July 2010

India Strategy

11 SENSEX

earnings
10

9 8
reforms fund flow

interest
6 7 rates

capex
5 consumption

3
payouts
monsoons

2
corporate
1 events

global
markets
valuations

India 2010: Watch out for the 2nd half

Research Team (Rajat@MotilalOswal.com)
 India Strategy

Contents
India Strategy 3-46

Sector & Companies 47-255 GSK Consumer 115 11. Pharmaceuticals 184-205
Godrej Consumer Products 116 Aventis Pharma 192
1. Automobiles 48-56
Hindustan Unilever 117 Biocon 193
Bajaj Auto 52 ITC 118 Cadila Healthcare 194
Hero Honda 53 Marico 119 Cipla 195
Mahindra & Mahindra 54 Nestle India 120 Divi’s Laboratories 196
Maruti Suzuki India 55 United Spirits 121 Dishman Pharma 197
Tata Motors 56
Dr Reddy’s Labs. 198
6. Information Technology122-134 GSK Pharma 199
2. Banking 57-82 HCL Technologies 128
Andhra Bank 63 Glenmark Pharma 200
Infosys 129 Jubilant Organosys 201
Axis Bank 64 MphasiS 130
Bank of Baroda 65 Lupin 202
Patni Computer 131 Piramal Healthcare 203
Bank of India 66 TCS 132
Canara Bank 67 Ranbaxy Labs. 204
Tech Mahindra 133 Sun Pharmaceuticals 205
Corporation Bank 68 Wipro 134
Dena Bank 69
Federal Bank 70 7. Infrastructure 135-143 12. Real Estate 206-216
HDFC 71 Hindustan Construction 139 Anant Raj Industries 211
HDFC Bank 72 IVRCL 140 DLF 212
ICICI Bank 73 Jaiprakash Associates 141 HDIL 213
Indian Bank 74 Nagarjuna Construction 142 Mahindra Lifespaces 214
LIC Housing 75 Simplex Infrastructure 143 Phoenix Mills 215
Oriental Bank 76 Unitech 216
Punjab National Bank 77 8. Media 144-153
Shriram Transport 78 Deccan Chronicle 149 13. Retailing 217-222
South Indian Bank 79 HT Media 150 Pantaloon Retail 221
State Bank 80 Jagran Prakashan 151 Titan Industries 222
Union Bank 81 Sun TV Network 152
Yes Bank 82 Zee Entertainment 153
14. Telecom 223-231
3. Cement 83-93 9. Metals 154-166 Bharti Airtel 228
ACC 87 Hindalco 159 Idea Cellular 229
Ambuja Cement 88 Hindustan Zinc 160 Reliance Communication 230
Birla Corporation 89 JSW Steel 161 Tulip Telecom 231
Grasim Industries 90 Nalco 162
15. Textiles 232-241
India Cements 91 Sesa Goa 163
Alok Industries 237
Shree Cement 92 SAIL 164
Sterlite Industries 165 Arvind Mills 238
UltraTech Cement 93
Tata Steel 166 Bombay Rayon 239
4. Engineering 94-104 Raymond 240
ABB 99 10. Oil & Gas 167-183 Vardhman Textiles 241
BHEL 100 BPCL 173
16. Utilities 242-253
Crompton Greaves 101 Cairn India 174
CESC 248
Larsen & Toubro 102 Chennai Petroleum 175
NTPC 249
Siemens 103 GAIL 176
Power Grid Corp. 250
Thermax 104 Gujarat State Petronet 177
PTC India 251
HPCL 178
5. FMCG 105-121 Reliance Infrastructure 252
IOC 179
Asian Paints 111 Tata Power 253
Indraprastha Gas 180
Britannia Industries 112 MRPL 181 17. Others 254-255
Colgate Palmolive 113 ONGC 182 Sintex Industries 254
Dabur India 114 Reliance Industries 183 United Phosphorus 255

Note: All stock prices and indices for India Strategy as on 30 June 2010, unless otherwise stated

July 2010 2
 2 July 2010

India Strategy
BSE Sensex: 17,701 S&P CNX: 5,313 As on: 30 June 2010

T O use football parlance, Earnings remains a star striker for Team India. It should
remain in steady form in 1QFY11, with Sensex PAT growing 19% YoY. Second half
of 2010 for Indian equities depends on the interplay of 11 different drivers. Monsoons and
Global markets remain the near term triggers for market direction. Our model portfolio is
overweight on domestic plays - Financials (SBI, ICICI Bank), Infrastructure & allied
sectors (BHEL, ACC, Unitech) and Oil & Gas (BPCL, GAIL). Amongst the global
plays, we prefer IT and Pharma over cyclicals.

Steady 1QFY11 for the Indian corporate sector; Sensex PAT up 19% YoY
We expect MOSL Universe (excluding oil marketing companies) to report 1QFY11 earnings
growth of 17% YoY. This growth is a moderation compared to 31% YoY in 2HFY10,
when earnings were largely driven by low base. Telecom sector and ONGC are the two
key reasons for lower growth. Ex these, growth for rest of Universe would be 31%.
1QFY11 will also be a quarter, where absolute PAT will be lower QoQ (first time in last 4
years). This is driven by flat growth QoQ in Oil & Gas and drop in earnings in Metals and
Telecom sector. Sensex performance is marginally better than aggregate with PAT growth
of 19% YoY.
QUARTERLY EARNINGS PERFORMANCE - MOSL UNIVERSE (RS B)

SALES EBITDA NET PROFIT

SECTOR JUN-10 VAR % VAR % JUN-10 VAR % VAR % JUN-10 VAR % VAR %

(NO OF COMPANIES) YOY QOQ YOY QOQ YOY QOQ

Auto (5) 317 36.6 -4.9 43 29.7 -7.9 27 29.7 -4.6

Banks (20) 267 28.8 -4.1 228 22.9 -5.8 115 16.4 2.8
Cement (7) 114 1.0 -4.0 32 -14.2 1.7 19 -18.9 6.2
Engineering (6) 218 20.5 -34.8 25 23.7 -59.0 16 13.4 -59.7
FMCG (11) 185 14.8 1.6 37 8.9 2.6 25 7.6 4.1
IT (7) 283 13.3 5.1 71 10.4 1.9 55 15.0 -0.1
Infrastructure (5) 72 15.9 -20.7 11 16.6 -22.2 4 5.4 -23.2
Media (5) 19 25.1 4.3 8 38.5 8.0 5 25.1 25.2
Metals (8) 713 26.4 -6.8 140 110.9 -16.2 82 461.4 -14.8
Oil Gas & Petchem (11) 2,210 28.0 -8.0 234 -4.2 -20.2 111 -26.3 -34.2
Pharma (14) 130 10.5 3.7 27 14.9 1.2 18 30.1 -5.4
Real Estate (6) 35 32.0 -7.5 15 14.6 -6.8 7 3.1 -15.6
Retail (2) 33 29.1 -2.5 3 34.7 -5.8 1 81.0 -23.0
Telecom (4) 197 0.9 3.4 66 -12.7 1.6 26 -43.8 -26.7
Textiles (5) 35 33.3 -2.1 8 58.3 -6.5 2 125.8 -11.9
Utilities (6) 238 11.8 13.2 66 16.2 21.6 36 5.1 -5.8
Others (2) 24 3.3 -9.2 4 7.1 -15.7 2 -0.1 -36.5
MOSL (124)* 5,090 23.0 -6.7 1,017 15.6 -11.2 551 8.9 -16.4
MOSL Excl. RMs (121) 3,821 25.1 -4.3 982 19.7 -6.4 534 17.0 -9.3
Sensex (29) 2,520 28.0 -4.8 622 20.6 -4.7 338 19.3 -7.8
*Tata Steel Consolidated Source: Company/MOSL

Navin Agarwal (Navin@MotilalOswal.com) / Rajat Rajgarhia (Rajat@MotilalOswal.com)

July 2010 3
 India Strategy

India 2010: Watch out for the second half

Indian markets had a lackluster first half 2010, rising just 1-2%. However, just like the
ongoing football World Cup, Indian equities could throw up a few surprises in the second
half of the year. How the second half plays out for India depends on the interplay of 11
different forces that we have identified and lined up like a typical football team.

TEAM INDIA LINE-UP (SUMMARY ASSESSMENT IN BRACKETS)

Forward line or Strikers Mid-field Defense

11. Earnings (good visibility) 8. Interest Rates (needs stability) 4. Monsoons (rainbow of hope)
10. Reforms (gathering momentum) 7. Capex Boom (key winger) 3. Corporate events (lower uncertainty)
9. Fund Flow (needs to improve) 6. Consumption (story goes on …) 2. Global markets (weak link)
5. Payouts (getting better) 1. Valuations (time correction underway)

Overall assessment
The Indian market’s strikers seem to be in good form. The midfield has remained solid for
quite some time now. Amongst the defense, Monsoons and Global markets remain near
term triggers for market direction. If the defense holds out, and all drivers work in tandem,
SENSEX
the Indian market could well be higher from current levels by March 2011.

Markets to remain range-bound; stock-picking to drive portfolio

performance
Accelerating economic and corporate profit growth will limit downside in the markets. At
the same time, above-average valuations cap the upside. Expect benchmark indices to
remain with a range of 10% from current levels. Thus, 2010 will be a year of stock-
picking, with market contribution to aggregate performance being the lowest in three years.
We believe stocks in our model portfolio offer growth at reasonable valuations. We are
overweight on domestic plays - Financials (SBI, ICICI Bank), Infrastructure & allied
sectors (BHEL, ACC, Unitech) and Oil & Gas (BPCL, GAIL). Amongst the global
plays, we prefer IT and Pharma over cyclicals.

SENSEX EPS TREND: A NEW CYCLE OF EARNINGS GROWTH FOR INDIAN MARKETS

FY10-12:
25% CAGR 1,276
FY08-10E:
-0.6% CAGR 1,052
FY03-08: 833 820 823
25% CAGR 718
FY93-96:
45% CAGR FY96-03: 1% CAGR 523
450
348
250 266 291 278 280 216 236 272
181
81 129
FY11E

FY12E
FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Source: MOSL

July 2010 4
 India Strategy

India 2010: Watch out for the second half

The World Cup football fever has truly spread far and wide. As the tournament progressed,
surprises have continued to dominate the event. Indian markets have also surprised in
1HCY10 with their resilience to weak global cues. We draw a strong parallel between
football and how the Indian market is set up for the second half of 2010 and beyond.

The starting line-up

The BSE Sensex has ended the June quarter at 17,700, marking its third consecutive
quarter of consolidation, post the sharp ~100% appreciation during March-September
2009. For the Indian market, it was a lackluster first half 2010, with the major indices rising
only 1-2%. Yet, in relative terms, India was one of the best performing markets.

INDIA V/S WORLD: STOCK MARKET RETURNS

FY10 1HCY10 2QCY10

Russia 129 Thailand 9 India - Nifty 1

Brazil 83 India - Nifty 2 Thailand 1
India - Sensex 81 India - Sensex 1 India - Sensex 1
Taiw an 78 South Korea 1 South Korea 0
India - Nifty 76 MSCI - Asia -4 Taiw an -7
Thailand 63 US -6 China -8
China 62 Russia -7 MSCI - Asia -8
South Korea 50 S&P 500 -8 US -10
MSCI - Asia 29 UK -9 S&P 500 -12
S&P 500 23 China -10 Brazil -13
UK 22 Taiw an -10 UK -13
Japan 19 Japan -11 Russia -15
US 19 Brazil -11 Japan -15

Source: MOSL

How the second half plays out for India depends on the interplay of 11 different forces
that we have identified. And like a typical football team, these forces can be lined up in a
4-4-3 formation (corresponding to defense-midfield-forward line).

TEAM INDIA LINE-UP (SUMMARY ASSESSMENT IN BRACKETS)

Forward line or Strikers Mid-field Defense

11. Earnings (good visibility) 8. Interest Rates (needs stability) 4. Monsoons (rainbow of hope)
10. Reforms (gathering momentum) 7. Capex Boom (key winger) 3. Corporate events (lower uncertainty)
9. Fund Flow (needs to improve) 6. Consumption (story goes on …) 2. Global markets (weak link)
5. Payouts (getting better) 1. Valuations (time correction underway)

Overall assessment
The Indian market’s strikers seem to be in good form. The midfield has remained solid for
quite some time now. Amongst the defense, Monsoons and Global markets remain near
term triggers for market direction. If the defense holds out, and all drivers work in tandem,
SENSEX
the Indian market could well be higher from current levels by March 2011.

We proceed to separately assess each individual driver.

July 2010 5
 India Strategy

Striker #11: Earnings - good visibility

11 Earnings growth has been the bedrock of Indian equities during the upcycle of FY03-08
(EPS CAGR of 25%). Post the global financial crisis, Indian earnings flattened for two
consecutive years. While 2HFY10 marked the beginning of earnings growth, markets
need more certainty about the resumption and sustenance of the trend. We estimate EPS
CAGR of 25% over FY10-12. Importantly, our FY11 EPS estimate has not witnessed any
earnings
major changes over the last one year, indicating greater confidence in the estimates.

SENSEX EPS TREND: A NEW CYCLE OF EARNINGS GROWTH FOR INDIAN MARKETS

FY10-12:
25% CAGR 1,276
FY08-10E:
-0.6% CAGR 1,052
FY03-08: 833 820 823
25% CAGR 718
FY93-96:
45% CAGR FY96-03: 1% CAGR 523
450
348
250 266 291 278 280 216 236 272
181
81 129

FY11E

FY12E
FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10
TREND OF REVISION IN FY11 EPS ESTIMATE: MARGINAL UPGRADE IN 1QFY11

Earnings to grow at 25% FY 11 EPS % Grow th Revision in FY11 EPS

CAGR till FY12. No major 10.5 16.4 26.1 32.1 29.5 27.9
revisions in last 12 months. 1,103
1,076
1,042 1,052
1,028
980

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

EPS growth YoY (%)

Source: MOSL

Another feature of earnings growth in this cycle would be the rising contribution of domestic
sectors. We expect domestic plays to contribute 56% of aggregate earnings in FY12 v/s
52.6% in FY08. The contribution in FY10 appears high due to insignificant profits and
losses in few cases from global cyclicals. Domestic proportion of earnings would have
further risen, if one were to include the gas profits from Reliance, GAIL, ONGC, etc.

July 2010 6
 India Strategy

MOSL UNIVERSE PAT MIX (FY10-12 EARNINGS AGGREGATES) - RS B

PAT (RS B) % SHARE PAT CAGR (%)

SECTOR FY06 FY08 FY10 FY12 FY06 FY08 FY10 FY12 FY08- FY10- FY06-

FY10 FY12 FY12

Domestic Plays 508 1,033 1,300 1,855 48.3 52.6 59.4 55.8 12.2 19.5 24.1
Banking 199 334 494 736 18.9 17.0 22.6 22.1 21.7 22.0 24.4
Utilities 86 111 157 247 8.2 5.6 7.2 7.4 19.0 25.6 19.3
Rising share of domestic Engineering 36 65 103 161 3.4 3.3 4.7 4.8 26.0 25.1 28.6
Auto 49 72 106 191 4.6 3.7 4.8 5.7 21.6 34.0 25.5
plays will lead to higher
Telecom 30 134 152 115 2.8 6.8 7.0 3.5 6.4 -13.2 25.0
valuations FMCG 51 71 98 135 4.8 3.6 4.5 4.0 17.5 17.1 17.5
Cement 25 80 88 94 2.3 4.1 4.0 2.8 4.7 3.4 24.9
Real Estate 9 123 38 63 0.9 6.3 1.7 1.9 -44.3 28.4 37.3
Infrastructure 9 18 27 54 0.8 0.9 1.3 1.6 25.0 41.0 35.2
Global Plays 545 930 889 1,469 51.7 47.4 40.6 44.2 -2.3 28.6 18.0
Cyclical 431 727 617 1,095 41.0 37.0 28.2 33.0 -7.8 33.2 16.8
Oil & Gas ex RMs 278 410 420 700 26.4 20.9 19.2 21.1 1.3 29.1 16.6
Metals 153 317 197 395 14.5 16.1 9.0 11.9 -21.1 41.6 17.1
Non-Cyclical 113 204 272 373 10.8 10.4 12.4 11.2 15.4 17.2 22.0
IT 84 148 211 276 8.0 7.5 9.6 8.3 19.3 14.4 21.9
Pharma 29 56 61 97 2.8 2.8 2.8 2.9 4.3 26.5 22.2
MOSL Universe ex RMs 1,053 1,964 2,189 3,324 100.0 100.0 100.0 100.0 5.6 23.2 21.1
Source: MOSL

Assessment of role as Sensex driver

Earnings (growth and visibility) is the star striker, having returned to make a meaningful
contribution after being on holiday during FY08-10. Rising share of domestic plays provides
greater stability to aggregate earnings growth and also lead to higher market valuations.
SENSEX We see this as a key source of market re-rating over the next few years.

Striker #10: Reforms - gathering momentum

The Congress-led UPA (United Progressive Alliance) government is in its second year of
10
office following its re-election in 2009. The market had cheered the election of the
government in May 2009 with a big gain on hopes of several reforms. We believe the
stage is set for policy reforms to gather significant momentum with impact on both corporate
earnings and stock valuations.

reforms
Oil Sector Reforms: LONG AWAITED!
The first set of reforms have come in the Oil sector, with hike in GAIL’s pipeline tariff in
April 2010, followed by a hike in APM gas price in May, and rounding up the quarter with
a move towards deregulation of major oil products in June 2010.

The scope and further hopes of these reforms have already driven PSU Oil & Gas stocks
to significantly outperform the market indices in 1QFY11. India’s outperformance over
the global markets has been driven by a rising confidence in the government reforms post
the fuel price de-regulation. In this section, we explain the importance of the Oil sector
reforms and their implications on stocks.

July 2010 7
 India Strategy

SIGNIFICANT OUTPERFORMANCE OF OIL STOCKS IN 1QFY11 … … MAKES UP FOR MUCH OF THE PAST UNDERPERFORMANCE

Sensex ONGC HPCL IOC BPCL Sensex ONGC HPCL IOC BPCL
150 162
149 151
149
135 144 146
135
129
122 126 125
120 121
113
108
105
100
90

Oct-09

Nov-09

Dec-09
Jul-09

Jan-10

Feb-10
Mar-10

May-10

Jun-10
Sep-09
Aug-09

Apr-10
90
Apr-10 May-10 Jun-10

Source: MOSL

2010 will be marked as a year of oil sector reforms in the Indian markets.
1. Reforms for the sector began with an independent regulator giving out the tariff for
the gas pipelines, resulting in earnings increase for GAIL over the coming years.
2. Then the APM gas price reforms: APM gas price had been stagnant for the last
several years. As against the expectation of gradual increase over the 2-3 years, in a
surprise move the government increased the APM gas price in a single instant from
US$2/mmbtu to US$4.2/mmbtu.
3. The reforms have reached the crescendo with the government now freeing petrol and
diesel prices.

Key announcements
„ Petrol: Retail prices to be market-determined. As per the latest fortnight data, price
hike is ~Rs3.5/liter.
Hike in fuel prices have „ Diesel: Though the Empowered Group of Ministers (EGoM) has decided to eventually

surprised positively deregulate diesel prices, currently it has decided to increase price by just Rs2/liter.
„ LPG: Domestic LPG cylinder price to be hiked by Rs35/cylinder (current loss is
Rs262/cylinder).
„ Kerosene: PDS kerosene price to be hiked by Rs3/liter from Rs9/liter to Rs12/liter
(current loss is Rs17.9/liter). Previous hike was in March 2002.

UNPRECENDENTED PRICE HIKE: KEROSENE PRICE HIKE WAS HIGHEST AT 33%

PRODUCT UNIT BEFORE AFTER CHG CHG (%) LAST PRICE HIKE KIRIT PARIKH RECO'S

Petrol Rs/litre 47.93 51.43 3.5 7.3 Feb.2010 To deregulate

Diesel Rs/litre 38.10 40.10 2.0 5.2 Feb.2010 To deregulate
Kerosene Rs/litre 9.23 12.23 3.0 32.5 Mar.2002 6.0
LPG Rs/Cylinder 310.35 345.35 35.0 11.3 Jun.2008 100.0
Prices are at Delhi Source: MOSL

These reforms have led to a significant reduction in the under-recoveries of the state-
owned oil companies. We analyze the impact of these reforms.

July 2010 8
 India Strategy

FY09 under-recoveries reached unprecedented levels, forcing the

government to seek a sustainable solution
„ In FY09, with crude price touching historic highs, under-recoveries reached an
unprecedented level of Rs1t. This also resulted in the government doling out the highest
ever oil bond compensation of ~Rs700b.
„ Fiscal deficit climbed to a decade-high of 6.6% in FY10. Till FY09, the government
used to share the subsidy through oil bonds, reducing the impact on reported fiscal
deficit. From FY10, it decided to make cash payments for subsidies and include in
fiscal deficit - this paved the way for the thought of deregulation.

GOI FISCAL DEFICIT HAD INCREASED OVER THE LAST 2 YEARS HIGHEST EVER OIL BONDS ISSUANCE BY THE GOI IN FY09 (RS B)

Fiscal Deficit (Rs b) % of GDP Oil Bonds Upstream Dow nstream

6.7 1,200
6.2 6.0 1,000
4,140

5.7 5.9
5.4 800
3,370

4.5 600
3.9
4.0 3.3 400
1,269
1,451

1,464

1,426
1,410

1,258

200
1,233
1,188
1,047

2.6 0
FY10E
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

-200
FY06 FY07 FY08 FY09 FY10

*Prior to FY10 fiscal deficit excludes oil bonds to OMC's Source: MOSL

FY11 - the year for deregulation

„ After a roller-coaster ride in FY09 and FY10, crude prices seem to be stabilizing in
FY11, albeit in a higher price band.
„ From the government's point of view, this was the best time to deregulate fuel prices,
given (1) largely stable crude oil price, (2) increased ability to withstand opposition
from political rivals, and (3) continued pressure to improve the country's energy security
(cannot allow financials of state-owned oil companies to suffer).
„ The government had set up the Expert Group to recommend a viable strategy for the
sector and the recent EGoM decision was based on the recommendations of the Expert
Group headed by Kirit Parikh.
„ FY11 is also the year when the government had windfall gains from the spectrum
auction of 3G and BWA (cash inflow of Rs1.06t).

Benign oil price would be positive for OMCs

„ We believe that the profits of state-owned oil marketing companies (OMCs) would be
favorably impacted (1) if oil prices remain benign i.e. below US$75/bbl, and (2) once
diesel prices are fully deregulated.
„ Diesel deregulation would provide a huge relief for the system: Higher oil prices result
in higher under-recoveries, and the sharing mechanism of the losses gets complicated
and delayed. We estimate gross under-recoveries (diesel, kerosene and LPG) of Rs433b
at an oil price of US$75/bbl. However, once diesel prices are freed, under-recoveries
would reduce to ~Rs347b.

July 2010 9
 India Strategy

„ Impact of diesel price deregulation would be significant at higher oil prices (refer
exhibit below). A US$1/bbl change in crude price would increase the gross under-
recoveries by Rs42b. If we exclude diesel, a change of US$1/bbl in crude price would
impact under-recoveries by Rs11b (only LPG and kerosene).
„ Impact of deregulation on retail fuel prices: In a free price scenario, we estimate an
impact of Rs4/liter for petrol and Rs3.8/liter for diesel for a crude price increase of
US$10/bbl.

DIESEL DE-REGULATION WOULD MEAN A SIGNIFICANT REDUCTION IN SUBSIDY (RS B)

LPG Kerosene Diesel Total LPG Kerosene Total

1,600 1,477 800
1,267 618
563
1,200 1,059 600 509
455
850 859 401
704 347 250 268
800 641 550 400 293 231
395 239 212
413 185 194
293 240 175
239 250 268 200 157
400 185 66 212 231 138 349
0 175 194 278 314
0 157 119 207 243
0
119 138 243 278 314 349 136 172
101 136 172 207 65 101
0 65 0
60 65 70 75 80 85 90 95 100 60 65 70 75 80 85 90 95 100

Source: Kirit Parikh Report

Controlled pricing regime has eroded the financial strength of OMC's

significantly
„ During the period FY02-05, OMCs used to earn significantly higher RoE and RoCE
as shown in the exhibits below.
„ However, as the government began controlling prices, the under-recoveries mounted.
Since the subsidy compensation to the OMCs was on an ad-hoc basis and mostly
delayed, this resulted in working capital problems for the OMCs and hence higher
debt levels.
„ As compared to good return ratios of 20-27% during the period FY02-05, in the recent
years, return ratios have been dismal at 9-16%.

RETURN RATIOS HAVE ERODED SIGNIFICANTLY IN RECENT YEARS

RoE RoCE 1.8 D/E

26.9 1.6
24.3 24.4 24.4
22.8
21.8
19.8
16.1
0.9 0.9
11.7 11.8 0.7
8.7

3.9 0.3

FY02- FY10 FY02- FY10 FY02- FY10 FY02- FY10 FY02- FY10 FY02- FY10
FY02- FY10 FY02- FY10 FY02- FY10
05 05 05 05 05 05
05 05 05
HPCL BPCL IOC HPCL BPCL IOC
HPCL BPCL IOC

Source: MOSL

July 2010 10
 India Strategy

The big deterioration in their earnings profile and uncertainty over their growth led to a
sharp de-rating for the OMCs. These stocks were completely ignored by global investors
during the best period of inflows to India. While FIIs brought US$52 into India over FY05-
10, their holding in OMCs declined from 9% to 5% during this period.

VALUATIONS OF OIL PSUS OVER SENSEX FIIS REDUCED THEIR HOLDINGS IN OIL PSUS DESPITE HUGE INFLOWS

OMC's & ONGC 1 Yr Fw P/E Sensex 1 Yr Fw P/E FII Net Investm ents (US$B)
25 FII Holding Indian Market (%)
FII Holding OMCs, ONGC & GAIL (%)
9.2 9.0
20 8.7
16.7
14.2 16.1
18.1 18.2 8.1
15 16.1 23.4
15.6 13.1
9.2 10.9
9.4 5.8 6.0
10
5.0
5 -10.4
Mar-05
Jul-05
Nov-05

Jan-07
May-07
Oct-07
Feb-08
Jul-08
Nov-08

Jan-10
May-10
Apr-06
Aug-06

Apr-09
Aug-09

FY05 FY06 FY07 FY08 FY09 FY10

Source: MOSL

What could be the best case earnings scenario for OMCs

Assuming, that OMC's will be compensated fully, we estimate the best case EPS at Rs55/
Rs77.7/Rs49 for HPCL/BPCL/IOC indicating an upside of 48%/20%/14% from our base
case scenario for FY12. (Our FY12 base case scenario assumes 11% sharing of total
under-recoveries by OMCs).

BEST CASE EPS FOR FY12 + LIKELY RE-RATING SCENARIOS INDICATE FURTHER ROOM FOR STOCK PRICE INCREASE

HPCL BPCL IOC

EPS (nil sharing) 55.0 55.0 55.0 77.7 77.7 77.7 49.0 49.0 49.0
Best case earnings for FY12E PE Multiple 8.0 10.0 12.0 8.0 10.0 12.0 8.0 10.0 12.0
Implied Price 440 550 660 622 777 932 392 490 588
OMCs leads to significant
Add: Investment Value 87 87 87 148 148 148 90 90 90
returns in stocks Likely Value 527 637 747 770 925 1,080 482 580 678
CMP (Rs) 470 470 470 663 663 663 399 399 399
Upside (%) 12 35 59 16 40 63 21 45 70
Source: MOSL

Valuation and view

We believe that full clarity on subsidy sharing would provide higher earnings predictability
for the state-owned oil companies. That, in turn, would be critical to the re-rating of state-
owned oil stocks. The process has begun and we expect clarity to improve in the days to
come. We have Buy ratings on ONGC, GAIL and the OMCs.

July 2010 11
 India Strategy

OUR BASE CASE ESTIMATES ASSUME 11% SHARING BY DOWNSTREAM PLAYERS

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Fx Rate (Rs/US$) 44.3 45.2 40.3 46.0 47.5 46.0 44.5

Brent (US$/bbl) 58.0 64.4 82.3 84.8 69.6 75.0 75.0
Gross Under recoveries (Rs b)
Petrol 27 20 73 52 52 22 -
Diesel 126 188 353 523 93 84 -
PDS Kerosene 144 179 191 282 174 177 163
Domestic LPG 102 107 156 176 143 176 157
Clarity on subsidy sharing
Total 400 494 773 1,033 461 459 320
will be key to further Sharing (Rsb)
changes in estimates Oil Bonds/Cash 115 241 353 713 260 256 178
Upstream 140 205 257 329 145 153 107
OMC's sharing 138 48 163 (9) 56 50 35
Total 400 494 773 1,033 461 459 320
Sharing (%)
Oil Bonds 29 49 46 69 56 56 56
Upstream 35 42 33 32 31 33 33
OMC's sharing 35 10 21 (1) 12 11 11
Total 100 100 100 100 100 100 100
*Nil diesel loss in FY12 is primarily due to lower exchange rate assumption Source: MOSL

The Oil sector had been deprived of any major reforms for the past several years. The
bold measures in this sector will bestow confidence to investors regarding likely major
policy reforms in several other areas, even if there is some delay in the final implementation.
9 Direct Tax Code, expected to be implemented from FY12
9 Goods & Services Tax, also expected to be implemented from FY12
9 FDI relaxation in sectors like Insurance and Aviation
9 Clarity on 2G spectrum norms and M&A reforms in the Telecom sector
9 New licenses for Banks, relaxed norms for foreign banks, etc.

Assessment of role as Sensex driver

As seen in past situations, Reforms actually help Earnings perform better. Reforms
combined with Earnings growth makes a lethal combination for Indian markets to move
SENSEX significantly higher over the next few years.

Striker #9: Fund Flow - needs to improve

The two important sources of fund flows to determine the direction of Indian markets in
9
the last few years have been (1) FIIs, and (2) Domestic Institutions, largely led by Insurance.
In 2HCY10 and beyond, Fund Flow is more critical than ever before due to three reasons:
1. Government norm of minimum 25% non-promoter holding for listed companies.
(Our calculations suggest that this could imply funds requirement of over US$30b
over the next five years).
fund flow
2. Government's disinvestment program of Rs400b (US$8b) as per its FY11 budget,
much of it likely in 2HCY10. We expect similar targets in FY12, also.
3. Large fund raising plans of companies in capital intensive sectors like Real Estate and
Infrastructure, and also as part of a de-leveraging strategy in specific companies.

July 2010 12
 India Strategy

COMPANIES IN BSE 500 INDEX WHICH NEED TO DILUTE PROMOTER HOLDING (RS B)
COMPANY MKT CAP NON- YEAR 1 NON- YEAR 2 NON- YEAR 3 NON- YEAR 4 NON- YEAR 5 NON-
PROMOTER DILU- PROMOTER DILU- PROMOTER DILU- PROMOTER DILU- PROMOTER DILU- PROMOTER
STAKE (%) TION STAKE (%) TION STAKE (%) TION STAKE (%) TION STAKE (%) TION STAKE (%)

Hind.Copper 452 0.4 23 5.4 23 10.4 23 15.4 23 20.4 21 25.0

MMTC 1,627 0.7 81 5.7 81 10.7 81 15.7 81 20.7 70 25.0
HMT 54 1.1 3 6.1 3 11.1 3 16.1 3 21.1 2 25.0
Natl.Fertilizer 56 2.4 3 7.4 3 12.4 3 17.4 3 22.4 1 25.0
Neyveli Lignite 262 6.4 13 11.4 13 16.4 13 21.4 9 25.0 0 25.0
RCF 46 7.5 2 12.5 2 17.5 2 22.5 1 25.0 0 25.0
STC 25 9.0 1 14.0 1 19.0 1 24.0 0 25.0 0 25.0
Engineers India 106 9.6 5 14.6 5 19.6 5 24.6 0 25.0 0 25.0
Fres.Kabi Onco. 27 10.0 1 15.0 1 20.0 1 25.0 0 25.0 0 25.0
NMDC 1,066 10.0 53 15.0 53 20.0 53 25.0 0 25.0 0 25.0
Puravankar.Proj. 22 10.0 1 15.0 1 20.0 1 25.0 0 25.0 0 25.0
Power Fin.Corpn. 331 10.2 17 15.2 17 20.2 16 25.0 0 25.0 0 25.0
BOC India 24 10.5 1 15.5 1 20.5 1 25.0 0 25.0 0 25.0
Omaxe 16 10.9 1 15.9 1 20.9 1 25.0 0 25.0 0 25.0
Alfa Laval (I) 25 11.2 1 16.2 1 21.2 1 25.0 0 25.0 0 25.0
Gillette India 55 11.3 3 16.3 3 21.3 2 25.0 0 25.0 0 25.0
MRPL 133 11.4 7 16.4 7 21.4 5 25.0 0 25.0 0 25.0
IVRCL Assets 24 11.9 1 16.9 1 21.9 1 25.0 0 25.0 0 25.0
JP Power Ven. 148 12.3 7 17.3 7 22.3 4 25.0 0 25.0 0 25.0
Natl. Aluminium 281 12.9 14 17.9 14 22.9 6 25.0 0 25.0 0 25.0
NHPC Ltd 382 13.6 19 18.6 19 23.6 5 25.0 0 25.0 0 25.0
Power Grid Corpn 435 13.6 22 18.6 22 23.6 6 25.0 0 25.0 0 25.0
D B Corp 44 13.7 2 18.7 2 23.7 1 25.0 0 25.0 0 25.0
SAIL 821 14.2 41 19.2 41 24.2 7 25.0 0 25.0 0 25.0
Reliance Power 415 15.2 21 20.2 20 25.0 0 25.0 0 25.0 0 25.0
NTPC 1,639 15.5 82 20.5 74 25.0 0 25.0 0 25.0 0 25.0
United Bank (I) 26 15.8 1 20.8 1 25.0 0 25.0 0 25.0 0 25.0
Godrej Propert. 43 16.2 2 21.2 2 25.0 0 25.0 0 25.0 0 25.0
Atlas Copco (I) 25 16.2 1 21.2 1 25.0 0 25.0 0 25.0 0 25.0
Essar Shipping 56 16.3 3 21.3 2 25.0 0 25.0 0 25.0 0 25.0
Kwality Dairy 19 16.3 1 21.3 1 25.0 0 25.0 0 25.0 0 25.0
Mahindra Holiday 44 16.9 2 21.9 1 25.0 0 25.0 0 25.0 0 25.0
Ackruti City 35 17.5 2 22.5 1 25.0 0 25.0 0 25.0 0 25.0
BGR Energy Sys. 51 18.7 3 23.7 1 25.0 0 25.0 0 25.0 0 25.0
Oracle Fin.Serv. 185 19.5 9 24.5 1 25.0 0 25.0 0 25.0 0 25.0
Central Bank 58 19.8 3 24.8 0 25.0 0 25.0 0 25.0 0 25.0
Mundra Port 286 19.8 14 24.8 0 25.0 0 25.0 0 25.0 0 25.0
SCI 69 19.9 3 24.9 0 25.0 0 25.0 0 25.0 0 25.0
Indian Bank 93 20.0 5 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Jet Airways 46 20.0 2 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Wipro 967 18.8 44 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Godrej Inds. 53 20.9 2 25.0 0 25.0 0 25.0 0 25.0 0 25.0
IOCL 966 21.1 38 25.0 0 25.0 0 25.0 0 25.0 0 25.0
DLF 495 21.4 18 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Dredging Corpn. 16 21.4 1 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Oil India 335 21.6 11 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Tata Tele. Mah. 43 22.3 1 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Thomas Cook (I) 13 22.7 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Nirma 30 22.8 1 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Sun TV Network 165 23.0 3 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Bank of Maha 26 23.2 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0
JSW Energy 210 23.3 4 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Fortis Health. 63 23.5 1 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Novartis India 21 23.6 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Tata Comm 74 16.4 1 25.0 0 25.0 0 25.0 0 25.0 0 25.0
3M India 31 24.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Gammon Infra. 20 24.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Bharat Electron 139 24.1 1 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Berger Paints 26 24.4 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0
IL&FS Transport 55 24.9 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0
Total 13,300 605 428 242 121 95
Source: Company/MOSL
July 2010 13
 India Strategy

The above three factors are over and above

„ The usually robust pipeline of IPOs in India, and
„ Newer forms of fund raising like sale of treasury stock and stake divestment by minority
promoters.

FUND RAISING IN INDIA (RS B)

Domestic (Public & Rights) Overseas (ADR / GDR / FCCB)

QIP Stake Sale & Others

645 576 1,065 495 937 578

Fund raising is likely to 135
232
accelerate at higher
levels of markets 38 304 344 61
37
326 30 82
222 44
209
529 428
319 316 391
249

CY05 CY06 CY07 CY08 CY09 CY10 YTD

Source: MOSL

Of the key Fund Flow sources, domestic mutual funds have been net sellers for the last six
months. Fund Flow from insurance is fraught with some uncertainty due to new norms for
ULIPs (unit-linked insurance plans) mandating assured return for pension and annuity
plans. Thus, the onus of Fund Flow falls significantly on FII flows. FII inflows remained
robust in 1HCY10. However, sustenance of the same is critical as in the past, 2H flows
have tended to carry higher weight than 1H.

