉 SAIL has drawn up plans to create an special purpose vehicle for
the revival of its Sindri unit in two-three months at a cost of
Rs350bn. (BS)
􀂉 Yes Bank has entered into an alliance with Malayan Banking
Berhad to collaborate on cross-border investment banking
advisory. (BS)
􀂉 REpower’s shareholders have approved Suzlon Energy’s
proposal to acquire the remaining shares in the company. (Mint)
􀂉 Dr Reddy’s Labs has announced the launch of the generic version
of Exelon in the US market. (Mint)

News Headlines: 24 Sept: Deutsche bank,

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News Headlines
BSE Sensex dives 4.1 pct; biggest fall in 2 years (Reuters)
The BSE Sensex slumped 4.1 percent on Thursday in its biggest one-day slide in more than two years as investors fled risky assets across global markets on a grim U.S. economic outlook and slowing manufacturing growth in China.
Rupee Plunges Most in 15 Years to 28-month Low (Bloomberg Finance LP)
India’s rupee plunged the most in more than 15 years as investors sold EM assets in favor of the dollar’s relative safety on concern the global economy is weakening.
RBI Currently Not Intervening in Rupee: Mukherjee (Bloomberg Finance LP)
India’s central bank will intervene in the currency market to curb excessive swings in the rupee, though it isn’t doing so at the moment, Finance Minister said.
RBI believed to have sold dollars around 49.15: Traders (ET)
The Reserve Bank of India was suspected to be selling dollars in the forex market on Thursday at around 49.15 rupees to arrest steep losses in the local unit.
Food Inflation Slows to Lowest Level in Seven Weeks (Bloomberg Finance LP)
An index measuring wholesale prices of agricultural products gained 8.84 percent in the week ended Sept. 10 from a year earlier. It rose 9.47 percent the previous week.
India cuts US debt exposure by $4.2 bn in 3 months (ET)
India has lowered its exposure to America's ballooning debt, as its holding of the US Treasury bonds fell by USD 4.2 billion between May and July this year.
Rains pick up in past week, monsoon withdrawal eyed (Reuters)
India's monsoon rains were 29 percent above normal in the week to Sept. 21, strengthening from 1 percent above average in the previous week.
FMC to regulate electronic commodity spot exchanges (BS)
The Union ministry of consumer affairs has told the Forward Markets Commission (FMC) to overview, monitor and regulate electronic commodity spot exchanges.
Dip in coal output to hit capacity utilisation of power projects (BS)
A dip in the coal production by Coal India is all set to bring down the capacity utilisation of power projects across India, said the ministry of power.
India buys palm olein after Indonesia tax change (ET)
India struck deals for 50,000 tonnes of refined, bleached and deodorised (RBD) palm olein from Indonesia in the last week, traders said on Thursday, in an immediate reaction to Jakarta's tax cut on exports of processed oils from September 15.
NMDC agrees to buy stake in Australia's Legacy (Reuters)
National Mineral Development Corp has agreed to acquire a 50 percent stake in Australian iron ore and gold explorer Legacy Iron Ore for almost A$19 mln ($19 mln).
GVK in talks with Indonesia firm to divest coal mines stake (Reuters)
GVK group is in talks with Indonesia's PT Kideco Jaya Agung for divesting part of its stake in the coal mines that it bought last week from Hancock Group for $1.26 billion.
IVRCL bags orders worth Rs 2229 crore (ET)
IVRCL Ltd has bagged orders worth Rs 2,228.94 crore, including a road project that entails widening a stretch of 311 km in Arunachal Pradesh worth Rs 1,486 crore.
ABB wins USD 71 million order from SAIL (ET)
ABB has won a USD 71 million order from Steel Authority of India to supply a sub-station package for its Bhilai Steel Plant in Chhattisgarh.
L&T bags Rs 700 cr order from Omanese gas company (ET)
Larsen & Toubro's hydrocarbon division has bagged a Rs 700 crore contract from Petroleum Development Oman for setting up a greenfield gas treatment plant.
Reliance Industries to review oil strategy, may drill abroad with BP (ET)
Reliance Industries is undertaking a comprehensive review of its oil and gas strategy, which may compel the company to drill abroad in partnership with global major BP instead of bidding for new blocks in the energy-starved country.
Global Stocks Enter Bear Market (Bloomberg Finance LP)
Stocks sank, dragging a gauge of global equities into a bear market, Treasury 10-year yields slid to a record low and the Dollar Index rose to a seven-month high amid concern central banks are running out of tools to prevent a recession.
Home Prices in U.S. Fell 3.3% in July (Bloomberg Finance LP)
U.S. home prices declined in the 12 months through July as concerns that the economy may enter another recession sapped the confidence of would-be buyers.
Greece Speeds Budget Cuts to Ensure Aid (Bloomberg Finance LP)
Greece said it will accelerate budget cuts to keep emergency loans flowing, extending austerity measures that have failed to ease doubts that it can avoid default.

