News

Chartered Semiconductor Manufacturing Ltd.’s (NASDAQ:CHRT) ADR price experienced a 20.3% single day appreciation on 16 April 2009. The rise followed an announcement on the day that Singapore’s stateowned investment firm Temasek Holdings Pte. Ltd. had increased its stake in the company from 59.4% to 62.3% as of 14 April 2009. The announcement of the increase in stake follows the closure of Chartered’s rights issue on 06 April 2009, which was oversubscribed. An announcement was also made on 16 April 2009 of an alliance with IBM Corp., Global Foundries Inc., Infineon Technologies AG, Samsung Electronics Co., Ltd , STMicroelectronics N.V. and Chartered to jointly develop 28-nanometer, high-k metal gate, low-power bulk CMOS process technology. Although the successful completion of its rights offer will help the company’s financial position, and signs of a slight recovery in orders and the company’s involvement in the development of new technology are encouraging, we believe the significant appreciation in the ADR price has left the stock overvalued at current price levels. Hence we downgrade the ADR rating from a HOLD to a SELL. We will reassess the ADR target price and rating for Chartered once the company announces its 1Q 09 results on 24 April 2009. Although we continue to anticipate a positive currency impact on the Singapore stock (10 Singapore shares = 1 ADR) over our investment horizon, based on our fundamental outlook we maintain the Singapore stock a SELL. We will reassess the target price and rating for the Chartered Singapore stock once the company announces its 1Q 09 results on 24 April 2009.

On 15 April 2009, Companhia Paranaense de Energia (NYSE:ELP) announced its 1Q 09 electricity sales data. The company registered a marginal increase in electricity sales volumes as sales were depressed by the economic slowdown. However, given current price levels we continue to maintain COPEL’s preferred stock a BUY as we are encouraged by the y-o-y increase in sales volumes from its largest segment, despite the economic slowdown. We will reassess the preferred stock rating in our 4Q 08 and FY 2008 update report in the coming weeks. As we expect a negative currency impact on the ADR over our investment horizon, and taking into account the current ADR price, we downgrade the ADR from a HOLD to SELL. We will reassess the ADR (1 ADR = 1 preferred share) rating in our 4Q 08 and FY 2008 update report in the coming weeks.

Weatherford International Limited’s (NYSE:WFT) NYSE common stock price has appreciated significantly since we rated it a BUY in our 4Q 08 & FY 2008 update report, dated 13 March 2009 , achieving our target price on 16 April 2009. We believe the increase in the stock price reflects the fundamentals outlined in our 4Q 08 & FY 2008 update report, the rise in crude oil price and the increase in the NYSE composite index. We believe the NYSE common stock is fairly valued at current price levels and therefore downgrade it from a BUY to a HOLD over our 6-12 months investment horizon. We will reassess our rating for Weatherford’s NYSE common stock after the company announces its 1Q 09 results on 20 April 2009. As we continue to anticipate a positive impact on the European stock over our investment horizon, we reiterate our BUY rating for the European stock. We will reassess the European Stock rating for Weatherford after the company announces its 1Q 09 results on 20 April 2009.

On 16 April 2009, Dassault Systemes S.A. (NASDAQ:DASTY) released its preliminary non-IFRS 1Q 09 results. While the final results for revenues are expected to fall short of both Management and our expectations, operating margin and EPS are expected to fall within Management guidance range. Lower-than-expected top-line performance is attributable to clients delaying the finalization of contracts in light of the uncertain and sluggish global economic conditions. However, considering increased savings target for FY 2009 and the company’s healthy recurring revenues stream, we maintain our BUY rating for the common stock at current levels until we reassess our target price and rating in our next update report, once the company releases its full 1Q 09 results. As we expect a significant negative currency impact over our investment horizon and given current price levels, we maintain our HOLD rating for the ADR. We will reassess our target price and rating in our next update report, once the company releases its 1Q 09.