FII FLOWS INTO INDIA: 2H TENDS TO BE HIGHER THAN 1H

20
1st Half 2nd Half
12 13
10
6
2H flows is always higher 5 6
0 0 0 5 7
1 4 5 6 5
than 1H for past 7 years 0 1 2 3
0 -6

-10 -6

-20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: MOSL

Assessment of role as Sensex driver

Of the three strikers, Fund Flow carries risk of running out of form. Even if Earnings and
Reforms combine well, non-performance of Fund Flow could lead to Sensex Goal 20,000
SENSEX remaining elusive for quite some time.

July 2010 14
 India Strategy

Midfield #8: Interest Rates - stable rates key to upcycle

The government has given strong indications of returning to the path of fiscal correction
8
and has so far indicated its resolve to even better its budgeted fiscal deficit target from
5.5% of GDP for FY11 to 4.5% of GDP. A few factors add to our optimism in this regards.
First, the return of growth and the high buoyancy in corporate taxes that has now become
the single biggest source of revenue for the government. Second, since services occupy a
dominant part of the Indian economy and service sector tax net has been widened further
interest rates in FY11, higher service tax collection is a distinct possibility. Third, overall revenue projection
at 12.9% of GDP in FY11 compares well with the low of 12% in FY10 and is way below
the peak of 14.1% realized during FY08.

GOVERNMENT CAN RIDE BACK ON REVENUE BUOYANCY ON RETURN OF GROWTH

Income tax Corporate tax Customs duties

Excise duties Service Tax Other taxes
Non-tax Revenue Gross Tax Receipts Gross revenue receipts
15%

Revenue buoyancy will be

As % of GDP

12%
key to containment of 9%
fiscal deficit
6%

3%

0%

FY11E
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10
Source: MOSL

However, a reduction in FY11 deficit still rests upon a few assumptions. First, the government
has set a disinvestment target of Rs400b (as compared with Rs260b and the peak of
Rs388b mobilized during FY08). Besides, the government also plans to effect major cuts
in subsidies (especially petroleum subsidies) and non-plan expenditure.

DETERMINATION IN THE AREA OF DISINVESTMENT, SUBSIDY REDUCTION AND NON-PLAN EXPENDITURE CRITICAL

FOR DEFICIT TARGETS AND THEIR BETTERMENT

Disinvestment Subsidies
20% Gross fiscal deficit Total expenditure
Non-plan expenditure
16%
As % of GDP

12%

8%

4%

0%
FY11E
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Source: MOSL

So far, the government has demonstrated its resolve to prune expenditure with early
indicators (for April-May) pointing towards lower than budgeted expenditure and increased

July 2010 15
 India Strategy

revenue leading to a zero revenue deficit for the first two months of FY11. The 3G/BWA
auction together fetched a bounty of Rs1,062b against a budgeted Rs350b. Even if a
slippage of Rs300b is allowed on account of missed targets of disinvestment, subsidies and
non-plan expenditure, it would leave ~Rs350b (0.5% of GDP) as additional revenue by
which the government's borrowing requirement would be reduced.
GOVERNMENT'S FINANCES FOR APRIL-MAY

Total Receipts Total Expenditure

Fiscal Deficit (RHS) Revenue Deficit (RHS)
20% 140%
Apr-May as % of budgeted

Apr-May as % of budgeted
1QFY11 deficit levels will be 15% 105%
amount

lowered, as revenues got a

amount
boost from telecom sector 10% 70%

5% 35%

0% 0%
FY06 FY07 FY08 FY09 FY10 FY11

Source: MOSL

Reduced borrowing program is a clear outcome of the budgetary consolidation process

and the government's increased cash position is also reflected in recent measures such as
pruning of the treasury bill calendar, prepayment of debt and lower than notified (as per
the borrowing calendar) amount announced for the last tranche of dated securities auction.
Going forward, the reduced borrowing requirement may be reflected in a pruned borrowing
calendar for H2FY11; the second half being the busy season for credit provides the
government an opportunity to vacate the space for credit growth to pick up.

The firming up of short-term interest rates and the liquidity gap that exists now might be
bridged in the second half with lower government borrowing, higher deposit mobilization,
banks' recourse to borrowing and an expected decline in inflation in 2HFY10. While the
immediate inflationary outlook has deteriorated somewhat with increase/freeing of
petroleum prices, softening of food prices observed in latest week and expectation of
normal monsoon coupled with softening of oil prices abroad holds the prospect of declining
inflationary outlook for 2HFY10.
INFLATION TO DECLINE IN 2HFY11 BUT LIKELY TO REMAIN AT ELEVATED LEVELS

12%
WPI inflation Projection - After oil price hike
11%
Projection - After oil price hike
Inflation will remain a and lower food inflation
10%
key driver of interest
rates in 2HCY10 9%
Projection - Before oil price hike
8%

7%
Oct-10

Nov-10

Dec-10
Jan-10

Feb-10

Jan-11

Feb-11
Mar-10

May-10

Jun-10

Jul-10

Mar-11
Sep-10
Aug-10
Apr-10

Source: MOSL

July 2010 16
 India Strategy

Assessment of role as Sensex driver

Interest Rates is a key midfielder for markets and is expected to remain in form in second
half of 2010. Deficit management and inflation will be key to direction of interest rates. The
economy will need stable interest rates in this period when the capex cycle is about to
SENSEX
begin. Stable interest rates will be a key to higher market indices.

Midfield #7: Capex Boom - key winger

We believe that India is at the cusp of a meaningful capex boom, driven by impending
7 large investments in infrastructure and industrial activities. The rapid economic growth
over the past decade has put a massive strain on the country's existing infrastructure.
Investment ratio (defined as percentage of GDP to the GDP growth rate) has declined
from 50 for 1988-1997 to 38 for 1998-2007. Under-investments in a period of high economic
growth have further aggravated the constraints. India, in our opinion, is now among the
capex boom
leading global destinations for infrastructure and investment spending over the next decade.

INDIA'S INFRASTRUCTURE LAGS BEHIND GLOBAL PEERS, INCLUDING MANY DEVELOPING COUNTRIES…

ROAD DENSITY RAIL DENSITY AIR PASSENGERS TELECOM

PAVED ROAD/1,000 KM RAIL / 1,000 KM 1,000 PASSENGERS/MILLION SUBSCRIPTIONS/100 PEOPLE

ARABLE AREA ARABLE AREA URBAN CAPITA

Japan 19.8 Japan 430 USA 2,896 UK 182

UK 6.5 UK 335 Canada 1,595 Italy 172
Sri Lanka 6.1 Bangladesh 309 UK 1,587 Germany 171
Italy 5.5 Germany 289 Thailand 1,520 France 138
France 5.4 S. Korea 198 Malaysia 1,225 Spain 135
S. Korea 5.1 Italy 189 Germany 1,141 US 134
Malaysia 4.4 France 159 France 1,003 Japan 125
Bangladesh 2.5 S. Africa 136 Japan 917 Canada 120
US 2.2 Poland 135 Italy 906 Russia 110
Germany 2.0 US 123 S. Korea 840 Malaysia 105
Poland 2.0 Sri Lanka 111 Sri Lanka 530 Poland 87
China 1.2 Malaysia 103 S. Africa 370 Mexico 76
Indonesia 1.1 Canada 98 Indonesia 283 China 72
Canada 1.1 Mexico 69 China 282 S. Korea 68
India 0.9 Russia 68 Mexico 268 Thailand 65
Russia 0.6 Braxil 55 Russia 243 S. Africa 65
Mexico 0.5 China 49 Brazil 231 Indonesia 36
S. Africa 0.4 India 35 Poland 140 Sri Lanka 24
Thailand 0.4 Indonesia 34 India 72 India 19
Brazil 0.2 Thailand 28 Bangladesh 42 Bangladesh 7

Source: World Bank

… AND IS NOW DRIVING A NEW WAVE OF INVESTMENTS: TWELFTH PLAN TARGET INFRASTRUCTURE SPENDING…

AT 4.5X OF TENTH PLAN ACCOUNTS FOR 10% OF GDP PRIVATE SECTOR SHARE TO GO UP FROM 25%

IN TENTH PLAN TO 50% IN TWELFTH PLAN

10.0%
4.5x 1,025 7.6%
US$b % of total 50
5.1%
2.3x 36
25
514 186 512
227 56

10th plan 11th plan 12th plan 10th plan 11th plan 12th plan 10th plan 11th plan 12th plan
actual revised target actual revised target actual revised target

Source: IPA

July 2010 17
 India Strategy

Eleventh Plan (FY08-12) targeted infrastructure spend on track at US$514b,

~2.3x of Tenth Plan (FY02-07) spend
„ Revised estimate [based on the mid-term appraisal for Eleventh Plan (FY08-12) by
the Planning Commission] for infrastructure investments under Eleventh Plan stands
at US$514b, and is similar to the original target.
„ Within the sector-wise composition, targeted investments in Telecom and Oil & Gas
(given inclusion of Oil pipeline within definition of Infrastructure) have now increased
v/s original estimates; sectors like Roads, Ports, Railways, etc have witnessed slippages.
Excluding Telecom and Oil & Gas, targeted infrastructure investments in the Eleventh
Plan now stand at US$393b (slippage of just 11.6% v/s original target), which is
commendable.
„ Actual investments in Infrastructure for the initial two years of the Eleventh Plan
period (FY08 and FY09) have been higher than initial estimates by 12.4% and 11.7%,
respectively.

Initial estimate for Twelfth Plan (FY13-17) at US$1t, ~2x of Eleventh Plan
target and 4.4x of Tenth Plan spending
„ Based on initial estimates by Planning Commission for the Twelfth Plan period (FY12-
17), total investment in Infrastructure is estimated at US$1,025b.
„ For the Twelfth Plan period, the target of private sector investment has been kept at
"at least" 50% of the total investment at US$500b, which is nearly the entire
infrastructure spending in the Eleventh Plan.

Corporate capex also at an inflexion point

Industrial capex is also at an inflexion point, as is evident from a V-shaped recovery in
terms of new projects announced. According to CMIE, an estimated Rs50t worth of
projects are under various stages of implementation and another Rs5t worth of projects
are being added every quarter.
PRIVATE CAPEX IS TURNING UP WITH A PHENOMENAL QUEUEING UP OF PROJECTS - PINK TO BE MADE A BAR

Project investments outstd at the end of the quarter

All industries project investments under implementation
Project investments added during the quarter (RHS)
Project investments completed during the quarter (RHS)
120,000 10,000

90,000 7,500

60,000 5,000

30,000 2,500

0 0
Jun-10
Jun-07

Oct-07

Oct-08

Jun-09

Oct-09
Dec-07

Feb-08

Jun-08

Dec-08

Feb-09

Dec-09

Feb-10
Aug-07

Apr-08

Aug-08

Apr-09

Aug-09

Apr-10

Source: MOSL

A further evidence of capex cycle in play can be obtained from the runaway growth
witnessed in the capital goods sector of IIP and eventual coming up of basic goods industry
to record near double-digit growth in 2010 (up to April). A continuation of these trends
would create the necessary condition for growth to inch up toward the double-digit level.

July 2010 18
 India Strategy

IIP-VERY STRONG SHOWING FROM THE CAPITAL GOODS SECTOR AND THE BASIC GOODS SECTOR ALSO HAS

TURNED UP

IIP Basic goods Capital goods

90%

60%

30%

0%

-30%
Mar-08

May-08

Jul-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Nov-09

Jan-10

Mar-10
Sep-08

Sep-09
Source: MOSL

Assessment of role as Sensex driver

Aside from the glare, Capex Boom will quietly - and yet rapidly - wing its way up the field,
paving the way for significant growth opportunities across industries. Over the next few
years, capex will be amongst the most important drivers of both earnings and market
SENSEX
valuations.

Midfield #6: Consumption - story goes on …

6
India's private final consumption expenditure (PFCE) accounts for 55-60% of GDP and
remains the bedrock of the economy's resilience. The share of PFCE has steadily declined
from 80%+ in the 1970s to the current levels; however, this is due to the faster growth of
capital formation. In recent years, however, share of PFCE has stabilized, translating into
significant growth in consumer-facing sectors.
consumption

LONG-TERM TREND OF PFCE AND GCF AS % TO GDP

Private final consumption exp (% of GDP)

Gross capital formation (% of GDP) Pvt Final consumption expenditure has
100%
been relatively stable in the last 5-years
80%
59%
60% 58%
57% 58% 58% 57%
57%
40%
35%
20%

0% FY05 FY06 FY07 FY08 FY09 FY10

FY71

FY74

FY77

FY80

FY83

FY86

FY89

FY92

FY95

FY98

FY01

FY04

FY07

FY10

Source: MOSL

July 2010 19
 India Strategy

In absolute terms, the consumer sector continues to display steady growth over a fairly
long period. This is true in both categories - (1) Non-durables and (2) Durables.

KEY INDICATORS OF TREND IN CONSUMER NON-DURABLES

FMCG SECTOR SALES (AC NIELSEN - RS B) PAINT VOLUMES TREND ('000 TONS)
1,161 899
1,016 10-year CAGR - 11%
8-year CAGR - 12% 775
864 702
609
711 523
585 446 457
542 369 400 406
468 494 504 331

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10
2001 2002 2003 2004 2005 2006 2007 2008 2009

KEY INDICATORS OF TREND IN CONSUMER DURABLES

TWO-WHEELER SALES TREND (MILLION) PASSENGER CARS SALES TREND ('000)

10.5 2,120
10-year CAGR - 11%
8.5 8.1 8.4 10-year CAGR - 13% 1,660
7.6 1,517
6.6 1,354
5.6
5.0 1,047 1,120
4.3 882
3.8 3.7 664
639 591 621
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10
Source: MOSL

The cross-substitution effect

In the last 5-7 years, there has emerged a unique phenomenon of cross-substitution by
Indian consuming households. This substitution is of two kinds:
1. Substitution of products by new services, mainly Telecom; and
2. Substitution of products/services by EMIs, mainly for Housing and Durables.

TELECOM SUBSCRIBERS V/S CONSUMPTION GROWTH HOUSING LOANS V/S CONSUMPTION GROWTH

5,000 600
Wireless subscriber base - indexed (584) Retail bank loans - indexed
(5,054) (5,521)
4,000 (Figures in brackets is actual subs (Figures in brackets is actual
450 (4,342)
in millions) loans in Rs b)
(392) (3,527)
3,000
(261) 300 (2,558)
2,000 (166) (1,787)
(96) (1,142)
Pvt final consumption 150
1,000 (35) (55)
(13) exp - indexed Pvt final consumption
exp - indexed
0 0
FY 03 FY04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 03 FY 04 FY05 FY 06 FY 07 FY08 FY 09

Source: MOSL

July 2010 20
 India Strategy

The strong consumption boom has enabled the economy to withstand the global meltdown.
Autos, FMCG, Engineering, Banks, etc have made record profits in FY10, despite flat
earnings growth for the aggregates. While the return of capex cycle and industrial growth
will be a source of rebound in profits in FY10-12, consumption themes will provide stability
to the aggregate profit growth.

Assessment of role as Sensex driver

Consumption is Team India's most dependable midfield force. It has helped the economy
to maintain its growth momentum over the last two years, when the industrial and external
sectors were under stress. We expect the consumption theme to remain strong as the
SENSEX
benefits of the Next Trillion Dollar opportunity will provide several growth avenues.

Midfield #5: Payouts - getting better

5 In FY10, corporate dividend payouts, both in absolute terms and as percentage of profits,
bounced back after a sluggish trend for the previous three years in a row. FY09 also saw
a surge of buyback offers.

Dividends and buybacks put cash into the hands of shareholders. This cash is typically
ploughed back into purchase of stocks or into higher consumption, both of which are
payouts
positive for the market. Simultaneously, higher payouts also reflect superior free cash flow
generation of companies, and hence are a positive for valuation multiples.

Over the last few months, there have been several announcements of buyouts, buybacks
and open offers by corporates. Prominent amongst them have been ABB, Piramal, Hindustan
Unilever, Areva, etc. We believe these events would also boost funds flow into the market.

DIVIDEND PAYOUT (%): RECOVERING IN FY10 BUYBACK OFFERS IN FY09 WERE AT AN ALL-TIME HIGH (RS B)

Dividend (Rs b) Payout (%)

42
31 30
29 30 36
28 28
26
24 25 24
22 20
22
437
13
334 336 10 9
279
206 239
148 3 4 3
62 81 121 1
49
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Payouts are computed for Nifty companies on standalone basis, excluding dividend tax Source: MOSL

Assessment of role as Sensex driver

Payouts has more of a supportive role in the line-up. It combines well with Consumption
on one hand and with Valuations on the other. Improvement in payouts along with growth
SENSEX will enable the market indices to move higher.

July 2010 21
 India Strategy

Defense #4: Monsoons - rainbow of hope

4 After the setback received in FY10 with 22% deficit in rainfall over the long period average
(LPA) there has been some setback in the monsoon this year as well with June recording
a 16% deficit. However, IMD has raised its forecast for the current year from 98% to
102% in its latest update for South West Monsoon. A few factors that provide us reason
for optimism are: (1) lower weightage (18%) of June in overall monsoon, (2) expectation
of La Nina conditions (60% probability) that are associated with either excess or normal
monsoons
rainfall, and (3) rare occurrence of drought in successive years (no occurrence of successive
years of severe drought; moderate drought has occurred only thrice in the past century).
INITIAL SETBACK OF JUNE CAN BE MADE UP BY SUBSEQUENT MONTS BECAUSE OF THEIR HIGHER WEIGHTAGE

AND GREATER IMPORTANCE FOR CROP SOWING

Normal Rainfall (mm) Actual/Expected Rainfall % of Normal in FY10-11 (RHS)

98% 101% 125%

84%

294 288 258 261 225

160 178
135

June Actual July IMD Est. Aug IMD Est. Sep Implied in IMD Est.

Source: MOSL

Monsoon has significant impact on the foodgrain production and food inflation in India. In
general, years of drought have been succeeded by higher rainfall and agricultural production.
Although the broader head of "agriculture and allied activities" (with 16-17% share of
Monsoons will be critical to GDP) is now fairly diversified with horticulture, livestock and fisheries contributing close
the growth, inflation and to 60% of the GDP originating from the broader agri-sector, and "cereals, pulses and
interest rates in FY11 oilseeds" grown during kharif season accounting for only 20% of the total agricultural
output, an overwhelming percentage of the population (~55%) is dependent upon agriculture
for livelihood. Besides, rainfall feeds the irrigation network and significantly affects hydro-
electricity generation and lessens fiscal burden for agricultural support and food management
operations for the government. The softening of food prices in the latest week augurs well
for the outlook of food prices, going ahead. The softening of international prices could also
keep a check on domestic prices.
HIGHER FORECAST (102% OF LPA) BY IMD HAVE RAISED THE ODDS OF HIGHER FOODGRAIN OUTPUT

30% Increase in Foodgrains production Food inflation (WPI) % deviation from LPA

15%

0%

-15%

-30%
FY90

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Source: MOSL

July 2010 22
 India Strategy

Assessment of role as Sensex driver

Monsoons is a key defender, albeit with a bit of unpredictability. When in form, it plays
well for Consumption to take matters forward. Current indications suggest that such will
be the case in second half 2010. However, any slip-ups here could be a setback for the
SENSEX market in 2HFY11.

Defense #3: Corporate Events - source of performance differential

Corporate developments have been a key valuation driver over the last few years. While
3
cross-border M&As in the past have been a major reason behind underperformance in
stocks, India Inc's plans to expand globally continue.

A big uncertainty has been terminated with the Supreme Court judgment in favor of Reliance
as regards gas pricing, over-ruling the family MoU. Given the high weightage of Reliance
corporate events
in the benchmarks, clarity on this issue was critical to the markets.

Over the next couple of years, we expect more Indian companies to announce global
deals and partnerships. Moreover, interest of global companies in India will also rise, driving
returns in specific sectors and stocks.

GLOBAL DEALS HAVE LED TO UNDERPERFORMANCE OF STOCKS

Price Change Current Vs Announced (%)

258

91 79 81
41 45 41
20 23 19 19 22
0 6 9 8 0

-8 -16
-27
-77
GMR Infra

ITC
BHEL

Jaiprakash
JSW Steel

Maruti
Tata
Hindalco

Idea
United

Bharti
Suzlon

Sterlite
Sensex

Sensex

Sensex

Sensex

Sensex

Sensex

Sensex
Tata Steel

Source: MOSL

Assessment of role as Sensex driver

Global acquisitions have resulted in underperformance for most of the corporates. Indian
markets like certainty on growth, and hence domestic businesses get significant premium
SENSEX over others. Uncertainty is best avoided for markets to move higher.

July 2010 23
 India Strategy

Defense #2: Global markets - weak link

2 Post the lows made in March 2009, global markets have recovered well, with average
returns of 75-100%. Indian benchmarks have outperformed almost every other market
over this time period (this was also driven by a 20% move post the election results). Since
September 2009, global markets have held on to their levels well, despite adverse
newsflowon Europe and recent concerns on China.

global markets INDIAN MARKETS HAVE OUTPERFORMED GLOBAL MARKETS FROM LOWS OF 2009

Sensex S&P 500 FTSE 100

Hang Seng China ENT KOSPI Brazil Bovespa
2.4
2.2
2.1
2.0
1.8 1.7
1.7
1.6
1.6
1.5
1.4 1.4
1.2
1.0
Jun-09
Jun-09

Nov-09

Dec-09
Jan-10

Feb-10
Feb-10

Jun-10
Mar-09

Mar-09

May-09

Jul-09

Oct-09
Nov-09

Mar-10

May-10
May-10
Sep-09
Sep-09
Aug-09
Apr-09

Apr-10
Source: MOSL

Given the strong correlation of Indian equities with global markets, any sharp sell-off will
also impact the domestic market. In the last couple of months, global markets have again
showed signs of weakness. While Indian equities have remained stable, further weakness
in global markets could impact Indian equities too.
GLOBAL MARKETS HAVE WELL CONSOLIDATED IN LAST 3 QUARTERS

Sensex S&P 500 FTSE 100

Hang Seng China ENT KOSPI Brazil Bovespa
1.21

1.12
1.0
1.03 1.0
1.0
1.0
1.0
0.94

0.85
Oct-09

Oct-09

Oct-09

Nov-09

Nov-09

Dec-09

Dec-09

Dec-09
Jan-10

Jan-10

Feb-10

Feb-10

May-10

May-10

Jun-10

Jun-10
Mar-10

Mar-10

Apr-10

Apr-10

Apr-10

While global markets have

well consolidated in last
three quarters, recent trends RECENT CORRECTION IN GLOBAL MARKETS HAS NOT YET IMPACTED INDIA

have turned weak Sensex S&P 500 FTSE 100

Hang Seng China ENT KOSPI Brazil Bovespa
1.05
1.00 1.0
1.0
0.95
0.90 0.89
0.86
0.85 0.85
0.84
0.80
01-May-10

05-May-10

09-May-10

13-May-10

17-May-10

21-May-10

25-May-10

29-May-10

02-Jun-10

06-Jun-10

10-Jun-10

14-Jun-10

18-Jun-10

22-Jun-10

26-Jun-10

30-Jun-10
15-Apr-10

19-Apr-10

23-Apr-10

27-Apr-10

Source: MOSL

July 2010 24
 India Strategy

Assessment of role as Sensex driver

Global markets need to stabilize for Indian markets to move higher. In the immediate
term, any threat to global equities will also adversely impact flows into India.

SENSEX

Defense #1: Valuations - time correction underway

1 With market indices being flat for the last three quarters, growth in earnings has led to a
correction in valuations. From a premium of over 20% to 15-year averages in September
2009, the Sensex P/E has now corrected as earnings have grown. Consolidation for another
couple of quarters will bring valuations in line with long-term averages.

valuations

P/E OF INDIAN EQUITIES TRENDING BACK TO LONG-TERM AVERAGES

P/E P/BV

Sensex P/E ( LHS) Sensex ( RHS ) Sensex P/B (x) Sensex ( RHS )
18.7 17,900 3.2 17,900

17.4 17,300 3.0 17,300

16.1 16,700 2.8 16,700

14.8 16,100 2.6 16,100

15 Year Average 2.5x
15 Year Average 14.4x
13.5 15,500 2.4 15,500
Dec-09

Mar-10

Jun-10

Dec-10

Mar-11

Dec-09

Mar-10

Jun-10

Dec-10

Mar-11
Sep-09

Sep-10

Sep-09

Sep-10

15-YEARS SENSEX P/E V/S SENSEX 15-YEARS SENSEX P/B V/S SENSEX

Sensex P/E ( LHS) Sensex ( RHS ) Sensex P/B (x) Sensex ( RHS )
27 21,700 4.8 21,700

22 16,700 3.9 16,700

15 Year Average 15 Year Average

17 11,700 3.0 11,700
14.4x 2.5x

12 6,700 2.1 6,700

7 1,700 1.2 1,700

Jun-95

Dec-96

Jun-98

Dec-99

Jun-01

Dec-02

Jun-04

Dec-05

Jun-07

Dec-08

Jun-10

Jun-95

Dec-96

Jun-98

Dec-99

Jun-01

Dec-02

Jun-04

Dec-05

Jun-07

Dec-08

Jun-10

Source: MOSL

July 2010 25
 India Strategy

SENSEX PER BAND SENSEX EARNINGS YIELD TO BOND YIELD

24,200 2.2 2.0

23x
20x
18,200 1.7 1.6
17x
14x
12,200 1.2
11x
15 Year Avg is 0.88x 0.83
8x
6,200 0.7

0.4
200 0.2
Mar-95

Mar-97

Mar-99

Mar-01

Mar-03

Mar-05

Mar-07

Mar-09

Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Source: MOSL

Assessment of role as Sensex driver

Valuations need to be supportive for market indices to resume their upward journey. With
another quarter of consolidation, market indices will start trending towards the long-term
SENSEX
averages. This along with good growth prospects will help to take the markets higher.

July 2010 26
 India Strategy

1QFY11 earnings preview

Cement, Oil & Gas and telecom impact YoY earnings growth

We expect MOSL Universe (excluding RMs) earnings growth to be 17% in 1QFY11.

This growth is a moderation from the 2HFY10, when earnings grew by 31%, largely
driven by low base. 1QFY11 will also be a quarter, where absolute PAT will be lower QoQ
(first time in last 4 years). This is driven by flat growth QoQ by Oil & Gas and drop in
earnings in Telecom and Engineering.

Metals (up 461% YoY), Textiles (up 126% YoY), Retail (up 81% YoY), Pharma (up 30%
YoY) and Auto (up 30% YoY) contribute significantly to the overall earnings growth of
MOSL universe. Other sectors would however have relative muted earnings growth, Viz.
Banks – up 16% YoY, IT – up 15% YoY, Engineering – up 13% YoY, FMCG – up 8%.
Telecom sector would report highest negative earnings growth (down 44% YoY), followed
by Cement (down 19% YoY) and Oil & Gas excl RMs (down 7% YoY).

1QFY11 will also see margin pressures at the aggregate level. While sales is expected to
grow at 25%, EBITDA growth at 19.7% and PAT growth at 17% will witness a slow
growth. Margins will decline in Autos, Cement, FMCG, IT, Oil & Gas and Telecom.

QUARTERLY EARNINGS PERFORMANCE - MOSL UNIVERSE (RS B)

SALES EBITDA NET PROFIT

SECTOR JUN-10 VAR % VAR % JUN-10 VAR % VAR % JUN-10 VAR % VAR %

(NO OF COMPANIES) YOY QOQ YOY QOQ YOY QOQ

Auto (5) 317 36.6 -4.9 43 29.7 -7.9 27 29.7 -4.6

Banks (20) 267 28.8 -4.1 228 22.9 -5.8 115 16.4 2.8
Cement (7) 114 1.0 -4.0 32 -14.2 1.7 19 -18.9 6.2
Engineering (6) 218 20.5 -34.8 25 23.7 -59.0 16 13.4 -59.7
FMCG (11) 185 14.8 1.6 37 8.9 2.6 25 7.6 4.1
IT (7) 283 13.3 5.1 71 10.4 1.9 55 15.0 -0.1
Infrastructure (5) 72 15.9 -20.7 11 16.6 -22.2 4 5.4 -23.2
Media (5) 19 25.1 4.3 8 38.5 8.0 5 25.1 25.2
Metals (8) 713 26.4 -6.8 140 110.9 -16.2 82 461.4 -14.8
Oil Gas & Petchem (11) 2,210 28.0 -8.0 234 -4.2 -20.2 111 -26.3 -34.2
Pharma (14) 130 10.5 3.7 27 14.9 1.2 18 30.1 -5.4
Real Estate (6) 35 32.0 -7.5 15 14.6 -6.8 7 3.1 -15.6
Retail (2) 33 29.1 -2.5 3 34.7 -5.8 1 81.0 -23.0
Telecom (4) 197 0.9 3.4 66 -12.7 1.6 26 -43.8 -26.7
Textiles (5) 35 33.3 -2.1 8 58.3 -6.5 2 125.8 -11.9
Utilities (6) 238 11.8 13.2 66 16.2 21.6 36 5.1 -5.8
Others (2) 24 3.3 -9.2 4 7.1 -15.7 2 -0.1 -36.5
MOSL (124)* 5,090 23.0 -6.7 1,017 15.6 -11.2 551 8.9 -16.4
MOSL Excl. RMs (121) 3,821 25.1 -4.3 982 19.7 -6.4 534 17.0 -9.3
Sensex (29) 2,520 28.0 -4.8 622 20.6 -4.7 338 19.3 -7.8
*Tata Steel Consolidated Source: MOSL

July 2010 27
 India Strategy

1QFY11 PAT YOY GROWTH ACROSS SECTORS 1QFY11 PAT QOQ GROWTH ACROSS SECTORS

25
461
126 6 4 3 0
81
30 30 25 19 17 16 -4 -5 -5 -6 -8 -9
15 13 8 5 5 3 -12 -15 -16
-23 -23 -27
-7 -19
-44
-60
FMCG

FMCG
MOSL Excl.

MOSL Excl.
Oil & Gas(Ex

Oil & Gas(Ex

Pharma

Real Estate

Telecom

Pharma

Real Estate

Telecom
Cement

Cement
IT

IT
Retail

Retail
Media

Engineering

Media

Engineering
Textiles

Banks
Metals

Utilities

Banks

Utilities

Textiles
Metals
Infrastructure

Infrastructure
Sensex

Sensex
Auto

Auto
Source: MOSL

QUARTERLY PAT TREND MOSL UNIVERSE EX RMS (RS B) PAT GROWTH MOSL UNIVERSE EX RMS
589

70 QoQ Grow th (%) YoY Grow th (%)

534

534
529

509
505

483
466

457
450

426
423

408

45
397
380
338
294
274
242

20
240
217

-5

-30
Jun-05

Dec-05
Mar-06
Jun-06

Dec-06
Mar-07
June-07

Dec-07
Mar-08
June-08

Dec-08
Mar-09
June-09

Dec-09
Mar-10
June-10

Jun-05

Dec-05

Jun-06

Dec-06

June-07

Dec-07

June-08

Dec-08

June-09

Dec-09

June-10
Sep-05

Sep-06

Sep- 07

Sep- 08

Sep-09

Source: MOSL

QUARTERLY PAT TREND - MOSL UNIVERSE (RS B)

SECTOR JUN SEP DEC MAR JUNE SEP DEC MAR JUNE SEP DEC MAR JUNE SEP DEC MAR JUN

2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010E

Automobiles 12.4 12.8 12.6 15.1 13.8 15.2 16.9 17.1 15.3 13.7 7.4 12.0 20.7 26.4 25.7 28.2 26.9
Banking 39.2 53.5 55.0 60.3 56.5 68.5 80.8 83.7 66.1 90.0 112.4 107.6 98.5 107.1 117.5 111.6 114.7
Cement 14.2 12.1 15.9 16.6 19.0 16.9 16.9 16.3 17.1 14.3 14.7 18.7 23.5 22.3 16.4 17.9 19.0
Engineering 6.1 8.6 13.5 21.9 8.0 14.5 16.5 23.7 13.8 16.5 19.7 31.8 14.5 18.4 22.3 40.8 16.4
FMCG 14.2 15.4 16.7 14.8 17.9 18.4 19.8 17.5 19.6 19.9 21.0 20.6 23.1 24.7 26.3 23.9 24.8
IT 26.1 31.4 34.4 37.5 35.0 37.8 39.9 40.2 39.1 45.6 48.1 46.4 48.2 51.2 53.9 55.5 55.4
Infrastructure 1.8 1.5 2.0 2.7 2.5 1.9 2.9 4.1 2.7 3.3 3.4 5.2 3.4 2.6 4.5 4.7 3.6
Media 1.7 1.8 2.5 2.4 3.2 3.1 3.8 2.4 3.6 3.0 2.5 2.5 3.9 4.3 4.3 3.8 4.8
Metals 53.1 66.2 70.8 70.3 72.8 69.6 64.7 99.1 102.3 110.7 35.1 16.2 14.6 26.7 61.1 96.2 82.0
Oil & Gas Ex RMs 79.3 77.9 86.2 66.5 94.7 101.2 94.7 80.1 138.0 105.2 51.0 77.6 101.0 103.2 87.0 98.3 94.0
Pharma 10.5 13.3 13.9 14.8 13.0 14.5 13.8 14.0 14.2 12.5 10.6 3.6 14.0 17.7 7.6 19.2 18.2
Real Estate 1.0 1.4 5.5 4.6 28.7 27.9 30.9 35.1 26.3 27.4 10.8 3.1 7.2 8.8 9.1 8.7 7.4
Retail 0.2 0.5 0.5 0.7 0.2 0.8 0.6 0.8 0.7 1.2 0.8 0.8 0.6 1.2 1.3 1.4 1.1
Telecom 13.8 17.8 22.8 26.0 30.7 32.0 34.1 37.6 39.7 39.2 39.1 39.8 46.2 34.2 36.4 35.4 26.0
Textiles 1.0 1.5 1.4 1.2 0.8 1.5 1.4 1.5 0.6 1.2 0.6 1.1 0.8 1.8 2.0 2.0 1.8
Utilities 18.8 21.4 25.7 39.6 25.5 24.6 27.7 28.6 27.9 28.0 29.6 36.7 34.4 31.0 32.3 38.4 36.2
Others 0.8 1.0 0.6 1.9 1.1 1.3 1.1 2.7 2.0 2.1 1.4 2.6 2.2 1.7 1.4 3.4 2.2
MOSL Univ Excl RMS 294 338 380 397 423 450 466 505 529 534 408 426 457 483 509 589 534
Source: MOSL

July 2010 28
 India Strategy

1QFY11 earnings growth

75% of companies in MOSL universe to report +ve growth

„ 1QFY11 earnings for MOSL universe is more broad-based with 75%of companies (vs
68% in June-09) in positive earnings growth trajectory and balance 25% (vs 32% in
June-09) likely to report negative earnings growth.
„ 54% of the companies in the MOSL Universe are expected to report PAT growth of
15%+ vs 65% in 4QFY10.
„ However, 21% of the companies are expected to report PAT growth of 0-15%, vs
14% over a year ago and 10% in 4QFY10. Balance 21% of companies would report
negative earnings growth, significantly lower than 32% a year ago and 25% in 4QFY10.