Buy Bharti Airtel- Clearing the foreign currency maze 􀂄 UBS

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Bharti Airtel Ltd.
C learing the foreign currency maze
􀂄 Event: US$ has appreciated against key Bharti’s operating currencies
Indian Rupee and other key African currencies have depreciated against USD in
the quarter (table 5). Given Bharti’s significant foreign currency (FX) exposure,
there have been concerns on the impact of FX movement on Bharti’s financials.
The stock has been down 4% in the last 5 trading sessions.
􀂄 Impact: P&L hit can be Rs4.6b in 2Q; B/S impact likely to be minimal
As of Mar’11, Bharti had gross debt of Rs621b, 84% of which had FX exposure.
We estimate that impact of FX transaction losses to be Rs4.6b on 2QFY12 P&L.
However, we caution that these are preliminary estimates and can change with Sep
ending FX rate. Also, we have not factored any gains/losses from derivative
positions in our estimates.
􀂄 Action: Reiterate Buy with a PT of Rs530
We note adjustments due to FX movement are temporal in nature and can reverse
once rupee appreciates. Our India economist, Philip Wyatt, expects year end USD
INR exchange rate to be Rs45. Given Bharti’s dominant position in the sector, we
believe any weakness in stock due to concerns of FX movement presents an
opportunity. Fundamentally, operating business environment continues to improve
with emergence of pricing power and easing in competitive intensity.
􀂄 Valuation: Our PT is SoTP based; Bharti is our top-pick
We value India/SA operations at Rs453, Indus & Bharti Infratel at Rs99, Africa
operations at Rs10. We also incorporate a regulatory charge of Rs32. Bharti has
underperformed Idea by 31% YTD.


􀁑 Bharti Airtel Ltd.
With a pan-India presence, Bharti Airtel is the largest mobile operator in the
country and recorded a revenue market share of 31.5% in Q4 FY10. The
broadband and telephone group provides services in 100 cities, while the
enterprise services group has two sub-units: carriers (long-distance services) and
corporate services. All services are provided under the Airtel brand. Singapore
Telecom owns a 32.04% stake. Bharti Airtel acquired an 80% stake in Zain
Africa in 2010 at an EV of US$10.7bn.
􀁑 Statement of Risk
Irrational competition among the operators, the shortage of frequency spectrum
and over-bidding during the 3G spectrum auction are the key risks facing all the
operators at the industry level.
We believe Bharti faces execution risk in light of the rapid growth of India's
mobile subscriber base. The company recently announced a shift in strategy and
will focus on overseas acquisitions as another means of creating shareholder
value. While Bharti's management has historically had good discipline when it
comes to investing capital, we believe there is a risk of Bharti overpaying for
acquisitions, given that there are typically multiple bidders in most transacti

