■ EU Fiscal Crisis. A restructuring of Greece’s debt is likely long-term. While the short-term risk for Greece has eased due to the recent package, market pressures on the rest of the peripheral euro area may force new fiscal measures. On any further deterioration in this situation, GEMs will be hit via rising risk aversion, weaker trade flows and falling commodity prices;■ Chinese Property Bubble. Our economists now believe that official efforts to bring property prices down could cut Chinese GDP growth by 3 percentage points in a full year. Signs of a property correction could, however, delay rate rises in China. Emerging markets that will lose out from slower Chinese growth are those that sell commodities (or other general exports) to China.■ Massive Show of Force:■ - €500bn from the EU (€440bn from SPV), over three years;■ - €250bn from the IMF;■ - ECB to buy up government and private sector securities in market;■ - Reactivation of swap lines;■ - More fiscal tightening to be imposed;■ - Also, Greece (€110bn) package fully passed.■ Conclusions/Thoughts■ - Ireland, Portugal, Spain 3-year borrowing needs (€550bn) covered;■ - Therefore, none of Greece, Ireland, Portugal, Spain need to go to capital markets;■ - European (and EMEA) GDP forecasts likely to be cut;■ - ECB not likely to raise rates until around mid-2011;■ - Vicious circle of falling GDP, rising deficits not broken;■ - Debt restructurings still likely in certain countries.■ Policy Bind Remains: i) no flexibility of exchange rates (and the dollar is now rising); ii) no flexibility of monetary policy, therefore; iii) weak fiscal policy; iv) dubious economic data; v) truculent trade unions.■ Contagion Model. Negatives from Greece situation: i) several countries with same symptoms; ii) expensive valuations (page 17); Positives: i) a ‘big wealthy neighbor’; ii) small equity market and economy; iii) no surprise; iv) immature bull market. The Big Unknowns: i) default?; ii) banking crisis?; iii) risk to global economy?To read the full report: EMERGING MARKETS
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>INDUSIND BANK: Into the next orbit (IDFC SSKI)
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After a spectacular turnaround, IndusInd Bank is working to gain scale. Marked improvement is evident in operating metrics, and the initial three-year targets have been accomplished in just two years. Now, ‘profitability with scalability’ is the new mantra with a clear intent to fast-track growth. With focus on fortifying the liability franchise (700 branches by FY13E), we expect 41% CAGR in the bank’s earnings over FY10-12. To account for higher loan growth and increasing comfort on asset quality, we upgrade our FY11E and FY12E earnings by 6.8% and 9.4% respectively. While the stock has outperformed the Sensex by a hefty 80% since September 2009, we expect strong growth in earnings as also assets to drive stock performance hereon. In view of RoA expansion of 30bp over FY10-12E to 1.4%, we see stock returns outpacing the ~25% CAGR in assets. IndusInd Bank remains our top mid-cap pick among financials.■ Remarkable progress over the last two years: A strong and well-incentivized management has enabled the bank to acquire a strong footprint despite its late entry in the crowded banking space. Over FY08-10, NIMs have surged by 150bp to 2.8%, fee income has grown 85% and cost efficiency has improved (cost to income down from 67% to 51%) – all converging into RoA expansion of 80bp to 1.1% in FY10.■ Fast-tracking future growth: IndusInd Bank plans to aggressively expand its branch network from 210 currently to ~350 by FY11 and 700 by FY13. A stronger branch network as also liability base in a recovering economy place the bank in a sweet spot to achieve ~30% CAGR in its loan book in next two years – well above the industry average of 20%. Also, NIMs are expected to expand to 3.1% as the liability mix turns favorable (CASA deposits seen at 28% by FY12) and elevated yields on retail loans.■ Strong earnings ahead; outperformance to continue: Above-industry loan growth, improving margins, increasing efficiency and lower provisioning costs are expected to drive RoA expansion of 30bp to 1.4% in FY12. Despite the recent re-rating on market cap to assets metric, the stock still trades at a discount of 20%+ to peers. Going forward, on the back of above-industry growth and a consistent rise in RoA, we expect stock returns to outpace growth in assets. At 2.5x FY12E adjusted book, we reiterate Outperformer.To read the full report: INDUSIND BANK
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>GMR INFRASTRUCTURE: Infrastructure giant
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With a broad portfolio of infrastructure projects supported by a track record of good execution, GMR looks ready to deliver flagship projects in airports and power. We value GMR on an NAV basis, leading to our TP of Rs78.4. Recent long term fund raising has strengthened the balance sheet; we initiate with a Buy.GMR enjoys first-mover advantage in the high entry barrier infra developer spaceIn the high entry barrier infrastructure developer space, GMR has a first-mover advantage as it aggressively builds a portfolio in transport (airports and roads), energy (thermal and hydro power, mines) and urban infrastructure (real estate and special economic zones (SEZ)). GMR's majority-management and financial control of projects have given it a strong execution track record in Indian infrastructure, in which overruns on time and costs are usual.Largest airport developer in India should benefit from 15% CAGR in trafficWe forecast GMR's airport division, with controlling stakes in Delhi and Hyderabad airports,commanding nearly 27% of India's air traffic, will grow at 15% CAGR in FY10-13F. Building on its first-mover advantage in the sector, we believe GMR has created a strong brand by giving international-quality service to Indian consumers. Supported by an open sky policy and project funding, we believe GMR offers a safe play on air traffic growth. GMR derives nearly 27% of its SOTP value from airports, which we see as more stable than cyclical airlines or the hotel industry. The adjoining premium land parcels supporting airport capex contribute 17% of our SOTP value.Ambitious power portfolio to start delivery in FY13F; will reduce project-specific riskGMR's judicious mix of fuel, customer profile, geography and fuel supply security in its energy business should lead to a sharp ramp-up in performance beginning in FY13F. Meanwhile, with a recent equity fundraising of US$510m, management appears on course to nearly triple sales, with an 85% CAGR in EPS FY10-13F. We value GMR on a SOTP basis at Rs78.4, in which we value projects on NPV of free cash flow to equity (FCFE), the highgrowth EPC division at an FY12F PE of 12x, and InterGen and Homeland at book value. GMR's monopoly in premium assets, good mix of regulated and market return projects, and ROE supported by government policy merit a premium valuation, in our view. We initiate with a Buy.To read the full report: GMR INFRASTRUCTURE