AllSec Tech, India Economy, Market Strategy,Deccan Aviation, Mahindra &Mahindra , Maruti Udyog, Automobiles, Banks,

JP Morgan in their daily report,

Economy: India: Full-year fiscal deficit below forecast

· The central government's fiscal deficit came in at 3.5% of GDP for 2006-07 (year-end Mar-31), lower than official revised estimate of 3.7% of GDP given by the government when it announced the budget for 2007-08 in Feb. Impressive revenues owing to the ongoing economic boom along with spending that was largely in line with expectations caused the fiscal deficit to print INR1,427.93 billion, or 6.3% lower than the revised estimate.
· In 2006-07, gross tax revenue surged 29.3%oya due to exceptional gains in corporate (+41.4%) and personal income (+35.4%) tax collections. Indeed, corporate tax revenue increased its share in gross tax revenue to 30.3% in 2006-07 from 27.7% in the prior year. In contrast, the share of personal income taxes in gross tax intake increased to 16.0% from 15.3% over the same period.
· The government forecasts the fiscal deficit to narrow to 3.3% of GDP in 2007-08. Overall, it appears on track to cut the fiscal deficit to 3.0% of GDP by 2008-09 as envisaged in the Fiscal Responsibility and Budget Management Act. However, it is unlikely that the government will be able to spring another positive surprise on the outcome for the fiscal deficit in the current year. Overall economic growth is poised to be slower this year, and corporate taxes will be impacted by slower top-line growth and increased pressure on margins. On the expenditure side, the government will be under pressure to increase populist spending ahead of the general election to be held by May 2009.

Allsec Technologies Ltd, ALLS.BO, Overweight Muted 4Q FY07; outlook remains robust

· Allsec reported a mixed 4Q FY07, largely below expectations. While demand remains robust, Allsec continues to face supply-side issues leading to lower-than-expected headcount addition in 4Q FY07. Combined with Rupee/US$ appreciation, supply issues led to muted 1% Q/Q revenue growth in 4Q FY07. However, margins were better than we expected due to continued control on costs. Overall, net profit was in line with our estimate.
· Demand remains sound: Allsec continues to see a robust business pipeline in line with strong momentum in offshore BPO business. Further, Allsec is already speaking to few Carlyle investee companies that could lead to significant business in our view over the coming 12-24 months.
· Allsec is making gradual improvements on supply issues: 1) 4Q FY07 attrition dropped to 17% from 20% in 3Q FY07; 2) Allsec plans to open a center in Trichi in 1Q FY08 that should have lower attrition. In fact, management expects to double voice-services headcount to ~4,000 people in FY08.
· Estimate changes: Strong headcount increase should lead to robust 42% revenue and 35% net profit CAGR over FY07-09E in our view. We highlight that our estimates have been reduced (12% for revenues and 17% for EPS in FY08) largely due to sharp Rupee appreciation and partially due to muted 4Q FY07.
· Investment view: We are reducing our DCF-based Dec-07 target price by ~6% to Rs400/share due to reduction in our FY08-09 estimates. With the stock having corrected in the past 2-3 months, we would recommend buying at the current level. Further, Allsec remains an attractive two-year investment story in our view given significant business potential from Carlyle investee companies.




Economy: India: Merchandise trade deficit surges

· India's international trade deficit in April jumped to a record high of US$7.06 billion (JPMorgan: US$5.3 billion). Merchandise exports increased an impressive 23.1%oya in April, while imports surged 40.7%. In the import details, oil imports gained 1.4%oya, but non-oil imports rose 54.3%.
· The over-year-ago growth rates for both exports and imports are much stronger than expected, but it is not clear how much of the increase owes to the underlying trend. This is because the relevant organization that announces the international trade data has adopted an "improved methodology" for estimating the provisional trade data reported today. However, it has chosen not to offer any details about the new methodology and how it is different from the old one.
· Unexplained changes in India's international trade data are not new and typically make meaningful analysis more challenging. Still, we'll attempt for more insightful comments after figuring out the impact of the new methodology.
· We maintain that India's current account deficit will widen to US$17 billion (1.5% of GDP) in 2007-08 (year that began on April 1) from an estimated US$10.5 billion (1.2% of GDP) in the last fiscal year. However, financing the wider deficit will not be a problem (see Tracking the shifts in India's balance of payments, GDW, May 11). The recent appreciation of INR should also cause the trade deficit to widen in the coming months.


