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BNP Paribas- INDIA STRATEGY When macro begins to matter

When macro begins to matter
n A prolonged slowdown – longer than we had anticipated
The continuing slowdown, in both investment and consumption, of the Indian economy has recently
been aggravated by the RBI’s liquidity tightening as it attempts to stabilize the INR. The INR,
however, remains volatile, implying that tight liquidity will continue longer than we had anticipated.
These factors, coupled with a lack of bold fiscal policies in a pre-election year led, BNPP Chief Asia
Economist Richard Iley to cut his Indian GDP growth forecast to 3.7% in FY14 and 5.2% in FY15.
Also, BNPP analysts have reduced earnings estimates across various sectors, primarily financials,
engineering and capital goods, consumer staples and discretionaries. There are potential silver
linings for the economy in the form of abundant monsoons supporting rural consumption and a
‘natural’ narrowing of the trade gap due to currency depreciation.
December 2013 Sensex target reduced to 17,000 from 21,300 previously
We held onto our earlier Sensex target of 21,300 for quite a while because we had already factored
in earnings downgrades. What we had not anticipated was the extent and pace of INR depreciation,
which has not only raised the cost of capital but also portends sharper earnings cuts than we had
foreseen. We have cut our Sensex target 21%, of which 12% is due to lower valuation multiples and
9% due to earnings downgrades. Despite INR-induced tailwinds to exporters and forex earners
(c30% of earnings), our Sensex EPS estimates of INR1,300 in FY14 and INR1,477 in FY15, based
on BNPP analyst estimates, appear at risk.
Top REDUCE ideas – Maruti, HUL, Nestle, SBI & BHEL
Even the erstwhile ‘FII darlings’ in the consumer space are suffering from earnings downgrades, and
their rich valuations are becoming increasingly unsupportable. In conjunction with our analyst views,
we note importers like Maruti, asset-quality victims like SBI and competition victims like BHEL as the
riskiest shares in the present scenario. Since late August, FIIs’ sense of fatigue about the so-called
defensives is becoming apparent. We also highlight Cummins and M&M as victims of sustained
economic slowdown, though M&M has some support from tractor sales. DLF suffers from the double
whammy of high leverage and slow growth

India: Downward spiral: bnp paribas,

„ Monthly production’s downward surprise in June suggests industrial value added is likely to
have fallen in Q1 FY2014, while various indicators point to slower private services activity.
„ Faster government spending and agricultural output growth should have offered some help
but will not have been strong enough to prevent headline GDP growth from sliding further.
„ Our tracking estimate now pegs Q1 FY2014 GDP growth at 4.4% y/y, which would mark the
worst quarterly performance for a more than decade outside of the global financial crisis.
„ Unless ‘quantitative tightening’ is reversed quickly, downside risks to our below-consensus
GDP forecasts will continue to crystallise, ensuring that GDP growth has a ‘4 handle’.
On the back of May’s weak industrial data and RBI’s recent ‘quantitative tightening’ measures,
we have recently revised down our expectations for GDP growth in FY2014 to 5.2% (see India:
Quantitative tightening (for now) and India: The beatings will continue). But the latest stream of
data suggests downside risks to even our below-consensus GDP forecast continue to build.
In a latest sign of India’s economic slowdown gathering pace since the turn of the financial year,
provisional data released late yesterday showed industrial production surprising significantly to
the downside with a 2.2% y/y decline in July, the second annual drop in a row. June’s
disappointment also came along with a sizable downward revision to May’s reading to -2.8% y/y
from -1.6% as initially reported. Capital goods output, which, over time, corresponds closely to
the national accounts measure of fixed investment, was the key culprit behind the weak
performance over the past few months as business confidence appears to be collapsing but
weakness also looked increasingly evident in the consumer goods sector. June’s industrial
report completes the full complement for Q1 FY2014, with overall production contracting by an
estimated 3.6% q/q or 13.6% q/q annualised, pointing to an annual contraction of close to 0.5%
in industrial valued added in the national accounts after a 2.0% y/y gain in Q4 FY2013 (Chart 1).
Gauging momentum in the services segments is less straightforward. But we have developed a
coincident indicator which draws on the main indicators that RBI includes in its quarterly
assessment of the ex-industrial economy and offers a good guide to growth in private services
and construction. The indicator suggests growth in private services and construction activity
combined may have slowed to the weakest post-GFC in q/q terms, an assessment corroborated
by the latest PMI non-manufacturing survey. Adding in our assumption of faster community
services growth in line with the monthly fiscal data after the strict fiscal spending control late last
year (Chart 2), however, overall services and construction growth should still have seen some
sequential improvement in Q1, leaving the y/y rate down slightly from Q4 FY2013.
A better agriculture economy as output continued to recover from the weak monsoon last year
will not have been strong enough to offset weakness in the non-agricultural sector. Our tracking
estimate now pegs Q1 GDP growth at 4.4% y/y or 3.7% annualised (vs. 4.6% as previously
anticipated), which would mark the second-worst quarterly performance since June 2003 after
the GFC-induced low of 3.5% in March 2009. While still the envy of many developed countries,
our GDP forecast of 4.4% y/y would be well short of the post-GFC potential rate of c.7%. Unless
‘quantitative tightening’ is reversed quickly, downside risks to GDP will continue to crystallise,
ensuring that GDP growth has a ‘4 handle'.