On 16 April 2009, AbitibiBowater Inc. (NYSE:ABH) announced that it, along with some of its US and Canadian subsidiaries have filed for Chapter 11 bankruptcy protection, following its failure to repay or refinance its debt. As a result, we are suspending our ratings until plans to restructure the company are unveiled. The Canadian stock was delisted from the Toronto Stock Exchange on 16 April 2009; therefore, we terminate our coverage of the Canadian stock.

Empresa Brasileira de Aeronautica S.A.’s (NYSE:ERJ) aircraft deliveries declined y-o-y in 1Q 09, reflecting weakness in the aviation industry in light of the prevailing economic slowdown. However, given the company’s expectations of higher deliveries for full year in 2009 and current price levels continuing to support a BUY, we do not anticipate a change to our BUY rating for the ADR. We will reassess our target price and rating in our 4Q 08 and FY 2008 update report. Given our fundamental outlook and continued expectations of a positive currency impact on the Brazilian stock over our 6-12 month investment horizon, we do not anticipate a change to our current BUY rating. We will reassess our target price and rating in our 4Q 08 and FY 2008 update report.

Orbotech Limited’s (NASDAQ:ORBK) common stock has appreciated significantly since our 4Q 08 and FY 2008 update report, which we believe reflects the on-going volatility in global financial markets. We expect global economic conditions to remain weak in FY 2009, which will lead to lower CapEx spending by Flat Panel Display (FPD) manufacturers during the year. Declining CapEx plans of these companies is likely to impact Orbotech’s revenues and bottom-line performance in FY 2009. Therefore, based on our fundamental outlook and current price levels, we downgrade the NASDAQ common stock from a HOLD to a SELL over our 6-12 months investment horizon. We will reassess our target price and rating in our next update report, once the company announces its 1Q 09 results. We expect a significant positive currency impact on the European stock over the medium term. Therefore, we maintain our current BUY rating for the European stock. We will reassess our target price and rating in our next update report, once the company announces its 1Q 09 results.

New Valuations

BHP Billiton Limited (NYSE:BHP) The company has announced various operational stoppages across its different CSGs for maintenance or in response to slow global demand in 2H 09. These operations include the indefinite suspension of nickel operations at Ravensthorpe (61% of total nickel production in 1H 09) and processing at the Yabulu refinery. Furthermore, the Samarco operations for two iron ore pellets plants will be temporarily discontinued and at the Samancor manganese operations production is expected to reduced by 1.5 mtpa in FY 2009. The company has announced reductions in copper production at Pinto Valley mines and metallurgical coal output. We anticipate commodity prices to remain low during 2H 09 and 1H 10 coupled with lower production. This will result in a steep decline in margins in 2H 09 and 1H 10. Nevertheless, we expect commodity prices to improve in 2H 10 with improved global activities and higher demand. Thus, we expect the company to benefit in the long term, given its growth projects and higher commodity prices. However, at current price levels, we think BHPB is over valued.

BHP Billiton PLC(NYSE:BBL) The company has announced various operational stoppages across its different CSGs for maintenance or in response to slow global demand in 2H 09. These operations include the indefinite suspension of nickel operations at Ravensthorpe (61% of total nickel production in 1H 09) and processing at the Yabulu refinery. Furthermore, the Samarco operations for two iron ore pellets plants will be temporarily discontinued and at the Samancor manganese operations production is expected to reduced by 1.5 mtpa in FY 2009. The company has announced reductions in copper production at Pinto Valley mines and metallurgical coal output. We anticipate commodity prices to remain low during 2H 09 and 1H 10 coupled with lower production. This will result in a steep decline in margins in 2H 09 and 1H 10. Nevertheless, we expect commodity prices to improve in 2H 10 with improved global activities and higher demand. Thus, we expect the company to benefit in the long term, given its growth projects and higher commodity prices. However, at current price levels, we think BHPB is over valued.