1QFY11 earnings growth distribution

DISTRIBUTION OF COMPANIES BASED ON EARNINGS GROWTH PROPORTION OF COMPANIES WITH EARNINGS GROWTH > 15%

PAT % OF COMPANIES WITH GROWTH OF

RANGE YOY (%) >15% >0-15% <0% 76 79

73 75 71
June 08 25.6 53 24 23 67 65
Sep 08 19.7 48 26 26 60
57
53 54 51 54
Dec 08 -8.4 36 22 42
48
Mar 09 -15.5 41 18 41 41
June 09 -14.9 54 14 32 36
Sep 09 -11.3 51 14 35
Dec 09 22.7 60 9 31

Dec 09
June 08

Dec 08
Mar 09
June 09

Mar 10
June 10
Dec 06
Mar 07
June 07

Dec 07
Mar 08

Sep 08

Sep 09
Sep 06

Sep 07

Mar 10 38.5 65 10 25
June 10 17.0 54 21 25
Source: CompanyMOSL

PROPORTION OF COMPANIES WITH EARNINGS GROWTH OF 0-15% PROPORTION OF COMPANIES WITH EARNINGS GROWTH < 0%

24 26 42 41
22 21 35
19 32
18 31
15 26 25 25
14 14 24 23
12 11 12 21
11 11 10 17
9 14 14
12 11
Dec 06
Mar 07
June 07

Dec 07
Mar 08
June 08

Dec 08
Mar 09
June 09

Dec 09
Mar 10
June 10

Dec 06
Mar 07
June 07

Dec 07
Mar 08
June 08

Dec 08
Mar 09
June 09

Dec 09
Mar 10
June 10
Sep 06

Sep 07

Sep 08

Sep 09

Sep 06

Sep 07

Sep 08

Sep 09

Source: MOSL

July 2010 29
 India Strategy

INTRA-SECTOR 1QFY11 EARNINGS DIVERGENCE

SECTORS 1QFY11 PAT EARNINGS GROWTH IN EARNINGS NEGATIVE EARNINGS

GROWTH (%) EXCESS OF 15% GROWTH OF 0-15% EARNINGS GROWTH MOMENTUM

Autos 29.7 Bajaj Auto, Tata Motors, Hero Honda 0

Maruti Suzuki, 1
4
Mahindra & Mahindra
Banks 16.4 Yes Bank, State Bank, Federal Bank,
Axis Bank, LIC Housing, Andhra Bank, Bank of India 3
HDFC Bank, PNB, Indian Bank 4
13
ICICI Bank, HDFC,
BoB
Cement -18.9 Ambuja Cements Grasim Inds., 1
0
ACC, Ultratech, 6
Shree Cement, India Cements
Engineering 13.4 BHEL Crompton Greaves, ABB 1 4 1
L&T, Thermax, Siemens
FMCG 7.6 Godrej Cons., United Spirits, Hind. Unilever 2
4
Dabur, Marico, ITC Asian Paints, Nestle 5
Infrastructure 5.4 Simplex Infra, Nagarjuna Hindustan Jaiprakash 1
1
3
Construction, IVRCL Infra. Construction Associates
IT 15.0 TCS, HCL Technologies, Patni Computer 2 1
Wipro, MphasiS Infosys 4
Media 25.1 Zee Entertainment Jagran Prakashan Deccan Chronicle 1
1
Sun TV, H T Media 3
Metals 461.4 Tata Steel, Hindalco, JSW Steel, SAIL 1
Sesa Goa, Nalco, 0
7
Sterlite Inds., Hind. Zinc
Oil Gas & Petchem -6.9 Reliance Inds., Cairn India, ONGC, 4 0 4
GAIL Chennai Petroleum
Pharma 30.1 Sun Pharma, Ranbaxy Lab, Glenmark Cipla, Jubilant Organosys, 2
Divis Lab, Lupin, Piramal GSK Pharma 3
Healthcare, Dr Reddy’ s Labs, 9
Real Estate 3.1 Mahindra Lifespace, Unitech, HDIL, DLF Anant Raj Industries 1
2
Phoenix Mills 3
Retail 81.0 Tital Industries - - 0
2 0
Pantaloon Retail
Telecom -43.8 - - Bharti Airtel, Idea Cellular, 0 0
Reliance Comm. 4
Textiles 125.8 Raymond, Vardhman Textiles, Arvind Mills 1
4 0
Bombay Rayon
Utilities 5.1 Power Grid Corp. Reliance Infra., Tata PTC India
1 4 1
Power, NTPC
Others -0.1 Sintex Industreis - United Phosphorous 0
1 1

Note: Earnings momentum represents number of companies in every sector in the MOSL Universe in each of the 3 buckets of earnings growth

July 2010 30
 India Strategy

Distribution of earnings growth of companies within sectors

„ Autos: Sector earnings growth of ~30% YoY boosted by Bajaj Auto (+83% YoY) and
Tata Motors (+ 45% YoY). Hero Honda would show earnings growth of mere 5%
YoY. Maruti and M&M are expected to report earnings growth of 24% and 21%,
respectively.
„ Banks: Sector earnings growth of 16% YoY. Amongst the Top 10 banks in terms of
contribution to universe, HDFC Bank, Axis bank, and Canara bank will report 30%+
earnings growth, ICICI and PNB would report 25%+ earnings growth. SBI is expected
to report earnings growth of 6%, while BOI would report negative earnings growth
(down 26% YoY).
„ Cement: Negative earnings growth of 19% YoY. Ambuja cement is only company in
the universe with positive earnings growth at 30%. Earnings growth for Grasim is flat
YoY, while ACC and Ultra tech would report negative earning growth of 20% and
42%, respectively.
„ IT: Sector earnings growth of 15% YoY comprises of near 20% earnings growth for
both TCS and Wirpo, while earnings growth for Infosys is expected at 4%.
„ Engineering: Earnings growth of 13% YoY is largely driven by BHEL – up 22%
YoY, while L&T and Crompton Greaves are the other 2 stocks with double digit earnings
growth at 14% and 13%, respectively. ABB is expected to report negative earnings
growth of 6% YoY.
„ FMCG: 6% earnings growth in sector has stark dispersion with 15% earnings growth
for ITC (41% contribution to Universe) and negative growth of 6% for HUL (20%
contribution to Universe). Nestle and Asian paints have modest earnings growth of
~5% YoY, while Godrej consumer would lead the pack with 39% earnings growth and
GSK consumer with 16% YoY growth.
„ Infrastructure: Negative earning of 5% YoY is due to de-growth in Jaiprakash
Associates (down 7% YoY and 56% contribution to Universe), while NCC, Simplex
and IVRCL would have earnings growth of 29%, 54% and 25%, respectively.
„ Pharmaceuticals: Earnings growth of 30% for sector boosted by Sun Pharma (+183%
YoY), Ranbaxy Labs (+100% YoY), and Lupin (+32% YoY). Cipla and Sun Pharma
contribute equally to Universe, but earnings growth for Cipla is relatively lower at
12% YoY, driving the overall Universe growth down.
„ Telecom: Sector earnings de-growth of 44% YoY, led by RCom (down 82% YoY,
contribution at 12%). Bharti (contribution of 76%) and Idea Cellular (contribution of
9%) earnings de-growth would be better than universe average at 21% and 25%,
respectively.

Key earnings divergence for Sensex stocks in 1QFY11

We expect Sensex Universe to report sales growth of 28%, EBIDTA growth of 21% and
PAT growth of 19%. The growth rates in Sensex Universe earnings are expected to
improve over the next 3 quarters with average growth of 22%. The EPS growth will be
even higher due to the higher weightage of the growth stocks.

July 2010 31
 India Strategy

SENSEX PAT GROWTH (YOY) - PENDING

39 42 43 40
33 31 30 33 30
28 26
25 24 24
19 20 19
17 15
12
6

-11
-17 -20 -17

1QFY11E
1QFY05
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
Source: MOSL

„ Commodity stocks are biggest contributor to the YoY earnings growth given low base
of June 2009. This is explained by loss to profit scenario for Tata Steel, 783% earnings
growth from Hindalco and 59% by Sterlite.
„ Reliance (contribution of 14%) is expected to report strong earnings growth of 30%,
while ONGC would report de-growth of 28% (contribution of 10%). Further, the muted
earnings growth of 3% & 6% respectively by NTPC and SBI (total contribution at
14%) would bring the overall earnings growth down.
„ Stock with 25%+ earnings growth include: Tata Motors (+45%), HDFC Bank (+31%),
and ICICI Bank (+25%). Stocks with 20-25% earnings growth are Maruti Suzuki
(+24%), BHEL (+22%), TCS (+22%), M&M (+21%) and HDFC (+21% YoY).
„ RCom, ONGC and Bharti Airtel would report de-growth of 82%, 28% and 21%,
respectively.

July 2010 32
 India Strategy

1QFY11 EARNINGS COMPOSITION OF SENSEX (RS B)

COMPANY SALES EBITDA PAT CONTRIBUTION TO %

JUN-10 VAR VAR JUN-10 VAR VAR JUN-10 VAR VAR PAT PAT

% YOY % QOQ % YOY % QOQ % YOY % QOQ GROWTH

ACC 20.2 -3.2 -4.1 5.9 -19.8 -5.4 3.9 -20.1 -4.3 1.2 -1.8
Bharti Airtel 103.9 4.5 3.3 39.1 -5.8 2.3 19.8 -21.4 -3.7 5.9 -9.8
BHEL 72.1 28.9 -46.8 8.5 43.4 -75.8 5.5 22.4 -75.5 1.6 1.9
Cipla 15.1 9.6 9.7 3.8 3.9 36.8 2.7 12.1 26.1 0.8 0.5
DLF 20.6 24.6 3.1 10.0 33.9 -0.4 4.0 1.6 -5.6 1.2 0.1
HDFC 9.1 25.4 -22.2 9.6 21.5 -25.0 6.8 21.0 -26.2 2.0 2.2
HDFC Bank 23.1 24.4 -1.8 16.7 10.3 -1.1 8.0 31.2 -4.9 2.4 3.5
Hero Honda 42.3 11.1 3.5 6.2 -3.3 -9.5 5.2 4.5 -12.8 1.6 0.4
Hind. Unilever 49.1 9.0 12.0 6.7 -6.7 12.1 5.0 -6.1 19.4 1.5 -0.6
Hindalco 164.3 36.6 -6.8 18.4 13.1 -2.0 6.8 782.8 57.6 2.0 11.1
ICICI Bank 19.5 -1.6 -4.0 24.3 -4.0 1.2 11.0 25.3 9.4 3.3 4.1
Infosys 62.8 14.7 5.6 20.8 11.3 2.8 15.9 3.9 6.9 4.7 1.1
ITC 46.2 11.7 -10.1 15.7 13.2 -3.0 10.1 15.2 -1.5 3.0 2.5
Jaiprakash Associates 24.9 20.5 -25.5 6.5 19.6 -24.1 2.0 -7.0 -17.1 0.6 -0.3
Larsen & Toubro 87.8 19.3 -34.3 9.6 21.7 -48.0 6.5 12.9 -51.2 1.9 1.4
Mahindra & Mahindra 53.5 26.5 1.4 8.4 22.6 -0.8 5.5 21.2 -3.1 1.6 1.8
Maruti Suzuki 84.3 29.8 0.0 10.2 28.7 -8.1 7.2 23.7 10.0 2.1 2.5
NTPC 134.4 12.0 8.8 37.6 18.5 41.2 23.3 2.5 -6.5 6.9 1.0
ONGC 146.1 -1.8 -0.7 79.6 -16.2 -2.8 34.9 -28.1 -7.7 10.3 -25.0
Reliance Comm 50.9 -17.2 -0.1 16.2 -34.1 0.8 3.2 -81.5 -71.8 1.0 -25.9
Reliance Inds. 564.7 81.1 -1.9 94.0 47.3 2.9 47.7 30.1 1.3 14.1 20.3
Reliance Infrastructure 30.8 26.0 16.6 3.3 10.6 26.8 3.5 9.5 38.0 1.0 0.6
State Bank 65.3 30.0 -2.8 51.8 41.0 -0.2 24.6 5.7 31.9 7.3 2.4
Sterlite Inds. 65.4 42.8 -9.5 16.4 60.5 -25.0 10.7 59.4 -22.3 3.2 7.3
Tata Motors 99.3 56.3 -18.4 10.1 39.1 -17.8 3.2 45.5 -24.6 1.0 1.8
Tata Power 18.7 -7.0 4.4 5.1 -20.0 12.7 2.2 7.6 -0.4 0.6 0.3
Tata Steel 290.9 24.9 5.8 50.1 LP 8.9 27.5 LP 19.3 8.2 87.0
TCS 81.2 12.7 5.0 23.2 18.5 0.5 18.5 21.8 -4.1 5.5 6.1
Wipro 73.7 15.4 5.7 13.8 7.3 3.5 12.1 19.5 -0.1 3.6 3.6
Sensex (29) 2,520 28.0 -4.8 622 20.6 -4.7 338 19.3 -7.8
Note: Tata Steel, Hindalco are Consolidated, excluding Jindal Steel & Power Source: MOSL

July 2010 33
 India Strategy

MOSL MODEL PORTFOLIO

SECTOR WEIGHT / BSE-100 MOSL WEIGHT RELATIVE EFFECTIVE SECTOR

PORTFOLIO PICKS WEIGHT TO BSE-100 STANCE

Banks 22.2 24.0 1.8 Overweight

PSU 6.0 11.0 5.0 Overweight
SBI 3.4 6 2.6 Buy
PNB 0.8 3 2.2 Buy
Indian Bank 0.0 2 2.0 Buy
Private 10.8 11.0 0.2 Overweight
ICICI Bank 4.9 5 0.1 Buy
HDFC Bank 3.6 4 0.4 Buy
Yes Bank 0.0 2 2.0 Buy
NBFCs 5.4 2 -3.4 Underweight
Dewan Housing 0.0 2 2.0 Buy
Infrastructure & Related sectors 13.1 19.0 5.9 Overweight
BHEL 2.1 5 2.9 Buy
Larsen & Toubro 5.0 5 0.0 Neutral
Unitech 0.5 3 2.5 Buy
ACC 0.5 2 1.5 Buy
Nagarjuna Construction 0.0 2 2.0 Buy
India Cements 0.1 2 1.9 Buy
Oil & Gas 16.4 15.0 -1.4 Underweight
Reliance Inds. 10.0 6 -4.0 Buy
ONGC 2.9 4 1.1 Buy
BPCL 0.5 3 2.5 Buy
GAIL 1.2 2 0.8 Buy
Information Technology 10.9 11.0 0.1 Overweight
Infosys Tech 6.9 7 0.1 Buy
HCL Tech 0.4 2 1.6 Buy
Mphasis 0.0 2 2.0 Neutral
FMCG / Media 8.0 7.0 -1.0 Underweight
ITC 4.1 3.0 -1.1 Buy
United Spirits 0.6 2.0 1.4 Buy
Zee Ent 0.4 2.0 1.6 Buy
Auto 6.1 6.0 -0.1 Underweight
Mahindra & Mahindra 1.4 2 0.6 Buy
Hero Honda 1.0 2 1.0 Buy
Maruti 1.0 2 1.0 Buy
Pharmaceuticals 3.9 5.0 1.1 Overweight
Cipla 0.9 3 2.1 Buy
Divi's Lab 0.3 2 1.7 Buy
Metals 5.9 4.0 -1.9 Underweight
Sterlite 1.3 2 0.7 Buy
Hindalco 1.0 2 1.0 Buy
Telecom 2.9 2.0 -0.9 Neutral
Bharti Airtel 1.8 2 0.2 Buy
Utilities 6.7 2.0 -4.7 Underweight
NTPC 1.7 2 0.3 Neutral
Others 3.9 5.0 1.1 -
Deccan Chronicle 0.0 1 1.0 Buy
Sintex Industries 0.0 1 1.0 Buy
Birla Corp 0.0 1 1.0 Buy
Anant Raj Industries 0.0 1 1.0 Buy
Prakash Inds 0.0 1 1.0 Buy
Cash 0.0 0.0 0.0
Total 100.0 100.0

July 2010 34
 India Strategy

MOSL Universe: 1QFY11 aggregate performance highlights

QUARTER-WISE SALES GROWTH (% YOY) QUARTER-WISE NET PROFIT GROWTH (% YOY)

29.2% 19.3%
23.0% 17.8%

12.8% 13.7%

8.9%

-12.9%
Sep- 09 Dec-09 Mar-10 June-10 Sep- 09 Dec-09 Mar-10 June-10

SECTORAL SALES GROWTH - QUARTER ENDED JUNE 2010 (%)

36.6 33.3 32.0

29.1 28.8 28.0
26.4 25.1 MOSL Universe Sales Growth = 23%
20.5
15.9 14.8
13.3 11.8
10.5
3.3
1.0 0.9

FMCG
Oil Gas & Pet.

Telecom
Real Estate

Pharma

Cement
IT
Retail

Media

Engineering
Textiles

Banks

Others
Metals

Utilities
Infrastructure
Auto

SECTORAL EBITDA GROWTH - QUARTER ENDED JUNE 2010 (%)

110.9
58.3
38.5 34.7
29.7 MOSL Universe EBITDA Growth = 15.6%
23.7 22.9
16.6 16.2 14.9 14.6
10.4 8.9 7.1

-4.2 -12.7 -14.2

FMCG

Oil Gas &

Telecom
Pharma

Real Estate

Cement
Retail
Media

Engineering
Metals

Textiles

Banks

Utilities
Infrastructure

Petchem
Auto

IT

Others

SECTORAL NET PROFIT GROWTH - QUARTER ENDED JUNE 2010 (%)

461.4 125.8
81.0

30.1 29.7 25.1 MOSL Universe Net Profit Growth = 8.9%

16.4 15.0 13.4 7.6
5.4 5.1 3.1 -0.1

-18.9 -26.3
-43.8
FMCG

Oil Gas &

Telecom
Pharma

Real Estate

Cement
Retail

Media

Engineering
Banks
Metals

Textiles

Utilities
Infrastructure

Petchem
Auto

IT

Others

July 2010 35
 India Strategy

QUARTERLY PERFORMANCE - MOSL UNIVERSE

SECTOR EBITDA MARGIN (%) NET PROFIT MARGIN (%)

(NO. OF COMPANIES) JUN.09 JUN.10 CHG. (%) JUN.09 JUN.10 CHG. (%)

Auto (5) 14.2 13.5 -0.7 8.9 8.5 -0.5

Banks (20) 89.6 85.5 -4.1 47.6 43.0 -4.6
Cement (7) 32.8 27.9 -4.9 20.8 16.7 -4.1
Engineering (6) 11.1 11.4 0.3 8.0 7.5 -0.5
FMCG (11) 21.3 20.2 -1.1 14.3 13.5 -0.9
IT (7) 25.9 25.3 -0.7 19.3 19.6 0.3
Infrastructure (5) 15.6 15.7 0.1 5.5 5.0 -0.5
Media (5) 37.9 42.0 4.1 24.9 24.9 0.0
Metals (8) 11.7 19.6 7.9 2.6 11.5 8.9
Oil Gas & Petchem (11) 14.1 10.6 -3.6 8.7 5.0 -3.7
Pharma (14) 19.6 20.4 0.8 11.9 14.0 2.1
Real Estate (6) 49.0 42.5 -6.5 27.4 21.4 -6.0
Retail (2) 9.1 9.5 0.4 2.3 3.3 0.9
Telecom (4) 38.8 33.6 -5.2 23.7 13.2 -10.5
Textiles (5) 18.3 21.7 3.4 3.0 5.1 2.1
Utilities (6) 26.5 27.6 1.0 16.2 15.2 -1.0
Others (2) 17.4 18.0 0.6 9.4 9.1 -0.3
MOSL (124)* 21.3 20.0 -1.3 12.2 10.8 -1.4
MOSL Excl. RMs (121) 26.8 25.7 -1.1 14.9 14.0 -1.0
Sensex (29) 26.2 24.7 -1.5 14.4 13.4 -1.0
*Tata Steel Consolidated Source: MOSL

EBITDA MARGIN GROWTH - QUARTER ENDED JUNE 2010 (%) NET PROFIT MARGIN GROWTH - QUARTER ENDED JUNE 2010 (%)

7.9 8.9 MOSL Universe Net Profit Margin Growth = -140bp

4.1 3.4 MOSL Universe EBITDA Margin Growth = -130bp
2.1 2.1 0.9
0.3
1.0 0.8
0.6 0.4 0.3 0.1 0.0 -0.3
-0.5-0.5-0.5 -0.9-1.0
-0.7 -0.7 -1.1
-3.7-4.1 -4.6
-3.6 -4.1-4.9 -6.0
-5.2 -6.5 -10.5
FMCG

FMCG
Oil Gas &

Oil Gas &

Telecom
Telecom

Real Estate
Pharma

Pharma
Real Estate

Cement
Cement
Retail

Retail
Media

Media
Engineering

Engineering
Textiles
Metals

Textiles
Utilities

Banks

Metals

Utilities

Banks
Infrastructure

Infrastructure
Auto

Auto
IT

IT
Others

Others

SECTORAL CONTRIBUTION TO GROWTH IN SALES, EBITDA AND NET PROFIT (%)

SECTOR CONTRIBUTION SECTOR CONTRIBUTION SECTOR CONTRIBUTION
TO SALES GR. TO EBITDA GR. TO NP GR.
Oil Gas & Petchem (11) 50.8 Metals (8) 53.5 Metals (8) 149.2
Metals (8) 15.7 Banks (20) 30.9 Banks (20) 35.8
Auto (5) 8.9 Auto (5) 7.1 IT (7) 16.0
Banks (20) 6.3 Utilities (6) 6.6 Auto (5) 13.6
Engineering (6) 3.9 IT (7) 4.9 Pharma (14) 9.3
IT (7) 3.5 Engineering (6) 3.5 Engineering (6) 4.3
Utilities (6) 2.6 Pharma (14) 2.5 Utilities (6) 3.9
FMCG (11) 2.5 FMCG (11) 2.2 FMCG (11) 3.9
Pharma (14) 1.3 Textiles (5) 2.1 Textiles (5) 2.2
Infrastructure (5) 1.0 Media (5) 1.6 Media (5) 2.1
Textiles (5) 0.9 Real Estate (6) 1.4 Retail (2) 1.1
Real Estate (6) 0.9 Infrastructure (5) 1.2 Real Estate (6) 0.5
Retail (2) 0.8 Retail (2) 0.6 Infrastructure (5) 0.4
Media (5) 0.4 Others (2) 0.2 Others (2) 0.0
Telecom (4) 0.2 Cement (7) -3.8 Cement (7) -9.8
Cement (7) 0.1 Telecom (4) -7.0 Telecom (4) -44.8
Others (2) 0.1 Oil Gas & Petchem (11) -7.4 Oil Gas & Petchem (11) -87.7
Source: MOSL

July 2010 36
 Hindalco Cairn India Cairn India

783%
235%

301%
Mahindra

July 2010
Mahindra
JSW Steel
Lifespace Lifespace

270%
Sun
Sesa Goa Sesa Goa
Pharma

397% 183%
142% 135%

225%
Oriental
Sesa Goa Nalco

93%
Bank

172%
TOP 10 BY SALES GROWTH (%)

TOP 10 BY EBITDA GROWTH (%)

Mahindra Glenmark Reliance

81%

91%
Lifespace Inds.

170% 168%
Pharma

TOP 10 BY NET PROFIT GROWTH (%)

Titan Titan Godrej

73%

81%
Industries Industries Consumer
Zee
Nalco Bajaj Auto
62%
Entertainment

139% 135%
Vardhman
Bajaj Auto Alok Ind

78% 73%
60%
Textiles

116%
Ranbaxy
Divis Labs Unitech

70%
60%

Labs

100%
Godrej Phoenix
Bajaj Auto

83%
70%
59%

Consumer Mills
Scoreboard (quarter ended June 2010)

Reliance Chennai Anant Raj

Comm Petroleum Inds

-90%
-20%

Reliance
MRPL MRPL
Comm

-72%
-17%

India Ultratech
HPCL
-9%

-81% -81% -79%

-63%
Cements Cement
India Arvind
HPCL
-9%

-76%
-54%
Cements Mills
Anant Raj Tata
WORST 10 BY SALES GROWTH (%)

IOC
WORST 10 BY EBITDA GROWTH (%)
-7%

-66%
-47%

Inds Power

WORST 10 BY NET PROFIT GROWTH (%)

Chennai
BPCL IOC
-6%

Petroleum

-56%
Ultratech
Britannia SAIL
-5%

Cement
-39% -37%

Anant India
Unitech
-5%

Raj Inds Cements

Shree Reliance United
-5%

-49% -47% -47%

Cement Comm Phos.
Ultratech Ranbaxy
Britannia
-5%

-42%
-34% -34% -33%

Cement Labs

37
India Strategy

Source: MOSL
 MOSL Universe

ANNUAL PERFORMANCE - MOSL UNIVERSE (RS BILLION)

SALES EBITDA NET PROFIT

FY10 FY11E FY12E CHG * CHG # FY10 FY11E FY12E CHG * CHG # FY10 FY11E FY12E CHG * CHG #

(%) (%) (%) (%) (%) (%)

Auto (5) 1,818 2,190 2,528 20.5 15.4 235 296 343 26.1 15.8 106 158 191 49.0 20.6
Banks (23) 1,117 1,379 1,663 23.4 20.6 889 1,121 1,364 26.0 21.7 494 594 736 20.1 23.9
Cement (8) 567 682 777 20.4 13.9 160 163 183 2.0 12.3 88 84 94 -4.5 11.8
Engineering (6) 941 1,144 1,446 21.6 26.4 139 178 232 28.4 30.1 103 126 161 22.1 28.2
FMCG (11) 695 798 921 14.8 15.4 149 168 199 12.6 18.7 98 112 135 13.8 20.5
IT (7) 1,052 1,224 1,413 16.4 15.4 281 320 363 14.2 13.3 211 245 276 16.1 12.8
Infrastructure (9) 350 446 538 27.5 20.6 92 112 154 20.9 37.4 27 38 54 40.1 42.0
Media (5) 68 82 94 19.4 14.9 27 34 40 24.3 18.8 16 20 25 23.9 22.3
Metals (9) 2,688 3,046 3,260 13.3 7.0 448 562 697 25.4 23.9 197 319 395 61.8 23.9
Oil Gas&Pet.(11) 8,606 9,491 9,479 10.3 -0.1 1,027 1,327 1,554 29.2 17.1 557 681 840 22.3 23.3
Pharma (14) 496 560 631 12.9 12.6 102 124 134 21.6 7.9 61 88 97 45.1 10.2
Real Estate (10) 144 189 271 31.7 42.9 63 82 108 31.0 31.3 38 46 63 21.3 35.8
Retail (2) 124 156 187 25.6 19.6 12 15 19 26.5 21.0 5 6 8 38.5 28.6
Telecom (4) 763 826 946 8.3 14.5 278 280 327 0.6 16.9 152 102 115 -33.0 12.6
Textiles (5) 153 181 209 18.2 15.5 29 36 43 26.6 18.6 7 9 14 29.2 51.1
Utilities (10) 846 1,086 1,312 28.3 20.8 244 335 437 37.6 30.2 157 184 247 17.6 34.0
Others (2) 88 103 121 17.4 16.9 16 20 24 29.8 19.3 9 11 14 32.5 22.0
MOSL (141) 20,517 23,585 25,795 15.0 9.4 4,191 5,175 6,220 23.5 20.2 2,325 2,824 3,464 21.4 22.7
Ex.RMS(138) 15,701 18,520 20,977 18.0 13.3 4,007 4,956 5,961 23.7 20.3 2,189 2,708 3,324 23.7 22.8
Sensex (30) 5,473 6,401 7,080 17.0 10.6 1,230 1,515 1,773 23.2 17.0 629 825 1,000 31.2 21.3
Nifty (50) 6,419 7,245 8,009 12.9 10.5 1,378 1,658 1,965 20.3 18.5 711 909 1,110 27.9 22.1
* Growth FY11 over FY10; # Growth FY12 over FY11. For Banks : Sales = Net Interest Income, EBIDTA = Operating Profits; Tata Steel Figures
are consolidated including corus; Note: Sensex & Nifty Numbers are Free Float

VALUATIONS - MOSL UNIVERSE

SECTOR P/E EV/EBITDA P/BV ROE DIV. EPS

(X) (X) (X) (%) YLD (%) CAGR

(NO. OF COMPANIES) FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY10-12

Auto (5) 18.8 12.6 10.5 9.0 7.1 6.0 6.0 4.4 3.4 31.9 34.9 32.2 2.0 34.0
Banks (23) 14.2 11.8 9.5 NM NM NM 2.6 2.2 1.9 18.1 18.5 19.8 1.4 22.0
Cement (8) 10.3 10.8 9.7 5.7 5.4 4.5 2.2 1.7 1.5 21.8 16.1 15.7 1.6 3.4
Engineering (6) 28.5 23.4 18.2 20.6 16.2 12.5 7.5 6.0 5.0 26.1 25.5 27.3 0.8 25.1
FMCG (11) 30.3 26.6 22.1 19.5 17.3 14.4 10.8 9.4 7.9 35.7 35.2 35.7 2.3 17.1
IT (7) 21.7 18.7 16.5 15.4 13.1 11.1 5.7 4.6 3.8 26.4 24.6 22.7 1.4 14.4
Infrastructure (9) 38.4 27.4 19.3 16.5 14.2 10.2 3.4 3.0 2.7 8.8 11.0 13.7 0.5 41.0
Media (5) 24.8 20.1 16.4 14.3 11.2 9.1 4.6 4.1 3.6 18.7 20.5 21.9 1.7 23.1
Metals (9) 16.9 10.5 8.4 8.5 6.8 5.2 2.1 1.7 1.5 12.1 16.6 17.2 1.0 41.6
Oil Gas & Petchem (11) 16.0 13.1 10.6 9.6 7.2 5.9 2.4 2.1 1.9 14.9 16.2 17.4 1.7 22.8
Pharma (14) 33.4 23.0 20.9 20.4 16.6 15.1 5.5 4.6 4.0 16.3 20.2 19.1 0.7 26.5
Real Estate (10) 25.3 20.8 15.3 20.3 14.9 11.1 1.4 1.4 1.3 5.6 6.7 8.6 0.4 28.4
Retail (2) 40.6 29.3 22.8 17.0 13.5 11.2 5.0 4.3 3.8 12.4 14.8 16.5 0.5 33.5
Telecom (4) 10.6 15.8 14.0 6.7 7.6 6.1 1.7 1.6 1.5 16.5 10.2 10.5 0.4 -13.2
Textiles (5) 11.1 8.6 5.7 7.9 6.0 5.0 0.8 0.7 0.7 7.7 8.7 11.9 0.7 39.7
Utilities (10) 23.2 19.7 14.7 17.5 14.3 12.6 2.6 2.4 2.1 11.2 11.9 14.5 1.2 25.6
Others (2) 14.8 11.2 9.1 9.3 7.1 5.6 2.6 2.2 1.8 17.6 19.5 19.6 0.8 27.1
MOSL (141) 18.4 15.1 12.3 N.M N.M N.M 3.0 2.6 2.3 16.3 17.2 18.2 1.4 22.0
MOSL Excl. RMs (138) 19.0 15.3 12.5 N.M N.M N.M 3.1 2.7 2.3 16.3 17.4 18.4 1.3 23.2
Sensex (30) 21.4 16.7 13.8 N.M N.M N.M 3.3 3.0 2.6 15.7 17.8 18.7 1.3 26.1
Nifty (50) 21.7 16.9 13.8 N.M N.M N.M 3.3 2.9 2.5 15.3 17.2 18.3 1.2 24.9
N.M. - Not Meaningful Source: MOSL

July 2010 38
 MOSL Universe

Ready reckoner: quarterly performance

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

RS M % YOY % QOQ RS M % YOY % QOQ RS M % YOY % QOQ

Automobiles
Bajaj Auto 2,418 Buy 37,936 62.2 11.6 7,891 73.3 1.5 5,685 83.1 0.6
Hero Honda 2,050 Buy 42,348 11.1 3.5 6,174 -3.3 -9.5 5,224 4.5 -12.8
Mahindra & Mahindra 615 Buy 53,517 26.5 1.4 8,423 22.6 -0.8 5,549 21.2 -3.1
Maruti Suzuki 1,397 Buy 84,264 29.8 0.0 10,211 28.7 -8.1 7,221 23.7 10.0
Tata Motors 769 UR 99,255 56.3 -18.4 10,128 39.1 -17.8 3,201 45.5 -24.6
Sector Aggregate 317,320 36.6 -4.9 42,828 29.7 -7.9 26,880 29.7 -4.6
Cement
ACC 861 Buy 20,152 -3.2 -4.1 5,887 -19.8 -5.4 3,879 -20.1 -4.3
Ambuja Cements 117 Neutral 20,978 13.6 5.4 6,025 25.6 5.7 4,216 29.9 8.8
Birla Corporation 362 Buy 5,478 11.7 -9.0 1,645 -6.3 -5.2 1,287 -17.1 -6.4
Grasim Industries 1,795 Buy 31,520 3.5 -6.5 9,152 3.4 1.3 5,385 -0.1 -10.7
India Cements 109 Buy 9,040 -5.2 -6.3 1,326 -53.7 5.2 277 -78.7 -5.8
Shree Cement 2,023 Buy 9,138 -0.9 -3.2 3,259 -23.3 0.1 1,567 -46.8 5841.6
Ultratech Cement 933 Buy 17,748 -9.1 -7.0 4,483 -37.5 11.3 2,434 -41.7 6.5
Sector Aggregate 114,054 1.0 -4.0 31,777 -14.2 1.7 19,045 -18.9 6.2
Engineering
ABB 873 Buy 16,555 10.0 13.7 1,159 -9.5 3915.3 788 -5.8 1086.7
BHEL 2,451 Buy 72,117 28.9 -46.8 8,491 43.4 -75.8 5,548 22.4 -75.5
Crompton Greaves 254 Neutral 13,806 17.7 -14.7 2,092 20.2 -22.7 1,308 14.0 -31.4
Larsen & Toubro 1,761 Neutral 87,813 19.3 -34.3 9,572 21.7 -48.0 6,529 12.9 -51.2
Siemens 728 Neutral 21,575 12.5 -3.1 2,697 4.9 -5.7 1,749 1.4 -4.4
Thermax 709 Neutral 6,172 14.8 -49.4 802 16.4 -45.3 507 9.1 -48.9
Sector Aggregate 218,038 20.5 -34.8 24,813 23.7 -59.0 16,430 13.4 -59.7
FMCG
Asian Paints 2,393 Neutral 16,939 16.0 -9.7 2,880 4.4 -7.4 1,859 5.6 -3.0
Britannia 1,872 Buy 8,556 17.0 -8.0 402 -32.9 LP 277 -49.0 302.6
Colgate 848 Buy 5,391 15.2 4.4 1,443 17.8 0.2 1,131 10.1 7.3
Dabur 200 Buy 8,801 18.5 3.7 1,382 16.9 -14.7 1,058 15.7 -20.5
Godrej Consumer 342 Buy 7,592 73.0 49.1 1,465 69.6 36.3 967 38.7 5.4
GSK Consumer 1,814 Buy 5,672 21.0 -12.5 828 11.0 -37.8 641 16.1 -33.3
Hind. Unilever 267 Neutral 49,079 9.0 12.0 6,675 -6.7 12.1 5,039 -6.1 19.4
ITC 302 Buy 46,151 11.7 -10.1 15,701 13.2 -3.0 10,124 15.2 -1.5
Marico 126 Buy 7,594 9.0 26.1 1,025 6.3 20.7 692 15.3 19.8
Nestle 2,908 Buy 14,151 17.0 -4.4 2,717 3.8 -10.6 1,865 4.7 -5.4
United Spirits 1,300 Buy 14,775 19.0 18.0 2,719 22.5 49.9 1,194 12.9 110.0
Sector Aggregate 184,700 14.8 1.6 37,237 8.9 2.6 24,846 7.6 4.1

