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MAY 4, 2011

Economy News4 RBI raised key policy rates by 50 bps and declared it would battle high

inflation even at the cost of some economic slowdown. Heads of leadingbanks said a 50-100 bps increase in interest rates was certain with RBIraising repo and reverse repo rates to 7.25% and 6.25%, respectively.This is the ninth increase since March last year. (BS)

4 IDBI Bank has taken the lead in raising its base rate and prime lendingrates (post rise in repo rates announced Tuesday) by 50 bps to 10% and14.50%, respectively, and deposits rates by 25-50 bps in some brackets.Chief executives of large commercial banks, including SBI, ICICI Bank andHDFC Bank, said they expect lending rates to increase before this monthend. (ET)

4 The commerce and industry ministry has set a target of achieving $500-billion exports by 2013-14 by strategising the country’s foreign tradethrough diversification of products and markets and technologicalenhancement. It floated a strategy paper for this purpose where it hadrecommended certain specific areas such as skill development, focus onresearch and development and channelising incentives in a propermanner. (BS)

Corporate News4 Mundra Port and Special Economic Zone (MPSEZ) announced the

acquisition of Abbot Point Port in Australia for A$ 1.8 billion (Rs 90 Bn).Australia’s northeastern state of Queensland is selling the coal exportterminal as part of an A$ 15 billion asset-sale programme. (BS)

4 Dabur India entered into an agreement with Mumbai-based AjantaPharma to acquire the latter’s over-the-counter (OTC) energiser brand,'30-Plus'.Dabur didn’t disclose the size of the deal With this acquisition,Dabur India is aiming to further strengthen its position in the OTCcategory in the coming years. (BS)

4 Birla Power Solutions is looking at raising up to $100 million in thecurrent financial year from private equity players to part finance itsdiversification plans, the company's managing director told ET. The YashBirla-led company has planned an investment of 100 Bn over the next fiveyears to foray into thermal and solar power. (ET)

4 In a major reprieve to Ranbaxy, an American court has dismissed apetition from rival pharmaceutical firm Mylan to challenge the former’sexclusive marketing rights over the generic version of Pfizer’s Lipitor. (BS)

4 Grasim Industries said it will acquire one-third stake in Swedish specialtypulp company Domsjo Fabriker, which was recently bought by group firmAditya Holding AB. Grasim will invest Rs 2.8 Bn in purchasing shares ofAditya Holding AB, which acquired the foreign firm through its 100%subsidiary, Aditya Group AB. (ET)

4 Madhucon Infra Ltd. plans to raise Rs 18Bn in an initial share offer tofund projects in India. The company will sell both new shares and aportion of the stake held by parent Madhucon Projects Ltd. (Mint)

4 Navin Fluorine International Ltd said it had acquired a 51% stake inUK-based Manchester Organics for ~Rs.320mn. Manchester Organics, aprivately-held company founded in 1996, specialises in laboratory scalemulti-step synthesis of a wide variety of organic compounds. (ET)

4 Glenmark Generics Inc. has been granted final approval by the UnitedStates Food and Drug Administration (USFDA) for their abbreviated newdrug application (ANDA) for Fluticasone propionate 0.05% lotion,Glenmark said in a filing to the Bombay Stock Exchange. Fluticasonepropionate 0.05% lotion by Glenmark is generic version of Nycomed'sCultivate lotion. (BS)

Equity% Chg

3 May 11 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 18,535 (2.4) (5.9) 2.9

NIFTY Index 5,565 (2.4) (5.8) 3.1BANKEX Index 12,407 (3.1) (7.6) 4.8BSET Index 6,080 (1.2) (8.7) (2.8)

BSETCG INDEX 12,721 (2.5) (6.9) (2.9)BSEOIL INDEX 9,665 (2.1) (6.2) 2.6CNXMcap Index 7,955 (2.0) (3.3) 2.6

BSESMCAP INDEX 8,436 (2.1) (1.8) 1.3

World IndicesDow Jones 12,808 0.0 3.3 5.9

Nasdaq 2,842 (0.8) 1.9 2.6FTSE 6,083 0.2 1.1 1.4Nikkei 9,850 1.6 3.0 (4.1)

Hangseng 23,633 (0.4) (2.9) (1.9)

Value traded (Rs cr)3 May 11 % Chg - Day

Cash BSE 3,071 30.1

Cash NSE 13,258 38.8Derivatives 155,801.4 76.8

Net inflows (Rs cr)2 May 11 % Chg MTD YTD

FII 12 (106.0) 7,030 3,913Mutual Fund (450) 132.9 (914) 1,139

FII open interest (Rs cr)2 May 11 % Chg

FII Index Futures 17,836 10.2FII Index Options 42,667 6.6

FII Stock Futures 29,952 (1.5)FII Stock Options 383 52.5

Advances / Declines (BSE)3 May 11 A B S Total % total

Advances 28 469 211 708 27Declines 178 1,607 315 1,785 69

Unchanged 0 75 37 112 4

Commodity % Chg

3 May 11 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 110.2 (0.7) 1.6 23.8

Gold (US$/OZ) 1,539.8 (1.5) 6.9 13.7Silver (US$/OZ) 42.8 (8.2) 7.1 42.4

Debt / forex market3 May 11 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % N/A N/A N/A 8.16Re/US$ 44.50 44.34 44.59 45.62

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

15,100

16,600

18,100

19,600

21,100

May-10 Aug-10 Nov-10 Feb-11 May-11

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT May 4, 2011

MONETARY POLICY

RBI Monetary Policy Statement - Inflation scores over growthq The 50bps increase in repo and reverse repo rates came in along expected

lines. We share RBI's concern that, sustained high inflation can createuncertainties in the economy and may impact investments and growth.RBI's endeavor is to protect the high growth in the long term at the costof some moderation in the near term. Its forecast on GDP for FY12 at7.4% - 8.5% (v/s about 9% projected by the Government) clearly reflectsthat.

q The increase of 50bps in savings interest rate from 3.5% to 4% was a sur-prise and is expected to have an impact of about 5% on an average onthe profits of banks. However, we expect the banks to pass on the highercosts to the customers in due course of time.

q Moreover, the revised provisioning norms will impact banks (mostly PSUbanks) to some extent. We understand that, most private sector banksand large PSU banks follow a more conservative policy on provisioning.To that extent, they may not be impacted by these higher provisioningrequirements.

q We expect RBI to raise interest rates further by 75 bps over FY12E.

q The stock market reacted viciously to the increase in savings account in-terest rate and reduction in GDP growth rate apart from the hike in reporate. We believe that, an 8% growth, if achieved, will make India one ofthe fastest growing economies. Moreover, in the immediate term, thecomfortable liquidity position (as alluded to be the RBI) may not lead tosudden spikes in interest rates for corporate India. Thus, earnings growthin FY12E may not suffer significantly despite the higher interest costs,we believe.

q To that extent, we opine that, the fall in markets / banking stocks overthe past couple of trading sessions may have discounted most of thenegatives coming out of the monetary policy announcements. However,elevated crude prices remain a concern. A correction in crude prices canlead to a sustained rise in markets.

