New Valuations

Tata Communications Limited (NYSE:TCL) After reporting a double digit decline in revenues in 1Q 10, woes in the Wholesale Voice segment were further compounded by continued pricing pressure and stiff competition in 2Q 10 (revenues fell 34.8% y-o-y) reflecting the presence of multiple operators. On 28 December 2009, Tata Communications entered into a collaboration with China Telecom to build an optical fiber network (to provide high speed connectivity between the countries) in order to expand its geographic coverage. However, we believe lack of pricing power due to cannibalization and continued shrinkage in market share will result in deterioration in the Wholesale Voice segment over the next few quarters. Nonetheless, to offset the slowdown in the Wholesale Voice segment, TCL is focusing on increasing its data revenues. After reporting an unexpected decline in 1Q 10, the E&C segment surprised us again in 2Q 10 with a further double digit decline (-17.4%) due to slowdown in global IT spend. Following a de-growth in FY 2010 (due to weak 1H 10) we anticipate modest growth in the E&C segment from FY 2011 onwards on signs that global economic recovery will boost IT spend worldwide. After reporting declining growth (-4.9% y-o-y) for the first time in the past 5 quarters the Others segment is expected to witness higher growth going forward due to wireless broadband expansion in India. Free Cash Flow (FCF) is expected to remain in negative territory until FY 2011 due to higher capex requirements resulting from expansion in untapped markets, while the balance sheet is likely to remain stretched due to increasing leverage to fund capex. The stock price declined post disappointing 2Q 10 numbers and we maintain our negative stance on the company due to stiff competition and general weakness persisting in the Indian telecom industry.

The Governor and Company of the Bank of Ireland (NYSE:IRE) continued its deteriorating financial performance in 1H 10. Both Ireland and the UK ended 2009 with negative GDP growth rates and poor unemployment numbers. Going forward, although we expect marginal improvement in 2010 and 2011 GDP numbers, unemployment rates are expected to remain weak in the region. Unfavorable unemployment figures will continue to impact the mortgage sector, resulting in higher impairment charges and lower demand for new loans. In light of this we now anticipate weaker than earlier expected demand for credit in the region and have lowered our FY 2010 and FY 2011 NII estimates. Moreover, although the bank’s decision to enter NAMA will help clean and deleverage its balance sheet in the long term, we remain skeptical. Hence, we continue to expect higher than management guided impairment charges for FY 2010 and FY 2011. The tightened regulatory environment that is expected for banks as governments continue to react to the crisis, with capital requirements expected to be increased, is also expected to be a burden. Nonetheless, an expected buoyant performance from global capital market indices will help boost assurance investment income and gains, resulting in higher non-interest income for the bank. Overall, however, our outlook is not strong over our investment horizon, considering the weak macroeconomic scenario in the area of operations.

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