PULL OUT

July 2010 39
 MOSL Universe

Ready reckoner: quarterly performance

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

RS M % YOY % QOQ RS M % YOY % QOQ RS M % YOY % QOQ

Information Technology
HCL Technologies 358 Buy 32,641 12.2 6.1 5,999 -4.0 2.8 2,982 -3.7 -7.2
Infosys 2,778 Buy 62,780 14.7 5.6 20,782 11.3 2.8 15,871 3.9 6.9
MphasiS 571 Neutral 12,857 16.3 5.3 3,073 5.3 -2.5 2,660 16.0 -0.5
Patni Computer 511 Buy 7,906 2.3 2.1 1,541 -6.6 -9.0 1,352 -1.2 -9.7
TCS 762 Neutral 81,204 12.7 5.0 23,243 18.5 0.5 18,512 21.8 -4.1
Tech Mahindra 738 Neutral 11,713 5.2 -1.0 2,641 -5.9 -5.3 1,501 67.4 -19.5
Wipro 391 Neutral 73,726 15.4 5.7 13,771 7.3 3.5 12,074 19.5 -0.1
Sector Aggregate 282,828 13.3 5.1 71,473 10.4 1.9 55,444 15.0 -0.1
Infrastructure
Hindustan Construction 116 Buy 10,220 6.0 -6.1 1,172 1.9 -4.7 270 0.5 -21.1
IVRCL Infra. 183 Neutral 13,095 20.6 -30.7 1,244 24.9 -37.2 437 24.6 -48.5
Jaiprakash Associates 129 Buy 24,918 20.5 -25.5 6,477 19.6 -24.1 2,028 -7.0 -17.1
Nagarjuna Construction 188 Buy 12,074 20.7 -20.7 1,232 19.4 -19.4 493 28.9 -20.7
Simplex Infra. 481 Buy 11,862 6.9 -5.3 1,198 7.2 -6.9 395 53.8 -14.1
Sector Aggregate 72,169 15.9 -20.7 11,323 16.6 -22.2 3,623 5.4 -23.2
Media
Deccan Chronicle 122 Buy 2,305 6.4 20.3 1,159 9.4 42.6 707 -8.1 988.4
HT Media 151 Neutral 3,774 12.6 -2.0 755 9.3 -18.7 430 16.4 -13.2
Jagran Prakashan 121 Neutral 2,573 11.0 8.9 846 20.0 33.8 518 4.6 42.3
Sun TV 412 Neutral 4,065 41.3 3.7 3,278 46.6 -0.9 1,676 39.9 1.6
Zee Entertainment 291 Buy 6,631 39.3 2.1 2,081 77.8 13.3 1,488 46.1 16.9
Sector Aggregate 19,348 25.1 4.3 8,119 38.5 8.0 4,820 25.1 25.2
Metals
Hindalco 149 Buy 164,331 36.6 -6.8 18,396 13.1 -2.0 6,816 782.8 57.6
Hindustan Zinc 966 Buy 17,851 18.0 -29.9 10,068 31.1 -35.0 8,338 16.0 -32.7
JSW Steel 1,043 Buy 50,776 29.6 -2.4 11,420 52.9 -14.2 4,806 396.6 -21.7
Nalco 425 Sell 13,772 47.2 -15.3 4,548 171.7 -15.9 2,976 135.3 -24.0
Sesa Goa 367 Buy 23,819 135.5 -1.5 14,735 225.2 -2.0 11,396 169.9 -6.0
Sterlite Inds. 168 Buy 65,379 42.8 -9.5 16,382 60.5 -25.0 10,724 59.4 -22.3
SAIL 196 Neutral 86,642 -5.3 -30.1 14,205 -24.3 -54.1 9,444 -29.4 -53.8
Tata Steel 490 Neutral 290,891 24.9 5.8 50,076 LP 8.9 27,529 LP 19.3
Sector Aggregate 713,461 26.4 -6.8 139,830 110.9 -16.2 82,030 461.4 -14.8
Oil & Gas
BPCL 621 Buy 323,334 26.8 -13.9 6,208 -16.7 -44.9 2,707 -55.9 -61.5
Cairn India 312 Buy 10,143 395.0 46.0 8,261 525.0 125.0 4,372 109.0 78.0
Chennai Petroleum 251 Buy 52,959 -6.4 -3.1 472 -89.9 LP -526 PL -
GAIL 483 Buy 76,433 26.9 17.2 13,672 28.3 3.8 7,942 21.1 -12.8
Gujarat State Petronet 100 Buy 2,684 27.3 4.1 2,523 29.5 6.4 1,040 29.1 -3.6
HPCL 401 Buy 273,611 13.1 -12.6 4,048 -62.8 -69.2 1,582 -75.6 -79.1
Indraprastha Gas 257 Neutral 3,216 38.3 11.7 1,091 28.5 18.0 609 26.2 18.4
IOC 377 Buy 671,498 14.5 -13.1 25,195 -39.2 -65.5 12,537 -66.0 -77.4
MRPL 73 Sell 88,436 49.6 1.7 1,696 -71.5 -37.3 652 -80.6 -45.5
ONGC 1,264 Buy 146,098 -1.8 -0.7 79,573 -16.2 -2.8 34,862 -28.1 -7.7
Reliance Inds. 1,063 Buy 564,709 81.1 -1.9 94,037 47.3 2.9 47,710 30.1 1.3
Sector Aggregate 2,209,843 28.0 -8.0 233,808 -4.2 -20.2 110,802 -26.3 -34.2

PULL OUT

July 2010 40
 MOSL Universe

Ready reckoner: quarterly performance

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

RS M % YOY % QOQ RS M % YOY % QOQ RS M % YOY % QOQ

Pharmaceuticals
Aventis Pharma 1,870 Neutral 2,785 11.5 10.8 483 -8.7 32.7 480 1.9 33.0
Biocon 321 Buy 5,918 19.3 -9.9 1,145 13.1 -12.1 698 22.3 -13.4
Cadila Health 640 Buy 10,542 16.7 24.5 2,342 15.0 23.7 1,502 19.6 26.5
Cipla 347 Buy 15,083 9.6 9.7 3,830 3.9 36.8 2,710 12.1 26.1
Divis Labs 767 Buy 2,881 40.0 -8.3 1,131 69.6 -25.3 899 51.4 -31.1
Dishman Pharma 217 Neutral 2,328 2.3 -6.1 508 -4.6 2.5 229 -41.5 14.9
Dr Reddy’ s Labs 1,484 UR 17,556 -3.5 6.9 2,721 -27.8 26.9 2,064 20.7 23.8
Glenmark Pharma 273 Neutral 7,343 35.1 3.6 2,316 90.8 29.9 949 77.5 -7.5
GSK Pharma 2,169 Buy 5,179 13.2 -4.3 1,857 14.0 -7.2 1,463 11.1 -9.3
Jubiliant Organosys 339 Neutral 10,367 15.7 4.7 1,988 22.6 -8.1 1,058 -15.9 -22.9
Lupin 1,918 Buy 13,446 23.9 4.7 2,456 26.5 -1.4 1,852 32.2 -16.0
Piramal Healthcare 494 Neutral 9,141 11.3 -2.9 1,774 14.0 -18.0 1,064 25.1 -33.5
Ranbaxy Labs 453 Neutral 18,103 -4.5 11.0 1,204 -0.9 -27.9 399 99.7 -25.2
Sun Pharma 1,793 Buy 9,375 19.0 -15.5 2,771 64.5 -19.1 2,785 182.6 -11.7
Sector Aggregate 130,049 10.5 3.7 26,526 14.9 1.2 18,153 30.1 -5.4
Real Estate
Anant Raj Inds 118 Buy 660 -20.0 93.6 401 -47.3 52.9 364 -47.2 22.3
DLF 286 Buy 20,562 24.6 3.1 9,964 33.9 -0.4 4,023 1.6 -5.6
HDIL 244 Buy 3,506 18.7 -19.2 1,580 36.1 -30.4 1,157 7.6 -34.9
Mahindra Lifespace 459 Buy 1,145 142.3 13.4 384 269.8 29.5 279 167.6 17.7
Phoenix Mills 209 Buy 395 59.4 14.6 276 46.3 39.5 177 15.4 12.6
Unitech 74 Buy 8,257 60.4 -27.1 2,073 -34.2 -24.0 1,384 17.4 -31.1
Sector Aggregate 34,526 32.0 -7.5 14,679 14.6 -6.8 7,383 3.1 -15.6
Retailing
Pantaloon Retail 420 Buy 20,279 22.0 -1.4 2,239 22.2 3.9 529 44.9 -5.4
Titan Industries 2,258 Neutral 12,580 42.5 -4.1 893 81.4 -23.6 541 139.1 -34.8
Sector Aggregate 32,859 29.1 -2.5 3,132 34.7 -5.8 1,070 81.0 -23.0
Telecom
Bharti Airtel 263 Buy 103,852 4.5 3.3 39,110 -5.8 2.3 19,787 -21.4 -3.7
Idea Cellular 57 Buy 36,665 23.2 9.5 9,331 8.5 1.0 2,243 -24.5 -15.9
Reliance Comm 193 UR 50,899 -17.2 -0.1 16,151 -34.1 0.8 3,206 -81.5 -71.8
Tulip Telecom 853 Buy 5,366 21.1 1.1 1,491 37.3 -3.5 726 -3.2 -8.6
Sector Aggregate 196,781 0.9 3.4 66,083 -12.7 1.6 25,963 -43.8 -26.7
Textiles
Alok Ind 20 Neutral 12,617 60.5 -14.2 3,496 62.6 -18.3 487 52.3 -48.9
Arvind Mills 33 Neutral 6,189 -8.6 7.5 720 -18.1 8.5 64 -24.8 -58.1
Bombay Rayon 253 Buy 5,120 52.2 8.0 1,280 60.8 11.8 564 51.3 12.0
Raymond 217 Buy 3,366 43.4 0.0 441 LP -1.4 70 LP 96.7
Vardhman Textiles 271 Buy 8,091 30.5 7.0 1,751 59.8 3.6 619 115.6 53.6
Sector Aggregate 35,382 33.3 -2.1 7,688 58.3 -6.5 1,805 125.8 -11.9
PL: Profit to Loss; LP: Loss to Profit; UR=Under Review; Tata Steel and Sterlite numbers are consolidated

PULL OUT

July 2010 41
 MOSL Universe

Ready reckoner: quarterly performance

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

RS M % YOY % QOQ RS M % YOY % QOQ RS M % YOY % QOQ

Utilities
CESC 374 Neutral 8,939 10.5 18.6 2,101 10.6 14.2 1,092 4.0 9.2
NTPC 196 Neutral 134,430 12.0 8.8 37,640 18.5 41.2 23,349 2.5 -6.5
PTC India 101 Neutral 24,215 2.1 94.8 157 6.9 74.5 274 -24.8 76.3
Power Grid Corp. 101 Buy 20,694 27.5 -7.2 17,279 29.9 -5.1 5,823 15.8 -23.1
Reliance Infrastructure 1,168 Buy 30,824 26.0 16.6 3,314 10.6 26.8 3,466 9.5 38.0
Tata Power 1,303 Neutral 18,745 -7.0 4.4 5,061 -20.0 12.7 2,173 7.6 -0.4
Sector Aggregate 237,847 11.8 13.2 65,553 16.2 21.6 36,177 5.1 -5.8
Others
Sintex Inds. 313 Buy 8,134 22.8 -25.6 1,139 30.3 -41.1 592 46.0 -51.4
United Phosphorous 192 Buy 15,692 -4.6 2.5 3,154 0.6 -0.2 1,575 -10.7 -28.3
Sector Aggregate 23,827 3.3 -9.2 4,293 7.1 -15.7 2,167 -0.1 -36.5

CMP (RS) RECO NET INT INCOME OPERATING PROFIT NET PROFIT
25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

RS M % YOY % QOQ RS M % YOY % QOQ RS M % YOY % QOQ

Banks
Andhra Bank 134 Buy 6,436 45.8 -1.9 5,161 48.3 -2.1 2,689 4.9 11.9
Axis Bank 1,248 Buy 13,937 33.3 -4.5 13,630 15.9 -1.5 7,617 35.5 -0.4
Bank of Baroda 696 Buy 16,881 40.1 -3.3 14,267 41.3 -12.4 7,970 16.3 -12.1
Bank of India 345 Neutral 15,034 15.6 -3.1 11,658 6.6 -8.6 4,311 -26.2 0.7
Canara Bank 434 Buy 15,457 19.7 -3.2 13,037 25.2 -8.9 7,344 32.2 46.0
Corporation Bank 514 Buy 6,219 33.0 -2.8 5,591 -2.1 2.6 3,054 16.9 -2.2
Dena Bank 93 Buy 3,023 20.7 -7.3 2,143 6.4 -23.5 1,245 8.3 -9.1
Federal Bank 318 Buy 3,972 36.9 -3.0 3,442 23.7 -2.1 1,348 -1.2 15.4
HDFC 2,937 Neutral 9,114 25.4 -22.2 9,619 21.5 -25.0 6,836 21.0 -26.2
HDFC Bank 1,948 Buy 23,079 24.4 -1.8 16,750 10.3 -1.1 7,953 31.2 -4.9
ICICI Bank 858 Buy 19,540 -1.6 -4.0 24,280 -4.0 1.2 11,002 25.3 9.4
Indian Bank 220 Buy 9,128 23.7 -2.3 7,349 16.6 -15.8 3,379 1.9 -17.6
LIC Housing Fin 1,015 Buy 3,022 43.2 -12.9 2,479 38.6 -13.2 1,663 34.3 -22.1
Oriental Bank of Commerce 323 Buy 9,326 92.6 -5.7 7,379 42.7 -5.0 3,106 20.7 -2.0
Punjab National Bank 1,045 Buy 24,177 34.2 -3.2 20,396 30.0 -12.6 10,674 28.3 -6.0
Shriram Transport Fin. 579 Buy 6,336 34.7 -2.1 5,061 48.0 -1.7 2,680 63.0 1.4
South Indian Bank 165 UR 1,584 3.9 100.8 1,040 -2.7 101.6 548 -8.9 41.8
State Bank 2,301 Buy 65,328 30.0 -2.8 51,818 41.0 -0.2 24,630 5.7 31.9
Union Bank 303 Buy 12,727 58.8 -8.8 10,647 35.2 -7.2 5,216 18.0 -12.1
Yes Bank 272 Buy 2,418 47.7 -1.0 2,418 22.3 -6.1 1,387 38.6 -0.9
Sector Aggregate 266,738 28.8 -4.1 228,164 22.9 -5.8 114,652 16.4 2.8

PULL OUT

July 2010 42
 MOSL Universe

Ready reckoner: valuations

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA (X) ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Automobiles
Bajaj Auto 2,418 Buy 125.6 164.9 181.1 19.2 14.7 13.3 12.8 9.7 8.5 64.3 53.1 41.3
Hero Honda 2,050 Buy 111.8 122.3 142.8 18.3 16.8 14.4 13.3 12.4 10.4 61.5 56.7 39.7
Mahindra & Mahindra 615 Buy 42.5 58.4 70.2 14.5 10.5 8.8 5.4 4.6 3.6 26.1 22.9 22.5
Maruti Suzuki 1,397 Buy 90.8 99.5 118.1 15.4 14.0 11.8 8.8 8.1 6.6 21.5 19.1 18.9
Tata Motors 769 UR 24.1 76.3 98.8 31.9 10.1 7.8 9.0 6.2 5.6 19.9 42.7 38.6
Sector Aggregate 18.8 12.6 10.5 9.0 7.1 6.0 31.9 34.9 32.2
Cement
ACC 861 Buy 86.7 75.5 82.9 9.9 11.4 10.4 5.9 6.1 5.2 29.8 22.0 19.7
Ambuja Cements 117 Neutral 7.8 8.5 9.1 15.0 13.8 12.9 8.8 8.4 7.2 19.6 18.9 18.0
Birla Corporation 362 Buy 72.4 62.5 64.1 5.0 5.8 5.6 2.6 2.3 3.0 31.1 21.8 18.7
Grasim Industries 1,795 Buy 331.1 255.5 283.6 5.4 7.0 6.3 2.6 2.3 1.6 23.2 15.0 14.7
India Cements 109 Buy 10.9 4.8 7.7 10.0 22.7 14.1 6.5 9.2 6.6 8.3 3.4 5.3
Kesoram Ind 318 Buy 54.2 61.7 78.1 5.9 5.2 4.1 4.6 4.3 3.5 17.2 16.9 18.2
Shree Cement 2,023 Buy 203.7 200.4 216.2 9.9 10.1 9.4 5.8 6.1 4.8 46.6 32.4 26.7
Ultratech Cement 933 Buy 87.8 63.0 73.0 10.6 14.8 12.8 13.2 7.7 6.6 23.7 21.9 16.6
Sector Aggregate 10.3 10.8 9.7 5.7 5.4 4.5 21.8 16.1 15.7
Engineering
ABB 873 Buy 16.7 20.1 33.9 52.2 43.5 25.7 34.0 28.0 16.1 15.6 16.3 23.1
BHEL 2,451 Buy 95.7 118.8 155.5 25.6 20.6 15.8 17.6 12.5 9.6 32.5 32.5 34.0
Crompton Greaves 254 Neutral 12.9 14.4 17.6 19.7 17.7 14.4 18.4 14.8 11.8 39.2 34.8 33.3
Larsen & Toubro 1,761 Neutral 61.7 71.9 89.2 28.6 24.5 19.7 23.0 20.7 16.4 19.7 17.8 18.8
Siemens 728 Neutral 13.7 23.3 26.9 53.1 31.3 27.0 22.6 16.5 15.0 12.7 24.9 24.9
Thermax 709 Neutral 21.8 24.8 32.0 32.6 28.6 22.1 21.0 18.4 14.5 27.0 28.7 32.1
Sector Aggregate 28.5 23.4 18.2 20.6 16.2 12.5 26.1 25.5 27.3
FMCG
Asian Paints 2,393 Neutral 79.9 86.5 104.6 29.9 27.7 22.9 19.0 17.4 14.4 48.2 41.2 39.9
Britannia 1,872 Buy 68.9 88.4 116.8 27.2 21.2 16.0 29.8 16.7 12.1 42.2 44.2 46.1
Colgate 848 Buy 29.7 32.3 38.1 28.6 26.2 22.3 22.4 19.2 16.3 156.0 120.1 114.4
Dabur 200 Buy 5.8 6.6 8.2 34.8 30.2 24.5 27.2 22.6 18.6 45.8 41.5 40.0
Godrej Consumer 342 Buy 11.7 15.2 18.4 29.3 22.5 18.6 24.6 17.7 15.0 50.3 52.4 49.8
GSK Consumer 1,814 Buy 55.4 64.6 79.1 32.8 28.1 22.9 22.1 19.9 15.7 25.7 25.4 26.1
Hind. Unilever 267 Neutral 9.4 9.5 11.3 28.2 28.2 23.7 20.0 19.9 16.5 64.0 71.5 74.4
ITC 302 Buy 10.6 12.4 14.6 28.4 24.4 20.7 17.0 14.7 12.4 28.9 28.5 28.5
Marico 126 Buy 4.0 4.7 5.9 31.7 26.6 21.3 20.6 17.9 14.7 37.3 32.3 30.0
Nestle 2,908 Buy 72.4 81.4 99.3 40.2 35.7 29.3 26.8 24.1 19.8 120.0 116.0 120.0
United Spirits 1,300 Buy 28.0 43.1 61.0 46.3 30.1 21.3 16.4 15.6 12.3 8.3 11.4 14.1
Sector Aggregate 30.3 26.6 22.1 19.5 17.3 14.4 35.7 35.2 35.7

July 2010 43
 MOSL Universe

Ready reckoner: valuations

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA (X) ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Information Technology
HCL Technologies 358 Buy 18.1 25.9 29.5 19.8 13.8 12.2 9.9 8.3 7.0 19.8 23.7 22.4
Infosys 2,778 Buy 107.4 123.7 149.9 25.9 22.5 18.5 18.5 15.2 12.5 29.7 27.5 27.6
MphasiS 571 Neutral 50.1 51.5 54.4 11.4 11.1 10.5 9.6 8.4 7.5 37.9 29.2 24.2
Patni Computer 511 Buy 36.1 43.8 45.3 14.2 11.7 11.3 7.3 6.3 5.1 15.7 16.1 14.6
TCS 762 Neutral 35.1 39.5 42.6 21.7 19.3 17.9 16.7 14.3 12.5 37.4 32.1 27.5
Tech Mahindra 738 Neutral 45.0 59.9 64.8 16.4 12.3 11.4 6.9 6.9 6.0 31.6 29.7 25.3
Wipro 391 Neutral 18.6 21.8 24.1 21.0 17.9 16.2 15.4 12.9 10.9 26.6 23.9 21.6
Sector Aggregate 21.7 18.7 16.5 15.4 13.1 11.1 26.4 24.6 22.7
Infrastructure
GMR Infrastructure 57 Neutral 1.2 1.2 1.4 47.9 49.6 42.1 15.3 14.0 9.4 6.4 5.9 13.8
GVK Power & Infra 44 Buy 1.0 1.8 3.1 43.0 24.1 14.4 21.7 15.5 10.8 5.0 8.6 12.8
Hindustan Construction 116 Buy 3.4 4.3 6.1 33.7 26.9 19.0 10.0 8.2 6.6 6.9 8.1 10.5
IVRCL Infra. 183 Neutral 7.8 9.5 12.5 23.5 19.2 14.6 11.5 9.5 7.7 11.5 13.2 15.4
Jaiprakash Associates 129 Buy 1.6 4.1 4.1 81.2 31.8 31.2 18.3 16.9 10.9 4.0 8.6 8.0
Nagarjuna Construction 188 Buy 9.2 11.7 14.3 20.4 16.1 13.1 11.7 9.9 8.3 9.8 10.4 12.1
Simplex Infra. 481 Buy 24.8 34.3 45.5 19.4 14.0 10.6 7.4 6.3 5.4 12.8 15.6 17.7
Sector Aggregate 38.4 27.4 19.3 16.5 14.2 10.2 8.8 11.0 13.7
Media
Deccan Chronicle 122 Buy 10.8 13.4 15.9 11.3 9.1 7.7 5.9 4.8 3.9 20.9 23.1 24.3
HT Media 151 Neutral 5.7 7.6 9.2 24.6 19.8 16.4 12.4 10.2 8.6 14.5 15.1 15.6
Jagran Prakashan 121 Neutral 5.8 6.5 6.9 20.8 18.7 17.6 12.2 11.1 10.4 28.7 30.0 31.8
Sun TV 412 Neutral 14.4 18.0 22.1 28.6 22.9 18.6 14.2 11.1 9.0 28.2 28.1 27.8
Zee Entertainment 291 Buy 10.5 12.6 16.1 27.7 23.1 18.0 22.2 15.7 12.0 12.9 15.1 17.7
Sector Aggregate 24.8 20.1 16.4 14.3 11.2 9.1 18.7 20.5 21.9
Metals
Hindalco 149 Buy 4.2 12.7 17.0 35.5 11.7 8.7 7.0 7.0 6.0 6.2 18.9 20.5
Hindustan Zinc 966 Buy 95.6 111.2 126.3 10.1 8.7 7.6 6.0 4.4 3.2 22.2 20.7 19.2
JSW Steel 1,043 Buy 59.4 79.8 145.4 17.5 13.1 7.2 9.8 9.5 4.1 12.3 13.7 19.0
Nalco 425 Sell 12.9 18.2 20.9 32.9 23.4 20.4 20.9 13.3 10.9 8.0 10.4 11.0
Prakash Inds 166 Buy 21.6 23.6 39.6 7.7 7.0 4.2 7.4 5.4 3.6 21.9 21.7 29.0
SAIL 196 Neutral 16.4 12.8 15.9 11.9 15.3 12.3 7.6 10.1 8.5 20.0 14.0 15.2
Sesa Goa 367 Buy 31.6 61.2 67.3 11.6 6.0 5.5 8.4 3.3 2.3 33.8 40.5 31.3
Sterlite Inds. 168 Buy 24.0 17.0 22.8 7.0 9.9 7.4 7.4 5.2 3.2 10.9 13.7 15.7
Tata Steel 490 Neutral -9.3 63.7 67.6 -52.7 7.7 7.3 11.2 7.0 6.5 -9.7 35.2 28.5
Sector Aggregate 16.9 10.5 8.4 8.5 6.8 5.2 12.1 16.6 17.2
Oil & Gas
BPCL 621 Buy 45.2 60.6 64.6 13.8 10.3 9.6 14.9 9.0 7.4 11.8 14.4 13.9
Cairn India 312 Buy 5.5 25.4 43.9 56.2 12.2 7.1 61.2 8.0 4.7 3.2 13.5 20.4
Chennai Petroleum 251 Buy 32.7 25.9 27.4 7.7 9.7 9.2 7.5 6.9 7.0 18.5 10.9 10.9
GAIL 483 Buy 24.8 30.6 34.5 19.5 15.8 14.0 13.1 10.2 9.3 18.7 20.1 19.7
Gujarat State Petronet 100 Buy 7.4 7.8 13.9 13.5 12.8 7.2 6.9 6.1 4.0 29.4 24.8 33.8
HPCL 401 Buy 38.4 34.6 37.1 10.4 11.6 10.8 8.5 8.5 7.1 11.7 9.8 9.9
Indraprastha Gas 257 Neutral 15.4 19.1 20.0 16.7 13.4 12.8 9.5 7.6 6.9 28.6 29.4 25.9
IOC 377 Buy 44.5 34.3 43.1 8.5 11.0 8.8 9.7 7.2 5.7 21.8 15.0 17.1
MRPL 73 Sell 6.0 1.7 4.4 12.1 43.5 16.6 10.2 20.5 12.4 20.6 5.3 13.2
ONGC 1,264 Buy 90.7 122.5 141.2 13.9 10.3 9.0 5.5 4.4 3.7 20.0 23.5 23.0
Reliance Inds. 1,063 Buy 54.8 69.0 83.4 19.4 15.4 12.7 13.0 9.8 8.2 13.4 14.9 15.6
Sector Aggregate 16.0 13.1 10.6 9.6 7.2 5.9 14.9 16.2 17.4

PULL OUT

July 2010 44
 MOSL Universe

Ready reckoner: valuations

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA (X) ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Pharmaceuticals
Aventis Pharma 1,870 Neutral 68.4 75.9 88.8 27.4 24.6 21.1 25.2 21.7 17.7 17.1 17.1 18.0
Biocon 321 Buy 14.7 16.9 20.1 21.9 19.0 16.0 13.5 11.7 10.3 16.7 16.8 17.3
Cadila Health 640 Buy 24.9 29.6 35.8 25.7 21.6 17.8 17.3 14.6 12.3 36.6 33.2 31.2
Cipla 347 Buy 12.7 14.6 17.4 27.3 23.8 19.9 19.4 16.8 14.8 17.3 17.3 17.9
Divis Labs 767 Buy 25.8 31.1 38.5 29.8 24.7 19.9 25.1 20.2 15.7 22.4 22.6 23.2
Dishman Pharma 217 Neutral 14.2 15.6 19.2 15.2 13.9 11.3 12.2 10.0 8.2 15.3 14.9 16.0
Dr Reddy’ s Labs 1,484 UR 6.3 54.6 61.6 234.0 27.2 24.1 22.3 21.2 19.1 2.5 20.7 20.1
GSK Pharma 2,169 Buy 59.6 69.8 80.3 36.4 31.1 27.0 25.2 21.9 18.7 28.7 30.2 31.4
Glenmark Pharma 273 Neutral 11.6 14.6 18.6 23.4 18.6 14.7 15.3 11.4 10.7 14.1 14.7 15.8
Jubiliant Organosys 339 Neutral 28.6 32.5 33.7 11.9 10.4 10.0 10.7 8.6 7.6 29.5 25.8 21.4
Lupin 1,918 Buy 76.6 94.4 110.5 25.0 20.3 17.3 21.1 17.2 14.5 40.1 37.0 33.7
Piramal Healthcare 494 Neutral 23.4 25.6 30.3 21.1 19.3 16.3 15.9 13.5 11.2 32.5 28.4 27.7
Ranbaxy Labs 453 Neutral 3.6 6.6 8.7 125.5 68.8 52.1 36.7 13.6 24.7 3.5 17.0 6.2
Sun Pharma 1,793 Buy 65.5 61.3 74.8 27.4 29.3 24.0 24.1 25.1 20.3 12.6 14.7 15.9
Sector Aggregate 33.4 23.0 20.9 20.4 16.6 15.1 16.3 20.2 19.1
Real Estate
Anant Raj Inds 118 Buy 8.1 7.8 13.2 14.6 15.2 9.0 12.9 11.4 6.1 6.7 6.1 9.4
Brigade Enterpr. 135 Buy 4.2 11.9 17.6 32.0 11.3 7.7 33.0 8.5 5.6 4.8 12.4 16.4
DLF 286 Buy 10.0 11.9 16.0 28.5 24.1 17.9 19.9 14.8 12.1 5.6 6.9 9.0
HDIL 244 Buy 15.8 15.7 18.9 15.5 15.6 12.9 15.5 14.3 11.9 8.1 7.6 8.7
Indiabulls Real Estate 153 Neutral -0.6 5.4 12.8 -246.5 28.2 11.9 -60.2 35.7 12.7 -0.2 1.4 3.3
Mahindra Lifespace 459 Buy 19.3 26.9 30.3 23.8 17.1 15.1 18.0 11.4 9.5 7.9 9.9 10.0
Peninsula Land 71 Neutral 10.0 12.0 13.2 7.1 6.0 5.4 5.7 4.4 4.0 24.3 24.8 23.5
Phoenix Mills 209 Buy 4.1 5.7 9.6 51.6 36.6 21.8 48.7 26.2 18.9 3.8 5.1 8.0
Puravankara Projects 105 Neutral 6.8 8.2 9.8 15.4 12.8 10.6 17.9 13.1 8.5 9.8 10.8 11.8
Unitech 74 Buy 2.8 3.2 4.3 26.5 23.2 17.2 21.1 18.7 11.8 6.3 6.7 8.3
Sector Aggregate 25.3 20.8 15.3 20.3 14.9 11.1 5.6 6.7 8.6
Retailing
Pantaloon Retail 420 Buy 9.9 14.5 19.0 42.6 29.0 22.1 12.7 10.4 8.8 6.8 9.1 10.7
Titan Industries 2,258 Neutral 58.9 76.2 96.0 38.3 29.7 23.5 26.3 19.8 15.8 34.9 34.5 33.5
Sector Aggregate 40.6 29.3 22.8 17.0 13.5 11.2 12.4 14.8 16.5
Telecom
Bharti Airtel 263 Buy 24.0 21.0 22.8 11.0 12.5 11.5 6.1 6.6 5.3 24.1 17.0 16.2
Idea Cellular 57 Buy 3.1 1.7 2.3 18.4 32.6 24.3 7.0 7.9 5.7 7.6 4.9 6.2
Reliance Comm 193 UR 23.7 6.2 7.7 8.1 30.9 25.2 7.5 10.3 8.4 12.6 3.2 3.8
Tulip Telecom 853 Buy 84.8 107.6 145.8 10.1 7.9 5.9 6.3 4.8 2.8 34.6 32.6 32.6
Sector Aggregate 10.6 15.8 14.0 6.7 7.6 6.1 16.5 10.2 10.5
Textiles
Alok Ind 20 Neutral 3.4 3.9 6.7 5.8 5.1 3.0 6.8 5.6 5.0 9.8 9.2 14.1
Arvind Mills 33 Neutral 2.4 3.0 4.0 13.8 11.1 8.4 6.1 4.9 4.3 2.7 3.3 4.2
Bombay Rayon 253 Buy 14.4 26.4 39.7 17.5 9.6 6.4 14.6 8.2 5.8 10.5 14.5 18.2
Raymond 217 Buy 1.3 5.6 15.7 163.5 38.9 13.8 26.0 8.6 6.3 -2.0 1.3 3.7
Vardhman Textiles 271 Buy 42.5 40.4 45.9 6.4 6.7 5.9 5.1 4.6 3.8 14.8 12.5 12.6
Sector Aggregate 11.1 8.6 5.7 7.9 6.0 5.0 7.7 8.7 11.9
UR = Under Review

PULL OUT

July 2010 45
 MOSL Universe

Ready reckoner: valuations

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA (X) ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Utilities
Adani Power 120 Not Rated 0.8 2.8 10.5 153.2 42.4 11.4 143.4 40.9 12.2 3.1 10.8 33.1
CESC 374 Neutral 34.5 36.5 40.2 10.8 10.2 9.3 9.3 9.2 9.5 13.4 12.6 12.4
JSW Energy 127 Not Rated 4.1 4.1 8.7 31.3 31.0 14.6 22.6 15.4 8.3 13.7 13.0 22.8
NTPC 196 Neutral 10.9 11.3 13.4 18.0 17.3 14.6 12.7 10.0 10.2 14.0 14.3 15.4
Power Grid Corp. 101 Buy 5.4 6.0 7.7 18.8 17.0 13.1 12.6 10.9 9.3 14.9 15.0 17.3
PTC India 101 Neutral 3.2 4.2 4.3 31.5 23.7 23.2 37.2 37.7 34.9 5.2 5.9 5.9
Reliance Infra. 1,168 Buy 43.1 56.7 67.3 27.1 20.6 17.4 23.7 17.1 14.4 9.1 9.7 10.1
Reliance Power 168 Not Rated - 4.4 5.7 - 38.4 29.3 - 100.8 66.3 - 7.1 8.6
Tata Power 1,303 Neutral 59.8 85.9 115.9 21.8 15.2 11.2 19.0 17.1 15.8 7.2 8.8 9.2
Sector Aggregate 23.2 19.7 14.7 17.5 14.3 12.6 11.2 11.9 14.5
Others
Sintex Inds. 313 Buy 22.5 29.8 38.0 13.9 10.5 8.3 10.6 7.3 5.8 18.0 18.9 20.0
United Phosphorous 192 Buy 12.0 15.8 18.8 16.0 12.1 10.2 8.6 6.9 5.4 18.8 21.0 20.4
Sector Aggregate 14.8 11.2 9.1 9.3 7.1 5.6 17.6 19.5 19.6

CMP (RS) RECO EPS (RS) P/E (X) P/BV (X) ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Banks
Andhra Bank 134 Buy 21.6 24.3 28.9 6.2 5.5 4.6 1.5 1.2 1.0 26.0 24.2 24.2
Axis Bank 1,248 Buy 62.1 78.0 96.7 20.1 16.0 12.9 3.2 2.7 2.3 19.2 18.3 19.4
Bank of Baroda 696 Buy 83.7 94.8 114.4 8.3 7.3 6.1 1.8 1.5 1.3 23.8 22.5 22.7
Bank of India 345 Neutral 33.1 41.1 58.0 10.4 8.4 5.9 1.4 1.3 1.1 14.2 15.8 19.4
Canara Bank 434 Buy 73.7 76.9 90.4 5.9 5.6 4.8 1.4 1.2 1.0 26.8 22.8 22.3
Corporation Bank 514 Buy 81.6 98.4 114.9 6.3 5.2 4.5 1.3 1.1 0.9 21.9 22.3 22.0
Dena Bank 93 Buy 17.8 18.1 22.1 5.2 5.1 4.2 1.1 0.9 0.8 23.6 19.9 20.3
Dewan Housing 225 Buy 18.4 26.2 36.2 12.3 8.6 6.2 2.2 1.8 1.5 22.7 23.0 25.7
Federal Bank 318 Buy 27.2 34.9 41.8 11.7 9.1 7.6 1.2 1.1 0.9 10.3 12.1 13.1
HDFC 2,937 Neutral 98.4 118.0 140.5 29.8 24.9 20.9 5.7 5.0 4.3 20.0 20.9 21.9
HDFC Bank 1,948 Buy 64.4 84.5 109.4 30.2 23.0 17.8 4.1 3.6 3.1 16.1 16.8 18.9
ICICI Bank 858 Buy 36.1 46.1 58.4 23.8 18.6 14.7 1.9 1.7 1.6 8.0 9.7 11.4
Indian Bank 220 Buy 36.2 37.9 47.2 6.1 5.8 4.7 1.4 1.2 1.0 25.6 22.5 23.6
Kotak Mahindra Bank 750 Neutral 37.0 44.5 51.7 20.3 16.9 14.5 3.3 2.8 2.3 17.9 17.9 17.5
LIC Housing Fin 1,015 Buy 69.7 87.7 105.2 14.6 11.6 9.7 2.8 2.4 2.0 23.6 22.5 22.7
Oriental Bank 323 Buy 45.3 53.6 64.4 7.1 6.0 5.0 1.1 1.0 0.8 16.5 17.1 17.7
Punjab National Bank 1,045 Buy 123.9 141.7 167.2 8.4 7.4 6.2 2.0 1.7 1.4 26.6 24.8 24.1
Rural Electric. Corp. 298 Buy 20.3 25.2 31.3 14.7 11.8 9.5 2.7 2.3 2.0 22.0 21.0 22.7
Shriram Transport Fin. 579 Buy 38.7 51.4 61.3 15.0 11.3 9.4 3.4 2.7 2.2 28.6 26.9 25.9
State Bank 2,301 Buy 184.8 226.0 285.4 12.5 10.2 8.1 1.8 1.5 1.3 15.1 16.1 17.6
South Indian Bank 165 UR 20.7 22.0 28.8 8.0 7.5 5.7 1.3 1.1 1.0 16.8 15.7 18.1
Union Bank 303 Buy 41.1 47.3 58.8 7.4 6.4 5.2 1.7 1.4 1.1 26.2 24.3 24.5
Yes Bank 272 Buy 14.1 19.1 25.2 19.3 14.2 10.8 3.0 2.5 2.1 20.3 19.3 21.2
Sector Aggregate 14.2 11.8 9.5 2.6 2.2 1.9 18.1 18.5 19.8

PULL OUT

July 2010 46
 Results Preview
QUARTER ENDING JUNE 2010

BSE Sensex: 17,701 S&P CNX: 5,313 As on: 30 June 2010

Sectors
&
Companies

Note: In our quarterly performance tables, our four-quarter numbers may not always add up to the full-year numbers. This is because of
differences in classification of account heads in the company’s quarterly and annual results or because of differences in the way we
classify account heads as opposed to the company. All stock prices and indices as on 25 June 2010, unless otherwise stated.

July 2010 47
 Results Preview
QUARTER ENDING JUNE 2010

Automobiles
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Strong momentum in volumes: Volume momentum remains robust, driven by a strong
Bajaj Auto
economic recovery, availability of credit and new product launches. Growth continues
Hero Honda
for all the segments with two-wheelers growing by 29% YoY (up ~6% QoQ), cars by
28% YoY (down ~5% QoQ), commercial vehicles by 56% YoY (down ~16% QoQ) and
Mahindra & Mahindra UVs by 31% YoY (down ~4% QoQ).

Maruti Suzuki India EBITDA margins to moderate from peaks due to raw material cost inflation:
EBITDA margins are estimated to moderate by 40bp sequentially to 13.5% due to increase
Tata Motors in RM costs. Increase in raw material prices and the cost of upgrading engines to adhere
to new emission norms will be partly offset by a price increase (0.5 to 1.5%) and higher
operating leverage. The benefit of softening RM costs will reflect from 3QFY10 due to
inventories and contracts.

