Deutsche's 10 picks to play the rural demand theme

Brokerage house Deutsche Equities India sees above average rainfall this year being a strong driver of growth in the rural economy, and is advising investors to buy stocks of companies, which have invested in strengthening their presence in rural areas. "Despite the low direct share of agriculture in India's GDP, rural prosperity has been a key driver of the overall economy. Years of above average monsoon rainfall have been characterized by rising rural prosperity and with India Inc progressively increasing its distribution footprint into rural India, we expect the multiplierimpact of rural prosperity to be higher in the current year relative to previous years of strong monsoons," says the Deustche note.

1. M&M, 
2. Maruti, 
3. Bharti, 
4. ITC, 
5. HDFC Bank, 
6. M&M Financials, 
7. Shriram Transport, 
8. Grasim 
9. Shree Cements and 
10. NHPC 

are the stocks that the brokerage is recommending
.

‘Boring investments are the best’ :Head, Private Wealth Management, Deutsche Bank India: Business Line

Buying stocks when everyone is bullish, at stretched valuations, always ends in tears.

“Simple and boring is the way to successful investments. Leave the flashy experiences for the movie theatres,” Ajay Bagga, Head, Private Wealth Management, Deutsche Bank India, tells Business Line. Excerpts from an interview:

Do you take your own financial decisions or do you rely on advisors?

Having worked in the financial services industry for over 23 years, I prefer to make my financial decisions. But I do have the humility to recognise that things change fast. So a good financial advisor can add value, not only in terms of the breadth of advice but also in all the related convenience and services that they can bring to the table.

How do you differentiate the goals and investment requirements for the same, for each member of your family?

It is a mix of financial goals, time horizon and risk appetite, and woven around each family member’s financial situation. So for an older member in retirement, stability of returns is most important, while for youngsters just starting their careers, long term risk adjusted returns are critical.

Which factor do you look for most in an investment — risk, returns, liquidity or income generation?

It depends on the overall asset allocation and the role that the investment plays in it. For example, I use equities for very long term financial goals and don’t trade in them for the short term. Income funds are used to smoothen cash flows and generate present income. Real estate is for stay or for long term capital appreciation. Gold gives an inflation hedge and is a store of value during an emergency. What is critical is that one should understand what one is investing into, for what objective.

Deutsche Bank -End of the commodity super-cycle :PDF link

http://www.docstoc.com/docs/160572386/Deutsche-Bank--End-of-the-commodity-super-cycle

The House View – September Struggle : Deutsche Bank’s Global Strategy Group

The global economy is gaining momentum. The Eurozone has emerged from its longest recession on record,
China’s slowdown appears to have stabilised, while US data continues to support our view of a strengthening
recovery. With the major regions exhibiting signs of stability, the risks of an economic dislocation has fallen
However, the recovery brings its own concerns. Global rates have spiked following Bernanke's May 21 speech
to Congress, which opened the door to a reduction, or ‘tapering’, of the Fed’s Quantitative Easing bond
purchases. Central banks are increasingly turning to ‘forward guidance’ as a tool to keep rates low to prevent
headwinds to the recovery. Nevertheless, volatility in some markets has picked-up amid fears of a liquidity
withdrawal. Emerging Markets, a key beneficiary of the abundant liquidity environment, have seen the most
dramatic moves as capital has exited the region amid general risk aversion and as investors chase higher
rates in developed markets. The weakness has been broad-based, although countries with current account
deficits have been hit disproportionately, especially the BIITS (Brazil, India, Indonesia, South Africa and
Turkey). However, so far the sell-off is consistent with a slowdown, not a collapse.
September, which is historically the worst month for stocks, has a minefield of possible event risks for the
market. In addition to a decision on Fed tapering, this month also sees the commencement of US budget
negotiations ahead of the impending debt ceiling and possibly the nomination of the next Fed Chair. We also
have federal elections in Germany. In the Middle East, tensions could escalate given the potential for imminent
military action in Syria. All of these risks are likely to keep volatility elevated in the near-term.
Ultimately, we do not see a systemic threat emerging from these events and expect any ‘September struggle’
to be short-lived. Over the long term, we remain positive on equities and retain our bias towards developed
markets, and expect earnings expectations will rise along with the economic recovery
David Folkerts-Landau, Group Chief Economist

Rajan's inaugural speech hinted at growth push: Deutsche Bank

Deutsche Bank on Friday said RBI governor Raghuram Rajan's inaugural statement hinted that the Reserve Bank is done with the rate tightening.

