Dalal Street

On the back of weakness in industrial sector, expect banks to cut their prime lending rates (PLR) by 75bp by March 09 and another 75 bp by 1HFY10.

Indian bankers who have been resisting a lending rate cuts – “only Delhi wants it”, arguing they have sufficient customers queuing up at their branches. Credit demand had indeed accelerated to 26.5% in November 08 from 22.8% last year with corporates shut out of the capital market and external commercial borrowings returning to banks.

Expect Delhi to be more amenable to a parallel reduction in public sector bank deposit rates with the November 08 assembly polls out of the way – and with a better-than expected performance.

Further one can expect RBI easing: 50bp rate and CRR cuts by January 09 and 100bp SLR cut by March 09.

The Private Life Insurance Companies have put a fantastic effort to break into the monopoly of LIC India. LIC controlled 100% of the market in 2000 and since then its market share has slipped to less than 50% and at the end of October-08, it was at 37.1%. Private Insurance Companies control 62.9% of the Life Insurance market in India.

Top 5 Private Life Insurance companies Marketshare at the end of Oct-08 is as follows,

• ICICI Prudential – 14.1%
• SBI Life 9.1%
• Bajaj Allianz – 8.5%
• Reliance Life – 5.6%
• HDFC Standard – 5.5%

The following chart [courtesy IRDA] shows the market share of the rest of life insurance companies operating in India.

Industrial production for Oct-08 contracted 0.4%. This was way behind market expectation. The last industrial-production contraction registered back in Apr-94. Manufacturing, the major part of industry, declined by 1.2% in Oct-08. Mining and electricity grew 2.8% and 4.4%, respectively.

Auto, chemicals, food products nonmetallic minerals and textiles contracted significantly. While the performance of almost all industrial categories deteriorated, the fall has been most marked for capital and intermediate goods.

Compared to the 15% export-GDP ratio for the whole economy, the ratio was over 50% for manufacturing. A near freeze of international trade finance in Oct-08 and stalling global demand seem to be the main factors behind the contraction of manufactured output.

Industrial growth is likely to be subdued during Nov-08 as well. Lacklustre industrial sector performance since Aug-08, however, does not necessarily indicate an impending recession/sharp growth slowdown in India. Recent improvements in domestic liquidity and the credit situation and the pro-active stance of the authorities are likely result in a modest bounce back in 4QFY09.

Govt. will issue INR100bn of fertilizer subsidy in the form of Bonds. This issue of bonds forms ~10% of total estimated fertilizer subsidy for FY09, which is higher than our expectation of ~5%. However we believe the companies will realize cash and minimize losses on discounting these bonds through a delayed sale to institutions given further rate cuts expected in FY09.

These bonds will bear a yield of 7% till maturity in 2022. They are being issued at par and are not eligible to be kept with banks under SLR requirement. The bonds can be bought by insurance companies in the “other approved securities” list and also by PF/Gratuity/Superannuation funds as special bonds. Moreover, these bonds are also eligible for repo transactions.

While Chambal Fertilizers will receive INR2.16bn and Tata Chemicals will get INR6.12bn worth of bonds, we expect these companies to wait for the discount to narrow before selling the bonds and hence minimize losses.