Sector outlook positive despite headwinds: The volume outlook for the industry is
positive based on the continuing economic recovery, prospects of a normal monsoon,
easy availability of finance and improved outlook for exports. This coupled with new
product launches will aid volume growth in 1QFY11. However, hardening of interest
rates, roll-back of excise duty cuts, pricing action to mitigate RM cost and compliance to
BS-IV emission norms will be the short term impediments in 1HCY10.

Valuation and view: Auto stocks have outperformed the benchmark over the past year
due to recovery in volumes and margin expansion. While volume outlook remains positive,
operating margins are expected to moderate from peak levels of FY10 but are expected
to remain higher than historical average margins. Valuations in the sector are attractive.
Our top pick is M&M.

KEY OPERATING INDICATORS

VOLUMES ('000 UNITS) EBITDA MARGINS (%)

1QFY11E 1QFY10 YOY (%) 4QFY10 QOQ (%) 1QFY11E 1QFY10 YOY (BP) 4QFY10 QOQ (BP)

Bajaj Auto 908 548 65.8 809 12.2 20.8 19.5 130 22.9 -210
Hero Honda 1,238 1,119 10.6 1,187 4.3 14.6 16.8 -220 16.7 -210
Maruti Suzuki 289 227 27.6 287 0.6 12.3 12.5 -10 13.4 -110
M&M 133 102 30.2 133 0.4 15.6 16.2 -60 16.0 -40
Tata Motors 1,817 1,280 42.0 2,167 -16.1 10.2 11.5 -130 10.1 10
Aggregate 4,385 3,275 33.9 4,583 -4.3 13.5 14.3 -70 14.0 -40
Source: SIAM/ MOSL
EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Automobiles
Bajaj Auto 2,418 Buy 37,936 62.2 11.6 7,891 73.3 1.5 5,685 83.1 0.6
Hero Honda 2,050 Buy 42,348 11.1 3.5 6,174 -3.3 -9.5 5,224 4.5 -12.8
Mahindra & Mahindra 615 Buy 53,517 26.5 1.4 8,423 22.6 -0.8 5,549 21.2 -3.1
Maruti Suzuki 1,397 Buy 84,264 29.8 0.0 10,211 28.7 -8.1 7,221 23.7 10.0
Tata Motors 769 UR 99,255 56.3 -18.4 10,128 39.1 -17.8 3,201 45.5 -24.6
Sector Aggregate 317,320 36.6 -4.9 42,828 29.7 -7.9 26,880 29.7 -4.6

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 48
 Automobiles

Robust performance continues in 1QFY11

Volume growth across segments is robust in 1QFY11, supported by overall improvement
in consumer sentiment, availability of credit and new product launches. Retail demand
continues to be strong, driven by continued improvement in the economic environment,
and as a result, overall inventory in the system is below normal levels.
„ Two-wheeler volumes are estimated to grow by 29% YoY (~6% QoQ). Bajaj Auto
will benefit most with 65.8% YoY (~12.2% QoQ) growth in two-wheeler volumes and
Hero Honda’s volumes will grow by 10.6% YoY (4.3% QoQ).
„ Car volumes are estimated to grow by 28% YoY (down ~5.4% QoQ), driven by growth
in the domestic markets and exports. Maruti Suzuki’s volumes will grow by 27.6%
YoY (up ~0.6% QoQ) and Tata Motors’ car volumes (ex-Fiat) will grow by 54.7%
YoY (down ~15.7% QoQ) driven by strong response to Indigo Manza and Nano.
„ 1QFY11 demand for commercial vehicles will improve by 55.8% YoY (down ~16.3%
QoQ), driven by 75% YoY growth (down ~21% QoQ) in M&HCV volumes and
42.5% YoY growth (down ~11.4% QoQ) in LCV volumes. Tata Motors’ 1QFY11 CV
volumes will grow by 42% YoY (de-growth of ~16.6% QoQ), as M&HCV volumes
rise 56.7% YoY (down ~21% QoQ) and LCV volumes grow by 29.1% YoY (down
~12.8% QoQ).
AUTO VOLUMES SNAPSHOT FOR 1QFY11 (‘000 UNITS)

1QFY11E 1QFY10 YOY (%) 4QFY10 QOQ (%)

Two Wheelers 3,058 2,371 29.0 2,883 6.1

Three Wheelers 169 118 42.5 174 -2.9
Passenger Cars 539 421 28.0 569 -5.4
UVs & MPVs 122 93 31.0 127 -4.0
M&HCV 74 42 75.0 94 -21.3
LCV 87 61 42.5 99 -11.4
Total CVs 162 104 55.8 193 -16.3
Total 4,049 3,107 30.3 3,947 2.6
Source: SIAM/ MOSL

Commodity prices to hurt in 1HFY11, moderate in 2HFY11

While commodity prices (except rubber) in the spot markets have moderated from their
peaks of 4QFY10, auto companies will benefit from this in 2HFY11. Auto companies will
be forced to re-negotiate their commodity contracts (especially steel contracts) at higher
than 2HFY10 contracted prices. RM costs are expected to increase from 1HFY11, driven
by higher contracted prices and due to a cost push for BS-IV engine compliance. Our
estimates now factor in a ~130bp increase in RM costs in FY11, the impact of which will
be diluted by a 0.5-2% increase in selling prices.
TREND IN COMMODITY PRICES (INDEXED)

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

-7.9% QoQ -15.2% QoQ -25.7% QoQ -15.8% QoQ +2.9% QoQ

104 105 111

96 108
82 89 89
72 75
67 62
54 54
47

Steel (HRC) Copper Zinc Aluminium Rubber

Source: Bloomberg/MOSL

July 2010 49
 Automobiles

Margins to moderate due to raw material cost inflation

We estimate margins for the auto industry will decline from peak margins of 2Q and
3QFY10, driven by a RM cost push. However, the impact will be partly offset as automakers
partly passed on the cost increase and higher operating leverage. We estimate EBITDA
margins for the MOSL Universe will moderate by 40bp QoQ (down ~70bp YoY) to 13.5%
in 1QFY11 and ~80bp decline in FY11. While margins are expected to come off their
peaks of 3QFY10, we do not expect reversion to mean due to a) strong volume growth, b)
relatively higher pricing power, c) cost controls, and d) increasing contribution from plants
enjoying fiscal incentives.
MARGINS TO MODERATE FROM PEAKS

1QFY11E 1QFY10 YOY CHG (BP) 4QFY10 QOQ CHG (BP

Bajaj Auto 20.8 19.5 130 22.9 -210

Hero Honda 14.6 16.8 -220 16.7 -210
Maruti Suzuki 12.3 12.5 -10 13.4 -110
Mahindra & Mahindra 15.6 16.2 -60 16.0 -40
Tata Motors 10.2 11.5 -130 10.1 10
Aggregate 13.5 14.3 -70 14.0 -40
Source: MOSL

Forex fluctuation to have a mixed effect

The exchange rate fluctuations have led to concerns about export revenue realizations,
the cost of imported inputs and the effectiveness of hedging practices being followed by
companies. After appreciating sequentially against all major currencies in the past two
quarters, the rupee has depreciated against the US dollar and the Japanese yen by 2.9%
and 6.3% QoQ respectively, but appreciated by 6.3% QoQ against the euro and stayed
flat against the British pound. The impact will vary depending on forex exposure and
hedging strategies deployed by companies.
YOY QOQ TREND IN RUPEE MOVEMENT (INDEX)

USD -3.5 2.9 USD Euro GBP JPY

JPY 2.6 6.3 155
EUR -15.6 -6.3
GBP -13.7 0.0
130

105

80
Mar-08
Dec-07

Jun-08

Mar-09
Dec-08

Jun-09

Mar-10
Dec-09

Jun-10
Sep-08

Sep-09

Source: Bloomberg

Sector outlook positive…

There has been a recovery of volumes in the auto sector after the impact of the financial
crisis in 2HFY09. While two-wheeler, passenger vehicles and LCV volumes resumed
growth after a brief pause, M&HCVs, tractors and three-wheelers have recovered
completely from the downturn. We are bullish on the sector because:
„ Volume growth is expected to continue, driven by a strong economic recovery, pent-
up demand, increase in availability of finance and new product launches expanding the
market;
July 2010 50
 Automobiles

„ Continued volume growth will enable pricing power for the industry and support a high
operating leverage. Moreover, the leading companies have undertaken cost cut
measures and productivity improvement programs, which will dilute the impact of RM
cost inflation, supporting margins at higher levels. Also, ramping up of operations in
tax-free zones like Uttaranchal will also help to counter cost pressures through a
lower tax burden.
„ Recovery in global economies augurs well for export demand. The export market is
yet to be fully tapped by Indian auto makers; this segment might become a further
volume growth driver for the industry. Companies like Bajaj Auto, Maruti, Tata Motors
and M&M are in a position to increase their exports by tapping new markets and
increasing penetration in existing markets.

…despite short-term hurdles

There will be some headwind in 1QFY11, which is expected to have a short-term impact
on demand. Events to watch out for are:
„ Change in emission norms to BS-IV in the top-11 cities (BS-III in other parts of India)
from September 2010 for CVs, which will result in engine modifications to comply
RELATIVE PERFORMANCE - 3M (%) with the new emission norms, thereby increasing costs.
Sensex „ Full roll-back in excise duty cut (after a partial roll-back in the 2010 Budget), which
M OSt A uto mo biles Index was offered as part of a stimulus package in December 2008. The excise duty cut
110
was a key measure to boost volumes for the auto sector. Increase in excise duty will
105
100 have a short term impact on demand as it will be entirely passed-on to consumers.
95 „ Expected increase in selling price of vehicles to partly offset RM cost inflation. This,
90 along with engine modifications to conform to new emission norms and higher excise
Mar-10

May-10

Jun-10
Apr-10

duty could result in a meaningful increase in the cost of ownership of a vehicle.

„ Expected hardening in monetary policy, to combat inflation, will result in interest rates
RELATIVE PERFORMANCE - 1YR (%) on auto loans increasing, which will further increase the cost of ownership/operating a
M OSt A uto mo biles Index
vehicle. However, we expect availability of finance to improve.
Sensex
200
170 Valuation and view
140
Volume growth in the domestic market is strong. Valuations in the sector are attractive,
110
80 especially considering impending improvement in the macro environment for the auto
Jun-09

Mar-10
Dec-09

Jun-10
Sep-09

industry, coupled with high operating margins. We prefer Bajaj Auto, M&M and Hero
Honda due to their relatively benign competitive environment and attractive valuations
compared with their peers.

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Automobiles
Bajaj Auto 2,418 Buy 125.6 164.9 181.1 19.2 14.7 13.3 12.8 9.7 8.5 64.3 53.1 41.3
Hero Honda 2,050 Buy 111.8 122.3 142.8 18.3 16.8 14.4 13.3 12.4 10.4 61.5 56.7 39.7
Mahindra & Mahindra 615 Buy 42.5 58.4 70.2 14.5 10.5 8.8 5.4 4.6 3.6 26.1 22.9 22.5
Maruti Suzuki 1,397 Buy 90.8 99.5 118.1 15.4 14.0 11.8 8.8 8.1 6.6 21.5 19.1 18.9
Tata Motors 769 UR 24.1 76.3 98.8 31.9 10.1 7.8 9.0 6.2 5.6 19.9 42.7 38.6
Sector Aggregate 18.8 12.6 10.5 9.0 7.1 6.0 31.9 34.9 32.2

July 2010 51
 Results Preview
SECTOR: AUTOMOBILES

Bajaj Auto
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BJAUT IN Buy
REUTERS CODE
S&P CNX: 5,269 BJAT.BO Previous Recommendation: Buy Rs2,418
Equity Shares (m) 144.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 2,450/926
3/09A 88,104 7,963 55.0 -3.4 44.6 38.3 21.1 29.5 47.2 36.3
1,6,12 Rel Perf (%) 10/ 41/126
3/10A 119,210 18,177 125.6 128.3 19.2 17.9 12.4 12.8 64.3 58.3
Mcap (Rs b) 349.8
3/11E 157,213 23,859 164.9 31.3 14.7 13.8 7.8 9.7 53.1 55.0
Mcap (USD b) 7.5
3/12E 177,849 26,206 181.1 9.8 13.3 12.5 5.5 8.5 41.3 46.5

„ Bajaj Auto volumes are expected to improve by 65.8% YoY (up 12.2 QoQ) in 1QFY11 to 907,764 units. Recovery in
volumes continued in 1QFY11, driven by robust demand for recently launched products and two and three wheelers.
„ We estimate net sales of Rs37.9b, a growth of 62.2% YoY. Realizations are estimated to decline by 2.1% YoY (down
~0.6% QoQ), as the contribution of three-wheelers declines. EBITDA margin is expected to decline by 210bp QoQ
(up ~130bp YoY) to 20.8%, impacted by higher raw material costs. We estimate EBITDA at Rs.7.89b (up ~73.3%YoY)
and adjusted PAT of Rs.5.7b, a growth of 83.1% YoY.
„ Volume growth in FY11 will be driven by Discover 100, Pulsar 135, Discover 150 and exports, along with normal
growth in the existing Pulsar and three-wheeler portfolio. The contribution from Pantnagar is expected to increase to
0.9m units in FY11 (v/s 0.6m units in FY10), which will boost the product mix and profitability.
„ We upgrade our EPS estimates for FY11 by 6.5% to Rs164.9 and FY12 by 4.4% to Rs181.1, driven by 4.7% upgrade
in volumes and 80bp upgrade in EBITDA in FY11. Our estimates factor in 31.3% growth in FY11 and 230bp YoY
increase in RM costs, translating into a 90bp decline in EBITDA margins to 20.8%. The stock trades at 14.7x FY11E
and 13.3x FY12E EPS. Maintain Buy.
QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Volumes (nos) 547,662 686,823 809,218 808,929 907,764 945,500 937,050 954,811 2,852,632 3,745,125
Change (%) -11.7 7.3 63.9 83.7 65.8 37.7 15.8 18.0 30.0 31.3
Realization 42,699 42,042 40,725 42,024 41,791 42,167 42,238 41,714 41,789 41,978
Change (%) 13.2 6.8 -4.4 -1.8 -2.1 0.3 3.7 -0.7 4.1 0.5
Gross Sales 24,545 30,392 34,525 35,843 40,313 42,367 42,059 42,324 125,306 167,063
Excise 1,161 1,517 1,570 1,849 2,377 2,498 2,480 2,496 6,096 9,851
Excise (%) 5.0 5.3 4.8 5.4 6.3 6.3 6.3 6.3 5.1 6.3
Net Sales 23,385 28,875 32,956 33,995 37,936 39,869 39,579 39,829 119,210 157,213
Change (%) -0.1 14.6 56.7 80.5 62.2 38.1 20.1 17.2 35.3 31.9
Total Cost 18,831 22,510 25,720 26,224 30,045 31,658 31,308 31,473 93,284 124,484
EBITDA 4,554 6,365 7,235 7,771 7,891 8,211 8,270 8,356 25,926 32,728
EBITDA Margins (%) 19.5 22.0 22.0 22.9 20.8 20.6 20.9 21.0 21.7 20.8
Other Income 231 217 351 425 440 470 600 553 1,225 2,063
Extraordinary Expenses 458 458 458 458 0 0 0 0 1,833 0
Extraordinary Income 218 0 0 0 0 0 0 0 218 0
Interest 60 0 0 0 20 20 20 19 60 79
Depreciation 331 336 357 341 360 385 400 430 1,365 1,575
PBT 4,155 5,788 6,771 7,397 7,951 8,276 8,450 8,460 24,111 33,137
Tax 1,220 1,760 2,020 2,075 2,266 2,338 2,366 2,308 7,075 9,278
Effective Tax Rate (%) 29.4 30.4 29.8 28.1 28.5 28.3 28.0 27.3 29.3 28.0
Rep. PAT 2,935 4,028 4,751 5,322 5,685 5,938 6,084 6,152 17,036 23,859
Change (%) 43.6 117.9 185.9 308.7 93.7 47.4 28.1 15.6 160.3 40.0
Adj. PAT 3,105 4,347 5,073 5,651 5,685 5,938 6,084 6,152 18,177 23,859
Change (%) 51.9 91.2 143.6 201.8 83.1 36.6 19.9 8.9 128.3 31.3
E: MOSL Estimates
Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 52
 Results Preview
SECTOR: AUTOMOBILES

Hero Honda
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HH IN Buy
REUTERS CODE
S&P CNX: 5,269 HROH.BO Previous Recommendation:Buy Rs2,050
Equity Shares (m) 199.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 2,094/1,301
3/09A 123,191 13,052 65.4 34.8 31.3 27.5 10.8 21.8 38.5 48.7
1,6,12 Rel Perf (%) 0/ 17/23
3/10A 157,582 22,318 111.8 71.0 18.3 16.9 11.8 13.3 61.5 72.8
Mcap (Rs b) 409.4
3/11E 182,123 24,416 122.3 9.4 16.8 15.5 8.0 12.4 56.7 65.3
Mcap (USD b) 8.8
3/12E 206,974 28,518 142.8 16.8 14.4 13.3 5.7 10.4 39.7 46.7

„ Hero Honda’s volumes are estimated to grow by 10.6% YoY (4.3% QoQ) to 1.24m in 1QFY11. Realizations are
expected to improve by 0.5% YoY (down ~0.8% QoQ) due to a higher contribution from the Haridwar plant (32.3%
of volumes v/s 28.2% in 1QFY10). Our estimates factor in about 400,000 units from Haridwar in 1QFY11.
„ Net sales are estimated to increase by 11.1% YoY to Rs42.3b and operating margins are likely to decrease by 210bp
QoQ to 14.6% ( down ~220bp YoY), due to tightening of commodity prices and compliance with BS-III norms.
However, a lower tax rate (~70bp QoQ savings to 18.1%) due to a ramp-up at Haridwar production will lead to
recurring PAT of Rs5.22b.
„ Retail demand is strong and, as a result, inventory levels are low. Capacity is not a constraint with ongoing de-
bottlenecking exercise to add ~0.3m to current capacity of ~5.7m units by September 2010. However managing the
supply chain will be a key challenge as it can be a constraint for growth.
„ Our estimates factor in FY11 volume growth of 15% (to 5.29m units), higher contribution from the Haridwar plant
and a 120bp decline in margins to 15.7%. The stock trades at 16.8x FY11E EPS of Rs122.3 and 14.4x FY12EPS of
Rs142.8. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Total Volumes (nos) 1,118,987 1,183,235 1,111,372 1,186,536 1,237,585 1,350,000 1,325,000 1,377,565 4,600,130 5,290,150
Change (%) 25.1 21.7 29.6 18.9 10.6 14.1 19.2 16.1 23.6 15.0
Net Realization 34,058 34,145 34,322 34,492 34,218 34,403 34,468 34,597 34,256 34,427
Change (%) 7.1 4.1 2.4 0.9 0.5 0.8 0.4 0.3 3.5 0.5
Net Sales 38,111 40,401 38,144 40,926 42,348 46,444 45,670 47,660 157,582 182,123
Change (%) 34.0 26.7 32.7 20.0 11.1 15.0 19.7 16.5 27.9 15.6
Total Cost 31,723 33,153 31,661 34,106 36,173 39,181 38,351 39,849 130,936 153,554
EBITDA 6,387 7,248 6,483 6,820 6,174 7,263 7,319 7,811 26,646 28,568
As % of Sales 16.8 17.9 17.0 16.7 14.6 15.6 16.0 16.4 16.9 15.7
Other Income 539 881 676 992 650 750 700 1,010 3,380 3,110
Interest -55 -61 -46 -45 -55 -61 -46 -59 -206 -220
Depreciation 456 503 469 487 500 515 525 535 1,915 2,075
PBT 6,525 7,686 6,736 7,370 6,379 7,559 7,540 8,345 28,317 29,824
Tax 1,524 1,715 1,378 1,382 1,155 1,368 1,365 1,520 5,999 5,408
Effective Tax Rate (%) 23.4 22.3 20.5 18.8 18.1 18.1 18.1 18.2 21.2 18.1
PAT 5,001 5,971 5,358 5,988 5,224 6,191 6,176 6,825 22,318 24,416
Change (%) 83.3 95.0 78.3 48.9 4.5 3.7 15.3 14.0 74.1 9.4
E: MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 53
 Results Preview
SECTOR: AUTOMOBILES

Mahindra & Mahindra

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 MM IN Buy
REUTERS CODE
S&P CNX: 5,269 MAHM.BO Previous Recommendation: Buy Rs615
Equity Shares (m) 573.5 YEAR NET SALES S/A PAT CON.PAT ADJ.EPS CONS. CONS, ROE ROCE EV/ EV/
END (RS M) (RS M) (RS M) (RS) EPS (RS) P/E (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 645/322
3/09A 130,937 9,604 15,047 16.7 26.2 23.4 18.3 13.2 2.3 22.7
1,6,12 Rel Perf (%) 9/ 15/52
3/10A 185,296 20,451 24,359 35.7 42.5 14.5 26.1 25.8 1.6 9.9
Mcap (Rs b) 352.5
3/11E 225,292 24,090 33,481 42.0 58.4 10.5 22.9 24.8 1.3 8.2
Mcap (USD b) 7.6
3/12E 262,356 28,784 24,359 50.2 70.2 8.8 22.5 25.4 1.0 6.6

„ M&M is expected to report volume growth of 30.2% YoY (~0.4% QoQ) in 1QFY11, driven by 24.6% YoY growth
(~15.1% QoQ) in tractor volumes, 10.5% YoY growth (down 6.1% QoQ) in UV volumes and 24.1% YoY growth
(down ~12% QoQ) in three-wheelers. UV volumes are impacted by supply side constraints. Realization is expected
to improve by 2.2% YoY (~1.2% QoQ), due to increasing contribution from the tractor segment.
„ Net sales are estimated to grow 19.5% YoY to Rs53.5b. EBITDA margins are expected to decline by 40bp QoQ
(~60bp YoY) to 15.6%. As a result recurring PAT is estimated to grow by 21.2% YoY to Rs5.54b.
„ The management expects growth of at least 10-14% in the auto and tractor industry, with M&M growing at least in
line with the industry. Volume growth will be driven by 6-7 new product launches in FY11 (details not shared), and
new products launched in 2HFY10 (Maximmo and Gio).
„ We upgrade our consolidated EPS estimates for FY11 by 8.2% to Rs58.4 and FY12 by 6.0% to Rs70.2, backed by
strong volume growth in the auto and tractor divisions, and improvement in subsidiary performance. Our estimates
factor in 21.3% volume growth in FY11 and 100bp YoY increase in RM costs, translating into a 60bp decline in
EBITDA margins to 15.6%. The stock trades at 10.5x FY11E and 8.8x FY12E consolidated EPS. Maintain Buy.
QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Total Volumes (nos) 102,281 109,292 113,510 132,620 133,189 136,200 135,000 150,865 457,702 555,254
Change (%) 23.8 29.3 61.0 49.2 30.2 24.6 18.9 13.8 40.0 21.3
Net Realization 414,797 410,394 396,187 399,987 404,814 402,677 404,670 410,304 404,840 405,747
Change (%) 3.9 3.4 -3.1 -2.5 2.2 0.7 3.0 2.4 1.1 0.2
Net Sales 42,295 44,650 44,787 52,789 53,517 54,345 54,330 61,451 183,795 223,642
Change (%) 28.7 35.1 56.3 45.8 19.5 2.9 -52.3 -52.7 41.5 21.7
Operating Other Income 131 203 184 258 400 500 300 450 1,501 1,650
Total Cost 35,557 37,173 38,116 44,554 45,493 46,403 46,207 52,006 155,334 190,110
EBITDA 6,869 7,680 6,855 8,492 8,423 8,442 8,423 9,894 29,962 35,183
As % of Sales 16.2 17.1 15.2 16.0 15.6 15.4 15.4 16.0 16.2 15.6
Change (%) 108.3 143.1 157.2 103.5 22.9 -0.6 -38.7 -25.6 125.3 17.4
Other Income 236 1,333 244 181 200 1,500 200 308 1,994 2,208
Interest 60 128 82 9 75 85 100 119 278 379
Gross Profit 6,266 10,425 6,857 8,628 8,548 9,857 8,523 10,083 32,175 37,012
Depreciation 885 892 984 947 1,050 1,100 1,150 1,158 3,708 4,458
EO Expense 779 -1,539 160 36 0 0 0 0 -498 0
PBT 5,381 9,533 5,873 7,681 7,498 8,757 7,373 8,925 28,468 32,553
Tax 1,373 2,504 1,736 1,978 1,950 2,277 1,917 2,321 7,590 8,464
Effective Tax Rate (%) 25.5 26.3 29.6 25.8 26.0 26.0 26.0 26.0 26.7 26.0
Reported PAT 4,009 7,029 4,137 5,703 5,549 6,480 5,456 6,605 20,878 24,090
Change (%) 158.1 185.0 NA 36.4 38.4 -7.8 31.9 15.8 140.7 15.4
Adj PAT 4,580 5,917 4,243 5,726 5,549 5,368 5,562 6,628 20,451 24,090
Change (%) 109.5 98.2 159.2 104.9 21.2 -9.3 31.1 15.8 121.9 17.8
E: MOSL Estimates; Quarterly results don't add-up to full year results due to restatement
Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 54
 Results Preview
SECTOR: AUTOMOBILES

Maruti Suzuki India

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 MSIL IN Buy
REUTERS CODE
S&P CNX: 5,269 MRTI.BO Previous Recommendation: Buy Rs1,397
Equity Shares (m) 289.0 YEAR TOTAL INC. PAT ADJ. EPS EPS P/E P/CE ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,740/995
3/09A 209,075 13,334 46.1 -22.0 30.3 19.8 4.3 17.6 13.0 18.7
1,6,12 Rel Perf (%) 7/ -12/14
3/10A 296,230 24,976 86.4 87.3 16.2 12.1 3.5 9.0 21.5 29.5
Mcap (Rs b) 403.7
3/11E 344,902 26,710 92.4 6.9 15.1 11.1 2.9 8.4 19.1 26.4
Mcap (USD b) 8.7
3/12E 407,322 31,842 110.2 19.2 12.7 9.2 2.4 6.8 18.9 25.9

„ Maruti’s volumes are expected to grow 27.6% YoY (~0.63% QoQ) in 1QFY11, driven by 27.9% YoY growth in the
domestic market and 25% YoY growth in exports. Realization is expected to improve by 1.8% YoY (down ~0.6%
QoQ), reflecting improvement in the product mix and price increase of 0.6-0.8% on select models.
„ Net sales are estimated to grow by 29.8% YoY to Rs84.2b. EBITDA margins are estimated to decline by 110bp QoQ
(~10bp YoY) to 12.1% due to raw material cost inflation of 120bp. EBITDA is estimated to grow by 28.7% YoY to
Rs 10.2b, translating into 23.7% growth in recurring PAT to Rs7.2b.
„ Margins are expected to remain under pressure in FY11 due to (a) a deteriorating export mix (higher non-EU v/s
EU), (b) deteriorating product mix in the domestic market, with increasing contribution of the C segment and a
refreshed product portfolio (without commensurate price increase), (c) unhedged forex exposure in 2HFY11, and d)
competitive pressure curtailing pricing power.
„ We are downgrading our earnings estimates by 4.7% for FY11 to Rs92.4 and 4.6% for FY12 to, Rs110.2. Our FY11
earnings estimate factors in 17.2% volume growth in FY11 and 160bp increase in RM cost, translating into 110 bp
decline in EBITDA margins to 12.2%. The stock trades at 12.7x FY12E EPS and 9.2x FY12E Cash EPS. Maintain
Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Total Volumes (nos) 226,729 246,188 258,026 287,422 289,233 300,000 295,500 309,119 1,018,365 1,193,852
Change (%) 17.7 29.9 48.7 21.5 27.6 21.9 14.5 7.5 28.6 17.2
Realizations (Rs/car) 279,640 286,349 284,226 286,508 284,767 286,183 279,029 279,353 284,362 282,301
Change (%) 13.8 12.9 8.0 7.5 1.8 -0.1 -1.8 -2.5 10.4 -0.7
Net Op. Revenues 64,930 72,026 75,029 84,246 84,264 87,715 84,433 88,490 296,230 344,902
Change (%) 33.6 44.2 60.3 31.0 29.8 21.8 12.5 5.0 41.7 16.4
Total Cost 56,998 62,865 63,689 73,135 74,053 77,159 74,124 77,644 256,687 302,980
EBITDA 7,932 9,161 11,339 11,111 10,211 10,556 10,310 10,846 39,543 41,922
As % of Sales 12.2 12.7 15.1 13.2 12.1 12.0 12.2 12.3 13.3 12.2
Change (%) 39.4 77.6 222.3 147.3 28.7 15.2 -9.1 -2.4 109.5 6.0
Non-Operating Income 2,165 1,100 913 790 2,450 1,250 1,100 1,125 4,968 5,925
Interest 63 60 84 129 85 90 95 98 335 368
Depreciation 1,961 2,031 2,028 2,230 2,260 2,300 2,375 2,387 8,250 9,322
PBT 8,073 8,171 10,140 9,542 10,316 9,416 8,940 9,486 35,925 38,157
Tax 2,238 2,471 3,265 2,976 3,095 2,825 2,682 2,846 10,949 11,447
Effective Tax Rate (%) 27.7 30.2 32.2 31.2 30.0 30.0 30.0 30.0 30.5 30.0
PAT 5,835 5,700 6,875 6,566 7,221 6,591 6,258 6,640 24,976 26,710
Adjusted PAT 5,835 5,700 6,875 6,566 7,221 6,591 6,258 6,640 24,976 26,710
Change (%) 25.3 92.5 221.6 170.0 23.7 15.6 -9.0 1.1 105.9 6.9
E: MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 55
 Results Preview
SECTOR: AUTOMOBILES

Tata Motors
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 TTMT IN Under Review
REUTERS CODE
S&P CNX: 5,269 TAMO.BO Previous Recommendation: Neutral Rs769
Equity Shares (m) 624.1 YEAR SALES ADJ/ PAT ADJ EPS NORMAL CONS. NORMAL ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) EPS (RS) P/E (X) P/E (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 882/254
3/09A 709,389 -21,125 -33.8 -114.0 -22.7 -6.7 -35.6 1.2 1.0 31.5
1,6,12 Rel Perf (%) 5/ -3/105
3/10A 925,193 15,051 24.1 -22.8 31.9 -33.8 19.9 9.8 0.8 8.5
Mcap (Rs b) 480.2
3/11E 1,139,788 47,608 76.3 25.1 10.1 30.6 42.7 17.1 0.7 6.0
Mcap (USD b) 10.4
3/12E 1,309,101 61,639 98.8 48.0 7.8 16.0 38.6 19.1 0.6 5.3
'* Consolidated EPS; ^ Normalized for capitalized expenses

„ Tata Motors is estimated to post 42% YoY volume growth (down ~16% QoQ) in 1QFY11, driven by a 56.7% YoY
growth in M&HCV, 29.1% YoY growth in LCVs and 54% YoY growth in cars (driven by Nano and Indigo Manza
sales). Price increases from January 2010 will drive realizations by 10.7% YoY increase (down ~2% QoQ).
„ Net sales are estimated to grow by 56.3% YoY to Rs99.2b. Margins are estimated to decline 130bp YoY (flat QoQ)
to 10.1%, due to a rise in raw material costs. EBITDA is expected to grow by 39.1% YoY (down ~17.8% QoQ) to
Rs10.1b, translating into a 45.5% YoY growth in recurring PAT of Rs3.2b.
„ For JLR, we estimate volume growth of 56% YoY to 56,062 units and realizations to decline by 1% QoQ (13.3% YoY
growth), resulting in revenue growth of 77% to 1.9b GBP. EBITDA margin is estimated at 11% (down ~40bp QoQ),
translating into PAT of 107m GBP (v/s 74m GBP in 4QFY10).
„ Our estimates factor in improvement in CV demand (25.2% growth in FY11), ~73.3% YoY growth in cars in FY11,
~34.9% YoY growth in UVs, 170bp QoQ increase in RM costs and improvement in JLR’s performance (~10.5%
EBITDA margins in FY11 and 11% in FY12). The stock trades at 10.1x FY11E consolidated EPS and 7.8x FY12E
consolidated EPS. Under Review.
QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Total Volumes (nos) 127,967 158,416 164,333 216,721 181,744 231,850 253,150 273,056 667,437 939,800
Change (%) -3.9 17.4 66.6 55.4 42.0 46.4 54.0 26.0 321.3 471.9
Average Realization 537,374 538,999 582,809 606,867 594,730 535,257 524,552 520,893 571,511 539,701
Change (%) -8.2 -8.0 9.6 16.6 10.7 -0.7 -10.0 -14.2 6.0 (7.4)
Net Sales 63,502 79,241 89,298 121,697 99,255 114,009 121,994 130,648 353,737 465,906
Change (%) -7.8 12.7 89.4 83.2 56.3 43.9 36.6 7.4 346.4 421.7
Other Operating Income 544 548 501 600 600 620 575 706 2,193 2,501
Total Cost 56,766 69,131 78,280 109,970 89,726 102,266 107,842 115,463 314,148 415,299
EBITDA 7,280 10,657 11,519 12,326 10,128 12,363 14,726 15,891 41,782 53,109
EBITDA Margins (%) 11.4 13.4 12.8 10.1 10.1 10.8 12.0 12.1 11.7 11.3
Change (%) 47.9 99.0 1,156.9 111.7 39.1 16.0 27.8 28.9 292.1 361.0
Non-Operating Income 5 510 2 6 100 750 100 303 523 1,253
Interest 2,535 2,856 2,861 2,786 2,950 2,975 3,000 3,080 11,038 12,005
Depreciation & Amort. 2,291 2,634 2,641 2,772 2,800 3,100 3,300 3,479 10,339 12,679
Product Dev. Expenses 112 154 226 948 250 350 400 593 1,440 1,593
PBT before EO Exp 2,347 5,522 5,793 5,826 4,228 6,688 8,126 9,042 19,488 28,085
EO Exp/(Inc) -3,134 -3,546 242 -2,369 0 0 0 0 -8,807 0
PBT after EO Exp 5,480 9,068 5,550 8,195 4,228 6,688 8,126 9,042 28,294 28,085
Tax 343 1,777 1,549 2,226 1,028 1,625 1,975 2,197 5,895 6,825
Effective Tax Rate (%) 6.3 19.6 27.9 27.2 24.3 24.3 24.3 24.3 20.8 24.3
PAT 5,138 7,291 4,001 5,969 3,201 5,063 6,152 6,845 22,400 21,260
Adj PAT 2,200 4,440 4,176 4,244 3,201 5,063 6,152 6,845 15,428 21,260
Change (%) -40.8 87.4 -376.5 372.4 45.5 14.0 47.3 61.3 284.8 37.8
E: MOSL Estimates
Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 56
 Results Preview
QUARTER ENDING JUNE 2010

Banking
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME „ Maintain positive stance: We maintain our positive stance on the Banking sector.
Andhra Bank
We expect strong core operating performance to continue in 1QFY11, driven by higher
Axis Bank
Bank of Baroda
loan growth and margin expansion (YoY), strong fee income growth and abating
Bank of India concerns on asset quality following the strong economic revival.
Canara Bank „ Gradual monetary tightening to continue: On the back of increased inflationary
Corporation Bank
concerns, we expect gradual monetary tightening to continue in FY11. However, we
Dena Bank
HDFC view gradual monetary tightening positively, as sudden increase in policy rates and
HDFC Bank interest rates can derail economic growth.
Federal Bank „ Expect aggregate PAT growth of 16% YoY for banks under our coverage: On
ICICI Bank
a lower base (due to excess liquidity and lower pricing power), we expect margins to
Indian Bank
LIC Housing expand meaningfully on a YoY basis. However, on a sequential basis, margins are
Oriental Bank likely to decline 10-15bp. Our coverage universe NII would grow by ~29% YoY,
Punjab National Bank operating profits by 23% YoY (despite lower trading profits), and PAT by 16% YoY
Shriram Transport
(despite factoring in higher NPA provisions).
South Indian Bank
State Bank „ Buy selectively: We prefer selective buying, and like banks with a strong core deposit
Union Bank franchise, higher tier-I capital and high provision coverage ratio. SBI, BoB, Indian
Yes Bank
Bank and Andhra Bank are our top picks among state-owned banks. ICICI Bank
is our top pick among private banks. In the NBFC space, we like Shriram Transport.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO NET INT INCOME OPERATING PROFIT NET PROFIT
25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Banks
Andhra Bank 134 Buy 6,436 45.8 -1.9 5,161 48.3 -2.1 2,689 4.9 11.9
Axis Bank 1,248 Buy 13,937 33.3 -4.5 13,630 15.9 -1.5 7,617 35.5 -0.4
Bank of Baroda 696 Buy 16,881 40.1 -3.3 14,267 41.3 -12.4 7,970 16.3 -12.1
Bank of India 345 Neutral 15,034 15.6 -3.1 11,658 6.6 -8.6 4,311 -26.2 0.7
Canara Bank 434 Buy 15,457 19.7 -3.2 13,037 25.2 -8.9 7,344 32.2 46.0
Corporation Bank 514 Buy 6,219 33.0 -2.8 5,591 -2.1 2.6 3,054 16.9 -2.2
Dena Bank 93 Buy 3,023 20.7 -7.3 2,143 6.4 -23.5 1,245 8.3 -9.1
Federal Bank 318 Buy 3,972 36.9 -3.0 3,442 23.7 -2.1 1,348 -1.2 15.4
HDFC 2,937 Neutral 9,114 25.4 -22.2 9,619 21.5 -25.0 6,836 21.0 -26.2
HDFC Bank 1,948 Buy 23,079 24.4 -1.8 16,750 10.3 -1.1 7,953 31.2 -4.9
ICICI Bank 858 Buy 19,540 -1.6 -4.0 24,280 -4.0 1.2 11,002 25.3 9.4
Indian Bank 220 Buy 9,128 23.7 -2.3 7,349 16.6 -15.8 3,379 1.9 -17.6
LIC Housing Fin 1,015 Buy 3,022 43.2 -12.9 2,479 38.6 -13.2 1,663 34.3 -22.1
Oriental Bank of Commerce 323 Buy 9,326 92.6 -5.7 7,379 42.7 -5.0 3,106 20.7 -2.0
Punjab National Bank 1,045 Buy 24,177 34.2 -3.2 20,396 30.0 -12.6 10,674 28.3 -6.0
Shriram Transport Fin. 579 Buy 6,336 34.7 -2.1 5,061 48.0 -1.7 2,680 63.0 1.4
South Indian Bank 165 UR 1,584 3.9 100.8 1,040 -2.7 101.6 548 -8.9 41.8
State Bank 2,301 Buy 65,328 30.0 -2.8 51,818 41.0 -0.2 24,630 5.7 31.9
Union Bank 303 Buy 12,727 58.8 -8.8 10,647 35.2 -7.2 5,216 18.0 -12.1
Yes Bank 272 Buy 2,418 47.7 -1.0 2,418 22.3 -6.1 1,387 38.6 -0.9
Sector Aggregate 266,738 28.8 -4.1 228,164 22.9 -5.8 114,652 16.4 2.8

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 57
 Banking

Expect strong core operating performance in 1QFY11, on a lower base

On a lower base in 1QFY11, we expect sharp YoY improvement in margins for banks
under our coverage. In 1QFY10, margins had suffered due to excess liquidity in the balance
sheet, lower pricing power and increasing cost of funds (due to lag impact of high cost
deposits contracted in 2HFY09). Sequentially, margins are likely to decline due to full
impact of CRR hike, savings deposits repricing and higher proportion of priority sector
loans (specially for private sector banks). On a lower base, YoY NII growth (~29% growth
for our coverage universe) would look strong. Andhra Bank, BoB, OBC and Union Bank
among the state-owned banks are likely to post 40%+ NII growth. ICICI Bank is the only
bank in our coverage which is likely to post a decline in NII.