"Beyond the discussion on price stability, the rest of the governor's statement was geared towards lowering the cost of doing business....We think that RBI is done with tightening for now," Deutsche Bank said in a note, two days after Rajan took over as RBI governor.

It further said with the growth falling to 4.4% for the June quarter, the country cannot afford high rates at present.

"Corporate and banking distress is spreading, consumer sentiment and consumption indicators are waning, and businesses are reeling from a 20% rise in the cost of imports and several hundred basis points of rise in financing costs," the report noted.

However, the report said some sacrifice in growth is inevitable to fight the declining rupee and Rajan "needs to follow up RBI's July tightening measures with more rate hikes to support the rupee".

The report also said the monetary policy should not give any "further negative impulse".

"We expect RBI to start looking hard at stabilising the financial system by securing financing through swaps and communicate that at this juncture inflation will not be assigned exceedingly high weight in its reaction function," it said, warning that any hawkish guidance in the September 20 policy announcement will lead Deutsche Bank to a further reduction in its growth estimate for the fiscal.

Deutsche Bank :: India strategy, LIC Housing, Jain Irrigation, Tata Motors

India Rates - Worsening technicals [Arjun Shetty]
Bottomline: The authorities in India have made it clear that stabilization of the
rupee is their highest priority. Even as they struggle to achieve the same
through a classic textbook style inversion of the yield curve; the spill over into
bond market technicals means more scope for pain on long end rates. In
particular, we note that RBI itself as a key buyer of duration will likely have to
stay out of the market, worsening the demand picture for bonds. While
nominal level of yields might look attractive to a section of end investors after
the recent correction, we see the risks more skewed still toward bear
steepening in curves.

Deutsche Bank Research: The Equity View August, 2013

 Equities are trading close to record highs in developed markets despite an underwhelming Q2 earnings season.
Multiples have rallied to mid cycle levels as markets discount an imminent earnings recovery.
 Recent macro data has given the market considerable empirical cover to anticipate an inflection in earnings
momentum, particularly given bottom up consensus expectations are now muted (+1% Europe/+6% US for CY13):
– ISM Manufacturing and Services data for August posted strong gains, including the new orders component.
– European PMIs confirmed the uptrend in flash figures, with the strongest gains from the periphery suggesting a
more balanced pattern of growth. Our long-standing non consensus view of a return to growth in Europe in Q2
was confirmed with a +0.3% print.
– In July, the UK composite PMI hit its highest level since 1998 and retail sales surged to a 7 year high
– Bearish views on China had become consensual. July trade data surprised positively and IP accelerated in July
to 9.7%, a 5 month high with electricity consumption in August up 10%.
– Only Japan came in light of forecasts with 2.6% GDP (annualised) vs consensus of 3.6%.
 Money flows continue to provide support to DM equities. AUM inflows have spread to Europe and are now positive
YTD in addition to the US and Japan. This is providing a positive tone to markets, particularly on pull-backs.
 After a slow start to 2013, global M&A activity has accelerated in Q2 and June –July were ahead of the 5 year
average. Global ECM activity (placings, IPOs) is up 42% at the H1 stage, highlighting levels of risk appetite.
 Conclusion: Despite concerns over rising treasury yields/taper risk and markets near to their highs, equities are well
supported at these levels through to YE on greater confidence of an inflection in earnings momentum, based on
more evidence of a broadly based recovery than had been anticipated, plus continued inflows to the asset class.
 The biggest risk to our view is a disorderly market response to the end of QE that sees bond yields rise or equities
fall in a manner that would impede growth. We expect intermittent volatility spikes around events such as German
elections/US debt ceiling discussions and would buy such pull-backs.

