Result Preview -3QFY2011 - 3-12-2011

1

3QFY2011 Results P3QFY2011 Results P3QFY2011 Results P3QFY2011 Results P3QFY2011 Results Preview |review |review |review |review | January 3, 2011

Refer to important Disclosures at the end of the report

Note: Stock Prices as on December 31, 2010.

Table of Contents

StrategyStrategyStrategyStrategyStrategy 2

Angel Research Model PAngel Research Model PAngel Research Model PAngel Research Model PAngel Research Model Portfolioortfolioortfolioortfolioortfolio 17

Automobile 19

Banking 22

Capital Goods 26

Cement 29

FMCG 32

Infrastructure 35

Logistics 38

Metals 41

Oil & Gas 44

Pharmaceutical 47

Power 50

Real Estate 53

Retail 56

Software 59

Telecom 62

Refer to important Disclosures at the end of the report 2


Strategy

Port of Choice

The onward march of the Indian stock markets was halted in

3QFY2011 by a flurry of scams that made headlines during

the period and as a result, markets remained flat compared to

the previous quarter. The Sensex did make an all-time high

during the quarter, extending the positive momentum of the

previous quarter. But, it eventually corrected owing to negative

news flow, ending a mere 2% higher qoq, after a strong

performance in 2QFY2011.

Positive or negative news flow notwithstanding, the FIIs continued

to pump in money through 3QFY2011 as well, rounding off

the calendar year with strong capital inflow into the markets.

Overall FII inflow in equities in 3QFY2011 stood at nearly

US $10bn, taking total investments in FY2011 this far to

US $25bn. As an indication of India's attractiveness as an

investment destination, total FII inflow during 9MFY2011 has

already exceeded the entire inflow during FY2010. On the other

hand, the DIIs continued to be sellers, with net selling of ̀ 9,700cr

(US $2bn) in 3QFY2011, making them net sellers of ̀ 29,700cr

in 9MFY2011.

Source: Bloomberg, Angel Research

Exhibit 2: Net fund inflows

(30)

(20)

(10)

0

10

20

30

40

50

60

1QFY

08

2QFY

08

3QFY

08

4QFY

08

1QFY

09

2QFY

09

3QFY

09

4QFY

09

1QFY

010

2QFY

010

3QFY

010

4QFY

010

1QFY

011

2QFY

011

3QFY

011

(`'0

00cr

)

FII DII

India to attract substantial FII inflows…

With QE2 related inflows on the anvil, CY2011 holds the

potential to see even higher foreign inflows into the Indian equity

markets, especially considering that earnings growth is also

expected to improve - while the Sensex EPS CAGR is estimated

at 18.4% over FY2010-11, FY2012E EPS growth is expected at

22.4%. This thesis is further validated by the broader perspective

on India as well. In our view, even though each of the emerging

markets is having its own set of cyclical headwinds and tailwinds,

for a long-term investor what matters is that eventually few

broader realities tend to overwhelm the myriad economic noises

(fiscal concerns, bureaucratic hurdles, etc.) to determine the

overall direction of the economy and in tow, the markets. The

evolving overwhelming reality is that India's demographic

dividend is approaching a key inflection point over the next few

years, not just in absolute terms but even relative to China,

which is set to make India a veritable port of choice for investors

across the world. No wonder, that seen on a yoy basis the Indian

markets gained 17.4%, much ahead of China.

…Indian markets underperformed sequentially though

The global equity markets continued their strong run through

3QFY2011 as well, with markets in the developed economies

giving significant returns to investors. Market sentiments were

soothed to some extent by the bailout extended to Ireland and

the QE2 program. Developed markets, on an average, recorded

QoQ gains of ~8%, led by Japan, which increased by more

than 9%. Amongst the emerging markets, Russia outperformed

the others, gaining ~17%. The other emerging markets rose

by a much lower 4%. Amidst this scenario, in comparison, India

was one of the underperformers. Taking a cue from this, in this

note we try and look at some of the near-term execution issues

which need to be kept in mind in the context of the growth rate

that the markets are factoring in, even though India's long-

term growth story remains intact.

Source: BSE, Angel Research

Exhibit 1: Rise in Sensex (qoq)

(30)

(20)

(10)

0

10

20

30

40

50

60

1Q

FY2

00

7

2Q

FY2

00

7

3Q

FY2

00

7

4Q

FY2

00

7

1Q

FY2

00

8

2Q

FY2

00

8

3Q

FY2

00

8

4Q

FY2

00

8

1Q

FY2

00

9

2Q

FY2

00

9

3Q

FY2

00

9

4Q

FY2

00

9

1Q

FY2

01

0

2Q

FY2

01

0

3Q

FY2

01

0

4Q

FY2

01

0

1Q

FY2

01

1

2Q

FY2

01

1

3Q

FY2

01

1

(%)


Exhibit 3: Performance of key global markets

yoy qoq

(20)

(10)

0

10

20

30

40

50

Russ

ia

US

Nasd

aq

Kore

a

Japan

Taiw

an

US

Dow

UK

FTSE

Indone

sia

Chi

na

Mala

ysia

Hong

Kong

Sing

apore

India

Brazi

l

(%)

3



Strategy

Portfolio strategy: Key monitorables in majorsectors

The Indian markets have come off their recent highs, as a host

of information flow is suggesting near-term execution hurdles

to India's double-digit growth ambitions. This is not to say that

the growth outlook for our demographically most-advantaged

economy is anything but buoyant over the long-term. But, it is

more a question of what is the right valuation to pay for the

expected growth. We believe that for the 8-8.5% real GDP

growth that India still looks set to achieve, talking in terms of

benchmark Sensex valuations, a target P/E multiple of 17x on

FY2012E EPS seems fair.

Source: Angel Research

Exhibit 4: Sensex EPS estimates

725

887

1,050

1,285

700

800

900

1,000

1,100

1,200

1,300

FY2009 FY2010 FY2011E FY2012E

22.3% Growth

18.4% Growth

22.4%

Growth

EPS

()

`

Source: BSE, Angel Research; Note: Prices till 31.12.2010

Exhibit 5: One-year forward Sensex P/E

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

(x)

Sensex 1-yr fwd P/E Average P/E

Source: Bloomberg, Angel Research; Note: Prices till 31.12.2010

Exhibit 6: Bond yield v/s earnings yield

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10

(%)

Bond Yield Earnings Yield

The Building Blocks - Infrastructure,commodities, banking and capital goods

Ironically, some of the sectors that constitute the building blocks

of the economy are facing headwinds. In our view, policy-related

issues like land acquisition/environmental clearance delays,

sector-specific issues like oversupply or company-specific

headwinds are limiting the investment options in infrastructure,

power, steel and cement. A large part of the oil & gas space in

any case has limited investibility. Together, these sectors comprise

~31% of the BSE-100, and the only weightage we have given

in our model portfolio is 10% to RIL, which we believe is trading

at too high a discount to the Sensex, as well as 3% to

infrastructure. In case of infrastructure, we believe valuations

have become reasonably attractive after a year of

underperformance, and expect execution to pick-up going forward.


Exhibit 7: BSE Sectoral returns (yoy and qoq)

yoy qoq

(40.0)

(20.0)

0.0

20.0

40.0

60.0

80.0

CD

BA

NK

EX

TEC

k

CG

OIL

&G

AS

POW

ER

REA

LTY

(%)

MET

AL

HC IT

FMC

G

AU

TO

SEN

SEX

In this context, post the correction, the Sensex is now lookingmore reasonably valued, available at 16.3x 1-year forwardEPS, close to its average P/E since April 2004. Our 17x targetmultiple translates into a Sensex target of 21,844 by March2011; however, once the markets start looking at FY2013Enumbers within the next few months, there would be acorresponding upside in the Sensex targets as well.

In fact, from January 2011 onwards with QE2 inflows on theanvil, there are widespread expectations that India will attractsubstantial FII investments, which could set an upward directionfor the markets during the year. But, as mentioned at the outset,some of the sectors are witnessing execution hurdles that havein the past year resulted in earnings disappointment andconsequent stock under-performance. Going into 2011 as well,we believe that the markets will continue to closely monitornear-term execution, especially in sectors or companies withless-than-exemplary corporate governance or inherentlylow-entry barriers. Hence, notwithstanding India's robust GDPgrowth outlook, sectoral strategies and stock-picking will remainvital to overall healthy portfolio returns.



Strategy

On the other hand, we believe the banking and capital goods

companies that are also set to benefit from the GDP up-cycle,

offer more investible ideas at this juncture. This is not only

because of the expected cyclical improvement that they are

expected to witness, but also backed by the structural tailwinds

and inherently stronger business models enjoyed by the leading

companies from these sectors. Accordingly, compared to a

BSE-100 weightage of 34%, in our model portfolio we have

given these two sectors 43% weightage.

Infrastructure: Monitoring execution

Earnings of the infrastructure companies in the preceding quarter

(2QFY2011) were disappointing, especially in case of the mid-

size contractors. The slippage in profit was due to the lower-

than-expected EBITDA margins and higher interest costs.

Looking at the execution track record in the recent quarters as

well, infrastructure companies have disappointed. This is partly

explained by the lopsided order inflow in 2HFY2010 (which

will enter execution phase only in 2HFY2011) and to policy-

related issues.

Nonetheless, in our view, the 2QFY2011 top-line numbers

depicted some signs of revival on the execution front with the

companies posting decent top-line growth. Overall, top-line

growth came broadly in line with our estimates, though it was

still lower than street expectations. The market's disappointment

on the top-line and bottom-line was reflected in the stock

performance - infrastructure companies in our coverage universe

have been battered in recent times (barring L&T) and

underperformed the markets.


Exhibit 8: Infra stocks qoq returns (%)

2.2

(17.1)

(13.4)

(19.7)

(12.3)

(16.8)

(10.1)

(19.4)

(13.1)

(3.2)

(25.0) (20.0) (15.0) (10.0) (5.0) - 5.0

BSE Sensex

HCC

IRB Infra

IVRCL Infra

JAL

MPL

NCC

Sadbhav

Simplex In.

L&T

a strong bidding pipeline, we expect the momentum to continue.

In any case, the second half of a fiscal is seasonally a strong

period for the infrastructure companies, with pick-up witnessed

in execution. Hence, we believe that the sector would once again

be on growth trajectory in the coming quarters, owing to: 1)

robust order book, and 2) long-term growth story being intact.

Increasing working capital in 1HFY2011 another lead indicatorIncreasing working capital in 1HFY2011 another lead indicatorIncreasing working capital in 1HFY2011 another lead indicatorIncreasing working capital in 1HFY2011 another lead indicatorIncreasing working capital in 1HFY2011 another lead indicator

of pickof pickof pickof pickof pick-up in execution:-up in execution:-up in execution:-up in execution:-up in execution: Analysis of the 1HFY2011 balance

sheets indicates that the sector experienced some rise in working

capital and pick-up in capex (a similar trend though to a lesser

extent was visible in 1HFY2010 as well). Working capital

requirement increased for the sector mainly on account of higher

loans and advances and debtors. We believe the key reasons

for the same include: 1) stocking up in anticipation of pick-up

in 2HFY2011, and 2) lending to subsidiaries to ensure flow of

in-house C&EPC revenue. Further, going ahead, we expect

companies to see some relief on the working capital front given

the significant share of captive orders in the overall order book.

Robust medium to longRobust medium to longRobust medium to longRobust medium to longRobust medium to long-term growth prospects:-term growth prospects:-term growth prospects:-term growth prospects:-term growth prospects: Infrastructure

investments are projected to touch US $135bn p.a. during

FY2011 and FY2012, registering 145% growth over the last

three year's annual spend of US $55bn. The Eleventh Five-Year

Plan missed projections by ~20% in the initial three years, and

we believe that even if this performance is maintained, it would

lead to huge opportunities for the infrastructure players. We

believe the power, road and water segments will witness

maximum traction.

Overall, earnings momentum is expected to pick up in

2HFY2011 on the back of strong order book and after the recent

underperformance by the stocks post the quarterly numbers,

the sector is attractively valued at 6-8x FY2012E earnings

(excluding L&T). We prefer IVRCL Infra, NCC and ITNL; our

preference indicates our relative comfort on the execution, order

book position, funding and valuations within the sector. We

Source: Company, Angel Research

Exhibit 9: Top-line growth and order book position

Average OB/Sales (RHS) Average Top-line growth (yoy, LHS)

38.5

45.4

47.2

43.0 40.6

47.1

34.2

18.1

9.3

12.5

5.7

18.3

7.49.6

19.2

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2Q

FY0

8

3Q

FY0

8

1Q

FY0

9

2Q

FY0

9

4Q

FY0

9

3Q

FY1

0

2Q

FY1

1

(x)

(%)

4Q

FY0

8

1Q

FY0

8

3Q

FY0

9

1Q

FY1

0

2Q

FY1

0

4Q

FY1

0

1Q

FY1

1

3Q

FY1

1

Execution to pick up: Execution to pick up: Execution to pick up: Execution to pick up: Execution to pick up: One of the most, if not the only, positive

outcomes from 1HFY2011 results has been traction in order

inflow, leading to soaring order backlog levels. Most contractors

saw good order inflow despite unexciting activity on the NHAI

front, particularly during 2QFY2011. Further, with positive

comments by managements of various companies coupled with

5



Strategy

have valued the construction companies on SOTP basis, taking

conservative P/E multiples for the core construction business in

the range of 10-14x (excluding L&T), valuing the listed

subsidiaries at 30% discount to CMP and unlisted subsidiaries

at 1-1.5x book value. From the preferred stocks, we have

included NCC in our model portfolio with 3% weightage.

Power: Fuel security, not merchant power is the key

India's domestic coal production is expected to post a CAGR of

8.6% over FY2010-15, as against a demand CAGR of 10.6%

during the period, resulting in huge deficit. We estimate India's

thermal coal imports to grow from 25mmt in FY2010 to 107mmt

in FY2015, increasing at a CAGR of 33.2% during the period.

Currently, coal-based plants are facing fuel shortage due to:

inadequate supply on the domestic front due to delays in

procurement of coal linkages

issues in obtaining environment clearances and other

regulatory approvals for developing captive coal blocks

hurdles in expansion of the mines, and

logistical and infrastructural issues

Source: Ministry of Coal, Angel Research

Exhibit 10: India coal imports

25 28

41

59

81

107

0

20

40

60

80

100

120

FY10 FY11E FY12E FY13E FY14E FY15E

(mn

tonnes)

As of now, 215 coal blocks have been allocated for captive

mining, of which only 26 blocks are currently operational. Also,

150 coal blocks have been classified in the no-go zone identified

by the environment ministry. Moreover, ~90% of the coal blocks

allocated for power generation are situated in Naxalite-affected

areas, which is also hampering the mining activities.

With availability of coal key to profitability, many Indian

companies have acquired coal mines abroad to meet their fuel

requirements. Tata Power acquired 30% stake in the Bumi coal

mines, which will provide it 11mtpa of coal for the Mundra

project. JSW Energy will have access to ~20mtpa of captive

coal in South Africa and Botswana through its acquisition of

SACMH and CIC Energy (CIC). However, JSWE's move to acquire

CIC to gain access to 2.6bn tonnes of coal resources will provide

fuel security only from FY2016F onwards, given the minimum

4-5 years that will be required to develop the mines as well as

the 1,500km+ rail lines to transport the same, posing its own

set of execution risks.

We believe that import of coal is not expected to solve the

problem of domestic coal shortage. While procuring imported

coal by itself is a challenging task, the problem is compounded

by the country's inability to handle imported coal.

Key measures under implementation

Auction of coal blocks:Auction of coal blocks:Auction of coal blocks:Auction of coal blocks:Auction of coal blocks: The government has already cleared

the system of auctioning the coal blocks thereby replacing

the current system of allocating coal blocks. This, we believe,

will bring in more private participation.

New mining tax could be a drag:New mining tax could be a drag:New mining tax could be a drag:New mining tax could be a drag:New mining tax could be a drag: The government is

proposing a mining tax of 26% to fund the compensation to

the local population affected by mining. While the proposed

tax may undergo several changes before its potential

implementation, if implemented, it could raise the coal prices

further.

MoEF's proposal to ban mining in forest land could affectMoEF's proposal to ban mining in forest land could affectMoEF's proposal to ban mining in forest land could affectMoEF's proposal to ban mining in forest land could affectMoEF's proposal to ban mining in forest land could affect

coal reserves: coal reserves: coal reserves: coal reserves: coal reserves: Identification of restricted areas will be based

on field studies of the forest cover and coal reserves. The

Ministry of Environment and Forests (MoEF) is currently in

discussion with the Ministry of Coal (MoC) to consider the

possibility of diverting certain designated forest land for

mining activities. If the two ministries are not able to agree

with the proposed issue, it could further affect the output.

Allowing private sector to sell coal from the allotted coalAllowing private sector to sell coal from the allotted coalAllowing private sector to sell coal from the allotted coalAllowing private sector to sell coal from the allotted coalAllowing private sector to sell coal from the allotted coal

blocks:blocks:blocks:blocks:blocks: If implemented, this would bring more private

participation and companies with higher coal assets currently

would also stand to benefit.

Domestic and international political risks: Domestic and international political risks: Domestic and international political risks: Domestic and international political risks: Domestic and international political risks: Many of the private

players have their projects dependent on the coal from

Indonesia. For instance, the contracted price of US $36 for the

coal supplied by Adani Enterprises (AEL) to Adani Power is

substantially lower than the prevailing market price of

Indonesian coal.

We doubt whether AEL can supply coal at such low rates, given

that the Indonesian government is planning to tighten the laws

regarding export of coal from the country. As per the new mining

laws, although the Indonesian government might not force the

producers to sell coal at market prices, it may seek to determine

royalties and income tax payable based on the prices

benchmarked to the Indonesian Coal Index (ICI).



Strategy

Source: CMA, Angel Research

Exhibit 11: Industry capacity utilisation and prices

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0

50

100

150

200

250

300

350

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

E

FY12

E

FY13

E

Effective Capacity (mtpa) -LHS Price ( /bag)` - LHS

Utilisation (%) - RHS

FY11E utilisation down by 1,150bp,

leading to a 8.3% fall in prices

9%CAGR in prices

over FY05-10

The cement players registered a collapse in EBITDA/tonne in

2QFY2011, touching its lowest level in the past seven years.

Margins are also expected to remain under pressure despite

the marginal improvement in utilisation and prices (expected

to witness a `10/bag increase in the next quarter) due to

spiraling prices of coal and other raw materials like limestone,

fly ash, etc. In the near term, we expect players with a

pan-India presence to post relatively better operating

performance, though the smaller players, especially in the south

may continue to witness substantial pressure.

Going ahead, we do not expect major capacity additions once

the current round of expansion in the sector gets completed.

This would improve the demand-supply dynamics post FY2013,

as we expect demand to regain its momentum. However, on

the valuation front, large cap cement players ACC, Ambuja

and UltraTech are currently trading at expensive valuations of

US $110-130/tonne owing to which we remain Neutral on them.

We have a Buy on India Cements, Madras Cements and

JK Lakshmi Cement due to attractive valuations - EV/tonne in

the range of US $37-80/tonne. However, in view of the poor

numbers that these companies are likely to post in the

near term, we have not included any of them in our

model portfolio.

Banking: Margin worries replace NPA concerns, CASAholds key

Back in August 2010 itself, we had sounded the warning bells

that the deposit rates appeared set to rise in the coming quarters,

possibly faster than consensus, which would signal peaking of

margins of the mid-sized banks and contribute to their

underperformance on the bourses. Since then, the gap between

deposit and credit growth has further widened. Credit growth

has jumped to 23.7% yoy, which we have been pointing out is

best estimated by top-down demand analysis rather than

sector-by-sector estimation.

Increasing Naxalite insurgency in prime coal belts - A keyIncreasing Naxalite insurgency in prime coal belts - A keyIncreasing Naxalite insurgency in prime coal belts - A keyIncreasing Naxalite insurgency in prime coal belts - A keyIncreasing Naxalite insurgency in prime coal belts - A key

concern: concern: concern: concern: concern: The eastern states of Orissa, Jharkhand and

Chattisgarh, which possess majority of the country's coal

reserves, have been rife with Naxalite activity. In fact, the Naxalite

violence has been on a rise over the last few months, which is a

cause for concern. More such instances would hamper coal

mining activities and aggravate the domestic shortage.

Regulatory developments to track:Regulatory developments to track:Regulatory developments to track:Regulatory developments to track:Regulatory developments to track: We expect potential

regulatory changes which are likely to incentivise higher private

sector participation. We expect some meaningful measures to

be introduced for faster execution, higher participation from

the private sector by allowing coal mine auctions and open

market sales from the captive coal mines. Also, expediting the

regulatory clearances and reforms in the environment and forest

clearances are the key monitorables to track over the next 3-6 months.

Outlook on power sector:Outlook on power sector:Outlook on power sector:Outlook on power sector:Outlook on power sector: In our view, certain key factors such

as quantum of near-term capacity addition providing revenue

visibility (and ability to profit from the high merchant rates),

execution capability, level of fuel security and degree of

long-term off-take arrangements would separate our top picks

from the rest of the players. NTPC, CESC and GIPCL are our

top picks in the sector. However, in our model portfolio, we

have nil weightage on the power sector owing to unexciting

valuations, potential long-term supply overhang and

uncertainties regarding fuel linkages.

Cement: Oversupply situation to worsen, may be toosoon for value-buying

The cement sector has over the past three quarters suffered

due to subdued demand growth on the one hand and substantial

capacity additions on the other, which has in turn resulted in

low utilisation levels and fall in prices. During the 8MFY2011

period, all-India cement dispatches grew by a modest ~5%

yoy as against ~10.5% CAGR recorded over FY2005-10.

However, effective cement capacity has increased by 55mtpa

over the past 20 months (28mtpa during 8MFY2011) resulting

in excess supply and pressure on prices. Utilisation levels, a

major indicator of the industry's performance, declined

substantially and touched a low of 77% in 2QFY2011. As a

result, cement prices, on an average, declined by `30/bag.

Moreover, an additional 11mtpa of effective capacity is expected

to be commissioned in the remaining 4 months of FY2011 alone.

7



Strategy

Credit growth robust:Credit growth robust:Credit growth robust:Credit growth robust:Credit growth robust: Despite concerns off-late regarding the

sluggishness in credit demand from the broader segments

ex-telecom, over the past one year though infrastructure

accounted for 29% of the incremental demand, most of the

other segments have also recorded 15%+ growth during the

period. Excluding the retail loans and loans to the real estate

sector, growth in other segments ex-infra (comprising 64% of

total non-food credit) was as high as 21.4%. Moreover, even in

case of retail loans, except for credit cards, ytd growth has been

strong in all other segments, including mortgages, car loans

and education loans. The real estate segment has seen a 10.4%

ytd increase, after seeing de-growth over August 2009 -

February 2010. Hence, credit growth has been fairly

broad-based contrary to majority opinion. Banks have

incrementally lent more than ̀ 4,00,000cr ytd in FY2011, which

is more than double the amount lent during the same period

last year.

Extremely tight liquidity:Extremely tight liquidity:Extremely tight liquidity:Extremely tight liquidity:Extremely tight liquidity:On the other hand, deposit growth has

continuously lagged credit growth during April-December 2010.

YTD credit growth has been healthy at ~12.3%, while deposits

have grown at ~6.0%, resulting in an incremental

credit-to-deposit ratio of 147.8%. The mismatch between credit

and deposit growth exacerbated the system liquidity situation

with the liquidity adjustment facility (LAF) borrowings averaging

more than ̀ 91,000cr during the quarter. The liquidity situation

further worsened with advance tax outflows in December taking

the LAF borrowings over `1,70,000cr. Consequently, the

short-term commercial paper (CP) and certificate of deposit (CD)

rates spiked by 190bp to 9.4% and 170bp to 8.9% respectively,

during the quarter.

The persistent tight liquidity situation and slower deposits growth

prompted many banks to raise their fixed deposit interest rates

aggressively by 50-150bp. Going forward, credit demand is

expected to sustain at least above the 19% level and central

and state government borrowings are also expected to kick in.

Hence, to mobilise sufficient deposits to meet an estimated

shortfall of about `50,000cr (post the `48,000cr RBI OMO) in

FY2011E and a further `1 lakh crore estimated shortfall in

FY2012E, we believe banks will have to continue increasing

the deposit rates over the coming quarters. Note that, while this

will also put upward pressure on lending rates, we believe rates

will remain below 2008 peak levels for the next six quarters,

and accordingly credit demand is unlikely to be hampered by

the same.

NPNPNPNPNPA concerns receding:A concerns receding:A concerns receding:A concerns receding:A concerns receding: Some of the PSU banks faced pressures

on the asset-quality front primarily due to switchover to

CBS-based NPA recognition. Going forward, these kinds of

pressures are likely for few other PSU banks as well. However,

overall asset-quality pressures have evidently moderated. Total

asset-weighted (FY2010) net NPAs for the sector have fallen

from the peak of 1.15% in 3QFY2010 to 1.09% in 2QFY2011.

Only 11 out of the 39 listed banks registered an increase in net

NPA ratio in 2QFY2011 v/s 23 banks witnessing an increase in

3QFY2010. The private banks, especially have witnessed a

substantial decline in net NPAs and provisioning expenses over

the mentioned period.

NIM performance to be key monitorable going forward:NIM performance to be key monitorable going forward:NIM performance to be key monitorable going forward:NIM performance to be key monitorable going forward:NIM performance to be key monitorable going forward:

Accordingly, going forward we believe that NIM progression

rather than asset quality will be the key monitorable for the

banking sector, having a major impact on divergence in stock

returns across the banking space. NIMs are likely to see

moderate impact in 3QFY2010. The NIM compression is likely

to be especially front-ended in case of banks with higher reliance

on certificate of deposits (3-6 month tenure) as well as wholesale

deposits (6-12 month tenure). Moreover, going forward, in case

of banks with sub-30% CASA ratios, we expect NIM compression

to be as much as 40-60bp over the next 4-6 quarters.

Correspondingly, larger banks with high CASA ratios and robust

branch expansion such as SBI, ICICI Bank, HDFC Bank and

Axis Bank are better placed to sustain or improve their NIMs

going forward. Monitoring CASA market share trends will

remain one of the most important monitorables impacting

earnings growth.


Exhibit 12: Spike in short-term CP and CD rates

3M CP 3M CD

(%)

6.0

7.0

8.0

9.0

10.0



Strategy

Capital Goods: Power segment experiencing Chinathreat; niche leaders are a better bet

Due to the relatively high intangible component in their business

models, we would normally place a high degree of preference

for capital goods companies during an up-cycle.

Macro-indicators, such as IIP and real GDP growth also point

to an imminent up-turn in the demand for capital goods. The

IIP numbers for October 2010 came in at a decent 10.8% as

compared to 6.9% and 4.4% for the previous two months,

respectively. Along with the strong 8.9% GDP growth reported

for the first half of the current fiscal, this should translate into a

pick-up in the investment cycle as robust corporate profit and

favourable financing conditions fuel investments. The current

quarter has also seen a narrowing of premium valuations in

the capital goods sector vis-à-vis the Sensex.

However, a big chunk of the Indian capital goods sector in the

listed space - mainly relating to power generation and T&D as

well as machine tools and equipment manufacturers catering

to industrial demand - continues to be negatively impacted by

the increasing quantum of imports, especially from China.

Evidently, the persistent under-valuation of the Yuan and the

favourable duty structure under which the Chinese companies

operate, have enabled them to flood the Indian markets with

cheaper equipment.

Hence, even post the sharp correction in most mid-sized banks,

we prefer to invest in the mid-cap banks which have stronger

CASA franchises such as J&K Bank and Dena Bank. Taking into

account valuations, our top picks among the private large-cap

banks include ICICI Bank and Axis Bank; SBI and Union Bank

of India from the PSU large-cap banking universe; and Dena

Bank, IOB, J&K Bank and Federal Bank among the mid-cap

banks.

Segments worst affected by the import deluge have been

construction equipment, machine tools, turbines and

transformers. The domestic power equipment manufacturers

Source: RBI, Angel Research

Exhibit 14: Import of capital goods

such as BHEL and L&T have been losing bulk of the orders to

their Chinese counterparts. Notable orders placed during the

current quarter include the Lanco Infratech order for supply of

16 sets of 660MW power equipment to Harbin Power for

~`6,800cr, Abhijeet Projects for supply of 10 sets of 660MW

supercritical units to Dongfang Electric for ~USD 2.5bn

(~`11,500cr) and the Reliance Power order to Shanghai Electric

for the supply of coal-fired power generators worth USD 8.3bn

(~`38,000cr). The above orders were placed when the domestic

power equipment industry was in the midst of expanding

capacities to meet the growing demand. Besides, the power

transmission and distribution (T&D) segment has also seen

serious competition from the Chinese and Korean majors.

Key developments worth monitoring for the power segment will

be any possible import duties being imposed by the government

on the Chinese equipment in the coming budget as well as

possible implications of a medium-term appreciation in the

Yuan. We believe there are merits to the thesis of such an

appreciation, which would be underpinned by China's evolving

demographics of an aging population that no longer

necessitates the creation of a huge quantum of jobs like it needed

to create in the past couple of decades. But, given the

near-term uncertainties, combined with the fact that valuations

are not leaving much margin of safety even post the correction,

at this juncture, we have not accorded any weightage in our

model portfolio to the conventional capital goods plays, relating

to the power segment, such as BHEL.

At the same time, in our view, some of the leaders in the niche

segments continue to offer attractive investment opportunities.

Specifically, we like Blue Star, one of the leaders in the

air-conditioning segment with a major portion of its revenue

9,88213,498

18,279

25,135

37,666

47,069

70,111 71,833

0

16,000

32,000

48,000

64,000

80,000

(USD

mn)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

HD

FCBK

ICIC

IBK

AXS

B

PNB

DEN

ABK

UN

BK

IND

BK

BO

I

OBC

CRP

BK

CASA (%) Inv/Dep (%) Duration (Years, RHS)

J&K

BK

SBI

IOB

FED

BK

UC

OBK

SIB

YES

BK


Exhibit 13: High CASA, low investment book - Key toALM in rising rate scenario

9



Strategy

Source: Bloomberg, Company, Angel Research ; Note: Copper prices forFY2011 are average for 9MFY2011

Exhibit 15: Copper prices and Blue Star margins

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

(%)

($/t

onne)

LME Copper Price (LHS) OPM (RHS)

Crude oil: Can it play spoilsport? We think that'sunlikely

Crude price hit a 27-month high, rising past the US $90/bbl

mark during the second fortnight of December 2010, boosted

by an unexpected surge in global demand (due to the cold

weather in the northern hemisphere and higher-than-expected

Chinese oil imports). This surge in demand has fueled the biggest

three-week drop (by 19mnbbl since November 26, 2010) in

US crude stockpiles in more than a decade. Overall, the OECD

oil stocks fell by 8.4mnbbl as indicated by the November 2010

preliminary data.

Stockpiles fell despite the global oil supply increasing by

0.4mnbpd mom to 88.1mnbpd (highest-ever level) in

November, largely due to increased non-OPEC production

(53.4mnbpd, up 0.3mnbpd versus October levels), notably from

Canada, Kazakhstan and Brazil. With demand exceeding

production, as indicated in the falling crude stockpiles, crude

prices ruled firm during the quarter at US $80-90/bbl as against

US $71-82/bbl in 2QFY2011. On an average, crude prices

rose by 12% during the quarter backed by gains in crude price

seen in the second half of the quarter. With this rise, crude oil

has soared by a substantial ~39% since hitting a CY2010 low

of US $66/bbl in May.

derived from the domestic segment, as well as Lakshmi Machine

Works, the dominant leader in the textile machinery space.

Blue Star:Blue Star:Blue Star:Blue Star:Blue Star: Blue Star is one of the more attractive bets in the

capital goods space, set to post strong 25.7% CAGR in top-line

over FY2010-12E. Its largest segment, Electro Mechanical

Projects and Packaged Air-Conditioning Systems (EMPPACS), is

showing signs of revival. The key monitorable for Blue Star over

the next few quarters is its order inflow, with a thrust on when

business from the traditionally strong IT and Office Space

segments starts improving. Another important monitorable is

the copper prices, especially as the company's margins have

been impacted by high input costs and copper is one of the

most important raw materials (we have factored margins to be

lower in FY2011 and FY2012 compared to FY2010 levels on

account of this). That said, the stock has corrected significantly

in the recent past, providing sufficient margin of safety in our

view from raw material price pressures.

Sales Order Inflow

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11*

(`cr)

Source: Company, Angel Research; *Note: FY11 order inflow is for 1H only

Exhibit 16: Order inflow, sales have started firming up


Exhibit 17: Crude on the rise

0

20

40

60

80

100

120

140

160

Jan-0

5

Apr-

05

Jul-

05

Oct

-05

Jan-0

6

Apr-

06

Jul-

06

Oct

-06

Jan-0

7

Apr-

07

Jul-

07

Oct

-07

Jan-0

8

Apr-

08

Jul-

08

Oct

-08

Jan-0

9

Apr-

09

Jul-

09

Oct

-09

Jan-1

0

Apr-

10

Jul-

10

Oct

-10

Jan-1

1

(US$

/bbl)

LLLLLakshmi Machine Wakshmi Machine Wakshmi Machine Wakshmi Machine Wakshmi Machine Works:orks:orks:orks:orks: Lakshmi Machine Works (LMW) is

currently at the beginning of a strong up-cycle, indicated by

significantly higher order inflow over the past two quarters and

firm demand across the textile industry. The company currently

has a strong order book with a delivery period of 10-12 months.

We expect this strong order book to translate into higher sales

over the coming quarters, including 3QFY2011, with standalone

top-line expected to grow to `2,368cr by FY2012E. The

company's ability to achieve this top-line would depend on the

order inflow and quarterly execution run-rate over the next six

quarters, which remain the key monitorables. In the past, the

company recorded highest quarterly sales of `604cr in

4QFY2008. LMW will have to achieve a comparable average

quarterly top-line in FY2012 to perform as per our estimates.

On the valuation front, owing to the recent correction the stock

is available at attractive valuations of 12.8x FY2012E EPS. LMW

is one of our top picks in the capital goods space.



Strategy

Exports: Structural and cyclical tailwinds

In the export sectors, the growth in the past year has generallybeen strong and outlook for the coming quarters is alsoencouraging. Within exports, we believe that the software sectorremains an attractive bet, underpinned by strong hiring pipelineand 20%+ revenue growth expectations (in dollar terms) in thenext two years. However, valuations leave only limited upsidesin the front-line IT companies, and it is in the next-rung that wefind several companies trading at unjustifiably high discountsto the front-liners owing to which we have an overweight stanceon them. While at the current juncture the pharma sector islooking fundamentally strong, valuations are fair. Hence, wehave included only Cipla in our model portfolio and have anunderweight stance on pharma vis-à-vis the BSE-100.

IT: Growth back with a bang

The Indian IT sector is riding the wave of global recovery. Mosttier-I IT companies are outperforming revenue growthexpectations by a fair margin, led by strong volume growth.The companies witnessed volume growth reaching 6.6-11.2%levels qoq in 2QFY2011, which were last seen during thepre-slowdown phase. This surge in volumes in 1HFY2011 canbe attributed to the return of spending on discretionary IT servicesby clients.

Growth is not just restricted to the anchor BFSI segment, buthas been broad-based, with retail as well as the once troubledverticals like manufacturing reverting to growth trajectory, with

On the back of upbeat outlook, companies like Infosys andTCS have raised their hiring guidance for FY2011 from 30,000to 40,000 and 36,000 to 50,000, respectively. This envisagesthe strong deal pipeline foreseen by companies. Going forward,we expect volume growth momentum to sustain at 5-6% CQGRfor the tier-I companies. The IT players are now looking atplanned hiring to address the strengthening demand pipeline.We expect the hiring trend to remain upbeat, with Infosys andTCS expected to have hired ~7,268 and ~13,837 employeesin 3QFY2011, respectively.

In 2QFY2011, attrition levels had shot up to pre-recessionarylevels of FY2008, as companies were flocking for peopleeverywhere to map the sudden surge in demand. However,going forward, we expect these rates to normalise as strongcampus hiring carried out by these companies will create astable bench, map any surge in demand and abate poachingof laterals. Accordingly, we do not expect attrition to be aspoilsport anymore, though it will remain a key monitorableespecially for the mid-sized IT companies that have been bearingthe brunt of lateral hiring by the larger companies.