BHARTI INFRATEL 1Q: largely in line ::bnp paribas

1Q: largely in line

RESULTS REVIEW
1Q largely in line; gross adds weaker than expected
Adjusted revenue missed our revenue by 1.3% while EBITDA and EPS beat
our estimate by 1.3% and 6.7% respectively. Gross adds for the quarter
were weak at 1,583 sites (4Q: 2,923) due to soft network rollout by telcos.
BHIN’s tenancy remained at 1.91x. The reported EBITDA beat was driven
by accounting change and cost efficiencies.
SUMMARY
Strong data growth and return of pricing power for telcos
Bharti Infratel is well positioned to benefit from data growth in India, in
our view. Indian telecom operators’ data revenue is increasing at a
healthy 20-25% q-q and falling 3G data tariffs could boost volumes.
Improvement in telecom operators’ RPM and profitability would improve
their ability to invest in networks which in turn would benefit BHIN.
VALUATION
No reason to significantly change our EPS forecast: BUY
BHIN trades at an attractive 5.1x FY15E EV/EBITDA, a discount to Indian
telecom operators at 5.8-7.1x. It has net cash of INR19 per share (13% of
CMP) and generates strong FCF. We do not expect significant changes to
our earnings forecasts on the back of the 1Q results. Capex was lower
than we expected, at INR3b, but the company retained its annual capex
guidance of INR20b. The average residual life of contract is 7.4 years.
Promoter Bharti Airtel has fully repaid its INR23b loan to BHIN. BHIN
continues to evaluate inorganic opportunities. Some of BHIN’s towers
merged with Indus Towers (Not Listed) effective 10 June, negatively
impacting revenue and costs with a net positive impact on EBITDA.

PERSISTENT SYSTEMS :: BNP Paribas

Positive catalysts lined up

RESULTS REVIEW
In-line 1Q operationally, EPS beat on higher other income
Persistent’s 4Q USD revenue (1.5% q-q) and INR EBITDA were in line with
our view, but the latter missed Street forecasts. EBITDA margin fell 310bp
q-q on onsite wage hikes, visa costs, conservative provision of doubtful
debts (+1.2 ppt q-q) and HPCA-related expenses, which came in ahead of
revenue from the deal. EPS beat our estimate by 29% on other income.
SUMMARY
IP revenue should recover from 2Q from HPCA contribution
IP contribution was down 12.7% q-q (+24.1% y-y) as revenue from the
recently acquired HPCA product was pushed into 2Q on renewal
paperwork delays. IP revenue has stabilized in the USD9m-11m range
over the past four quarters, but PES and platforms grew a healthy 4.5% qq (1.5% from pricing), signalling a recovery in the traditional business.
VALUATION
High-margin growth drivers for rest of FY14; attractive valuations
Despite its lumpiness, we believe IP is the key driver for Persistent. The
HPCA licenses, TNPM deal, and Doyenz (SMB platform) and Novaquest
(PLM) acquisitions continue a strategy of capability building. We expect IP
revenue to increase from the current 15% of sales to over 25% by FY16.
We see growth drivers for the rest of FY14 in HPCA renewals and client
investments in cloud, analytics, mobility and collaboration (c.50% of
revenue). Other positives include a revival in the services business,
continued sales hires (+20 in 1Q) and falling attrition (14.2% vs 18.9% yy). We believe the current valuations of 5x FY14E EV/EBITDA and 10x P/E
are attractive given Persistent’s unique growth drivers.