Pearson PLC (NYSE:PSO) Although the US economic crisis has created a challenging operating environment, Pearson managed to report a healthy set of FY 2008 results that exceeded our expectations and were supported by favorable currency movements. In constant currency terms, top-line registered a healthy 8% y-o-y increase. Management stated that the integration of the North American Education Group is on track and the integration of the Harcourt businesses is close to completion. In addition, the company has adopted several measures to cut back on costs such as selective pay hikes restricte to employees who earn less than US$50,000 annually. Going forward, in FY 2009 we expect Pearson to deliver healthy double-digit revenue growth in its largest business segment, Education, which contributed approximately 65% of FY 2008 revenues. We expect the pro-education policies adopted by the Obama administration in the US to sustain growth from the North American Education market and believe that additional growth will be driven by the company’s expansion in South Africa, Nigeria, Middle East, Latin America and Asia. We expect modest performance in the FT Group business as we anticipate weak advertising revenues in FT Publishing. The Penguin business is likely to witness flat to mute growth as we expect recessionary pressure to cause a decline in demand for books. However, for FY 2009 Management has guided to a mute bottom-line with adjusted earnings (excluding tax deductibility of goodwill amortization) expected at or slightly above FY 2008 adjusted EPS (GBp57.7p per share). Therefore, as the outlook for Pearson’s performance is mixed and based on current levels we believe that the stock holds limited upside potential.

In 4Q 08 Philippine Long Distance Telephone Company (NYSE:PHI)registered higher-than-expected wireless subscriber-base growth, reflecting improved domestic demand attributable to the government’s monetary and fiscal initiatives. However, we expect a marginal improvement in wireless subscriber-base growth for FY 2009 and FY 2010, in anticipation of continuous stress on consumer spending attributable to declining GDP growth, reflecting a sharp slump in exports and remittance from Filipinos working abroad. Moreover, with Sun Cellular’s (the third largest wireless operator in Philippines) aggressive pricing policies during the quarter we expect competition to intensify further in the region resulting in declining ARPUs, going forward. In order to offset the declining growth from fixed-line voice segment, PLDT is focusing on other segments such data services, consumer broadband and 3G which is expected to support top-line growth. Furthermore, we continue to expect strong demand for broadband in Philippines due to the current low Internet penetration levels.

Shinhan Financial Group (NYSE:SHG) The South Korean economy contracted by 3.4% in 4Q 08 (versus growth of 3.8% in 3Q 08), and grew by 2.5% in 2008 overall (versus growth of 5.0% in 2007). Government forecasts point to a fall of 2% in GDP during 2009, with the economy being hard hit by the unfolding financial crisis. However, the IMF takes a bleaker view, forecasting a fall of 4% in 2009 GDP (source: The Korea Times, 03 February 2009). In view of this, we expect demand for credit to decline in the near-to-medium term. Meanwhile, inflation eased to 3.7% in January 2009, although it rose once again in February 2009, hitting 4.1%. This rate is above the central bank’s target rate of 3.0% ±50 bps. Despite this, we expect the Bank of Korea to ease monetary policy in order to stimulate the economy, and a 13 March 2009 survey by Reuters showed that 11 out of 12 analysts polled also anticipate further rate cuts this year. As a result of this, as well as the impact of the economic downturn, we expect NIM to remain under pressure through the near-to-medium term, with a rise in non-performing assets and defaults. This will likely force a hike in provision expenses during FY 2009.

Sterlite Industries (India) Ltd(NYSE:SLT) After the steep decline in commodity prices in last quarter of 2008, we do not foresee any significant decline in metal prices in 2009. Furthermore, production cuts across major commodities in 2009 in view of the economic slowdown are expected to support commodity prices going forward. Thus, with the anticipated increase in commodity prices and the increased production volumes in Aluminum and Zinc segments from the ongoing projects will help Sterlite boost its top-line growth in FY 2010. In addition, during the quarter, Sterlite announced that it will acquire Asarco LLC’s (Asarco) operating assets. Asarco is a Tucson based copper mining, smelting and refining company, with FY 2008 revenues of US$1.9bn. Since Sterlite currently generates the majority of its revenues from the Copper segment, after the Asarco acquisition the company’s copper contribution is expected to improve. On 14 April 2009, Sterlite’s acquisition for Asarco was counter bid by Grupo Mexico S.A.B for an all cash offer. The US Bankruptcy Court has therefore asked Asarco to discontinue its proposed sale to Sterlite, as discussed in our company news alert dated 15 April 2009. With the recent spike in the common stock price, we believe the common stock is over valued at current levels.