10-year G-sec yields have declined by ~30bp QoQ on a higher base. Though trading
profits are unlikely to very strong YoY, we expect strong improvement on a QoQ basis.
For most banks, we expect lower other income YoY due to a fall in trading profits. On the
back of strong operating performance, we expect operating profit growth of 23% YoY,
despite factoring in lower trading profits. We expect banks to prudently make higher NPA
provisions; provisions can surprise positively. We expect aggregate earnings growth of
16% YoY. We expect SBI to post 6% earnings growth YoY. BoI's PAT is likely to fall
~25%. Axis Bank, HDFC Bank, Canara Bank, Shriram Transport Finance and Yes Bank
are likely to post earnings growth of over 30%. While we expect ICICI Bank to report
decline in operating profits, lower NPA provisions will lead to 25% YoY growth in net
profit.

Strong economic growth; but inflation remains a concern

Strong IIP, auto numbers, cement dispatches, increasing order backlog of engineering
companies and increase in housing sales indicate speedy economic revival. RBI has so far
been supportive of the growth process and has taken the evolving global economic outlook
and capital flows into consideration while framing its monetary policy stance. Upward
risks to inflation have materialized in the meantime, with rising food prices, revision in oil
and gas prices, and move towards decontrol of auto fuels.

Expect further monetary tightening

On the back of increasing inflationary concerns and expected decline in fiscal deficit (due
to higher revenues from 3G/BWA and possibility of higher tax collection), we expect RBI
to take a mid-course corrective policy action by raising repo and reverse repo rates. Once
the current liquidity situation eases, RBI could effect a cumulative 75bp increase for 2HFY11.
Lower fiscal deficit may lead to lower government borrowing, acting as a check on policy-
driven upward movement in yields and interest rates.

Liquidity tightens during the quarter; expect easing in 2QFY11

In 1QFY11, liquidity in the system dried up significantly on the back of higher than expected
fund demand for 3G/BWA and advance tax outflow. Rates have moved up from the lower
end of the LAF corridor to the upper end. Long-term rates continue to be lower than at the
end of FY10. We expect the tightness in liquidity to ease in 2QFY11, as the government
begins spending.

July 2010 58
 Banking

Interest rates to increase gradually

On the back of drying up of liquidity in 1QFY11, bulk deposit rates (up 200bp since April
2010) have started inching up. If loan growth picks up faster than expected, banks could
raise deposit rates again in 2QFY11. While we expect all state-owned banks to withdraw
teaser loan schemes for car and home loans in 2QFY11, we expect a broad-based rise in
lending rates only in 2HFY11.

Loan growth likely to remain strong

Loan growth has improved to ~20% YoY as on 18 June 2010. On a QoQ basis, loans grew
2.2% or Rs700b (significantly higher than a decline of Rs20b during the same period in the
previous year), led by sudden increase in demand for funds from 3G and BWA. We expect
the gradual recovery in loan growth to continue because of (1) improved sales and higher
inflation, which will lead to higher working capital requirements, (2) a drawdown of sanctions
made to the infrastructure sector, and (3) improved business confidence, which will lead to
higher capex and investment related loan growth. A lower statistical base, which started
from 4QFY10, will also lead to better loan growth until December 2010. We expect the
industry to grow ~20% in FY11-12.

Deposit growth calibrated to loan growth

While the reported loan growth is very strong, deposit growth is moderating every fortnight.
After strong deposit mobilization in FY09, banks are moderating deposit growth as they
were faced with excess liquidity. However, as excess liquidity in the balance sheet has
declined in 1QFY11 and banks have become net borrowers from RBI, we expect deposit
rates to increase in 2QFY11. Deposit growth, which started moderating from 22% in
1QFY10 to 19.8% in 2QFY10, 17.6% in 3QFY10, and 17.1% in 4QFY10, has further
moderated to 13.9% as of 18 June 2010. We expect deposit growth to remain calibrated to
loan growth. However, CASA deposit mobilization will continue to show strong traction.
Payment of interest on daily average basis has made savings deposits more attractive.
Incremental loans during the quarter are funded by liquidating SLR and MF investments
thus, CD ratio is likely to expand QoQ.

Margins to decline sequentially, but improve sharply YoY

On a sequential basis, we expect margins to decline 10-15bp for most banks due to upward
repricing of savings deposits, full impact of CRR hike, higher share of priority sector loans
and falling benefit of capital raising (for HDFC, Axis and Yes Bank). On a sequential
basis, we expect NII to decline for banks under our coverage.

Trading profits to increase QoQ, but decline YoY

Yields have declined 25-30bp on 10-year G-secs, but have increased 25bp on 1-year and
5bp on 2-year G-secs due to drying up of liquidity. As yields have declined QoQ for longer
tenors and yield volatility has been higher (75bp change in minimum and maximum rate in
10-year G-sec) during the quarter, we expect higher trading profits QoQ. However, trading
profits are likely to be significantly lower YoY. We also expect banks to transfer securities
from AFS to HTM category; however, transfer losses are unlikely due to lower G-sec
yields QoQ.

July 2010 59
 Banking

RELATIVE PERFORMANCE - 3M (%) Asset quality pressure continues; expect slippages to increase QoQ for
Sensex state-owned banks
M OSt B anking Index
110
We expect slippages to increase during the quarter. While in 4QFY10 some signs of
105 slippages from the restructured portfolio were noticed, we believe the real test of asset
100 quality from the restructured portfolio will be in 1HFY11. Some banks may decide to
95 declare the agri relief scheme amount as NPA in 1QFY11, depending on the profitability.
90 Due to strong operating profitability, we expect banks to make higher NPA provisions.
Mar-10

May-10

Jun-10
Apr-10

Among the large banks, ICICI and SBI will have to make additional NPA provisions to
comply with 70% PCR, as per RBI directive.
RELATIVE PERFORMANCE - 1YR (%)

M OSt B anking Index

Sensex
Valuation and view
165 We prefer selective buying, and like banks with a strong core deposit franchise, higher
130 tier-I capital and high provision coverage ratio. SBI, BoB, Indian Bank and Andhra
95 Bank are our top picks among state-owned banks. ICICI Bank is our top pick among
60 private banks. In the NBFC space, we like Shriram Transport.
Jun-09

Mar-10
Dec-09

Jun-10
Sep-09

BANKS CMP (RS) RECO EPS (RS) P/E (X) P/BV (X) ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Banks
Andhra Bank 134 Buy 21.6 24.3 28.9 6.2 5.5 4.6 1.5 1.2 1.0 26.0 24.2 24.2
Axis Bank 1,248 Buy 62.1 78.0 96.7 20.1 16.0 12.9 3.2 2.7 2.3 19.2 18.3 19.4
Bank of Baroda 696 Buy 83.7 94.8 114.4 8.3 7.3 6.1 1.8 1.5 1.3 23.8 22.5 22.7
Bank of India 345 Neutral 33.1 41.1 58.0 10.4 8.4 5.9 1.4 1.3 1.1 14.2 15.8 19.4
Canara Bank 434 Buy 73.7 76.9 90.4 5.9 5.6 4.8 1.4 1.2 1.0 26.8 22.8 22.3
Corporation Bank 514 Buy 81.6 98.4 114.9 6.3 5.2 4.5 1.3 1.1 0.9 21.9 22.3 22.0
Dena Bank 93 Buy 17.8 18.1 22.1 5.2 5.1 4.2 1.1 0.9 0.8 23.6 19.9 20.3
Dewan Housing 225 Buy 18.4 26.2 36.2 12.3 8.6 6.2 2.2 1.8 1.5 22.7 23.0 25.7
Federal Bank 318 Buy 27.2 34.9 41.8 11.7 9.1 7.6 1.2 1.1 0.9 10.3 12.1 13.1
HDFC 2,937 Neutral 98.4 118.0 140.5 29.8 24.9 20.9 5.7 5.0 4.3 20.0 20.9 21.9
HDFC Bank 1,948 Buy 64.4 84.5 109.4 30.2 23.0 17.8 4.1 3.6 3.1 16.1 16.8 18.9
ICICI Bank 858 Buy 36.1 46.1 58.4 23.8 18.6 14.7 1.9 1.7 1.6 8.0 9.7 11.4
Indian Bank 220 Buy 36.2 37.9 47.2 6.1 5.8 4.7 1.4 1.2 1.0 25.6 22.5 23.6
Kotak Mahindra Bank 750 Neutral 37.0 44.5 51.7 20.3 16.9 14.5 3.3 2.8 2.3 17.9 17.9 17.5
LIC Housing Fin 1,015 Buy 69.7 87.7 105.2 14.6 11.6 9.7 2.8 2.4 2.0 23.6 22.5 22.7
Oriental Bank 323 Buy 45.3 53.6 64.4 7.1 6.0 5.0 1.1 1.0 0.8 16.5 17.1 17.7
Punjab National Bank 1,045 Buy 123.9 141.7 167.2 8.4 7.4 6.2 2.0 1.7 1.4 26.6 24.8 24.1
Rural Electric. Corp. 298 Buy 20.3 25.2 31.3 14.7 11.8 9.5 2.7 2.3 2.0 22.0 21.0 22.7
Shriram Transport Fin. 579 Buy 38.7 51.4 61.3 15.0 11.3 9.4 3.4 2.7 2.2 28.6 26.9 25.9
South Indian Bank 165 UR 20.7 22.0 28.8 8.0 7.5 5.7 1.3 1.1 1.0 16.8 15.7 18.1
State Bank 2,301 Buy 184.8 226.0 285.4 12.5 10.2 8.1 1.8 1.5 1.3 15.1 16.1 17.6
Union Bank 303 Buy 41.1 47.3 58.8 7.4 6.4 5.2 1.7 1.4 1.1 26.2 24.3 24.5
Yes Bank 272 Buy 14.1 19.1 25.2 19.3 14.2 10.8 3.0 2.5 2.1 20.3 19.3 21.2
Sector Aggregate 14.2 11.8 9.5 2.6 2.2 1.9 18.1 18.5 19.8

July 2010 60
 Banking

DEPOSITS GROWTH MODERATED FURTHER IN 1QFY11 LOAN GROWTH IMPROVING AT A FASTER PACE

Deposits (Rs t) Chg YoY (%) Loans (Rs t) Chg YoY (%)
25.5 25.6 23.8
24.6 24.4 24.2
23.2 21.7
21.9 22.1 26.0
20.1 21.4
19.8 19.8 22.8
17.6 17.1 22.4
17.3 17.0
13.9
19.6
12.6
16.3

13.7
27.1

28.6

29.9

32.0

33.0

34.4

36.3

38.3

40.3

41.2

42.6

44.9

45.2

19.1

20.3

21.5

23.6

24.1

25.5

26.6

27.7

28.0

28.7

30.2

32.4

33.1
1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10
18-Jun-10

18-Jun-10
DEPOSITS MODERATION CONTINUES LED BY FALL IN BULK DEPOSITS (RS T) STRONG LOAN GROWTH IN 1QFY11 LED BY 3G/BWA DISBURSEMENTS

2,130 2,036 2,220 2,154 2,196

2,087
1,984
1,874
1,657
1,505 1,445 1,454 1,477
1,353
1,196 1,239 1,211
1,071 1,109 1,124
913 1,066
744 700
437
310 287
-87
4QFY07

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

18-Jun-10

4QFY07

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

18-Jun-10
CD RATIO IMPROVED TO ~73% (%) SLR RATIO (%)

74.1 73.9 74.2 30.1 30.3 30.2

73.3 73.3
72.8
72.3 72.4
72.2 28.5 28.4 28.5
71.8 28.128.2 28.1
27.5 27.4
70.7 70.8 27.0
70.5
69.7
69.5 25.6
4QFY07
1QFY08

2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10
04-Jun-10
18-Jun-10

18-Jun-10

Source: Company/MOSL

July 2010 61
 Banking

LIQUIDITY DRIED UP IN 1QFY11 ... ... LEADING TO INCREASE IN G-SEC YIELD AT SHORTER END

Net Repo (Rs B) 1-Year G-Sec Yield 10-Year G-Sec Yield

1,500 2-Year G-Sec Yield
9.0

1,000
8.0
6.94 7.21
500 7.01 7.59 7.84 7.55
7.0
6.20
0 5.87 6.15
6.0
5.66 5.63
5.43
-500 5.0
5.02 4.23 4.40 4.39 5.15 5.42

-1,000 4.0
Jun-08

Nov-08

Jan-09

Jun-09

Nov-09

Jan-10

Jun-10

May-09
May-09
Jun-09
Jul-09

Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10

May-10
Jun-10
Sep-09
Apr-08

Aug-08

Apr-09

Aug-09

Apr-10

Apr-09

Aug-09

Apr-10
CP RATES HAVE ALSO INCREASED ACROSS MATURITIES CD RATES HAVE INCREASED BY 75-150BP IN 1QFY11

1 Month 3 Month 6 Month 12 Month 7.5

6 Month (%) 12 Month (%)
12.0 6.90

10.0 6.5 6.05

6.65
5.65 5.85
8.0
5.5 5.25
5.20
6.0
4.5
4.0 4.45
3.95
4.15
2.0 3.5
Feb-09
Jan-09

May-09

Jun-09

Nov-09

Dec-09

Feb-10

Mar-10

May-10

Jun-10
Sep-09

May-09

Jun-09

Nov-09

Dec-09

Feb-10

May-10
Mar-10

Jun-10
Apr-09

Aug-09

Sep-09
Apr-09

Aug-09

Source: Company/MOSL

July 2010 62
 Results Preview
SECTOR: BANKING

Andhra Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ANDB IN Buy
REUTERS CODE
S&P CNX: 5,269 ADBK.BO Previous Recommendation: Buy Rs134
Equity Shares (m) 485.0 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 145/74
3/09A 23,923 6,531 13.5 13.5 9.9 1.8 13.2 18.9 1.0 1.8
1,6,12 Rel Perf (%) -3/ 23/40
3/10A 31,594 10,459 21.6 60.2 6.2 1.5 13.9 26.0 1.3 1.5
Mcap (Rs b) 64.8
3/11E 36,863 11,774 24.3 12.6 5.5 1.2 14.1 24.2 1.2 1.2
Mcap (USD b) 1.4
3/12E 43,315 14,006 28.9 19.0 4.6 1.0 13.0 24.2 1.2 1.1

„ On a lower base, we expect net interest income (NII) to grow 45%+ YoY to Rs6.5b in 1QFY11. We expect loan
growth to remain strong at 25%+ YoY.

„ We expect fee income growth to outpace loan growth however, other income will be flat YoY due to lower trading
profits.

„ Operating expenses are expected to fall sequentially. In 4QFY10, bank had made provisions of ~Rs200m for wage
revisions and Rs400m for pension liability.

„ While we expect operating profit to grow ~50% YoY, PAT growth is likely to be just 5% YoY as we expect the bank
to make higher NPA provisions on a prudent basis. Our provisions estimates can provide positive surprises considering
the strong asset quality.

„ The stock trades at 1.2x FY11E BV and 1x FY12E BV. The stock also offers an attractive dividend yield of ~4%.
Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 15,046 15,577 16,026 17,079 18,107 19,489 20,976 23,053 63,729 81,626
Interest Expense 10,633 10,431 10,200 10,518 11,672 12,839 14,123 15,912 41,781 54,545
Net Interest Income 4,414 5,147 5,825 6,562 6,436 6,651 6,854 7,141 21,948 27,081
% Change (Y-o-Y) 27.5 18.7 28.9 66.0 45.8 29.2 17.7 8.8 34.9 23.4
Other Income 2,381 2,332 2,242 2,691 2,325 2,350 2,400 2,706 9,646 9,781
Net Income 6,794 7,479 8,068 9,253 8,761 9,001 9,254 9,847 31,594 36,863
Operating Expenses 3,314 2,950 3,250 3,981 3,600 3,626 3,677 3,225 13,495 14,127
Operating Profit 3,480 4,528 4,818 5,272 5,161 5,374 5,577 6,623 18,099 22,735
% Change (Y-o-Y) 69.5 62.6 29.3 22.1 48.3 18.7 15.7 25.6 40.5 25.6
Other Provisions -32 578 964 2,229 1,320 1,370 1,270 1,955 3,740 5,915
Profit before Tax 3,512 3,950 3,854 3,043 3,841 4,004 4,307 4,668 14,359 16,820
Tax Provisions 950 1,210 1,100 640 1,152 1,201 1,292 1,400 3,900 5,046
Net Profit 2,562 2,740 2,754 2,403 2,689 2,803 3,015 3,267 10,459 11,774
% Change (Y-o-Y) 230.1 69.6 29.5 19.4 4.9 2.3 9.5 36.0 60.2 12.6
Interest Exp/Interest Income (%) 70.7 67.0 63.6 61.6 64.5 65.9 67.3 69.0 65.6 66.8
Other Income/Net Income (%) 35.0 31.2 27.8 29.1 26.5 26.1 25.9 27.5 30.5 26.5
Cost/Income Ratio (%) 48.8 39.5 40.3 43.0 41.1 40.3 39.7 32.7 42.7 38.3
Provisions/Operating Profits (%) -0.9 12.8 20.0 42.3 25.6 25.5 22.8 29.5 20.7 26.0
Tax Rate (%) 27.0 30.6 28.5 21.0 30.0 30.0 30.0 30.0 27.2 30.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 63
 Results Preview
SECTOR: BANKING

Axis Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 AXSB IN Buy
REUTERS CODE
S&P CNX: 5,269 AXBK.BO Previous Recommendation: Buy Rs1,248
Equity Shares (m) 405.2 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 1318/705
3/09A 65,831 18,154 50.6 68.9 24.7 4.4 13.7 19.1 1.4 4.5
1,6,12 Rel Perf (%) -2/ 25/38
3/10A 89,503 25,145 62.1 22.7 20.1 3.2 15.8 19.2 1.5 3.2
Mcap (Rs b) 505.6
3/11E 104,438 31,617 78.0 25.7 16.0 2.7 14.2 18.3 1.6 2.8
Mcap (USD b) 10.9
3/12E 126,592 39,165 96.7 23.9 12.9 2.3 12.7 19.4 1.6 2.4

„ On a lower base, the loan book growth is expected to be ~35% but it is expected to remain flat sequentially. We model
loan growth of 25% in FY11

„ We expect NII growth of ~33% YoY due to strong loan growth and improved margins (due to capital raising and a
sharp fall in the cost of deposit). We expect margins to fall sequentially due to higher savings deposit costs, the full
impact of CRR and a higher share of priority sector loans.

„ We have factored in 25% YoY growth in fee income. We expect higher trading gains sequentially but significantly
lower than in 1QFY10.

„ Conservatively we have factored in higher credit costs. Movement in asset quality is a key factor to watch out for.

„ The stock trades at 2.7x FY11E BV and 2.3x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 29,056 28,604 28,837 29,885 30,584 34,144 39,846 45,480 116,380 150,054
Interest Expense 18,599 17,107 15,345 15,284 16,647 19,311 24,138 28,595 66,335 88,691
Net Interest Income 10,456 11,497 13,491 14,601 13,937 14,833 15,708 16,886 50,045 61,364
% Change (Y-o-Y) 29.0 25.9 45.1 41.4 33.3 29.0 16.4 15.6 35.8 22.6
Other Income 9,586 10,656 9,881 9,335 10,095 10,502 11,017 11,461 39,458 43,074
Net Income 20,042 22,153 23,372 23,936 24,032 25,335 26,725 28,346 89,503 104,438
Operating Expenses 8,278 9,095 9,626 10,098 10,403 11,023 12,167 12,662 37,097 46,254
Operating Profit 11,764 13,058 13,746 13,838 13,630 14,312 14,558 15,684 52,406 58,184
% Change (Y-o-Y) 46.6 49.3 51.1 21.5 15.9 9.6 5.9 13.3 40.7 11.0
Other Provisions 3,153 4,989 3,731 2,019 2,000 2,425 2,225 3,263 13,892 9,913
Profit before Tax 8,611 8,069 10,015 11,819 11,630 11,887 12,333 12,421 38,514 48,271
Tax Provisions 2,990 2,752 3,455 4,171 4,012 4,101 4,255 4,285 13,368 16,653
Net Profit 5,620 5,316 6,560 7,649 7,617 7,786 8,078 8,136 25,145 31,617
% Change (Y-o-Y) 70.2 32.0 31.0 31.5 35.5 46.5 23.1 6.4 38.5 25.7
Interest Exp/Interest Income (%) 64.0 59.8 53.2 51.1 54.4 56.6 60.6 62.9 57.0 59.1
Other Income/Net Income (%) 47.8 48.1 42.3 39.0 42.0 41.5 41.2 40.4 44.1 41.2
Cost/Income Ratio (%) 41.3 41.1 41.2 42.2 43.3 43.5 45.5 44.7 41.4 44.3
Provisions/Operating Profits (%) 26.8 38.2 27.1 14.6 14.7 16.9 15.3 20.8 26.5 17.0
Tax Rate (%) 34.7 34.1 34.5 35.3 34.5 34.5 34.5 34.5 34.7 34.5
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 64
 Results Preview
SECTOR: BANKING

Bank of Baroda
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BOB IN Buy
REUTERS CODE
S&P CNX: 5,269 BOB.BO Previous Recommendation: Buy Rs696
Equity Shares (m) 365.5 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 753/371
3/09A 78,811 22,272 60.9 55.1 11.4 2.2 14.1 20.8 1.1 2.2
1,6,12 Rel Perf (%) -7/ 35/38
3/10A 87,458 30,583 83.7 37.3 8.3 1.8 14.4 23.8 1.2 1.9
Mcap (Rs b) 254.3
3/11E 101,876 34,639 94.8 13.3 7.3 1.5 13.3 22.5 1.1 1.6
Mcap (USD b) 5.5
3/12E 119,260 41,819 114.4 20.7 6.1 1.3 12.4 22.7 1.2 1.3

„ On a lower base, we expect NII growth of 40%+ YoY led by sharp improvement in margins YoY and strong loan
growth. In 1QFY10, on back of excess liquidity in the balance sheet, margins had fallen sharply to 2.3%.

„ We expect loan growth of 25%+ YoY in 1QFY11. Deposit growth is expected to be calibrated. We expect CD ratio
to improve sequentially.

„ We expect other income to stay largely flat YoY however, trading profits are expected to fall YoY. A decline in trading
profits is expected to be compensated by higher fee income growth of 20%+.

„ The bank is expected to make higher NPA provisions on a prudent basis due to strong operating profits.

„ The stock trades at 1.5x FY11E BV and 1.3x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 40,321 41,354 41,770 43,538 44,437 49,842 56,040 63,770 166,983 214,088
Interest Expense 28,274 27,468 25,757 26,089 27,556 32,103 37,239 44,267 107,589 141,164
Net Interest Income 12,047 13,886 16,012 17,450 16,881 17,739 18,801 19,503 59,395 72,924
% Change (Y-o-Y) 14.0 22.5 9.5 18.6 40.1 27.7 17.4 11.8 15.9 22.8
Other Income 7,030 5,953 6,597 8,483 7,116 7,174 6,874 7,788 28,064 28,951
Net Income 19,077 19,839 22,609 25,933 23,997 24,913 25,674 27,291 87,458 101,876
Operating Expenses 8,978 9,523 9,959 9,645 9,731 10,356 10,824 11,546 38,106 42,457
Operating Profit 10,099 10,316 12,650 16,288 14,267 14,557 14,850 15,745 49,353 59,419
% Change (Y-o-Y) 17.4 22.0 -10.6 24.9 41.3 41.1 17.4 -3.3 14.6 20.4
Other Provisions -390 1,163 2,425 3,773 2,881 2,593 2,016 2,444 6,972 9,934
Profit before Tax 10,489 9,153 10,225 12,515 11,385 11,964 12,835 13,301 42,381 49,485
Tax Provisions 3,635 2,811 1,900 3,452 3,416 3,589 3,850 3,990 11,797 14,845
Net Profit 6,854 6,342 8,325 9,063 7,970 8,375 8,984 9,311 30,583 34,639
% Change (Y-o-Y) 84.8 60.4 17.5 20.4 16.3 32.1 7.9 2.7 37.3 13.3
Interest Exp/Interest Income (%) 70.1 66.4 61.7 59.9 62.0 64.4 66.5 69.4 64.4 65.9
Other Income/Net Income (%) 36.9 30.0 29.2 32.7 29.7 28.8 26.8 28.5 32.1 28.4
Cost/Income Ratio (%) 47.1 48.0 44.1 37.2 40.5 41.6 42.2 42.3 43.6 41.7
Provisions/Operating Profits (%) -3.9 11.3 19.2 23.2 20.2 17.8 13.6 15.5 14.1 16.7
Tax Rate (%) 34.7 30.7 18.6 27.6 30.0 30.0 30.0 30.0 27.8 30.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 65
 Results Preview
SECTOR: BANKING

Bank of India
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BOI IN Neutral
REUTERS CODE
S&P CNX: 5,269 BOI.BO Previous Recommendation: Neutral Rs345
Equity Shares (m) 525.9 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 475/295
3/09A 85,508 30,077 57.2 49.7 6.1 1.6 13.0 29.2 1.5 1.6
1,6,12 Rel Perf (%) -2/ -10/-22
3/10A 83,726 17,411 33.1 -42.1 10.5 1.4 12.9 14.2 0.7 1.6
Mcap (Rs b) 181.5
3/11E 97,740 21,611 41.1 24.1 8.5 1.3 11.4 15.8 0.7 1.4
Mcap (USD b) 3.9
3/12E 117,503 30,518 58.0 41.2 6.0 1.1 10.3 19.4 0.8 1.2

„ We expect loans to remain flat QoQ and to increase by 17-18% YoY in 1QFY11. CD ratio is expected to remain
stable QoQ.

„ Other income is expected to decline on account of lower expected trading profits than 1QFY10. We model in fee
income growth of 15% YoY

„ NPA provisions are likely to remain higher as asset quality stays under pressure. Slippage from restructured loans is
the key factor to watch out for. In 1QFY10, the bank had MTM write back of Rs1.3b.

„ On a higher base, we expect 1QFY11 earnings to decline ~25% YoY due to lower trading gains and higher provisions.
The stock trades at 1.3x FY11E BV and 1.1x FY12E BV. Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 43,777 44,890 44,862 45,251 46,320 52,249 60,463 71,379 178,780 230,413
Interest Expense 30,771 30,801 29,915 29,734 31,287 35,630 41,522 50,055 121,220 158,494
Net Interest Income 13,006 14,089 14,948 15,517 15,034 16,620 18,941 21,324 57,559 71,919
% Change (Y-o-Y) 10.1 3.4 -1.8 8.3 15.6 18.0 26.7 37.4 4.7 24.9
Other Income 6,459 6,760 5,716 7,232 6,325 6,450 5,925 7,120 26,166 25,821
Net Income 19,465 20,849 20,664 22,749 21,359 23,070 24,866 28,444 83,726 97,740
Operating Expenses 8,529 8,789 9,366 9,995 9,701 9,749 10,889 10,936 36,678 41,275
Operating Profit 10,936 12,060 11,298 12,754 11,658 13,322 13,977 17,508 47,048 56,465
% Change (Y-o-Y) 2.0 -0.7 -35.9 -9.4 6.6 10.5 23.7 37.3 -13.8 20.0
Other Provisions 2,234 6,021 5,764 8,090 5,500 5,850 5,490 7,844 22,109 24,684
Profit before Tax 8,702 6,038 5,534 4,664 6,158 7,472 8,487 9,664 24,938 31,781
Tax Provisions 2,859 2,805 1,479 385 1,847 2,242 2,716 3,365 7,528 10,170
Net Profit 5,843 3,233 4,055 4,279 4,311 5,230 5,771 6,299 17,411 21,611
% Change (Y-o-Y) 4.0 -57.6 -53.5 -47.2 -26.2 61.8 42.3 47.2 -42.1 24.1
Interest Exp/Interest Income (%) 70.3 68.6 66.7 65.7 67.5 68.2 68.7 70.1 67.8 68.8
Other Income/Net Income (%) 33.2 32.4 27.7 31.8 29.6 28.0 23.8 25.0 31.3 26.4
Cost/Income Ratio (%) 43.8 42.2 45.3 43.9 45.4 42.3 43.8 38.4 43.8 42.2
Provisions/Operating Profits (%) 20.4 49.9 51.0 63.4 47.2 43.9 39.3 44.8 47.0 43.7
Tax Rate (%) 32.9 46.5 26.7 8.3 30.0 30.0 32.0 34.8 30.2 32.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 66
 Results Preview
SECTOR: BANKING

Canara Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 CBK IN Buy
REUTERS CODE
S&P CNX: 5,269 CNBK.BO Previous Recommendation: Buy Rs434
Equity Shares (m) 410.0 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 443/235
3/09A 70,290 20,724 50.5 32.4 8.6 1.8 14.1 22.6 1.0 2.0
1,6,12 Rel Perf (%) -1/ 6/46
3/10A 85,384 30,214 73.7 45.8 5.9 1.4 13.4 26.8 1.3 1.6
Mcap (Rs b) 177.7
3/11E 96,249 31,526 76.9 4.3 5.6 1.2 12.5 22.8 1.1 1.3
Mcap (USD b) 3.8
3/12E 111,677 37,061 90.4 17.6 4.8 1.0 12.0 22.3 1.0 1.1

„ We expect 1QFY11 loan growth to remain healthy at 22% YoY despite a higher base. Deposit growth is expected to
be calibrated and CD ratio is expected to improve QoQ. We expect NII to grow at ~20% YoY.

„ Unlike peers, in 1QFY10 Canara Bank’s trading profits were muted thus, on a lower base other income is expected
to grow 30%+ YoY. We model in 15% fee income growth.

„ We expect the bank to make higher NPA provisions on a prudent basis due to a 25% growth in operating profits.

„ The stock trades at 1.2x FY11E BV and 1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 45,584 47,092 46,878 47,966 49,799 54,121 61,656 68,048 187,520 233,623
Interest Expense 32,669 33,955 32,100 31,990 34,342 37,776 44,198 49,140 130,714 165,456
Net Interest Income 12,915 13,137 14,778 15,976 15,457 16,345 17,458 18,908 56,805 68,167
% Change (Y-o-Y) 26.7 14.3 18.8 22.4 19.7 24.4 18.1 18.4 20.4 20.0
Other Income 4,736 8,929 7,813 7,101 6,331 6,599 6,622 8,530 28,579 28,082
Net Income 17,651 22,066 22,591 23,077 21,787 22,944 24,080 27,438 85,384 96,249
Operating Expenses 7,237 7,875 7,891 8,772 8,750 9,231 9,642 10,042 34,776 37,665
Operating Profit 10,413 14,191 14,700 14,305 13,037 13,713 14,438 17,396 50,608 58,584
% Change (Y-o-Y) 48.0 83.5 21.1 12.4 25.2 -3.4 -1.8 21.6 27.7 15.8
Other Provisions 3,360 3,086 1,674 7,274 3,500 3,600 3,950 6,590 12,394 17,640
Profit before Tax 7,053 11,105 13,026 7,031 9,537 10,113 10,488 10,805 38,214 40,943
Tax Provisions 1,500 2,000 2,500 2,000 2,194 2,326 2,412 2,485 8,000 9,417
Net Profit 5,553 9,105 10,526 5,031 7,344 7,787 8,076 8,320 30,214 31,526
% Change (Y-o-Y) 352.7 72.0 50.0 -30.0 32.2 -14.5 -23.3 65.4 45.8 4.3
Interest Exp/Interest Income (%) 71.7 72.1 68.5 66.7 69.0 69.8 71.7 72.2 69.7 70.8
Other Income/Net Income (%) 41.0 35.7 34.9 38.0 40.2 40.2 40.0 36.6 40.7 39.1
Cost/Income Ratio (%) 26.8 40.5 34.6 30.8 29.1 28.8 27.5 31.1 33.5 29.2
Provisions/Operating Profits (%) 32.3 21.7 11.4 50.8 26.8 26.3 27.4 37.9 24.5 30.1
Tax Rate (%) 21.3 18.0 19.2 28.4 23.0 23.0 23.0 23.0 20.9 23.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 67
 Results Preview
SECTOR: BANKING

Corporation Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 CRPBK IN Buy
REUTERS CODE
S&P CNX: 5,269 CRBK.BO Previous Recommendation: Buy Rs514
Equity Shares (m) 143.4 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 590/276
3/09A 27,982 8,928 62.2 21.5 8.3 1.5 13.6 19.6 1.2 1.5
1,6,12 Rel Perf (%) -7/ 23/31
3/10A 33,967 11,703 81.6 31.1 6.3 1.3 16.0 21.9 1.2 1.3
Mcap (Rs b) 73.7
3/11E 38,913 14,113 98.4 20.6 5.2 1.1 15.2 22.3 1.2 1.1
Mcap (USD b) 1.6
3/12E 45,873 16,482 114.9 16.8 4.5 0.9 14.4 22.0 1.1 0.9

„ On a lower base, 1QFY11 loan growth is expected to be ~35% YoY. We expect loans to remain flattish QoQ. Deposit
growth is also expected to remain strong at ~30% YoY.

„ We expect NII growth of ~33% YoY led by YoY improvement in margins.

„ We expect other income to decline sharply YoY. More than 50% of the other income in 1QFY10 was derived from
trading profits, which is expected to decline sharply. We model fee income growth of 20%.