Investor feedback on Indian Infrastructure sector:: Deutsche bank,

A lot of investors in the first two days of our marketing trip in Asia were bit
taken aback by the extent of slowdown suggested by the micro data points,
with impact now being seen in power, coal demand (after a prolonged slow
down in industrial products such as cement). While a few investors felt that
India has probably achieved the inflation target, the key related question was –
at what cost? The next worry for most seems to be, what would happen if
foreign investors were to start selling from hereon?
Other stock specific questions were
• Why is L&T not at INR 1200/ sh (vs INR 1428/sh)
• Do we think that utilities like Coal India / NTPC can even correct 5-
10% from here, given the demand slowdown? What are must buy
levels? and
• For investors with a longer horizon, the key debate was which
companies can weather the downturn?
What do Investors own in the Infrastructure sector?
Surprisingly very few hold Larsen & Toubro (Buy, INR 1428) our top infra pick
and are underweight the large caps in the sector, with ownership being either
in cement names or mid-caps such as Cummins India (Hold, INR 456) and for
some even the likes of Crompton (unrated) and Voltas (unrated). Amongst
Utilities it is either PowerGrid (Hold, INR 109) or NTPC (Buy, INR 142) with no
large holders in Coal India (Buy, INR 291) or BHEL (Buy, INR 187). For few
BHEL is still a short - but we find the tradeoff on cost of the position vs fair
value estimate is not that attractive. Despite L&T being low in ownership, the
stock remains on the radar for everyone with buying levels around INR 1200-
1250/sh as they feel a large company like L&T has a lot of levers to reduce
earnings cyclicality and the near term earnings weakness is well known.
What's our message?
At our end, we are cautious in our approach given the macro headwinds and
recommend investors buying into companies that (a) can weather downturn
through entry into new businesses/markets (b) have a strong balance sheet,
(c) can show an earnings CAGR above 12-15% under the scenario of GDP
growth continuing at low levels, (d) are trading at valuations cheaper to market
on a relative basis and/or offering a dividend yield of over 5%.
Our preferred picks are L&T, UltraTech, Coal India, NTPC, Shree Cement and
Thermax.

Utilities - Intent to improve coal for IPPs, modalities not clear :: Deutsche bank,

Utilities - Intent to improve coal for IPPs, modalities not clear [Abhishek Puri]
Press reports (Hindu, 21 Jun’13) suggest that the Cabinet Committee on Economic Affairs has approved the coal price pass-through mechanism. Key decisions – 1) Coal India will sign fuel supply agreements (FSA) with all 78 GW capacities – additional 16GW capacities approved to include cases of tapering linkage. Fuel supply will start after power purchase agreement (PPA) is signed. 2) Coal India annual supply quantity will be limited to 65/65/67/75% for FY14/15/16/17 for domestic coal and balance coal to meet 80% in FSA will be met through imports either by Coal India or directly by power generators. 3) Higher cost of imported coal will be allowed as a pass-through in tariffs. Ministry of Power (MOP) will issue advisory to Central Regulator (CERC) and State Regulators (SERC) to develop modalities for pass-through.
Indian Infrastructure - Needing much more than help from the weather gods [Manish Saxena]
We are encouraged by the monsoon, which is above normal, widespread and could help arrest the dip in India's water tables. This is good news for the economy as a whole, as power deficits decline, both from lower demand from the subsidized agri sector and higher supply from low-cost hydro. However, for the majority of infrastructure projects, built on structural shortages, this would mean a push-back in earnings. Notwithstanding strong 2H demand, we cut Coal India estimates by 4% to factor in the likely H1 miss, similar to cuts we made for the cement companies. Even for DG sets, sales may be pushed back, not good news for CUMM (Hold) and merchant power player IPPs.
Indian IT Services - Currency tailwind for the sector; HCL Tech and TCS key beneficiaries [Aniruddha Bhosale]
In our view, HCL Tech and TCS will be the main beneficiaries of the recent rupee depreciation. Our sensitivity analysis suggests that, ceteris paribus, for every 1% depreciation of the INR vs. the USD, earnings of the top-tier Indian IT service companies are likely to increase by 1.5-1.9%, while EBIT margins will be up 20-25bps in FY14E. We believe HCL Tech and Infosys are the most likely to post better-than-expected margin performance if the rupee weakness persists, while TCS will reinvest the gains from the weaker rupee to improve its top line. We reiterate our positive view on the sector, with TCS and Tech Mahindra our top picks.
India Economics Weekly - Will "taper" damage India? [Taimur Baig]
Will "taper" damage India? Since May 21, there has been a rise in global risk aversion as the US Federal Reserve has begun to provide guidance, in a manner somewhat more hawkish than expected, regarding its "tapering" of asset purchase program. India's markets have not been spared, with the INR depreciating the most against the USD in Asia (-6.6%), the Nifty declining by about 8%, and the 10-yr bond selling off by 2%. Plenty can be done to prevent the exchange rate from depreciating in a disorderly manner, in our view.