Genco Shipping & Trading Ltd (NYSE:GNK) As outlined above, the declining demand for iron ore and coke will have a negative impact on freight rates in the near term. Furthermore, the company’s recent renewal of time charter contracts at lower rates is an example of an industry wide trend, which we believe will have a significant negative impact on freight rates. Considering these factors, we remain cautious about the company’s future top-line growth. Moreover, we remain concerned regarding the possible bankruptcy of Genco’s customers, after Samsun Logix Corporation filed for the equivalent of bankruptcy protection in South Korea in 1Q 09, impacting the company’s top-line. Considering these factors, we remain cautious about the company’s future top-line growth. Although Genco has amended its credit facility with its bankers, enabling the company to pursue its vessel acquisition plans (Genco is expected to take delivery of three vessels during 2009), we believe that increase in revenues from these vessels will be more than offset by declining freight rates and therefore expect the company’s revenues to decline y-o-y in FY 2009 with margins remaining under pressure over the next couple of years. Therefore, we hold a cautious outlook for the NYSE common stock at current price levels. Overall, we believe the market has already taken into account the problems facing the company over our investment horizon and we believe the NYSE common stock is fairly valued at current price levels.

Nordic American Tanker Shipping Ltd (NYSE:NAT) On 10 April 2009, the International Energy Agency (IEA) cut its projections for global crude oil demand by 1.0 mn barrels per day (b/d) following a reassessment of global GDP assumptions and the significantly lower-than-anticipated 1Q 09 demand data. Global oil demand is now forecast to be 83.4 mn b/d in 2009, lower than in 2008 by 2.4 mn b/d. The IEA also expects demand for oil to remain weak in 2010 (Source: International Energy Agency). If the forecast contraction in oil demand occurs in 2009 as it did in 2008, it will be the first two year contraction in demand since 1982-1983. On 14 April 2009, the US Energy Information Administration (EIA) cut its projections for global crude oil consumption by 0.18 mn b/d to 84.09 mn b/d in 2009, indicating a 1.6% y-o-y decline. However, the EIA expects oil consumption to increase 1.3% y-o-y to 85.22 mn b/d in FY 2010 (Source: EIA). Considering these factors we expect the company’s vessels to generate lower freight rates in the near term. Therefore, we hold a negative outlook for the NYSE common stock based on the near term concerns.

Grupo Aeroportuario del Pacifico, S.A.B. de C.V. (NYSE:PAC) We continue to expect a y-o-y decline in top-line in FY 2009, reflecting reduced passenger traffic due to the continuation of the economic slowdown over our investment horizon. GAP’s passenger traffic declined 16.8% y-o-y in 1Q 09, which will depress aeronautical revenues. However, the company’s expansion and improvement of the commercial areas at its airports during FY 2008 will facilitate the leasing of larger commercial space and other services, benefiting non-aeronautical revenues in FY 2009. Furthermore, our forecast of a depreciating Mexican peso relative to the US dollar over our investment horizon will be accretive for non-aeronautical revenues as a large proportion of GAP’s commercial contracts are denominated in US dollars. Consequently, we expect growth in nonaeronautical revenues in FY 2009, however this will be diluted by declining passenger traffic. Overall, revenues will decline primarily due to the drop in aeronautical revenues. GAP’s operating margin is set to decline y-o-y in FY 2009 due to a combination of declining revenues and higher fixed costs related to the larger terminal space.