In 4QCY2010 till date, the rupee has appreciated by 3.5%against the USD over 3QCY2010, on the back of FII inflowswitnessed over the past one-and-a-half month. We believe thisis a temporary phase as India's high current account deficit(expected to touch 3.5-4% of GDP in FY2011) is not expected

Despite this recent sharp run up in crude price, we expect crude

price to average around US $80/bbl in FY2011 and around

US $80-85/bbl in FY2012 on expectations of lower demand

growth next fiscal vis-à-vis the current one due to the sedate

nature of the global economic recovery. Moreover, going ahead,

non-OPEC supply is expected to average 52.8mnbpd in

CY2010 and 53.4mnbpd in CY2011, representing a growth

of 1.1mnbpd and 0.6mnbpd, respectively. The OPEC supply

for CY2011 is estimated at 29.5mnbpd and OPEC natural gas

liquid output is expected to average 5.3mnbpd in CY2010 and

5.8mnbpd in CY2011 on higher demand projections.

At estimated levels of crude price of about US $80-85/bbl in

FY2012 and based on IMF's projection of global GDP touching

US $65.5tn in CY2011, the weightage of crude consumption

in global GDP would remain comfortably below 5%, and not

act as a deterrent to growth, in our view. We believe that only

above US $105-110/bbl, the crude prices may start becoming

a cause for concern.

strong spending on services like package implementation andengineering. This has led to return of the large, multi-yeartransformational deals, with total contract value (TCV) of US$100-800mn thereby strengthening the deal pipeline for the ITcompanies. In 3QFY2011, on the back of strong volume growth,stable pricing and favourable cross-currency movement, weexpect dollar revenues to surge 6.0-8.7% qoq for tier-I ITcompanies. Moreover, we expect Infosys to revise its revenuegrowth guidance upwards for FY2011 from the previous24-25% to 27-28% yoy.


Exhibit 18: Revenue growth trend (USD)

(10)

(6)

(2)

2

6

10

14

4Q

FY08

2Q

FY09

3Q

FY09

4Q

FY09

3Q

FY10

2Q

FY11

(%qoq)

Infosys TCS HCL Tech Wipro

3Q

FY08

3Q

FY08

1Q

FY10

2Q

FY10

4Q

FY10

1Q

FY11

3Q

FY11E

11



Strategy

to support a strong rupee in the medium term and the RBI'sintervention is likely. Thus, we have taken a moderate USD/INRassumption of 45.5 and 44.5 for FY2011 and FY2012respectively, and do not expect the rupee to play spoilsport toour positive outlook for the IT sector. TCS, Infosys and HCL Techare our preferred picks in the large-cap space, of which wehave allocated equal-weight to TCS in our model portfolio.Among the mid caps, we prefer Mphasis and Tech Mahindradue to the steep discounts at which they are currently tradingvis-à-vis the tier-I IT companies, despite having growthcomparable to them.

TTTTTech Mahindra:ech Mahindra:ech Mahindra:ech Mahindra:ech Mahindra: In 3QFY2011, Tech Mahindra is expected torecord a strong growth of 6% qoq in its non-BT accounts, whilerevenue from BT is expected to be flat despite BT decreasingthe outsourcing spends globally, as it has committed volumesto Tech Mahindra. Also, the cross-currency movement hasproved favourable for the company, with GBP and Euroappreciating by 1.9% and 5.4% qoq respectively, and expectedto aid dollar revenues further by 1.5%. Management foreseesstrong growth in telecom service providers (TSP) accounts in theemerging markets for new roll outs and in the US to gaincompetitive advantage by enriching the end-users' experience.We expect the company to post 12% CAGR in dollar revenuesover FY2010-12. The stock underperformed in the past due touncertainty related to Mahindra Satyam's financial health, whichis now behind us. At current levels, the stock is trading at 7.6xFY2012E EPS of `55.1 (excluding Satyam) i.e. at a discount ofmore than 68% to the benchmark Infosys, which is unjustifiedin our view. Hence, we recommend a Buy on the stock, with aSOTP-based Target Price of `866, valuing the standalonebusiness at 12x FY2012E EPS and adding the stake of Satyamwith a holding discount of 20% to the current market cap.

Mphasis: Mphasis: Mphasis: Mphasis: Mphasis: For 1QFY2011, Mphasis is expected to record a strongvolume growth of 5% qoq on the back of robust demand seenin both the application and ITO businesses, having open billablepositions of 1,600-plus and 800-plus to be filled in, respectively.The company has been outperforming on the revenue front inthe mid-tier space, recording 6% CQGR in revenues vis-à-vis7% CQGR recorded by tier-I companies like TCS and Infosys.The company survived the semi-annual pricing renegotiationrounds with HP very well. Around 28% of the company's businesswhich includes the migration and internal work of HP has alreadybeen moved to the fixed rate card with rates lower than most ofthe other offshore players, leaving little downside going forward.Also, the pricing for its go-to-market business (44% of revenues)continues to be market driven. Hence, we do not foresee anypricing cuts going forward. The company is currently trading ata steep discount of over 52% to Infosys (vis-à-vis its historicaldiscount of 25-30%) despite profitability better than likes of HCLTech and Wipro coupled with growth also comparable to them.Hence, we recommend a Buy on the stock, with a Target Priceof `862, based on 15x FY2012E EPS.

Consumption: Strong business dynamics, fewstocks to play it

Looking at the domestic consumption sectors, FMCG valuationsare not available within an attractive range to take a materiallyoverweight stance. On the other hand, real estate remains ahigh beta sector, with its own set of transparency issues. Thatsaid, several real estate stocks are trading at well below bookvalues that reflect the large land banks at historical cost. This,in our view, provides substantial margin of safety, thoughcompany-specific parameters such as execution and leverageand macro parameters like interest rates and property priceswill remain critical monitorables. In auto and auto ancillaries,we continue to believe that there is strong visibility of 15%+volume growth for many years to come, which justifies anoverweight stance on the sector, especially considering thatfront-line stocks such as Maruti are trading at a discount to theSensex, even though both growth and RoE are expected to bebetter than the Sensex.

Sales (Sales (Sales (Sales (Sales (CCCCCAAAAAGR %GR %GR %GR %GR %))))) EBIDTEBIDTEBIDTEBIDTEBIDTA Margin (%)A Margin (%)A Margin (%)A Margin (%)A Margin (%) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x)

FY2010-12EFY2010-12EFY2010-12EFY2010-12EFY2010-12E FY2012EFY2012EFY2012EFY2012EFY2012E FY2012EFY2012EFY2012EFY2012EFY2012E

Infosys 22.8 31.7 24.2

TCS 22.2 28.5 24.1

Wipro 15.7 21.6 20.2

HCL Tech 24.6 17.9 14.5

MphasisMphasisMphasisMphasisMphasis 18.318.318.318.318.3 23.023.023.023.023.0 11.711.711.711.711.7

Exhibit 20: Mphasis trading at unjustified discount



Exhibit 19: Growth in non-BT accounts

Non BT ($ mn) qoq growth (%)

118

137 140 138

150

8.2

15.9

1.9

(1.1)

8.3

(2)

2

6

10

14

18

80

100

120

140

160

2QFY10 3QFY10 4QFY10 1QFY11 2QFY11

(%)

($m

n)



Real Estate: Low debt, dirt-cheap valuations provideselective value-buying opportunities

We are positive on the long-term outlook of the real estate sectoron the back of growing disposable income, shortage of 2.5crhouses in India and reasonable affordability. Given the currentscenario, we expect stability in the residential prices with theexception of certain micro markets, where prices haveoverheated. We also expect an uptick in the commercial segmentover the next twelve months.

The risk-reward ratio is turning favourable for the sector, withrecovery widening towards tier-II and tier-III cities in theresidential segment. The recent moves by the RBI to curbspeculation by tightening capital and provisioning norms aswell as stipulating maximum 80% loan-to-value will lead tohigher interest rates and could further hit affordability in the`1cr and above segment. Having said that, we believe higherabsorption, not price appreciation, will drive residential growthover the next six quarters. New launches have been rewardingfor the developers who have launched projects at 10-15%discount to the ongoing market rates. For instance, HDIL hasbeen able to pre-sell 75% of its residential projects (7mn sq.ft.)launched since FY2009, thereby providing ̀ 5,000cr of revenuevisibility over FY2010-12E. High inventory is still hamperingcommercial recovery; however, there has been uptick inabsorption levels. We expect rentals to remain firm at currentlevels, with uptick apparent over the next twelve months.

For 3QFY2011, volumes are expected to be flat to moderateon a sequential basis on account of festive demand. Revenueof the real estate companies will largely be driven by executionof existing projects and new launches. Among our universe ofstocks, we prefer companies with strong near-term cash flowvisibility, low leverage and strong project pipeline. Our top picksare HDIL and ARIL, which are trading at 53% and 49% discountto their NAVs respectively, and are both having negligible tolow levels of debt. Even in terms of book value, both thesestocks are trading at well below their book values, providingsubstantial margin of safety. However, execution remains a keymonitorable, apart from the macro risks to demand from risinginterest rates and property prices.


Exhibit 21: Top-10 cities residential absorption trend

Source: Cushman & Wakefield, Angel Research

Exhibit 22: Commercial rentals stabilising

Midcaps: The quest for Alpha

Midcaps across the board have witnessed selling pressure as aplethora of scams have hit sentiment. Nonetheless, this hasthrown up investment opportunities in quality businesses withgood corporate governance standards. Accordingly, for the restof our portfolio, we prefer to take a stock-specific approachand identify Alpha stocks - either high RoE businesses or deepvalue stocks. This list presently includes companies like JagranPrakashan, United Phosphorus, Taj GVK, Surya Roshni, Greenplyand CRISIL, among others. Below, we set out the near-termtrends, developments and key monitorables that are likely toaffect the performance of these companies, even as theone-to-two-year outlook for each of them is quite promising.

Greenply:Greenply:Greenply:Greenply:Greenply: Greenply Industries (GIL) has posted lacklustreperformance over the last two quarters on account of the delayin commencement of production at its new MDF unit, whichwas slated to commence production in 1QFY2011.Consequently, GIL saw an increase in depreciation and interestcosts without commensurate revenue contribution, resulting inerosion of margins.

With the new laminate capacity running at almost full capacityon the back of strong demand, we expect GIL to post robusttop-line for 3QFY2011 and 4QFY2011. The existing laminateand plywood capacity is also operating at 115%+ capacity

(50)

0

50

100

150

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

4Q

CY0

8

1Q

CY0

9

2Q

CY0

9

2Q

CY1

0

(%)

(Units

)

1Q

CY0

8

2Q

CY0

8

3Q

CY0

8

3Q

CY0

9+

4Q

CY0

9

1Q

CY1

0

Absorption (LHS) yoy growth (RHS)

60

70

80

90

100

110

120

130

140

150

4Q

CY07

1Q

CY08

2Q

CY08

3Q

CY08

4Q

CY08

2Q

CY10

3Q

CY10

(Month

lyRe

nta

l Index

)

1Q

CY07

2Q

CY07

3Q

CY07

1Q

CY09

2Q

CY09

3Q

CY09

4Q

CY09

1Q

CY10

Gurgaon Bangalore Mumbai

Strategy

13




Exhibit 23: Segment-wise sales outlook

utilisation. However, the MDF unit, which commenced productionin mid-3QFY2011, is expected to contribute to top-line from4QFY2011 onwards. Thus, profit would remain subdued in3QFY2011 and improve qoq in 4QFY2011. Further, thecompany proposes to increase its plywood capacity by 3.75mnsq ft in 4QFY2011, which would augment 1QFY2012 revenues.

We like GIL because of its leadership position, largest distributionnetwork across India, strong demand for its existing products.Moreover, the new MDF segment is expected to contribute`350cr at full capacity. Given that 80% of India's MDF demandis met through imports, going ahead a substantial portion ofthe same is expected to be replaced by GIL. Currently, the stockis trading at attractive valuations of 5.8x FY2012E EPS v/s itshistorical median of 10x one-year forward earnings, providinga strong margin of safety. The key monitorable remains howsoon the company scales up its MDF operation.

Surya Roshni:Surya Roshni:Surya Roshni:Surya Roshni:Surya Roshni: Surya Roshni is well positioned for growth overthe next few years, after expanding capacities across its entirerange of products. Going ahead, we expect the benefits fromthese expanded capacities to start kicking in, as the companyramps up the capacity utilisation rate. We also expect thecompany to increase its market share in the lighting space,especially CFLs, to 14.0% in FY2012, and post a CAGR of 23.8%in top-line over FY2010-12E. Over the coming quarters,including 3QFY2011, the company's performance would

depend on the key monitorables of capacity utilisation andmarket share. We expect capacity utilisation across its majorproducts to be in the range of 85-90% in FY2012. Margins arealso expected to expand, based on higher contribution fromthe lighting division. Owing to attractive valuations of 5.3xFY2012E EPS, we maintain a Buy on Surya Roshni.

United Phosphorus:United Phosphorus:United Phosphorus:United Phosphorus:United Phosphorus: After a year of drought, good monsoonsin 2QFY2011 brought back the much needed cheer across thedifferent sectors of the economy. This euphoria was however,short-lived as rainfall continued across the country duringOctober and November as well causing crop destruction inmany of the key agri states. Hence, 3QFY2011 is expected tobe muted for the agrichemical companies, compared to thegrowth witnessed in 2QFY2011 and 3QFY2010. As for theinternational markets (US and EU), winter has set in and thetime and inventories of the agrichemical players at the retaillevel have fallen to near pre-crisis levels. However, hereon, endof the winter season would be the key determinant for theinternational segment's performance in 4QFY2011.

Against the backdrop, we expect United Phosphorus (UPL) toscale down its FY2011 guidance, and have accordingly prunedour earnings estimates. On the bourses too on account of thesedevelopments, the stock has corrected by a more than justified25% from its recent highs. But, the fact remains that UPL isamongst the top-five generic agrichemical manufacturers inthe world. The company has a sound acquisition strategy, backedby a robust balance sheet along with a cash pile of `2,000cr,which makes it one of the fastest growing global agrichemicalcompanies amongst its peers. Given the recent correction inthe stock price and attractive valuations of 11.4x FY2012E EPS(post downward adjustment to our earnings estimate), UPLremains our preferred pick in the agrichemical space.

TTTTTaj GVKaj GVKaj GVKaj GVKaj GVK: : : : : TajGVK appears set to make the most of the reboundthat the hotel industry is currently witnessing on the back of anincrease in foreign tourist arrivals and the economy getting backon track. With demand growth (13% CAGR over FY2010-13E)outstripping supply (10.8% CAGR over FY2010-13E), we expectbusiness destinations like Hyderabad and Chennai whereTAJGVK has a presence, to significantly benefit. Overall, weexpect TajGVK to post 20.7% CAGR in sales during thementioned period on the back of an increase in averageoccupancy rates (OR) and average room rates (ARR). We expectthe company's 3QFY2011 performance to be strong, as thethird quarter is the "on" season for hotels in India. Besides, touristinflows during the quarter have been strong. Major upside ordownside to our target valuations are dependent on the trendin occupancy rates and average room rates v/s our estimates.

182 217 267 312 479 514

72207

276391

544655

703

848

-

10

20

30

40

50

60

-

500

1,000

1,500

2,000

FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

Decorative Laminates MDF Board

Plywood & Allied Products Total Revenue Growth (RHS)

(`cr

)

(%)

Exhibit 24: Promoters' shareholding to increase to 60%


PPPPPromoters'romoters'romoters'romoters'romoters' shareholding (%) shareholding (%) shareholding (%) shareholding (%) shareholding (%)

WWWWWarrantarrantarrantarrantarrant ConversionConversionConversionConversionConversion AmountAmountAmountAmountAmount BeforeBeforeBeforeBeforeBefore AfterAfterAfterAfterAfter

allocation dateallocation dateallocation dateallocation dateallocation date price (price (price (price (price (`̀̀̀̀/share)/share)/share)/share)/share) invested (invested (invested (invested (invested ( `̀̀̀̀ cr) cr) cr) cr) cr) convconvconvconvconv..... convconvconvconvconv.....

Dec. 14, 2009 59 37.8 24.1 39.1

Jul. 12, 2010 83 94.9 39.1 55.0

Oct. 22, 2010 111 60.8 55.0 60.0

Strategy



Jagran PJagran PJagran PJagran PJagran Prakashan: rakashan: rakashan: rakashan: rakashan: The recent IRS 2010 (Q3) re-iterates theleadership position of Jagran Prakashan (JPL) amongst the printdailies, indicating a strong presence in the Hindi market. Thisin our opinion will help JPL to garner high advertisementrevenue. It is expected that the vernacular print space will record14% CAGR in advertisement revenues over FY2010-13 drivenby higher ad-spends in tier II/III towns on account of increasedper capita income. We expect JPL to register 16% CAGR overthe same period.

For 3QFY2011, we expect JPL to derive strong advertisingrevenue owing to the festive season, up-tick in the economyand rising colour ad-inventory. Lower losses in nascentbusinesses and higher operating leverage will benefit JPL's grossmargins. However, we expect this benefit to gross margins tobe offset by rising prices of newsprint. While we have not factoredthe Mid-Day deal in JPL's numbers, we expect the deal to beearnings accretive by ~2% in FY2011. Moreover, withBlackstone's recent investment of `225cr and a wider portfolio(including Mid-Day's publications), we believe that Jagran iswell poised to benefit from steady growth in the print mediasector. We believe that the recent underperformance of the stockand attractive valuations of ~14x FY2013E EPS, provides agood entry point for investors.

FFFFFinolex Cables:inolex Cables:inolex Cables:inolex Cables:inolex Cables: Finolex Cables is poised for strong growth inthe years to come, as it continues to witness strong demand inthe low-tension cables segment, backed by an entry into thehigh-tension cables segment. We expect the company to clock23.2% CAGR in revenues over FY2010-12. In the medium term,despite the top-line growth momentum expected to sustain,concerns remain on the high copper prices and forex lossesfront. The company has been unable to pass on the high copperprices, which are ruling at their all-time peak levels at the LME,thus taking a hit on margins. We expect 3QFY2011 also towitness subdued albeit sequentially higher margins, as thecopper prices continued to scale new heights through the quarter.Forex losses are also expected to continue till FY2013, thoughdiminishing every year. For 3QFY2011, we expect the companyto book around `10cr of forex losses. Currently, the stock istrading at attractive valuations of 5.9x FY2012E EPS, providinga strong factor of safety, even as the copper prices and forexlosses remain key monitorables.


Exhibit 25: ARR, OR expected to strengthen


Exhibit 26: Segment-wise sales outlook

130 189 239 292 353 425107100 60

5162

75

168226 238

286

352

427

0

5

10

15

20

25

30

35

40

45

-

100

200

300

400

500

600

700

800

900

1,000

CY07 CY08 CY09 CY10E CY11E CY12E

Rating Advisory Research Total Revenue Growth (RHS)

(`cr

)

(%)

CRISILCRISILCRISILCRISILCRISIL::::: CRISIL has witnessed strong growth in the three quartersof CY2010, with the highest yoy growth reported in 3QCY2010on the back of strong credit off-take and improvement in theglobal economic conditions. Operating margins however, tooka hit in the first two quarters owing to forex losses and highexpenses arising from relocation of operations. Margins revertedto normal in 3QCY2010 setting the pace for ensuing quarters.

CRISIL is expected to leverage its expertise in ramping upbusiness of the recently acquired Pipal Research Corp., (inSeptember 2010). This is expected to lend a boost to thecompany's 4QCY2010 revenues as synergies come to play. Also,we expect margins to remain stable from 4QCY2010 onwards.Thus, overall the strong growth in credit demand, large untappedbank loan rating market, the Pipal acquisition and strong infraspend combined are expected to boost the company's overallperformance.

We like CRISIL, as it is market leader in all its segments, is set toreap the benefits from an improving economy and registerstrong growth going ahead. On the bourses, the stock is currentlytrading at attractive valuations of 17.3x CY2012 earnings, whichis close to the lower-end of its historical range of 16.4-29.9xone-year forward earnings. Apart from macro-factors such assustained credit demand and infra spend, the key monitorableswill be the scaling up of Pipal operations and the continuedramp-up in bank loan ratings as the company increasingly looksto tap into the mid and small-corporates.

Strategy

ARR (LHS) Average OR (RHS)

50.0

55.0

60.0

65.0

70.0

75.0

80.0

6,000

6,500

7,000

7,500

8,000

8,500

FY07 FY08 FY09 FY10 FY11E FY12E

(%)

(`cr)

15



3QFY2011 Sensex earnings outlook

For 3QFY2011, we expect the Sensex companies to report arobust 19% yoy performance on the sales front. On thebottom-line front, the performance is expected to be even better,with a yoy growth of 26%. However, operating margins areexpected to remain more or less flat for the quarter and increaseby a mere 8bp. Overall, we expect OPM to come in at 21.7%,while NPM is expected to increase to 11.7% vis-à-vis 11.1% forthe corresponding period of the previous year.

The oil and gas, auto and metals sectors are set to postrobust numbers for 3QFY2011. The oil and gas sector isexpected to be the major contributor to the growth in Sensexsales and profit, with a 20% and 47% growth in sales andprofit respectively, mainly on the back of the 80bp expansionin margins and 79% increase in profit of ONGC. Ex-oil andgas, growth in Sensex sales and earnings is expected to be13.8% and 17.2%, respectively. The auto companies areexpected to report 69% yoy increase in net profit in3QFY2011, led mainly by Tata Motors, which is expected toreport a 146bp increase in OPM and 195% rise in net profit.Overall, the auto sector is expected to report 18% growth insales for the quarter. Metals are expected to report 52%jump in net profit, despite the mere11% yoy increase intop-line, mainly on account of margin expansion. We expectoverall OPM of the sector to come in at 14.8%for 3QFY2011.

The capital goods sector is expected to report a strong 27%growth in top-line. However, net profit growth is expected tobe subdued due to margin compression by 131bp. The BFSI,FMCG and IT sectors are expected to report growth ratessimilar to the Sensex. Top-line growth of BFSI sector isexpected to come in at 18%, while a 15bp increase in OPMwould result in 22% yoy increase in bottom-line. The FMCGcompanies are set to post 16% yoy growth in top-line, drivenprimarily by robust volumes. On the bottom-line front,growth is expected to be 14%. The IT sector is expected topost 25% yoy growth during the quarter, primarily driven byhigher volumes and favourable cross-currency movements.However, high wage inflation would exert pressure onmargins, which are expected to decline by 140bp. Overall,the IT companies are expected report earnings growth of17% for the quarter under review.

During 3QFY2011, the telecom and power sectors areexpected to be the main underperformers, despite strongtop-line growth. Telecom is expected to report a strong 35%yoy increase in sales, partially because of the inclusion ofZain's numbers in Bharti's accounts. However, owing to a413bp decline in OPM resulting from the price wars thathave intensified, bottom-line is expected to reduce sharplyby 44%. The decline in margins is expected to hit the powersector too. Net profit is expected to remain flat despite a24% increase in top-line, as margins are expected to correctby 347bp owing to low merchant power rates and high fuelcost.

In the pharmaceutical sector, Cipla is expected to report a9% decline in net profit, as margins decline by 70bp.Similarly, DLF, the only real estate sector representative onthe Sensex, is expected to be impacted by a higher debtburden and report flat profit growth despite a strong 25%growth in top-line. JP Associates in the construction sector isexpected to report a substantial 218% spike in profit for3QFY2011.


Exhibit 27: Derivative losses expected to taper off

0

20

40

60

80

100

120

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

(`cr)

Strategy



Net Sales (Net Sales (Net Sales (Net Sales (Net Sales (`̀̀̀̀ cr) cr) cr) cr) cr) Net PNet PNet PNet PNet Profit (rofit (rofit (rofit (rofit (`̀̀̀̀ cr) cr) cr) cr) cr) WWWWWeightageeightageeightageeightageeightage % Contribution% Contribution% Contribution% Contribution% Contribution

CompanyCompanyCompanyCompanyCompany 3QFY2011E3QFY2011E3QFY2011E3QFY2011E3QFY2011E 3QFY20103QFY20103QFY20103QFY20103QFY2010 % chg% chg% chg% chg% chg 3QFY2011E3QFY2011E3QFY2011E3QFY2011E3QFY2011E 3QFY20103QFY20103QFY20103QFY20103QFY2010 % chg% chg% chg% chg% chg (%) (%) (%) (%) (%) to Sensex growth to Sensex growth to Sensex growth to Sensex growth to Sensex growth

RIL 68,347 56,856 20.2 5,535 4,008 38.1 11.7 20.1

Tata Steel 27,800 26,069 6.6 1,392 610 128.4 2.6 13.1

Sterlite 7,143 6,677 7.0 1,147 1,005 14.1 1.9 1.7

Tata Motors 28,720 25,980 10.5 1,920 650 195.3 2.7 19.8

ONGC 18,488 15,506 19.2 5,475 3,054 79.3 3.4 11.6

ICICIBK 3,920 3,731 5.1 1,353 1,101 22.9 8.1 6.0

BHEL 9,398 7,229 30.0 1,135 1,073 5.8 2.4 0.5

ITC 5,388 4,532 18.9 1,341 1,144 17.2 5.8 3.3

JP Associates 3,616 2,964 22.0 328 103 218.1 0.8 3.0

HDFCBK 3,708 3,077 20.5 1,091 819 33.3 5.3 5.2

Maruti Suzuki 9,518 7,334 29.8 601 688 (12.6) 1.3 (0.9)

TCS 9,680 7,650 26.5 2,197 1,797 22.2 4.2 2.9

Hindalco 17,749 15,136 17.3 606 455 33.1 2.0 2.5

DLF 2,536 2,026 25.2 475 468 1.4 0.8 0.0

M&M 5,972 4,479 33.3 611 424 44.1 2.1 3.4

Bajaj Auto 3,951 3,166 24.8 596 475 25.4 1.4 1.5

Hero Honda 4,927 3,814 29.2 548 536 2.2 1.2 0.1

Wipro 7,972 6,977 14.3 1,348 1,203 12.0 1.8 0.9

Cipla 1,552 1,344 15.4 261 289 (9.5) 1.2 (0.4)

Reliance Infra 3,450 2,287 50.9 299 277 7.8 0.8 0.3

L&T 10,202 8,071 26.4 720 696 3.4 6.6 1.7

Infosys 7,292 5,741 27.0 1,815 1,559 16.4 10.3 5.2

Bharti Airtel 15,787 10,305 53.2 1,535 2,195 (30.1) 2.9 (5.5)

HUL 5,023 4,504 11.5 699 649 7.7 2.1 0.6

HDFC 1,195 1,053 13.5 796 671 18.5 5.9 2.7

Jindal Steel 3,458 2,675 29.3 1,116 874 27.6 1.8 2.6

SBI 12,412 9,682 28.2 2,911 2,479 17.4 4.9 4.7

NTPC 13,277 11,708 13.4 2,132 2,365 (9.8) 2.0 (1.1)

Tata Power 1,723 1,556 10.8 216 148 46.3 1.4 1.1

RCOM 5,301 5,284 0.3 311 1,130 (72.5) 0.6 (6.9)

TTTTTotalotalotalotalotal 319,505 319,505 319,505 319,505 319,505 267,412 267,412 267,412 267,412 267,412 19.5 19.5 19.5 19.5 19.5 40,509 40,509 40,509 40,509 40,509 32,944 32,944 32,944 32,944 32,944 23.0 23.0 23.0 23.0 23.0 100.0100.0100.0100.0100.0 100.0100.0100.0100.0100.0

Sensex # 18.7 25.6

Exhibit 28: Quarterly earnings trend for Sensex companies

Source: Angel Research; Note: #Sensex sales and earnings growth based on free-float weightages

Strategy

17



BSE-100 AngelSector Company CMP (`) Target Price (`) Weightage (%) Weightage (%) StanceConsumptionConsumptionConsumptionConsumptionConsumption 15.215.215.215.215.2 14.014.014.014.014.0

FMCGFMCGFMCGFMCGFMCG 7.57.57.57.57.5 3.03.03.03.03.0 UnderweightUnderweightUnderweightUnderweightUnderweight

ITC 175 177 4.1 3.0 Underweight

Auto & AncillariesAuto & AncillariesAuto & AncillariesAuto & AncillariesAuto & Ancillaries 6.66.66.66.66.6 8.08.08.08.08.0 OverweightOverweightOverweightOverweightOverweight

Maruti Suzuki 1,421 1,654 0.9 3.0 Overweight

Ceat 134 200 0.0 3.0 Overweight

Fag Bearing 879 1,035 0.0 2.0 Overweight

Real EstateReal EstateReal EstateReal EstateReal Estate 1.11.11.11.11.1 3.03.03.03.03.0 OverweightOverweightOverweightOverweightOverweight

HDIL 194 302 0.0 3.0 Overweight

Domestic IndustryDomestic IndustryDomestic IndustryDomestic IndustryDomestic Industry 64.364.364.364.364.3 56.056.056.056.056.0

BFSIBFSIBFSIBFSIBFSI 25.525.525.525.525.5 31.031.031.031.031.0 OverweightOverweightOverweightOverweightOverweight

SBI 2,811 3,500 3.5 5.0 Overweight

Axis Bank 1,350 1,678 1.6 6.0 Overweight

ICICI Bank 1,145 1,332 5.7 10.0 Overweight

HDFC Bank 2,347 2,501 3.8 4.0 Equalweight

CRISIL 6,040 7,584 0.0 3.0 Overweight

J&K Bank 776 1,063 0.0 3.0 Overweight

Oil & GasOil & GasOil & GasOil & GasOil & Gas 13.613.613.613.613.6 10.010.010.010.010.0 UnderweightUnderweightUnderweightUnderweightUnderweight

Reliance Industries 1,058 1,260 8.3 10.0 Overweight

MetalsMetalsMetalsMetalsMetals 8.68.68.68.68.6 0.00.00.00.00.0 UnderweightUnderweightUnderweightUnderweightUnderweight

Capital GoodsCapital GoodsCapital GoodsCapital GoodsCapital Goods 7.87.87.87.87.8 12.012.012.012.012.0 OverweightOverweightOverweightOverweightOverweight

Bluestar 437 565 0.0 4.0 Overweight

L&T 1,979 2,024 4.7 5.0 Equalweight

LMW 2,462 2,977 0.0 3.0 Overweight

PPPPPowerowerowerowerower 3.93.93.93.93.9 0.00.00.00.00.0 UnderweightUnderweightUnderweightUnderweightUnderweight

InfrastructureInfrastructureInfrastructureInfrastructureInfrastructure 2.62.62.62.62.6 3.03.03.03.03.0 OverweightOverweightOverweightOverweightOverweight

Nagarjuna Construction 141 196 0.0 3.0 Overweight

CementCementCementCementCement 2.22.22.22.22.2 0.00.00.00.00.0 UnderweightUnderweightUnderweightUnderweightUnderweight

ExportsExportsExportsExportsExports 16.616.616.616.616.6 16.016.016.016.016.0

SoftwareSoftwareSoftwareSoftwareSoftware 12.112.112.112.112.1 13.013.013.013.013.0 OverweightOverweightOverweightOverweightOverweight

TCS 1,165 1,208 3.0 3.0 Equalweight

Tech Mahindra 702 866 0.0 4.0 Overweight

Mphasis 673 862 0.0 6.0 Overweight

PharmaPharmaPharmaPharmaPharma 4.44.44.44.44.4 3.03.03.03.03.0 UnderweightUnderweightUnderweightUnderweightUnderweight

Cipla 370 388 0.8 3.0 Overweight

OthersOthersOthersOthersOthers 4.04.04.04.04.0 14.014.014.014.014.0

HotelsHotelsHotelsHotelsHotels 0.20.20.20.20.2 3.03.03.03.03.0 OverweightOverweightOverweightOverweightOverweight

Taj GVK 133 228 0.0 3.0 Overweight

MediaMediaMediaMediaMedia 0.40.40.40.40.4 3.03.03.03.03.0 OverweightOverweightOverweightOverweightOverweight

Jagran Prakashan 132 185 0.0 3.0 Overweight

TTTTTelecomelecomelecomelecomelecom 2.82.82.82.82.8 0.00.00.00.00.0 UnderweightUnderweightUnderweightUnderweightUnderweight

OthersOthersOthersOthersOthers 0.5 0.5 0.5 0.5 0.5 8.08.08.08.08.0 OverweightOverweightOverweightOverweightOverweight

United Phosporus 173 198 0.3 2.0 Overweight

Finolex Cables 54 82 0.0 2.0 Overweight

Greenply 192 266 0.0 2.0 Overweight

Surya Roshni 105 143 0.0 2.0 Overweight

Angel Research Model Portfolio



3QFY2011 Sectoral Outlook

19



Automobile

CV growth to moderate on a high base effect

CV sales, which have a strong correlation with domestic GDPand industrial production, were caught in a cyclical downturnover FY2008-09. CV volumes witnessed good recovery inFY2010 and registered 38.6% yoy growth YTD in FY2011.However, CV sales moderated during 3QFY2011, given thatthe pre-buying ahead of the changes in emission norms hadresulted in strong sales growth in 1HFY2011. With positive

For 3QFY2011, we expect our auto universe to post a strongnet sales growth of ~27% yoy, aided by robust ~26% yoy volumegrowth (due to increased production by most players to meethigh festive demand) across product segments. Revenue growthis expected to be led by Maruti (strong domestic volume offtakedue to the festival season), Mahindra & Mahindra (M&M, robusttractor sales due to the festive season and post-harvestingperiod), Hero Honda (HH, healthy volume growth) and BajajAuto (BAL, increased capacity and low base effect). We expectAshok Leyland (ALL) to emerge as a laggard in terms of revenuegrowth as commercial vehicle (CV) sales moderated during thequarter due to pre-buying ahead of emission norm changesfrom October 2010 and production constraints ofBS III vehicles. For most companies, the focus continues to beon volume growth. Going ahead, near-term volume growthwould be tapered off due to the high base effect of 2HFY2010and an increase in financing cost; while in the long run, weexpect sales momentum to continue, aided by healthy consumersentiment, rising income levels, easy availability of finance andsuccess of new product launches.

Rising raw-material costs pose margin pressure

The auto industry is expected to face margin pressure as inputcosts spiraled during the quarter. Prices of major raw materialssuch as steel, aluminum, plastic and rubber witnessed averageincreases of ~6.5%, ~15%, ~16.5% and ~65.2% yoy,respectively, during 3QFY2011. However, cost-reductioninitiatives, improved operating leverage and price increases willdilute the impact of input cost inflation to some extent. We expectthe operating margin of our auto universe to contractsubstantially by ~300bp yoy, reflecting higher input costs; whilenet profit margin is expected to decline by ~150bp yoy. Playersare expected to register a yoy decline in net profit for 3QFY2011on a yoy increase in input cost. On a sequential basis, net profitis estimated to decline by ~10% qoq, owing to a sequentialincrease in input cost.

Interest rate, fuel price and commodity price trend

Financing plays an important role and industry trend suggeststhat there is a negative correlation between auto finance ratesand auto volume growth. Auto finance rates declined by200-250bp in FY2010, which supported robust growth duringthe period. A swift revival in underlying vehicle sales volume, abenign finance environment and an increase in financepenetration and loan-to-value (LTV) ratio are the key factorsresponsible for the industry's growth. However, the beginningof monetary tightening by the RBI has pushed interest rates up,thereby increasing the cost of ownership for consumers. Further,the government's policy of deregulating petrol prices to control

the fiscal deficit has led to a substantial increase in petrol pricessince June 2010. Petrol and diesel prices were hiked by`8.59/litre and ̀ 5.36/litre in CY2010. This should have a directimpact on ownership cost and freight operators' profitability,and could moderately impact auto volume growth in the mediumterm. For 3QFY2011, commodity prices in general havewitnessed an upward trend, with prices of key raw materials,steel and aluminum, increasing by 6-15% yoy. Rubber and leadprices also rose by ~65% and ~4% yoy during the quarter.Further, around 10-12% yoy increase in average internationalcrude oil prices during 3QFY2011 has had an impact ontransportation costs for all the companies in our auto universe.