The main features of the monetary policy are as under:

n Repo Rate hiked by 50 bps to 7.25%. Reverse repo rate to be 100bps lower thanthe repo rate - thus hiked to 6.25%

n A shift to a single rate regime - Repo rate.

n Bank Rate left unchanged at 6.0%. CRR also left unchanged at 6.0%

n Savings bank rate increased from 3.5% to 4% with immediate effect

n Marginal Standing Facility (MSF) to be initiated WEF May 7. Banks can borrow at8.25%

n Additional 10% provision set on unsecured sub-standard loans. 25% (20%) pro-vision on secured portion of up to 1 year doubtful loans and 40% (30%) provi-sion on secured portion of 1-3 year doubtful loans

n 2% (0.25% - 1%) provision on recast loans in standard assets for 1st 2 years

n Cap on investments of banks' funds into debt MFs liquid plans at 10% of networth

n WEF April 2011, bank loans to micro finance companies to be treated as part ofpriority sector lending

n Inflation projection factors in fuel price hike

n FY12 GDP projection at 7.4% - 8.5% - average 8%; March 2012 inflation at 6%with an upward bias; FY12 credit growth 19%; FY12 deposit growth at 17%.

ECONOMY UPDATE

Saday [email protected]+91 22 6621 6312

Jayesh [email protected]+91 22 6652 9172



Inflation scores over growthInflation has been hovering at elevated levels over the past few months on the backof food prices initially and non-food prices recently. The transmission of food inflationto non-food inflation is on the back of higher disposable incomes in rural India andalso because of passage of higher raw material prices of manufactured goods to theconsumers.

Till the last monetary policy, the RBI was banking on lower commodity prices tomoderate inflation while it continued to support growth. However, with inflation re-maining at elevated levels and external factors like crude / commodity prices sup-porting it, the RBI had to attack the higher demand to try and moderate inflationand anchor inflationary expectation, we opine. We understand that, inflationary ex-pectations had likely moved up and there was a risk of those getting further an-chored if the RBI was not seen taking decisive steps to tame inflation. The RBI hasalso indicated that, the steps taken in the policy are to curb inflation, anchor infla-tionary expectations, rein in demand pressures and to sustain growth in the medium-term.

We share RBI's concern that, sustained high inflation can create uncertainties in theeconomy and may impact investments and growth. RBI's endeavor is to protect thehigh growth in the long term at the cost of some moderation in the near term. Tothat effect, we had expected RBI to be more hawkish in this monetary policy review.

The rate hike has taken into account a hike in petrol / diesel prices in the immediateterm. To that extent, we believe that, the probability of another "shock" hike is low.We expect the interest rates to be hiked by another 75 bps over FY12.

Savings account interest rate hiked by 50 bps - about 5% averageimpact on banks' profitsThe rate at which banks will have to pay interest on savings accounts balances hasbeen increased by 50bps to 4% pa. In the recent period, the spread between thesavings deposit and term deposit rates has widened significantly. The RBI had initi-ated a study on the issue of deregulation of savings bank deposit interest rate. Pend-ing finalization of this issue, the RBI decided to increase the savings bank depositinterest rate to 4% with immediate effect.

This came as a negative surprise to us as well as the markets. Banks have beenlooking at increasing their CASA balances to take advantage of the relatively lowerinterest rates. As increase of 50bps and potential de-regulation of the rates will likelyhave an impact on the cost of funds.

We expect NIMs to contract by about 10-12 bps due to the 50bps hike. Profits ofbanks may moderate by an average of 5% for FY12 assuming status quo on othervariables. However, we expect banks to recover atleast a part of these increasesthrough fees or transaction charges. Thus, we expect the impact on banks to bemuch lower.

Provisioning norms tightened - a marginal negative for the sec-torThe RBI has tightened some of the provisioning norms by increasing the provisioningrequirements on certain categories of non-performing advances and restructuredadvances. The proposals are as under :

n advances classified as "sub-standard" will attract a provision of 15% as againstthe existing 10% (the "unsecured exposures" classified as sub-standard assetswill attract an additional provision of 10 per cent, i.e., a total of 25 per cent).

n the secured portion of advances which have remained in "doubtful" category upto one year will attract a provision of 25% (as against the existing 20%);

n the secured portion of advances which have remained in "doubtful" category formore than one year but upto 3 years will attract a provision of 40% (as againstthe existing 30%)



These provisions will have to be made as part of the prudential provisioning frame-work. In our opinion, most private sector banks and large public sector banks havebeen conservative in terms of provisioning and to that extent are already compliantwith the new norms. However, some smaller banks may have to increase their pro-visioning requirements.

Thus, while this will have some impact on the profitability of the banks, it will bemarginal, in our view.

Malegam Committee Recommendations to be implementedA Sub-Committee of the Central Board of the Reserve Bank (Chairman: Shri Y. H.Malegam) was constituted by the RBI to study issues and concerns in the MFI sector.Based on the recommendations of the committee and the feedback received by theRBI, it has decided that bank loans to all MFIs, including NBFCs working as MFIs onor after April 1, 2011, will be eligible for classification as priority sector loans underrespective category of indirect finance if the prescribed percentage of their total as-sets are in the nature of "qualifying assets" and they adhere to the "pricing of inter-est" guidelines to be issued in this regard. We believe that, this is positive for MFIsas it will ensure flow of funds to them from banks.



SECTOR UPDATE


MONETARY POLICY: IMPACT ON BANKING SECTOR

Slew of regulatory changes by RBI: Impact on banking sectorRBI used the occasion of annual monetary policy announcements to unveilslew of regulatory changes for the banking sector. We have tried to gaugethe impact on the banking sector. We advise our clients to use thisopportunity to enter into stocks under our preferred list. Our preferred picksare ICICI Bank, HDFC Bank, SBI and Axis bank.

RBI hiked the interest rate offered by banks on saving a/c depos-its by 50 bps from 3.5% to 4.0%.RBI's move to hike the interest rate offered on saving account deposits is expectedto impact the NIM of the banks. This is precursor to the deregulation of saving a/cdeposit rates which is awaiting final decision.

The impact would be higher for those banks having higher SA component in totaldeposits. For the system as a whole, saving a/c deposits constitute ~23% of totaldeposits. A 50 bps hike would reduce the NIM by 10-12 bps.

Impact of 50 bps hike in interest on saving a/c deposits

CA/ SA/ Impact of NII % of PBT % ofdeposits deposits 50 bps hike FY12 NII FY12 PBT

(%) (%) (Rs bn) (Rs bn) (Rs bn)

Axis Bank 19.5 21.6 1.87 115.6 1.6 64.39 2.9

HDFC Bank 22.3 30.4 2.83 121.9 2.3 77.47 3.7

ICICI Bank 15.4 29.6 3.00 197.3 1.5 86.52 3.5

Allahabad Bank 6.9 26.5 1.58 45.4 3.5 26.54 6.0

Andhra Bank 6.4 22.2 0.88 38.1 2.3 23.08 3.8

Bank of Baroda 7.4 27.0 2.86 102.1 2.8 70.00 4.1

Indian Bank 6.3 25.7 1.23 48.6 2.5 32.14 3.8

Indian Overseas Bank 8.0 22.2 1.47 49.6 3.0 20.73 7.1

Punjab National Bank 7.9 31.1 4.25 139.9 3.0 86.82 4.9

State Bank of India 9.7 38.5 14.54 392.4 3.7 217.93 6.7

Union Bank 8.4 24.9 2.19 70.5 3.1 39.00 5.6

Source: Company, Kotak securities - Private Client Research

The impact of this hike on the NII (Net Interest Income) for FY12 varies from 1.5%-3.7%. On PBT level, impact could vary from 2.9%-7.1% for FY12E.