DB - Indian Infrastructure - Needing much more than help from the weather gods

We are encouraged by the monsoon, which is above normal, widespread and
could help arrest the dip in India's water tables. This is good news for the
economy as a whole, as power deficits decline, both from lower demand from
the subsidized agri sector and higher supply from low-cost hydro. However, for
the majority of infrastructure projects, built on structural shortages, this would
mean a push-back in earnings. Notwithstanding strong 2H demand, we cut
Coal India estimates by 4% to factor in the likely H1 miss, similar to cuts we
made for the cement companies. Even for DG sets, sales may be pushed back,
not good news for CUMM (Hold) and merchant power player IPPs.

Titan plans to diversify further "Deutsche bank,

Fact:
** Titan proposes to change its name to “Titan Company Limited” from “Titan
Industries Limited” (it was incorporated as “Titan Watches Limited” in 1984).
** It plans to amend the “Objects” clause of Memorandum of Association
enabling it to enter newer businesses (excerpts below):
1. Hearing aids and related accessories
2. Apparel, garments, sarees, writing instruments, mobile phones,
musical instruments, lifestyle accessories, etc.
3. Rendering content through educational workshops, conferences,
theater, entertainment shows, gadgets, toys, DIY kits, activity books,
sports products, food and beverages, etc.
4. Kitchen appliances, storage shelves, kitchen utensils, chimneys, hobs,
furniture and cabinets, etc.
5. Products powered by solar energy
Deutsche view:
** While we believe that Titan is unlikely to aggressively enter many of these
new segments, the intention seems clear—to diversify from jewelry (which
accounts for c.80% of profits) in the medium term.
** While the company believes in its ability to incubate and grow new
business lines, it will likely face organizational challenges. It would require a
significant mindset change to incubate smaller business at this point, as the
jewelry division is c.INR80 bn in sales (in our view, there are parallels in
Hindustan Unilever’s Foods and Ice cream business—top management
attention and adequate resourcing are challenges faced by small businesses in
large companies).
Retain Hold
Titan's jewelry business model's attractiveness has diminished substantially
with the recent Reserve Bank regulation which effectively bans the 'gold-onlease' model. Even if we look beyond the near-term earnings cuts, the
overhang of further regulation (likely curbs on advance purchase scheme)
cannot be ignored. Recent stock correction reflects some of the concerns.
Retain Hold rating.

DB - Indian IT Services - Currency tailwind for the sector_ HCL Tech and TCS key beneficiaries

In our view, HCL Tech and TCS will be the main beneficiaries of the recent
rupee depreciation. Our sensitivity analysis suggests that, ceteris paribus, for
every 1% depreciation of the INR vs. the USD, earnings of the top-tier Indian IT
service companies are likely to increase by 1.5-1.9%, while EBIT margins will
be up 20-25bps in FY14E. We believe HCL Tech and Infosys are the most likely
to post better-than-expected margin performance if the rupee weakness
persists, while TCS will reinvest the gains from the weaker rupee to improve its
top line. We reiterate our positive view on the sector, with TCS and Tech
Mahindra our top picks.
Prolonged rupee weakness could accelerate turnaround at Infosys
Rupee depreciation further improves the competitiveness of the Indian IT
service companies. In particular, it will enable vendors to enhance win rates in
IMS (infrastructure management services) based deals. Margin pressure
exerted by these deals (which, in some cases, involve transfer of assets and
employees) can be offset by gains from a weaker rupee. In keeping with recent
trends, we believe TCS will use the current rupee weakness to win more
transformational engagements (involving IMS) and improve its top line, while
maintaining operating margins. With regard to Infosys, a weaker rupee can
help accelerate the ‘course correction’ undertaken by the company. In the
short term, however, we expect it to partially offset the impact of (a) pricing
pressure, (b) wage increases, (c) the deferred cost of the Lodestone acquisition
and (d) heightened investment in sales.
Weak rupee to improve operating margins by 100-150bps in the June-Q
In the June-Q, the rupee has depreciated 5% (average for the quarter) vs. the
USD. We believe this will likely improve operating margins (EBIT) positively by
100-150bps. For TCS, wage hikes offered during the quarter will affect
operating margins by 200-250bps qoq. Overall, we expect TCS to deliver a
25.5% (-100bps qoq) EBIT margin during the Jun-Q.
Valuing Indian IT service stocks at PE of 13-20x FY14E earnings; risks
We continue to value the stocks at 13-20x one-year forward earnings (relative
to their historical trading range, comparing with peers, as well as growth rates)
and will revisit our earnings estimates and target PE multiples once there is
more clarity on the nature and size of IT budgets and the sustainability of the
demand pick-up. The key sector risks relate to cross-currency headwinds.