Auto index outperforms the Sensex

The auto index posted gains of 7.4% during 3QFY2011 versus2.2% gains for the Sensex, outperforming it by 5.2%. The upturnin volume witnessed in 1HFY2011 continued during 3QFY2011,albeit at a slightly lower pace, on the back of positive consumersentiment and healthy festival demand. Further, advancedbuying in anticipation of the expected price increases fromJanuary 2011 due to higher input costs also boosted volumegrowth to a certain extent during the quarter. The auto sectorhas turned out to be a star performer since FY2010, while,going forward, concerns over rising input cost, higher cost offinance and rising inflation could act as headwinds for theindustry's volume growth. Heavyweights, Tata Motors and M&Moutperformed the auto index by 11.6% and 4.7%, respectively,during 3QFY2011. However, other heavyweights such as Maruti,HH, Bajaj Auto and Apollo Tyres underperformed in 3QFY2011.

Source: Company; Angel Research

Exhibit 1: Auto index v/s the Sensex

0

50

100

150

200

250

Apr-07 Aug-07 Dec-07 May-08 Sep-08 Feb-09 Jun-09 Nov-09 Mar-10 Jul-10 Dec-

BSE Auto BSE_SENSEX

10



Automobile

Exhibit 4: BAL, HH, TVS - Quarterly volumes

SegmentSegmentSegmentSegmentSegment 3QFY113QFY113QFY113QFY113QFY11 3QFY103QFY103QFY103QFY103QFY10 % chg% chg% chg% chg% chg 9MFY9MFY9MFY9MFY9MFY1111111111 9MFY109MFY109MFY109MFY109MFY10 % chg% chg% chg% chg% chg

Bajaj AutoBajaj AutoBajaj AutoBajaj AutoBajaj Auto 946,850946,850946,850946,850946,850 809,218809,218809,218809,218809,218 17.017.017.017.017.0 2,875,7342,875,7342,875,7342,875,7342,875,734 2,043,7032,043,7032,043,7032,043,7032,043,703 40.740.740.740.740.7

Motorcycles 838,487 711,991 17.8 2,550,350 1,794,455 42.1

Scooters - 1,060 - 27 4,593 (99.4)

Total 2 Wheelers 838,487 713,051 17.6 2,550,377 1,799,048 41.8

Three WheelersThree WheelersThree WheelersThree WheelersThree Wheelers 108,363108,363108,363108,363108,363 96,16796,16796,16796,16796,167 12.7 12.7 12.7 12.7 12.7 325,357325,357325,357325,357325,357 244,655244,655244,655244,655244,655 33.0 33.0 33.0 33.0 33.0

Exports (Inc above )Exports (Inc above )Exports (Inc above )Exports (Inc above )Exports (Inc above ) 296,644296,644296,644296,644296,644 273,902273,902273,902273,902273,902 8.3 8.3 8.3 8.3 8.3 927,875927,875927,875927,875927,875 676,627676,627676,627676,627676,627 37.1 37.1 37.1 37.1 37.1

Hero HondaHero HondaHero HondaHero HondaHero Honda 1,428,0301,428,0301,428,0301,428,0301,428,030 1,111,3721,111,3721,111,3721,111,3721,111,372 28.5 28.5 28.5 28.5 28.5 3,948,0133,948,0133,948,0133,948,0133,948,013 3,413,5943,413,5943,413,5943,413,5943,413,594 15.715.715.715.715.7

TVS MotorsTVS MotorsTVS MotorsTVS MotorsTVS Motors 524,171524,171524,171524,171524,171 374,799374,799374,799374,799374,799 39.939.939.939.939.9 1,512,9591,512,9591,512,9591,512,9591,512,959 1,117,7371,117,7371,117,7371,117,7371,117,737 35.435.435.435.435.4

Motorcycles 208,632 151,105 38.1 617,996 458,726 34.7

Scooters 122,696 74,982 63.6 342,538 228,471 49.9

Mopeds 182,735 145,487 25.6 524,562 421,947 24.3

Three WheelersThree WheelersThree WheelersThree WheelersThree Wheelers 10,10810,10810,10810,10810,108 3,2253,2253,2253,2253,225 213.4213.4213.4213.4213.4 27,86327,86327,86327,86327,863 8,5938,5938,5938,5938,593 224.3 224.3 224.3 224.3 224.3

Exports (Inc above )Exports (Inc above )Exports (Inc above )Exports (Inc above )Exports (Inc above ) 51,39451,39451,39451,39451,394 43,69643,69643,69643,69643,696 17.6 17.6 17.6 17.6 17.6 163,898163,898163,898163,898163,898 110,132110,132110,132110,132110,132 48.8 48.8 48.8 48.8 48.8

Source:Company, Angel Research

Passenger vehicles (PV) - Maruti ahead of competition

PV volumes witnessed strong 25.6% yoy growth YTD in FY2011,aided by buoyant domestic demand. Domestic demand wassupported by sustained positive consumer sentiment, easyavailability of finance and new model launches. Exports,however, declined by 1.6% yoy YTD in FY2011 as PV majorsconcentrated on meeting the strong demand in the domesticmarket. Moreover, robust volume growth, low penetration anda low-cost manufacturing base have been attracting global automajors to India, who have started launching products for theIndian market. During CY2010, General Motors, Volkswagen,Nissan and Ford launched Beat, Polo, Micra and Figo,respectively, in the dominant A2 segment, thereby escalatingcompetition for the market leader Maruti. However, Marutirecorded a robust 28% and 27% yoy increase in volumes during3QFY2011 and 9MFY2011, respectively, supported by strongvolume traction in the A2 and C segments. Going ahead, weexpect volume momentum in the PV segment to continue but ata slightly modest pace. We estimate the PV segment to registera CAGR of ~15% over FY2010-12E.

Two-wheeler segment's momentum continues

The two-wheeler segment registered robust 29.2% yoy growthYTD in FY2011, aided by 26.4% growth in the dominantmotorcycle segment and 49.2% yoy growth in the scootersegment. Hero Honda reported robust 28.5% yoy growth inthe domestic market in 3QFY2011, indicating strength of itsmarket reach and better performance by the rural market. Atthe same time, backed by a series of new launches and lowbase, BAL reported a 17.8% yoy increase in motorcycle volumesin 3QFY2011. We believe though the substantial ownershipbase of two-wheelers results in reduced headroom for highergrowth and increases dependence on replacement demand tosustain volumes, rural markets will register better growth ondemand arising from the relevant rural population. This isexpected to help two-wheeler companies maintain their growthmomentum and register a ~13% CAGR in volumes over thenext couple of years.

Exhibit 3: Maruti, M&M - Quarterly volumes

SegmentSegmentSegmentSegmentSegment 3QFY113QFY113QFY113QFY113QFY11 3QFY103QFY103QFY103QFY103QFY10 % chg% chg% chg% chg% chg 9MFY9MFY9MFY9MFY9MFY1111111111 9MFY109MFY109MFY109MFY109MFY10 % chg% chg% chg% chg% chg

Maruti SuzukiMaruti SuzukiMaruti SuzukiMaruti SuzukiMaruti Suzuki 330,687330,687330,687330,687330,687 258,026258,026258,026258,026258,026 28.228.228.228.228.2 927,665927,665927,665927,665927,665 730,943730,943730,943730,943730,943 26.926.926.926.926.9

Total Passenger cars 298,636 218,230 36.8 815,652 622,573 31.0

MUV Gypsy, Vitara 891 680 31.0 4,698 2,835 65.7

DomesticDomesticDomesticDomesticDomestic 299,527299,527299,527299,527299,527 218,910218,910218,910218,910218,910 36.8 36.8 36.8 36.8 36.8 820,350820,350820,350820,350820,350 625,408625,408625,408625,408625,408 31.231.231.231.231.2

ExportsExportsExportsExportsExports 31,16031,16031,16031,16031,160 39,11639,11639,11639,11639,116 (20.3) (20.3) (20.3) (20.3) (20.3) 107,315107,315107,315107,315107,315 105,535105,535105,535105,535105,535 1.7 1.7 1.7 1.7 1.7

M&MM&MM&MM&MM&M 153,833153,833153,833153,833153,833 116,063116,063116,063116,063116,063 32.532.532.532.532.5 423,710423,710423,710423,710423,710 336,209336,209336,209336,209336,209 26.026.026.026.026.0

Domestic Auto 90,205 68,679 31.3 255,965 201,201 27.2

Exports 5,020 3,581 40.2 13,480 7,338 83.7

Domestic Tractor 55,488 40,917 35.6 145,493 121,528 19.7

Expotrs 3,120 2,886 8.1 8,772 6,142 42.8


traction in the GDP, which is estimated to register a CAGR of~8.5% over FY2010-12E, we expect CV demand to remainbuoyant. Moreover, healthy freight rates, ease in financeavailability and government thrust on infrastructure investmentare expected to boost the growth momentum further. However,this growth momentum is expected to witness a slowdown onaccount of the high base effect and as such we estimate the CVsector to register a CAGR of ~14% over the next two years.Tata Motors recorded a healthy growth of 23.2% yoy in CVvolumes, aided by 17.2% yoy and 27.7% yoy growth in M&HCVand LCV, respectively.

Source: Company; Angel Research; Note: ALL -Dec. nos. are estimated

Exhibit 2: TML, ALL - Quarterly volumes

SegmentSegmentSegmentSegmentSegment 3QFY113QFY113QFY113QFY113QFY11 3QFY103QFY103QFY103QFY103QFY10 % chg% chg% chg% chg% chg 9MFY9MFY9MFY9MFY9MFY1111111111 9M9M9M9M9MFY10FY10FY10FY10FY10 % chg% chg% chg% chg% chg

TTTTTata Motorsata Motorsata Motorsata Motorsata Motors 186,820186,820186,820186,820186,820 159,139159,139159,139159,139159,139 17.417.417.417.417.4 566,936566,936566,936566,936566,936 432,629432,629432,629432,629432,629 31.031.031.031.031.0

M&HCV 50,883 43,408 17.2 149,616 110,416 35.5

LCV 74,617 58,425 27.7 201,786 163,648 23.3

TTTTTotal CVotal CVotal CVotal CVotal CV 125,500125,500125,500125,500125,500 101,833101,833101,833101,833101,833 23.2 23.2 23.2 23.2 23.2 351,402351,402351,402351,402351,402 274,064274,064274,064274,064274,064 28.228.228.228.228.2

Utility Vehicles 9,478 6,545 44.8 29,019 22,518 28.9

Cars 51,842 50,761 2.1 186,515 136,047 37.1

TTTTTotal PVotal PVotal PVotal PVotal PV 61,32061,32061,32061,32061,320 57,30657,30657,30657,30657,306 7.0 7.0 7.0 7.0 7.0 215,534215,534215,534215,534215,534 158,565158,565158,565158,565158,565 35.9 35.9 35.9 35.9 35.9

Exports (Inc Above )Exports (Inc Above )Exports (Inc Above )Exports (Inc Above )Exports (Inc Above ) 15,96215,96215,96215,96215,962 10,30010,30010,30010,30010,300 55.055.055.055.055.0 42,66042,66042,66042,66042,660 23,52223,52223,52223,52223,522 81.481.481.481.481.4

ALL CV salesALL CV salesALL CV salesALL CV salesALL CV sales 18,43718,43718,43718,43718,437 16,12916,12916,12916,12916,129 14.3 14.3 14.3 14.3 14.3 64,42764,42764,42764,42764,427 38,11938,11938,11938,11938,119 69.069.069.069.069.0

21



Analyst - VAnalyst - VAnalyst - VAnalyst - VAnalyst - Vaishali Jajoo/Yaishali Jajoo/Yaishali Jajoo/Yaishali Jajoo/Yaishali Jajoo/Yaresh Karesh Karesh Karesh Karesh Kothariothariothariothariothari

Automobile

Exhibit 5: Quarterly estimates - Automobile (((((`̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31, 2010, @Adjusted for extraordinary items; * Consolidated numbers

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTaaaaargrgrgrgrgeeeeettttt Reco.Reco.Reco.Reco.Reco.

(((((`̀̀̀̀))))) 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E chg bpchg bpchg bpchg bpchg bp 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (((((`̀̀̀̀)))))

Ashok Leyland 64 2,105 16.0 10.3 (111) 94.9 (9.3) 0.71 (9.3) 2.9 4.0 5.2 22.2 16.1 12.3 73 Accumulate

Bajaj Auto@ 1,542 3,951 24.8 19.9 (202) 596.0 25.4 20.6 25.4 58.8 87.7 99.5 26.2 17.6 15.5 - Neutral

Hero Honda 1,986 4,927 29.2 12.8 (442) 547.5 2.2 27.4 2.2 104.2 100.8 110.6 19.1 19.7 18.0 - Neutral

Maruti 1,421 9,518 29.8 10.4 (472) 601.3 (12.6) 20.8 (12.6) 83.7 82.9 103.4 17.0 17.1 13.7 1,654 Buy

M&M@ 778 5,972 33.3 14.8 (13) 611.4 44.1 10.6 39.7 34.9 41.5 47.2 22.3 18.7 16.5 827 Accumulate

Tata Motors@* 1,306 28,720 10.5 12.8 142 1,920.0 195.3 33.6 181.5 18.1 130.9 160.7 72.1 10.0 8.1 1,458 Accumulate

TVS Motors 71 1,545 44.0 7.0 65 50.8 115.9 1.1 115.9 2.3 4.5 5.9 30.1 15.8 12.0 76 Accumulate

Exhibit 6: Quarterly estimates - Auto Ancillary (((((`̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31, 2010, * Consolidated numbers; # December year ending; ^ September year ending; @ Adjusted for FCCB

interest after tax, & FY2010-12E EPS on consolidated basis



Auto Axle^ 431 175 28.4 12.0 11 9.9 53.9 6.6 53.9 29.2 32.6 35.0 14.8 13.2 12.3 525 Buy

Bharat Forge*@ 379 714 44.0 23.9 40 68.1 79.4 3.1 79.4 (2.8) 12.3 20.2 - 30.9 18.8 404 Accumulate

Bosch India# 6,319 1,724 30.8 18.7 158 210.0 32.7 66.3 31.7 167.7 273.3 314.8 37.7 23.1 20.1 6,766 Accumulate

Exide Industries 167 1,160 27.2 21.0 (292) 150.6 15.4 1.8 8.6 6.3 7.4 9.0 26.4 22.5 18.5 - Neutral

FAG Bearing# 879 277 27.9 18.9 772 32.7 98.7 19.7 98.7 39.4 70.9 76.7 22.3 12.4 11.5 1,035 Buy

Motherson Sumi* 182 1,975 10.8 10.5 (44) 86.8 15.9 2.2 6.4 6.2 8.7 11.6 29.2 20.8 15.6 195 Accumulate

Apollo Tyres& 67 1,259 (4.9) 10.0 (549) 34.0 (66.7) 0.7 (66.7) 13.0 6.0 8.7 5.1 11.1 7.7 70 Accumulate

Auto ancillaries to track the auto sector

The auto ancillaries sector, which depends on OEMs for growth,was stuck in the midst of sluggish growth in the domestic marketand a recession-hit global export market in FY2009. However,revival of domestic auto volumes in FY2010 supported recoveryof the players during the period. Growth of the Indian autocomponent industry is directly linked to growth of the auto sectorand has more than 65% of its domestic sales to OEMs. Thus,recovery of auto sales volume in FY2010 would help the OEMsegment to register a ~13% CAGR over FY2010-12E. Further,an overall increase in vehicle population (recorded a 10% CAGRover FY2000-10E) is expected to support consistent growth inreplacement demand of auto parts and register a ~8% CAGRover FY2010-12E. Broadly, the sector is expected to deliver goodyoy earnings performance in 3QFY2011 on improved volumesand better operating leverage.

Among battery manufacturers, we expect Exide to post ~27%yoy growth aided by increased capacity of two-wheeler andfour-wheeler batteries by ~35% and ~13%, respectively, duringthe quarter. Tyre manufacturers are likely to post a sharp declinein profitability due to a significant increase in raw-material prices,especially natural rubber. Natural rubber prices increased by~65% yoy in 3QFY2011. We expect Apollo Tyres to report a~550bp yoy contraction in operating margins for the quarter.

Outlook

Going ahead, driven by strong economic recovery, we expectthe auto sector, which includes PVs, CVs and two-wheelers, toregister good growth in the domestic market and decent growthin the export market over FY2010-12E. We estimate overallauto volumes to register a CAGR of ~13% over FY2010-12E,aided by improved business environment for the sector.

Over the longer term, comparatively low penetration levels, ahealthy economic environment and favourable demographicssupported by higher per capita income levels are likely to helpauto companies in sustaining their top-line growth. Corebusiness performance of auto companies improved in FY2010and visibility restored, with substantial 25% yoy and 29% yoygrowth witnessed in volumes in FY2010 and YTD FY2011,respectively. Thus, while this quarter's performance is likely tobe robust on a yoy basis, we expect auto companies to report asequential spurt in revenue on better volumes. Most stocks havebeen positive in the last one year due to better visibility for thesector. We remain positive on the long-term prospects of theIndian auto sector. We prefer stocks with attractive valuationand where strong fundamentals could deliver positiveearnings surprises.

Among auto heavyweights, we prefer Maruti Suzuki and M&M.Among auto heavyweights, we prefer Maruti Suzuki and M&M.Among auto heavyweights, we prefer Maruti Suzuki and M&M.Among auto heavyweights, we prefer Maruti Suzuki and M&M.Among auto heavyweights, we prefer Maruti Suzuki and M&M.Among ancillary stocks, we maintain our positive stance onAmong ancillary stocks, we maintain our positive stance onAmong ancillary stocks, we maintain our positive stance onAmong ancillary stocks, we maintain our positive stance onAmong ancillary stocks, we maintain our positive stance onApollo TApollo TApollo TApollo TApollo Tyres, Ceat and Fyres, Ceat and Fyres, Ceat and Fyres, Ceat and Fyres, Ceat and Fag Bearings, which are available atag Bearings, which are available atag Bearings, which are available atag Bearings, which are available atag Bearings, which are available atreasonable valuations.reasonable valuations.reasonable valuations.reasonable valuations.reasonable valuations.



Banking

Stock performance

During the first two months of 3QFY2011, banking stocksperformed in line with the broader markets on the back of good2QFY2011 results and continuance of healthy credit demand.However, in December 2010, banking stocks underperformedthe broader indices due to negative newsflows (related to thebribes-for-loan scam, telecom-related and MFI exposures of afew banks) as well as margin worries (expected NIM pressuresdue to aggressive deposit rate hikes). Consequently, by the endof the quarter, the BSE Bankex was down 4.6% sequentially,underperforming the Sensex by 6.8%. Most banking stocks underour coverage universe declined in line with the correction inother banking stocks. Within our coverage universe, IOB gavethe highest returns of 10.8% sequentially, followed by DenaBank and ICICI Bank with gains of 9.6% and 3.1%, respectively.

Deposit growth yet to pick up meaningfully

As per the latest fortnightly data for credit and deposit, creditgrowth jumped to 23.7% yoy compared to growth of 19.0%yoy as of September 24, 2010. Banks have incrementally lentclose to ̀ 4,00,000cr YTD in FY2011, which is more than doublethe amount lent during the same period last year. Deposit growth


Exhibit 2: Incremental CD ratio for the quarter at 235%

Exhibit 1: 3QFY2011 stock performance


(%)(%)(%)(%)(%) Returns (qoq) Returns (qoq) Returns (qoq) Returns (qoq) Returns (qoq) Returns (yoy)Returns (yoy)Returns (yoy)Returns (yoy)Returns (yoy)

IOB 10.8 32.4

DENABK 9.6 40.0

ICICIBK 3.1 30.7

UCOBK 2.7 108.1

Sensex 2.2 17.4

FEDBK 1.5 68.7

SIB 0.8 62.0

J&KBK (3.7) 34.2

Bankex (4.6) 33.4

HDFCBK (5.4) 38.0

PNB (5.4) 34.7

CRPBK (8.4) 50.3

UNBK (10.5) 31.6

YESBK (11.0) 17.1

INDBK (11.7) 41.9

AXSB (11.9) 36.5

OBC (12.0) 61.9

BOI (13.0) 16.8

SBI (13.1) 23.9

Extremely tight liquidity position

The mismatch between credit and deposit growth exacerbatedthe system liquidity situation with the Liquidity Adjustment Facility(LAF) borrowings averaging more than `91,000cr during thequarter. The liquidity situation worsened further with advancetax outflows in December, taking the average LAF borrowingsfor the last fortnight over ̀ 1,32,000cr. On December 22, 2010,LAF borrowings hit a new record of `1,70,500cr.

Consequently, the short-term commercial paper (CP) and

certificate of deposit (CD) rates spiked up sharply by 195bp to

9.5% and 187bp to 9.0%, respectively, during the quarter.

has continuously lagged credit growth from April-December2010. YTD credit growth has been healthy at ~12.3%, whiledeposits have grown at ~6.0%, resulting in an incrementalcredit-to-deposit ratio of 147.8%. Consequently, the overallcredit deposit ratio, which had bottomed out during 2QFY2010at 68.8%, improved substantially to 75.8% in 3QFY2011.

From September 24, 2010 to December 17, 2010, the gapbetween credit and deposit growth widened further, with creditshowing strong traction (6.4% qoq), while deposits growth notpicking up meaningfully (growing at just 2.0% qoq), resultingin an incremental credit-to-deposit ratio of 235.2%.

Inc. Credit ( cr)` Inc. Deposit ( cr)` Inc CD ratio (%, RHS)

0

50

100

150

200

250

(200,000)

(150,000)

(100,000)

(50,000)

-

50,000

100,000

150,000

200,000

250,000

8-O

ct-1

0

22-

Oct

-10

29-

Oct

-10

5-N

ov-1

0

19-

Nov

-10

3-D

ec-1

0

17-

Dec

-10

Tota

l


Exhibit 3: Tight liquidity leading to sharp jump in short-term rates

Repo ( ve) / Reverse Repo (+ve) 3M CP (RHS) 3M CD (RHS)

6.0

7.0

8.0

9.0

10.0

(2,000)

(1,600)

(1,200)

(800)

(400)

0

400

800

Jul-

10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

(` bn) (%)

23



Banking

As a consequence of the FD rate hike and persistently tight

liquidity situation, lending rates were also raised by many banks.

Further, banks like SBI and ICICI Bank have hiked their base

rates with effect from January 3, 2011, by 40bp to 8.0% and

by 50bp to 8.25%, respectively.

Going forward, credit demand is expected to sustain at least

above the 19% level and central and state government

borrowings are also expected to kick in. Hence, to mobilise

sufficient deposits to meet the expected increase in credit, we

believe banks will have to continue increasing the deposit rates,

which will continue the upward pressure on lending rates.

Large banks better placed to sustain NIMs

NIMs are likely to be moderately affected in 3QFY2011.Moreover, going forward over the next 4-6 quarters, we expectrising retail and wholesale fixed deposit rates to lead tosubstantial 40-60bps NIM compression of low-CASA mid-sizebanks. Correspondingly, larger banks with high CASA ratiosand robust branch expansion such as SBI, ICICI Bank, HDFCBank and Axis Bank are better placed to sustain or improvetheir NIMs going forward.

Higher G-sec yields might result in moderate MTM losses

During the quarter, yields also went up across the yield curve,especially more so at the shorter end. The benchmark 10-yearG-sec yield went up marginally by 8bp to 7.9%, while theone-year G-sec yield increased by 75bp and the three-yearG-sec yield went up by 21bp. Hence, we expect most of thebanks under our coverage to have moderate MTM lossesin 3QFY2011.

Exhibit 4: Peak wholesale deposit rates

Source: Company, Angel Research; Note: As per data available on bankwebsites

BankBankBankBankBank 3QFY11 (%)3QFY11 (%)3QFY11 (%)3QFY11 (%)3QFY11 (%) 2QFY11 (%)2QFY11 (%)2QFY11 (%)2QFY11 (%)2QFY11 (%) bp chg bp chg bp chg bp chg bp chg. (qoq). (qoq). (qoq). (qoq). (qoq)UNBK 8.60 7.00 160

CANBK 8.55 7.00 155

INDBK 8.50 7.00 150

OBC 8.75 7.25 150

PNB 8.50 7.00 150

BOM 8.30 7.00 130

BOB 7.75 6.50 125

KNTBK 8.50 7.25 125

IDBI 8.75 7.75 100

The persistent tight liquidity situation and slower deposits growth

prompted many banks to raise their fixed deposit interest rates

aggressively across maturities. Most banks hiked deposit rates

by 50-150bp during the quarter. In spite of the aggressive rate

hikes, deposits growth as of now has not picked up meaningfully.

Exhibit 5: Peak retail FD rates in 1-3 years maturity bracket


BankBankBankBankBank 3QFY11 (%)3QFY11 (%)3QFY11 (%)3QFY11 (%)3QFY11 (%) 2QFY11 (%)2QFY11 (%)2QFY11 (%)2QFY11 (%)2QFY11 (%) bp chgbp chgbp chgbp chgbp chg. (qoq). (qoq). (qoq). (qoq). (qoq)UNBK 8.60 7.00 160

INDBK 8.50 7.00 150

PNB 8.50 7.00 150

SIB 9.00 7.50 150

J&KBK 8.50 7.25 125

DENABK 8.25 7.00 125

OBC 8.75 7.50 125

SBI 8.50 7.25 125

UCOBK 8.25 7.00 125

YESBK 8.50 7.50 100

AXSB 8.25 7.35 90

CRPBK 8.40 7.50 90

IOB 8.60 7.75 85

BOI 8.25 7.50 75

HDFCBK 8.25 7.50 75

ICICIBK 8.25 7.50 75

Exhibit 6: Base rates


BankBankBankBankBank 3QFY113QFY113QFY113QFY113QFY11 (%) (%) (%) (%) (%) 2QFY112QFY112QFY112QFY112QFY11 (%) (%) (%) (%) (%) bp chgbp chgbp chgbp chgbp chg. (qoq). (qoq). (qoq). (qoq). (qoq)

BOI 9.00 8.00 100

INDBK 9.00 8.00 100

OBC 9.00 8.00 100

PNB 9.00 8.00 100

IOB 9.00 8.25 75

DENABK 8.95 8.25 70

AXSB 8.00 7.50 50

CRPBK 8.25 7.75 50

UCOBK 8.50 8.00 50

UNBK 8.50 8.00 50

SIB 8.50 8.10 40

FEDBK 8.00 7.75 25

HDFCBK 7.50 7.25 25

ICICIBK 7.75 7.50 25

J&KBK 8.50 8.25 25

SBI 7.60 7.50 10

YESBK 7.00 7.00 0



NPA concerns receding

Some of the PSU banks faced pressures on the asset-quality

front primarily due to switchover to CBS-based NPA recognition.

Within our coverage universe, Indian Bank and Union Bank of

India shifted to the CBS-based NPA recognition system during

1HFY2011, while Corporation Bank and PNB are expected to

complete major part of it in the 3QFY2011. Going forward,

such asset-quality pressures are likely for a few other PSU banks

as well. However, overall asset-quality pressures have evidently

moderated. Total asset-weighted (FY2010) net NPAs for the

sector have fallen from the peak of 1.15% in 3QFY2010 to

1.09% in 2QFY2011.

Only 11 out of the 39 listed banks had registered an increase

in net NPA ratio in 2QFY2011, compared to 23 banks witnessing

an increase in 3QFY2010. Especially private banks have

witnessed a substantial decline in net NPAs as well as

provisioning expenses over the same period.


Exhibit 7: Sharper rise at the short-end of the yield curve

31-Dec-10 30-Sep-10 30-Jun-10

4.5

5.5

6.5

7.5

8.5

T-bi

ll

3-y

ear

Gse

c

Gse

c

7-y

ear

Gse

c

Gse

c

(%)

12-m

onth

5-y

ear

10

-yea

r


Exhibit 8: Investment book - Composition and duration

Capital infusion to aid credit growth

The government in December 2010 approved capital infusionof `6,000cr in public sector banks to ensure tier-I CRAR of allpublic sector banks in excess of 7% and to raise the government’sholding in all public sector banks to 58%. The exact amount,mode of capitalisation and other terms and conditions wouldbe decided in consultation with the banks at the time of infusion.At present, we have factored in the proposed infusion only forUnion Bank of India and Dena Bank, as other banks haveindicated that they have neither been intimated by thegovernment nor does their own assessment indicate a need forlarge capital infusion at present. In case of Uco Bank, althoughit was earlier planning an FPO, it has now received the capitalit needed from the GoI itself, though in the form of preferenceshares. Accordingly, we have factored the same in our estimates.

Exhibit 9: Capital infusion plans


BankBankBankBankBank Exp. Infusion (Exp. Infusion (Exp. Infusion (Exp. Infusion (Exp. Infusion (`̀̀̀̀ cr) cr) cr) cr) cr) TierTierTierTierTier-I CAR (%)-I CAR (%)-I CAR (%)-I CAR (%)-I CAR (%) GoI holding (%)GoI holding (%)GoI holding (%)GoI holding (%)GoI holding (%)

BOB 3,500 8.2 53.8OBC 1,900 9.4 51.1ANDBK 1,210 7.3 51.6UNBK 1,150 7.9 55.4ALBK 670 8.4 55.2DENABK 520 8.0 51.2VIJAYA 350 9.6 53.9PNB 190 8.0 57.8CRPBK 185 8.3 57.2


Exhibit 10: Asset-weighted net NPA ratio stabilizing

Assets -weighted Net NPA Ratio (%)

0.90

0.95

1.00

1.05

1.10

1.15

1.20

3QFY

09

4QFY

09

1QFY

10

2QFY

10

3QFY

10

4QFY

10

1QFY

11

2QFY

11Pension liabilities unlikely to impact profitability in amajor way

PSU banks had given the option to their employees to opt forthe pension scheme instead of the existing Provident Fundscheme. As of now, most banks are working out the liabilitiesas per the actuarial assumptions; however, initial estimatesindicate the liability to be ~`8lakhs-10lakhs per employee.Some of the banks had proactively started making provisionsagainst the same in 1HFY2011 itself. Some of the banks havedirectly provided the estimated liability amount, while othershave given the number of employees who have opted for thepension option-in which case we have assumed a liability of`10lakhs per employee. We expect that pension liabilities willbe allowed to be amortised over a five-year period.

AFS % HTM %

AFS Duration (Yrs , RHS) Overall duration (Yrs , RHS)

-

2.0

4.0

6.0

8.0

-

25.0

50.0

75.0

100.0

J&K

BK IOB

AXS

B

UC

OBK

CRP

BK

UN

BK SBI

BOI

FED

BK

PNB

OBC SI

B

DEN

ABK

25



Analyst - VAnalyst - VAnalyst - VAnalyst - VAnalyst - Vaibhav Agrawaaibhav Agrawaaibhav Agrawaaibhav Agrawaaibhav Agrawal/l/l/l/l/Shrinivas BhutdShrinivas BhutdShrinivas BhutdShrinivas BhutdShrinivas Bhutdaaaaa/////VVVVVasant Lasant Lasant Lasant Lasant Lohiyohiyohiyohiyohiya/a/a/a/a/VVVVVarun Varun Varun Varun Varun Varmarmarmarmarmaaaaa

Source: Company, Angel Research; Note: Bulk deposits data as per availability

Exhibit 12: Deposits composition and investments/deposits

CASA (%) Bulk Dep. (%) Inv/Dep (%, RHS)

-

15.0

30.0

45.0

60.0

75.0

-

15.0

30.0

45.0

60.0

SBI

AXS

B

J&K

BK

DEN

ABK

IND

BK

BO

I

OBC

CRP

BK

HD

FCBK

ICIC

IBK

PNB

IOB

UN

BK

FED

BK

UC

OBK

SIB

Exhibit 13: Quarterly estimates ((((( `̀̀̀̀ cr) cr) cr) cr) cr)CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Operating Income Net P Operating Income Net P Operating Income Net P Operating Income Net P Operating Income Net Profit EPS (rofit EPS (rofit EPS (rofit EPS (rofit EPS (`̀̀̀̀) Adj B) Adj B) Adj B) Adj B) Adj BVPS (VPS (VPS (VPS (VPS (`̀̀̀̀))))) P/E (x) P/AB P/E (x) P/AB P/E (x) P/AB P/E (x) P/AB P/E (x) P/ABV (x)V (x)V (x)V (x)V (x) TTTTTargetargetargetargetarget Reco.Reco.Reco.Reco.Reco.

(((((`̀̀̀̀))))) 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (((((`̀̀̀̀)))))

AXSB 1,350 2,736 17.1 837 27.5 62.1 80.4 100.8 393.8 455.1 524.3 21.7 16.8 13.4 3.4 3.0 2.6 1,678 Buy

FEDBK 398 581 16.7 145 31.8 27.2 33.8 45.3 273.9 300.7 336.7 14.6 11.8 8.8 1.5 1.3 1.2 505 Buy

HDFCBK 2,347 3,708 20.5 1,091 33.3 64.4 86.1 115.6 470.2 536.5 625.3 36.4 27.2 20.3 5.0 4.4 3.8 2,501 Accum.

ICICIBK 1,145 3,920 5.1 1,353 22.9 36.1 44.7 60.8 449.8 470.4 506.4 31.7 25.6 18.8 2.5 2.4 2.3 1,332 Buy

SIB* 24 242 12.8 76 22.4 2.1 2.5 2.8 12.9 15.0 17.0 11.7 9.6 8.6 1.9 1.6 1.4 - Neutral

YESBK 313 477 40.7 176 39.8 14.1 20.0 21.9 91.0 109.4 129.8 22.2 15.7 14.3 3.4 2.9 2.4 353 Accum.

BOI 450 2,432 17.7 669 65.0 33.1 51.7 61.3 215.6 275.3 321.7 13.6 8.7 7.3 2.1 1.6 1.4 483 Accum.

CRPBK 635 962 13.0 324 6.2 81.6 93.7 96.6 398.3 474.6 541.9 7.8 6.8 6.6 1.6 1.3 1.2 705 Accum.

DENABK 117 599 43.9 165 22.6 17.8 22.0 20.9 73.8 99.3 115.1 6.5 5.3 5.6 1.6 1.2 1.0 138 Buy

INDBK 247 1,278 9.6 436 (1.3) 35.1 37.6 41.9 154.3 183.5 216.0 7.0 6.6 5.9 1.6 1.3 1.1 281 Accum.

IOB 146 1,237 17.5 183 79.6 13.0 15.1 19.4 96.5 123.4 138.2 11.3 9.7 7.6 1.5 1.2 1.1 166 Accum.

J&KBK 776 442 13.5 121 (13.5) 105.7 120.1 138.2 620.8 712.3 817.8 7.3 6.5 5.6 1.2 1.1 0.9 1,063 Buy

OBC 406 1,298 16.9 410 41.6 45.3 63.3 70.1 278.0 342.0 397.6 9.0 6.4 5.8 1.5 1.2 1.0 437 Accum.

PNB 1,222 3,775 23.4 1,100 8.8 123.9 138.2 154.1 509.1 623.8 745.2 9.9 8.8 7.9 2.4 2.0 1.6 1,341 Accum.

SBI 2,811 12,412 28.2 2,911 17.4 144.4 171.7 240.9 944.5 1,124.3 1,320.8 19.5 16.4 11.7 3.0 2.5 2.1 3,500 Buy

UCOBK 116 1,227 42.4 142 (42.3) 18.4 11.6 21.7 63.9 80.6 97.4 6.3 10.0 5.3 1.8 1.4 1.2 - Neutral

UNBK 348 1,922 25.7 594 11.1 41.1 42.9 48.0 168.5 202.4 246.1 8.5 8.1 7.2 2.1 1.7 1.4 394 Accum.

Source: Company, Angel Research; Note: Price as on December 31, 2010; *EPS and book value for FY2010 adjusted for split

Outlook

Back in August 2010 itself, we had cautioned that deposit rateswere set to rise in the coming quarters, possibly faster than theconsensus, which would signal margins of mid-size banks topeak and contribute to their underperformance on the bourses.Since then, the gap between deposit and credit growth haswidened further, prompting many banks to raise their fixeddeposit interest rates aggressively by 50-150bp during thequarter. To mobilise sufficient deposits to meet an estimatedshortfall of about `50,000cr (post the `48,000cr RBI OMO) inFY2011E and a further `1lakh crore estimated shortfall inFY2012E as well, we believe banks will have to continueincreasing their deposit rates over the coming quarters.