We believe the pressure on NIM could rise further if RBI deregulates saving a/c de-posit rates as banks are likely to pay rates similar to prevailing short-term rates.Currently many banks are offering 4.0-4.5% rates for FD below 3 months.

However, this does not mean banks will at the receiving end. We opine that, inorder to compensate for this, banks might impose additional charges on the custom-ers. So, measures like higher charges on non-maintenance of AQB (average quar-terly balance), charges on issuance of additional cheque or limiting the number offree transactions could lead to more fee-income for them. Apart from this banksmight resort to hiking the minimum balance requirement which would help them inmobilizing higher deposits per account at lower costs.

We believe the deregulation of interest on saving a/c deposits might compress NIMby few bps but banks are well positioned to deal with this situation. We also believethat bank's overall profitability is not likely to get significantly impacted as lowerNIM would more partly offset by increase in their non-interest income.



Provisioning requirements on certain categories of non-perform-ing advances and restructured advances will be enhanced.This regulatory change would not have material impact on the provisioning require-ments of the banks (especially private sector banks) whose provisioning policies arefar more conservative. Even for PSU banks this would not have much impact asmajority of them have already reached to 70% provisioning mark.

However, banks have to provide more on their restructured book where standardasset provisioning requirement would be 200 bps as against 25 bps earlier. Hereagain, private sector banks have small restructured book portfolio as compared toPSU banks. Few banks like IOB, PNB and Indian bank will have more than 3% im-pact on their PBT (FY12E).

Provision coverage ratio and impact on restructured book

PCR Restructured % of 2% std % of(%) Book advances asset PBT

(Rs bn) provisions(Rs bn)

Axis Bank 91.4 19.3 1.4 0.4 0.6

HDFC Bank 82.5 6.4 0.4 0.1 0.2

ICICI Bank 76.0 19.7 0.9 0.4 0.5

Allahabad Bank 75.7 28.2 3.0 0.6 2.1

Andhra Bank* 80.4 29.7 5.3 0.6 2.6

Bank of Baroda 85.0 67.1 2.9 1.3 1.9

Indian Bank 84.3 52.0 6.9 1.0 3.2

Indian Overseas Bank 70.5 69.7 6.1 1.4 6.7

Punjab National Bank 77.2 143.6 6.5 2.9 3.3

State Bank of India 64.1 184.0 2.5 3.7 1.7

Union Bank 70.2 52.6 3.9 1.1 2.7

Source: Company; Kotak Securities - Private Client Research; * indicates number at the end of FY10

Increase in rates-Demand – Supply balance is more importantWhile the RBI has hiked repo rate by 50 bps, this may not immeddiately be transmit-ted to the consumers in the immediate period, which is the lean season.

The liquidity in the system is comfortable, & this may not lead to any immediateimpact on the cost of funds for banks.

It will likely have an impact in the busy season but the actual impact can be gaugeddepending on the actual liquidity situaution (government spending).

Thus, overall growth may suffer at that time. We have already factored in a lowergrowth for our coverage.



MARKET STRATEGY

Lower than expected results from few large caps and higher than expectedinflation kept domestic markets sideways during April, 2011. Positive globalcues and forecast of normal monsoons though provided support to themarkets. Strong domestic demand and high non-food manufacturinginflation coupled with rising oil prices may continue to pose a concern andmay prompt RBI to further hike the interest rates to control the inflation.

Global markets like US and Europe edged up higher led by excellentcorporate results. Federal Reserve kept the key rates unchanged and saidthat economy is recovering at a moderate pace. Fed also indicated that theywould wind down the asset buying program in June. However, inflationedged up higher in Europe and China which led to hike in the interest ratesin these economies. Tensions continued to remain in Middle-East which ledto spiraling up of crude oil prices. Thus we believe that higher crude oilprices, slower than expected recovery in US, euro-debt issues or hike ininterest rates may have adverse impact on domestic markets also.

We had been continuously stating that markets may remain side ways tillthe time concerns related to inflation, interest rate movements, oil prices aswell as other global factors are addressed. These factors will continue toplay a significant role in deciding market direction going ahead. Along withthis, full year results and outlook for FY12 coupled with monsoons will alsobe playing a crucial part.

Thus, in near term, markets may remain soft till the time above statedconcerns are addressed while for a longer term, we believe markets providedecent upside from the current levels. This is based on the assumption thatreforms will be initiated by the Government. We have been bullish onseveral stocks across sectors such as Banking, Capital goods, Construction,IT, Media, Metals etc Thus, at current levels, we recommend accumulatingfundamentally sound stocks available at reasonable valuations with a longerterm horizon. Consistently high crude prices remain the key risk.

MARKET STRATEGY

Research Team+91 22 6621 6301

Benchmark indices - India

Source: Bloomberg

Market performance - sector wise (April 2011)

Source: Bloomberg

-3.0%

0.0%

3.0%

6.0%

9.0%

12.0%

Sen

sex

NIF

TY

BS

E m

idca

p

BS

E s

mal

l cap

FM

CG

Cap

ital g

oods

Ban

king

PS

U

Oil

& G

as

Aut

o

Tec

h

Hea

lthca

re

Met

al

8500

11625

14750

17875

21000

Jan'

08

Apr

July

Oct

Jan'

09

Apr

July

Oct

Jan'

10

Apr Ju

l

Oct

Jan'

11

Apr

2600

3320

4040

4760

5480

6200Sensex (LHS)

Nifty (RHS)



Global markets moved up on good corporate results but inflationworries remainUS markets witnessed gains during last month led by excellent corporate results aswell as better than expected macro economic data. Labor market was strengtheningand jobless rate hit a two-year low of 8.8 percent. Other economic reports pointedtowards a strength in manufacturing, rising consumer confidence, and subdued infla-tion. Housing starts and building permits also increased more than expected for themonth of March. Fed reassured that nation's economy is recovering at a moderatepace and also stated that they would keep the interest rates low for an extendedperiod. Central bank is still in the process of buying bonds but is expected to winddown its asset buying program in June. It also plans to continue buying Treasurieswith the proceeds of maturing securities. First quarter GDP data was also releasedbut it came at 1.8% as against expectations of 2%. Going forward, market wouldalso be eyeing on any interest rate hikes which may come up on completion of assetpurchase program.

While Fed may keep interest rates near zero for some more time but EuropeanCentral Bank raised the rates from a record low to 1.25% due to higher than antici-pated inflation data for four months in a row. Though European stocks edged higherduring last month but concerns continue to remain regarding euro-debt issues afteranother downgrade of Portugal's sovereign debt and impounding debt of Greece.

Chinese markets were impacted by rising inflation with consumer price inflation ris-ing 5.4 percent in the year to March, ahead of market estimates. China's centralbank had raised interest rates earlier in the month to control stubbornly high inflationand also raised bank's reserve requirements for the seventh time since October,2010 to fight against excessive liquidity. Though central bank had raised interestrates, slapped price control on certain commodities, clamped down on propertyspeculation, but abundant liquidity and soaring global commodity prices continue topose a threat to Chinese economy. We expect further rate and reserverequirement's hike going ahead since Chinese economic growth is still cruising neardouble digits.