„ The stock trades at P/BV of 1.1x of FY11E BV and P/BV of 0.9x of FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 17,422 17,695 18,606 19,222 19,383 21,306 24,164 28,491 72,946 93,345
Interest Expense 12,747 12,660 12,612 12,824 13,164 14,875 17,256 20,940 50,844 66,235
Net Interest Income 4,675 5,035 5,994 6,398 6,219 6,431 6,909 7,552 22,103 27,110
% Change (Y-o-Y) 23.7 23.8 25.4 49.4 33.0 27.7 15.3 18.0 30.7 22.7
Other Income 3,593 3,028 2,517 2,727 2,468 2,782 2,967 3,586 11,864 11,803
Net Income 8,269 8,063 8,511 9,124 8,687 9,213 9,876 11,137 33,967 38,913
Operating Expenses 2,556 2,707 2,995 3,674 3,096 3,142 3,261 3,454 12,600 12,953
Operating Profit 5,712 5,356 5,516 5,450 5,591 6,071 6,614 7,684 21,367 25,960
% Change (Y-o-Y) 78.0 52.4 22.7 -19.2 -2.1 13.3 19.9 41.0 18.9 21.5
Other Provisions 1,550 940 1,271 1,651 1,100 1,295 1,130 1,371 4,744 4,896
Profit before Tax 4,162 4,417 4,245 3,799 4,491 4,776 5,484 6,313 16,623 21,064
Tax Provisions 1,550 1,500 1,195 676 1,437 1,576 1,810 2,128 4,921 6,951
Net Profit 2,612 2,917 3,050 3,123 3,054 3,200 3,675 4,185 11,703 14,113
% Change (Y-o-Y) 41.8 52.3 18.9 19.9 16.9 9.7 20.5 34.0 31.1 20.6
Interest Exp/Interest Income (%) 73.2 71.5 67.8 66.7 67.9 69.8 71.4 73.5 69.7 71.0
Other Income/Net Income (%) 43.5 37.6 29.6 29.9 28.4 30.2 30.0 32.2 34.9 30.3
Cost/Income Ratio (%) 30.9 33.6 35.2 40.3 35.6 34.1 33.0 31.0 37.1 33.3
Provisions/Operating Profits (%) 27.1 17.5 23.0 30.3 19.7 21.3 17.1 17.8 22.2 18.9
Tax Rate (%) 37.2 34.0 28.2 17.8 32.0 33.0 33.0 33.7 29.6 33.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 68
 Results Preview
SECTOR: BANKING

Dena Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 DBNK IN Buy
REUTERS CODE
S&P CNX: 5,269 DENA.BO Previous Recommendation: Buy Rs93
Equity Shares (m) 286.8 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 96/45
3/09A 14,976 4,257 14.8 18.3 6.3 1.4 10.7 24.2 1.0 1.5
1,6,12 Rel Perf (%) 5/ 10/50
3/10A 16,887 5,113 17.8 20.1 5.2 1.1 13.3 23.6 1.0 1.3
Mcap (Rs b) 26.8
3/11E 18,957 5,198 18.1 1.7 5.1 0.9 12.3 19.9 0.8 1.1
Mcap (USD b) 0.6
3/12E 22,233 6,340 22.1 22.0 4.2 0.8 11.8 20.3 0.8 0.9

„ We expect NII to grow ~21% YoY to Rs.3b. We expect margins to decline sequentially due to repricing of saving
deposits and the full impact of the CRR increase.

„ Loan growth is expected to be 27% YoY on a lower base and deposit growth is expected to be 22% YoY.

„ Other income is expected to decline QoQ and YoY. We model fee income growth of 15% YoY. Decline in other
income will be largely due to lower trading profits in 1QFY11.

„ The stock trades at P/BV of 0.9x of FY11E BV and P/BV of 0.8x of FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 9,685 9,628 10,159 10,632 11,041 11,971 13,348 14,675 40,104 51,035
Interest Expense 7,180 7,223 7,329 7,371 8,018 8,820 9,878 11,137 29,103 37,853
Net Interest Income 2,505 2,405 2,830 3,261 3,023 3,151 3,470 3,538 11,000 13,182
% Change (Y-o-Y) 14.5 -5.4 -19.7 36.5 20.7 31.0 22.6 8.5 3.1 19.8
Other Income 1,554 1,253 1,331 1,749 1,305 1,383 1,458 1,630 5,886 5,776
Net Income 4,059 3,658 4,161 5,010 4,327 4,534 4,927 5,168 16,887 18,957
Operating Expenses 2,045 2,043 2,185 2,208 2,185 2,156 2,350 2,313 8,481 9,004
Operating Profit 2,013 1,615 1,977 2,801 2,143 2,378 2,577 2,855 8,406 9,953
% Change (Y-o-Y) 62.2 8.2 -25.5 49.2 6.4 47.3 30.4 1.9 15.2 18.4
Other Provisions 406 15 293 824 425 650 750 959 1,538 2,784
Profit before tax 1,607 1,600 1,684 1,977 1,718 1,728 1,827 1,897 6,868 7,170
Tax Provisions 457 354 339 606 472 475 502 522 1,755 1,972
Net Profit 1,150 1,246 1,345 1,371 1,245 1,253 1,324 1,375 5,113 5,198
% Change (Y-o-Y) 68.4 21.2 -4.2 23.3 8.3 0.6 -1.5 0.3 20.1 1.7
Interest Expense/Int. Income (%) 74.1 75.0 72.1 69.3 72.6 73.7 74.0 75.9 72.6 74.2
Other Income/Net Income (%) 38.3 34.3 32.0 34.9 30.1 30.5 29.6 31.5 34.9 30.5
Cost to Income Ratio (%) 50.4 55.9 52.5 44.1 50.5 47.5 47.7 44.8 50.2 47.5
Provisions/Operating Profits (%) 20.2 0.9 14.8 29.4 19.8 27.3 29.1 33.6 18.3 28.0
Tax Payout (%) 28.4 22.1 20.1 30.7 27.5 27.5 27.5 27.5 25.6 27.5
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 69
 Results Preview
SECTOR: BANKING

Federal Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 FB IN Buy
REUTERS CODE
S&P CNX: 5,269 FED.BO Previous Recommendation: Buy Rs318
Equity Shares (m) 171.0 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 355/211
3/09A 18,312 5,005 29.3 36.0 10.9 1.3 20.1 12.1 1.4 1.3
1,6,12 Rel Perf (%) -5/ 31/9
3/10A 19,417 4,646 27.2 -7.2 11.7 1.2 17.6 10.3 1.1 1.2
Mcap (Rs b) 54.4
3/11E 21,848 5,966 34.9 28.4 9.1 1.1 17.1 12.1 1.2 1.1
Mcap (USD b) 1.2
3/12E 25,239 7,151 41.8 19.9 7.6 0.9 15.8 13.1 1.2 1.0

„ On a lower base, we expect NII growth of 35%+ YoY in 1QFY11. We expect loan growth of 2% QoQ and 18% YoY.

„ We expect other income to remain flat sequentially and decline YoY due to lower trading gains and muted fee income
growth.

„ We factor in higher NPA provisions as the pressure on asset quality prevails. However, improving asset quality trend
in the past two quarters can provide upside to our earnings estimates.

„ We have modeled a tax rate of 34% v/s 39% in 1QFY10. On a higher base we expect profit to remain flat YoY.

„ The stock trades at 1.1x FY11E BV and 0.9x FY12E BV with an RoA of 1.2%+. However RoE is likely to stay
lower due to lower leverage. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 8,744 9,011 9,446 9,531 9,754 10,475 11,358 12,587 36,732 44,173
Interest Expense 5,843 5,711 5,635 5,435 5,781 6,360 7,123 8,240 22,624 27,504
Net Interest Income 2,901 3,300 3,811 4,097 3,972 4,115 4,235 4,347 14,108 16,669
% Change (Y-o-Y) 4.3 -0.6 -0.9 27.7 36.9 24.7 11.1 6.1 7.2 18.1
Other Income 1,474 1,364 1,165 1,306 1,295 1,404 1,242 1,238 5,309 5,179
Net Income 4,375 4,664 4,976 5,403 5,267 5,519 5,477 5,585 19,417 21,848
Operating Expenses 1,592 1,631 1,661 1,885 1,825 1,875 1,925 1,985 6,769 7,610
Operating Profit 2,783 3,032 3,315 3,518 3,442 3,644 3,552 3,600 12,649 14,238
% Change (Y-o-Y) 9.8 0.1 -13.8 10.3 23.7 20.2 7.1 2.3 0.4 12.6
Other Provisions 520 1,501 1,053 979 1,400 1,450 1,275 1,073 4,053 5,198
Profit before Tax 2,263 1,531 2,262 2,539 2,042 2,194 2,277 2,526 8,596 9,039
Tax Provisions 900 520 1,160 1,370 694 746 774 859 3,950 3,073
Net Profit 1,364 1,011 1,103 1,169 1,348 1,448 1,503 1,667 4,646 5,966
% Change (Y-o-Y) 100.1 -11.6 -45.9 2.3 -1.2 43.3 36.3 42.7 -7.2 28.4
Interest Exp/Interest Income (%) 66.8 63.4 59.7 57.0 59.3 60.7 62.7 65.5 61.6 62.3
Other Income/Net Income (%) 33.7 29.3 23.4 24.2 24.6 25.4 22.7 22.2 27.3 23.7
Cost/Income Ratio (%) 36.4 35.0 33.4 34.9 34.6 34.0 35.1 35.5 34.9 34.8
Provisions/Operating Profits (%) 18.7 49.5 31.8 27.8 40.7 39.8 35.9 29.8 32.0 36.5
Tax Rate (%) 39.7 34.0 51.3 54.0 34.0 34.0 34.0 34.0 46.0 34.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 70
 Results Preview
SECTOR: BANKING & FINANCE

HDFC
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HDFC IN Neutral
REUTERS CODE
S&P CNX: 5,269 HDFC.BO Previous Recommendation: Neutral Rs2,937
Equity Shares (m) 287.1 YEAR NET INCOME PAT ADJ. EPS EPS AP/E* P/BV CAR ROAE ROAA AP/ABV*
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 3,027/2,145
3/09A 35,852 22,825 80.2 17.5 30.5 6.4 15.1 23.3 2.6 7.2
1,6,12 Rel Perf (%) 3/ 9/1
3/10A 42,978 28,265 98.4 22.7 22.4 5.7 14.6 25.3 2.7 5.5
Mcap (Rs b) 843.1
3/11E 51,127 33,875 118.0 19.9 17.8 5.0 14.2 25.7 2.8 4.5
Mcap (USD b) 18.2
3/12E 60,526 40,325 140.5 19.0 14.0 4.3 14.1 26.1 2.8 3.6
* Price is adjusted for value of key ventures. Book Value is adjusted by deducting investments in
key ventures from net worth

„ We expect 1QFY11 loan growth of ~15% YoY and ~2% QoQ. We expect HDFC Bank will continue to buy out home
loans from HDFC Ltd in 1QFY11 which would hamper HDFC's own loan growth.

„ We expect spreads to remain stable sequentially or decline marginally.

„ We model lower other operating income as we factor in lower dividend and lower fees than those a year earlier. We
have modeled dividend from HDFC Bank in our 2QFY11 earnings estimates.

„ Overall, we expect strong profit growth of 20%+, led by improving loan growth and stable spreads.

„ HDFC trades at 4.5x FY11E AP/ABV and 3.6x FY12E AP/ABV (price adjusted for value of other businesses and
book value adjusted for investments made in those businesses). Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 26,894 26,209 25,994 27,307 25,966 29,455 34,834 42,210 106,404 132,465
Interest Expense 19,628 18,365 17,042 15,595 16,851 19,379 24,030 28,744 70,631 89,004
Net Interest Income 7,266 7,844 8,952 11,712 9,114 10,076 10,805 13,465 35,773 43,461
YoY Change (%) 7.6 1.8 9.7 23.3 25.4 28.5 20.7 15.0 11.4 21.5
Profit on Sale of Investments 513 613 514 454 600 600 600 694 2,094 2,494
Other Operating Income 1,035 1,627 1,061 1,162 600 1,350 1,250 1,723 4,885 4,923
Net Operating Income 8,814 10,083 10,527 13,328 10,314 12,026 12,655 15,882 42,752 50,877
YoY Change (%) 18.3 17.5 20.1 23.1 17.0 19.3 20.2 19.2 20.0 19.0
Other Income 49 54 53 70 40 60 70 80 226 250
Total Income 8,863 10,137 10,580 13,398 10,354 12,086 12,725 15,962 42,978 51,127
Operating Expenses 944 868 847 579 735 872 1,075 892 3,238 3,574
Pre Provisioning Profit 7,919 9,269 9,733 12,819 9,619 11,214 11,650 15,070 39,740 47,554
YoY Change (%) 20.0 19.5 22.6 23.3 21.5 21.0 19.7 17.6 21.6 19.7
Provisions 120 140 160 160 125 150 250 142 580 667
PBT 7,799 9,129 9,573 12,659 9,494 11,064 11,400 14,928 39,160 46,887
YoY Change (%) 20.0 20.1 22.5 23.2 21.7 21.2 19.1 17.9 21.7 19.7
Provision for Tax 2,150 2,490 2,860 3,395 2,658 3,043 3,192 4,118 10,895 13,011
PAT (Excl exceptional) 5,649 6,639 6,713 9,264 6,836 8,022 8,208 10,810 28,265 33,875
YoY Change (%) 20.7 24.3 22.8 26.3 21.0 20.8 22.3 16.7 23.8 19.9
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 71
 Results Preview
SECTOR: BANKING

HDFC Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HDFCB IN Buy
REUTERS CODE
S&P CNX: 5,269 HDBK.BO Previous Recommendation: Buy Rs1,948
YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
Equity Shares (m) 457.7
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 2010/1333
3/09A 107,118 22,449 52.8 27.7 36.9 5.5 15.8 15.6 1.3 5.7
1,6,12 Rel Perf (%) -2/ 13/11
3/10A 121,942 29,487 64.4 22.1 30.2 4.1 17.4 16.1 1.5 4.2
Mcap (Rs b) 891.6
3/11E 147,948 38,686 84.5 31.2 23.0 3.6 16.1 16.8 1.6 3.7
Mcap (USD b) 19.2
3/12E 181,379 50,066 109.4 29.4 17.8 3.1 14.3 18.9 1.7 3.2

„ We expect strong 1QFY11 loan growth of ~27% YoY (~5% QoQ) backed by a lower base and strong up-tick in retail
disbursements.

„ We expect NII growth of ~25% YoY led by strong loan growth of 27% YoY. Margins are expected to decline QoQ
due to savings deposits repricing, higher share of priority sector loans and full impact of CRR hike.

„ Other income is expected to remain flat YoY despite lower expected trading gains. With the up-tick in loan growth,
we have modeled ~20% YoY growth in fee-based income (largely flattish QoQ).

„ We model 20% growth in operating expenses with an up-tick in income growth.

„ Provisions are expected to decline from Rs6.6b in 1QFY10 to Rs4.5b in 1QFY11. We expect the bank to make
higher NPA provisions on a prudent basis.

„ We estimate PAT CAGR of ~31% over FY10-12 with RoE increasing to ~19% by FY12. The stock trades at 3.6x
FY11E BV and 3.1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 40,931 39,919 40,348 40,531 42,011 47,069 53,560 60,719 161,729 203,360
Interest Expense 22,375 20,361 18,109 17,018 18,932 22,340 26,807 31,873 77,863 99,951
Net Interest Income 18,556 19,558 22,239 23,514 23,079 24,730 26,753 28,847 83,866 103,408
% Change (Y-o-Y) 7.7 4.8 12.4 27.0 24.4 26.4 20.3 22.7 13.0 23.3
Other Income 10,437 10,074 8,530 9,036 10,238 10,848 11,315 12,138 38,076 44,540
Net Income 28,992 29,632 30,769 32,549 33,317 35,578 38,068 40,985 121,942 147,948
Operating Expenses 13,806 13,702 14,532 15,605 16,567 16,784 17,408 19,445 57,645 70,205
Operating Profit 15,187 15,930 16,237 16,944 16,750 18,794 20,659 21,541 64,297 77,743
% Change (Y-o-Y) 47.8 41.9 11.4 7.9 10.3 18.0 27.2 27.1 24.2 20.9
Other Provisions 6,588 5,941 4,477 4,399 4,514 4,957 5,355 6,026 21,400 20,853
Profit before Tax 8,598 9,989 11,760 12,545 12,236 13,837 15,304 15,514 42,897 56,891
Tax Provisions 2,537 3,114 3,575 4,178 4,282 4,843 4,591 4,488 13,410 18,205
Net Profit 6,061 6,875 8,185 8,366 7,953 8,994 10,713 11,026 29,487 38,686
% Change (Y-o-Y) 30.5 30.2 31.6 32.6 31.2 30.8 30.9 31.8 31.3 31.2
Interest Exp/Interest Income (%) 54.7 51.0 44.9 42.0 45.1 47.5 50.1 52.5 48.1 49.2
Other Income/Net Income (%) 36.0 34.0 27.7 27.8 30.7 30.5 29.7 29.6 31.2 30.1
Cost/Income Ratio (%) 47.6 46.2 47.2 47.9 49.7 47.2 45.7 47.4 47.3 47.5
Provisions/Operating Profits (%) 43.4 37.3 27.6 26.0 27.0 26.4 25.9 28.0 33.3 26.8
Tax Rate (%) 29.5 31.2 30.4 33.3 35.0 35.0 30.0 28.9 31.3 32.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 72
 Results Preview
SECTOR: BANKING

ICICI Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ICICIBC IN Buy
REUTERS CODE
S&P CNX: 5,269 ICBK.BO Previous Recommendation: Buy Rs858
Equity Shares (m) 1,114.9 YEAR NET INCOME PAT EPS EPS P/E AP/E* AP/ABV* CAR COREROE ROAA
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (X) (%) (%) (%)
52 Week Range (Rs) 1,010/607
3/09A 159,703 37,581 33.8 -9.7 25.4 21.0 2.1 15.5 9.3 1.0
1,6,12 Rel Perf (%) -4/ -2/0
3/10A 155,920 40,250 36.1 6.9 23.8 18.6 1.9 19.4 9.7 1.1
Mcap (Rs b) 956.0
3/11E 169,391 51,445 46.1 27.8 18.6 14.0 1.7 19.0 11.7 1.4
Mcap (USD b) 20.6
3/12E 195,782 65,069 58.4 26.5 14.7 10.6 1.5 16.8 13.7 1.5
*Price is adjusted for value of key ventures; Book value adjusted for investment in subsidiaries

„ We expect loans to decline ~7% YoY and to grow ~2% QoQ in 1QFY11. The sequential increase will be driven by
domestic corporates, auto loans and housing loans. We expect deposits to decline ~7% YoY due to net repayment of
bulk deposits and moderation in loan book growth.
„ We expect margins to decline QoQ due to a higher share of priority sector loans, the impact of repricing of savings
deposits and the full impact of the CRR revision.
„ Despite the decline in loans YoY, NII is expected to stay flattish YoY driven by margin expansion.
„ We expect other income to remain flat YoY despite lower trading profit. We expect fees to grow 2% QoQ and 18%
YoY (on a lower base).
„ On a higher base, we model a 4% QoQ rise in operating expenses as branch expansion has been strong in the past
two quarters.
„ NPA provisions are likely to fall on a YoY basis. In 1QFY10, the bank had provided Rs2b as provision for Dabhol
restructuring. We have modeled an NPA charge of Rs9b (v/s Rs10b in 4QFY10) in 1QFY11 despite the falling
slippages as the bank is likely to make higher provisions to reach 70% PCR.
„ Excluding subsidiaries value, the stock trades at 1.7x FY11E ABV and 1.5x FY12E ABV (BV adjusted for NPA and
investment in subsidiaries). Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 71,334 66,569 60,896 58,270 59,259 64,790 71,250 79,124 257,069 274,423
Interest Expense 51,482 46,209 40,315 37,920 39,720 43,692 48,061 53,667 175,926 185,139
Net Interest Income 19,853 20,361 20,581 20,349 19,540 21,098 23,189 25,457 81,144 89,285
% Change (Y-o-Y) -5.0 -5.2 3.4 -4.9 -1.6 3.6 12.7 25.1 -3.0 10.0
Other Income 20,899 18,238 16,731 18,908 20,590 19,764 19,912 19,840 74,777 80,106
Net Income 40,751 38,599 37,312 39,258 40,130 40,862 43,102 45,297 155,920 169,391
Operating Expenses 15,460 14,245 13,624 15,269 15,850 16,229 16,933 18,111 58,598 67,123
Operating Profit 25,291 24,353 23,688 23,989 24,280 24,633 26,169 27,186 97,322 102,268
% Change (Y-o-Y) 47.5 6.6 -14.5 11.3 -4.0 1.1 10.5 13.3 9.0 5.1
Other Provisions 13,237 10,713 10,022 9,898 9,000 7,750 7,250 6,816 43,869 30,816
Profit before Tax 12,055 13,640 13,667 14,091 15,280 16,883 18,919 20,370 53,453 71,452
Tax Provisions 3,273 3,239 2,656 4,036 4,278 4,727 5,297 5,704 13,203 20,006
Net Profit 8,782 10,401 11,011 10,056 11,002 12,156 13,621 14,666 40,250 51,445
% Change (Y-o-Y) 20.6 2.6 -13.4 35.2 25.3 16.9 23.7 45.9 7.1 27.8
Interest Exp/Interest Income (%) 72.2 69.4 66.2 65.1 67.0 67.4 67.5 67.8 68.4 67.5
Other Income/Net Income (%) 51.3 47.3 44.8 48.2 51.3 48.4 46.2 43.8 48.0 47.3
Cost/Income Ratio (%) 37.9 36.9 36.5 38.9 39.5 39.7 39.3 40.0 37.6 39.6
Provisions/Operating Profits (%) 52.3 44.0 42.3 41.3 37.1 31.5 27.7 25.1 45.1 30.1
Tax Rate (%) 27.1 23.7 19.4 28.6 28.0 28.0 28.0 28.0 24.7 28.0
E: MOSL Estimates
Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 73
 Results Preview
SECTOR: BANKING

Indian Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 INBK IN Buy
REUTERS CODE
S&P CNX: 5,269 INBA.BO Previous Recommendation: Buy Rs220
Equity Shares (m) 429.8 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 236/115
3/09A 36,440 12,453 29.0 23.5 7.6 1.7 14.0 24.8 1.6 1.7
1,6,12 Rel Perf (%) -2/ 25/37
3/10A 44,776 15,550 36.2 24.9 6.1 1.4 12.7 25.6 1.7 1.4
Mcap (Rs b) 94.4
3/11E 51,115 16,277 37.9 4.7 5.8 1.2 11.7 22.5 1.5 1.2
Mcap (USD b) 2.0
3/12E 59,938 20,276 47.2 24.6 4.7 1.0 11.1 23.6 1.5 1.0

„ We expect NII to grow 23%+ YoY . We expect deposit growth to be calibrated to loan growth. In 1QFY11 loans are
expected to grow ~23% YoY and CD ratio to improve sequentially.

„ Other income growth is expected to decline YoY due to lower treasury gains expected in the current quarter compared
with Rs1b in 1QFY10. Even recoveries from written-off accounts were high in 1QFY10 of Rs800m. Fee income is
expected to grow by ~15% YoY in 1QFY11.

„ On a higher base we model flat operating expense YoY. In 1QFY11 the bank made an ad hoc provision of Rs450m
towards wage revision.

„ We have conservatively modeled higher NPA provisions in our earnings estimates.

„ The stock trades at 1.2x FY11E BV and 1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 18,802 19,372 20,148 20,249 21,217 22,960 25,296 27,334 78,571 96,807
Interest Expense 11,426 11,780 11,418 10,908 12,089 13,540 15,436 16,681 45,532 57,746
Net Interest Income 7,377 7,591 8,730 9,341 9,128 9,419 9,860 10,654 33,039 39,061
% Change (Y-o-Y) 36.7 11.3 21.3 39.9 23.7 24.1 12.9 14.1 26.7 18.2
Other Income 3,502 2,372 2,935 2,929 2,821 3,004 2,900 3,329 11,737 12,054
Net Income 10,878 9,963 11,665 12,270 11,949 12,424 12,760 13,982 44,776 51,115
Operating Expenses 4,573 4,425 4,178 3,545 4,600 4,700 4,500 4,581 17,302 18,381
Operating Profit 6,305 5,539 7,487 8,724 7,349 7,724 8,260 9,401 27,473 32,734
% Change (Y-o-Y) 44.4 4.0 20.0 37.2 16.6 39.5 10.3 7.8 22.9 14.2
Other Provisions 1,209 293 320 2,136 2,229 1,866 1,834 2,142 3,957 8,071
Profit before Tax 5,096 5,246 7,166 6,589 5,120 5,858 6,426 7,259 23,516 24,662
Tax Provisions 1,780 1,526 2,172 2,488 1,741 1,992 2,185 2,468 7,966 8,385
Net Profit 3,317 3,720 4,994 4,101 3,379 3,866 4,241 4,791 15,550 16,277
% Change (Y-o-Y) 52.4 31.5 42.4 4.1 1.9 3.9 -15.1 16.8 24.9 4.7
Interest Exp/Interest Income (%) 60.8 60.8 56.7 53.9 57.0 59.0 61.0 61.0 58.0 59.7
Other Income/Net Income (%) 32.2 23.8 25.2 23.9 23.6 24.2 22.7 23.8 26.2 23.6
Cost/Income Ratio (%) 42.0 44.4 35.8 28.9 38.5 37.8 35.3 32.8 38.6 36.0
Provisions/Operating Profits (%) 19.2 5.3 4.3 24.5 30.3 24.2 22.2 22.8 14.4 24.7
Tax Rate (%) 34.9 29.1 30.3 37.8 34.0 34.0 34.0 34.0 33.9 34.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 74
 Results Preview
SECTOR: BANKING & FINANCE

LIC Housing Finance

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 LICH IN Buy
REUTERS CODE
S&P CNX: 5,269 LICHF.BO Previous Recommendation: Buy Rs1,015
Equity Shares (m) 95.0 YEAR NET INCOME PAT EPS EPS P/E P/BV ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (X)
52 Week Range (Rs) 1,049/558
3/09A 8,867 5,316 62.5 37.3 16.2 3.9 26.2 2.0 3.9
1,6,12 Rel Perf (%) 5/ 27/39
3/10A 10,740 6,622 69.7 11.4 14.6 2.8 23.6 1.9 2.8
Mcap (Rs b) 96.5
3/11E 14,240 8,330 87.7 25.8 11.6 2.4 22.5 1.8 2.4
Mcap (USD b) 2.1
3/12E 17,078 9,992 105.2 20.0 9.7 2.0 22.7 1.8 2.0

„ We expect 1QFY11 loans to grow ~35% YoY led by continued buoyancy in disbursement growth.

„ We expect NIM to remain fall marginally QoQ however, we expect sharp improvement on a YoY basis due to
repricing of wholesale borrowings (leading to lower cost of funds). Strong loan growth and margin improvement will
translate into net income growth of 40%+ YoY.

„ Asset quality is robust and the provision charge is likely to be negligible.

„ The stock trades at P/BV of 2.4x FY11E and 2x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Operating Income 7,802 8,349 8,782 9,629 9,819 10,864 12,171 13,806 34,562 46,660
Other Income 17 42 22 53 35 40 45 40 135 160
Total income 7,819 8,391 8,805 9,683 9,854 10,904 12,216 13,846 34,697 46,820
Y-o-Y Growth (%) 25.5 18.6 14.8 20.1 26.0 29.9 38.8 43.0 19.5 34.9
Interest Expenses 5,709 5,979 6,057 6,214 6,832 7,516 8,417 9,815 23,957 32,580
Net Income 2,110 2,413 2,748 3,469 3,022 3,388 3,799 4,031 10,740 14,240
Operating Expenses 322 552 428 613 543 563 578 606 1,911 2,290
Operating Profit 1,788 1,861 2,320 2,856 2,479 2,825 3,221 3,425 8,829 11,950
Y-o-Y Growth (%) 17.4 4.5 26.8 30.8 38.6 51.8 38.8 19.9 20.7 35.3
Provisions and Cont. 100 -417 158 -126 200 100 120 80 -283 500
Profit before Tax 1,688 2,278 2,162 2,982 2,279 2,725 3,101 3,345 9,113 11,450
Tax Provisions 450 566 629 847 615 744 847 914 2,491 3,120
Net Profit 1,238 1,712 1,533 2,135 1,663 1,981 2,254 2,431 6,622 8,330
Y-o-Y Growth (%) 18.3 26.8 14.1 35.5 34.3 15.7 47.1 13.8 24.6 25.8
Int Exp/ Int Earned (%) 73.2 71.6 69.0 64.5 69.6 69.2 69.2 71.1 69.3 69.8
Other Income / Net Income (%) 0.8 1.8 0.8 1.5 1.2 1.2 1.2 1.0 1.3 1.1
Cost to Income Ratio (%) 15.3 22.9 15.6 17.7 18.0 16.6 15.2 15.0 17.8 16.1
Tax Rate (%) 26.6 24.8 29.1 28.4 27.0 27.3 27.3 27.3 27.3 27.3
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 75
 Results Preview
SECTOR: BANKING

Oriental Bank of Commerce

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 OBC IN Buy
REUTERS CODE
S&P CNX: 5,269 ORBC.BO Previous Recommendation: Buy Rs323
Equity Shares (m) 250.5 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 357/152
3/09A 30,678 9,054 36.1 7.7 8.9 1.3 13.0 14.8 0.9 1.3
1,6,12 Rel Perf (%) -7/ 23/56
3/10A 41,075 11,347 45.3 25.3 7.1 1.1 12.5 16.5 0.9 1.2
Mcap (Rs b) 80.9
3/11E 49,338 13,437 53.6 18.4 6.0 1.0 12.1 17.1 0.9 1.0
Mcap (USD b) 1.7
3/12E 57,856 16,130 64.4 20.0 5.0 0.8 11.5 17.7 0.9 0.9

„ On a lower base (NII up only 8% YoY), we expect NII to increase by 90%+ YoY to Rs9.3b. We expect NII to
decline by 6% QoQ. We expect the margins to moderate on a QoQ basis. In 4QFY10, margins improved 100bp YoY
(up 27bp QoQ) to 3.3% due to repricing of bulk deposits.

„ We expect 19% YoY growth in loans, and 19% YoY growth in deposits.

„ Non-interest income is expected to decline YoY due to lower trading profit in 1QFY11. Fee income is expected to
show strong traction.

„ We expect operating expenses to decline sequentially as in 4QFY10 the bank booked exceptional expenses due to a
wage revision provision of Rs1.5b.

„ Conservatively we expect the bank to make higher NPA provisions due to high restructured assets (~6.8% of the
loan book)

„ The stock trades at P/BV of 1x FY11E and 0.8x of FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 24,042 24,958 26,716 26,855 27,242 29,395 33,545 38,914 102,571 129,096
Interest Expense 19,201 19,347 17,987 16,961 17,915 20,065 24,078 29,409 73,497 91,468
Net Interest Income 4,842 5,611 8,729 9,894 9,326 9,330 9,466 9,505 29,074 37,628
% Change (Y-o-Y) 8.4 8.0 53.7 114.9 92.6 66.3 8.4 -3.9 45.6 29.4
Other Income 3,919 3,051 2,377 2,654 2,494 2,753 2,935 3,528 12,000 11,710
Net Income 8,760 8,662 11,106 12,548 11,820 12,083 12,401 13,034 41,075 49,338
Operating Expenses 3,591 3,612 4,878 4,779 4,441 4,614 5,116 5,158 16,860 19,330
Operating Profit 5,169 5,049 6,228 7,769 7,379 7,469 7,285 7,876 24,215 30,008
% Change (Y-o-Y) 46.1 24.1 61.2 44.3 42.7 47.9 17.0 1.4 43.7 23.9
Other Provisions 1,514 551 1,921 4,174 2,600 2,550 2,200 2,899 8,176 10,249
Profit before Tax 3,656 4,498 4,307 3,595 4,779 4,919 5,085 4,977 16,039 19,760
Tax Provisions 1,082 1,789 1,413 425 1,673 1,623 1,627 1,400 4,692 6,323
Net Profit 2,574 2,709 2,894 3,170 3,106 3,296 3,458 3,577 11,347 13,437
% Change (Y-o-Y) 16.7 14.3 14.8 61.9 20.7 21.7 19.5 12.8 25.3 18.4
Interest Exp/Interest Income (%) 79.9 77.5 67.3 63.2 65.8 68.3 71.8 75.6 71.7 70.9
Other Income/Net Income (%) 44.7 35.2 21.4 21.2 21.1 22.8 23.7 27.1 29.2 23.7
Cost/Income Ratio (%) 41.0 41.7 43.9 38.1 37.6 38.2 41.3 39.6 41.0 39.2
Provisions/Operating Profits (%) 29.3 10.9 30.8 53.7 35.2 34.1 30.2 36.8 33.8 34.2
Tax Rate (%) 29.6 39.8 32.8 11.8 35.0 33.0 32.0 28.1 29.3 32.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 76
 Results Preview
SECTOR: BANKING

Punjab National Bank

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 PNB IN Buy
REUTERS CODE
S&P CNX: 5,269 PNB.BO Previous Recommendation: Buy Rs1,045
Equity Shares (m) 315.3 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 1,067/598
3/09A 99,505 30,909 98.0 50.9 10.7 2.5 14.0 25.8 1.4 2.5
1,6,12 Rel Perf (%) 1/ 14/43
3/10A 120,882 39,054 123.9 26.4 8.4 2.0 14.2 26.6 1.4 2.1
Mcap (Rs b) 329.4
3/11E 138,737 44,679 141.7 14.4 7.4 1.7 12.7 24.8 1.4 1.8
Mcap (USD b) 7.1
3/12E 163,093 52,727 167.2 18.0 6.2 1.4 11.6 24.1 1.3 1.4

„ On a higher base of 1QFY10, we expect reported loan growth of 21% YoY v/s 38% a year ago, and 21% in FY10.
We expect loans to grow 2% QoQ.

„ Deposit growth is expected to moderate to 16% v/s 19% in 3QFY10 and 4QFY10. In 1QFY10 deposits grew by
27% YoY. On a lower base, NII growth is expected to be 34% YoY. We expect a sequential decline in NII due to
pressure on margins.

„ We expect other income to decline YoY due to lower trading profits. We have modeled 20% YoY growth in fee
income in 1QFY11.

„ Due to strong operating profit growth of 30% we expect the bank to make higher NPA provisions on a prudent basis.

„ The stock trades at 1.7x FY11E BV and 1.4x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 51,466 53,241 53,885 56,076 58,025 63,534 71,402 80,830 214,669 273,792
Interest Expense 33,456 33,123 31,764 31,097 33,848 38,776 45,134 53,433 129,440 171,191
Net Interest Income 18,010 20,118 22,121 24,980 24,177 24,759 26,268 27,397 85,229 102,600
% Change (Y-o-Y) 24.7 17.5 12.4 31.0 34.2 23.1 18.7 9.7 21.2 20.4
Other Income 10,309 7,518 8,480 9,346 8,970 8,441 9,218 9,508 35,653 36,137
Net Income 28,320 27,636 30,601 34,326 33,146 33,200 35,486 36,905 120,882 138,737
Operating Expenses 12,626 11,573 12,419 11,001 12,750 13,388 14,726 14,403 47,619 55,267
Operating Profit 15,693 16,063 18,182 23,325 20,396 19,812 20,760 22,502 73,263 83,471
% Change (Y-o-Y) 59.7 17.4 0.7 46.9 30.0 23.3 14.2 -3.5 27.5 13.9
Other Provisions 3,018 2,160 2,819 6,219 4,700 4,225 4,125 4,716 14,215 17,766
Profit before Tax 12,676 13,903 15,363 17,106 15,696 15,587 16,635 17,786 59,048 65,704
Tax Provisions 4,355 4,634 5,250 5,756 5,023 4,988 5,323 5,691 19,994 21,025
Net Profit 8,321 9,270 10,113 11,350 10,674 10,599 11,312 12,094 39,054 44,679
% Change (Y-o-Y) 62.4 31.1 0.5 31.1 28.3 14.3 11.9 6.6 26.4 14.4
Interest Exp/Interest Income (%) 65.0 62.2 58.9 55.5 58.3 61.0 63.2 66.1 60.3 62.5
Other Income/Net Income (%) 36.4 27.2 27.7 27.2 27.1 25.4 26.0 25.8 29.5 26.0
Cost/Income Ratio (%) 44.6 41.9 40.6 32.0 38.5 40.3 41.5 39.0 39.4 39.8
Provisions/Operating Profits (%) 19.2 13.4 15.5 26.7 23.0 21.3 19.9 21.0 19.4 21.3
Tax Rate (%) 34.4 33.3 34.2 33.6 32.0 32.0 32.0 32.0 33.9 32.0
E: MOSL Estimates; FY10 quarterly reclassified for first three quarters

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 77
 Results Preview
SECTOR: BANKING & FINANCE

Shriram Transport Finance

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SHTF IN Buy
REUTERS CODE
S&P CNX: 5,269 SRTR.BO Previous Recommendation: Buy Rs579
Equity Shares (m) 225.5 YEAR NET INCOME PAT EPS EPS P/E P/BV ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (X)
52 Week Range (Rs) 614/284
3/09A 17,535 6,124 30.1 56.8 19.2 5.2 30.3 3.1 5.3
1,6,12 Rel Perf (%) -2/ 23/76
3/10A 22,528 8,731 38.7 28.7 15.0 3.4 28.6 3.9 3.4
Mcap (Rs b) 130.6
3/11E 29,426 11,598 51.4 32.8 11.3 2.7 26.9 4.8 2.8
Mcap (USD b) 2.8
3/12E 35,748 13,834 61.3 19.3 9.4 2.2 25.9 4.7 2.2

„ Total income is expected to increase by 22% YoY (3% QoQ) in 1QFY11. Net income, including securitization
income, is expected to grow ~35% YoY.