Accordingly, going forward, we believe NIM progression ratherthan asset quality will be the key monitorable parameter for thebanking sector, having the major impact on divergence in stockreturns across the banking space. NIMs are likely to see

moderate impact in 3QFY2010. The NIM compression is likelyto be especially front-ended in case of banks with higher relianceon certificate of deposits (3-6 month tenure) as well as wholesaledeposits (6-12 month tenure). Moreover, in case of banks withsub-30% CASA ratios, we expect NIM compression to be asmuch as 40-60bp over the next 4-6 quarters. Correspondingly,larger banks with high CASA ratios and robust branch expansionsuch as SBI, ICICI Bank, HDFC Bank and Axis Bank are betterplaced to sustain or improve their NIMs going forward.Monitoring CASA market share trends will remain one of themost important monitorables impacting earnings growth.

Hence, even post the sharp correction in most mid-sized banks,we prefer to invest in the mid-cap banks which have strongerCASA franchises such. TTTTTaking into account valuations, our topaking into account valuations, our topaking into account valuations, our topaking into account valuations, our topaking into account valuations, our toppicks among the private largepicks among the private largepicks among the private largepicks among the private largepicks among the private large-----cap banks include ICICI Bankcap banks include ICICI Bankcap banks include ICICI Bankcap banks include ICICI Bankcap banks include ICICI Bankand Axis Bank; SBI and Union Bank from the PSU largeand Axis Bank; SBI and Union Bank from the PSU largeand Axis Bank; SBI and Union Bank from the PSU largeand Axis Bank; SBI and Union Bank from the PSU largeand Axis Bank; SBI and Union Bank from the PSU large-----capcapcapcapcapbanking universe; and Dena Bank, IOBbanking universe; and Dena Bank, IOBbanking universe; and Dena Bank, IOBbanking universe; and Dena Bank, IOBbanking universe; and Dena Bank, IOB, J&K Bank and F, J&K Bank and F, J&K Bank and F, J&K Bank and F, J&K Bank and FederalederalederalederalederalBank among the mid-Bank among the mid-Bank among the mid-Bank among the mid-Bank among the mid-cap banks.cap banks.cap banks.cap banks.cap banks.

Exhibit 11: Expected pension liabilities

Source: Company, Angel Research; Note: *Assuming amortisation over five years; Estimates not yetavailable for INDBK, OBC and UCOBK; For SBI, liability is nil; while for JKBK, it is negligible.

(((((`̀̀̀̀ cr) cr) cr) cr) cr) OptingOptingOptingOptingOpting ExpectedExpectedExpectedExpectedExpected LiabilityLiabilityLiabilityLiabilityLiability PPPPProvisionsrovisionsrovisionsrovisionsrovisions Surplus/Surplus/Surplus/Surplus/Surplus/

EmployeesEmployeesEmployeesEmployeesEmployees LiabilityLiabilityLiabilityLiabilityLiability p.a.*p.a.*p.a.*p.a.*p.a.* 1HFY111HFY111HFY111HFY111HFY11 (Deficit)(Deficit)(Deficit)(Deficit)(Deficit)

PNB N/A 2,500 500 250 -

BOI 24,000 2,400 480 350 110

UNBK N/A 2,400 480 240 -

IOB 14,724 1,030 206 252 149

CRPBK 4,900 490 98 - (49)

DENABK 4,500 450 90 - (45)

SIB N/A 146 29 24 9

FEDBK 2,600 145 29 16 2



Capital Goods

Source: CMIE, Angel Research

Exhibit 3: GDP growth to bounce backExhibit 3: GDP growth to bounce backExhibit 3: GDP growth to bounce backExhibit 3: GDP growth to bounce backExhibit 3: GDP growth to bounce back

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

(%)

On a stock specific basis, Areva T&D was the top performergaining ~11.8% in absolute terms and outperformed the Sensexby ~9.6%. Despite the price erosion of 10-15% in the T&Dsegment, Areva managed to register 40% yoy revenue growthand 425bp expansion in EBDITA margins to 12.7% during theSeptember 2010 quarter. Being the market leader in the highvoltage transmission, the company is expected to gain from theexpected release of T&D orders post the successful FPO ofPGCIL. In contrast, ABB was the major loser during the quarter.The scrip lost ~-13% in absolute terms and underperformedthe Sensex by ~15.2%. Declining revenue and margincontraction on account of the exit cost of RE Projects continuedto weigh on the stock.

Capital Goods Index - LCapital Goods Index - LCapital Goods Index - LCapital Goods Index - LCapital Goods Index - Lagging behindagging behindagging behindagging behindagging behind

The current quarter saw narrowing of premium valuations inthe capital goods (CG) sector vis-à-vis the Sensex. While majorityof the sector specific indices reported positive growth, the CGindex ended 3QFY2011 down 3.6% and underperformed theSensex by 5.8%. Valuation consistently drifted during the firsttwo months of the quarter under review before marginallyrecovering during December 2010. The quarter also witnessedhigh volatility in the reported numbers for the Index of IndustrialProduction (IIP) and CG production. Despite underperformingthe broad-based Sensex for a major portion of the quarter,valuations of front-line stocks in the CG index continue to tradeat a premium to the Sensex.

..but benefits not percolating down to CG industry

The Indian CG sector continues to be negatively impacted bythe increasing quantum of imports, especially from China. Webelieve that the administered currency regime, cheaper financeand the favourable duty structure under which the Chinesecompanies operate have enabled them to flood the Indianmarkets with cheaper equipment. Segments worst affected bythe import deluge have been the construction equipment,machine tools, turbines and transformers. The domestic powerequipment manufacturers such as BHEL and L&T have beenlosing bulk of the orders to their Chinese counterparts. Notableorders placed during the current quarter include the LancoInfratech order for supply of 16 sets of 660MW power equipmentto Harbin Power for ~`6,800cr, Abhijeet Projects for supply of10 sets of 660MW supercritical units to Dongfang Electric for~USD 2.5bn (~`11,500cr) and the Reliance Power order toShanghai Electric for the supply of coal-fired power generatorsworth USD 8.3bn (~`38,000cr). The above orders were placedwhen the domestic power equipment industry was in the midstof expanding capacities to meet the growing demand. Besides,the power transmission and distribution (T&D) segment has alsoseen serious competition from the Chinese and Korean majors.

Macro indicators showing strength

The IIP numbers for October 2010 came in at a decent 10.8%as compared to 6.9% and 4.4% for the previous two months,respectively. The manufacturing sector, which contributes ~80%to the IIP, reported double-digit growth of 11.3%, almost doublethan the 4.6% clocked during the previous month. The reboundin IIP was mainly driven by the consumer durables and CGproduction, which reported growth of 31% and 22% yoy,respectively. Along with the strong 8.9% GDP growth reportedfor the first half of the current fiscal, we expect the investmentcycle to pick up in the near term as robust corporate profit andfavourable financing conditions fuel investments.

Source: C-line, Angel Research

Abs. ReturnsAbs. ReturnsAbs. ReturnsAbs. ReturnsAbs. Returns Relative to SensexRelative to SensexRelative to SensexRelative to SensexRelative to Sensex(%)(%)(%)(%)(%) (%)(%)(%)(%)(%)

BSE Sensex 2.19 0.00BSE Cap Goods (3.63) (5.82)ABB (13.03) (15.22)Areva T&D 11.82 9.63BHEL (6.40) (8.59)BGR Energy Sys. (4.35) (6.55)Crompton Greaves (0.74) (2.93)Jyoti Structures (2.24) (4.43)KEC Intl. 5.01 2.82Thermax 8.52 6.33

Exhibit 1: Sensex v/s CG stocks (3QFY2011)Exhibit 1: Sensex v/s CG stocks (3QFY2011)Exhibit 1: Sensex v/s CG stocks (3QFY2011)Exhibit 1: Sensex v/s CG stocks (3QFY2011)Exhibit 1: Sensex v/s CG stocks (3QFY2011)


Exhibit 2: CG index: Relative returns to the SensexExhibit 2: CG index: Relative returns to the SensexExhibit 2: CG index: Relative returns to the SensexExhibit 2: CG index: Relative returns to the SensexExhibit 2: CG index: Relative returns to the Sensex

23.5

1.3

17.2

(6.2)

(14.1)

9.4

(9.7)(7.1)

48.6

(10.7)

0.6

(0.6)

3.5

(4.6) (5.8)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1Q

08

2Q

08

3Q

08

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08

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09

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09

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09

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10

3Q

10

4Q

10

1Q

11

2Q

11

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11

(%)

27



Capital Goods


Exhibit 4: IIP growthExhibit 4: IIP growthExhibit 4: IIP growthExhibit 4: IIP growthExhibit 4: IIP growth(%)

0

3

6

9

12

15

18

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Key Developments

ABB

Major order inflow for ABB during the quarter included the USD40mn contract from PMC Project (I) Private Limited to supply765 kilovolt (kV) and 400kV substations for the MaharashtraEastern Grid Power Transmission Company. ABB also won anorder worth USD 32mn from PGCIL to construct two transmissionsubstations, to be located in the cities of Gwalior and Indore inMadhya Pradesh. In the metals space, ABB was awarded ordersworth USD 23mn to provide integrated automation systems andrelated services to modernise the plate mill at the Rourkela Steelplant in India.

Crompton Greaves (CGL)

CGL announced that it has developed high range 1,200KVcapacitive voltage transformer (CVT), becoming the firstcompany in the world to develop such a high range powerproduct. The company recently delivered its first 1,200KVproduct to the ultra high voltage (UHV) station of PGCIL atBina, Madhya Pradesh.

BHEL

BHEL and GE India Industrial Private Limited (GEIIPL), a wholly-owned subsidiary of GE, USA joined hands to co-operate onwater treatment equipment. Orders worth `3,700cr werereceived from the Karnataka Power Corporation (KPCL) forsetting up a 700MW coal-fired thermal unit with supercriticalparameters.

BGR Energy

During 3QFY2011, the BGR stock displayed extreme volatilityon the back of the ongoing CBI investigations into the LICHousing scam, which had named BGR Energy as one of theimplicated companies. At the analyst conference call hosted bythe company thereafter, management clarified its position andstrongly refuted the allegations. The company was also awardeda BoP contract worth ̀ 2,168cr for the 2 x 660MW supercriticalthermal power project of Thermal Powertech Corporation.

KEC International

KEC bagged orders totaling to ̀ 1,018cr across the transmission,railways and cables segments. In transmission, the companybagged three orders for construction of 765kV transmissionlines totaling `540cr. These orders were received from theRajasthan Rajya Vidyut Prasaran Nigam (`313cr), PGCIL (`130)and Eskom, South Africa (`97). In addition to above, KEC'swholly-owned subsidiary, SAE Towers, secured `246cr supplyorders in the Americas.

(12)

(5)

2

9

16

23

30

Oct

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(%)


Exhibit 7: Intermediate goods component growthExhibit 7: Intermediate goods component growthExhibit 7: Intermediate goods component growthExhibit 7: Intermediate goods component growthExhibit 7: Intermediate goods component growth


Exhibit 6: Basic goods components growthExhibit 6: Basic goods components growthExhibit 6: Basic goods components growthExhibit 6: Basic goods components growthExhibit 6: Basic goods components growth

(2)

1

4

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13

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(%)


Exhibit 5: CG component growthExhibit 5: CG component growthExhibit 5: CG component growthExhibit 5: CG component growthExhibit 5: CG component growth

(8)

5

18

31

44

57

70

Oct

-07

Jan-

08

Apr

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09

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(%)



Capital Goods

Analyst - John PAnalyst - John PAnalyst - John PAnalyst - John PAnalyst - John Perinchery/Hemang Thakererinchery/Hemang Thakererinchery/Hemang Thakererinchery/Hemang Thakererinchery/Hemang Thaker

Exhibit 8: Quarterly estimates ((((( `̀̀̀̀ cr) cr) cr) cr) cr)

Source: Company; Angel Research; Note: Price as on December 31, 2010; * December year ending

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.


ABB* 801 2,207 17.1 10.7 186 179 63.6 8.5 63.6 16.7 11.1 28.7 47.9 72.2 27.9 - Neutral

Areva* 325 1,177 1.5 12.7 66 75 10.7 3.2 16.4 8.0 7.3 10.5 40.6 44.5 30.9 260 Sell

BHEL 2,325 9,398 30.0 18.0 (360) 1,135 5.8 23.2 5.8 88.1 109.5 129.9 26.4 21.2 17.9 - Neutral

BGR 726 1,207 90.0 11.0 (25) 78 85.4 10.8 85.3 28.0 38.7 48.1 26.0 18.7 15.1 - Neutral

Crompton Grv. 310 2,415 7.5 13.5 (74) 207 3.5 3.2 3.5 13.4 13.7 16.2 23.2 22.6 19.2 375 Buy

Kec Intl' 105 1,186 25.0 10.0 (25) 59 26.9 2.3 21.8 6.7 8.4 10.0 15.7 12.5 10.5 130 Buy

Jyoti Stryctures 133 615 20.0 11.5 (10) 31 31.3 3.7 31.2 11.2 13.7 17.3 11.9 9.7 7.7 215 Buy

Thermax 865 1,015 50.0 12.0 5 82 45.9 6.9 45.9 21.8 29.7 37.4 39.8 29.1 23.1 - Neutral

Jyoti Structures

Jyoti Structures announced plans to set up base in the US formaking lattice steel towers. The company is likely to invest ~USD12mn (~`55cr), which would be fully funded through internalaccruals.

Thermax

Thermax acquired Danstoker A/S, a leading European boilermanufacturer and its German subsidiary, Omnical Kessel at avaluation of Euro 29.5mn. Danstoker has strong presence inbiomass-based boilers and waste heat recovery systems for awide range of industries. The acquisition will enable Thermaxto leverage the ongoing renewable energy movement of Europeaimed at generating 20% of its overall energy generation fromrenewables.

3QFY2011 expectations

We expect the companies in our universe to post cumulativetop-line growth of 41% on a yoy basis on the back of improvingorder executions and favourable base effect. Companies likeBGR Energy and Thermax are expected to report strongtop-line growth of 90% and 50% yoy, respectively. Jyoti Structuresand KEC are expected to maintain a steady top-line growth of20% and 25% yoy, respectively. In the T&D segment, we expectABB to report strong growth of 17%, while Areva and CromptonGreaves are expected to show a growth of 1.5% and 7.5%,respectively.

On the operating front, we expect our universe companies toreport flat margins at ~14.8%. ABB is likely to report a pick-upin margins from the current quarter and post strong OPM of10.7%, while Areva is expected to report OPM of 12.7%. Weexpect BHEL to report 360bp dip in OPM to 18%, while BGR isexpected to maintain its OPM at 11%.

The expected top-line growth of 41% yoy coupled with flattishmargins would result in 41% yoy growth in net profit. BGR Energyand ABB are expected to report strong profitability growth alow base, while companies like KEC and Jyoti Structures arelikely to maintain steady growth.

Outlook

The revival in the IIP numbers during the past few quarters signalsstrong recovery of the Indian economy in general and that ofthe capital goods industry in particular. Almost all the companiesin our CG universe are highly dependent on the generation,and T&D segments of the power sector.

The generation segment has attracted increasing domesticcompetition in addition to the Chinese imports. In transmission,companies like ABB and Areva T&D have consistently lost groundto lower priced imports from China and Korea. However, withthe government mandating domestic manufacturing to be apre-requisite to bid for NTPC and PGCIL tenders, we expect theflow of imports to temporarily slow down thereby benefittingthe domestic companies. Foreign companies can still enter intojoint ventures (JV's) with the local manufacturers and supplyequipment manufactured at the Indian facilities. However, similarrestrictions do not apply to the private sector projects, whichcan place direct orders with the foreign companies. Post therecent spate of equipment orders placed with the Chinesecompanies, we expect other private sector power projects tofollow suit.

KEC and Jyoti Structures are expected to benefit from the capexplans of PGCIL and other state utilities. With increasing numberof power projects likely to be commissioned over the next coupleof years, we expect the work orders for setting up transmissionfacilities to be released over the next 6-8 months, especially byPGCIL as the recent FPO proceeds are likely to be utilised forsetting up transmission assets.

On the valuation front, we believe that most of the CGcompanies in our universe are presently trading at premiumvaluations offering meagre upside from current levels. In sucha scenario, we prefer a stock-specific approach. CromptonCromptonCromptonCromptonCromptonGreaves, KEC, Jyoti Structures, Blue Star and LGreaves, KEC, Jyoti Structures, Blue Star and LGreaves, KEC, Jyoti Structures, Blue Star and LGreaves, KEC, Jyoti Structures, Blue Star and LGreaves, KEC, Jyoti Structures, Blue Star and Lakshmi Machineakshmi Machineakshmi Machineakshmi Machineakshmi MachineWWWWWorks figure among our preferred picks.orks figure among our preferred picks.orks figure among our preferred picks.orks figure among our preferred picks.orks figure among our preferred picks.

29



Cement

Dispatches up 7.5% yoy

In 3QFY2011, all-India dispatches grew 7.5% yoy comparedto the 3.7% yoy growth recorded in 2QFY2011. Dispatchesincreased by a robust 18.5% yoy in October 2010 due to thecessation of monsoons and on account of inventory build-up inanticipation of price hikes by the dealers. However, themomentum could not be sustained in November due to labourshortage on account of the festive and harvest seasons, declinein demand from the infrastructure sector and unavailability ofsand in the southern region due to heavy rainfalls. Going ahead,we do not expect a major growth in dispatches over the nextfew months due to the high base effect in the northern regionand continuing political instability in the southern region.However, the central and western regions are expected toperform slightly better due to increase in government spendingon infrastructure.

Performance of top players

During October and November 2010, Jaiprakash Associatescontinued to remain the top-performer with respect to dispatchgrowth, posting a 38.9% yoy jump in sales volumes to 2.4mntonnes (1.8mn tonnes) on the back of substantial capacityaddition. ACC reported a 9.3% yoy growth in dispatches to3.7mn tonnes. Ambuja Cements' dispatches grew by a modest5.1% yoy to 3.2mn tonnes.

Price situation

Cement manufacturers hiked prices by `15-20 per bag acrossthe country towards mid-October post the two rounds of pricehikes carried out in the southern region in September. The pricehike was carried out against the norm of keeping pricesunchanged during Dusshera and Diwali. However, the pricehikes carried out in October 2010 did not last long as poordemand and surplus capacity exerted pressure on the prices.Hence, since mid-November prices have started to trenddownwards. Further, increase in the costs of other constructioninputs such as steel, sand and gravel has slowed down theconstruction activity. Efforts by the cement manufacturers to bringin pricing discipline have not been very successful, as it did notget much support from players like ACC and Ambuja withyear-end obligations. The prices were also brought down dueto the government intervention in Tamil Nadu.

Southern region:Southern region:Southern region:Southern region:Southern region: In the south, the price decline was highest inTamil Nadu, which has been facing weak demand due tounavailability of sand on account of rains. The prices in Chennaihave fallen from around `260/bag in the beginning ofNovember to `230/bag currently. Further, during the quarter,the cement manufacturers in Tamil Nadu reduced the pricesafter the state government asked for a price cut. The prices fellin Karnataka due to low demand and increased dispatchesfrom Andhra Pradesh due to the price differential between thetwo states. In Bangalore, the price per bag is currently ruling at`255/bag, down from `275/bag in November. In AndhraPradesh, the prices have not corrected much, but continue tobe the lowest in the region, with average prices at around`220/bag in Hyderabad.

Northern region:Northern region:Northern region:Northern region:Northern region: The prices have declined in the northern regiondue to low demand. In Delhi, the prices have fallen from`230/bag towards mid-November to `200/bag currently. Theprices in other areas like Amritsar and Ludhiana have also fallenand stand at ~`250/bag currently. Efforts to bolster the pricesin the region during the first week of December throughcurtailment of dispatches did not succeed as the Holcim groupcompanies did not participate due to year-end obligations.

WWWWWestern region:estern region:estern region:estern region:estern region: The cement prices have corrected in mostparts of Maharashtra. In Mumbai, the prices have declined by~`10/bag to ̀ 230/bag currently. In Gujarat however, the priceshave sustained at mid-November levels despite weak demandowing to supply constraints faced by some companies.

Eastern region:Eastern region:Eastern region:Eastern region:Eastern region: The region experienced weak demand andhigher inventory levels in some areas, resulting in price correctionsince November. The prices have declined by `10-25/bag. In

CompanyCompanyCompanyCompanyCompany OctOctOctOctOct- Nov- Nov- Nov- Nov- Nov OctOctOctOctOct- Nov- Nov- Nov- Nov- Nov GrowthGrowthGrowthGrowthGrowth

20102010201020102010 20092009200920092009 (yoy(yoy(yoy(yoy(yoy, %), %), %), %), %)

ACC 3.7 3.4 9.3

Ambuja Cements 3.2 3.0 5.1

JP Associates 2.4 1.8 38.9

UltraTech Cement 2.7 2.9 (9.2)

Shree Cement 1.5 1.4 8.5

Dalmia Cement 0.7 0.6 11.8

Exhibit 2: Dispatches of leading players

Source: Company, Industry

Source: Industry, Angel Research

Exhibit 1: Dispatch growth (8MFY2011)

7.56.5

3.82.5 2.8

4.8

18.0

(2.5)

(5.0)

0.0

5.0

10.0

15.0

20.0

Apri

l

May

June

July

August

Septe

mber

Oct

ober

Nove

mber

(yoy

%)



Cement to report flat performance in top-line

Dispatches of the companies in our universe are expected torise marginally by 3.3% yoy during the quarter under review.We expect the pure cement players are to report flat performance

Cement

Kolkata, the prices have declined from ̀ 240/bag to ̀ 230/bagcurrently. Similarly, in Bhubaneshwar, the prices have correctedby `20 to `215/bag.

Central region: Central region: Central region: Central region: Central region: Weak demand coupled with increased supplyin some cities has led to price correction of ~`20-25/bag inthe region. In Lucknow, the prices are down from `230/bag to`210/bag. The prices in Bhopal have declined to `185/bag.

All-India capacity to increase by 28mt in FY2011

In FY2010, all-India cement capacity stood at 267mtpa. InFY2011, the country's cement capacity is expected to increaseby 28mt and touch 295mt by the end of the fiscal. YTD FY2011,capacity has been augmented by ~12mtpa. Going ahead,ACC's 3mtpa plant in Chanda is expected to get operationalby 4QFY2011. JP Associates is also expected to increase capacityby ~3.0mtpa spread across two locations during 4QFY2011.

Capacity utilisation

The all-India capacity utilisation picked up slighlty during3QFY2011 and increased to 78.5% from 77% in 2QFY2011on the back of better demand. Overall, utilisation levels areexpected to record moderate improvement to 79.5% in FY2011.

Coal prices surge

The global spot coal prices were substantially higher on a yoybasis during the quarter. Average prices of the New CastleMckloksey 6,700kc coal stood at around US $104/tonne in3QFY2011 as against US $77/tonne in 3QFY2010. The coalprices stood higher by 10.6% even on a qoq basis. The rise inthe coal prices is expected to result in higher power costs forthe cement manufacturers during the quarter.

Key developments

AAAAACCCCCCCCCC: : : : : During the quarter, the Holcim group, the promoters ofACC, acquired an additional 2.01% stake in the company. Postthis deal, Holcim's stake in ACC now stands increased at 48.1%.This deal once again raised expectations of a merger of ACCamd Ambuja Cements (Holcim holds 45.58% stake in Ambuja).

Ambuja Cements: Ambuja Cements: Ambuja Cements: Ambuja Cements: Ambuja Cements: Dispatches from the company's Suli and Rauriplants in Himachal Pradesh were affected by the transport strike.The strike which began in the first week of October lasted tillNovember 22. To off-set this fall in supply, the company utilisedbuilt-up inventory and increased output from the other plants.

India Cements: India Cements: India Cements: India Cements: India Cements: Subsidiary, Indo-Zinc, commenced operationsat its 1.5mtpa green-field plant in Rajasthan during 3QFY2011.This plant has begun supplies to the central and western regions.

Cement stocks - Performance on the bourses

During 3QFY2011, the cement stocks under our coverage exceptAmbuja underperformed the Sensex, with Jk Lakshmi Cement(JK Lakshmi) being the biggest loser with negative returns of15.2%.


Exhibit 4: Global thermal coal prices

0

50

100

150

200

250

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Prices beginning to firm up

(US$

/tonne)

Source: CMA, Angel Research

Exhibit 3: All-India capacity addition

146

154

158

167

198

219

267

295

313

7

8

4

9

31

21

48

28

18

0 100 200 300 400

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011E

FY2012E

Year-end Capacity Additions during the year

(mtp

a)


Abs. ReturnsAbs. ReturnsAbs. ReturnsAbs. ReturnsAbs. Returns Relative to SensexRelative to SensexRelative to SensexRelative to SensexRelative to Sensex(%)(%)(%)(%)(%) (%)(%)(%)(%)(%)

Sensex 2.2

ACC 8.6 6.4

Ambuja 1.7 (0.5)

India Cements (7.4) (9.6)

JK Lakshmi (15.2) (17.4)

Madras Cements (7.4) (9.6)

UltraTech 1.4 (0.8)

Exhibit 5: Sensex v/s Cement stocks (3QFY2011)

31



CementCementCementCementCement

Analyst - Rupesh Sankhe / V SrinivasanAnalyst - Rupesh Sankhe / V SrinivasanAnalyst - Rupesh Sankhe / V SrinivasanAnalyst - Rupesh Sankhe / V SrinivasanAnalyst - Rupesh Sankhe / V Srinivasan

Amongst the pure cement players, we expect Ambuja Cementsto post top-line growth of 3.4%. However, the other majorpure cement players are expected to post de-growth intop-line. Madras Cements, predominantly a south-based player,is expected to report highest top-line decline of 13.3%.

Exhibit 10: Quarterly estimates (((((`̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31, 2010; ^December year ending; *Consolidated numbers; #Estimates for merged entity

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) EPS ( EPS ( EPS ( EPS ( EPS (`̀̀̀̀))))) P/E (x) P/E (x) P/E (x) P/E (x) P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.


ACC^ 1,076 1,919 (3.3) 17.7 (713) 186 (33.6) 9.9 (33.6) 85.5 60.4 51.0 12.6 17.8 21.1 - Neutral

Ambuja^ 143 1,849 3.4 21.1 (407) 228 (5.3) 1.5 (5.3) 8.0 8.0 6.5 17.9 17.8 21.9 - Neutral

Grasim* 2,341 4,987 3.0 17.4 (1,229) 412 (42.4) 44.9 (42.4) 337.6 203.3 235.8 6.9 11.5 9.9 - Neutral

India Cem. 108 812 (7.3) 7.6 (707) (8) - (0.3) - 11.5 2.8 4.0 9.3 39.0 27.1 139 Buy

JK Lakshmi 55 322 (8.7) 14.5 (1,070) 16 (65.2) 1.3 (65.2) 19.7 6.7 8.7 2.8 8.3 6.3 92 Buy

Kesoram Ind. 249 1,334 10.6 6.5 (467) (27) - (5.8) - 51.9 5.7 18.6 4.8 43.6 13.4 389 Buy

Madras Cem. 107 529 (13.3) 20.7 248 19 17.3 0.8 17.3 14.9 7.6 8.5 7.2 14.1 12.6 141 Buy

UltraTech Cem.# 1,082 3,486 108.8 16.0 (802) 206 5.3 16.6 5.3 87.8 33.4 45.5 12.3 32.4 23.8 - Neutral

to the substantial reduction in realisations and increase in thecost of inputs such as coal and limestone. JK Lakshmi is set torecord the higest decline in OPM by 1,070bp during the quarter.

Valuation

Going ahead, we expect demand to pick-up in 4QFY2011,leading to marginal price increase. However, the industry wouldremain bogged down due to over-capacity. WWWWWe maintain oure maintain oure maintain oure maintain oure maintain ourNeutral view on large cap cement players like ANeutral view on large cap cement players like ANeutral view on large cap cement players like ANeutral view on large cap cement players like ANeutral view on large cap cement players like ACC, AmbujaCC, AmbujaCC, AmbujaCC, AmbujaCC, Ambujaand UltraTand UltraTand UltraTand UltraTand UltraTech. Wech. Wech. Wech. Wech. We remain positive on India Cements, Madrase remain positive on India Cements, Madrase remain positive on India Cements, Madrase remain positive on India Cements, Madrase remain positive on India Cements, MadrasCements and JK LCements and JK LCements and JK LCements and JK LCements and JK Lakshmi due to attractive valuations (on EV/akshmi due to attractive valuations (on EV/akshmi due to attractive valuations (on EV/akshmi due to attractive valuations (on EV/akshmi due to attractive valuations (on EV/tonne basis) and maintain a Buy on these stocks.tonne basis) and maintain a Buy on these stocks.tonne basis) and maintain a Buy on these stocks.tonne basis) and maintain a Buy on these stocks.tonne basis) and maintain a Buy on these stocks.

on the top-line front primarily due to the decline in realisations.Operating profit is expected to decline by 33.9%


CompanyCompanyCompanyCompanyCompany FY11E installedFY11E installedFY11E installedFY11E installedFY11E installed EV/tonne (US $) (US $) (US $) (US $) (US $)

capacity (mtpa)capacity (mtpa)capacity (mtpa)capacity (mtpa)capacity (mtpa) FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E

ACC^ 30.4 140.2 128.8 127.3

Ambuja^ 23.5 201.4 164.9 162.2

India Cements 14.0 70.5 77.6 72.0

JK Lakshmi 5.4 33.4 32.9 36.8

Madras Cements 11.0 99.5 82.9 76.6

Ultra Tech 23.1 141.7 140.5 128.3

Exhibit 9: EV/tonne

Exhibit 8: OPM to declineCompany (%)Company (%)Company (%)Company (%)Company (%) 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E 3QFY103QFY103QFY103QFY103QFY10 chg bpchg bpchg bpchg bpchg bp 2QFY112QFY112QFY112QFY112QFY11 chg bpchg bpchg bpchg bpchg bp

(yoy)(yoy)(yoy)(yoy)(yoy) (qoq)(qoq)(qoq)(qoq)(qoq)

ACC* 17.7 24.9 (713) 14.0 373

Ambuja* 21.1 25.1 (407) 19.1 196

India Cements 7.6 14.7 (707) 3.6 399

JK Lakshmi 14.5 25.2 (1,070) 10.4 410

Madras Cements 20.7 18.2 248 17.7 297

UltraTech 16.0 24.0 (802) 13.5 251

Source: Company, Angel Research; Note: *Year ending December


Exhibit 7: Top-line performance (3QFY2011E, yoy)

(3.3)

3.4

(7.3)(8.7)

(13.3)

(4.1)

(30)

(20)

(10)

0

10

ACC Ambuja Cem India Cements JK Lakshmi

cements

Madras

Cements

Ultratech

(%)

Operating margins to fall

Operating margins are expected to decline substantially duringthe quarter. The decline in margins can primarily be attributed

Source: Industry, Angel Research

Exhibit 6: Realisation per tonne

3QFY10 3QFY11E

3,720

3,574

2,400

2,800

3,200

3,600

4,000

3QFY10 3QFY11E

(`)



For 3QFY2011, we expect our FMCG universe to post steadytop-line growth of 20% yoy aided by robust volumes andselective price hikes. While a buoyant economy, increaseddemand owing to the festive season and sustained ad-spendsare expected to drive volumes, the impact of selective pricehikes taken by the companies in 2QFY2011 will also be feltduring the quarter under review. Godrej Consumer (GCPL) isexpected to post the highest top-line growth this quarter albeiton a low base aided by the revenue traction from its recentacquisitions. GSK Consumer (GSKCHL), Asian Paints, Daburand Marico are also expected to post strong top-line growthfor the quarter.

FMCG

Erratic monsoons spell doom for crops

Erratic monsoons (23% above normal till third week of December2010) have proved to be bad for crops in India as the rawmaterial prices have been spiraling. Currently, while the wheatand rice prices are ruling firm, the potato and onion priceshave spiked and are in double digits. We believe that the samewill negatively impact input costs of the agri-dependentcompanies like ITC, Marico, Nestle and GSK Consumer as theincrease in raw material prices will exert pressure on the marginsof these companies. Cooling demand due to the rise in foodinflation, which has increased in close succession over the lastthree weeks (current food inflation stands at 12.1%) could alsoimpact HUL, Colgate and GCPL performance for the quarter.

Input costs still a major concern

Among the agri-commodities, while the sugar and tobaccoprices are benign, milk has also finally started showing signs ofcooling. The tobacco prices have fallen (16% yoy and 6% qoqdecline) due to: 1) poor quality of tobacco leaves on account oferratic rainfalls, 2) higher-than-expected tobacco output inKarnataka resulting in higher arrivals at the auctions therebydragging the prices, and 3) global decline in prices resulting inlack of fresh export orders. The wheat and barley prices arehowever, ruling high on account of supply constraints.

All the vegetable oils and copra prices have increased~20-30% qoq mirroring the global prices with groundnut andrice bran oil being the only exceptions. Prices of crude-linkedraw materials such as caustic soda and soda ash have alsorisen with crude touching ~US $90/barrel.

Growing inorganically to fill in portfolio gaps

FMCG majors have been focusing on expanding their globalfootprint through acquisitions in niche segments to fill the gapsin their product portfolio. In line with this, Dabur acquiredNamaste Laboratories LLC, a USA based ethnic hair colourmanufacturer. This acquisition marks Dabur's entry into the fast-growing US $1.5bn ethnic hair care product market in the US,Europe and Africa.

In the domestic market, amidst much speculation ReckittBenckiser completed the acquisition of Paras Pharma. This deal

Exhibit 3: Key input prices in 3QFY2011CMP (CMP (CMP (CMP (CMP (`̀̀̀̀))))) yoy (%)yoy (%)yoy (%)yoy (%)yoy (%) qoq (%)qoq (%)qoq (%)qoq (%)qoq (%)

Wheat (`/quintal) 1,309 11 5

Barley (`/quintal) 1,235 24 8

Sugar (`/ quintal) 3,060 (6) 13

Tea (`/kg) 190 21 6

Coffee (`/100kg) 3,850 28 8

Cocoa (US$/ton) 2,958 (26) 8

Milk Liquid (`/ltr) 25 75 -

Palm Oil (MYR/ton) 3,562 (4) 29

Copra (`/quintal) 5,500 32 22

Safflower (`/quintal) 2,375 18 8

Soyabean Oil (`/10kg) 568 35 19

Groundnut Oil (`/MT) 76,500 (1) (15)

Coconut Oil (`/quintal) 6,844 57 19

Rice Bran Oil (`/MT) 5,200 4 (28)

Tobacco (`/kg) 86 (16) (6)

Caustic Soda (`/kg) 1,100 11 23

Soda Ash (`/kg) 985 18 11

Source: Bloomberg, CMIE, Angel Research

Source: IMD, Angel Research

Exhibit 2: Monsoon trend in Oct-Dec 2010

Source: Company, Angel Research; Note: Nestle and GSKCHL figures are for4QCY2010E

Exhibit 1: Revenue growth in 3QFY2011E (yoy %)87.9

24.1

15.2

23.1 25.6

11.518.9

21.717.7

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

GC

PL

Asi

anPa

ints

Col

gate

Dab

ur

GSK

CH

L

HU

L

ITC

Mar

ico

Nes

tle

Excess Rainfall (LHS) Normal Rainfall (LHS)

Defecient/ Scanty (LHS) Deviation from Normal rainfall (RHS)

17%

-15%

-37%-29%

9%

23%

-60%

-40%

-20%

0%

20%

40%

0

20

40

60

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

(No

ofSu

bdiv

isio

ns)

33



(5.3)

(2.2)

(6.9)

9.3

7.0

10.9

(6.3)

(3.2)(7.4)

(4.9)

(0.4)

(8.0

)

(3.0

)

2.0

7.0

12

.0

HUL

Colgate

Dabur

Nestle

GSKCHL

Asian Paints

ITC

Marico

GCPL

BSE FMCG

Sensex

FMCG


Exhibit 4: Relative outperformance to Sensex (3QFY2011)

is touted to be the most expensive one being executed at`3,260cr or ~8x sales. Among the other deals, GCPL acquiredNaturesse Consumer Care Products and Essence ConsumerCare Products from Muskan Projects (has the Genteel andSwastik Shikakai soap brands) for an undisclosed amount. Inanother event, the Oetker Group, Germany acquired Fun FoodsPvt. Ltd.