Unrest continued to remain in Middle-East markets which kept oil prices high. Alongwith this, Saudi Arabia also slashed the oil output by 800,000 barrels per day inMarch due to oversupply, thereby sending the signal that it will not act to quell thesoaring prices.

Indian markets remained sideways as expectedDomestic indices remained range bound during April, 2011 in line with ourexpectations. This was mainly due to lower than expected set of earnings from fewlarge caps such as Infosys, Reliance and Axis Bank. Positive global cues and forecastof a normal monsoon supported the markets to some extent. Higher than expectedinflation and fears of further spike in inflation on fuel price hikes in near future alsoweighed down on the markets.

Results from Infosys missed our estimates with volumes lower by 1% QoQ indicatingvolatility in client spending but future outlook from the management indicatednormal year of growth. Reliance also missed the street expectations mainly onaccount of lower refining margins as well as lower gas production from KG-D6 basinand Panna-Mukta and Tapti field. At the same time, there was a lack of clarity onramping up of gas production from KG-D6 block. Axis bank also reported pressureon NIMs (Net interest margins).

Rising crude oil prices may also prompt oil and marketing companies to raise petrolor diesel prices in May, 2011 post the assembly elections in few states. This may putfurther pressure on inflation, thereby prompting RBI to further hike the interest ratesin the next monetary policy meet. However, Indian Meteorological Department haspredicted normal monsoon rains and expects the south-west monsoon season to be98% of the long-term average. This would be positive for main Kharif crops and willkeep the price under check this season.

Crude (US$/bl)

Source: Bloomberg

20

55

90

125

160

Jan-

05Ju

n-05

Nov

-05

Apr

-06

Sep

-06

Feb

-07

Jul-0

7D

ec-0

7M

ay-0

8O

ct-0

8M

ar-0

9A

ug-0

9Ja

n-10

Jun-

10N

ov-1

0A

pr-1

1



Going ahead, we expect that in near term, markets may remain sideways andwould be mainly driven by quarterly and full year FY11 results and outlook goingahead, inflation and interest rate movements, monsoon as well as on global factorsemerging from Middle-East, Asian, US and European markets. Higher interest rateswill continue to impact interest rate sensitive sectors such as infrastructure, realestate auto, financials and utilities while higher commodity prices may impactsectors like automobile, cement and FMCG.

Moderation in IIP growth continuesFebruary IIP came at 3.6% on a larger base led by 11.1% in the consumer goods,23.4% growth in consumer durables but impacted by 18.4% fall in the capital goodssegment and a muted growth in the mining segment. Consumer durables reportedan encouraging growth of 23.4% for February, 2011 despite a significantly high baseof 29.1% in February, 2010. On a MoM basis, seasonally adjusted IIP growth inFebruary was -0.2% against that of (1.1%) in January and (-1.6%) in December.The cumulative growth for the period April-February, 2010-11 stands at 7.8% overthe corresponding period of the previous year.

Macroeconomic factors such as high inflation, high crude oil prices as well as higherinterest rates are impacting the investment climate, thereby leading to fall in thegrowth in capital goods segment. We now expect IIP growth for the fiscal 2011 tobe less than 8%, reflecting around 8-8.5% GDP growth for 2011.

Sluggish growth in fixed capital formation also continues to remain a worrying sign.In a scenario of strong consumption, inflation has remained high which prompted RBIto increase interest rates. Further increase in interest rates from here on may slowdown the consumption coupled with slowdown in the capacity creation. This wouldhave an impounding impact on driving up inflation further, thereby making the taskof RBI difficult. However, we expect RBI to continue with its anti-inflationary stanceand increase interest rates further after its first hike of 50 bps in repo and reverserepo came up in its May 2011 policy meeting.

Inflation remained ahead of estimatesWPI inflation for the month of March, 2011 flared up to 9% as compared to 8.31%seen in Feb, 2011 and much ahead of RBI's expectation of 8%. Inflation for Jan,2011 has also been revised upwards to 9.4% from 8.23% estimated earlier. Sharpjump in non-food manufacturing inflation as well as fuel inflation led to a spike ininflation. However, on a MoM basis, food article and non-food primary articleinflation eased to 9.5% and 25.9% respectively vis-à-vis 10.7% and 29.8%respectively in Feb, 2011. This was due to reversal seen in the vegetable prices.

But sharp jump seen in the international commodity prices, higher non-food primaryarticle prices as well as strong domestic demand led to sharp jump in non-foodmanufacturing inflation. Along with this, fuel inflation also climbed to 12.9% inMarch, 2011 vs 11.5% in Feb, 2011 led by spike in the coal prices. Fuel inflationmay inch up further if government decides to increase petrol prices post assemblyelection in May in various states.

Food article inflation inched to 8.76 per cent for the week ended April 16 from 8.74per cent for the previous week. Fuel inflation also inched up to 13.53% from theprevious week's level of 13.05 %. Index for primary articles also moved up to12.08% for the week from 11.96% the previous week. Thus we believe that goingforward, food, non-food manufactured product as well as higher crude pricescontinue to pose a concern and may prompt RBI to further hike the interest rates tocontrol the inflation.

IIP growth (%)

Source: Bloomberg; Note: IIP growth sinceApril 2009 has been recompiled using newseries of WPI

(4.0)

-

4.0

8.0

12.0

16.0

20.0

Apr

-06

Dec

-06

Aug

-07

Apr

-08

Dec

-08

Aug

-09

Apr

-10

Dec

-10

Rupee/US$

Source: Bloomberg

38

41

44

47

50

53

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11



Inflation (%)

Source: Bloomberg

FII fund flowsForeign funds continued to remain net buyers in the month of April, 2011 with netinflows in the cash market (till 26th April) stood at Rs 79.6 bn while mutual fundsturned net sellers and net outflows stood at Rs 5 bn. Buying from FIIs was spurred bynear zero interest rates in US but was also impacted by lower than expected FY11results from select companies.

FII & Mutual Fund investment (Rs Cr)

Source: Bloomberg

RecommendationDomestic indices remained range bound during April, 2011 in line with our expecta-tions. This was mainly due to lower than expected set of earnings from few largecaps such as Infosys, Reliance and Axis Bank. Positive global cues and forecast of anormal monsoon supported the markets to some extent. Higher than expected infla-tion and fears of further spike in inflation on fuel price hikes post assembly electionsalso weighed down on the markets.

Global markets like US and Europe edged up higher led by excellent corporate re-sults but inflation worries remained in Europe and China which lead to hike in theinterest rates. Spiraling oil and commodity prices continue to weigh on the econo-mies. Further spike in oil prices, poor economic data from US or Europe or worsen-ing situation in Middle-East may also impact domestic markets adversely.

Going ahead, we expect that in near term, markets would be mainly driven by quar-terly and full year FY11 results and outlook going forward, inflation and interest ratemovements, monsoon as well as on global factors emerging from Middle-East,Asian, US and European markets. Higher interest rates will continue to impact inter-est rate sensitive sectors such as autos, infrastructure, real estate, financials and utili-ties while higher commodity prices may impact sectors like automobile, cement andFMCG.