Market Strategy
India Monthly Wrap: May 2007: Inflation and liquidity boost

· The MSCI India (US$) index gained 6.9% over May, and the market significantly outperformed the MSCI emerging markets (US$) index, which gained 4.6%. The US$ index gain has been aided by a 1.4% rupee appreciation over the period. Financials, industrials and energy companies are relative outperformers, while IT and consumer discretionary sectors underperformed.
· The index gain has been supported by market expectations of an easier interest rate outlook on the back of lower headline inflation and continued higher risk appetite among global investors.
· 4Q FY07 GDP increased 9.1%oya, below JPMorgan's (+10.0%) expectations, but the shortfall is mainly on account of significant upward revisions for the previous three quarters. The growth is driven by strong gains in industry and services.
· Institutional buying support continued for Indian equities. Domestic mutual funds and FIIs net invested US$ 430 million and US$ 942 million respectively, over the month.
· Among other developments:
1. Coca Cola bought Glaceau for US$ 4.1 billion and Tata Tea's sold its 25% stake in the company.
2. Industrial production unexpectedly surged in March and is up 12.9%oya (JPMorgan expectation-10.4%).


Deccan Aviation Limited, DECA.BO, Underweight
Kingfisher takes the driving seat - ALERT

· Deccan has confirmed that it has placed 35m new share to UB Holdings (the parent of Kingfisher Airlines) at Rs155 per share - equivalent to a 26% equity stake. UB will also bid for a further 20% of Deccan Aviation at the same price.
· UB gets 6 board seats, along with 6 existing directors. Capt Gopinath becomes Exec Chaiman and Vijay Mallya becomes Vice Chairman. Warwick Brady is leaving with a replacement to be appointed. Deccan's CFO remains in situ, but also assumes the acting CEO/COO role until further hires are made.
· Conclusion: The structure of the deal (between two Bangalore based carriers operating identical equipment) looks like a rescue on one hand. On the other, it looks like Vijay is well positioned to move equipment between the two airline brands. At a later stage, a back door listing looks likely.
· We maintain our view that this consolidation marks the bottom of the earnings cycle for the profit starved sector. We believe JAIL offers the best, most liquid play on this rebound. We would look to sell Deccan shares to UB and for Deccan shares to decline thereafter as we do not expect profits to flow easily to Deccan.


Mahindra & Mahindra, MAHM.BO, Overweight
May '07 Sales - Unit sales growth of 17% led by UV's - ALERT

· M&M reported robust unit sales growth of 17% yoy for May. Growth was driven entirely by the automotive segment (+27% yoy) while the tractor segment reported a flattish trend (up 2% yoy).
· In the Auto segment, UV sales grew 25% yoy with Scorpio sales growing 28% yoy while other UV's (semi urban segment and pick up vehicles) grew 24% yoy. The recently launched stripped down Bolero and the Maxi truck are boosting sales for Mahindra's UV's. Low value 3 wheeler sales grew 22% yoy.
· The relative weak trend in tractor sales continues (up only +2% yoy). Apart from a more demanding base effect, tractor sales have likely been impacted by a) pipeline inventories and b) tightening of lending norms by banks for this segment.
· Mahindra launched the Renault Logan (in both petrol and diesel versions) in April in the entry level C segment at a competitive price point of Rs.428,000. In May, the Logan has sold 2,786 units across 11 cities.
· In the recent analyst meet, management has guided to Auto sales growth of 8-12% and tractor sales growth of 6-8% for FY08.
· To drive growth over the future M&M has the following plans: launch a new UV - the Ingenio (in about 12 months), followed by another UV (in 2010) and enter the CV market (in 2010). A new facility at Chennai is expected to be commissioned in 2010 for manufacturing cars and at Pune for trucks.
· Over March, M&M marginally underperformed the market - down 3% vs a gain of 5% for the BSE Sensex. Slowing growth rates in tractors along with concerns on interest rates have resulted in the underperformance. While we remain underweight the auto sector, M&M remains amongst our preferred picks on a relative basis as we expect lower volatility in sales for key product segments and due to the substantial value of investments in high growth areas (account for 40% of the SOTP valuation).