New launches gather pace

FMCG companies maintained the momentum of launching newproducts and re-launching existing products with newformulations. The food and beverages category witnessed mostnumber of new product launches/re-launches during the quarter.Heinz led the pack with maximum number of launches, followedclosely by Dabur India.

In beverages, HUL re-launched Brooke Bond Red Label tea,while Dabur re-branded its Real Juice portfolio. Coca Colalaunched Nestea, a global brand of Beverage PartnersWorldwide (BPW), a joint venture between Coca Cola andNestle. In the food segment, Heinz expanded its portfolio withthe launch of Heinz Home Style Chutneys, Heinz Chef StyleSauces, Heinz Kitchen Klassics ready-to-eat meals and instantmixes, and Heinz Golden Circle Juices. Britannia entered thediabetes management space with its first-ever diabetic friendlysnack under its NutriChoice brand. ITC relaunched SunfeastDark Fantasy, the premium dark chocolate biscuits. CG Foodsrolled out two new flavours of Wai Wai Quick - Wai Wai QuickChicken Pizza and Wai Wai Quick Masala Curry with threeseasonings. Bambino launched Instant Pasta, the first-of-its-kind of product and manufactured using one-of-its kindtechnology in Asia. During the quarter, Dabur launched differentproduct ranges targeting men and women along with two newfruit flavours of its flagship healthcare brand, DaburChyawanprash, viz. Dabur Chyawanprash Orange and DaburChyawanprash Mango. The company also launched a healthsupplement, Nutrigo. Through subsidiary, Dabur Nepal, thecompany launched its first hair oil for men, viz. PROstyleDandruff Control Hair Oil.

Johnson & Johnson launched the nicotine gum. A new variantof Alpenliebe and Alpenliebe Eclairs was introduced by PerfettiVanMelle. Emami launched two new products under the Boroplusbrand, namely Boroplus Healthy & Fair Winter Cream andBoroplus Intensive Skin Therapy Cream. Godfrey Philips launchedvariants in its seven-year old brand, Marlboro, in the king-sizeor 84-mm segment.

Quarter all about garnering volumes

In a bid to cash in on the festive season, the FMCG playerswooed customers with attractive discounts, contests andinnovative packaging. Going ahead, we expect most of theFMCG companies to continue re-investing their margin gainsin an attempt to enhance their ad-spend to support volumegrowth.

Currently, while Asian Paints is running a contest, Surprise yourSpouse, Nestle is wooing consumers with Santa Dreamz contest.Colgate is promoting its Max Fresh gel toothpaste by givingfree toothbrush and an 80gm tube with the purchase of every150gm tube. PepsiCo and Coca Cola were in a race of sorts togarner higher number of customers through innovativeadvertisements, special festive packs (PepsiCo) and special Warlibottles (Coca Cola).

The rural theme continues to be a focus area for most of theFMCG companies, who have been undertaking various ruralactivation programs to garner higher volumes. Thus, HULlaunched its multi-brand rural activation program, Khushiyonki Doli in the three states of Uttar Pradesh, Andhra Pradesh andMaharashtra to educate consumers about personal hygiene.Dabur launched a rural campaign for its brand Dabur Lal Tailin Chattisgarh and Madhya Pradesh.

Heavyweights ITC and HUL drag FMCG index

During the quarter, the BSE FMCG Index posted 5%underperformance vis-à-vis the Sensex, in line with ourexpectations. ITC, which witnessed a sharp rally in 2QFY2011,came off its highs during the quarter. HUL continued tounderperform, even though the competitive pressures have beeneasing and pricing power slowly returning. Concerns persistedabout HUL not being able to salvage lost market share (facedaggressive price war with P&G in 2QFY2011) and a higherinput cost environment, which has impacted its profitability.During the quarter, Asian Paints was the biggest outperformerfollowing high demand for paints on account of the festiveseason.



FMCG

Analyst: Chitrangda KAnalyst: Chitrangda KAnalyst: Chitrangda KAnalyst: Chitrangda KAnalyst: Chitrangda Kapur/Sreekanth Papur/Sreekanth Papur/Sreekanth Papur/Sreekanth Papur/Sreekanth P.V.V.V.V.V.S.S.S.S.S

Exhibit 5: Quarterly estimates (`̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31, 2010; * December year ending; ^ Consolidated

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) EPS ( EPS ( EPS ( EPS ( EPS (`̀̀̀̀))))) P/E (x) P/E (x) P/E (x) P/E (x) P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.


Asian Paints ^ 2,875 2,011 24.1 18.6 (104) 236.2 18.9 24.6 18.9 80.5 92.8 113.5 35.7 31.0 25.3 - Neutral

Colgate 868 565 15.2 21.4 80 107.4 (7.7) 7.9 (7.7) 31.1 32.8 37.3 27.9 26.5 23.3 820 Reduce

Dabur India ^ 100 1,140 23.1 19.6 40 171.2 24.3 2.0 24.3 2.9 3.5 4.7 34.8 29.0 21.5 121 Buy

GCPL ^ 385 972 87.9 20.3 65 147.7 73.5 4.6 65.2 10.5 14.9 18.7 36.7 25.9 20.6 410 Accumulate

GSK Consumer * 2,313 525 25.6 12.5 371 56.7 68.5 13.5 68.3 72.0 87.3 103.6 32.1 26.5 22.3 - Neutral

HUL 312 5,023 11.5 15.7 (30) 698.8 7.7 3.2 7.6 9.6 10.6 12.0 32.4 29.6 26.1 276 Reduce

ITC 175 5,388 18.9 37.7 104 1,341.2 17.2 3.5 16.5 5.3 6.4 7.4 32.8 27.3 23.7 - Neutral

Marico ^ 120 815 21.7 13.9 (90) 78.9 26.8 1.3 26.8 3.9 4.9 5.7 30.6 24.7 21.3 136 Accumulate

Nestle * 3,795 1,591 17.7 17.8 309 187.3 65.9 19.4 65.9 84.4 103.5 125.0 45.0 36.7 30.4 3,501 Reduce

Midcaps to outshine heavyweights

With most festivals falling in 3QFY2011, we expect our FMCGuniverse to report robust top-line growth of 20% yoy andearnings growth of 19% yoy. Most of the companies are expectedto register margin expansion largely aided by robust top-linegrowth. Sector leader, HUL, is expected to report robust 11.5%yoy growth in top-line driven by both value and volume growth.The company is expected to post 7.7% yoy growth in earnings(recurring) despite margin contraction. We expect ITC to deliver18.9% yoy growth in revenues during the quarter and 17.2%yoy growth in earnings, aided by margin expansion. Overall,the company's margins would largely receive a fillip aided bythe cigarette division on account of the absorption of earlierrate hikes and benign tobacco price environment.

Valuations rich, recommend stock-specific approach

Post the recent rally in most FMCG stocks on the back of steadyearnings growth, significant margin expansion and sustained

volume growth, they are currently trading at rich valuations. Interms of their one-year forward P/Es, most of the FMCGcompanies are trading in line with their five-year averages. Whilethe long-term consumption story for the FMCG industry remainsintact, any further re-rating hereon seems less likely owing toconcerns over high input costs.

Remain equal-weight on sector

We continue to emphasise on selective stock picking and prefercompanies with a leadership position in their product categories,a diverse product portfolio and with stronger pricing power, aswe believe they are better placed to combat the vagaries ofhigh input costs.

In mid-In mid-In mid-In mid-In mid-caps, we maintain an Accumulate on GCPL (due tocaps, we maintain an Accumulate on GCPL (due tocaps, we maintain an Accumulate on GCPL (due tocaps, we maintain an Accumulate on GCPL (due tocaps, we maintain an Accumulate on GCPL (due tosignificant margin expansion and GSL consolidation wouldsignificant margin expansion and GSL consolidation wouldsignificant margin expansion and GSL consolidation wouldsignificant margin expansion and GSL consolidation wouldsignificant margin expansion and GSL consolidation wouldaddress portfolio concerns), and Marico (a play on the valuationaddress portfolio concerns), and Marico (a play on the valuationaddress portfolio concerns), and Marico (a play on the valuationaddress portfolio concerns), and Marico (a play on the valuationaddress portfolio concerns), and Marico (a play on the valuationgap). Wgap). Wgap). Wgap). Wgap). We upgrade Dabur to a Buy post integrating its recente upgrade Dabur to a Buy post integrating its recente upgrade Dabur to a Buy post integrating its recente upgrade Dabur to a Buy post integrating its recente upgrade Dabur to a Buy post integrating its recentacquisitions.acquisitions.acquisitions.acquisitions.acquisitions.

35



Infrastructure

We expect the infrastructure sector to post decent numbers -especially on the top-line front - for 3QFY2011 as theconstruction activity picks up in the second half of the year.


Larsen and Toubro (L&T)

We expect L&T to record revenues of `10,202cr, a substantialjump of 26.4% yoy. For FY2011, management has guided for20% yoy growth in revenues, which implies growth of ~27% in2HFY2011. On the EBITDA front, we expect margins to be flatat 11.3% as against 11.8% in 3QFY2010. We project net profitat ̀ 720cr, a modest increase of 3.4% yoy primarily due to higherinterest cost.

IVRCL Infra (IVRCL)

We project IVRCL Infra to clock revenue growth of ~17.8% yoyfor 3QFY2011 to `1,391cr as against management guidanceof `1,500-1,600cr, primarily on the back of the slow-moving

irrigation and road projects. Management has guided for aminimum 18% yoy growth in revenues for FY2011, implying agrowth of ~40% in 2HFY2011, which exceeds our expectationof reasonable growth of ~24%. We project marginal decline inEBITDA margins at 9.2% and net profit de-growth of ~7.6%for the quarter to `42.3cr mainly on account of higher interestcosts.

Nagarjuna Construction (NCC)

We project the company to post decent revenue growth of 22.3%yoy for 3QFY2011 to `1,452cr. Management has guided forrevenue growth of ~20% for FY2011 (standalone), which impliesgrowth of >25% in 2HFY2011. We expect the company todeliver as per management guidance given its diversified orderbook and consistent performance over the past quarters. Weproject stable EBITDA margins of 9.6% and net profit growth of9.3% for the quarter to `52.3cr assuming a tax rate of 37.5%.

Hindustan Construction Company (HCC)

We project modest ~10.1% yoy growth in revenues for3QFY2011 to `994.1cr impacted by the AP crisis and highexposure to longer gestation period orders. We project stableEBITDA margins at 12.6% and net profit growth of 19.2% to`17.6cr for the quarter primarily due to the low base effect.

IRB Infra

We estimate consolidated revenue growth of ~78.9% yoy for3QFY2011 on the back of the increase in construction andEPC (C&EPC) revenues of `572cr for the quarter. However,EBITDA margins are expected to decline given highercontribution to top-line from the low-margin C&EPC segmentcompared to the BOT revenues. Hence, EBITDA margins areexpected at 37.8%. We project net profit before tax and aftertax at `167.9cr and `134.4cr respectively, for 3QFY2011. PATis expected to increase 46.9% yoy assuming a tax rate of 20%for the quarter.

Simplex Infra

We project a decent 17.4% yoy growth in revenues for3QFY2011 to ̀ 1,250cr. We expect EBITDA margins to improveby 106bp to 10.0%, which is in line with management guidance.Net profit is expected to post a staggering ~51% jump to ̀ 34.8crfor the quarter primarily due to the low base effect.


Exhibit 1: Revenue trend (3QFY2011E)

Top-line ( cr, LHS)` yoy chg (%, RHS)

10.1

78.9

17.8

22.0

46.8

22.3 26.017.4

26.4

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

-

2,000

4,000

6,000

8,000

10,000

12,000

HC

C

IRB

Infr

a

IVRC

LIn

fra

JAL

MPL

NC

C

Sadbhav

Sim

ple

xIn

.

L&T


Exhibit 2: Earnings trend (3QFY2011E)

19.246.9

(7.6)

218.1

(16.3)

9.3

56.0 51.0

3.4

(50.0)

-

50.0

100.0

150.0

200.0

250.0

0

200

400

600

800

HC

C

IRB

Infr

a

IVRC

LIn

fra

JAL

MPL

NC

C

Sadbha

v

Sim

ple

xIn

.

L&T

Earning ( cr, LHS)` yoy chg (%, RHS)

On the earnings front the picture would be mixed as the sectoris still plagued by high interest cost owing to rising interest ratesand increasing working capital requirement leading to increasein overall debt levels. We expect IVRCL Infra and MadhuconProjects in our coverage universe to lag on the bottom-linegrowth front for the quarter compared to its peers on accountof higher interest cost.



Infrastructure

Key Developments

Road sector plagued by constant changes

Over the last few months, there has been a lull in the awardactivity from NHAI primarily due to policy and capacity issues,some of which are as below:

During the quarter, in its attempts to avoid a transport strike,the government lowered the toll (base) rates slab for three-axlecommercial vehicles to `2.40/km from `3.45/km earlier. Thismove is not expected to impact the road developers as the newrate will be applicable to all future PPP projects and not affectthe already awarded projects. Thus, the new rates will not impactthe currently operational PPP projects. To that extent, it wouldnot impact our estimates and valuations for IRB and ITNL.However, in the long run, we believe it could hit NHAI's financials(which are already under pressure) in turn impacting theawarding activity. We estimate that this road transport ministry'sagreement with the truckers could lead to a potential loss of~`350cr annually for NHAI. Besides, we believe that it is a badprecedent set by the government, as in the future in case of asimilar situation arising pertaining to rates, it is quite possiblethat the government may once again be caught on the backfoot, which is fundamentally negative for the sector. Moreover,new projects likely to be awarded under the new proposed tollrate may find fewer bidders or the bidders may demand higherviability gap funding (VGF) to make the projects viable.

Lack of a succession plan at the NHAI has impacted theaward of projects. Appointment of a successor to the outgoingchairman, Brijeshwar Singh, is still pending. In the interim, theministry has asked Brijeshwar Singh, who retired on August 31,2010, to continue for another one month after serving the threemonth extension till such time a new chairman is appointed.

The finance ministry has put a cap on the yearly annuityoutgo at the total cess collected by NHAI. NHAI is expected toreceive `8,500cr as its share of road cess for the current fiscaland its annuity payments are also expected to be in the samerange. However, the highway authority may find it difficult toaward further projects on annuity basis owing to the new capAccording to its roadmap, NHAI has to award projects worth`40,000cr on annuity basis in the current and next fiscal.However, the cess amount is expected to increase by mere 5.1%a year. Under NHAI's work plan, 20% of the projects would beawarded on BOT annuity, 65% on BOT toll and the rest onengineering-procurement-contract basis. With this, NHAI'sannuity outgo is expected to increase to around ̀ 13,000cr. Thusannuity cap may force NHAI to award majority of the new


2.2

(17.1)

(13.4)

(19.7)

(12.3)

(16.8)

(10.1)

(19.4)

(13.1)

(3.2)

(25.0) (20.0) (15.0) (10.0) (5.0) - 5.0

BSE Sensex

HCC

IRB Infra

IVRCL Infra

JAL

MPL

NCC

Sadbhav

Simplex In.

L&T

Exhibit 3: Relative underperformance to Sensex (3QFY11)

projects on BOT toll basis with more VGF, so that the projectsare viable.

Lavasa under environment scanner

We have been maintaining that HCC is no longer a constructionplay, as most of its value accretion is from its real estatesubsidiary - Lavasa - for which the company is seeking exorbitantvaluations and beyond our estimates. Further, as per our houseview, there are better plays in real estate, viz., HDIL and AnantRaj, which are at very compelling valuations and at low/nil netdebt levels. Moreover, HCC/Lavasa is shrouded in controversy- the CBI has sought details about money matters, it is facingenvironment clearance issues coupled with some other allegedirregularities. Consequently, we expect a delay in the listing ofLavasa, which would be a negative for the stock performancegoing ahead.

Thus, though our SOTP target price of `59 for HCC implies anupside of ~20% from current levels, we recommend investorsto consider other stocks in the sector including IVRCL, NCCand ITNL, which are also trading at attractive valuations.

Sensex v/s infrastructure stocks

The infrastructure sector stocks have taken a beating in recenttimes (barring L&T) and underperformed the markets on accountof dismal 2QFY2011 performance on the earnings front.

Earnings for 2QFY2011 were disappointing, mainly for themid-size contractors. The slippage in the profit was due to thelower-than-expected EBITDA margins and higher interest costs,though top-line growth was broadly in line.

37



Infrastructure

Analyst: Shailesh KAnalyst: Shailesh KAnalyst: Shailesh KAnalyst: Shailesh KAnalyst: Shailesh Kanani / Nitin Aroraanani / Nitin Aroraanani / Nitin Aroraanani / Nitin Aroraanani / Nitin Arora

Currently, the stocks are trading at attractive valuations -available at 6-8x FY2012E earnings, excluding L&T. Also, weexpect the earnings momentum to pick up in 2HFY2011 on theback of strong order book. From our universe, we prefer IVRCLInfra, NCC and ITNL due to the relative comfort on the executionfront, healthy order book position and attractive valuations. Wehave valued the construction companies on SOTP basis, whereinfor the core construction business we have assigned earningsmultiple of 10-14x (excluding L&T) based on certain quantitativeand qualitative factors. The listed (unlisted) subsidiaries of theconstruction companies have been valued at 30% discount totheir CMP (1-1.5x book value).

Exhibit 6: Quarterly estimates ( `̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31, 2010, Target prices are based on SOTP methodology; ^Consolidated numbers; *(1) For HCC value of Lavasaand Road BOT totals to `37.4/share; (2) For IRB, investments in BOT and real estate totals to `140/share; (3) For IVRCL, value of IVRCL Assets and BOT projects totals to`48/share; (4) For JAL, no investments have been adjusted; (5) For Madhucon Projects, Road BOT and other investments total to `81.1/share; (6) For Nagarjuna, value of landbank, BOT projects and investments total to `55.8/share;(7) For Sadbhav, its investments in BOT projects totals to `88.4/share; (8)For Simplex Infra, there are no majorinvestments in subsidiary; and (9) For L&T, investments in subsidiaries amounts to `482/share.

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) *Adj. P/E (x) *Adj. P/E (x) *Adj. P/E (x) *Adj. P/E (x) *Adj. P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.

(((((`̀̀̀̀))))) 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E chg bpchg bpchg bpchg bpchg bp 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY103QFY103QFY103QFY103QFY10 % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (((((`̀̀̀̀)))))

HCC 49 994 10.1 12.6 (38.7) 17.6 19.2 0.3 18.4 1.3 1.6 1.8 8.6 7.2 6.3 59 Buy

IRB Infra^ 226 775 78.9 37.8 (1464.8) 134.4 46.9 4.0 47.0 11.6 15.2 15.9 7.4 5.6 5.4 265 Buy

IVRCL Infra 129 1,391 17.8 9.2 (37.0) 42.3 (7.6) 3.2 (7.6) 7.8 7.7 9.5 10.3 10.5 8.5 181 Buy

JP Associate 106 3,616 22.0 26.6 (326.8) 327.7 218.1 1.5 218.1 4.7 5.3 8.2 22.8 19.9 12.9 160 Buy

MPL 123 411 46.8 8.8 (355.6) 9.1 (16.3) 1.2 (16.1) 6.2 7.3 9.2 6.8 5.7 4.6 173 Buy

NCC 141 1,452 22.3 9.6 (29.8) 52.3 9.3 2.0 10.2 7.8 8.5 10.0 10.9 10.0 8.5 196 Buy

Sadbhav Engg 120 397.0 26.0 11.2 206.6 22.0 56.0 1.8 56.0 3.9 6.3 8.3 8.0 4.9 3.8 170 Buy

Simplex Infra 411 1,250 17.4 10.0 106.4 34.8 51.0 7.0 50.9 25.6 30.3 37.2 16.0 13.6 11.0 521 Buy

L&T 1,979 10,202 26.4 11.3 (56.3) 720.0 3.4 11.8 3.4 47.3 54.7 70.1 31.7 27.4 21.4 - Neutral


Exhibit 4: 2QFY2011 Earnings growth120.1

39.9

(51.3)

(16.3)

12.0

(43.7)

4.7

(4.4)

(60.0)(40.0)

(20.0)

-

20.0

40.0

60.080.0

100.0

120.0

140.0

HC

C

IRB

Infr

a

IVRC

LIn

fra

JAL

L&T

Madhuco

n

NC

C

Sim

ple

xIn

f.

The lull in execution, which we believe is temporary in nature,was also partially responsible for the underperformance of thesector. Nonetheless, post the lacklustre performance the infrastocks are trading at attractive valuations, and we believe thatseveral stocks have limited downside from current levels.Therefore, we remain overweight on infra and recommendinvestors to seize the opportunity to increase exposure to thesector.

Outlook

Robust medium to long-term growth prospects

The Eleventh Five-Year Plan missed its projections by ~20% inthe initial three years, and we believe that even if thisperformance is maintained, it would lead to huge opportunitiesfor the infrastructure players. Going ahead, infrastructureinvestment is projected to touch US $135bn p.a. in FY2011and FY2012, which represents 145% growth over the last threeyear's annual spend of US $55bn. Moreover, we expect thepower, road and water segments to witness maximum traction.


Exhibit 5: Coverage universe underperforming since last 12 months

17.4

(33.0)

(7.8)

(26.5)(27.9) (28.4)

(15.1)

(0.3)

(25.9)

17.8

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

BSE

Sense

x

HC

C

IRB

Infr

a

IVRC

LIn

fra

JAL

MPL

NC

C

Sadbhav

Sim

ple

xIn

.

L&T

Favourable risk-reward ratio

The sector, after outperforming in the initial run-up from abysmallevels, has underperformed over the last one year. As against a17.4% return generated by the Sensex over the last one year,most construction stocks have generated negative returns(excluding L&T), leading to underperformance ranging from18-50%.



Logistics

For 3QFY2011, we expect Concor and Gateway Distripark(GDL) to report strong revenue growth of 11.6% and 10.7%yoy respectively, on the back of healthy volume growth in theExim segment following inventory build-up ahead of the festiveseason both domestically as well as abroad. We expect AllcargoGlobal Logistics (AGL) to post robust revenue growth of 25.7%yoy on a low base and consistently improving ECU Line numbers.Operating margins are expected to remain stable for ourcoverage universe. While Concor and GDL are expected toreport moderate PAT growth of 6.9% and 4.8% yoy respectively,we expect AGL's PAT to spike 61.5% yoy on a low base andmoderate appreciation (2.6%) of rupee vis-à-vis the euroduring the quarter. Overall, we expect a 16.0% and 24.4% yoyincrease in revenue and PAT respectively, for our coverageuniverse.

Container volumes stabilising at higher levels

The container traffic data released for FY2011 YTD (April-Nov2010) by the Indian Port Association (IPA) has registered robustgrowth of 12.2% yoy on a low base and demand generated bythe festive season. The JNPT port, which handles around 60%of the country's container volumes, has registered 7.8% yoygrowth in volumes. The Chennai port, which handles around17% of the country's container volumes, has recorded strongincrease of 28.0% yoy in volumes for the mentioned period.The container data for FY2011 so far indicates that the volumes

Exports picking up

In October 2010, India's exports stood at `79,763cr (+15.3%yoy), whereas imports were valued at ̀ 122,970cr (+1.5% yoy).Cumulative value of exports for the April-October 2010 periodstood at ̀ 556,162cr (+20.3% yoy), while the cumulative valueof imports stood at `876,997cr (+17.9% yoy) for the period.Thus, the trade deficit increased 14.2% yoy to ̀ 320,835cr duringthe mentioned period. The revival in Exim trade has been visiblein the overall port throughput as well as container volumes.

Key developments

Railways hiked Exim haulage charges

The recent revision by Indian Railways (IR) on transportation ofnine commodities, which was put on hold, has now been revisedupwards with effect from Jan 2011. Consequently, Concor aswell as the private operators will be revising their rail freighttariffs with effect from mid-Jan 2011. We believe this couldresult in substantial traffic moving to the road segment if theoperators choose to pass on majority of the hike. However,given the intense competition, the operators may not be in aposition to pass on the hike substantially, which could impactprofitability of the rail container operators going forward.

AGL continues inorganic expansion

During 4QCY2010, AGL's wholly-owned subsidiary acquireda controlling stake for US $22mn in two Hong Kong basedcompanies engaged in non-vessel owning common Carrier(NVOCC) business in China and other parts of the easternregion. While AGL already has eight offices in China, the

have stabilised at higher levels albeit on the low base of FY2010.Going ahead, we expect the ports to sustain the monthlyrun-rate and surpass the 7.0mn TEU mark set for FY2011.Company-wise, Concor is expected to post a 13.0% yoy increasein Exim volumes, while GDL is expected to report 9.6% yoygrowth in CFS volumes for 3QFY11.

Source: Angel Research; Note: Allcargo-December year ending

Exhibit 1: Revenue and PAT estimates for 3QFY2011E

Concor Gateway Distriparks Allcargo Logistics

11.66.9

10.7

4.8

25.7

61.5

0

10

20

30

40

50

60

70

Revenue PAT

(%)

Exhibit 2: Container traffic - Sustaining post recovery

Source: IPA, Angel Research

Container Volumes (LHS) YoY change (RHS)

607

553 553

569

554

604 608

555

654

630

649

608

640

562

636643

624

(15)

(10)

(5)

-

5

10

15

20

25

30

35

500

520

540

560

580

600

620

640

660

680

Jul-

09

Aug

-09

Sep

-09

Oct

-09

Nov-

09

Dec

-09

Jan

-10

Feb

-10

Mar-

10

Apr-

10

May-

10

Jun

-10

Jul-

10

Aug

-10

Sep

-10

Oct

-10

Nov-

10

('00

0TE

Us)

(%)

Exhibit 3: Steadily growing EXIM trade


Imports Exports

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Apr-

06

Jul-

06

Oct

-06

Jan-

07

Apr-

07

Jul-

07

Oct

-07

Jan-

08

Apr-

08

Jul-

08

Oct

-08

(`cr

)

Jan-

05

Apr-

05

Jul-

05

Oct

-05

Jan-

06

Jan-

09

Apr-

09

Jul-

09

Oct

-09

Jan-

10

Apr-

10

Jul-

10

Oct

-10

39



Logistics

acquisition adds one in Shanghai (75% stake with an option toraise it further to 100% at same price) and another in Ningbo(100% stake). The acquisition has been made at reasonablevaluations of 6.2x CY2009 EBITDA. Further, the acquisition isexpected to add US $35mn in revenues and US $3.6mn at theEBITDA level on a yearly basis. AGL has also acquired two vesselsof approximately 6,500 dead weight tones (DWT) each toaugment its project cargo movement business. This would helpit in saving the ship chartering and hiring charges and increasecontrol across the project cargo supply chain.

GDL outlines expansion roadmap

GDL's 60% subsidiary, Gateway Distriparks (Kerala) (GDKL),won a tender floated by the Cochin Port Trust for a 2.58 hectareplot in Vallarpadam on a 30-year lease. It is a prime site oppositethe US $442mn International Container Transhipment Terminal(ICTT), which is India's first trans-shipment hub designed toreduce dependence on ports like Colombo, Dubai, Singaporeand Salalah. GDKL already owns an eight-hectare freeholdproperty at Kalamasserry, which together with this leaseholdland, will enable it to create adequate capacities to handlecontainers in sync with the capacities and throughput of theICTT. GDKL's total investment in Vallarpadam and Kalamasserryexceeds `50cr. However, we expect GDKL to witness stablevolumes only after 1HFY2012 once the necessary infrastructureis established.

Competition, higher haulage charges to impactConcor's Exim growth

Concor's OPM has been declining over the years, though sincethe last two-three years it has stabilised at around 25-27% levels.Margins declined mainly on account of lower ground rentrevenue, inability to completely pass on the hike in haulagecharges due to intense competition and rebates to clients, all ofwhich pulled down the company's Exim performance. We believethat volumes would remain subdued in Concor's Exim segmentin FY2011 due to the slowdown in the northern routes owing toheavy monsoons and lower exports, leading to higher empties.In addition, the increase in haulage charges by the IR wouldfurther dent Concor's Exim growth.

Container traffic outperforming overall cargo traffic

Container traffic has increased from 3.4mn TEUs in FY2003 to6.9mn TEUs in FY2010, registering 11% CAGR during theperiod. Meanwhile, cargo at major ports posted 9% CAGRduring the mentioned period. The share of container traffic inthe current decade increased from 11.5% to 18.0% in FY2010,

following increased private participation in handling containerterminals and customer preference in transporting cargo incontainerised form as it reduces handling costs.

While the slowdown in global trade in FY2009 impactedcontainerisation more than the overall cargo traffic, the trendreversed in 2HFY2010 and container traffic is expected tooutperform overall cargo going ahead.

Bullish on the container industry on low penetrationand customer preference

Non-bulk cargo, which constitutes ~35% of the total cargo atmajor ports, has the potential to be transported in containerisedform. Earlier, only basic goods were suitable for shipment incontainers, but now most items can be shipped in a container.It is estimated that 75-80% of the total non-bulk cargo can becontainerised. Currently, the level of containerisation in India isat ~51%, compared to 80% globally, which indicates the scopeof growth on account of improved infrastructure. The share ofcontainerised traffic increased by around 700bp duringFY2007-09 despite the slowdown in trade in FY2009; however,it tapered down in FY2010. We expect the share ofcontainerisation to sustain at current levels in the near term asit helps to reduce handling costs. Over the next five yearshowever, it is expected to increase to 62-65%.


Exhibit 5: Improving levels of containerisation

45

4746

4747

52

54

52

54

40

42

44

46

48

50

52

54

56

0

100

200

300

400

500

600

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY11TD

EXIM traffic at major ports-LHS Non-bulk cargo-LHS Container share in non bulk cargo-RHS

('000

TEU

s)

(%)

0

5

10

15

20

25

30

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

EXIM growth YoY Container growth YoY

3rd container terminal at JNPT cameinto existence boosting volumes

Slowdown in global trade has impactedcontainer volumes more than overall cargo

(%)


Exhibit 4: Container traffic to outperform cargo traffic in FY2011E



Analyst: PAnalyst: PAnalyst: PAnalyst: PAnalyst: Param Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salot

Logistics

Sensex v/s logistics stocks

During 3QFY2011, the Sensex posted moderate gain of 2.2%.However, during the quarter, Concor and AGL underperformedthe Sensex by 551bp and 1,180bp, respectively. The overhangof the IR freight hike from January 2011 is expected to impactrail container operator margins and investors have begun todiscount the same. For GDL, we expect the increase in the paceof capex post cash infusion by Blackstone and PAT break-evenin the rail business to be the key triggers for its stockperformance. AGL's performance shall be largely driven by theuptick in volumes and realisations at its European subsidiaryECU Line, which contributes ~70% to its revenue. AGL currentlytrades at attractive valuations of 6.8x FY2012E earnings and1.1x FY2012E book value. However, Concor's ability to sustainoperating margins along with market share in rail freight willdetermine its stock performance.

Outlook

We believe that sustained growth in the Indian economy withGDP growth expected at 8.5% over the next few years, as wellas emergence of India as a global outsourcing hub will facilitatethe country's container trade. In the current decade, containertraffic registered 12% CAGR compared to the 9% CAGR postedby the total traffic at the major ports. We expect this trend tocontinue and container traffic to register 11% CAGR over thenext five years driven by the addition of new container terminalsand increased containerisation.

We prefer companies that provide a decent blend of growthopportunities and are quoting at attractive valuations. WWWWWeeeeemaintain a Reduce on Concor as the company is losing itsmaintain a Reduce on Concor as the company is losing itsmaintain a Reduce on Concor as the company is losing itsmaintain a Reduce on Concor as the company is losing itsmaintain a Reduce on Concor as the company is losing itspricing power in the high-margin Exim segment and is tradingpricing power in the high-margin Exim segment and is tradingpricing power in the high-margin Exim segment and is tradingpricing power in the high-margin Exim segment and is tradingpricing power in the high-margin Exim segment and is tradingat expensive valuations. Wat expensive valuations. Wat expensive valuations. Wat expensive valuations. Wat expensive valuations. We maintain a Buy on Ae maintain a Buy on Ae maintain a Buy on Ae maintain a Buy on Ae maintain a Buy on AGL owing toGL owing toGL owing toGL owing toGL owing toreasonable valuations and improved performance by ECU Linereasonable valuations and improved performance by ECU Linereasonable valuations and improved performance by ECU Linereasonable valuations and improved performance by ECU Linereasonable valuations and improved performance by ECU Lineover the last few quarters. Wover the last few quarters. Wover the last few quarters. Wover the last few quarters. Wover the last few quarters. We recommend an Accumulate one recommend an Accumulate one recommend an Accumulate one recommend an Accumulate one recommend an Accumulate onGDL and expect the company to register 14.1% CAGDL and expect the company to register 14.1% CAGDL and expect the company to register 14.1% CAGDL and expect the company to register 14.1% CAGDL and expect the company to register 14.1% CAGR in EPSGR in EPSGR in EPSGR in EPSGR in EPSover FY2010-12 on account of being present at strategicover FY2010-12 on account of being present at strategicover FY2010-12 on account of being present at strategicover FY2010-12 on account of being present at strategicover FY2010-12 on account of being present at strategiclocations, its ongoing expansion plans and breaklocations, its ongoing expansion plans and breaklocations, its ongoing expansion plans and breaklocations, its ongoing expansion plans and breaklocations, its ongoing expansion plans and break-----even in theeven in theeven in theeven in theeven in therail business at the Prail business at the Prail business at the Prail business at the Prail business at the PAAAAAT level.T level.T level.T level.T level.

Exhibit 7: Quarterly estimates (`̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31, 2010; *data for CY2010-12E

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS ( EPS ( EPS ( EPS ( EPS (`̀̀̀̀))))) EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.


Allcargo* 147 683.5 25.7 11.1 159 45.8 61.5 3.5 61.5 13.4 17.0 21.7 11.0 8.6 6.8 217.0 Buy

Concor 1,257 987.2 11.6 27.5 (133) 214.4 6.9 16.5 6.9 59.8 66.0 72.3 21.0 19.0 17.4 1,194 Reduce

Gateway Dist. 113 142.4 10.7 26.5 (198) 21.0 4.8 2.0 4.8 7.3 7.5 9.5 15.4 15.1 11.8 123 Accumulate


Exhibit 6: Underperforming the Sensex in 3QFY2011

2.21.0

(3.3)

(9.6)(12.0)

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

Sensex GDL Concor AGL

(%)

41



Metals

During 3QFY2011, steel prices remained muted on a qoq basis,as appreciating INR led to price cuts in November, reversingOctober gains; but later in December, companies hiked steelprices by `500/tonne. Base metal prices also witnessed hugevolatility during the quarter; however, prices increased by11-19% qoq due to Chinese production cuts and US Treasurycommitment to buy US $600bn treasury securities.

During 3QFY2011, the BSE metals index outperformed theSensex by 2.1% and gained 4.3% in absolute terms. A series ofindustry and corporate events took place during the quarter,which dictated the direction of few stocks. In the ferrous space,Tata Steel topped the charts, outperforming the Sensex by 2.2%,on account of Rio bidding for Riversdale, in which Tata Steelholds a 24% stake. SAIL underperformed the Sensex by 13.2%on reports that its FPO price would be at lower levels. SesaGoa underperformed the Sensex by 1.9%, while NMDCoutperformed by 4.3%. On the non-ferrous front, HindustanZinc, Hindalco and Sterlite outperformed the Sensex by 24.1%,22.8% and 9.6%, respectively, on account of higher LME prices.

Domestic steel demand remains strong: Domestic steel demand remains strong: Domestic steel demand remains strong: Domestic steel demand remains strong: Domestic steel demand remains strong: As per the steel ministry,Indian steel consumption for FY2011 is expected to grow at10%. In the eight months of FY2011, steel consumption rose by7.2% to 43.5mn tonnes, while steel production grew by 5.0%.For 3QFY2011, we expect steel companies to register highersales volume growth of 4-14% yoy.