Chronicle of QE3 exit foretold ■Volatility is back ■Long-term yields up ■Stock exchanges down:: BNP Paribas

Renewed volatility in the financial
markets helped focus the attention of
the G8 heads of state, who were
meeting at the beginning of the week
in Northern Ireland, on the main
challenges that must be met to
promote long-term world growth. Ben
Bernanke was absent but he was in
everyone’s head. Over the past
weeks, investors react nervously his
statements. The Fed’s president
suggested that the central bank could
begin to slow the pace of its QE3
monetary easing programme in the
near future. In this context, the press
conference which followed the FOMC
meeting on 18 and 19th of June was
an occasion for him to clarify his
point. Ben Bernanke has never been
so explicit about the pace of changing
monetary policy in the near future.
This changing will be closely hinged
on macroeconomic data trends. A
QE3 exit is likely as soon as the
middle of next year, once the
unemployment rate has dropped to
about 7%.In the meantime, the
evolution in monetary and financial
conditions is also key. Along with the
analysis of economic data, the latest
will determine whether maintaining
the current massive monetary
stimulus is still accurate or not.

ASIA STRATEGY EUROPE’S POINT OF VIEW ON ASIA: BNP Paribas

We are just back from a week’s marketing in Europe. Since our last trip in early 2013, concerns about Asian
equities have mounted due to: 1) liquidity squeeze in EM and USD appreciation; 2) China’s slowdown, which
is increasingly perceived to be structural; and 3) Japan’s reflation strategy and its consequences. However,
investors see some significant investible pockets. We highlight key perspectives and investment themes.
1: Asian equities to bottom out when bond yields stabilise
FII outflows started in the bond markets and the ensuing contagion led to withdrawals from equities. Until
bond yields and real rates stabilise, investors don’t see equities bottoming out.
2: China – the market most European investors love to hate
China’s economic slowdown is perceived to be structural, with eventual restrictions on shadow banking
activities expected to contract liquidity significantly. Sharp valuation discounts have led some investors to
be neutral on China, but they are in a clear minority.
3: Increasing preference for Korea and Taiwan
These exporting economies underperformed in early 2013 on investor concern about the impact of JPY
depreciation on their competitiveness. Such concerns have faded significantly, leading to recoveries in both
markets. For Taiwan, this is a by-product of investors’ clear preference for the technology sector (a
consensus overweight). For Korea, ‘non-Samsung Korea’ seems to be a focus area.
4: India – the default choice
Despite severe macro headwinds, investors’ default choice is India, in marked contrast to the attitudes we
encountered in early 2013. Apart from the relative ease of stock selection, continued commodity price
weakness and anticipation of further moderation are perceived as macro tailwinds for India.
5: More worried about Indonesia than Thailand
In a world of declining commodity prices, Indonesia – with its commodity-heavy export basket – could face
further current account deficit and currency depreciation pressures, though rate increases and fuel subsidy
cuts are perceived as positives. Thailand, though over-owned, appears relatively safe to investors from a
current account perspective and from a growth stability perspective. Neither are investors significantly
concerned about Thailand’s inflation, fiscal balance or credit cycle for the time being.
New themes: Playing consumption through new avenues & ‘safe’ commodities
The resilience of Asian consumption and its changing pattern across Asian countries have led investors to
focus on consumption as a broad theme across the continent. However, investors are looking at new
avenues to play this theme – eg, through Tourism and travel, 4G services in telecom, online retailing and
messaging, and consumer companies listed in DM but growing in EM. On the other hand, Chinese oil
companies, particularly CNOOC [883 HK], are perceived to be relatively safe due to impending growth
prospects, sensitivity to the USD and relatively stable oil prices