Coal India Misses YTD production target by 16mt 􀂄 UBS

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UBS Investment Research
Coal India
M isses YTD production target by 16mt
􀂄 Event: misses YTD production due to rains; wagon availability reduces
(1) Coal India (CIL) achieved 93% of its production target in April-August.
Production was 152mt (versus target of 163mt). Production fell further short of the
target in September due to heavy rains (table below) leading to a YTD production
miss of 16mt (versus target). CIL achieved only 86% of its target in July-August
(56mt versus 65mt) versus 98% in 1QFY12. (2) Wagon/rake availability reduced
to less than 150 rakes/day in September (1QFY12—166 rakes/day) implying that
2QFY12 sales could be lower than street estimates.
􀂄 Impact: CIL maintains FY12 production/sales est; hopes for H2 recovery
CIL had guided for 452mt production for FY12. It maintains its target as it hopes
to recover the shortfall in H2 post monsoons as coal excavation/railway wagon
availability improves. H2 is usually stronger in production/sales. CIL has guided
for 454mt (lower end)/477mt (upper end) of sales for FY12.
􀂄 Action: maintain estimates; have been highlighting execution/wagon issues
As highlighted in our note, Asia on the Ground: India Coal Sector—What’s
happening on the execution side, published on 28 July 2011, we remain cautious
on CIL as: 1) progress on washeries is slow—only one out of 20 has been
contracted; 2) production/despatch target of 452mt/454mt for FY12 could
disappoint due to execution/wagon availability issues; 3) railway wagon ordering
was delayed—the government’s budget for 2012 had targeted 18,000 new wagons
but ordering did not happen till August; and 4) delay in starting wage negotiations.
We maintain our estimates (details below).
􀂄 Valuation: maintain Neutral rating and price target of Rs400
We continue to value CIL on 15x FY13E PE.


􀁑 Coal India
Coal India is the largest coal company in the world (primarily thermal coal). The
government owns 90% of the company. It sells its entire output (415Mt in
FY10) in the domestic market. Coal India sells coal at a significant discount (55-
60%) to international coal prices.
􀁑 Statement of Risk
Coal India is a public sector enterprise and hence, may not be able to raise coal
prices in line with input costs (given inflation concerns), negatively impacting
earnings. Coal India is expanding capacity significantly; any delay in capacity is
likely to impact earnings. Valuation: We value Coal India on 15x FY13E EPS.

Emerging Markets Strategist -- Permafrost or permarisk?  HSBC

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Emerging Markets Strategist
Permafrost or permarisk?
 The developed world may be entering a world of economic
“permafrost” but EM fundamentals remain robust
 However, now is not the time to increase risk because
investors fear a bleaker scenario of “permarisk”
 We have grown more cautious, favoring cash, reducing
duration in local debt, switching toward hard-currency
bonds, and becoming more conservative with EM FX


HSBC economists have talked about developed markets entering a “permafrost”
world characterized by anemic growth (see The new economic permafrost, by
Stephen King, 23 August). EM economies, by contrast, are cooling, not freezing.
While the economic team ha cut its forecasts of GDP growth in the developed world to
1.3% for 2011 and 1.6% for 2012, we expect only a modest impact on the emerging
world, with growth of 6.2% and 6.1% this year and next.
It is not time to abandon our defensive stance to EM assets. With the euro-zone
financial crisis unresolved, investors fear a gloomier “permarisk” scenario. While EM
risk-on is consistent with permafrost, that would not be the case under “permarisk.”
Geographical distance would not insulate EM from the type of financial distress of 2008.
We recommend reducing duration in local markets and being cautious on EM FX.
Permafrost should anchor the short end of local yield curves, as lower growth opens room
for monetary easing in some EM countries. On the other hand, permarisk fears are starting
to weigh on EM long-term bond yields and currencies.
Weakened inflows to EM funds conspire against further tightening in local yields after the
recent rally. In turn, lower carry weakens the support to EM FX, which remains highly
correlated with risk-on/risk-off trading patterns. EM equity valuations are cheap, but a
rebound of stock markets in the developed world is needed for EM equities to rally again.
 Local markets: We recommend reducing duration. Receive 5yr TIIE in Mexico, we
continue to like receiving 5y IRS spread between South Africa and Poland.
 External debt: EM EXD has cheapened, but vulnerabilities to a risk-off scenario
suggest a preference for high-grade credits over high-yield.
 FX: We still have conviction on short USD-CNH. We like CZK, IDR, BRL, and MXN at
these levels. Our preferred defensive trades are to short PLN, RUB, VND, and ARS.
 Equity: The 12-month forward PE now stands at 9.3%, compared with a post-2000
average of 11x. S&P stabilization is a necessary condition for cheap valuations to
get traction.

