India Quarterly
Pessimism overdone
􀀗 Don’t despair: we think June 2009 will be the trough
􀀗 India’s economy and corporate earnings likely to
outperform peers
􀀗 Elections an event-based risk; fiscal deficit key concern for
economic outlook

Having been gloomier than most about India’s economic prospects over the last couple of
years, we now have an above-consensus growth view (as others have downgraded their
projections more than us). Our forecasts of a 6.2% average expansion in 2009-10e and 8%
in 2010-11e are about 1 percentage point above the current consensus expectations.
Significantly, we think the April-June 2009 quarter is likely to be the trough of the cycle.
This report incorporates our views on the economy, FX and the outlook for equities.
While India has clearly demonstrated that it is not immune from the dramatic deterioration
in the world trade cycle (merchandise export values fell 22% in February, for example),
we believe there are several positives that some are overlooking. These may not be
significant individually, but we believe they add up to something meaningful. They
include lagged effects of monetary policy, fiscal stimulus, the drop in commodity prices
and additional oil and gas output.
We expect the Indian rupee to weaken (HSBC forecast: INR54/USD at end-2009e) due to
a variety of forces, including 1) the ongoing decline in remittance and FDI flows; 2)
normalisation of software exports; and 3) a deterioration in currency-relevant domestic
conditions relating to politics and fiscal accounts.
Markets in India face two major risks; one is event-based (the general election), the other
structural (the state of public finances). India has one of the world’s highest ratios of
outstanding public debt as a percentage of GDP, and the next government will need to
tackle this. Most recent opinion polls indicate that a Congress-led coalition has the edge in
the general elections. However, markets would welcome a coalition led by either
Congress or the BJP as economic reforms are likely to be high on the agenda.
What will matter most towards end of FY10e will be the outlook for FY11e, when we
expect the economy to grow 8% and corporate earnings to increase close to trend levels of
10-12%. We doubt if this has been priced in, and believe the markets may be pleasantly
surprised towards the end of 2009.
In our sector recommendations, we are overweight on banks (from underweight) and
energy, and underweight on real estate, retail and healthcare.

Economics 4
Equity market outlook 7
INR… no change in trend yet 12
Sector and stock picks 14
Company profiles 19
Bharti Airtel, BHARTI IN, OW(V) 20
BHEL (BHEL IN) OW(V) 21
Colgate Palmolive, CLGT IN, OW 22
GMR, GMRI IN, UW(V) 23
Hindalco, HNDL IN, UW(V) 24
ING Vysya, VYSB IN, UW(V) 25
ONGC, ONGC IN, OW(V) 26
Punjab National Bank, PNB IN, OW(V) 27
Reliance Industries, RELI IN, OW(V) 28
State Bank of India, SBIN IN, OW(V) 29
Tata Power, TPWR IN, OW(V) 30
Unitech, UT IN, UW (V) 31
Disclosure appendix 36
}D isclaimer 39