ASIA EQUITY STRATEGY WILL GROWTH BE HIGHER IN 2013? bnp paribas

SUMMARY
Will growth be higher in 2013?
This is the key question for investors in deciding positioning for the
remainder of the year. Our view remains positive and we continue to
favour cyclicals and financials ahead of defensives.
CATALYST
Central banks united for first time since 2009
Central banks are aligned in a global effort to boost growth for the first
time since 2009. Weak current economic performance adds weight to our
view that 2013 growth will be higher than 2012.
IMPLICATIONS
Upgrade Technology & Taiwan, downgrade India
We upgrade the technology sector and Taiwan to OVERWEIGHT. We
downgrade India on policy concerns and add Samsung Electronics,
Komatsu, Mediatek and Jiangxi Copper to our top cyclical picks.

Investment Nuggets: A ‘market of one’ : Business Line

Despite all the idiosyncratic factors that are seemingly hurting India, such as weak growth and stubborn inflation (aka stagflation), high interest rates, and so on, India’s equity return correlations with the rest of the world are rising and close to record highs.

The market remains hinged to global outcomes more than ever before. Of course, this phenomenon is not unique to India. We remain in a “market of one,” to borrow a phrase coined by Henry McVey, our erstwhile US strategist.

India’s beta is not high, relatively speaking. India ranks 9th out of 21 countries in the emerging market (EM) index on beta — its current 12-month trailing beta is just under one versus the MSCI EM index measured using weekly returns. India’s relative volatility ranks 9th in the EM pecking order, behind both Brazil and Russia.

Spain: The cost of doubt ::BNP Paribas

Spain: The cost of doubt
Uncertainties surrounding banks’ bailout are costly for Spain. Spain’s
10-year spread over Germany exceeds 500 basis points, compared
with half that a year ago. Above all, it is the lack of visibility that
undermines investors’ confidence. They are clearly reluctant to fund a
recapitalisation if they don’t know the extent of the whole problem.
Yet, even if the government undertook the complete recapitalisation
of the banking sector, and assuming it amounted to €100bn, that
would represent 10% of GDP, far short of the 45% of GDP needed in
Ireland. It would be definitely better to get an accurate and final
estimation from an independent body of the total bill for bailing out
Spanish banks than getting gradual and partial news.

Tata Motors, A challenger emerges - Initiate at BUY with 20% upside ::BNP Paribas

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A challenger emerges
CHANGE
Initiate at BUY with 20% upside potential
Tata Motor’s sales and profitability have increased nearly five-fold since
its acquisition of Jaguar Land Rover (JLR) in 2008. High-brand equity and
the planned near doubling of investment commitment in JLR to GBP1.5b
per year over the next five years should help Tata Motors sustain doubledigit
volume growth as well as earnings growth over FY12-14E.
CATALYST
Innovation and margins to support growth momentum
The company plans to launch over 40 models/variants in the next five
years, which we believe will help diversify growth momentum that is
currently largely dependent on the Range Rover Evoque model. EBITDA
margins should also remain above average (16-17%) to FY14, supported
by new launches, high volume growth and better capacity utilisation.
VALUATION
SoTP-based TP of INR360.00, with JLR valued at 3x EV/EBIDTA
Although Tata Motors shares have rallied sharply YTD in line with other
cyclical stocks, we anticipate further re-rating on improving free cash
flow and return on capital. Our 3x target FY14E adjusted EV/EBITDA for
the JLR business is at a premium to peers in the luxury-car segment to
reflect the prospects of market-share gains and higher earnings growth.

Brazil Outlook :: BNP Paribas

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Brazil
In Brazil, the surprise came once again from monetary policy. After four consecutive cuts of 50 bp, the central bank (BCB)
decided to ease monetary conditions more rapidly, cutting its key policy rate (Selic) by 75 bp on 7 March. Neither the press
release nor the minutes provided much explanation for this decision, leaving the door open to several assumptions. The
only elements of certainty are the future path of the Selic (expected to be cut to as low as 9%) and the government’s
determination to bolster the industrial sector and combat the appreciation of the exchange rate.