Private and Public Sector Indebtedness in Advanced Economies::Goldman Sachs,

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As the major advanced economies sputter
along at sub-par growth and sovereign debt
concerns weigh heavily on Euro-zone
members, attention has turned increasingly to
whether the debt accumulated before and
through the ‘great recession’ is a key factor
holding back growth. While the most recent
headlines out of the Euro-zone (and the US not
so long ago) have focused on government
debt, the indebtedness of the private sector is
equally relevant in assessing the prospects for
the growth of private demand.
In recent work we have discussed government
indebtedness and the challenge of fiscal
consolidation in the advanced economies. Here
we focus primarily on the developments in
household and corporate sector indebtedness.
Broadly speaking, households and corporates
in the developed markets are already a couple
of years into the deleveraging process from
peak debt levels.
Part of that private sector deleveraging has
occurred through an implicit transfer of debt to
the public sector as governments stepped in to
support growth through the crisis. So the
process of public deleveraging is much more
recent, and in most places has not even started
in earnest. While it is difficult to assess
precisely how far the overall deleveraging
process has left to go, the countries in the
Euro-zone periphery are likely to face the
hardest challenge given weakening growth
prospects, higher interest rates and falling
asset values.


Private and Public Sector Indebtedness in Advanced Economies
As the major advanced economies sputter along at subpar
growth and sovereign debt concerns weigh heavily on
Euro-zone members, attention has turned increasingly to
whether the debt accumulated before and through the
‘great recession’ is a key factor holding back growth.
While the most recent headlines out of the Euro-zone
(and the US not so long ago) have focused on
government debt, the indebtedness of the private sector is
equally relevant in assessing the prospects for the growth
of private demand.
In recent work we have discussed government
indebtedness and the challenge of fiscal consolidation in
the advanced economies (see The Balancing Act of Fiscal
Consolidation, Global Economics Weekly 11/20). Here
we focus primarily on the developments in household and
corporate sector indebtedness.1 Broadly speaking, DM
households and corporates are already a couple of years
into the deleveraging process from peak debt levels. Part
of that private sector deleveraging has occurred by an
implicit transfer of debt to the public sector as
governments stepped in to support growth through the
crisis. So the process of public deleveraging is much
more recent, and in most places has not even started in
earnest. While it is difficult to assess precisely how far
the overall deleveraging process has left to go, the
countries in the Euro-zone periphery are likely to face the
hardest challenge given weakening growth prospects,
higher interest rates and falling asset values.
How Much ‘Deleveraging’ Has There Been?
Indebtedness or leverage can be measured in many
different ways, but it is often calculated as debt relative to
GDP (a measure of national income). Private sector debt
levels, on this measure, have grown significantly in
advanced economies in the past decade. In many cases, in
addition to a longstanding upward trend that reflected
financial deepening and decreases in nominal and real
interest rates, private sector debt accelerated in the 2000s.
Since the great recession, however, there has been a
significant adjustment in private sector debt levels, driven
initially and substantially by the corporate sector but
followed recently by the household sector as well. Private
sector debt levels have declined in pretty much all
advanced economies in our sample, with the most
significant reductions from peak levels taking place in
Ireland and the UK (Table 1).
Much of this decrease has happened in the non-financial
corporate sector, where indebtedness peaked in 2009
across most countries, and subsequently started to fall.
Cumulatively from peak levels, the biggest declines were
in Ireland, Sweden, Norway, the UK, and Germany.
Some of these declines have been very large indeed. In
Ireland, indebtedness has fallen almost 40ppt relative to
GDP since 2009Q4 (even with a large fall in GDP),
although it is still the highest in the group. In Sweden and
Norway, debt-to-GDP ratios for the corporate sector have
corrected about 20ppt from peak levels in 2009Q1, and
even in the UK they have corrected almost 15ppt since
peak levels in 2009Q3. In the US, non-financial corporate
debt-to-GDP was relatively low to start with, and it has
corrected by another 6ppt since its peak in 2009Q1.
In many cases (such as the US, UK and Germany),
corporate leverage measured in this fashion is not far off
pre-crisis levels. So, overall, this has been a story of
corporates in many advanced economies lowering their
leverage aggressively in response to the great recession.
And whereas we have focused on the overall nonfinancial
sectors, the story is even more true at the top
end of the distribution of firms. As Charlie Himmelberg
has pointed out, for the rated credit universe, corporate
leverage (measured by the debt-to-EBITDA ratio) is the
lowest in 25 years. By many metrics, corporate credit
quality for the higher-rated corporate is very strong.