Major events

Coal India (CIL) and MOIL debut:Coal India (CIL) and MOIL debut:Coal India (CIL) and MOIL debut:Coal India (CIL) and MOIL debut:Coal India (CIL) and MOIL debut: While CIL's issue, whichmopped up `15,200cr in October, was the biggest IPO in thehistory of the Indian capital market, MOIL was subscribed 55x,the highest total subscription multiple witnessed this year. Onthe listing day, CIL and MOIL closed higher at 40% and 24%,respectively.

JSW Ispat Steel:JSW Ispat Steel:JSW Ispat Steel:JSW Ispat Steel:JSW Ispat Steel: JSW Steel will buy a 41.3% controlling stake inIspat through fresh equity issuance of 108.6cr for `2,157cr(acquisition price: `19.85/share). We believe the acquisition ispositive for JSW Steel in the long term, as it will become India'slargest steel company with a total capacity of 14.3mn tonnes.With operational synergies expected to accrue in FY2012, Ispatis likely to post positive EBITDA/tonne of US $50. Moreover, asand when Ispat's capex projects (coke over, pellet and power

Metal MajorsMetal MajorsMetal MajorsMetal MajorsMetal Majors Abs.Abs.Abs.Abs.Abs. Relative toRelative toRelative toRelative toRelative to

Returns (%)Returns (%)Returns (%)Returns (%)Returns (%) Sensex (%) Sensex (%) Sensex (%) Sensex (%) Sensex (%)

Sensex 2.2

BSE Metals 4.3 2.1

SAIL (11.0) (13.2)

Tata Steel 4.4 2.2

JSW Steel (12.1) (14.3)

Hindalco 24.9 22.8

Nalco (2.0) (4.2)

Sterlite Ind 11.7 9.6

Hindustan Zinc 26.3 24.1

NMDC 6.5 4.3

Sesa Goa 0.2 (1.9)

Exhibit 1: Sensex v/s metal stocks (3QFY2011)


Ferrous sector

Steel companies hiked steel prices by ̀ 1000/tonne in October,which was reversed in November to counter cheaper importsas the INR appreciated against the USD. However, in December,companies increased prices by `500/tonne on the back ofimprovement in demand and rising raw-material prices.

In 3QFY2011, average world HRC prices marginally increasedby 1.2% qoq to US $675/tonne (up 20.3% yoy). AverageChinese export prices showed a flattish trend qoq and were

higher by 24.2% yoy to US $615/tonne. Average domestic HRCprices increased by 1.0% qoq to ̀ 35,000/tonne and 6.6% yoy.


Exhibit 2: World HRC prices witness a slight uptick qoq

World HRC prices China export HRC prices (FOB)

0

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1QFY08 3QFY08 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 3QFY11

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)

Source: CRISIL Research, Angel Research

Exhibit 3: Domestic HRC prices

0

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Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

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Metals

plant) are completed, EBITDA/tonne is likely to increase toUS $100-125.

Rio bidding for Riversdale:Rio bidding for Riversdale:Rio bidding for Riversdale:Rio bidding for Riversdale:Rio bidding for Riversdale: Rio Tinto made a bid of AUD3.5bn(AUD15/share) to take over Riversdale Mining, in which TataSteel has a 24.2% stake, and later revised it to AUD3.9bn(AUD16/share). International Coal Ventures Ltd., comprisingSAIL, CIL, NTPC, RINL and NMDC, is also reportedly in therace for Riversdale and has appointed Citigroup to conduct adue diligence on Riversdale. While a counter bid from Tata Steelseems unlikely, given its high leverage, we believe Tata Steelwill continue to hold on to its existing stake and may not sell outas its investment in Riversdale is of strategic importance andwill help in increasing the raw-material integration level at TataSteel Europe.

KKKKKarnataka High Court upholds ban on iron ore, iron ore exportsarnataka High Court upholds ban on iron ore, iron ore exportsarnataka High Court upholds ban on iron ore, iron ore exportsarnataka High Court upholds ban on iron ore, iron ore exportsarnataka High Court upholds ban on iron ore, iron ore exportsdecrease:decrease:decrease:decrease:decrease: On November 19, 2010, the Karnataka High Courtupheld the government's decision to halt iron ore exports. Ironore exporters have contested the ban and the matter is nowbeing heard by the Supreme Court. Next hearing by the SupremeCourt is expected in the third week of January 2011.

According to the FIMI, Indian iron ore exports for Novemberwere down 30.6% yoy to 8.1mn tonnes. Total iron ore exportsfor April-November were down 16% yoy to 54.6mn tonnes.

Sterlite acquires Skorpion Zinc Mine - FSterlite acquires Skorpion Zinc Mine - FSterlite acquires Skorpion Zinc Mine - FSterlite acquires Skorpion Zinc Mine - FSterlite acquires Skorpion Zinc Mine - First phase of the Angloirst phase of the Angloirst phase of the Angloirst phase of the Angloirst phase of the AngloZinc acquisition:Zinc acquisition:Zinc acquisition:Zinc acquisition:Zinc acquisition: During the quarter, Sterlite completed theacquisition of Skorpion Zinc Mine (Namibia) from Anglo forUS $707mn. The Namibian asset is part of the acquisition ofAnglo American's zinc assets announced in May 2010 for aconsideration of US $1,338mn. As per Sterlite, the acquisitionhas been undertaken by its wholly owned subsidiary SterliteInfra, as against intended under Hindustan Zinc because theIndian government's approval was not received within thecontractual completion timeline for Skorpion. The acquisitionsof the other two mines (Lisheen mine and Black Mountain mines)are expected to be completed by 1QFY2012.

GoM approves new mining policy: GoM approves new mining policy: GoM approves new mining policy: GoM approves new mining policy: GoM approves new mining policy: The Group of Ministers(GoM) has approved the draft mining bill, which provides forsharing 26% of mining profits with locals. The approved draftwill now be placed before the cabinet. As clarifications arerequired on the implementation of the bill, we feel mining stockswill remain under pressure in the near term.

4QFY2011 raw4QFY2011 raw4QFY2011 raw4QFY2011 raw4QFY2011 raw-material prices fixed higher: -material prices fixed higher: -material prices fixed higher: -material prices fixed higher: -material prices fixed higher: The settlement ofbenchmark coking coal contracts for the January-March 2011quarter was higher by 7.7% at US $225/tonne (US $209/tonnefor October-December 2010). In case of iron ore negotiations,media reports suggest a hike of 7-10% over 3QFY2011. Duringthe quarter, average spot iron ore prices for 63% Fe grade (CFR,China) were up 63.4% yoy and 14.0% qoq to US $163/tonne.

Outlook

Iron ore prices to remain firm on supply disturbances: Iron ore prices to remain firm on supply disturbances: Iron ore prices to remain firm on supply disturbances: Iron ore prices to remain firm on supply disturbances: Iron ore prices to remain firm on supply disturbances: We expectiron ore prices to remain firm because of the continuing banon exports by Karnataka. Further, Chinese iron ore importsincreased by 25.5% mom to 57.4mn tonnes in November, thusproviding support to prices.

According to World Steel, global capacity utilisation levels havemarginally increased to ~75% in 3QF20Y11E as compared to73-74% in 2QFY2011. With increasing raw-material prices andlow inventory levels, companies are expected to raise prices by


Exhibit 4: Iron ore exports to China down yoy

0

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8

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12

14

16

May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

(mn

tonnes)

Sesa Goa closes third-party operations in Orissa:Sesa Goa closes third-party operations in Orissa:Sesa Goa closes third-party operations in Orissa:Sesa Goa closes third-party operations in Orissa:Sesa Goa closes third-party operations in Orissa: Sesa Goahas closed its mining operations in Thakurani mines in Barbil,Orissa, from December 1, 2010, as it was unable to renew themining contract on viable commercial terms on a long-termbasis. Sesa Goa started operating the Thakurani mines from1999 under a 10-year contract that expired in June 2009. Sincethen, the company has been carrying out its operations on short-term renewals. In FY2010, iron ore sales volume from Orissamine stood at 1.9mn tonnes. In our view, Sesa Goa's volumegrowth is at risk, given the closure at Orissa and ban inKarnataka.


Exhibit 5: Iron ore prices and inventory in China

Iron ore inventory (RHS) Indian Iron ore 63% Fe, CFR China (LHS)

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90

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Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

(mn

tonnes)

(US

$/t

onne)

43



Analyst : PAnalyst : PAnalyst : PAnalyst : PAnalyst : Paresh Jain/Paresh Jain/Paresh Jain/Paresh Jain/Paresh Jain/Pooja Jainooja Jainooja Jainooja Jainooja Jain

Metals

Exhibit 6: Average base metal prices (US $/tonne)


3QFY113QFY113QFY113QFY113QFY11 3QFY103QFY103QFY103QFY103QFY10 yoy %yoy %yoy %yoy %yoy % 2QFY112QFY112QFY112QFY112QFY11 qoq %qoq %qoq %qoq %qoq %

Copper 8,631 6,650 29.8 7,260 18.9

Aluminium 2,341 2,002 16.9 2,090 12.0

Alumina 353 306 15.5 317 11.2

Zinc 2,314 2,212 4.6 2,015 14.9

Lead 2,387 2,285 4.5 2,039 17.0

Exhibit 8: Quarterly estimates ((((( `̀̀̀̀ c c c c crrrrr)))))

Source: Company, Angel Research; Note: Price as on December 31, 2010; EPS calculation based on fully diluted equity



Hindalco 246 17,749 17.3 10.3 (128) 606 33.1 3.2 33.1 20.5 20.1 20.7 12.0 12.2 11.9 - Neutral

Hind. Zinc 1,362 2,374 7.1 55.6 (693) 1,126 (2.0) 26.7 (2.0) 95.6 97.2 123.6 14.2 14.0 11.0 - Neutral

JSW Steel 1,172 6,042 26.0 18.0 (446) 391 8.2 19.4 8.2 63.8 55.6 97.2 18.4 21.1 12.1 1,310 Accumulate

Nalco 391 1,673 20.7 25.7 434 278 79.4 4.3 79.4 12.9 18.9 21.1 30.3 20.7 18.5 316 Sell

SAIL 182 10,825 11.6 17.3 (931) 1,200 (28.4) 2.9 (28.4) 16.4 13.8 17.1 11.2 13.2 10.7 198 Accumulate

Sesa Goa 329 1,855 (1.8) 58.7 387 921 11.3 10.7 11.3 29.5 46.1 40.9 11.1 7.1 8.0 - Neutral

Sterlite Ind. 187 7,143 7.0 24.9 (60) 1,147 14.1 3.4 14.1 11.9 13.4 19.1 15.7 13.9 9.8 196 Accumulate

Tata Steel 681 27,800 6.6 13.0 166 1,392 128.4 15.1 120.2 (25.0) 73.1 80.7 (27.3) 9.3 8.4 768 Accumulate

`1,000-1,500/tonne in January. We expect steel prices to remainfirm in the coming months.

3QFY2011 expectations:3QFY2011 expectations:3QFY2011 expectations:3QFY2011 expectations:3QFY2011 expectations: For 3QFY2011, we expect steelvolumes to increase, aided by higher realisations. Thus, the topline of the steel companies under our coverage is expected togrow by 7-26% yoy. However, due to relatively higherraw-material costs, margins of steel companies are likely tocontract by 440-940bp yoy-except for Tata Steel, which isexpected to report a 166bp margin expansion. For Sesa Goa,the top line is expected to marginally dip on account of loweriron ore sales volume. WWWWWe remain positive on Te remain positive on Te remain positive on Te remain positive on Te remain positive on Tata Steel andata Steel andata Steel andata Steel andata Steel andJSW Steel.JSW Steel.JSW Steel.JSW Steel.JSW Steel.

Non-ferrous sector

The quarter witnessed great volatility with 1) temporary tightnessin the Chinese domestic market due to energy conservation-related production cuts; and 2) metal prices touching recordhigh in early November, after the Federal Reserve announcedthat it would buy US $600bn of treasury securities. However,base metals fell the most in mid-November, as China raisedthe reserve requirement for the fifth time (the sixth hike came inDecember). However, the loan package of � 85bn agreedbetween Ireland and the EU supported prices thereafter.

During the quarter, average LME prices of copper, aluminium,alumina, zinc and lead increased by 11-19% qoq and 4-30%yoy. During the quarter, copper touched new highs ofUS $9,405/tonne. Aluminium touched 2010-high ofUS $2,453/tonne, while zinc and lead were also close to their2010 highs.

On a yoy basis, inventory levels of copper and aluminium, atthe LME warehouse, were down 24.8% and 7.6%, respectively,but were higher by 43.7% and 42.2% for zinc and lead,respectively.

Outlook

In our view, the key positives for base metal prices are ongoingeconomic recovery, tighter market balances and emergence ofrestocking activity. Further, the launch of the physically backedbase metals exchange traded funds could be another trigger.However, developments in China need to be closely watchedas frequent tightening of the monetary policy to contain inflationcan be somewhat discouraging.

We expect non-ferrous companies to register positive top-linegrowth of 7-21% yoy, owing to a surge in LME prices. WhileNalco is expected to report margin expansion of 434bp yoy,Hindustan Zinc's margin is expected to contract by 693bp yoyon account of higher operating cost. WWWWWe maintain oure maintain oure maintain oure maintain oure maintain ourAccumulate rating on Sterlite.Accumulate rating on Sterlite.Accumulate rating on Sterlite.Accumulate rating on Sterlite.Accumulate rating on Sterlite.


Exhibit 7: Base metal inventory levels (Indexed to 100)

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50

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150

200

250

Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10

Copper Aluminium Zinc Lead



Oil & Gas

Prices mix, margins firm

In 3QFY2011, crude oil price stood firm (hitting 27-month high)at US $80-90/bbl. While natural gas price, which weakenedduring the later part of 2QFY2011, continued its weak trend inthe first half of 3QFY2011 before showing some recovery inthe second half of 3QFY2011. However, petchem marginsimproved. Refining margins were also higher sequentially dueto improvement in heating oil and naphtha cracks.

Crude hits a 27-month high, passes the US $90/bbl mark

Crude price hit a 27-month high, rising past the US $90/bblmark, during the second fortnight of December 2010, boostedby an unexpected surge in global demand that fueled the biggestdrop in US crude stockpiles in more than a decade. Stockpilesin the US, the world's biggest oil consumer, fell by 19mnbblssince November 26, 2010, roughly equivalent to one day ofUS fuel consumption, being the biggest three-week drop since1998. The higher-than-expected fall in inventories was due tothe cold weather in the northern hemisphere. Consequently,crude oil soared substantially (~39%), since hitting a CY2010low of US $66/bbl in May, driven by a faster-than-expectedrecovery in global fuel demand and continued optimism for USeconomic recovery. Further, Chinese government's reportsclaiming that China (world's second-largest oil-consumingcountry) nearly doubled its net oil-product imports in Novemberled to higher crude oil price. With positive developments takingplace, crude price stood firm in 3QFY2011 (US $80-90/bbl)against US $71-82/bbl in 2QFY2011. On an average, crudeprice rose by 12% qoq in 3QFY2011. Crude price has nowmoved above US $70-80/bbl, the preferred level for OPEC.

However, OPEC, at its December 11, 2010, meeting at Quito(Ecuador), left production quotas unchanged after reviewingthe oil market's outlook, including overall demand and supplyprojections for CY2011. OPEC has not formally changed itsoutput policy since agreeing on the record cut in December 2008.

The Indian crude oil basket averaged US $85.3/bbl in3QFY2011 v/s US $74.9/bbl in 2QFY2011. Despite this recentsharp run up, we expect crude price to average ~US $80/bblin FY2011 and ~US $80-85/bbl in FY2012, as expectation oflower demand growth in FY2012 v/s FY2011 along withchallenging risks to the fragile global economic recovery,including the adverse effect of possible currency conflicts andfears of a second banking crisis in Europe, would negativelyaffect oil demand.

On the supply side, as per the IEA's December outlook, OECDstocks rose by modest 0.7mnbbl in October 2010 to2,745mnbbl. Thus, October OECD forward demand cover rosemarginally to 60.1 days. However, as per November preliminarydata, OECD oil stocks fell by 8.4mnbbls. Global oil supply roseby 0.4mnbpd mom to 88.1mnbpd (its highest-ever level) inNovember, largely due to increased non-OPEC production to53.4mnbpd, up 0.3mnbpd mom, notably from Canada,Kazakhstan and Brazil. Global oil output in November increasedby 1.6mnbpd yoy, of which half came from higher non-OPECsupply, one-third came from OPEC NGLs and one-sixth camefrom OPEC crude. Non-OPEC supply is expected to average52.8mnbpd in CY2010 and 53.4mnbpd in CY2011,representing growth of 1.1mnbpd and 0.6mnbpd, respectively.OPEC crude oil supplies also stood higher by 45kbpd inNovember to 29.2mnbpd. Effective spare capacity of OPEC,thus, fell marginally mom to 5.6mnbpd. The demand for OPECcrude and stock change for CY2011 has been raised by100kbpd to 29.5mnbpd on higher demand projections.

On the demand side, IEA has increased its global oil demandestimates by 130kbpd to 87.4mnbpd in CY2010 and by260kbpd to 88.8mnbpd in CY2011 on stronger data fromOECD North America and non-OECD Asia. In CY2010, yoygrowth of 2.5mnbpd was mainly led by buoyant gasoil demand,notably in 3QCY2010; however, demand growth in CY2011should slow to 1.3mnbpd, as temporarily supportive factors fade.

Average gas price takes a hit, dips 11.6% qoq

Natural gas price, which stood weak at US $3.75-4/mmbtu inthe latter part of 2QFY2011 after declining from the peak ofUS $4.9/mmbtu in August 2010, continued its weakness andtouched a low of US $3.18/mmbtu in October 2010. Post that,natural gas price tried to recover and got a fillip only towardsthe beginning of December on increasing demand for gas dueto lower-than-expected temperatures, thus leading to naturalgas price hitting 3QFY2011 high of US $4.5/mmbtu towardsmid-December. However, in the subsequent weeks, despite low


Exhibit 1: WTI crude and Indian crude oil basket prices

WTI Crude Avg. WTI priceIndian Crude oil basket Avg. Indian Crude oil basket

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45



Oil & Gas

temperatures, the price corrected by 10-12% due to sufficientgas supply. Currently, natural gas price is at US $4-4.2/mmbtu.With this, average natural gas price in 3QFY2011 stood atUS $3.78/mmbtu, a fall of 11.6% qoq, due to subdued price inthe second half of 3QFY2011. Thus, natural gas price, whichwas on a recovery path through 1QFY2011 and in the first halfof 2QFY2011, gave up much of the gains due to subdueddemand and sufficient availability of LNG, with increasing shalegas production in the US.

Spot LNG price during 3QFY2011 was marginally high qoq,with delivered price of LNG procured by Indian firms (Petronet,LNG and GAIL) being in the range of US $9.0-9.5/mmbtu.Despite higher demand, the market is expected to remain amplysupplied in CY2011 as new production in Russia, Yemen,Indonesia and Qatar comes on stream. Thus, we expect spotLNG prices to be subdued going ahead.

Petchem and refining margins improved

Polyethylene and polypropylene prices increased higher thannaphtha, thus increasing polymer cracks sequentially. Asianpolymer plants operated at relatively higher rates in 3QFY2011on account of higher demand. Polyester prices addedsignificantly to average global petchem margins due to tightercotton market. Demand supply imbalance resulted in a spurt incotton prices, benefiting relatively cheaper polyester producers.The cotton market is expected to remain tight in the comingquarters, leading to sustainably high polyester demand.

During 3QFY2011, global refining margins on an averageincreased due to higher heating oil demand because of thecold weather coupled with strong Chinese demand for dieseldue to its government's mandate to meet emission reductionsand energy-efficiency targets, lending a considerable supportto regional middle distillate markets. Naphtha cracks in Asiacontinued to improve in November due to strong petrochemicaldemand in line with stronger economic activity. BP's generic

Refining Global Indicator Margin also witnessed a marginalimprovement in 3QFY2011. We expect margins for complexrefineries to improve due to the increase in heavy-light spreadsduring 3QFY2011. Benchmark Singapore margins are likelyto average at US $5.5-6.0/bbl v/s US $4.25/bbl in 2QFY2011.

Key developments

Rising under recoveries put ONGC and IOC FPO in limbo

Rising crude price has again tested the government in manyways. The biggest casualty is the government staring at thepossibility of missing the disinvestment target of `40,000cr inFY2011 with FPO of two major oil companies (ONGC andIOC) in limbo. The problem is government's unwillingness toshare the mounting under recoveries beyond one-third of thetotal under recovery and delay in the implementation of KiritParikh committee's recommendation of freeing up diesel,cooking gas and kerosene prices. This has led to the expectationof total under recovery touching a whopping ~`70,000cr forFY2011. Even on petrol, the price of which has been hiked sixtimes post its deregulation on June 26, 2010, is bearing thebrunt of the under recovery as the recent December 16, 2010,price hike of ~`2.96/litre was still less than the required. TheEGoM meeting, scheduled on December 30, 2010, to take acall on hiking diesel price is also postponed and, thus, onlytime will tell how much courage the government shows in hikingfuel prices to stem under recovery for FY2011.

GSPC - OMCs win `18,000cr gas pipeline bids

GSPC, along with its consortium partners (OMCs - IOC, HPCLand BPCL), in a field so far dominated by GAIL and RIL, is set toget authorisation for three major gas pipeline projects worth`18,000cr. In the venture, GSPC and IOC owns 52% and 26%stake, while HPCL and BPCL holds 11% each. The consortiumis said to be ahead of the other bidders (GAIL-Engineers Indiaand Adani-Welspun) in all the three projects put up for bidding.However, the PNGRB has not yet declared the official winnersince an interim order of the Supreme Court has prevented itfrom passing final decisions. PNGRB has requested the SupremeCourt to modify its order, since the government has notifiedSection 16 of the PNGRB Act. The three trunk pipelines beingwon by the consortium are Mallavaram-Bhilwara,Mehsana-Bhatinda and Bhatinda-Jammu-Srinagar whereinGSPL , its subsidiary would be the ultimate beneficiary ofcontructing these pipelines. We have not factored these bids forvaluing GSPL, waiting for further operational and financialvisibility.


Exhibit 2: Natural gas - Henry Hub prices

0.0

2.0

4.0

6.0

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14.0

(US$

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Henry Hub Price Average Henry Hub NG Price

Jan

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Oil & Gas

Analyst: Vinay Nair / Amit VAnalyst: Vinay Nair / Amit VAnalyst: Vinay Nair / Amit VAnalyst: Vinay Nair / Amit VAnalyst: Vinay Nair / Amit Voraoraoraoraora

Oil & gas index underperforms the Sensex

On the bourses, the oil & gas index underperformed the Sensexby 0.7% in 3QFY2011 despite significant outperformance byindex heavyweight RIL (59.9% weightage). After a substantialfall of 9.3% in 2QFY2011, RIL registered robust gains of 7.3%during 3QFY2011 due to the improving refining marginscenario with cracks widening on the back of the cold weather.However, the substantial increase of 12% in average crude price,resulting in mounting under recoveries and reducing chancesof any further deregulation reforms, has proved to be a majorspoilsport for OMCs and upstream PSU companies. HPCL, BPCLand IOC registered whopping loss of 23.1%, 12.3% and 18%,respectively; whereas, ONGC and Oil India lost 7.7% and 7.2%,respectively. Cairn also lost 1% despite robust gains in crudeprice, as it awaits clearance for the Vedanta-Cairn Energy deal.However, gains were seen in gas companies, with GAIL andPetronet LNG posting robust gains of 7.4% and 18%,respectively, on higher petchem margins and spot LNG imports,respectively. Non-index gas companies, including IGL and GSPL,also registered gains of 12.2 and 6.8%, respectively.


ONGCONGCONGCONGCONGC is likely to report net realisation of US $65/bbl v/sUS $58/bbl in 3QFY2010 and US $63/bbl in 2QFY2011.Despite the expected rise in subsidy burden by 45% to ̀ 43.2bn,ONGC is expected to report the highest net realisation in the


Exhibit 3: Relative performance to the Sensex

(40.0)

(30.0)

(20.0)

(10.0)

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Q3'FY09 Q4'FY09 Q1'FY10 Q2'FY10 Q3'FY10 Q4'FY10 Q1'FY11 Q2'FY11 Q3'FY11

(%)

BSE Sensex BSE Oil & Gas

last two years due to material increase in crude oil price(US $85/bbl v/s US $79/bbl in 2QFY2011). However, thepositive effect of the spurt in crude oil price to some extent hasbeen offset by stronger INR/USD qoq, resulting in mere 2%growth in the bottom line.

RILRILRILRILRIL is likely to post higher GRM qoq at US $9.3/bbl v/sUS $7.9/bbl. The spurt in GRMs could be attributed to highermiddle distillates crack and wider heavy-light crude oil spread.Petchem margins are expected to improve due to better polymercracks over naphtha and higher polyester prices on account ofhigher cotton prices globally. Higher petchem and refiningmargins are expected to offset the dip in natural gas production(55mmscmd v/s 60mmscmd) qoq from KG-D6.

CairnCairnCairnCairnCairn, being highly leveraged to crude oil, is likely to benefitfrom the spurt in crude oil price, although stronger INR/USDwill offset gains to a certain extent. Production from MBA fieldsis likely to remain stagnant qoq due to approvals awaited fromJV partners and management committee for additional production.

GAILGAILGAILGAILGAIL is expected to report flat transmission volumes qoq. Highertransmission tariff and petchem margins are offset by highersubsidy burden, leaving bottom-line flatter qoq.

PPPPPetronetetronetetronetetronetetronet is likely to post volume growth qoq with the companyimporting spot LNG cargoes due to lower production from KG-D6. For 3QFY2011, we expect volumes to stand at 106.6TBTUs.

GSPLGSPLGSPLGSPLGSPL’s’s’s’s’s bottom-line is likely to decline by 19% yoy, as we expecttariff adjustment, which is happening over the last few quarters,to adversely impact profitability. We expect volumes to increasemarginally by 2.5% yoy to 36mmscmd during 3QFY2011.

IGL'sIGL'sIGL'sIGL'sIGL's volumes are likely to grow by 29% yoy due to the recentcommonwealth games and remain flat qoq. Margins are likely tobe flat qoq and fall yoy due to increased sourcing of costlier gas.

Gujarat Gas' Gujarat Gas' Gujarat Gas' Gujarat Gas' Gujarat Gas' volumes will be supported by restart of the PMTfield and LNG imports . We expect the company to report volumeof 3.52mmscmd for the quarter, up 18.2% yoy and 2.8% qoq.

Overall, for 3QFY2011EOverall, for 3QFY2011EOverall, for 3QFY2011EOverall, for 3QFY2011EOverall, for 3QFY2011E, our universe of stocks is likely to, our universe of stocks is likely to, our universe of stocks is likely to, our universe of stocks is likely to, our universe of stocks is likely towitness mixed performance.witness mixed performance.witness mixed performance.witness mixed performance.witness mixed performance.Exhibit 4: Quarterly estimates ( `̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31, 2010; * Calender year, ^ standalone numbers for quarter and consolidated numbers for full year



Cairn India 332 3,019 509.3 69.0 (109) 1,706 486.3 9.0 486.3 5.5 23.2 46.1 60.0 14.4 7.2 - Neutral

GAIL 511 8,276 33.7 19.4 (112) 930 8.1 7.3 8.1 24.8 29.5 33.3 20.6 17.3 15.4 - Neutral

GSPL 118 257 (4.4) 92.4 (181) 93 (19.0) 1.7 (19.0) 7.4 7.2 9.4 16.0 16.3 12.5 128 Accumulate

Gujarat Gas * 398 488 26.4 18.9 (100) 54 19.0 4.2 19.0 18.0 19.9 23.2 22.2 20.0 17.2 418 Accumulate

IGL 343 461 61.0 27.8 (891) 71 20.8 5.1 20.8 15.4 17.2 21.1 22.3 19.9 16.2 - Neutral

Petronet LNG 125 3,376 50.4 8.5 (84) 137 64.3 1.8 64.3 5.4 6.8 8.5 23.2 18.2 14.8 - Neutral

ONGC ^ 1,293 18,488 19.2 61.0 80 5,475 79.3 25.6 79.3 90.7 114.4 123.1 14.3 11.3 10.5 1,391 Accumulate

RIL ^ 1,058 68,347 20.2 15.0 120 5,535 38.1 16.9 38.1 48.6 69.5 87.2 21.8 15.2 12.1 1,260 Buy

47



Pharmaceutical

Barring the run-up in few mid-cap stocks, the rally in the HCsector was broadly restricted to large caps, which gained around10-20% during the period. Sun Pharma was the key gaineramongst large caps, reporting gains of 19.4%, after posting astellar performance in 2QFY2011 and favourable appeals courtruling, which has once again paved the way for Sun Pharma tolaunch the generic Eloxatin. Other large-cap gainers duringthe quarter were DRL and Cipla, which gained almost 14.2%and 12.6%, respectively. Ranbaxy, on the other hand, remainedflat during the period.

Amongst mid and small caps, Lupin and Aurobindo Pharmawere the key gainers, gaining 21.1% and 24.8%, respectively.Lupin and Aurobindo Pharma witnessed a surge on the back ofstrong/better-than-expected numbers posted in 2QFY2011.Amongst small caps, Indoco Remedies gained almost 17.7%.

Key developments

Ranbaxy launches Ranbaxy launches Ranbaxy launches Ranbaxy launches Ranbaxy launches AriceptAriceptAriceptAriceptAricept in the US in the US in the US in the US in the US::::: Ranbaxy has launchedgeneric Aricept in the US, with 180-day exclusivity. Aricept, abranded product of Eisai Pharmaceuticals, grossed sales ofaround US $2bn in the US.Besides Ranbaxy, Greenstone willlaunch the Authorised Generic of the product. During theexclusivity period, Ranbaxy could garner sales and profit ofaround US $240mn and US $168mn, respectively, contributingaround `16.8 to the company's EPS. This is the fourth First-To-File (FTF) product monetised by the company, despite ongoingUSFDA issues (Imitrex, Valtrex, Flomax and Aricept) over the

Pharma sector back in the limelight

During 3QFY2011, the BSE healthcare (HC) index outperformedthe BSE Sensex after underperforming during 2QFY2011-thefirst quarter of underperformance in 2010. The HC index surgedby handsome 10.3% as against a flat closing of the Sensex.With markets nearing 21,000, increased risk-aversion led tothe sector's outperformance.

Exhibit 1: BSE HC index v/s SensexExhibit 1: BSE HC index v/s SensexExhibit 1: BSE HC index v/s SensexExhibit 1: BSE HC index v/s SensexExhibit 1: BSE HC index v/s Sensex


last two years; hence, this has further reinforced management'sability to monetise its FTF opportunities, despite issues with itsmanufacturing facilities. Overall, we value the one-off FTFopportunities of the company at `129/share.

LLLLLupin settles patent litigation with Wupin settles patent litigation with Wupin settles patent litigation with Wupin settles patent litigation with Wupin settles patent litigation with Warner Chilcott: arner Chilcott: arner Chilcott: arner Chilcott: arner Chilcott: During thequarter, Lupin, Warner Chilcott plc and its subsidiary WarnerChilcott Company, LLC entered into a settlement agreement toresolve the pending patent litigations involving Warner Chilcott'soral contraceptive (OC) products, Loestrin 24 Fe andFemcon Fe. The products, which grossed sales of ~US $250mnand ~US $50mn in 2009, will go off patent in July 2014 andApril 2019, respectively.

Under the terms of the settlement agreement, Lupin has agreedthat, except in the event of an at-risk launch of a genericLoestrin 24 Fe product by a third party, neither Lupin nor itsaffiliates will market or sell a generic Loestrin 24 Fe productprior to July 22, 2014. In addition, Lupin has been granted anon-exclusive license by Warner Chilcott, covering Femcon Fe.The license will permit Lupin to commence the product'smarketing either as an authorised generic product, which wouldbe supplied by Warner Chilcott, or as the generic equivalent ofFemcon Fe in the US beginning on the earlier of (1) the 180-day exclusivity period, after which Teva Pharmaceutical Industrieswill enter the market with a generic equivalent to Femcon Fe;or (2) by January 1, 2013.

Under the agreement, Lupin has also been granted rights topurchase and sell an authorised generic version of the Asacol400mg product (a US $115mn product in 2009) in the US,which would be supplied by Warner Chilcott, only if a genericversion of the Asacol 400 mg product is launched by a thirdparty in the US.

Going forward, from FY2013, OC, which addresses a marketopportunity of around US $3bn-4bn in the US, would be oneof the key growth drivers of the company. Lupin, which hasfiled around 23 OC products in the US, expects to launch around17-18 products over the next two years, with the first productexpected to be launched by 3QFY2012.

TTTTTakeda settles akeda settles akeda settles akeda settles akeda settles AAAAActosctosctosctosctos patent litigations: patent litigations: patent litigations: patent litigations: patent litigations: Takeda and its whollyowned subsidiary, Takeda Pharmaceuticals North America, Inc.,entered into settlements with all the defendants in patent litigationbrought against the companies in response to their ANDAs forgeneric Actos (pioglitazone HCl), Actoplus met (pioglitazoneHCl and metformin HCl) and duetact (pioglitazone HCl andglimepiride). Actos, which is a Type-2-diabetes drug, reportedsales of around US $3bn.

BSE HC Sensex

-10

0

10

20

30

40

50

4Q

FY2009

1Q

FY2010

2Q

FY2010

3Q

FY2010

4Q

FY2010

1Q

FY2011

2Q

FY2011

3Q

FY2011

(%)



Pharmaceutical

Exhibit 2: ANDA approvals for select companiesCompanyCompanyCompanyCompanyCompany Generic productsGeneric productsGeneric productsGeneric productsGeneric products Approvals Approvals Approvals Approvals Approvals

Alembic Venlafaxine HCL, Losartan Potassium,

Pramipexole Dihydrochloride, Theophylline 4

Aurobindo Losartan Potassium, Losartan Potassium HCL, 2

Cadila Indomethacin, Losartan Potassium,

Losartan Potassium HCL 3

Cipla Zidovudine 1

DRL Zafirlukast, Lansoprazole 2

Lupin Losartan Potassium, Losartan Potassium HCL,

Cefixime, Desloratadine 4

Ranbaxy Donepezil HCL 1

Sun Pharma Diltiazem HCL, Desloratadine 2

Source: US FDA, Angel Research

Among large caps, Sun Pharma and Lupin to outperform

Among the large caps in our coverage universe, for 3QFY2011,Sun Pharma is likely to post 48.1% yoy growth on the salesfront, mainly on the back of integration of Taro, which will driveexport formulation sales during the period. On the domesticfront, Indian formulation sales would continue to grow at ahealthy pace at 20%. However, despite strong top-line growth,on account of the integration, operating profit is likely to growonly by 22.8%, with margins likely to be around 29.9%, a dipof around 619bp yoy, resulting in net profit registering yoygrowth of 32.0% during the period.

Lupin, on the other hand, is expected to register growth of 15.9%,mainly led by formulation sales in the exports markets (US andEurope) and the Indian domestic market. On the operating front,margins are likely to remain stable at 19.4% during the period;however, lower tax and interest outgo during the period wouldlead to 36.6% growth in net profit in 3QFY2011.

DRL is expected to post top-line growth of 10.8% to `1,917cr,driven by the US market. The region is expected to post growthof around 35%. Similarly, the company is expected to see strongtraction in its Indian and Russian formulation businesses.However, the PSAI segment is expected to post a lacklustreperformance during the quarter. The company is expected topost OPM of 15.3%, up 90bp yoy. On the net profit front, thecompany is expected to post net profit of `259.5cr, vis-à-vis aloss during the last corresponding period, which was impactedby the write-down on goodwill and intangibles.

Source: Angel Research; Note: 4QCY2010 for Ranbaxy

Exhibit 3: Sales growth and OPM for 3QFY2011

According to the settlement, FTF players Mylan, Watson andRanbaxy, which are expected to get 180-day exclusivity, havebeen licensed to enter the US market with generic Actos onAugust 17, 2012, subject to regulatory approval, or earlier undercertain circumstances. We estimate Ranbaxy to gross net salesand profit of US $128mn and US $64mn, respectively, duringthe exclusivity period.