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Thus we continue to believe that in near term, markets may remain soft till the timeabove stated concerns are addressed while for a longer term, we believe marketsprovide decent upside from the current levels. This is based on the assumption thatreforms will be initiated by the Government. Investors entering at current levelsmust be prepared for a longer time horizon for making gains. We have been bullishon several stocks across sectors such as Banking, Capital goods, Construction, IT,Media, Metals etc Thus, at current levels, we recommend accumulating fundamen-tally sound stocks available at reasonable valuations with a longer term horizon.Consistently high crude prices remain the key risk.

Preferred picks

Sector Stocks

Automobiles Bajaj Auto, Escorts

Banking Axis Bank, Bank of Baroda, ICICI Bank

Construction IRB Infra, BGR Energy, IVRCL Infra

Engineering L&T, Greaves Cotton, Tractors India, Cummins, Diamond Power

Information Technology Infosys, TCS, KPIT, NIIT Tech

Media HT Media

Metals & Mining Sesa Goa

NBFC M&M Financials

Oil & Gas Cairn India

Other Midcaps Time Techno

Source: Kotak Securities - Private Client Research



ALLAHABAD BANK

PRICE: RS.195 RECOMMENDATION: BUYTARGET PRICE: RS.248 FY12 P/E: 5.1X, P/ABV: 1.0X

Q4FY11: Core earnings came better than our expectations; how-ever pension provision mars the PAT growth. Slippage remainedat elevated levels. Maintain BUY as stock is trading at reason-able valuations (1.0x FY12E ABV).q Net interest income (NII) grew 55.0% YoY on back of sharp expansion in

NIM (49 bps YoY) and strong loan growth (30.6% YoY). However, netprofit growth was moderate at 14.7% YoY on back of higher pensioncharge (Rs.3.57 bn provided during Q4FY11).

q CASA mix remained stable QoQ at 33.5% at the end of Q4FY11 as com-pared to 33.3% at the end of Q3FY11. Expansion in margin has come onthe back of 103 bps improvement (YoY) in blended yield on assets, whilecost of funds rose only 39 bps (YoY).

q Gross NPA has remained stable during Q4FY11 both in terms of percent-age as well as in absolute terms. However, slippage remained at the el-evated levels (annualized slippage at 4.5% during Q4FY11), negative inour view.

q We are slightly revising our earnings estimate downward for FY12E toincorporate 50 bps hike in interest rates offered on saving deposits. Atthe current market price of Rs.195, the stock is trading at 5.1x its FY12Eearnings and 1.0x its FY12E ABV. We maintain BUY rating on the stockwith TP of Rs.248 (Rs.260 earlier) based on 1.3x of its FY12E adjustedbook value.

Result Performance

(Rs mn) Q4FY11 Q4FY10 YoY (%)

Interest on advances 23,485.4 16,636.7 41.2

Interest on Investment 7,461.1 5,386.7 38.5

Interest on RBI / banks' balances 216.1 41.9 415.9

Other interest 29.5 0.4 NM

Total Interest earned 31,192.1 22,065.7 41.4

Interest expenses 19,679.0 14,639.7 34.4

Net interest income 11513.1 7426.0 55.0

Other income 4,694.7 4,020.3 16.8

Net Revenue (NII + Other income) 16,207.8 11,446.4 41.6

Operating Expenses 8,407.3 4,866.9 72.7

Payments to / Provisions for employees 6,024.0 3,057.2 97.0

Other operating expenses 2,383.3 1,809.7 31.7

Operating profit 7,800.5 6,579.5 18.6

Provisions & contingencies 4,655.1 2,971.6 56.7

Provision for taxes 569.3 1,362.9 -58.2

Net profit 2,576.1 2,245.1 14.7

EPS (Rs.) 5.77 5.03 14.7

Source: Company

RESULT UPDATE




Core earnings came better than our expectations; however pen-sion provision mars the PAT growth.Net interest income (NII) grew 55.0% from Rs.7.43 bn in Q4FY10 to Rs.11.51 bn inQ4FY11 on back of sharp expansion in NIM (49 bps YoY) and strong loan growth(30.6% YoY). However, net profit growth was moderate at 14.7% from Rs.2.25 bnin Q4FY10 to Rs.2.58 bn in Q4FY11 on back of higher pension charge (Rs.3.57 bnprovided during Q4FY11).

Strong business growth; loan book grew 30.6% YoYThe bank's gross loan book grew 30.6% YoY to Rs.945.7 bn at the end of Q4FY11vis-à-vis the corresponding quarter last year (8.9% QoQ).

The strong growth momentum in loan book has come on the back of robust growthin MSME (47.2% YoY) and retail segments (29.2% YoY). During the same period,agriculture grew moderately at 15.7% YoY.

Deposits grew 24.4% YoY (9.0% QoQ) from Rs.1060.6 bn at the end of Q4FY10 toRs.1318.9 bn at the end of Q4FY11. Strong growth in loan book vis-à-vis deposits ledto improvement in the C/D ratio from 68.3% at the end of FY10 to 71.7% at theend of FY11.

CASA mix remains at 33-34%; likely to support the margin in ris-ing rate environmentCASA mix remained stable QoQ at 33.5% at the end of Q4FY11 as compared to33.3% at the end of Q3FY11. Expansion in margin has come on the back of 103 bpsimprovement (YoY) in blended yield on assets, while cost of funds rose only 39 bps(YoY).

Trend in CASA (%)

Source: Company

We are forecasting CASA share to remain at ~33% levels during FY12E and this islikely to help the bank in sustaining healthy NIM, going forward.

NIM came at 3.49% for Q4FY11; improved both QoQ as well asYoYIt reported NIM at 3.49% for Q4FY11, better than our expectations. It expanded 49bps YoY and 5 bps QoQ on the back of 103 bps improvement (YoY) in blended yieldon assets while cost of funds rose by only 39 bps.

Blended yield on assets improved from 8.43% in Q4FY10 to 9.46% in Q4FY11 onback of improvement in both yield on advances (10.11% in Q4FY10 to 10.71% inQ4FY11) as well as yield on investments (6.76% in Q4FY10 to 7.20% in Q4FY11).

However, during the same period cost of funds rose relatively at moderate pace (39bps) from 5.61% in Q4FY10 to 6.00% in Q4FY11 on back of sharp 6 bps fall in costof borrowings along with 43 bps rise in cost of deposits.

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Healthy growth in non-interest income aided by strong growth infee incomeNon-interest income rose 16.8% from Rs.4.02 bn in Q4FY10 to Rs.4.70 bn inQ4FY11 on back of strong growth in fee-income (40.8% YoY; 72.4% QoQ). Thehealthy growth has come despite muted treasury profit (78.7% decline from Rs.5.77bn in Q4FY10 to Rs.1.60 bn in Q4FY11) during Q4FY11.

Trends in Non-interest income

(Rs. bn) 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 YoY (%) QoQ (%)

Fee Income (CEB & Forex) 2.13 1.70 2.13 1.74 3.00 40.8 72.4

Profit on sale of Investments 0.61 0.90 0.38 0.20 0.13 -78.7 -35.0

Others 1.28 0.39 0.94 0.63 1.56 22.2 148.4

Total non-Interest income 4.02 2.99 3.45 2.57 3.57 -11.2 38.9

Source: Company

Gross NPA has remained stable; however, higher slippage duringQ4FY11 has been a little dampener.Gross NPA has remained stable during Q4FY11 both in terms of percentage as wellas in absolute terms. In absolute terms, gross NPA rose 7.0% QoQ; in percentageterms, it remained at 1.74% at the end of Q4FY11 as compared 1.69% at the endof Q4FY10 and 1.77% at the end of Q3FY11. However, net NPA as a proportion ofnet advances rose to 0.79% at the end of Q4FY11 as compared 0.66% at the endof Q4FY10 and 0.59% at the end of Q3FY11.