OUTLOOK KEY ISSUES
UNITED STATES We lowered our growth forecast and now expect real
GDP growth of just 1.5%-2.0% (annualised) in 2011H2
and 2.0%-2.5% through the end of 2012. Since this
pace is below the US economy’s potential, we now
expect the unemployment rate to be at 9.4% by the end
of 2012, slightly above the current level. The large—
and now growing—output gap will result in significant
renewed disinflation, pushing core inflation from a peak
of around 2% in late 2011 to 1¼% in late 2012.
The US economy has not fallen off a cliff, despite the
‘confidence shock’ precipitated by the debt ceiling
impasse, the downgrade of its sovereign rating and
the recent turmoil in financial markets. We continue to
see a one-in-three risk of renewed recession due to
the worsening European financial crisis and the
potential for greater-than-expected fiscal drag in early
2012 if the payroll tax cut is not extended for another
year.
JAPAN We forecast growth of –0.5% in 2011 and 2.6% in
2012. On a quarterly basis, we expect real GDP to
rebound sharply in Q3 (+4.4%qoq annualised) after
contracting between 2010Q4 and 2011Q2. While
production has recovered nearly to its pre-earthquake
level, there are growing risks to the production outlook
for autumn due to declining foreign demand, prolonged
Yen strength and supplementary budget delays.
Finance Minister Noda won the run-off election to
become the DPJ’s next president and was elected
soon after as the 62nd prime minister. We expect him
to respect the path laid out by the previous
administration and think there will be little disruption in
economic policy. We believe the BoJ will be affected
by the outcome of the September FOMC meeting and
the degree to which the Yen rises in response.
EUROPE For 2011 and 2012, we forecast growth of 1.8% and
1.6% for the EU-27 and 1.7% and 1.3% for the Eurozone.
We believe that the first estimates of Q2 GDP
growth in the core Euro-zone countries understate the
underlying pace of economic expansion; as such, we
expect a rebound in growth in the core in 2011H2 to
steady, albeit not spectacular, rates. By contrast,
further fiscal austerity, intensifying financial dislocation
and the ongoing effects of the required substantial
balance sheet adjustments all point to substantially
weaker growth in the periphery.
Political leadership is required to address the deeper
fiscal, structural and institutional weaknesses in the
Euro-zone. In our view, demonstration of such
leadership is unlikely. In the face of this political
impasse, the ECB will continue to address financial
dislocations in the periphery through non-standard
means, because the alternative—a financial collapse
in the periphery, with contagion to the core—is simply
too costly for the ECB to contemplate. In this context,
market tensions, punctuated by episodes of stress,
are likely to persist.
NON-JAPAN ASIA For Asia ex Japan, we forecast growth of 7.7% and
7.8% in 2011 and 2012. Our baseline remains that AEJ
growth will remain resilient, as weaker external demand
is offset by less tight macro policies. In China, we
expect growth of 9.3% in 2011 and 9.2% in 2012. In
India, we also are expecting slower growth of 7.3% in
2011, followed by a reacceleration to 7.8% in 2012.
In China, we expect policymakers to keep policy
relatively tight in the very near term as year-on-year
CPI inflation remains elevated. But as inflation and
growth data both show a clear downward trend in the
coming months, the policy stance will likely become
incrementally looser than it is now, thereby softening
the growth impact of a weaker external environment.
LATIN AMERICA Our LatAm growth forecast is 4.7% in 2011 and 4.0%
in 2012. Following a period of determined monetary
policy rate normalisation moves, the majority of the
regional inflation-targeting central banks are expected
to moderate the pace of rate normalisation significantly.
In Brazil, we recently lowered our growth forecasts to
3.7% and 3.8% in 2011 and 2012, respectively, from
4.5% and 4.0% previously, owing to weaker incoming
domestic data and a deterioration in the global
outlook.
CENTRAL & EASTERN
EUROPE, MIDDLE
EAST AND AFRICA
The broad ‘sustained recovery’ theme in the CEEMEA
region remains intact, although we expect the weaker
global picture to have a negative impact on growth
prospects for the small open economies (Czech Republic,
Israel) and the relatively more leveraged/balance-sheetconstrained
economies (Hungary, Turkey). We see a
number of downside risks, including further weakening in
the global picture and contagion from the Euro-zone.
We maintain our constructive views on Russia and
expect to see sustained, strong growth going into
2012, but see downside risk from the debate on the
political transition, which is proving more drawn out
than we initially thought. We are now substantially
less upbeat on South Africa, given continuing
weakness in domestic demand and the supply
disruptions caused by recent industrial action.