Piramal Healthcare goes in for a share buyback:Piramal Healthcare goes in for a share buyback:Piramal Healthcare goes in for a share buyback:Piramal Healthcare goes in for a share buyback:Piramal Healthcare goes in for a share buyback: Theshareholders of Piramal Healthcare approved the buyback of~4.18cr shares or 20% of the company's share capital. Thebuyback would be on a proportionate basis through the tenderoffer at a price of `600/share, aggregating to `2,508cr. Thebuyback would open on January 17, 2011, and end onFebruary 7, 2011. With promoters tendering equal number ofshares, the acceptance ratio for the shareholders would workout to 20%. Further, with cash constituting a larger portion ofthe balance sheet, clarity on the utilisation of the same wouldbe the key value driver for the stock.

ANDA approvals in 3QFY2011

During the quarter, Alembic and Lupin received four approvalseach, while Cadila received three approvals. Further, DRLlaunched Zafirlukast, the bioequivalent generic version ofAccolate, in the US. The product launch was subsequent to thesummary judgment of non-infringement against AstraZenecaby the US District Court of New Jersey. The product addresses amarket opportunity of US $50mn in the US.

3QFY2011 result expectations

The Indian pharmaceutical sector is expected to post robustgrowth on the sales front for 3QFY2011. We expect ourcoverage universe to register 14.7% yoy top-line growth, albeitthe 3.7% yoy appreciation in INR against USD on an averageduring the quarter. Amongst large caps, Sun Pharma is expected

to post 48.2% yoy sales growth, mainly on the back of integrationof Taro. Other players, which are expected to post robustperformance, include Lupin and Cadila, which will report 36.6%and 33.6% growth in net profit, respectively. Amongst smallcaps, Indoco Remedies is expected to post 27.2% yoy and 60.0%yoy growth in sales and net profit, respectively. Amongst theMNC pack, Aventis is likely to post 40.4% growth in net profit,on the back of a 668bp yoy improvement in OPM, comparedto the last corresponding period, which was marred by thedecline in the domestic formulation business.

Sales growth OPM

(%)

48.2

15.9 15.4

0.9

10.8

29.9

19.4 20.417.4

15.3

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Sun Pharma Lupin Cipla Ranbaxy DRL

49



Pharmaceutical

Analyst: Sarabjit KAnalyst: Sarabjit KAnalyst: Sarabjit KAnalyst: Sarabjit KAnalyst: Sarabjit Kour Nangraour Nangraour Nangraour Nangraour Nangra


Source: Company, Angel Research; Note: Price as on December 31, 2010; Our numbers include MTM on foreign debt. #4QCY2010,* Quarterly numbers are standalone financials

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) P/E (x) P/E (x) P/E (x) P/E (x) P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.


Alembic 68 321 7.0 11.7 138 16.1 19.9 1.2 19.9 3.0 5.6 6.5 22.8 12.1 10.4 74 Accumulate

Aurobindo 1,318 935 11.0 19.3 (53) 145.0 40.4 24.9 30.2 101.1 84.9 109.2 13.0 15.5 12.1 - Neutral

Aventis # 1,950 263 10.8 13.6 668 36.5 40.5 15.9 40.5 68.4 70.6 92.1 28.5 27.6 21.2 - Neutral

Cadila 774 1,143 18.4 19.9 82 173.3 33.6 12.7 33.6 24.7 30.6 39.6 31.3 25.3 19.5 - Neutral

Cipla 370 1,552 15.4 20.4 (86) 261.1 (9.5) 3.3 (9.5) 13.5 13.0 17.6 27.5 28.5 21.0 - Neutral

Dishman 157 291 30.9 23.1 1 36.7 11.0 4.6 11.0 14.5 13.9 17.5 10.8 11.3 8.9 230 Buy

Dr. Reddys 1,663 1,917 10.8 15.3 90 259.5 - 15.4 - 20.9 59.1 78.1 79.7 28.1 21.3 - Neutral

Glaxo # 2,357 511 15.0 30.0 (118) 119.7 15.3 14.1 15.3 60.0 68.4 73.9 39.3 34.5 31.9 - Neutral

Indoco 493 122 27.2 13.9 101 12.4 60.0 10.1 60.0 34.3 39.5 54.1 14.4 12.5 9.1 541 Accumulate

Ipca Labs 345 475 20.6 21.1 (140) 63.4 8.8 5.1 8.8 16.4 19.5 23.7 21.0 17.7 14.6 - Neutral

Lupin 480 1,454 15.9 19.4 (17) 219.2 36.6 4.9 36.6 15.3 18.6 23.3 31.3 25.8 20.6 - Netural

Orchid Chem* 304 315 2.0 19.0 305 35.5 - 5.0 - - 12.7 16.6 - 23.9 18.3 - Neutral

Ranbaxy Lab# 599 2,266 0.9 17.4 (470) 312.6 22.4 7.4 22.4 7.1 45.1 28.1 84.9 13.3 21.3 - Neutral

Sun Pharma 485 1,513 48.2 29.9 (619) 447.4 32.0 21.6 32.0 13.0 15.7 21.2 37.3 30.9 22.9 - Neutral

Cipla is expected to post net sales growth of 15.4% to ̀ 1,552cr,driven by exports. On the operating front, OPM (excludingtechnical know-how fees) is expected to fall by 86bp yoy to20.4% on the back of higher employee expenses. Further, netprofit is expected to register a decline of 9.5% yoy to ̀ 261cr, astop-line growth will be offset by the fall in OPM.

Ranbaxy is expected to post a flat top line of `2,245cr. Growthlooks muted despite the launch of Aricept in the US, on theback of high base during the last corresponding period onaccount of sales of Valtrex. For Aricept, we expect the companyto post sales of around US $240mn during the exclusivity period.However, the impact of the same would be more visible in1QCY2011. On the operating front, Ranbaxy is expected toreport OPM of 17.4%.Overall, the company is expected to postnet profit of `312.6cr during the period.

Among mid caps, Cadila expected to continue itsoutperformance

Cadila is expected to post strong 18.4% growth in net sales to`1,143cr on the back of robust growth on the export anddomestic formulation fronts, where the company is expected togrow at 18.2% and 19.4% yoy, respectively. On the OPM front,we expect the company's OPM to expand by 82bp yoy to 19.9%on the back of favourable product mix. Net profit is expected toincrease by 33.6% yoy to `173cr, driven by top-line growthand OPM expansion.

We estimate Ipca Laboratories' top line to grow by 20.6% to`474.9cr for 3QFY2011. The company is expected to post stronggrowth both on the export and domestic fronts, where the

company is expected to log in growth of 17.2% and 23.8% yoy,respectively. OPM is expected to compress by 140bp yoy to21.1% on the back of rise in other expenditure. Overall, netprofit is expected to rise by 8.8% yoy to `63.4cr on the back ofpressure on operating margins.

Aurobindo Pharma is expected to post an 11% yoy rise in sales,aided by formulation exports. Margins are likely to remain stable,despite improvement in gross margins, on the back of higheremployee expenditure. Overall, net profit is expected to rise by40% yoy on the back of lower tax-outgo during the period.

Indoco Remedies is expected to report top-line growth of 27.2%to `121.7cr, driven by the domestic and export segments. Thecompany's OPM is expected to expand by 101bp yoy to 13.9%,driven by growth in domestic formulation sales. As a result, netprofit is expected to increase by 60.0% yoy to `12.4cr.

Outlook and valuation

During the past three years, the BSE HC index has been amongthe best performing indices, posting returns of 52.4% andoutperforming the market by 51.3% during this period. At thecurrent juncture, most of the stocks in our universe are currentlytrading at fair valuations and, hence, we continue to recommenda bottom-up approach.

In the generic segment, we prefer Cipla, LIn the generic segment, we prefer Cipla, LIn the generic segment, we prefer Cipla, LIn the generic segment, we prefer Cipla, LIn the generic segment, we prefer Cipla, Lupin, Cadilaupin, Cadilaupin, Cadilaupin, Cadilaupin, CadilaHealthcare, Aurobindo Pharma and Indoco Remedies.Healthcare, Aurobindo Pharma and Indoco Remedies.Healthcare, Aurobindo Pharma and Indoco Remedies.Healthcare, Aurobindo Pharma and Indoco Remedies.Healthcare, Aurobindo Pharma and Indoco Remedies.

The CRAMS segment is witnessing near-term hiccups becauseof inventory rationalisation and multiple mega global pharmamergers in CY2009; these concerns are mostly factored invaluations. In this segment, we recommend Dishman Pharma.In this segment, we recommend Dishman Pharma.In this segment, we recommend Dishman Pharma.In this segment, we recommend Dishman Pharma.In this segment, we recommend Dishman Pharma.



Power deficit highest in the western region

The western region's overall power deficit of 13.4% during8MFY2011 was the highest amongst all the regions.Maharashtra had an overall power deficit of 17.4%; peak deficitin Maharashtra stood at 22.1%. The eastern region had thelowest power deficit of 4.6%, with peak deficit of 5%.

Power

For 3QFY2011, we expect power-generating companies in ouruniverse to report top-line growth of 15.3% yoy, driven bycapacity additions and higher tariffs. However, operating profitsare expected to decline by 12.3% on account of higher fuelcosts. Net profit is expected to fall by 6.5% yoy.

Capacity addition: Status check

Generation

Inordinate delays in the completion of projects have led to theCEA revising its XIth Plan capacity estimates to 62,488MW, muchbelow the target of 78,000MW set at the beginning of the planperiod. Capacity addition has generally been delayed due toexecution issues relating to acquiring land and obtainingenvironment and other statutory clearances. Capacity additiontill November 2010 from the beginning of the XIth Plan periodstood at 29,361MW, which is just 54% of the capacity targetedto be achieved during the period.

Nov-10Nov-10Nov-10Nov-10Nov-10 Nov-09Nov-09Nov-09Nov-09Nov-09 chg (%)chg (%)chg (%)chg (%)chg (%) 8MFY118MFY118MFY118MFY118MFY11 8MFY108MFY108MFY108MFY108MFY10 chg (%)chg (%)chg (%)chg (%)chg (%)

Thermal 52.5 50.9 3.1 426.8 412.7 3.4

Hydro 7.4 6.8 8.8 83.3 78.7 5.8

Nuclear 2.2 1.4 57.1 15.4 11.9 29.4

TTTTTotalotalotalotalotal 62.162.162.162.162.1 59.159.159.159.159.1 5.15.15.15.15.1 525.5525.5525.5525.5525.5 503.3503.3503.3503.3503.3 4.44.44.44.44.4

Exhibit 2: Power generation (BU)

Source: CEA, Angel Research

Transmission lines

During April-November 2010, 5,579 circuit kilometers (ckm)were added to the 400kV HVDC transmission lines, as againstthe targeted 5,563ckm. Total addition to other transmission linecategories stood at 3,979ckm, as against the targeted2,997ckm.

Transmission sub-stations

During April-November 2010, total addition to the 400kVsubstation stood at 8,245MW, which was higher than thetargeted 7,645MW. Addition to the 220kV sub-station categorystood at 7,330MW, as against the targeted 6,220MW.

Operational highlights

During 8MFY2011, power generation in India rose by 4.4%yoy to 525.5BU (503.3BU). The country's thermal power

Power-deficit situation

The country continued to face power deficit due to the delay inthe commissioning of new capacities, fuel shortage in existingplants and deficiencies in the T&D system. India's overall andpeak power-deficit levels during 8MFY2011 stood at 8.9% and10.2%, respectively, slightly lower than 9.7% and 12.6% reportedin 8MFY2010.

generation rose by 3.4% yoy to 426.8BU. The plant load factor(PLF) of thermal plants for 8MFY2010 stood at 75.7%, whichwas 65bp lower than the target of 76.4%. Hydro powergeneration increased by 5.8% yoy to 83.3BU, while the amountof nuclear power generated grew substantially by 29.4% yoy to15.4BU.



Exhibit 3: India - Power deficit scenario

Target (T) Achievement (A) A as a % of T

20

40

60

80

100

0

5,000

10,000

15,000

20,000

FY2003 FY2005 FY2007 FY2009 8MFY2011

(%)(MW)

Exhibit 1: Generation capacity addition performance

8.87.1 7.3

8.49.6 9.9

11.09.9

8.9

12.2 11.2 11.712.3

13.8

16.6

12.0 12.6

10.2

0.0

4.0

8.0

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FY2003

FY2004

FY2005

FY2006

FY2007

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FY2009

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8M

FY2011

Overall Peak

(%)

51



240253 263

278 280302

330355 366

0

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FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

(mn

tonnes)

Power

Exhibit 4: Region-wise power deficitExhibit 4: Region-wise power deficitExhibit 4: Region-wise power deficitExhibit 4: Region-wise power deficitExhibit 4: Region-wise power deficit

Source: CEA

Region (%)Region (%)Region (%)Region (%)Region (%) OverallOverallOverallOverallOverall PPPPPeakeakeakeakeak

Northern (8.5) (8.9)

Western (13.4) (17.2)

Southern (5.8) (9.8)

Eastern (4.6) (5.0)

North Eastern (10.1) (18.5)

All IndiaAll IndiaAll IndiaAll IndiaAll India (8.9)(8.9)(8.9)(8.9)(8.9) (10.2)(10.2)(10.2)(10.2)(10.2)

Coal scenario

Coal

India's coal-based power-generation capacity, which currentlystands at 89,778MW, accounts for ~53% of overall capacity.The dominance of coal as a power-generation fuel in India isset to continue with a major portion of the upcoming capacitybeing based on coal. The power sector is the leading consumerof coal in the country, accounting for 75% of India's overalldemand of 534mn tonnes in FY2010. As per our estimates,India's power sector would require an additional coal supply of~188mn metric tonnes (MMT) over the next five years.Coal-based power plants have been facing fuel shortage dueto various reasons such as delay in procuring coal linkages;issues in obtaining environment clearances and other regulatoryapprovals for developing coal blocks; hurdles in expansion ofcoal blocks; and logistical and infrastructural issues.

As of November 30, 2010, 27 critical thermal power stationsout of the 82 monitored by the CEA have critical coal stocks forless than seven days.

Primary market activity

The quarter witnessed two major public offerings from the energyspace from Coal India (CIL) and Power Grid Corporation(PGCIL).

CIL: IPO

CIL, the world's largest coal producer raised funds through itsinitial public offer (IPO) during the quarter. The ̀ 15,000cr issuewas subscribed by 15.28 times. We had a Subscribe rating onthe issue based on 1) the huge reserves and production base ofthe company; 2) the highly encouraging domestic coal demandscenario, which is expected to significantly outpace the supply;and 3) the expected improvement in blended realisations ofCIL due to a) hikes in notified prices of raw coal, b) increasedproportion of beneficated coal in overall sales going aheadand c) higher e-auction sales volume.

PGCIL: FPO

PGCIL, India's principal electric power transmission company,raised money through an FPO offer during the quarter. The`7,600cr issue received a good response from investors andwas subscribed by 14.88 times. We had a Subscribe rating onthe issue based on the expectation of a substantial increase inthe regulated capital of the company post the rev up in thecommissioning of generation projects.

Global coal prices on the rise

Spot global coal prices were substantially higher on a yoy basisduring the quarter. Average prices of the New Castle Mckloksey6,700kc coal stood at around US $104/tonne in 3QFY2011,as against US $77/tonne recorded in 3QFY2010. On a qoqbasis as well, coal prices were higher by 10.6%.


Exhibit 6: Global coal prices

Source: CEA

Exhibit 5: Coal consumption for power generation

0

50

100

150

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250

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Prices beginning to firm up

(US$

/tonne)



Analyst - Rupesh Sankhe / VAnalyst - Rupesh Sankhe / VAnalyst - Rupesh Sankhe / VAnalyst - Rupesh Sankhe / VAnalyst - Rupesh Sankhe / V. Srinivasan. Srinivasan. Srinivasan. Srinivasan. Srinivasan

Power

Key corporate developments

NTPC

During the quarter, the Ministry of Power gave NTPC the goahead to sell 15% of power outside the long-term PPA withrespect to the 500MW Unit 7 of Korba Super Thermal PowerProject and 500MW unit 6 of Farakka Super Thermal PowerProject. The company will sell the balance to state power utilitiesunder the long-term PPA. Thus, 150MW of power would beavailable for sale on a short-term basis. We believe thecompany's profitability would receive a substantial boost if thegovernment allows sale under the short-term route from its otherexisting and upcoming plants as well.

JSW Energy

JSW Energy has agreed to acquire 100% equity stake in CICEnergy, which has 2.6bn tonnes of coal reserves in Botswanafor a consideration of ~CAD422mn (~US $414.4mn). The offerprice is attractive as it implies an EV of US $0.22/tonne ofmineable reserves. The offer is yet to get regulatory approvaland must be accepted by 66% of shareholders for the deal topass through. The deal is expected to close before February28, 2011. The acquisition of CIC Energy with 2.6bn tonnes ofcoal reserves would provide JSW Energy 16-20mtpa of coalfrom FY2016.

Reliance Power

Reliance Power has tied up with some Chinese banks forfinancing US $1.1bn (~`5,000cr) to import power equipmentfor Sasan UMPP in Madhya Pradesh. Banks that have promisedfinancing include Bank of China, China Development Bank andThe Export-Import Bank of China.

Adani Power

During the quarter, Adani Power completed the synchronisationof the 330MW fourth unit in Mundra, Kutch. Post thecommissioning of this plant, the company has a total capacityof 1,320MW. The company would be adding another 660MWin the remaining portion of FY2011, while another 1,980MWof capacity would be added in FY2012E.

Exhibit 8: Quarterly estimatesExhibit 8: Quarterly estimatesExhibit 8: Quarterly estimatesExhibit 8: Quarterly estimatesExhibit 8: Quarterly estimates ( `̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31, 2010

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net P Net P Net P Net P Net Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) EPS (EPS (EPS (EPS (EPS (`̀̀̀̀))))) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.


CESC 366 1,168 46.6 28.6 503 168 63.4 13.3 63.4 34.5 43.2 47.1 10.6 8.5 7.8 474 Buy

GIPCL 104 257 8.0 31.2 603 33 15.0 2.2 15.0 7.1 8.7 12.9 14.8 12.0 8.1 135 Buy

NTPC 201 13,277 13.4 24.2 (900) 2,132 (9.8) 2.6 (9.8) 10.7 10.2 11.4 18.7 19.6 17.5 230 Buy

PTC 127 2,509 47.8 1.5 86 40 150.0 1.3 164.1 3.2 4.9 6.6 39.9 25.9 19.4 137 Accumulate


We expect NTPC to witness a 13.4% yoy increase in its top lineto `13,277cr during the quarter, aided by volume growth dueto commencement of new capacities; and higher tariffs.However, the company's operating profit is expected to declineby 17.3% yoy to ̀ 3,217cr. We estimate NTPC's net profit to dipby 9.8% yoy to `2,132cr on high depreciation costs.

We expect CESC to register 46.6% yoy growth in its standalonetop line to `1,168cr, aided by higher volumes due to thecommissioning of the 250MW Budge-Budge plant. Thecompany's OPM is expected to expand by 503bp yoy to 28.6%.We expect CESC to record 64% yoy growth in net profit to ̀ 167cr.

We expect GIPCL to register a 8.0% yoy increase in revenue for3QFY2011, primarily on account of higher volumes. The highervolumes are expected due to the commissioning of Unit 3 and4 in Surat. OPM is expected to expand by 603bp to 31.2%,while the bottom line is set to increase by 15% yoy to ̀ 33.1cr in3QFY2011.

Industry outlook

We expect capacity addition to gather pace going ahead, withthe XIth Plan period ending in FY2012. However, thepower-deficit scenario is likely to persist, as supply is not likelyto keep up with demand. Thus, players with the ability to executeprojects on time would be benefited by high merchant tariffsexpected to prevail over the next two years. WWWWWe maintain Buye maintain Buye maintain Buye maintain Buye maintain Buyon NTPC, GIPCLon NTPC, GIPCLon NTPC, GIPCLon NTPC, GIPCLon NTPC, GIPCL, PT, PT, PT, PT, PTC and CESC.C and CESC.C and CESC.C and CESC.C and CESC.


Exhibit 7: Performance on the bourses

10.4%

-7.5%

-9.0%

-4.9%

-7.6%

2.2%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

PTC

NTPC

GIPCL

CESC

BSE Power

Sensex

53



Real Estate

For 3QFY2011, we expect residential volumes to report flat tomoderate growth on a sequential basis on account of festivedemand. Revenue of real estate companies will be largely drivenby execution of existing projects and new launches. Companiessuch as DLF and Unitech (through UCP) will continue to seesustainability in office leasing volumes on a sequential basis.Banks have tightened lending norms in line with the RBI’smandate that loan to value (LTV) should not exceed 80%, whichmay marginally impact housing demand in the short term.

In our universe of stocks, we expect DLF's revenue to be drivenby the execution of its existing projects. We expect HDIL to postflat growth sequentially in transfer of development rights (TDR)volumes and prices. This is on account of the anticipation ofMaharashtra state government overruling the Bombay HighCourt's decision and hiking FSI from 1x to 1.33x. However,HDIL's new launch of Paradise City project Palghar (W) hastaken off well and phase-I has been completely sold. For ARIL,we expect revenue to be driven by the residential segment andrental income.

HDIL's new launches continue to be rewarding

HDIL opened the booking for phase-II of its mega townshipproject, Paradise City, on December 24, 2010. The project is inclose proximity to Palghar railway station and offers over 20,000homes at affordable prices coupled with modern amenities.The first phase involving sectors 1, 2 and 3 of 4,332 flats and399 shops was launched on December 10, 2010, withresidential units being completely sold out within two weeks ofthe launch. Phase-II involves shops from phase-I and sectors 4,5 and 6 with 6,407 flats (340-930sq. ft.) and 320 shops (5,155-7,950sq. ft.) for sale. The company has been able to pre-sell75% of its residential projects (7mn sq. ft.) launched sinceFY2009, thereby providing `5,000cr of revenue visibility overFY2010-12E. In FY2011/12, HDIL plans to launch new projectsof 27mn sq. ft., largely in Mumbai.


Exhibit 1: Revenue, PAT estimates (3QFY2011)

Increasing land acquisition by ARIL

During 1HFY2011, ARIL acquired 153 acres of land for a totalconsideration of `564cr. These land parcels were primarilybought in Gurgaon (125 acres), Sonepat (10 acres) andNeemrana (18 acres). Out of the 125 acres in Gurgaon, 110acres of land is agricultural land, where the company intendsto develop group housing and township. On the remaining 43acres, it intends to launch a mid-income residential project overthe next six months. This is in line with the company's strategyto acquire land at a cheaper cost.

Delay in Unitech's Golibar project

Unitech's upcoming Golibar SRA project, which was being jointlydeveloped with Shivalik Ventures at Santacruz (Mumbai), hasbeen delayed on account of fresh litigation following protestfrom slum dwellers. Unitech has so far invested `600cr for its50% stake in the JV. Phase-I of the project is expected to generate~11mn sq. ft. of saleable area. Further, overhang of Comptrollerand Auditor General of India’s (CAG) report on Uninor has ledto correction in the stock price by 24.9% over the last threemonths. Unless we get more clarity on both the above issues,we expect the stock price to remain range bound.

Improvement in leasing; new launches hold key forDLF stock performance

DLF's non-residential segment constitutes 55% of our GNAV. InFY2010, the company leased only 0.93mn sq. ft. of commercialand retail space. However, it witnessed improvement in leasingin 1HFY2011 by leasing out 2.7mn sq. ft. DLF expects the leasingactivity to continue its uptick in FY2011. Further, in CY2012, itexpects to list DAL as a business trust/REIT, which could be valueaccretive for DLF's shareholders at the lower cap rate. However,much will depend on the sustainable recovery in the commercialleasing segment. Post the merger of DLF and DAL/Caraf, the

PPPPProjectrojectrojectrojectroject LLLLLocationocationocationocationocation Saleable AreaSaleable AreaSaleable AreaSaleable AreaSaleable Area(mn sq. ft.)(mn sq. ft.)(mn sq. ft.)(mn sq. ft.)(mn sq. ft.)

Popular Car Bazaar Andheri 0.8

Ekta Nagar Kandivali 1.5

Palghar Township Palghar 11.8

Whispering Towers Phase-II Mulund 0.8

Meadows Phase-II Goregaon 3.6

Daulat Nagar Santacruz 0.8

Premier Residency Phase-II Kurla 0.8

Ghatkopar Ghatkopar 0.5

Kochi Kochi 6.3

TTTTTotalotalotalotalotal 26.926.926.926.926.9

Exhibit 2: Forthcoming residential projects


48.5

25.2

2.8

(27.0)

1.4

26.5

(40.0)

(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

ARIL DLF HDIL

Revenue PAT

(%)



Commercial demand likely to pick up over the next 12months

After witnessing a sharp decline in the past few quarters, capitalvalues have started to strengthen and have registered marginalappreciation across most micro markets. Industry participantshave indicated that the surge in leasing enquiries is because ofa renewed interest from corporates. This has already beenreflected for companies like DLF, which leased out 2.7mn sq. ft.in 1HFY2011-higher than the entire area leased out in FY2010.

In the IT/ITES sector, we expect net employee addition of 15%over FY2010-12E. Accordingly, we believe demand in officespace will start picking up from 2HFY2011E. Cushman andWakefield estimates pan India cumulative demand for officespace during CY2009-13E to be 196mn sq. ft.

Real Estate

Retail segment - Still some pain left

Vacant space in shopping centres increased during 2008-09.This was primarily on account of higher real estate costs andlower consumption, because of which many retailers startedshifting from their rapid expansion mode to a consolidationmode. Consequently, absorption of retail space fell to 4mn sq.ft. in CY2009. Retail supply is projected to be around 16.4mnsq. ft. in CY2010, with an expected absorption of only around8.9mn sq. ft. Therefore, vacant spaces are likely to increase inthe short term, given the considerable rationalisation in thesupply pipeline. We believe demand is yet to pick up, especiallyin tier-II and tier-III cities, which is not the case with metroswhere catchment areas are high. We expect prices to remainunder pressure, as the segment has fragmented supplydynamics. Initial recovery volumes are likely to be cornered byexperienced players, such as Phoenix Mills, and not necessarilylarge ones.

company has 20mn sq. ft. of rent-yielding assets, which willgenerate ̀ 1,500-1,600cr of rental income in FY2011. However,new launches have been delayed because of delays in gettingnew approvals. Therefore, in 1HFY2011, the company was ableto launch only 1mn sq. ft., much below peers. In light of this,we believe management's guidance of achieving >12mn sq.ft. of development volumes in FY2011 will prove to be achallenging task.

RBI tightened liquidity to curb speculative demand

In order to curb excess liquidity and speculative demand in thereal estate sector, the RBI introduced the following measuresviz. 1) capped the LTV ratio to 80% (previously 85%), 2) increasedrisk weights on residential housing loan of above `75lakh and3) raised standard asset provisioning for teaser loans from 0.4%to 2.0%. We believe these measures would marginally affectdemand and may lead to postponement of buying in the shortterm. Further, we believe debt refinancing requirement in1HFY2012 will come under pressure, which can lead to coolingoff in prices in cities like Central Mumbai and Gurgaon, whereprices have overheated since the last six months.

Residential recovery has slowed, but not stopped

Prices in Mumbai and Delhi are 15-30% above their peak levelsin 2008, whereas prices in most other markets are still 10-15%lower than their last peak levels. This has resulted in the taperingof volumes in cities like Mumbai, where prices have increasedsubstantially. Volumes slowed down in 2QFY2011 on accountof seasonal weakness. Launch activity also remained subduedduring this period. However, for 3QFY2011, while new launcheshave been robust, we expect volumes to be benign on the backof tightening measures by the RBI. Response to new launchesand absorption trends over the next quarter should provide usgreater clarity on sustainability of volumes witnessed in FY2010,especially in Mumbai/NCR.

Source: Jones Lang LaSalle, Angel Research

Exhibit 3: Absorption trend of top-10 Indian cities

(50)

0

50

100

150

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1Q

CY0

8

2Q

CY0

8

3Q

CY0

8

4Q

CY0

8

1Q

CY0

9

2Q

CY0

9

3Q

CY0

9

4Q

CY0

9

1Q

CY1

0

2Q

CY1

0

(%)

(Units

)

Absorption (LHS) yoy growth (RHS)

Source: Cushman & Wakefield, Angel Research

Exhibit 4: Pan India commercial demand

0

10

20

30

40

50

60

2009E 2010E 2011E 2012E 2013E

(mn

sq.

ft.)

55



Real Estate

Analyst - PAnalyst - PAnalyst - PAnalyst - PAnalyst - Param Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salot

Exhibit 7: Quarterly estimatesExhibit 7: Quarterly estimatesExhibit 7: Quarterly estimatesExhibit 7: Quarterly estimatesExhibit 7: Quarterly estimates ( `̀̀̀̀ cr)

Source: Company, Angel Research; Note: Price as on December 31 , 2010


(((((`̀̀̀̀))))) 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E chg bpchg bpchg bpchg bpchg bp 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (((((`)))))

DLF 292 2,536 25.2 45.5 387 474.6 1.4 2.8 1.4 10.1 10.9 16.9 28.8 26.7 17.3 - Neutral

Anant Raj Ind 107 123 48.5 51.0 (4,143) 49.0 (27.0) 1.7 (27.0) 7.6 6.2 13.4 14.2 17.3 8.0 178 Buy

HDIL 194 420 2.8 58.0 1,183 205.9 26.5 5.0. 26.5 12.9 20.6 29.2 15.1 9.4 6.6 302 Buy


The risk reward ratio is turning favourable for the sector, withrecovery widening towards tier-II and tier-III cities in theresidential segment. Lending from the banking sector is slowingdown and the new RBI circular shall further hit affordability inthe `10mn and above segment. Having said that, we believeabsorption, not price appreciation, will drive residential growthover the next six quarters. New launches have been rewardingfor developers who have launched projects at 10-15% discountto ongoing market rates. Further, high inventory is still hamperingcommercial recovery; however, there has been an uptick inabsorption levels. We believe rentals to remain firm at currentlevels with an uptick apparent over the next 12 months. Webelieve stock performances are related to macro factorsinterspersed with company-specific issues, such as the DLF-DALmerger translating into higher debt and 2G-related scam forUnitech. We are positive on the long-term outlook of the realtysector, with growing disposable income, shortage of 25mnhouses in India and reasonable affordability. Given the currentscenario, we expect stability in residential prices, with anexception of certain micro markets such as Mumbai andGurgaon, where prices have overheated, and expect an uptickin the commercial segment over the next 12 months.

In our universe of stocks, we prefer companies with visibility oncash flow, low leverage and a strong project pipeline withattractive valuations. Our top picks are HDIL and ARILOur top picks are HDIL and ARILOur top picks are HDIL and ARILOur top picks are HDIL and ARILOur top picks are HDIL and ARIL, which, which, which, which, whichare trading at 52% and 49% discount to their NAare trading at 52% and 49% discount to their NAare trading at 52% and 49% discount to their NAare trading at 52% and 49% discount to their NAare trading at 52% and 49% discount to their NAVs, respectivelyVs, respectivelyVs, respectivelyVs, respectivelyVs, respectively.....WWWWWe maintain a Neutral rating on DLF with concerns of a weake maintain a Neutral rating on DLF with concerns of a weake maintain a Neutral rating on DLF with concerns of a weake maintain a Neutral rating on DLF with concerns of a weake maintain a Neutral rating on DLF with concerns of a weakoperating cash flowoperating cash flowoperating cash flowoperating cash flowoperating cash flow, increasing gearing levels and the stock, increasing gearing levels and the stock, increasing gearing levels and the stock, increasing gearing levels and the stock, increasing gearing levels and the stocktrading at 12% discount to our onetrading at 12% discount to our onetrading at 12% discount to our onetrading at 12% discount to our onetrading at 12% discount to our one-year forward NA-year forward NA-year forward NA-year forward NA-year forward NAVVVVV.....


Exhibit 5: Pan India retail demand

Sensex v/s realty stocks

During 3QFY2011, the BSE realty index stronglyunderperformed the Sensex by 2,555bp on the back of thehousing loan scam, which stoked fears of 1) corporategovernance, 2) restricted credit-flow to the sector and 3) theexpected increase in cost of funding for future projects. Moreover,the RBI's measures to tighten liquidity and curb speculativedemand by increasing LTV and risk weight on teaser loans havefurther dampened stock performances. We believe the recentcorrection gives good entry opportunity on account of1) companies trading at significant discount to our one-yearforward NAV, 2) stability in volumes and 3) comfortable balancesheet position, unlike that in 2008. We believe HDIL, OberoiRealty and ARIL are best placed in the sector.

0

2

4

6

8

10

12

14

2009E 2010E 2011E 2012E 2013E

(mn

sq.f

t.)


Exhibit 6: Realty stocks underperform the Sensex2.2

(22.8) (23.8)(25.0)

(30.0)

(25.0)

(20.0)

(15.0)

(10.0)

(5.0)

0.0

5.0

BSE Sensex DLF ARIL HDIL

(%)



Retail

As against the mild recovery seen in the global economy, the

Indian economy has shown good growth on account of strong

government spend, low dependence on exports and rising

consumerism in India. The Indian economy has steadily

recovered to pre-2007 levels and economists across the board

expect GDP growth of around 9% levels for the next decade.

The Private Final Consumption Expenditure (PFCE) is expected

to reach about $1trn (`5,000,000cr) by CY2020. Key growth

drivers for the same include investments in infrastructure by the

government and private sector, which would propel earning

power of the Indian consumer. Rising income levels are likely to

boost consumption in the country and in turn lend a boost to

the modern retail trade. Thus, investments are likely to boost

consumption and vice-versa is also likely to be true.

The retail consumption trends remained upbeat in both the rural

and urban households in 3QFY2011. The quarter saw the Diwali

festival being celebrated towards early November compared

to mid-October. Pertinently, majority of India's retail sales take

place during the festival season and Diwali being one of the

biggest festivals, it bring a lot of cheer for the retailers. This

Diwali particularly, the mood was quite upbeat compared to

2008 and 2009, when most global economies including India

were reeling amidst the throes of the economic downturn. This

time round, the retailers were pleasantly surprised to see growth

exceeding their expectations in certain areas. Consumers were

upbeat in their spending, not only in apparel and fashion items,

but consumer durables and home improvement products as

well. These categories were incidentally the most affected last

year, as there was a decline of business in the home retail

category. Thus, with the economic revival gathering steam, we

expect the retailers to experience better times going ahead.

In this context, we believe that the organised retail sector is

currently at inflexion point, and is ready to take the next leap of

growth at a steady and stable pace. We maintain that the

segment has tremendous growth potential, and accordingly we

expect it to capture 10% share of the overall retail sector over

the next 4-5 years.

Expansion but with a cautious approach

Overall, optimism was also visible in the space booking done

by the retailers during the quarter. Markets witnessed strong

space booking not only from the domestic retailers, but

international too albeit with a cautious approach. We believe

that the mood on the street is buoyant on account of the

sustained strong industrial production (IIP) figure and resulting

increase in consumer spend.

As per the recent CB Richard Ellis report, developers have

chalked out aggressive plans to build 90 new malls and take

the grand total to 280 by the end of 2012. India is likely to add

5 million square feet (mn sq ft) in 2010 and another 15mn sq

ft is likely to be added by 2012. Of the total addition, Bangalore

forms the largest share with 70%.

Although the retailers have gone aggressive in space booking,

it has been done with a very cautious approach post the learning

phase for the retailers during the recessionary times of 2008

and 2009. Developers are also a more knowledable clan now

and have started appreciating the retailers' matrix (footfalls,

tenant mix and conversion rates) while commencing projects

and approaching tenants. Many developers have changed the

rental model from fixed to revenue share, which is more

acceptable to the retailers. We believe that the change in strategy

signals evolution in the business model that allows more flexibility

to the retailers in developing their business. This is because

rental is a key cost component in the retail business, which had

witnessed stunning increase during the pre-recession era. As a

result, during the recession, rentals plunged 30-40% across

cities, which is now stabilising

Value retailing maintains positive momentum

The value retailing segment is expected to have witnessed robust

growth during 3QFY2011, despite the high food prices. Value

retail formats such as Big Bazaar, Food Bazaar, More and D'Mart

tried to cushion the impact of inflation on demand by stepping

up bargains and discount offers across product categories that

have been hit hard by the spiraling prices. Pantaloon Retail

(PRIL) reported 12.5% growth in value retailing in 1QFY2011,

and we expect the segment to register higher double-digit growth

in 2QFY2011. Overall, major players in the value retailing

segment, including PRIL, Reliance Retail, Spencer's and More

stand to benefit from this ongoing trend.