Slippage has remained at elevated levels (Rs.8.13 bn; annualized slippage at 4.5%)during Q4FY11 as against the average run rate of ~Rs.4.37 bn during last four quar-ters, negative in our view.

Cumulative restructured book stands at Rs.28.15 bn at the end of Q4FY11 (3.0% ofgross advances), which is in line with the industry average. Out of this, Rs.3.24 bnhas already slipped into NPA.

Valuations and recommendationsWe are slightly revising our earnings estimate downward for FY12E to incorporate 50bps hike in interest rates offered on saving deposits. We now expect full year profitsof Rs.18.27 bn for FY12E (Rs.19.33 earlier). This would result into an EPS of Rs.38.4and ABV of Rs.189.0, respectively for FY12E.

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Rolling 1-year forward P/ABV band

Source: Company, Kotak Securities - Private Client Research

Rolling 1-year forward P/E band


At the current market price of Rs.195, the stock is trading at 5.1x its FY12E earningsand 1.0x its FY12E ABV. We maintain BUY rating on the stock with TP of Rs.248(Rs.260 earlier) based on 1.3x of its FY12E adjusted book value.

Key data

(Rs bn) 2009 2010 2011 2012E

Interest income 73.65 83.69 110.15 135.05Interest expense 52.06 57.19 69.92 89.64

Net interest income 21.59 26.50 40.22 45.41Growth (%) 29.1 22.8 51.8 12.9Other income 11.42 15.16 13.70 14.91Gross profit 19.01 25.48 30.55 37.45

Net profit 7.69 12.06 14.23 18.27Growth (%) -21.1 56.9 18.0 28.4Gross NPA (%) 1.8 1.7 1.7 1.8Net NPA (%) 0.7 0.7 0.8 0.7

Net interest margin (%) 2.9 2.9 3.4 3.0CAR (%) 13.1 13.6 13.1 12.6RoE (%) 16.5 22.2 21.3 22.4

RoAA (%) 0.9 1.1 1.0 1.1Dividend per share (Rs) 2.5 5.5 6.0 6.5EPS (Rs) 17.2 27.0 29.9 38.4Adjusted BVPS (Rs) 121.6 140.6 161.3 189.0

P/E (x) 11.3 7.2 6.5 5.1P/ABV (x) 1.6 1.4 1.2 1.0


We maintain BUY on AllahabadBank with a revised price target

of Rs.248

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INDIAN OVERSEAS BANK (IOB)PRICE: RS.152 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.162 FY12 P/E: 6.9X, P/ABV: 1.1X

Q4FY11: Reported earnings better than our expectations; assetquality also improved QoQ. We revise our earning estimates up-ward for FY12 and maintain ACCUMULATE on the stock.q IOB delivered superior core earnings; NII grew at 48.1% (YoY) on back of

strong loan growth (40.9% YoY) and 43 bps (YoY) improvements in NIM.However, net profit growth was even stronger (240.8% YoY) due tostrong traction in non-interest income (36.4% YoY) and lower operatingexpenses (decline of 3.7% YoY) along with write-back of provisions.

q Asset quality has stabilized; since Q4FY10, both gross NPA and net NPAare on the downward trajectory, positive in our view. Gross NPA and netNPA now stand at 2.72% and 1.19%, respectively, at the end of Q4FY11.Its coverage ratio has reached to 70.5%, an improvement of 490 bps se-quentially.

q Bank has provided Rs.1.52 bn during FY11 towards second pension op-tion liability for serving employees (1/5 of total liability to the tune ofRs.7.59 bn); left over amount of Rs.6.07 bn would be amortized over nextfour years. They have also fully provided for the retired employees(Rs.1.88 bn) as per the regulatory requirement. They are also amortizinggratuity liability over 5 years (Rs.493 mn each year; full liability is Rs.2.47bn).

q We have revised our earnings estimate upward for FY12E to take into ac-count better core earnings and lower credit costs. We are also raising TPto Rs.162 (Rs.140 earlier) and maintain ACCUMULATE rating on the stock.At the TP, stock would trade at 1.2x its FY12E ABV.

Result Performance

(Rs mn) Q4FY11 Q4FY10 YoY (%)

Interest on advances 26,156 18,636 40.4

Interest on Investment 8,233 6,233 32.1

Interest on RBI/ banks' balances 677 488 38.8

Other interest 254 121 110.5

Total Interest earned 35,321 25,478 38.6

Interest expenses 23,168 17,274 34.1

Net interest income 12,153 8,204 48.1

Other income 3,845 2,820 36.4

Net Revenue (NII + Other income) 15,997 11,024 45.1

Operating Expenses 6,228 6,468 -3.7

Payments to / Provisions for employees 3,627 4,327 -16.2

Other operating expenses 2,601 2,141 21.5

Operating profit 9,769 4,556 114.4

Provisions & contingencies 4,460 4,598 -3.0

Provision for taxes 966 (1,317) -173.4

Net profit 4,343 1,274 240.8

EPS (Rs) 7.88 2.34 236.8

Source: Company

RESULT UPDATE




Core earnings better than our estimates; revise earnings upwardfor FY12IOB has delivered superior core earnings - its NII grew at 48.1% to Rs.12.15 bn inQ4FY11 from Rs.8.20 bn in Q4FY10 on back of strong loan growth (40.9% YoY) and43 bps (YoY) improvements in NIM.

However, net profit growth was even stronger at 240.8% to Rs.4.34 bn in Q4FY11from Rs.1.27 bn in Q4FY10 due to strong traction in non-interest income (36.4%YoY) and lower operating expenses (decline of 3.7% YoY) along with write-back ofprovisions.

Strong loan book growth (40.9% YoY; 13.6% QoQ); CASA mix re-mained stable at ~30%Bank witnessed strong business growth by 35.2% YoY (15.0% QoQ) to Rs.2590.2 bnat the end of Q4FY11 from Rs.1915.8 bn at the end of Q4FY10.

Loan growth was much stronger at 40.9% YoY (13.6% QoQ) to Rs.1137.9 bn at theend of Q4FY11 from Rs.807.8 bn at the end of Q4FY10. During the same period,deposits grew at 31.1% YoY (16.1% QoQ) to Rs.1452.3 bn. Within deposits, CASAdeposits grew 21.6% YoY as compared to 35.6% growth in term deposits.

Trend in deposits

(Rs bn) 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 YoY (%)

Total Deposits 1008.1 1094.4 1062.5 1108.0 1094.6 1181.4 1250.6 1452.3 31.1

CASA 294.8 337.1 318.2 360.6 362.5 390.9 387.3 438.6 21.6

CASA (%) 29.2 30.8 30.0 32.6 33.1 33.1 31.0 30.2

Term Deposits 713.3 757.3 744.3 747.3 732.1 790.5 863.3 1013.7 35.6

Source: Company

Faster loan growth as compared to deposit growth led to improvement in the C/Dratio from 72.9% at the end of Q4FY10 to 78.4% at the end of Q4FY11.