Deutsche bank, reports update

Cairn India - Factoring in lower crude oil forecast; maintaining Hold [Harshad Katkar]
Deutsche Bank has lowered its oil price forecast by 4-6% on weaker oil demand, resulting in a reduction to Cairn India’s FY14-15E EPS by 4-7% and valuation by 7% to INR330/sh. We have also lowered our Rajasthan oil production forecast by 9% to 184k bpd for FY14 and 6% to 207k bpd for FY15, but raised our USD/INR assumption by 2% to 55 for FY14 and 53 thereafter. We maintain a Hold, as we see near-term challenges to a faster crude oil production ramp-up.
Oil & Gas - ONGC and Oil India acquire stake in Mozambique gas block for USD2.5bn [Harshad Katkar]
ONGC Videsh (OVL), fully owned subsidiary of ONGC, and Oil India (OIL) have signed definitive agreements with Videocon to acquire its 10% participating interest in the Rovuma Area 1 Offshore Block in Mozambique for USD2.475 bn. The acquisition will likely be implemented via a newly incorporated special purpose vehicle with OVL and OIL having 60% and 40% shares respectively.
Metals & Mining - Increase in iron ore royalty to 15% under consideration [Anuj Singla]
An Indian government panel has recommended a 5% increase in iron ore royalty (charge paid by mine owner/lessee to the respective state government for every tonne of mined mineral), as per Bloomberg reports. In case this proposal was to be implemented, it will increase the royalty rate for iron ore miners to 15% from 10% earlier. The panel’s report will need the approval of the mines ministry as well as Cabinet approval before the new proposed royalty rates become effective.
Indraprastha Gas - Pricing power reasserted, but we expect volumes to disappoint [Amit Murarka]
IGL has increased the selling price of compressed natural gas (CNG) by INR2/kg (5%), effective today. The new consumer price is INR41.9/kg in Delhi and INR47.35/kg in Noida, Greater Noida and Ghaziabad. The company has also raised domestic piped natural gas (PNG) price by 4% to INR24.5/scm for consumption upto 30scm in two months and by 14% to INR40.5/scm for consumption beyond 30scm.
Commodities Quarterly - Searching For Value [Michael Lewis]
We expect the DBLCI-MRE will prosper in the event of an eventual upturn in Chinese and US growth while a turn in Fed policy and heightened asset market volatility should provide favourable market conditions that the DB Momentum index can exploit.
US Daily Economic Notes - The spring is coiled, as we are due for some meaningful payroll volatility [Joseph LaVorgna]
Changes in monthly nonfarm payrolls have shown very little variation over the past couple of years. For example, last month nonfarm payrolls rose 175k. This was little different than its trailing three-month moving average of 163k, which itself was not statistically different from the 12-month moving average of 137k. Incidentally, all of our analysis uses the initially-reported change in nonfarm payrolls.

India Financial: 4QFY13 preview – does not look bad; valuations are attractive: Deutsche Bank