Maruti Udyog, MRTI.BO, Overweight
May '07 unit sales: Sales growth (11% yoy) led by SX4 launch and exports - ALERT

· Maruti reported unit sales growth of 11% yoy for May. Local sales rose 10% yoy, while exports (typically lumpy) increased 38% yoy.
· The A1 segment continued to decline (down 19%) and growth in the A2 segment moderated to 8% - an indication that rising interest rates are beginning to impact demand.
· Growth in the A3 segment was however boosted significantly (up 104%) due to the launch of the new SX4 model. Reviews for the model have been encouraging. The local content in the SX4 is 79%, which has helped price the product competitively at Rs. 618,000 (ex showroom Delhi). Management expects to further bolster its presence in the mid to premium segments over the current fiscal by launching a new SUV model.
· Maruti has had the best product momentum in the Indian passenger car market over the last 2 years. Prominent launches have included the Swift, Wagon R Duo, Zen Estillo, Swift Diesel and the SX4.
· But competition is attempting to play catch up. The month of April has seen 4 new model launched by competition (GM Spark, Hyundai Getz, Fiat Palio & Renault Logan). We see the passenger car space getting increasingly crowded over the next 12 - 24 months, with several competitors setting up additional/ new capacity.
· The Government sold its residual 10% stake in Maruti at Rs.797/ share (a 5% premium to the floor price of Rs.760). The shares were sold to 32 local institutions. The sale price represents an 18% premium to the previous sale price of Rs.678, which was effected in Jan'06.
· Over the month, the stock delivered a positive return of 2% vs. 4% for the broad market. While sales growth and product momentum remain healthy so far, investor sentiment remains cautious due to rising competition and the potential impact of rising interest rates on growth.



Banks
Indian Financial Services: On Bank Street -Vol 85

· Inflation at 5.06 % -in line with expectations - 21 bps lower than last week's release. Inflation likely to moderate below 5% by end June given favorable base effect.
· Stock Movement - Neutral: SOE and private banks up 2.2% and 2.5% respectively - in line with the market. Star stock performers - HDFC up 6.6%, HDFC Bank up 4.6% and SBI up 5.3%. DEVB and CBOP see profit booking after solid runup.
· HDFC to raise Rs31.1 bn via preference issue
· India Infoline to raise Rs. 4.84 bn; Ropes in key CLSA personnel
· PNB chairman retires
· Indian Bank to offload Rs.15 bn bad loan portfolio
· Indiabulls to foray into Life Insurance business


Automobile Manufacture
India Two Wheeler: May'07 unit sales decline further - ALERT

· The slowdown in the two-wheeler sector continued over May with sales declining (10% yoy) for the top three manufacturers - Hero Honda (-6% yoy), TVS Motor (-13% yoy), and Bajaj Auto (-15% yoy).
· The 6% decline in Hero Honda's sales comes off a high base. Sales had crossed the 300,000 mark in May last year as the company had pumped inventory in the system.
· Bajaj Auto's bike sales declined 15% yoy, with sales of entry level Platina taking a hit. We believe the success of Hero Honda's CD Deluxe as well as Bajaj cleaning up channel inventories in preparation for the launch of a new platform in August led to the fall. High-margin three-wheeler sales were flat yoy. Strong export growth for Bajaj (+53%) partially mitigated the effect of the sharp fall in domestic sales (-24% yoy).
· TVS Motors continued to struggle with bike sales (-37% yoy). Hero Honda continued to gain market share at the expense of the other manufacturers.
· Over the month, Hero Honda launched an upgraded variant of the Splendor-- Splendor NXG (100cc) priced at Rs.40,990 (ex-showroom Delhi). This follows the prices of the Splendor Plus being reduced by Rs.1,200 last month.
· We expect competitive intensity in the two-wheeler sector to remain sedate over the next two months until Bajaj launches its new platform in August.
· Over the month, Bajaj Auto announced the re-structuring of the company by creating two new entities for its automotive and financial services business; at the same time the holding company has retained 30% stake in these two companies, thus ensuring control.
· Over the month, the two-wheeler sector performance was a mixed bag. Hero Honda was up 5%, TVS was up 7% while Bajaj Auto was down 9% for the month vs the broad market return of +5%. While Bajaj was beaten down due to concerns on the demerger, Hero Honda rose on the company gaining market share and TVS rose on beaten down valuations. We remain underweight on the sector.