Aspen Insurance Holdings Limited (NYSE:AHL) Going forward, we expect premium rates to improve in some lines of the US insurance and reinsurance market, following the massive losses triggered by hurricane activities and large investment losses. Global reinsurance prices are up for January 2009 renewals and are expected to remain firm through April and July 2009 renewals. The company has indicated that its property reinsurance business in particular has witnessed a significant hardening of rates and is expected to follow an upward trend in 2009. However, while this will support top-line to some extent, we believe that the negative outlook offered by ratings agencies for the insurance industry and economic recession will impose restrictions on the company’s ability to write new business, although the reduction of its capital by only 1.4% in FY 2008, in contrast to the steep falls reported by some of its peers, places it in a relatively healthy position. Although we remain concerned by ongoing weakness in global financial markets and losses arising from investments in funds of hedge funds, we expect net investment income to increase y-o-y in FY 2009 and are encouraged by Aspen’s average credit quality of AAA, with 87% of the portfolio graded AA or higher as of 31 December 2008. Even though we are concerned by the possibility of high claims expenses, with Tropical Storm Risk predicting 2009 to be another active year for hurricane activity, the stable outlook for the reinsurance industry from S&P’s, A.M. Best and Moody’s is encouraging, with approximately 50% of Aspen’s business in reinsurance lines in FY 2008. Moreover, despite downturn, Aspen’s strong global presence across a wide range of insurance and reinsurance lines will help it in a hardening market. However, we believe that the fundamental positives have largely been factored into the current stock price and that there is relatively little upside potential.

Infineon Technologies AG (NYSE:IFX)Despite some small signs of encouragement, including the suspension of reduced working hours in April and May at the company’s Dresden plant, and possible signs of stabilization in key end-markets, we expect semiconductor demand to shrink further, resulting in y-o-y revenue declines in 2Q 09 as well as FY 2009, before a return to growth in FY 2010. While we expect the company’s IFX 10+ cost reduction program to limit the losses resulting from decline in top-line to some extent, we expect the company to experience negative earnings ahead. The outcome of the Qimonda bankruptcy is also crucial to the company, potentially having a material impact on bottom-line, while the ability of the company to finance its debt maturities in FY 2010 is also a significant concern.

Mobile TeleSystems OJSC (NYSE:MBT) Going forward, we expect revenues to decline in FY 2009 due to an expected decline in Average Revenue Per User (ARPU) from all operations, partially offset by an increase in subscriber-base. Furthermore, MTS do not anticipate any increase in tariffs as it would result in an increase in churn rate and decline in traffic. As a result, we do not see MTS loosing out its market share, despite intense competition. Furthermore, we believe deteriorating economic conditions in Russia coupled with expected decline in Russian ruble will pressurize revenue growth in FY 2009. However, we expect improvement in the Russian economy and stabilization of the ruble (due to several initiatives taken by the Central Bank), from FY 2010 onwards to positively impact the company’s performance. Moreover, MTS has taken several cost reduction initiatives such as the renegotiation of rental contracts and reduction in headcount which is expected to result in a decline in general & administrative expenses. However, we expect promotional & advertising spend and subscriber acquisition costs to increase due to stiff competition. Consequently, we expect margins to be under pressure in the near term. Furthermore, we believe the ADR is currently undervalued and provides a lucrative investment opportunity.

Companhia Siderurgica Nacional (NYSE:SID) The slowdown in sectors that consume steel, such as construction and automobile manufacturing, has resulted in a steep decline in demand for steel across the globe. We do not expect a significant recovery in the auto and construction sectors in 2009, hence we do not expect steel demand and prices to increase significantly over our investment horizon. However with CSN’s continued shift towards sales to its domestic market, we expect the company will be able to maintain its FY 2008 price levels, as q-o-q steel prices for CSN actually increased in Brazil in 1Q 09, despite the poor performance of the industry during this period. We therefore expect the company’s realized prices to increase y-o-y during FY 2009 in line with the recent increase in CSN’s prices in the domestic market in the early part of 2009. We expect an improvement in demand for steel in FY 2010 as we expect the emphasis on the automobile and construction sectors of stimulus packages announced by central banks worldwide will eventually drive up demand for steel through recoveries in these sectors, combined with our expectation of signs of a recovery in the global economic condition in FY 2010. Measures have already been taken by the Brazilian government to revive the construction and auto sectors over the past few months, which we expect will boost demand going forward. The Brazilian government has already lowered IPI industrialized product taxes on automobiles and has made BRL20 bn available to fund mortgages, as well as announcing a construction incentive plan for 2009. Even though the outlook for the steel industry continues to remain bleak in the near term, the company has given positive volume and price guidance, expecting increases for both, during its recent conference call on 30 March 2009, despite the significant drop in steel production in Brazil during 1Q 09. The common stock has appreciated significantly since our previous update report and we believe the stock is overvalued at current levels. We therefore hold a negative near to medium term outlook for the company’s common stock, however with our expectation of a recovery in the global economy, and subsequent increase in steel demand, from FY 2010, we hold a more positive long term outlook for the company.