Steady earnings for private banks and NBFCs; upgrading UNBK to Buy


We expect steady earnings and asset quality to continue for private banks and
NBFCs in 4QFY13, aided by stable NIMs and capital issuances by Axis and IIB.
PSU banks are likely to see a QoQ improvement in gross and net slippages,
even while remaining high. Overall for banks, we expect NII to grow 8% YoY
and PAT to fall 1% YoY (private banks +21%, +22%). NBFCs’ earnings growth
is likely to be 26%. The recent sharp correction seems unjustified, and has
made valuations very attractive, in our view. We upgrade Union Bank to Buy
given the attractive valuations. We maintain a preference for ICICI, Axis, Yes
and IIB. We like PNB, Canara and BOI among the PSU banks.
NIM should remain stable; SBI is worst positioned
We think banks like Axis and IIB, which have raised equity capital, should
witness a QoQ NIM expansion. We expect most other private banks to witness
a stable QoQ NIM, with a rise on a YoY basis. While select public banks, such
as Canara and BOI, should also benefit, due to lower wholesale rates, we
believe the cut in base rates will neutralize this, to some extent. We expect SBI
to be the worst-positioned on margins, as its funding costs will be slow to fall,
as it is largely retail-funded, coupled with its intent to grow fast.
Asset quality may surprise positively on reported NPLs; restructuring may rise
As we have been highlighting, in terms of overall reported numbers, the
worsening phase on slippages is over, even though any improvement will be
gradual. We maintain our view that net slippages for PSU banks are likely to be
lower than 3Q levels, but that the pace of restructuring may continue.
However, credit costs are likely to remain high for public banks, as these banks
improve their provision coverage levels. Among the private banks, we expect
similar positive trends to continue, with no meaningful deviation. On retail
assets, we remain positive, despite some pressure in the CV portfolio.
On PSU banks, we lower our earnings forecasts and target prices marginally
Overall, in line with our thoughts on loan growth and margins, we have
reduced our earnings estimates for the PSU Banks by 2-9% and our target
prices by 3-9%. However, given their very attractive valuations, we remain
positive on these banks. Post a very sharp decline in stock prices, we upgrade
our recommendation on Union Bank to Buy.
NBFCs: another quarter of strong earnings
We expect NBFCs to continue to report stable asset quality in 4QFY13, with no
surprises likely. NIMs are likely to remain stable, even as we expect loan
growth to remain strong for most players. Overall, we expect NBFCs to report
net profit growth of 25% YoY during 4QFY13.
Valuation and risks
We value the Indian banks’ lending businesses on a two-stage residual income
model, insurance on appraisal value, asset management on percentage of
AUM and other non-banking businesses on P/E or P/B. Key upside risks are a
much lower NPL formation and higher-than-expected loan growth, driven by
economic recovery in FY14. The biggest downside risk is a sharply weaker
macro environment, which could result in higher-than-expected delinquencies,
in turn resulting in higher provisions

Deutsche Bank - Asia Outlook 2013 :: report PDF link

Deutsche Bank - Asia Outlook 2013

India Equity Strategy: Show me the earnings:: Deutsche bank,

Show me the earnings is the motto for 'reluctantly bullish' investors
We believe that the dynamic interplay of weak macro fundamentals on the one
hand coupled with central bank injections of liquidity at regular intervals has
compelled investors to become 'reluctantly bullish". As our Asia equity
strategist Ajay Kapur says "Show me the earnings" is the motto for markets in
the current environment. We believe that earnings and quality balance sheets
will become the key factors for markets, more than ever before. In the peculiar
environment we are in currently, investors may need to shed long-held dogmas
on valuations. We expect companies and sectors—particularly with a shrinking
investible universe—seen displaying sustainable earnings momentum will see
valuations continue to expand, in many cases, beyond recent historical highs.
The premium for earnings predictability will only get richer, in our view.

Sterlite Industries, Residual stake buyout of HZL and Balco likely to be earnings accretive::Deutsche bank,

Buyouts likely to be earnings accretive, though fair valuation could take a hit

Sterlite’s long-awaited buyout of the government’s residual stakes in HZL and
Balco is on investor radar screens yet again after media reports that the buyout
could be put on a fast track. Our analysis indicates the residual stake buyouts
are likely to be earnings accretive in the range of 7-13%. However, Sterlite’s
fair valuation could take a hit. If the January 2012 offer is executed, Sterlite’s
fair valuation would be positively affected by 2.6%. If the new potential offer –
implying higher bid prices for HZL (+20%) and Balco (+70%) – is executed,
Sterlite’s fair valuation would be negatively affected by 8.7%, without factoring
in any re-rating on improved cash fungibility. We maintain our Buy rating.