United States Outlook: BNP Paribas

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United States
Since the early 1980s, the path to recovery changed in the US, a pattern that has intensified with each recession. These
were called jobless recoveries. At early stages of the economic rebound, growing demand is now met through labour
productivity gains. The recovery from the 2008-09 recession was no different, but it is getting obvious that the process ran
its course, and to meet demand, the business sector does no more have a choice but to increase payrolls. This explains the
recent strength of the labour market, with job creations that are, at first sight, stronger than implied by GDP growth. We
expect the dynamism in employment to keep running, limiting the need for another round of monetary accommodation.

United Kingdom Outlook: BNP Paribas

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United Kingdom
2011 turned out to be a year of lacklustre growth, marked by one out of two quarters of contraction in GDP. Only exports
underpinned activity, while domestic demand contracted. Growing uncertainties regarding the resolution of the eurozone
sovereign debt crisis can partly explain the decline in household consumption and private investment in 2011. However,
certain domestic factors should not be overlooked. Ongoing efforts to consolidate public finances not only weighed on
public-sector consumption but also encouraged households to make precautionary savings. In 2012, private consumption
could rebound on the back of a further decline in inflation. The Bank of England is expected to opt for the status quo.

Greece Outlook :: BNP Paribas

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Greece
The unblocking of the second bailout should ensure that Greece is financed out to 2014. However, there may be some
disappointments regarding the assumptions underpinning this second programme. We expect the recession to be longer
and more severe than expected by the EU and the IMF. Public finances are likely to improve but not at the pace or on the
scale provided for in the programme. Additionally, the results of the upcoming general elections could add to the political
uncertainty. The stricter supervision provided for in the programme should however ensure that the reforms are
implemented. All in all, despite episodic tensions, we expect to see an overall improvement in the country’s situation over
the next few years, which should ensure the eurozone’s support over the medium term.

Russia Outlook :: BNP Paribas

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Russia
The end of the electoral season signals the comeback of a more pacified political environment. The protest movement that
flared up in the wake of the parliamentary elections in December came dissipated in the wake of the election of Vladimir
Putin in early March and progress made in political liberalisation. The interest in Russian assets from portfolio investors is
back while the Russian government’s bond issues have been a success. The inflows of liquidity and vigorous activity are
likely to stoke inflationary pressures, encouraging the central bank to undertake sterilising operations. At the same time,
the government’s pre-electoral tendency to spend up large is likely to abate, so we expect the comeback of a more
conservative policy mix.

Balancing act : BNP Paribas

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Balancing act
In spring 2012, the world economy regained somewhat its vigour, notably in the
United States, where the upbeat message of economic indicators is no doubt.
They signal a rally on almost all fronts, from the job market, which is picking up
at a rate of 2.5 million net job creations a year, to consumption, which is keeping
pace with employment, but also benefits from rebound in lending, and corporate
investment, buoyed by high earnings and a rising production capacity utilisation
rate. Real estate, by far the most distressed sector (housing starts have never
been so low since the early 1940s), is also showing signs of exiting the
doldrums (chart 1). The stock of houses available for sale is decreasing, real
estate prices are historically low as a share of disposable household income,
and real interest rates on mortgage loans are extremely attractive, thanks
largely to the Fed's Twist operation. The affordability index, which measures the
financial capacity of consumers to buy a home, has never been so high, while
surveys of real estate developers show they are climbing out of depression
territory.
The rally in the United States is likely to boost the big Asian suppliers first,
namely China and Japan, which together account for a quarter of US imports,
although maybe not as much as one might expect. During recovery phases, it is
normal to see a swelling of net imports from overseas: the world's number one
power steps up international purchases more than sales, and foreign trade
generally makes a negative contribution to growth. This has been the case since
June 2009 (the latest, officially-dated cyclical trough), but only to a limited
extent: the negative contribution has trimmed growth by only 0.6 points out of a
cumulative total of 6.2 points between June 2009 and December 2011. The US
recovery has been rather stingy in terms of imported goods. This can be
attributed to several factors: the recovery has been accompanied by an
unparalleled decline in the household debt ratio (-14 points of disposable
income since June 2009), which has held down consumer spending. It also has
been coupled with a very strong improvement in the competitiveness of "Made
in America". Though rising again, US unit labour costs (what a unit of GDP costs
in terms of wages and benefits) are still 1% lower than at year-end 2008. This is
an exception within the G7, where in a main challenger like Germany, for
example, unit labour costs rose 3.3%. The dollar is also weak. Measured via the
real effective exchange rate, the combination of these two factors (lower labour
costs and exchange rates) resulted in a 20% depreciation of US products in
relative terms since year-end 2008. If there is one sector in which American
products are selling best, it is the automotive industry. Restructured under the
Federal government support, which injected nearly $80bn via TARP, the
Troubled Asset Relief Program, the US automotive industry has regained nearly
10 points of domestic market share over the past three years (chart 2).
Japan's troubles have undoubtedly contributed to the relative improvement in
America's trade position. A year after the Fukushima disaster, only one of
Japan's 54 nuclear power plants is still operating. Plants shut down for
maintenance must undergo stringent resistance tests and can only start up
again after receiving the go ahead from local authorities, who are
understandable being extremely cautious. In the meantime, Japan must import
fossil fuels, and is struggling to restore production to the levels prior to March
2011