Asset quality has stabilized; coverage ratio also improved 490bps sequentially.Asset quality has stabilized; since Q4FY10, both gross NPA and net NPA are on thedownward trajectory, positive in our view. In absolute terms, gross NPA declined14.4% YoY and 5.4% QoQ, respectively. Similarly, net NPA also declined by 33.4%(YoY) and 10.7% (QoQ), respectively.

Gross NPA and net NPA now stand at 2.72% and 1.19%, respectively, at the end ofQ4FY11. Its coverage ratio has reached to 70.5%, an improvement of 490 bps se-quentially.

Trend in NPAs

(Rs bn) 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 YoY (%) QoQ (%)

Gross NPA 23.4 26.8 32.2 36.1 35.7 33.3 32.6 30.9 -14.4 -5.4

Gross (%) 3.04 3.42 4.05 4.47 4.30 3.78 3.26 2.72

Net NPA 12.0 12.2 16.9 19.9 17.9 17.6 14.9 13.3 -33.4 -10.7

Net (%) 1.59 1.59 2.17 2.52 2.21 2.04 1.51 1.19

Source: Company



C/I ratio came at 47.3% during FY11 on higher pension chargesIts C/I ratio came at 47.3% during FY11 on back of higher pension & gratuitycharges. Q4FY11 saw decline in opex as bank had provided a large chunk in earlierquarters.

Bank has provided Rs.1.52 bn during FY11 towards second pension option liability forserving employees (1/5 of total liability to the tune of Rs.7.59 bn); left over amountof Rs.6.07 bn would be amortized over next four years. They have also fully providedfor the retired employees (Rs.1.88 bn) as per the regulatory requirement. They arealso amortizing gratuity liability over 5 years (Rs.493 mn each year; full liability isRs.2.47 bn).

ValuationsWe have revised our earnings estimate upward for FY12E to take into account bettercore earnings and lower credit costs. We now expect net profit for FY12E to be13.56 bn. This would result into an EPS of Rs.21.9 and ABV of 133.5 for FY12E.

Rolling 1-year forward P/ABV band


Rolling 1-year forward P/E band


At the current market price of Rs.152, the stock is trading at 6.9x its FY12E earningsand 1.1x its FY12E ABV. We raise TP to Rs.162 (Rs.140 earlier) and maintain ACCU-MULATE rating on the stock. At the TP, stock would trade at 1.2x its FY12E ABV.

We maintain ACCUMULATErating on IOB with a revised price

target of Rs.162

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Key data

(Rs bn) 2009 2010 2011 2012E

Interest income 96.41 102.46 121.01 152.01

Interest expense 67.72 70.78 78.93 102.40

Net interest income 28.70 31.68 42.08 49.61

Growth (%) 17.1 10.4 32.8 17.9

Other income 15.96 11.43 12.25 12.83

Gross profit 25.24 18.45 28.61 35.21

Net profit 13.26 7.07 10.73 13.56

Growth (%) 10.3 -46.7 51.7 26.4

Gross NPA (%) 2.5 4.5 2.7 2.8

Net NPA (%) 1.3 2.5 1.2 0.7

Net int. margin (%) 2.9 2.8 3.1 2.8

CAR (%) 13.2 14.8 14.6 14.3

RoE (%) 24.8 11.5 15.0 15.7

RoAA (%) 1.2 0.6 0.7 0.7

Dividend per share (Rs) 4.5 3.5 5.0 6.0

EPS (Rs) 24.3 13.0 17.3 21.9

Adjusted BVPS (Rs) 90.7 79.9 107.5 133.5

P/E (x) 6.2 11.7 8.8 6.9

P/ABV (x) 1.7 1.9 1.4 1.1




THERMAX LTD

PRICE: RS.642 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.737 FY11E P/E: 17.9X

Thermax's numbers are lower than expectations (Rs 1.27 bn vs Rs 1.47 bn asper our expectations) mainly on account of decline in margins. It appearsthat higher share of project revenues could have resulted in a sharp increasein material costs. Other heads of expenditure have been under control. Thecompany exits the fiscal with a muted growth of 8% in order backlog.

We maintain ACCUMULATE on the stock in view of reducing revenuevisibility as a result of weak order intake and deteriorating macros foreconomy (rising interest rates) and power sector in particular (coalavailability and health of SEBs).

Financial performance

(Rs mn) Q4 FY11 Q4 FY10 YoY (%)

Net Sales 17,455 11,715 49

Other income from operations 258 478 (46)

Total Expenditure + 15,762 10,727 47

Raw Matl costs 12,313 7,595 62

Purchase of trading goods 518 525 (2)

Staff costs 969 928 4

Other costs 1,962 1,678 17

PBIDT 1,951 1,466 33

Other Income 133 179 (26)

Depreciation 116 101 14

EBIT 1,968 1,543 28

Interest 10 3 213

PBT 1,959 1,540 27

Tax 694 549 26

Adj Profit After Tax 1,265 992 28

Extra-ordinary Items + - (1,149) (100)

Reported Profit After Extra-ordinary item 1,265 (157) (906)

EPS (Rs) 10.6 8.3

RM costs to sales (%) 70.5 64.8

Other costs to sales (%) 11.2 14.3

PBIDTM (%) 11.2 12.5

Tax rate (%) 35.4 35.6

Source: Company

Result Highlightsn Revenue for the quarter is up 49% yoy to Rs 17.4 bn, in line with expectations.

Revenue growth has bounced back in FY11 as the company began the year witha strong order backlog.

n The energy segment has posted a growth of 58% on robust execution of orderbacklog.

Segment revenues

(Rs mn) Q4FY11 Q4FY10 % change

Segment- Energy 14299 9072 58

Segment - Enviro 3862 3478 11

Source: Company

Summary table

(Rs mn) FY10 FY11 FY12E

Sales 33,703 51,144 55,409

Growth (%) -3 52 8EBITDA 3,947 5,881 6,388EBITDA margin (%) 11.7 11.5 11.5

PBT 4,004 5,905 6,445Net profit 2,647 3,903 4,260EPS (Rs) 22.2 32.8 35.8

Growth (%) -8.4 47.5 9.2CEPS (Rs) 16.3 36.8 40.4Book value (Rs/share) 90.6 117.6 147.5

Dividend / share (Rs) 5.0 5.0 5.0ROE (%) 13.7 30.3 26.3ROCE (%) 33.0 42.7 36.5

Net cash (debt) 10,327 7,848 10,267NW Capital (Days) -51.9 0.8 11.2EV/Sales (x) 2.1 1.3 1.2

EV/EBITDA (x) 17.7 11.7 10.4P/E (x) 28.9 19.6 17.9P/Cash Earnings 39.4 17.4 15.9

P/BV (x) 7.1 5.5 4.4

Source: Company, Kotak Securities - PrivateClient Research

RESULT UPDATE

Sanjeev [email protected]+91 22 6621 6305



n Operating margins for the quarter was lower primarily due to higher materialcosts, which we believe could be due to higher share of project work. Marginsare higher in equipment supply as compared to projects.

n The management is not very much concerned about the material prices movingup though most of its orders are fixed priced. This is because it has frozen theprices for specialized tubes for upto three months delivery. These tubes form acritical component of boilers. It is well-covered for bulk of the material and com-ponent supply except structural steel which typically forms roughly 15-20% of theorder book.

n More than material prices, the company is concerned about any signs of demandshrinkage which may then result in severe price competition and may hurt mar-gins. If the demand remains firm, then the margin situation can be manageableeven with the recent rise in material prices.