Lifestyle retailing on a roll

Stable economic conditions and a pick-up in consumer

confidence resulted in consumers opening up their wallets for

purchasing lifestyle goods during the quarter. PRIL reported

21.7% growth in lifestyle retailing in 1QFY2011, which is

expected to register higher double-digit growth in 2QFY2011.

Proposal to ease FDI rules in retail - Positive for sector

The concept note on allowing 51% FDI in multi-brand retail

continues to be at the discussion stage. The department of

industrial policy and promotion (DIPP), under the commerce

57



Retail


An upbeat festive season during the quarter leading to increased

footfalls and consequently higher sales per sq ft, coupled with

ongoing cost-rationalisation measures are likely to benefit the

retail players. We expect value retailing to further strengthen,

while lifestyle retailing is likely to maintain its growth trajectory.

We expect our coverage universe to report top-line growth of

52% yoy. We estimate Shoppers Stop to lead our universe with

70% yoy growth in top-line for the quarter.

ministry, is seeking comments on putting an FDI cap on multi-

brand retail, which is currently banned. The paper, however,

remains silent on the quantum of FDI cap, even after the draft

paper had proposed 51% FDI in multi-brand retail.

We concur with the industry experts that enabling FDI would be

good for the sector, as it will result in increased employment

and higher level of consumerism, on account of a substantial

range of competitively priced products. The government also

stands to benefit from this, as the exchequer would receive

increased collections, since the large organised trade players

are tax-compliant, contribute robust tax revenue and are unable

to avail exemption limits. On the supply-chain front, we believe

wastage in farm-to-fork will reduce with the transfer of

technology used by the global players.

According to a recent research by Crisil, the entry of FDI in

multi-brand retail has the potential to bring down prices of

perishable goods such as fruits and vegetables over the long

term. The report states that an efficient supply chain will enable

the large retailers to source fruits and vegetables directly from

the co-operatives and in turn lower the annual wastage

amounting to around `630bn. Wastage in the supply chain

and commission to trade intermediaries inflate the final price

paid by the Indian consumers. They shell out almost 2-2.5x the

price a farmer gets as compared to 1-1.5x in developed markets,

where penetration of organised retail is much higher. As per

the research, the overall investment required to set-up the supply-

chain infrastructure for fruits and vegetables would be close to

Rs650bn over the medium term. This is estimated after taking

into consideration the number of cold storage facilities and

refrigerated trucks that would be required for handling

perishable goods. About 30% of the country's total production

of fruits and vegetables is wasted every year because of

inadequate cold storage and transport facilities.

Retail stocks marginally outperform Sensex

Most stocks in the retail sector marginally outperformed the

Sensex during October -December 2010. While Shoppers Stop

(SSL) outperformed the Sensex by 12%, Titan beat the Sensex

by 8%. However, retail major, PRIL, underperformed the Sensex

by around 26% during the mentioned period.

On the margins front, we expect PRIL and SSL to register a yoy

decline of 60bp and 310bp in OPM, respectively. However, the

higher growth in top-line is expected to cushion the impact of

the increase in fixed cost. We expect NPM to increase by a

marginal 35bp yoy.


Exhibit 1: Retail outperforms Sensex marginally


Exhibit 2: Sales estimates

PRIL Shoppers Titan

-

500

1,000

1,500

2,000

2,500

3,000

3,500

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11

(`cr

)

-

4

8

12

16

20


(%)

PRIL Shoppers Titan


Exhibit 3: EBITDA margin estimates

60

80

100

120

140

30-

Sep

-10

7-O

ct-1

0

14-

Oct

-10

21-

Oct

-10

28-

Oct

-10

4-N

ov-

10

11-

Nov-

10

18-

Nov-

10

25-

Nov-

10

2-D

ec-1

0

9-D

ec-1

0

16-

Dec

-10

23-

Dec

-10

30-

Dec

-10

PRIL Shoppers Titan Sensex



Analyst - Sageraj BariyaAnalyst - Sageraj BariyaAnalyst - Sageraj BariyaAnalyst - Sageraj BariyaAnalyst - Sageraj Bariya

Retail

Outlook and Valuation

With the economic recovery gathering steam, coupled with the

revived consumer sentiment amidst the Diwali festival during

the quarter under review, footfalls registered an upward trend,

resulting in an increment in same store sales (SSS) and the sales

per square feet (SPSF) of the retailers. We expect the trend to

continue and strengthen going ahead, thereby keeping the

long-term growth prospects intact for the organised retail

segment in India. We expect organised retail to post a CAGR of

31% over the next five years.

The value retailing segment is likely to lead the growth over the

next few years, as more and more consumers are expected to

go for value-for-money-goods. However, we expect the lifestyle

retailing segment growth to pick-up on the back of stable

economic conditions. Players like PRIL, who are straddled across

the price and product points, are expected to benefit both in

the short and long term. Overall, retail continues to be one of

the fastest growing sectors in India and we remain positive on

its growth prospects.

PRIL continues to be our preferred pick

On account of being present across price points and categories,

we believe that PRIL is better-placed than its peers. Apart from

the cost-rationalisation measures, the company's restructuring

initiatives would also enable it to enhance its focus on the

different segments and provide it a good opportunity for value

unlocking. At `367, the stock is trading at 19.8x FY2012E

earnings and 2.1x FY2012E P/BV. Our sum-of-the-parts target

for PRIL is ̀ 469, wherein we have valued its stake in FCH, HSRIL

and Future Bazaar at `31, `12 and `18, respectively. PRILPRILPRILPRILPRIL

continues to be our top pick in the retail sector and recommendcontinues to be our top pick in the retail sector and recommendcontinues to be our top pick in the retail sector and recommendcontinues to be our top pick in the retail sector and recommendcontinues to be our top pick in the retail sector and recommend

a Buy on the stock.a Buy on the stock.a Buy on the stock.a Buy on the stock.a Buy on the stock.

Titan has a stable and niche business model. In the jewellery

segment, Titan had witnessed a dip in volumes earlier, as

demand fell due to the higher gold prices. However, the falling

rate of decline in volumes indicates that the consumers may be

adjusting to the high prices and do not expect gold prices to

correct significantly. The company's watch segment is performing

well, while the other segments are also expected to turn in a

good performance, as there has been a revival in the demand

for lifestyle category goods. At `3,601, the stock is trading at

35.8x FY2012E earnings and 12.2x FY2012E P/BV. Owing toOwing toOwing toOwing toOwing to

rich valuations, we remain Neutral on Titan.rich valuations, we remain Neutral on Titan.rich valuations, we remain Neutral on Titan.rich valuations, we remain Neutral on Titan.rich valuations, we remain Neutral on Titan.

We expect SSL’s performance to improve in the ensuing quarters

on the back of pick-up in consumer demand for lifestyle retailing.

At `748, the stock is trading at 36.3x FY2012E earnings and

5.8x FY2012E P/BV. In view of the recent run-up in the price,In view of the recent run-up in the price,In view of the recent run-up in the price,In view of the recent run-up in the price,In view of the recent run-up in the price,

we remain Neutral on SSLwe remain Neutral on SSLwe remain Neutral on SSLwe remain Neutral on SSLwe remain Neutral on SSL.....


Source: Company, Angel Research; Note: Price as on December 31, 2010, * June year ending, For PRIL estimates are for 2QFY2011

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (EPS (EPS (EPS (EPS (`))))) EPS (EPS (EPS (EPS (EPS (`))))) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.

(((((`̀̀̀̀))))) 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E chg bpchg bpchg bpchg bpchg bp 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg 3QFY11E3QFY11E3QFY11E3QFY11E3QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (((((`)))))

Pantaloon* 367 2,869 50.0 287 (60) 72 42.2 3.5 42.2 11.2 15.1 19.8 32.8 24.3 18.5 469 Buy

Shoppers Stop 748 745 70.0 52 (310) 16 14.6 4.5 14.1 10.3 18.0 20.6 72.7 41.6 36.3 - Neutral

Titan 3,601 2,001 50.0 200 190 145 92.0 32.6 92.0 56.5 83.4 100.7 63.7 43.2 35.8 - Neutral


Exhibit 5: PAT margin estimates

0

2

4

6

8

10


(%)

PRIL Shoppers Titan


Exhibit 4: PAT estimates

PRIL Shoppers Titan

-

20

40

60

80

100

120

140

160


(`cr

)

59



Software

Broad-based growth continues to cheer the IT pack

The aggregate US macro data for November 2010 pointstowards a sustained recovery going ahead. The positive cuesfor November 2010 include 1) capacity utilisation firming upto 75.2% v/s 74.9% in October 2010; 2) industrial productionholding at 5.4% v/s 5.5% in October 2010; 3) retail salescontinuing to grow at 7.7% yoy in November 2010; 4) personalincome growth sustaining the momentum of 3.8% yoy; and 5)durable goods order growth expanding to 10.4% yoyv/s 9.3% yoy in October 2010. Also, in December 2010, theUS PMI expanded to 57.0 from 56.6 in November 2010. Infact, even Europe's macro data strengthened with PMI shootingto 58.0 in November 2010 from 55.4 in October 2010. Thechange in the perception about recovery being sustainable fromthe earlier perception of it being just a fad (in 2QFY2011) andthe continued spending on IT by global corporates led to theoutperformance of IT stocks over the BSE Sensex, although clientsare going in for short-term spending commitment rather thanlong-term commitment. For CY2011, managements of tier-I ITcompanies expect client budgets to remain flat to positive, witha higher element of offshoring.

The recent increase in IT spending in the BFSI segment (themajor contributor with 45-50% to exports) is driven by businessneeds related to 1) regulatory compliance and risk,2) rationalisation and consolidation and 3) post-mergerintegration. The next wave of strategic investment by BFSI clientsis expected in areas of 1) mobility 2) social commerce and3) risk and compliance. For the retail segment, IT spendcontinues to grow in order to tap the digital consumer's behavior,social media and multi-channel commerce.


Exhibit 3: Retail - Revenue growth trend

For 3QFY2011, we expect growth to continue to bebroad-based with the BFSI and retail segments leading thegrowth path and the manufacturing segment following theirfootsteps; however, the telecom segment will continue to belaggard.

The hi-tech and manufacturing segments are also back to theirsecular growth phase, but spending in telecom continues to bea laggard though telecom service providers (TSPs) in theemerging markets are investing in expansion and roll outs.Geographically, US is ahead, riding on the wave of technologicalinvestments to drive growth apart from harvesting costefficiencies, whereas European clients, especially in continentalEurope, are opening up to outsourcing-offshoring to drive costefficiencies. This is leading to the rise of transformational dealswith a higher component of discretionary services such asenterprise application services (EAS) and engineering, researchand development (ERD) from the manufacturing, utilities andretail segments.

Infosys TCS Wipro HCL Tech

(20)

(15)

(10)

(5)

0

5

10

15

20

3Q

FY09

4Q

FY09

1Q

FY10

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FY10

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FY10

4Q

FY10

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FY11

2Q

FY11

(%qoq)


Exhibit 4: Manufacturing - Revenue growth trend


Exhibit 2: BFSI - Revenue growth trend


Exhibit 1: IT index v/s Sensex

BSE IT Sensex (RHS)

18,000

19,000

20,000

21,000

22,000

5,200

5,600

6,000

6,400

6,800

7,200

1-O

ct-1

0

16-O

ct-1

0

31-O

ct-1

0

15-N

ov-

10

30-N

ov-

10

15-D

ec-1

0

30-D

ec-1

0

Infosys TCS Wipro HCL Tech(15)

(10)

(5)

0

5

10

15

3Q

FY09

4Q

FY09

1Q

FY10

2Q

FY10

3Q

FY10

4Q

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1Q

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(%qoq)


(10)

(5)

0

5

10

15

3Q

FY0

9

4Q

FY0

9

1Q

FY1

0

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

2Q

FY1

1

(%qoq)



Software

In case of EAS, incremental growth is emerging out ofimplementation work rather than sale of new licenses. In fact,the need for standardisation of enterprise platforms, i.e.conversion of multi-version implementation into single-versionor limited-version as well as global-level rollout of the same ispacing up. Even ERD services are witnessing a spurt in demand,with product companies getting aggressive and trying to launcha series of new products by shortening the go-to-market cycle.Thus, the surge in discretionary spending witnessed in2QFY2011 continues its traction as more and more clients lookat change-the-business initiatives via IT spending as a growthdriver and cost optimiser.

Cross-currency movement continues to favour revenue

The cross-currency movement, which had proved to be the baneover 4QFY2010-1QFY2011 impacting USD revenue by0.8-1.5% (qoq), has turned into a boon since 2QFY2011. TheUSD depreciated by 1.9%, 5.1% and 9.1% against the GBP,Euro and AUD to 1.58, 1.36 and 0.99, respectively, in3QFY2011. This will aid USD revenue for Infosys, TCS, Wiproand HCL Tech by 1.3%, 0.7%, 1.1% and 1.7%, respectively.Although, gains from weaker USD against global currencieswill be wiped off due to the INR appreciating steeply againstthe USD by 3.5% qoq in 3QFY2011.


Exhibit 5: EAS - Revenue growth trend Hiring spree to continue

IT players got into the hiring mode from 3QFY2010, with highlateral hiring in 2HFY2010 to tap the sudden pent-up demand.With an improving demand landscape, Infosys and TCS haveincreased their hiring targets for FY2011 by over 10% and 20%,respectively, over the past two quarters. Companies are nowlooking at planned hiring to address the strengthening demandpipeline. We expect the hiring trend to remain upbeat, withInfosys expected to have hired ~7,268 employees and TCShiring ~13,837 employees in 3QFY2011.

Net additionNet additionNet additionNet additionNet addition FY08FY08FY08FY08FY08 FY09FY09FY09FY09FY09 FY10FY10FY10FY10FY10 1QFY111QFY111QFY111QFY111QFY11 2QFY112QFY112QFY112QFY112QFY11

Infosys 18,946 13,663 8,946 1,026 7,646

TCS 21,988 32,354 16,668 3,271 10,717

Wipro 18,529 2,243 10,261 4,854 2,975

HCL Tech 9,653 4,224 4,103 6,428 5,661

TTTTTotal employeesotal employeesotal employeesotal employeesotal employees

Infosys 91,187 1,04,850 1,13,796 1,14,822 1,22,468

TCS 1,11,407 1,43,761 1,60,429 1,63,700 1,74,417

Wipro 95,567 97,810 1,08,071 1,12,925 1,15,900

HCL Tech 49,802 54,026 58,129 64,557 70,218

Exhibit 7: Trend in net addition


Utilisation to be a mixed bag

Utilisation levels for TCS and Infosys peaked in 2QFY2011,reporting historic high of 77.7% and 74.3% (including trainees),respectively. For HCL Tech and Wipro, due to strong fresherhiring, utilisation level did not expand but remained lower thanthat in 1QFY2011. In 3QFY2011, we expect utilisations forTCS to come off, but expect them to remain firm for Infosys andHCL Tech as trainees hired in 1HFY2011 will start getting billed.For Wipro, we expect better utilisations in 3QFY2011.


Exhibit 8: Trend in utilisation rates

Attrition to cool off

Attrition levels had shot up in 2QFY2011 to the pre-recessionarylevels of FY2008, as companies were flocking for peopleeverywhere to map the sudden surge in demand. However,


(10)

(5)

0

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0

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1

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1

(%qoq)


Exhibit 6: Cross-currency impact on USD revenue

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

3QFY10 4QFY10 1QFY11 2QFY11 3QFY11E

(%)



65

70

75

80

85

1Q

FY0

8

2Q

FY0

8

3Q

FY0

8

4Q

FY0

8

1Q

FY0

9

2Q

FY0

9

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9

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9

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0

2Q

FY1

0

3Q

FY1

0

4Q

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0

1Q

FY1

1

2Q

FY1

1

(%)

61



Analyst - Srishti Anand/Ankita SomaniAnalyst - Srishti Anand/Ankita SomaniAnalyst - Srishti Anand/Ankita SomaniAnalyst - Srishti Anand/Ankita SomaniAnalyst - Srishti Anand/Ankita Somani

Software

Exhibit 11: Quarterly estimates ((((( `̀̀̀̀ c c c c crrrrr)))))

Source: Company, Angel Research; Note: Price as on December 31, 2010; * June ending so 2QFY2011 estimates, % chg is qoq



Infosys 3,445 7,292 5.0 29.4 (78) 1,815 4.5 31.8 4.5 109.5 121.1 142.5 31.5 28.4 24.2 - Neutral

TCS 1,165 9,680 4.2 27.5 (48) 2,197 4.3 11.2 4.3 35.1 43.1 48.3 33.2 27.0 24.1 - Neutral

Wipro 490 7,972 3.1 19.0 81 1,348 4.9 5.5 4.9 18.9 21.9 24.3 26.0 22.4 20.2 515 Accumulate

HCL Tech* 456 3,898 5.1 13.2 30 360 16.7 5.2 16.7 17.6 24.0 31.5 25.8 18.9 14.4 513 Accumulate

Surge in revenue to continue

In 3QFY2011, on the back of strong volume growth, stablepricing and favourable cross-currency movement, we expectUSD revenue to surge by 6.0-8.7% qoq for tier-I IT companies.This growth will be lower in INR terms at 3.1-5.1% qoq due toINR being stronger in 3QFY2011, at 44.85 v/s 46.48 (in2QFY2011).

Margins to be a mixed bag

We expect Infosys to record a dip of 78bp qoq in its EBIT marginsdue to the impact of mid-year promotion in October 2010 and3.4% appreciation in INR against USD. In case of TCS, the dropin utilisations and INR appreciation are expected to take away


Exhibit 9: Trend in volume growth (qoq)

(8)

(6)

(4)

(2)

0

2

4

6

8

10

12

1Q

FY07

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3Q

FY11E

(%qoq

)


productivity gains. Wipro is expected to record a 110bp qoqexpansion in EBIT margins for the IT services segment on theback of better utilisations qoq; however, at a consolidated level,Wipro is expected to record only 81bp qoq expansion due togood growth in the IT products segment, which is a thin-marginbusiness. HCL Tech is expected to record a 30bp qoq expansionin its EBIT margins on the back of strong cross-currency benefitand productivity gains. Thus, for 3QFY2011, tier-I IT companiesare expected to report a mixed bag performance on the EBITmargin front.


Over the last three quarters, there is an uptick in discretionaryspending as clients are looking forward to gain competitiveadvantage by remaining ahead of the curve. This trend, thoughled by the BFSI and retail segments and largely driven by theUS market, is expected to be more broad-based with broadereconomies tracking recovery in the true sense, thereby instillingconfidence in the IT sector. Thus, we expect 3QFY2011 to beyet again a strong quarter with 6.0-8.7% qoq growth in USDrevenue for tier-I IT companies, aided by buoyant demanddriving volumes, favourable cross-currency movement andstable pricing environment. Moreover, we expect Infosys to reviseits revenue growth guidance upwards from 24-25% yoy to27-28% yoy for FY2011. WWWWWe remain positive on the IT sectore remain positive on the IT sectore remain positive on the IT sectore remain positive on the IT sectore remain positive on the IT sectorwith Twith Twith Twith Twith TCSCSCSCSCS, Infosys and HCL T, Infosys and HCL T, Infosys and HCL T, Infosys and HCL T, Infosys and HCL Tech as our preferred picks.ech as our preferred picks.ech as our preferred picks.ech as our preferred picks.ech as our preferred picks.

going forward, we expect these rates to normalise as strongcampus hiring carried out simultaneously by these companieswill create a stable bench, which will help them to map anysurge in demand and thus, abate poaching of laterals. Thus,we do not expect attrition to be a spoilsport anymore, causingany lapse in the billable position of companies.

Cyclically a weak quarter but with strong volume growth

Traditionally, 3Q is a weak quarter for IT companies as thenumber of working days is less, compared to the other quarters,due to the holiday season at the client site. However, for3QFY2011, on the back of continued IT spend by clients, weexpect volume growth to remain strong at 5.6-7.1% qoq fortier-I companies, even on the base of high volume growth of6.6-11.2% qoq witnessed in 2QFY2011.

Source: Company, Angel Research; *Note: For IT services segment

Exhibit 10: Change in EBIT margins (qoq)

Infosys TCS Wipro* HCL Tech(300)

(200)

(100)

-

100

200

300

3QFY10 4QFY10 1QFY11 2QFY11 3QFY11E

BP

(qoq)



Telecom

During 3QFY2011, almost all telecom stocks slumped, withBharti Airtel (Airtel), Reliance Communication (RCOM) and Ideadropping off by 2.5%, 13.7% and 6.2%, respectively. Thesestocks were set on fire by the report issued by the CAG. As perthe report:

(1) 85/122 new licenses issued in 2008 did not fulfill theeligibility criteria

(2) The Department of Telecom (DoT) favoured RCOM byaccepting its license entry fee for dual-technology spectrumbefore others

(3) The licensing/spectrum allocation policy resulted in a lossof revenue of ~`1,76,000cr to the exchequer as the entry feefor spectrum licenses in 2008 was pegged at 2001 prices

Following this, the DoT has issued show cause notices to newoperators such as Etisalat, Videocon, Uninor, Loop, S Tel andAllianz Infratech (merged with Etisalat), because, as per theDOT, these operators had suppressed information to baglicenses and have failed to roll out services as mandated.Recently, Etisalat and Sistema Shyam have paid penalty of ̀ 9.9crand `11cr, respectively, to the DoT for failing to launch mobilephone services on time.

Amongst the listed players, RCOM was set on fire as CAG alsofound a violation of rules in the equity structure of Swan Telecomas Reliance Telecom (GSM subsidiary of RCOM) had more thanthe maximum 10% stake in the company. The quarter alsowitnessed some key developments, including 1) rollout of mobilenumber portability (MNP) in Haryana, which allows a subscriberto shift from one service provider to another without changingthe mobile number and 2) launch of 3G services by operatorssuch as Tata Teleservices and RCOM.

3G launch by private players: Not at an irrational price

RCOM gave respite to the industry by launching 3G services ata premium to Tata Docomo, for usage lower than 1 GB, thusruling out the possibility of any irrational pricing by otherincumbents going forward.

New players continue to gain subscriber market share

Over September-November 2010, the Indian subscriber basegrew at an average rate of 2.9% mom. Amongst the incumbents,Airtel, RCOM, Vodafone, Aircel and Idea grew at an averagerate of 2.1-3.1% mom, whereas BSNL outperformed its peersby growing at an average rate of 3.7% mom. New entrants,including Uninor, Etisalat, Videocon and S Tel, grew at averagerates of 19.9%, 55.8%, 4.5% and 12.5% mom, respectively.

Company Company Company Company Company (mn) Jun-10Jun-10Jun-10Jun-10Jun-10 July -10July -10July -10July -10July -10 AugAugAugAugAug-10-10-10-10-10 SepSepSepSepSep-10-10-10-10-10 OctOctOctOctOct-10-10-10-10-10 Nov-10Nov-10Nov-10Nov-10Nov-10

Airtel 136.6 139.2 141.3 143.3 146.3 149.4

RCOM 110.8 113.3 115.3 117.3 119.4 122.4

Vodafone Essar 108.8 111.2 113.5 115.3 117.8 120.9

TTSL 72.5 74.8 76.9 79.0 80.7 82.5

IDEA 68.9 70.7 72.7 74.2 76.0 78.8

BSNL 66.9 68.1 70.4 72.7 75.2 78.2

Aircel Cellular 41.7 43.3 44.9 46.5 47.5 48.7

Uninor 6.0 6.9 9.1 11.3 13.7 16.2

Shyam Telelink 5.1 5.5 6.0 6.5 7.0 7.6

MTNL 4.9 4.9 5.0 5.0 5.1 5.1

BPL Mobile 2.9 2.9 3.0 3.0 3.0 3.0

S Tel 1.1 1.1 1.2 1.3 1.5 1.7

HFCL 0.7 0.9 0.9 1.0 1.0 1.4

Videocon 3.0 3.9 4.9 1.3 1.3 1.4

DB Etisalat 0.0 0.0 0.0 0.1 0.1 0.1

TTTTTotalotalotalotalotal 629.8629.8629.8629.8629.8 646.9646.9646.9646.9646.9 665.1665.1665.1665.1665.1 677.8677.8677.8677.8677.8 695.5695.5695.5695.5695.5 717.3717.3717.3717.3717.3

Source: COAI, AUSPI, Angel Research

Exhibit 2: Total subscriber base


Exhibit 1: Stock return analysis of leading Indian TSPs

MNP as a non-MNP as a non-MNP as a non-MNP as a non-MNP as a non-event:event:event:event:event: Haryana witnessed the launch of MNPduring the quarter, which proved to be a non-event as theanticipated escalation in the churn of post-paid customers fellthrough. Pan India rollout of MNP is due in January 2011.

Thus, a trend was spotted with most of the incumbents (Airtel,RCOM, Aircel and Vodafone) losing out their market share tonew entrants. Whereas, BSNL and Idea bucked the trend oflosing out their market share to new entrants and gained marketshare by 0.2% and 0.1%, respectively, over the same period.Over September-November 2010, subscriber market share ofnew entrants such as Uninor increased by 0.6%, whereas marketshare of Videocon and S Tel remained stable at 0.2%.

(2.5)

(13.7)

(6.2)

8.5

(16.0)

18.6

(20)

(15)

(10)

(5)

0

5

10

15

20

Airtel RCOM Idea

Chg. (3 months) Chg. (1 year)

(%)

63



Telecom

Company (%)Company (%)Company (%)Company (%)Company (%) Jun-10 Jun-10 Jun-10 Jun-10 Jun-10 July -10July -10July -10July -10July -10 Aug -10Aug -10Aug -10Aug -10Aug -10 SepSepSepSepSep-10-10-10-10-10 OctOctOctOctOct-10-10-10-10-10 Nov-10Nov-10Nov-10Nov-10Nov-10

Airtel 21.7 21.5 21.2 21.1 21.0 20.8

RCOM 17.6 17.5 17.3 17.3 17.2 17.1

Vodafone Essar 17.3 17.2 17.1 17.0 16.9 16.8

TTSL 11.5 11.6 11.6 11.7 11.6 11.5

IDEA 10.9 10.9 10.9 10.9 10.9 11.0

BSNL 10.6 10.5 10.6 10.7 10.8 10.9

Aircel Cellular 6.6 6.7 6.8 6.9 6.8 6.8

Uninor 1.0 1.1 1.4 1.7 2.0 2.3

Shyam Telelink 0.8 0.9 0.9 1.0 1.0 1.1

MTNL 0.8 0.8 0.8 0.7 0.7 0.7

BPL Mobile 0.5 0.5 0.4 0.4 0.4 0.4

S Tel 0.2 0.2 0.2 0.2 0.2 0.2

HFCL 0.1 0.1 0.1 0.2 0.1 0.2

Videocon 0.5 0.6 0.7 0.2 0.2 0.2

DB Etisalat 0.0 0.0 0.0 0.0 0.0 0.0Source: COAI, AUSPI, Angel Research

Exhibit 3: Operator-wise subscriber market share

Company (mn)Company (mn)Company (mn)Company (mn)Company (mn) Jun -10 Jun -10 Jun -10 Jun -10 Jun -10 July -10July -10July -10July -10July -10 AugAugAugAugAug-10-10-10-10-10 SepSepSepSepSep-10-10-10-10-10 OctOctOctOctOct-10-10-10-10-10 Nov-10Nov-10Nov-10Nov-10Nov-10

Airtel 3.0 2.6 2.0 2.0 3.0 3.1

Vodafone Essar 2.7 2.4 2.3 1.8 2.5 3.1

BSNL 1.1 1.2 2.3 2.3 2.5 3.0

RCOM 2.9 2.5 2.0 2.0 2.0 3.0

IDEA 2.2 1.9 2.0 1.5 1.8 2.8

Uninor 1.0 0.9 2.2 2.2 2.5 2.4

TTSL 2.7 2.3 2.1 2.1 1.7 1.8

Aircel Cellular 1.6 1.6 1.6 1.6 1.0 1.2

Shyam Telelink 0.4 0.5 0.5 0.5 0.4 0.6

HFCL 0.3 0.2 0.1 0.1 - 0.4

S Tel 0.1 0.1 0.1 0.1 0.2 0.2

Videocon 0.6 0.9 1.0 (3.6) 0.1 0.1

DB Etisalat 0.0 0.0 0.0 0.0 0.0 0.1

MTNL 0.0 0.0 0.0 0.0 0.0 0.0

BPL Mobile 0.0 0.0 0.0 0.0 0.0 0.0

TTTTTotalotalotalotalotal 18.718.718.718.718.7 17.117.117.117.117.1 18.318.318.318.318.3 12.712.712.712.712.7 17.717.717.717.717.7 21.921.921.921.921.9Source: COAI, AUSPI, Angel Research

Exhibit 4: Trend in subscriber net additions

The net addition run rate of incumbents faced a churn duringAugust-September 2010 due to tightened security norms as wellas rollout of 2G services by new operators, including Uninor,Etisalat and Videocon. In October-November 2010, incumbentsagain supported strong net additions, with Airtel and Vodafoneleading the pack by adding 3.1mn subscribers each inNovember 2010.

MOU to marginally firm up

From 2QFY2010-1QFY2011, Airtel and Idea witnessed asecular growth trend in their minutes of usage (MOU); however,they witnessed a decline in the seasonally weak 2QFY2011.RCOM, on the other hand, has been consistently experiencinga decline in its MOU. For 3QFY2011, we expect MOU for Airteland Idea to grow marginally by 0.5% and 0.2% qoq,respectively; whereas for RCOM, we expect MOU to continueto decline at 1% qoq.

Circle-wise net additions

In the first two months of 3QFY2011, all the circles witnessedimpressive growth in subscribers with Metro, A and C circles

Circle (%)Circle (%)Circle (%)Circle (%)Circle (%) Jun-10 Jun-10 Jun-10 Jun-10 Jun-10 July -10July -10July -10July -10July -10 AugAugAugAugAug-10-10-10-10-10 SepSepSepSepSep-10-10-10-10-10 OctOctOctOctOct-10-10-10-10-10 Nov-10Nov-10Nov-10Nov-10Nov-10

Metro 15.3 14.1 11.5 9.5 11.3 8.9

A 30.4 38.0 32.9 24.2 32.7 34.1

B 38.9 40.3 41.8 46.2 40.6 42.6

C 15.4 7.6 13.9 20.0 15.4 14.5

Source: COAI, AUSPI, Angel Research

Exhibit 5: Market share in subscriber net addition

VAS share to grow

We expect VAS share to have grown in 3QFY2011, on accountof the festival season leading to higher exchange of text andother value-added services. This should help the downside inaverage revenue per minute (ARPM) to be limited due to lowervoice ARPM resulting in from higher growth in B and C circles.

growing by 2.1-3.4% mom, whereas B circle growing by 3.1%despite having the highest subscriber base.

In November 2010, Metro lost its share to A and B circles in abig way, which stood tall with market share of 34.1% and 42.6%in subscriber net addition, respectively. On an absolute basis,in November 2010, all circles except Metro grew rapidly, withB circle leading at 9.3mn net addition (28.9% mom), followedby A and C circles at 7.4mn (28% mom) and 3.2mn (15.7%mom), respectively. Net additions in Metro circle trendeddownwards by 3.2% mom at 1.9mn.


Exhibit 6: Trend in MOU per month per subscriber

Airtel (ex -Africa) Idea RCOM

505485 478

450 446468

480454 456

416402 399

375389 398

415394

395410

372 365340 330

318

295 276 273

250

350

450

550

3Q

FY09

4Q

FY09

1Q

FY10

2Q

FY10

3Q

FY10

4QFY

10

1Q

FY11

2Q

FY11

3Q

FY11E

min

utes

per

user



Telecom

Analyst - Srishti Anand/Ankita SomaniAnalyst - Srishti Anand/Ankita SomaniAnalyst - Srishti Anand/Ankita SomaniAnalyst - Srishti Anand/Ankita SomaniAnalyst - Srishti Anand/Ankita Somani


Source: Company, Angel Research; Note: Price as on December 31, 2010, % chg is qoq



Airtel 357 15,787 3.8 34.2 56.0 1,535 (7.6) 4.0 (7.6) 32.0 17.4 23.8 11.1 20.5 15.0 - Neutral

RCOM 145 5,301 5.5 31.4 30.0 311 (30.3) 1.5 (30.3) 22.8 6.7 9.1 6.4 21.6 16.0 - Neutral

Idea 69 3,844 5.0 24.1 7.0 178 (1.1) 0.5 (1.1) 2.9 2.2 2.0 23.9 32.0 34.6 65 Reduce

ARPM to remain flattish

ARPM registered a free fall at a ~5% CQGR over the past ninequarters on the back of entry of new players and the price war.However, the price war logged by these new entrants has turnedinto a curse for their own sustainability. The confidence of nofurther possibility of a price war resurfacing was instilled by therational pricing move for 3G services by RCOM vis-à-vis TataDocomo, i.e. no case of undercutting. Therefore, we expectARPM to remain flat qoq for 3QFY2011.

ARPUs to inch up

For 3QFY2011, we expect the combination of flat ARPM andmarginal improvement in MOU to push average revenue peruser (ARPU) marginally up by 0.4% and 0.3% qoq for Airteland Idea, respectively. However, for RCOM, ARPU is expectedto fall by 2.0% qoq due to slippage in MOU.

EPMs to remain stable

For 3QFY2011, we expect EBITDA per minute (EPM) to remainflat for all the three telcos as stable ARPM, marginal uptick inMOU and strong subscriber growth will set off cost escalationdue to higher access charges.


Exhibit 7: Trend in ARPM per subscriber

0.40

0.50

0.60

0.70

3Q

FY0

9

4Q

FY09

1Q

FY10

2Q

FY10

3Q

FY1

0

4Q

FY10

1Q

FY11

2Q

FY11

3Q

FY1

1E

`/m

in



324305

278252

230 220 215202 202

266254

232

209

200185 182

165 166

251224

210

161 149139 130

121 119100

200

300

400

3QFY

09

4QFY

09

1QFY

10

2QFY

10

3QFY

10

4QFY

10

1QFY

11

2QFY

11

3QFY

11E

`/m

onth


Exhibit 8: Trend in ARPU per month


For 3QFY2011, we expect revenue growth to be driven by stronggrowth in subscriber base, flat ARPM and a marginal uptick inMOU. Amongst the top three operators, we expect Idea toregister revenue growth of 5.0% qoq and RCOM to grow at5.5% qoq. Airtel (including Zain) is expected to post growth of3.8% qoq. On the EBITDA margin front, we expect Airtel torecord an expansion of 56bp qoq on the back of lower personnelcost and decreasing network-operating expense (NOE) withhigher subscribers per cell site. Idea and RCOM are alsoexpected to post EBITDA margin expansion of 7bp and 30bpqoq, respectively, for 3QFY2011. The sector continues to behaunted by issues related to the 2G scam. We believe industrydynamics point toward a possible consolidation in the long runand expect only select few operators, including Airtel, Vodafone,RCOM, BSNL, Aircel, Idea and Uninor, to be the survivors outof the current 14 operators. Airtel continues to be our preferredpick amongst telcos due to its low-cost integrated model (ownedtower infrastructure), potential opportunity to scale up in Africa,established leadership in revenue and subscriber market share,and relatively better KPIs.


Exhibit 9: EPM trend

0.20 0.20

0.240.23

0.20

0.170.17 0.16 0.16

0.150.16

0.160.14

0.13 0.130.11 0.10 0.10

0.230.22

0.22

0.160.14

0.13 0.13 0.13 0.13

0.05

0.10

0.15

0.20

0.25

3QFY

09

4Q

FY09

1Q

FY10

2Q

FY10

3Q

FY10

4Q

FY10

1Q

FY11

2Q

FY11

3Q

FY11E

`/m

inAirtel (ex -Africa) Idea RCOM

65



Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Ratings (Returns) :

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Result Preview -3QFY2011 - 3-12-2011

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