Arcelor Mittal (NYSE:MT) We expect the slowdown in global automobile sales and construction activities to impact the company’s performance during 1H 09. US auto sales are close to 30-year lows and General Motors Corporation is expected to file for bankruptcy, despite the aid which has been provided by the US government. This deterioration in 2 key markets is likely to negatively impact the steel industry, going forward. However, we expect demand to improve from 2H 09, as the impact of multiple stimulus packages improves the US economy during 2H 09. We also expect measures including further cuts in interest rates and other incentives, such as providing vouchers to consumers buying fuel efficient vehicles and replacing older cars, to support demand in FY 2010. The decline in input costs and the company’s cost cutting programme is expected to support margins, going forward. As we continue to maintain a cautious outlook for the steel industry, primarily due to the recent slowdown in the auto and construction sectors, we believe the ADR has further downside potential at current price levels. Hence, we downgrade the ADR from a HOLD to a SELL.

Harmony Gold Mining Company Limited(NYSE:HMY) Spot gold prices have improved significantly in 2Q 09, from low prices in the last quarter of 2008. Furthermore, the gold price realizations for Harmony improved in 2Q 09, supported by appreciation of the US dollar against the South Africa rand. With the Hidden Valley project anticipated to begin commercial production in 3Q 09, we believe production volumes are likely to improve. Going forward, we anticipate gold prices to continue to remain higher than current levels during FY 2009 and FY 2010. Furthermore, we anticipate significant appreciation of the US dollar against the South African rand over our investment horizon, which is expected to support revenues over the near-to-medium term. In addition, with the company experiencing zero debt, we maintain our positive outlook for the company’s financial performance. However, we anticipate gold prices to decline from FY 2011. Furthermore, we expect the South African rand to strengthen against the US dollar from FY 2011. These factors are likely to result in decline in revenues and margins from FY 2011. In light of these factors, and given the significant appreciation in the common stock price, we believe the stock price is fairly valued at current levels.