Segment Margins

(%) Q4FY11 Q4FY10

Segment- Energy 10.4 13.0

Segment - Enviro 12.9 14.7

Source: Company

Order intake lower on a yoy basis but marginally up sequen-tially.n Consolidated Order backlog is up 8% yoy to Rs 64.0 bn, thus imparting a rev-

enue visibility of 14 months based on trailing four quarters revenues. Revenuevisibility has been trending downwards in FY11 as order intake has decelerated.

n We estimate order intake of Rs 10.9 bn in the quarter, down 26% yoy but upmarginally on a sequential basis. This was the third consecutive quarter of weakorder intake.

n For FY11, we estimate order intake of Rs 51.4 bn down 13% over FY10. For thefiscal, the company had guided for a double-digit growth in order intake, whichthe company revised to flattish at the end of Q3 FY11. However, the companyhas not met the revised guidance for order intake.

n The company is receiving orders from secondary steel, cement, Power and foodprocessing industries.

n During the quarter, the company has not announced any major order win fromthe Power Utility segment, which has affected order booking.

n On order outlook, the company has been maintaining that order inquiries havebeen better every quarter but order finalization is taking a longer time than be-fore, which is translating into reduced order intake.

n The company indicated that for several small to medium size corporates, currentinterest rates tend to act as a major hurdle for making fresh investment.

n The company intends to get itself technically prequalified for 9x800 MW bulktender for boilers. However, it is undecided on whether it will participate in thebidding process.

Update on Thermax's entry in manufacture of supercritical boil-ersThermax will be investing Rs 1.7 bn in FY11-12 towards its equity contribution in themanufacturing facility. The company has already bought land for setting up themanufacturing facility and expects the facility to be ready by September 2012. Thecompany has already received feelers from clients who intend to place main equip-ment package orders with Thermax and are waiting for them to be ready with theirsupercritical boiler manufacturing facility.



Future Initiatives - Nuclear and Solar Powern The company is positioning itself for emerging opportunity in the nuclear power

arena and intends to partner with the world leaders (Areva, GE and Toshiba) toco-produce equipments. It also targets the water-treatment business in thenuclear power sector. However, meaningful traction in the nuclear power busi-ness will be visible only from FY13 onwards.

n The company has also initiated moves in the solar power sector. Thermax is de-signing a plant to operate with solar energy, with biomass as support energysource to meet round-the clock energy requirements. This power plant will bedesigned using air condensers to economise on the water requirements forpower generation. Thermax will also manage the operation & maintenance ofthe solar thermal power plant at Shive village for a period of five years

n The company has also initiated work on geothermal power and has identified asite in Maharashtra to utilize geothermal energy to produce power.

Valuation - Maintain Accumulate on emerging macro-environ-ment and weak order inflows

Change in Earnings Estimates - FY12

Earlier Revised

Revenue (Rs mn) 57787 55409

EBITDA (%) 11.80 11.70

EPS (Rs) 38.3 35.8

% change -6.5


We maintain ACCUMULATE on the stock in view of reducing revenue visibility as aresult of weak order intake and deteriorating macros for economy (rising interestrates) and power sector in particular (coal availability and health of SEBs).

The strong cash flow from operations supports our DCF based target price of Rs 737(Rs 773 earlier). At our target price, the stock would trade at 20.6x FY12 earnings.

DCF model Summary

(Rs mn)

WACC (%) 13.5

NPV of cash flows 2011-24 53913

TV 23401

Profit growth between FY11-19 (%) 16

One year forward target price 737


We mainain ACCUMULATE onThermax with a revised price

target of Rs.737



Trade details of bulk deals

Date Scrip name Name of client Buy/ Quantity Avg.Sell of shares price

(Rs)

3-May Arms Paper Sangeeta Ajay Goenka B 277,709 9.5

3-May Arms Paper Nikita Ajay Goenka S 275,709 9.5

3-May Asahi Infra Indravarun Trade Impex Pvt Ltd B 238,442 10.0

3-May Asia Hr Tech Niraj Lachhmandas Talreja B 102,500 6.2

3-May Asia Hr Tech Telesys Software Ltd S 70,000 6.2

3-May Beckons Inds Jmp Securities Pvt Ltd S 460,450 2.7

3-May Carol Info Venktesh Securities Ltd S 230,000 126.9

3-May Gemstone Invest Ritu Jain B 500,000 9.2

3-May Glory Polyfilms Meena Agarwal S 519,138 3.1

3-May Jumbo Bag Indira Ratilal Gandhi B 50,000 24.2

3-May Mahaveer Info Chinubhai Joytabhai Patel S 31,809 29.2

3-May Nandan Exim Chiripal Industries Limited B 3,200,200 2.7

3-May Nandan Exim Manjudevi Jayprakash Agarwal S 3,100,000 2.7

3-May Oregon Comm Dhiraj Lohiya Huf B 6,450 31.5

3-May Pentamedia Gra Ashok Saragur Rajanna S 80,000 1.4

3-May Ravinay Trad Ranisati Dealer Pvt Ltd B 24,900 171.0

3-May Ravinay Trad Satish Kumar Agarwal S 24,900 171.0

3-May Regency Trust Mukesh Nanubhai Desai S 50,000 105.0

3-May Rotam Comm Sarij Devi Munot S 6,043 27.8

3-May Sankhya Info Jai Annanya Investments Pvt Ltd S 79,289 18.0

3-May Shreejal Info Ghanshyam Khubchandani S 25,000 0.4

3-May Tele Techno India Focus Cardinal Fund S 2,500,000 0.6

3-May Twilight Litaka IFCI Factors Ltd S 137,521 55.0

Source: BSE

Bulk deals



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Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

BHEL 2,014 0.2 0.2 0.9

Siemens India 865 (0.1) (0.0) 0.3

Kotak Mahindra Bank 413 (0.1) (0.1) 1.6

Losers

L&T 1,537 (4.2) (12.0) 2.2

Relianace Ind 944 (2.2) (11.7) 5.0

ICICI Bank 1,068 (2.8) (11.7) 6.3

Source: Bloomberg

Research TeamDipen ShahIT, [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, Cement, Mid [email protected]+91 22 6621 6302

Saurabh AgrawalMetals, [email protected]+91 22 6621 6309

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, [email protected]+91 22 6621 6222

Jayesh [email protected]+91 22 6652 9172

Shrikant ChouhanTechnical [email protected]+91 22 6621 6360

K. [email protected]+91 22 6621 6311

Forthcoming events Company/MarketDate Event

4-May Essel Propack, Hero Honda, PNB, Torrent Power earnings expected.

5-May Andhra Bank, Bharti Airtel, Canara Bank, Cipla, Kotak Mahindra Bank, Mirc Elecearnings expected.

6-May Cadila Health, Central Bank, Eicher Motors, Federal Bank, Glaxosmithkl Phar,GE Shipping, KEC Intl, KSK Energy, MTNL, NIIT Tech, Piramal Health, Rolta India,Union Bank, Varun Ind earnings expected

Source: Bloomberg

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