ECB: Exit Talk is Premature 􀂉 Deutsche Bank

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ECB: Exit Talk is Premature
􀂉 Italian PM Monti’s week-old suggestion that the Euroland debt crisis is almost over looks somewhat
hopeful based on developments overnight. Triggered by a poor Spanish bond auction, peripheral bond
yields have risen more than 20bps in Spain, Italy and Portugal and the Stoxx600 shed 2.1%. This price
action has carried through to the US, although the S&P500 closed with a comparatively modest 1.0%
loss. Treasuries have reversed some of yesterday’s Fed-inspired sell-off and the Dollar has strengthened.
􀂉 Spain had planned to sell between EUR2.5 and EUR3.5bn of bonds overnight. The eventual sale yielded
EUR2.6bn – very much bottom of the range – at yields and coverage ratios that spoke of declining
demand. The January 2015 bonded yielded 2.89%, up from 2.44% on 15 March, with a bid-to-cover of
2.41 times (down from 4.96 previously), whilst the October 2016 bond yielded 4.319%, up from 3.376%
on 1 March, with a bid-to-cover of 2.46 times (down from 2.59 times previously). And the October 2020
bond, last auctioned in September, yielded 5.338% at a bid-to-cover of 2.96 times. If the ECB isn’t buying
peripheral debt directly (or gifting cheap money to banks so that they can buy) the pressure on yields
remains very much to the topside it seems. As Spanish PM Rajoy told his supporters overnight “Spain is
facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t
understand that is fooling themselves,”.
􀂉 Given the price action overnight, markets didn’t have too much difficulty digesting ECB President
Draghi’s post meeting message that “…given the present conditions of output and unemployment, which
is at historical high, any exit strategy talking for the time being is premature.”. The ECB’s general
description of the Euroland economy was largely unchanged from last month, with the risks to growth
said to be lying to the downside whereas the risks to inflation were unchanged. My colleagues did detect
a very modest incremental increase in hawkishness, with Draghi saying, “It also is important to keep in
mind that all non-standard measures are temporary in nature and all the necessary tools are available to
address upside risks to medium-term price stability in a firm and timely manner” (although he did go on to
say “I don't think I'm stepping up my rhetoric on inflation”). The ECB seems to be banking on some
improvement in the dataflow, with Draghi noting that “All the data do not take into account the impact of
the second LTRO.”
􀂉 Speaking of the dataflow, in Europe a modest upward revision to the Euroland flash services PMI saw
the index end the month at 49.2, up from 48.8 last month. As a result, the composite PMI was revised up
to 49.1, down from 49.3 in February but up from the preliminary reading of 48.7. Within the services PMI
the greatest surprise was a unlikely 4.4pt increase in Spain’s index to 46.3. Italy’s index rose marginally to
44.3 from 44.1 in February. Countering this news was a very disappointing 0.3% mom rebound in German
factory orders in February which, after revisions, were down a greater than expected 6% yoy. Looking at
the detail, what struck us most was that demand from non-EMU countries rose 5% mom whereas
demand from EMU countries fell 3.2% mom (domestic demand fell 1.4% mom). The weakness was
concentrated in consumer goods where orders fell 3.8% mom after declining 2.8% mom in January. On a
brighter note, the UK’s services PMI rose to 55.3 in March. With the composite PMI now back above its
long-term trend the likelihood of the BoE announcing further QE continues to recede, at least for now.
􀂉In the US the dataflow was mixed. The ADP report recorded a 209k rise in private payrolls in March, not
too far away from consensus expectations. The non-manufacturing ISM did fall to 56.0 in March from 57.3
last month, but the activity and orders indices were still very robust (just under 59) and the employment
index rose to 56.7. The employment components of the twin ISM reports leave my US colleagues content
to call a 250k rise in official non-farm payrolls in March (and just as importantly, a further nudge down in
the unemployment rate to 8.2%, and possibly lower.)
􀂉 Over the day ahead the focus will be on the latest US weekly jobless claims report, Canada’s March
labour market report and IP reports in the UK and Germany. Given the poor Spanish bond auction, there
will also be some interest in how the French government fares when it goes to the market seeking
EUR7.0-8.5bn today. The BoE MPC meeting should pass without any policy change or statement from the
Bank. Due to the Easter holiday break our next daily will be on Tuesday. Before then we will also receive
Friday’s US labour market reports and Monday’s BoC Business Outlook Survey.