Tata Motors (NYSE:TTM)is currently experiencing extremely difficult operating conditions, with the global economic downturn impacting domestic sales and exports, coupled with higher interest rates impacting the bottom-line and a high leverage position for refinancing JLR. However, 4Q 09 has provided some positive factors with domestic Commercial Vehicles (CV) reporting a 41.3% q-o-q improvement in sales volume, fuelled by depreciation benefits (accelerated depreciation of 50% will be provided for commercial vehicles to be purchased on or after 01 January 2009 up to 31 March 09) provided by the Government of India (GOI). Management had indicated that a y-o-y improvement in 4Q 09 was not expected, considering 4Q 08 was one of the strongest quarters. Hence, Tata Motors is now expected to report weak y-o-y revenue growth in 4Q 09, however, we do anticipate q-o-q improvement. Furthermore, the industry is still experiencing pressure due to slowdown in consumer spending and exports are expected to remain stagnant. Consequently, post depreciation benefits; we expect further weakness in revenues in 1H 10. Considering inflation is benign at 0.18%, we expect another round of cash infusion in the economy by the Reserve Bank of India (RBI) in order to support industrial growth over the next quarter. Hence, domestic sales volumes of CVs are expected to increase from 2H 10 onwards. We expect CV exports to remain subdued in light of recessionary conditions in the US, UK, Japan and some European countries. Except for the Nano, Passenger Vehicles (PVs) are expected to experience significant competition considering Tata Motors still markets outdated models and has only introduced variants of its existing models, while the company’s major competitors have consistently launched new vehicles into the market. Hyundai Motors launched i10 and i20 while Maruti Suzuki Ltd. launched A-Star in the mid-size compact car market. Consequently, Tata will continue to experience severe competition from its competitors. We continue to expect major subsidiaries such as TDCV and TELCON to apply further pressure on consolidated profits over the next year and half. In light of JLR sales volume numbers (-35.0% y-o-y in 3Q 09) and considering the brands major markets are experiencing recessionary conditions, we believe Tata Motors will continue to struggle in improving this business over the medium term. However, the abovementioned negatives will be partially offset by Management’s cost reduction initiatives (targeted savings of INR10,000 mn over the next 3 years) and reduction in raw material prices, associated with declining global commodity prices over the next 2 years. Therefore, we expect operating margin to expand from 4Q 09 onwards. Interest expenses will continue to impact net margin over our investment horizon. Moreover, repayment of public deposits will coincide with redemption of Foreign Currency Convertible Bonds (FCCB; maturing in FY 2011 and FY 2012) and apply significant pressure on Tata Motors’ cash flows. However, in April FY 2009 the company repurchased US$17 mn worth of FCCB, which demonstrates the company’s efforts to reduce its high debt levels. Tata Motors is experiencing extreme difficulty in refinancing the remaining portion of the JLR bridge loan (maturity June 2009) amounting to US$2,000 mn. We believe the refinancing will occur, which will significantly impact the company’s cash position. However, high leverage, (consolidated Debt/Equity ratio of 2:1) will continue to impact Tata Motors over the medium term. Management’s decision to curtail its capital spending and expansion plans for existing facilities will support its depleting cash position and allow higher utilizations, going forward. Free Cash Flow (FCF) is expected to be negative for FY 2009, suffering from the operational downturn and the expected higher working capital requirements. Consequently, we hold a negative outlook for the common stock.

Max Capital Group Limited (NASDAQ:MXGL) Although we are not currently valuing the stock as a combined entity, the agreed merger with IPC Holdings Limited (IPC Holdings) has a significant positive impact on our outlook for Max Capital. With approval from US antitrust authorities already granted, the merger awaits approval from IPC Holdings’ and Max Capital’s shareholders, with IPC Holdings’ board unanimously recommending the deal rather than the offer by Validus Holdings Ltd. We believe that the merger agreement is particularly beneficial for Max Capital, with IPC Holdings’ strong fundamentals significantly boosting the company’s position. The combined entity will have an enhanced capital position, with a capital base of over US$3 bn, as well as a healthily diversified portfolio across the global insurance and reinsurance market. IPC’s solid investment portfolio will further reduce the company’s exposure to alternative investments. Looking at the company on a standalone basis, while we would expect the hardening of premium rates to support top-line to some extent, we believe prevailing economic conditions, and the 19.2% y-o-y reduction in the company’s shareholders’ equity in FY 2008 would impose restrictions on the company’s ability to write new business. Moreover, we are concerned about increased claims expenses, with Tropical Storm Risk predicting 2009 to be another active year for hurricane activity, and likely further deterioration in the company’s investment portfolio. However, the stable outlook for the reinsurance industry from S&P’s, A.M. Best and Moody’s is encouraging. We hold a positive outlook for Max at Lloyd’s and are encouraged by the underwriting performance in the P&C and Specialty segments in the quarter. Although we are concerned about Max Capital’s significant alternative investment losses, we are encouraged by the company’s efforts to reduce its exposure. As of 31 December 2008, the total exposure to alternative investments had been reduced from 21% on 31 December 2007 to approximately 14% of total invested assets including cash and cash equivalents, which Management intends to reduce to the range of 10% to 12% following the merger.

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