China itself is at a turning point. Like the western nations caught up by their
excessive debts, the Middle Kingdom is testing the limits of its growth model
built solely on exports. China's trade surpluses are no longer what they used to
be, even though world production has already surpassed pre-crisis levels. From
nearly $300bn in 2008, its trade surplus fell back to $156bn in 2011 (cumulative
12-month figure, chart 4). In February, China reported a trade deficit for the first
time in a long time.
The erosion of China's trade surplus is not only due to debt reduction by its
major trading partners in Europe and America, which are curbing purchases. It
also reflects the ongoing erosion of the terms of trade. Over the past ten years,
the unit value of Chinese exports has plunged 30% relative to imports. China's
selling prices have increased little in absolute terms, and have declined relative
to its purchases. Its increasingly sophisticated products are increasingly costly in
terms of inputs, notably raw materials, which China lacks. In ten years, its
energy and food bill with the rest of the world has increased 15 fold, generating
an annual deficit of about $300bn, one of the highest in the world as a share of
GDP. The cost of labour is also rising as workers demand their share of the
considerable productivity gains that have accompanied the country's economic
miracle. In 2011, China's minimum wage increased 20%, much more than per
capita GDP. Another 15% increase is planned in 2012. "Made in China" is no
longer as cheap, but in the final marketing phase, the end price is what big
foreign companies look at most. China has reached the point where increasing
the worldwide distribution of its products is no longer as profitable, and certainly
not as easy.
China's next source of growth is China. Its 1.3 billion inhabitants consume only
30% of the wealth they produce, a small share that has constantly eroded over
the past fifteen years. The authorities in Beijing are now determined to reverse
this trend.
In the end, the economic picture that we just painted is generally favourable with
slightly more robust, better balanced world growth (chart 4). But it is still
threatened by a major risk: the deterioration of the sovereign debt crisis in the
eurozone. In southern Europe, financing tensions have reappeared recently,
after the lull triggered by the ECB's €1,000 billion 3-year loans. This is especially
true for Spain, where public protests are growing against a backdrop of
recession and record unemployment. Public deficits, which were already higher
than expected in 2011, are barely budging. Italy's remarkable turnaround in the
first 100 days of the Mario Monti administration has also hit a snag with the
latest -- extremely ambitious -- job market reform, currently being debated in
Parliament.
April 2012

Spain Outlook :: BNP Paribas

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Spain
Against a backdrop of renewed uncertainty as to Spain’s financial and economic situation, the Spanish government has
unveiled its plan to reduce the fiscal deficit to 5.3% of GDP this year compared with 8.5% in 2011. The 2012 budget contains
austerity measures representing EUR 27 billion. It ought to enable the central government to meet its budgetary targets but
the regions will need to make additional efforts. The across-the-board austerity throughout the eurozone will inevitably
result in recession this year, estimated at around 2%. Although painful, the present period of fiscal rebalancing is
necessary to absorb the excesses of the property market bubble. Over the medium term, the implementation of structural
reforms will lead to in-depth changes for the Spanish economy.