Tata Power - Hold Namaste India conference highlights :Deutsche Bank

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We hosted Tata Power in our Access India conference. Key takeaways are-
* For Mundra project, Tata power is in talks with power procurers and the
procurers have asked them to respond on cost detail. The tariff relief may
be difficult in the near-term due to lack of ownership of the issue by beneficiaries
or Govt. The question is on the extent of relief, if at all, is considered.
* The breakeven tariff for Mundra is INR2.9/kWh and currently it gets
INR2.35 according to management. However, the company expects
Mundra project to be profitable on stand-alone basis with INR3.2/kWh tariff
at the prevailing coal prices, which is cheaper than new domestic coal
projects due to economies of scale.
* The company is adopting 3 steps loss-reduction measures for Mundra- a)
reduce availability to 80% and PLF to 75%; b) blend low-grade coal- 30%
blending achieved, but need to test-run for 50% or more blending (50%
blending likely to reduce cost by ~10%); c) Adding another 2x800MW unit
at same location to sell at higher tariffs (awaiting EC).
* Regarding transfer of coal assets to Mundra SPV (CGPL), the company is
awaiting Direct Tax code which may impact tax benefits (on dividends). On
cash flow basis, 75% of investment transfer is likely to make CGPL breakeven;
while upon 100% transfer the company will make desired 14% ROE.
* For Naraj marthapur (1320MW), the site is close to a wild life sanctuary
and may not receive EC. However, it may be converted to gas project
whereas alternate land is sought for the coal project.
* While Maithon's U#1 has stabilized and operating at PLF of ~90%, U#2
will start by Apr'12. For U#2, company is building a railway line for coal
evacuation which would be ready by Sep'12 due to land acquisition issues.
Company expects to manage debt servicing even if U#2 works at a lower
PLF initially.
* For coal assets in Indonesia, company has adopted cost cutting measures:
1) new 54MW power plant to reduce diesel requirement; 2) Electrical
draglines to replace diesel ones to become all-weather; 3) Coal conveyed
via all-weather belts from pits.
* Tata power has formed a 50:50 JV with Exxaro Resources to pursue power
projects in SA, Namibia and Botswana, to expand its overseas ambitions.
* NDPL's INR1bn per month receivables have reduced to INR200mn/
month. AT&C losses are around 12.5% and is targeting single digit in next
2 years.
We have a Hold recommendation with INR105/sh target price.

Larsen & Toubro - Buy Namaste India conference highlights :Deutsche Bank

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L&T represented in our Namaste India conference. Key highlights of the
meetings were -
*The overall sentiment has improved, but that is not reflected in the ordering
at the ground level yet.
* Margins vs. volumes - L&T has witnessed intense competition in particular
sectors such as roads, hydrocarbon, etc. While the company has not
won any blockbuster order during FY12, the overall base level orders have
been good and the order book position remains comfortable at the moment,
hence the Board has not allowed individual businesses to dilute the minimum
margin threshold for bidding of any projects.
* Risk management - The basic philosophy is that both 0% and 100%
hedging are speculative and also that the viability of business should not
rely solely on presence /absence of hedges. Hence the company believes
in dynamic hedging for business. While it hedges the forex loans to the
extent (currently 80-90%) to reduce P&L volatility, the level of hedging beyond
the hygiene level by individual project managers is dynamic, based on
project-specific variables like margin profile, the contingencies factored in,
etc.
* Hyderabad Metro - The govt. has completed the land acquisition and it
may allow to start the survey work in 2 weeks and the ground level construction
may start in 2 months. However, the 'Appointed Date' is not yet
finalized. Meanwhile, L&T is proceeding with the pre-construction work.
* Middle-east - Most of the projects in M.E. markets are fixed-price contracts
and denominated in local currency (generally pegged to USD). The
reason for focusing on these markets is to diversify away from India and
also due to high entry-barrier of these markets. (e.g. a new T&D equipment
player could take 8-10 years to qualify for all ratings of equipment.)
* Power equipment JV - Currently backlog is good for 1.5 years, but may
face problems if don't get new orders over next 1 year. In the long term,
the proposed efficiency-based bidding for power projects, where fuel cost
is pass-through, could be positive for its business as it believes its equipment
have one the best efficiency metrics. L&T thinks that to make at least
a small margin, the lowest price of its basic boiler must be at least INR
15mn/MW and boiler with ESP, critical piping at INR 18/MW.
We have a Buy on L&T with a target price of INR 1600 and reiterate it as
one of our top-infra picks.