„ We model operating profit growth of 35% YoY, led by higher net income growth and a fall in C/I ratio on a YoY basis.

„ Conservatively we are assuming higher NPA provisions for STF at Rs1b. Considering an improved outlook on asset
quality and comfortable provision coverage ratio at 76%, NPA provisions can surprise us positively.

„ Net profit is expected to grow 60%+ YoY. The stock trades at 2.7x FY11E BV and 2.2x FY12E BV with RoE at
~26% over FY10-12. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 9,052 9,476 10,264 8,753 8,971 9,869 11,053 12,404 37,544 42,297
Interest expenses 5,384 5,248 5,708 5,522 5,936 6,529 7,247 7,905 21,862 27,618
Net Interest Income 3,668 4,227 4,557 3,231 3,036 3,339 3,805 4,498 15,683 14,679
Y-o-Y Growth (%) 13.6 14.8 34.7 -14.9 -17.2 -21.0 -16.5 39.2 11.3 -6.4
Securitisation income 1,037 1,044 1,208 3,242 3,300 3,366 3,433 3,502 6,531 13,602
Net Inc. (Incl. Securitisation) 4,705 5,272 5,765 6,473 6,336 6,705 7,239 8,001 22,214 28,281
Y-o-Y Growth (%) 14.6 19.1 36.2 43.7 34.7 27.2 25.6 23.6 28.6 27.3
Fees and Other Income 168 140 154 189 252 275 298 321 651 1,145
Net Operating Income 4,873 5,412 5,919 6,661 6,588 6,980 7,536 8,321 22,865 29,426
Y-o-Y Growth (%) 16.6 20.0 37.2 42.4 35.2 29.0 27.3 24.9 29.3 28.7
Operating Expenses 1,454 1,227 1,318 1,513 1,527 1,534 1,713 1,935 5,512 6,709
Operating Profit 3,418 4,185 4,601 5,149 5,061 5,446 5,823 6,387 17,353 22,716
Y-o-Y Growth (%) 17.8 34.4 52.3 62.4 48.0 30.1 26.6 24.0 42.2 30.9
Provisions 949 1,122 1,014 1,022 1,000 1,250 1,350 1,544 4,107 5,144
Profit before Tax 2,469 3,063 3,588 4,127 4,061 4,196 4,473 4,842 13,246 17,572
Tax Provisions 825 988 1,219 1,482 1,381 1,427 1,521 1,646 4,515 5,975
Net Profit 1,644 2,075 2,369 2,644 2,680 2,769 2,952 3,196 8,732 11,598
Y-o-Y Growth (%) 14.5 25.3 58.6 71.9 63.0 33.5 24.6 20.9 42.6 32.8
Int Exp/ Int Earned (%) 59.5 55.4 55.6 63.1 66.2 66.2 65.6 63.7 58.2 65.3
Securitisation Inc. / Net Inc. (%) 21.3 19.3 20.4 48.7 50.1 48.2 45.6 42.1 28.6 46.2
Cost to Income Ratio (%) 29.8 22.7 22.3 22.7 23.2 22.0 22.7 23.3 24.1 22.8
Tax Rate (%) 33.4 32.3 34.0 35.9 34.0 34.0 34.0 34.0 34.1 34.0
E: MOSL Estimates; Quaterly nos and full year nos will not tally due to different way of reporting financial nos

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 78
 Results Preview
SECTOR: BANKING

South Indian Bank

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SIB IN Under Review
REUTERS CODE
S&P CNX: 5,269 SIBK.BO Previous Recommendation: Under Review Rs165
Equity Shares (m) 113.0 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 184/84
3/09A 6,872 1,948 17.2 4.6 9.6 1.4 14.8 15.8 1.0 1.5
1,6,12 Rel Perf (%) -3/ 12/60
3/10A 7,768 2,338 20.7 20.0 8.0 1.3 15.4 16.8 1.0 1.3
Mcap (Rs b) 18.6
3/11E 9,060 2,488 22.0 6.4 7.5 1.1 13.0 15.7 0.9 1.1
Mcap (USD b) 0.4
3/12E 10,760 3,251 28.8 30.7 5.7 1.0 11.1 18.1 0.9 1.0

„ We expect loans to grow by 30% YoY and deposits to grow by 25%+. Reported NII is expected to grow by 4% YoY.
But adjusted for technical errors in accounting for interest expenses in 1QFY10 (interest expense was under stated
by Rs230m) NII is expected to grow 22% YoY.

„ We expect other income to decline in 1QFY11 due to lower trading gains. Fee income is expected to grow 15% YoY.

„ Reported profits are expected to decline 9% YoY, adjusted for the technical error in accounting for interest expenses
(Rs152m post tax) we expect PAT to grow 22% YoY.

„ The stock trades at 1.1x FY11E BV and 1x FY12E BV with RoE of 18-19%. Under Review.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 4,653 4,689 4,878 5,138 5,438 5,928 6,566 7,377 19,357 25,309
Interest Expense 3,128 3,037 3,160 4,349 3,854 4,239 4,727 5,330 13,674 18,150
Net Interest Income 1,524 1,652 1,718 789 1,584 1,689 1,840 2,047 5,683 7,159
% Change (Y-o-Y) 48.3 28.5 17.5 -46.7 3.9 10.8 11.4 19.1 8.7 26.0
Other Income 560 655 431 439 456 464 490 491 2,085 1,901
Net Income 2,084 2,307 2,149 1,227 2,040 2,153 2,330 2,537 7,768 9,060
% Change (Y-o-Y) 52.1 39.9 11.6 -36.2 -2.1 3.3 1.0 18.1 13.0 16.6
Operating Expenses 1,015 968 967 711 1,000 1,032 1,069 1,138 3,662 4,239
Operating Profit 1,069 1,339 1,182 516 1,040 1,121 1,261 1,400 4,106 4,821
% Change (Y-o-Y) 54.1 44.0 18.0 -46.4 -2.7 4.9 -5.8 18.4 14.5 17.4
Other Provisions 104 165 195 -31 210 250 270 322 433 1,052
Profit before Tax 965 1,174 987 547 830 871 991 1,077 3,673 3,769
Tax Provisions 364 448 363 161 282 296 337 366 1,336 1,281
Net Profit 601 726 625 386 548 575 654 711 2,338 2,488
% Change (Y-o-Y) 55.6 40.3 15.2 -23.2 -8.9 -4.4 -9.9 13.8 20.0 6.4
Interest Expense/Int. Income (%) 67.2 64.8 64.8 84.6 70.9 71.5 72.0 72.3 70.6 71.7
Other Income/Net Income (%) 26.9 28.4 20.1 35.7 22.4 21.5 21.0 19.3 26.8 21.0
Cost to Income Ratio (%) 48.7 42.0 45.0 58.0 49.0 47.9 45.9 44.8 47.1 46.8
Provisions/Operating Profits (%) 9.8 12.3 16.5 -6.0 20.2 22.3 21.4 23.0 10.5 21.8
Tax Rate (%) 37.7 38.2 36.7 29.4 34.0 34.0 34.0 34.0 36.4 34.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 79
 Results Preview
SECTOR: BANKING

State Bank of India

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SBIN IN Buy
REUTERS CODE
S&P CNX: 5,269 SBI.BO Previous Recommendation: Buy Rs2,301
Equity Shares (m) 634.9 YEAR NET INCOME PAT EPS CON.EPS CON. CON. CON. CAR ROAE ROAA
END (RS M) (RS M) (RS) (RS) P/E (X) P/BV (X) P/ABV (X) (%) (%) (%)
52 Week Range (Rs) 2,500/1,512
3/09A 335,639 91,212 143.7 172.6 12.7 1.9 2.1 14.3 17.1 1.1
1,6,12 Rel Perf (%) -3/ 2/12
3/10A 386,396 91,661 144.4 184.8 11.9 1.7 1.9 13.4 14.8 0.9
Mcap (Rs b) 1,460.7
3/11E 470,255 113,841 179.3 226.0 9.6 1.4 1.6 12.5 16.2 1.0
Mcap (USD b) 31.5
3/12E 549,821 143,832 226.5 285.4 7.6 1.2 1.3 11.9 17.9 1.1
* valuation multiples are adjusted for SBI Life

„ We expect loans to grow 19%+ YoY and 3% QoQ. Deposit growth is expected to be calibrated with loan growth. We
expect CD ratio to improve sequentially.

„ We expect sharp improvement in margins on a YoY basis. In 1QFY10, on back of excess liquidity in the balance
sheet, lag impact of rise in deposits cost and lower pricing power margins were at an abysmally lower level of 2.3%.

„ While we expect margins to decline QoQ due to savings deposits repricing and full impact of CRR hike however;
extant of decline is expected to be lower than peers as the bank has used the excess liquidity to fund the loan growth.

„ We expect fee growth of 25% YoY. Overall, we expect other income to grow 12% YoY.

„ Due to strong operating profit of 40% YoY, we conservatively model higher NPA provisions of Rs14b. In 1QFY10
the bank had MTM provisions write back of Rs12b. The trend in the asset quality will be the key factor to watch out
for.

„ The stock trades at 1.6x FY11E and 1.3x FY12E consolidated ABV. SBI is our top pick in the sector.
QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 174,728 177,759 177,797 179,656 186,498 200,680 217,380 244,448 709,939 849,006
Interest Expense 124,479 121,671 114,634 112,442 121,170 129,196 141,061 157,810 473,225 549,236
Net Interest Income 50,249 56,088 63,163 67,214 65,328 71,484 76,320 86,638 236,714 299,770
% Change (Y-o-Y) 4.3 2.8 9.7 38.8 30.0 27.5 20.8 28.9 13.4 26.6
Other Income 35,688 35,252 33,657 45,085 40,016 39,026 38,767 52,675 149,682 170,485
Net Income 85,936 91,340 96,820 112,300 105,344 110,510 115,087 139,314 386,396 470,255
Operating Expenses 49,198 42,990 50,639 60,361 53,526 53,252 57,649 62,265 203,187 226,693
Operating Profit 36,739 48,350 46,181 51,939 51,818 57,258 57,438 77,048 183,209 243,562
% Change (Y-o-Y) -7.3 15.3 3.0 -1.6 41.0 18.4 24.4 48.3 2.3 32.9
Other Provisions 1,727 10,161 8,566 23,494 14,500 14,900 13,100 28,576 43,948 71,076
Profit before Tax 35,011 38,190 37,615 28,445 37,318 42,358 44,338 48,472 139,261 172,487
Tax Provisions 11,708 13,289 12,825 9,779 12,688 14,402 15,075 16,481 47,600 58,645
Net Profit 23,304 24,900 24,791 18,666 24,630 27,956 29,263 31,992 91,661 113,841
% Change (Y-o-Y) 42.0 10.2 0.0 -31.9 5.7 12.3 18.0 71.4 0.5 24.2
Interest Exp/Interest Income (%) 71.2 68.4 64.5 62.6 65.0 64.4 64.9 64.6 66.7 64.7
Other Income/Net Income (%) 41.5 38.6 34.8 40.1 38.0 35.3 33.7 37.8 38.7 36.3
Cost/Income Ratio (%) 57.2 47.1 52.3 53.7 50.8 48.2 50.1 44.7 52.6 48.2
Provisions/Operating Profits (%) 4.7 21.0 18.5 45.2 28.0 26.0 22.8 37.1 24.0 29.2
Tax Rate (%) 33.4 34.8 34.1 34.4 34.0 34.0 34.0 34.0 34.2 34.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 80
 Results Preview
SECTOR: BANKING

Union Bank of India

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 UNBK IN Buy
REUTERS CODE
S&P CNX: 5,269 UNBK.BO Previous Recommendation: Buy Rs303
Equity Shares (m) 505.1 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 322/201
3/09A 52,961 17,265 34.2 24.5 8.9 2.2 13.3 27.2 1.2 2.2
1,6,12 Rel Perf (%) -1/ 12/10
3/10A 61,672 20,749 41.1 20.2 7.4 1.7 12.5 26.2 1.2 1.9
Mcap (Rs b) 153.0
3/11E 75,901 23,882 47.3 15.1 6.4 1.4 11.7 24.3 1.1 1.5
Mcap (USD b) 3.3
3/12E 89,581 29,678 58.8 24.3 5.2 1.1 10.9 24.5 1.1 1.2

„ On a lower base, loan growth is expected to be 25%+. We expect flattish sequential loan growth in 1QFY11. We
expect deposit growth of ~20%.

„ On a lower base, we expect NII to grow by 55%+ YoY (down ~10% QoQ) led by margin expansion due to deposit
repricing and improving CD ratio. In 4QFY10, the bank had higher interest income on investments due to recognition
of interest on CDs at the end of the year. We expect margins to decline from an elevated level of 3.4% in 4QFY10
to 3-3.1% in 1QFY11. In 1QFY10, on back of excess liquidity in the balance sheet, margins had fallen to abysmally
lower level of 2.3%.

„ We model in core fee income growth of 25% YoY in 1QFY11 due to the bank's increased thrust on scaling up
traditional non-fund based revenue. Overall other income is expected to decline by 13% led by lower trading profit.

„ Considering asset quality deterioration in 2HFY10, we estimate higher provision for NPAs compared with previous
quarters. Asset quality is expected to deteriorate in 1QFY11.

„ The stock trades at 1.4x FY11E and 1.1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 31,753 32,056 32,936 35,617 36,206 39,558 44,356 51,133 133,027 171,254
Interest Expense 23,737 23,420 22,289 21,656 23,479 26,283 29,961 35,779 91,103 115,502
Net Interest Income 8,016 8,636 10,647 13,961 12,727 13,275 14,395 15,354 41,924 55,751
% Change (Y-o-Y) 1.6 -11.2 -5.4 50.7 58.8 53.7 35.2 10.0 9.9 33.0
Other Income 5,287 5,553 4,648 4,925 4,584 4,598 4,868 6,099 19,747 20,150
Net Income 13,303 14,189 15,294 18,887 17,311 17,874 19,263 21,453 61,672 75,901
Operating Expenses 5,429 6,086 6,152 7,411 6,664 6,819 7,314 7,565 25,078 28,363
Operating Profit 7,875 8,103 9,142 11,475 10,647 11,055 11,949 13,888 36,593 47,538
% Change (Y-o-Y) 27.8 15.8 7.0 25.9 35.2 36.4 30.7 21.0 18.7 29.9
Other Provisions 1,903 1,350 1,611 3,400 3,300 2,800 3,200 4,601 8,264 13,901
Profit before Tax 5,972 6,753 7,531 8,075 7,347 8,255 8,749 9,287 28,329 33,637
Tax Provisions 1,550 1,700 2,190 2,140 2,130 2,394 2,537 2,693 7,580 9,755
Net Profit 4,422 5,053 5,341 5,935 5,216 5,861 6,212 6,594 20,749 23,882
% Change (Y-o-Y) 93.7 39.8 -20.5 27.6 18.0 16.0 16.3 11.1 20.2 15.1
Interest Exp/Interest Income (%) 74.8 73.1 67.7 60.8 64.8 66.4 67.5 70.0 68.5 67.4
Other Income/Net Income (%) 39.7 39.1 30.4 26.1 26.5 25.7 25.3 28.4 32.0 26.5
Cost/Income Ratio (%) 40.8 42.9 40.2 39.2 38.5 38.2 38.0 35.3 40.7 37.4
Provisions/Operating Profits (%) 24.2 16.7 17.6 29.6 31.0 25.3 26.8 33.1 22.6 29.2
Tax Rate (%) 26.0 25.2 29.1 26.5 29.0 29.0 29.0 29.0 26.8 29.0
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 81
 Results Preview
SECTOR: BANKING

Yes Bank
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 YES IN Buy
REUTERS CODE
S&P CNX: 5,269 YESB.BO Previous Recommendation: Buy Rs272
Equity Shares (m) 339.7 YEAR NET INCOME PAT EPS EPS P/E P/BV CAR ROAE ROAA P/ABV
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) (%) (X)
52 Week Range (Rs) 300/124
3/09A 9,462 3,038 10.2 51.3 26.6 5.0 16.6 20.6 1.5 5.1
1,6,12 Rel Perf (%) -4/ -1/72
3/10A 13,635 4,777 14.1 37.5 19.3 3.0 20.6 20.3 1.6 3.0
Mcap (Rs b) 92.4
3/11E 19,008 6,500 19.1 36.1 14.2 2.5 18.6 19.3 1.5 2.5
Mcap (USD b) 2.0
3/12E 25,085 8,568 25.2 31.8 10.8 2.1 16.1 21.2 1.5 2.1

„ We expect strong loan and deposit growth of 90%+ YoY. We expect NII growth of 45%+ and margins are likely to
decline sequentially.

„ Non-interest income is expected to improve YoY due to higher advisory and transaction banking income. Trading
profits are expected to be lower YoY. Strong improvement in capital markets and pick up in economic activities
augurs well for various streams of fee income and the bank can surprise us positively.

„ GNPA ratio of 27bp and provision coverage ratio of 78% are among the best in the industry. We do not expect higher
NPA provisions.

„ The stock trades at P/BV of 2.5x FY11E and 2.1x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Interest Income 5,427 5,269 6,264 6,646 7,439 8,761 10,267 12,087 23,697 38,555
Interest Expense 3,789 3,670 4,154 4,204 5,021 6,025 7,080 8,632 15,818 26,758
Net Interest Income 1,637 1,600 2,109 2,442 2,418 2,736 3,188 3,455 7,880 11,797
% Change (Y-o-Y) 44.9 30.5 69.5 62.9 47.7 71.1 51.1 41.5 54.7 49.7
Other Income 1,452 1,516 1,278 1,601 1,550 1,774 1,944 1,943 5,755 7,211
Net Income 3,089 3,115 3,387 4,043 3,968 4,510 5,132 5,398 13,635 19,008
Operating Expenses 1,111 1,197 1,226 1,467 1,550 1,650 1,850 1,944 5,002 6,994
Operating Profit 1,978 1,918 2,162 2,576 2,418 2,860 3,282 3,454 8,633 12,014
% Change (Y-o-Y) 116.4 95.8 17.2 67.3 22.3 49.1 51.8 34.1 63.6 39.2
Other Provisions 455 234 254 426 300 500 600 690 1,368 2,090
Profit before Tax 1,523 1,684 1,908 2,150 2,118 2,360 2,682 2,764 7,265 9,924
Tax Provisions 522 567 649 750 731 814 925 954 2,487 3,424
Net Profit 1,001 1,117 1,259 1,400 1,387 1,546 1,756 1,810 4,777 6,500
% Change (Y-o-Y) 84.0 75.6 19.0 74.8 38.6 38.4 39.5 29.3 57.2 36.1
Interest Expense/Interest Inc. (%) 69.8 69.6 66.3 63.3 67.5 68.8 69.0 71.4 66.7 69.4
Other Income/Net Income (%) 47.0 48.7 37.7 39.6 39.1 39.3 37.9 36.0 42.2 37.9
Cost to Income Ratio (%) 36.0 38.4 36.2 36.3 39.1 36.6 36.1 36.0 36.7 36.8
Provisions/Operating Profits (%) 23.0 12.2 11.7 16.5 12.4 17.5 18.3 20.0 15.9 17.4
Tax Rate (%) 34.3 33.7 34.0 34.9 34.5 34.5 34.5 34.5 34.2 34.5
E: MOSL Estimates

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com)

July 2010 82
 Results Preview
QUARTER ENDING JUNE 2010

Cement
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Snapshot of 1QFY11 Cement Preview

ACC
„ Expect volumes to grow 9.1% YoY, but decline 1.9% QoQ
„ Expect domestic prices to be flat QoQ (~7% YoY decline) - price recovery in March
Ambuja Cements
and April negated by pricing pressure in May and June
„ Capacity utilization to fall to 79% (v/s 90% in 1QFY10 and 88% in 4QFY10), impacted
Birla Corporation
by ~50MT capacity added in last one year
„ 1QFY11 aggregate EBITDA margin to decline by 710bp YoY (~70bp QoQ
Grasim Industries
improvement)
„ Cement prices likely to exhibit high volatility over the next 6-9 months, as seasonality
India Cements
in demand and new capacities impact pricing
„ We estimate decline in pace of capacity addition, with ~38MT of capacity addition
Shree Cement
over 18 months from 3QFY11 as against ~66MT addition over 18 months till 2QFY11
UltraTech Cement
(from 1QFY10 to 2QFY11)
„ Cement stocks have underperformed over the last three months on the back of
negative short term outlook. Valuations are attractive and offer good entry point for
the next upcycle. We prefer companies that are ahead of the curve in adding capacity
and where strong cost-saving possibilities exist. We prefer ACC, UltraTech, India
Cement, Birla Corp and Shree Cement.
CEMENT INDUSTRY DYNAMICS: DEMAND AND PRICE TRENDS

Despatches (MT) Avg National Retail Prices (Rs/bag) (Rs/bag)

(MT)
52 250 252 255
235 238 238 238
229 232 232
CHANGE DISPATCHES PRICES 43 230
55.4 54.3
(%) YOY QOQ YOY QOQ 50.3 49.8
46.1 49.0
34 44.4 41.6 44.7 205
1QFY11E 9.1 -1.9 -7.0 Flat
FY09 12.1 -5.4
FY10E 10.4 1.7 25 180
1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

Source: CMA/MOSL

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Cement
ACC 861 Buy 20,152 -3.2 -4.1 5,887 -19.8 -5.4 3,879 -20.1 -4.3
Ambuja Cements 117 Neutral 20,978 13.6 5.4 6,025 25.6 5.7 4,216 29.9 8.8
Birla Corporation 362 Buy 5,478 11.7 -9.0 1,645 -6.3 -5.2 1,287 -17.1 -6.4
Grasim Industries 1,795 Buy 31,520 3.5 -6.5 9,152 3.4 1.3 5,385 -0.1 -10.7
India Cements 109 Buy 9,040 -5.2 -6.3 1,326 -53.7 5.2 277 -78.7 -5.8
Shree Cement 2,023 Buy 9,138 -0.9 -3.2 3,259 -23.3 0.1 1,567 -46.8 5841.6
Ultratech Cement 933 Buy 17,748 -9.1 -7.0 4,483 -37.5 11.3 2,434 -41.7 6.5
Sector Aggregate 114,054 1.0 -4.0 31,777 -14.2 1.7 19,045 -18.9 6.2

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 83
 Cement

MOSL CEMENT UNIVERSE: 1QFY11 PERFORMANCE AT A GLANCE

VOL (M TON) GROWTH (%) REAL (RS/BAG) CHANGE (%)

1QFY11 YOY FY11E 4QFY10 YOY QOQ FY11E

ACC 5.4 -1.3 3.0 188 -1.9 0.0 -1.7

Ambuja Cement 5.6 15.1 12.2 191 -1.3 0.0 -2.3
Grasim 5.3 7.8 9.5 169 -7.8 0.0 -7.7
UltraTech 5.3 -0.8 7.1 168 -8.4 0.5 -8.1
Birla Corp 1.5 19.7 11.0 173 -6.7 0.0 -6.8
India Cement 2.8 11.7 11.9 156 -16.4 0.0 -6.7
Shree Cement 2.6 0.1 8.8 166 -4.4 -0.9 -5.0
Industry 54.3 9.1 12.1 232 -7.0 0.0 -7.1
Source: CMA/MOSL

Volumes to grow by 9.1% in 1QFY11

We expect cement dispatches to grow 9.1% YoY in 1QFY11. There has been slowdown
in the momentum of dispatches since February 2010. Demand growth has been impacted
due to continuous slowdown in southern region, especially Andhra Pradesh. The organized
real-estate segment is witnessing gradual recovery. Increase in launch of new housing
projects would drive cement consumption with a lag of 6-9 months.

DEMAND TO GROW AT 10.6% IN FY10

Despatches (MT) Grow th (%)

12.2%
10.7% 10.8%
9.4% 10.0%
9.2% 9.2% 9.1%
9.3%
7.6% 7.4%
PERIOD MT GROWTH (%) 6.8%
6.3%
FY10 200 10.4 55.4 54.3
1QFY11 54.3 9.1
50.3 49.8 49.0
46.1 44.4 44.7 46.1
FY11E 224.6 12.1 41.6 40.9 41.6
38.8
1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11
Source: CMA/MOSL

CAP UTILIZATION %
Seasonality and new capacity addition suppress capacity utilization to 79%
FY08 99
FY09 92
Capacity utilization for 1QFY11 is likely to be 79% (v/s 90% in 1QFY10 and 88% in
FY10 86 4QFY10), impacted by new capacity additions (~50MT in TTM) and slowdown in demand
1QFY11E 79 momentum. Capacity utilization for the industry is expected to ease from ~92% in FY09 to
FY11E 84
~84% in FY11, on the back of further 50-55MT capacity addition over the next two years.

Prices under pressure; expect volatility to prevail till 3QFY11

We expect domestic cement prices to remain flat QoQ (~7% YoY decline) - price recovery
in March and April is negated by pricing pressure in May and June. Cement prices are
likely to exhibit high volatility over next 6-9 months, as seasonality in demand and new
capacities impact pricing. Prices are likely to remain under pressure at least till September
2010. We factor in Rs10/bag QoQ decline in 2QFY11, flat prices in 3QFY11 and recovery
of Rs5/bag QoQ in 4QFY11, translating into ~Rs12/bag decline in FY11.

July 2010 84
 Cement

CEMENT PRICES UNDER PRESSURE SINCE MAY 2010

6.4% 5.9%
4.4%
3.5% 3.0% 2.6%
-3.8%
-2.5% -7.2%

250 252

235 238 238 238

229 232 232
1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11
Source: CMA/MOSL

TREND IN 1QFY11 KEY OPERATING PARAMETERS

VOLUME (M TON) REALIZATION (RS/TON) EBITDA (RS/TON)

1QFY11 YOY QOQ 1QFY11 YOY QOQ 1QFY11 YOY QOQ

(%) (%) (RS/T) (RS/T) (RS/T) (RS/T)

ACC 5.4 -1.3 -4.1 188 -3.7 0.0 55 -12.7 -0.7

Birla Corp 5.6 15.1 5.4 189 -2.6 0.0 54 4.5 0.1
Grasim 5.3 7.8 -1.3 169 -14.3 0.0 53 -21.0 -5.0
Ambuja Cement 5.3 -0.8 -7.5 168 -15.4 0.9 43 -24.9 7.2
India Cement 1.5 19.7 -12.4 173 -12.4 0.0 57 -19.6 -2.5
Shree Cement 2.8 11.7 -6.8 156 -30.5 0.0 24 -34.1 2.8
UltraTech 2.6 0.1 -4.4 166 -7.7 -1.5 58 -20.1 1.2
Sector Aggregate 28.2 5.7 -3.3 175 -11.0 0.4 50 -16.5 0.8
Source: CMA/MOSL

TREND IN 1QFY11 KEY FINANCIAL PARAMETERS

NET SALES (RS M) EBITDA MARGIN (%) NET PROFIT (RS M)

1QFY11 YOY QOQ 1QFY11 YOY QOQ 1QFY11 YOY QOQ

(%) (%) (BP) (BP) (%) (%)

ACC 20,152 -3.2 -4.1 29.2 -600 -40 3,879 -20.1 -4.3
Birla Corp 20,978 13.6 5.4 28.7 280 10 4,216 29.9 8.8
Grasim* 22,111 3.1 -3.7 25.9 -860 -190 5,385 -0.1 -10.7
Ambuja Cement 17,748 -9.1 -7.0 25.3 -1,140 420 2,434 -41.7 6.5
India Cement 5,478 11.7 -9.0 30.0 -580 120 1,287 -17.1 -6.4
Shree Cement 9,040 -5.2 -6.3 14.7 -1,540 160 277 -78.7 -5.8
UltraTech 9,138 -0.9 -3.2 35.7 -1,040 120 1,567 -46.8 5,841.6
Sector Aggregate* 104,645 0.7 -3.2 27.1 -710 70 13,660 -24.5 14.7
* Grasim's sales and EBITDA Margin for cement business only; Sector PAT excl Grasim
Source: CMA/MOSL

Revising estimates
We are revising our FY11 earnings estimates to factor in the current pricing environment.
Our estimates factor in flat prices QoQ in 1QFY11, and ~Rs4/bag increase in FY11 (over
FY10 average). We are downgrading our FY11 earnings estimates by 1-34%, with the
highest downgrade for UltraTech (~15%) and India Cement (~34%) due to very high
sensitivity to cement prices.

July 2010 85
 Cement

REVISING ESTIMATES

FY11E FY12E

REV OLD CHG (%) REV OLD CHG (%)

ACC 75.5 76.5 -1.2 82.9 83.5 -0.6

Ambuja Cement 8.5 8.7 -2.1 9.1 9.3 -2.3
Grasim 255.5 276.7 -7.7 283.6 305.4 -7.1
UltraTech 63.0 74.1 -14.9 73.0 84.8 -13.9
Birla Corp 62.5 65.9 -5.0 64.1 65.1 -1.6
India Cement 4.8 7.3 -34.4 7.7 9.0 -13.8
Shree Cement 200.4 214.1 -6.4 216.2 229.2 -5.7
Source: MOSL

Valuation and view

Short-term outlook is negative based on seasonally low demand and impact of new
capacities. News flow on pricing is likely to be negative. We expect cement prices to
remain under pressure in 2HCY10. However, presence of sustainable demand drivers
and expected gradual recovery in utilization from 3QFY11 would create the foundation for
the next upcycle.

We prefer companies that are ahead of the curve in adding capacity, and where strong
RELATIVE PERFORMANCE - 3M (%)
cost-saving possibilities exist. Among large cap stocks, ACC and UltraTech remain our
Sensex
M OSt Cement Index top picks; we prefer India Cement, Birla Corp and Shree Cement among mid-caps.
106
98 VALUATIONS - ATTRACTIVE DESPITE RECENT RUN UP (FY12)

90
82 Ambuja, (18%,
$140
74 UltraTech, $125)
Mar-10

May-10

Jun-10
Apr-10

(17%, $111)
$105 Replacement Cost at US$110/ton
Shree, (18%, $79)
EV (US$/Ton)

RELATIVE PERFORMANCE - 1YR (%)

$70 ACC, (20%, $89)
M OSt Cement Index India Cement, (6%,
Sensex $70) Grasim, (14%, $37)
140
$35 Birla Corp,
125
(19%, $49)
110
95 $0
80 0% 6% 12% 18% 24%
Jun-09

Mar-10
Dec-09

Jun-10
Sep-09

RoE (%)

Source: MOSL

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Cement
ACC 861 Buy 86.7 75.5 82.9 9.9 11.4 10.4 5.9 6.1 5.2 29.8 22.0 19.7
Ambuja Cements 117 Neutral 7.8 8.5 9.1 15.0 13.8 12.9 8.8 8.4 7.2 19.6 18.9 18.0
Birla Corporation 362 Buy 72.4 62.5 64.1 5.0 5.8 5.6 2.6 2.3 3.0 31.1 21.8 18.7
Grasim Industries 1,795 Buy 331.1 255.5 283.6 5.4 7.0 6.3 2.6 2.3 1.6 23.2 15.0 14.7
India Cements 109 Buy 10.9 4.8 7.7 10.0 22.7 14.1 6.5 9.2 6.6 8.3 3.4 5.3
Kesoram Ind 318 Buy 54.2 61.7 78.1 5.9 5.2 4.1 4.6 4.3 3.5 17.2 16.9 18.2
Shree Cement 2,023 Buy 203.7 200.4 216.2 9.9 10.1 9.4 5.8 6.1 4.8 46.6 32.4 26.7
Ultratech Cement 933 Buy 87.8 63.0 73.0 10.6 14.8 12.8 13.2 7.7 6.6 23.7 21.9 16.6
Sector Aggregate 10.3 10.8 9.7 5.7 5.4 4.5 21.8 16.1 15.7

July 2010 86
 Results Preview
SECTOR: CEMENT

ACC
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ACC IN Buy
REUTERS CODE
S&P CNX: 5,269 ACC.BO Previous Recommendation: Buy Rs861
Equity Shares (m) 187.9 YEAR NET SALES PAT EPS* EPS P/E P/BV ROE ROCE EV/ EV/TON
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) EBITDA (US$)
52 Week Range (Rs) 1,017/686
12/08A 72,829 11,787 62.7 -7.9 14.9 3.3 26.0 27.3 8.7 139
1,6,12 Rel Perf (%) -7/ -1/-12
12/09A 80,272 16,292 86.7 38.2 10.3 2.7 29.8 33.7 5.9 120
Mcap (Rs b) 161.8
12/10E 81,244 14,193 75.5 -12.9 11.7 2.3 22.0 23.8 6.1 94
Mcap (USD b) 3.5
12/11E 91,026 15,586 82.9 9.8 10.4 2.0 19.7 22.6 5.2 88

„ We expect dispatches to decline 1.3% YoY (~4.1% QoQ) to 5.35MT in 2QCY10, as ACC continues to face capacity
constraints. Average realizations are likely to decline 1.9% YoY (flat QoQ) to Rs3,767/ton.

„ Net sales would de-grow by 3.2% YoY to Rs20.15b. EBITDA margins are likely to decline by 610bp YoY (~40bp
QoQ decline) to 29.2%, impacted by lower realizations. As a result, we expect EBITDA to decline 20% YoY (~5%
QoQ) to Rs5.9b and PAT to decline 19% YoY to Rs3.9b.

„ Ramp-up of the recently commissioned capacity at Orissa (~1.2MT) and Karnataka (~3MT) will drive volume
growth in 2HCY10. Also, 3MT capacity expansion at Maharashtra is likely to be operational by 3QCY10, further
aiding volumes.

„ We are downgrading our EPS estimates by 1.2% for CY10 to Rs75.5 and by 0.6% for CY11 to Rs82.9. Valuations
at 11.7x CY10E EPS and an EV of 6.1x CY10E EBITDA appear rich. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E DECEMBER CY09 CY10 CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Cement Sales (m ton) 5.73 5.42 5.01 5.36 5.58 5.35 5.40 5.84 21.5 22.2
YoY Change (%) 6.1 2.4 3.1 -1.8 -2.6 -1.3 7.8 8.9 2.4 3.0
Cement Realization 3,587 3,840 3,931 3,585 3,767 3,767 3,567 3,567 3,730 3,665
YoY Change (%) 7.9 13.8 10.1 2.4 5.0 -1.9 -9.3 -0.5 7.6 -1.7
QoQ Change (%) 2.5 7.1 2.4 -8.8 5.1 0.0 -5.3 0.0
Net Sales 20,551 20,813 19,694 19,215 21,018 20,152 19,260 20,814 80,272 81,244
YoY Change (%) 14.4 16.5 10.0 0.6 2.3 -3.2 -2.2 8.3 10.2 1.2
EBITDA 6,474 7,337 6,679 4,307 6,222 5,887 4,420 5,378 24,797 21,908
Margins (%) 31.5 35.3 33.9 22.4 29.6 29.2 23.0 25.8 30.9 27.0
Depreciation 789 784 796 1,052 935 1,050 1,150 1,174 3,421 4,309
Interest 368 159 135 -44 127 135 150 154 619 567
Other Income 508 570 509 825 609 800 650 1,041 2,411 3,100
PBT 5,825 6,963 6,257 4,123 5,769 5,502 3,770 5,091 23,168 20,132
Tax 1,777 2,107 1,900 1,092 1,717 1,623 1,112 1,486 6,877 5,939
Rate (%) 30.5 30.3 30.4 26.5 29.8 29.5 29.5 29.2 29.7 29.5
Reported PAT 4,048 4,856 4,356 3,031 4,051 3,879 2,658 3,605 16,292 14,193
Adjusted PAT 4,048 4,856 4,356 3,031 4,051 3,879 2,658 3,605 16,292 14,193
Margins (%) 19.7 23.3 22.1 15.8 19.3 19.2 13.8 17.3 20.3 17.5
YoY Change (%) 22.2 84.7 53.7 -9.4 0.1 -20.1 -39.0 18.9 38.2 -12.9
E: MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 87
 Results Preview
SECTOR: CEMENT

Ambuja Cements
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ACEM IN Neutral
REUTERS CODE
S&P CNX: 5,269 GACM.BO Previous Recommendation: Neutral Rs117
Equity Shares (m) 1,523.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/TON
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) EBITDA (US$)
52 Week Range (Rs) 126/82
12/08A 62,203 11,616 7.6 -11.2 15.4 3.2 22.6 31.5 9.6 194
1,6,12 Rel Perf (%) 2/ 17/11
12/09A 70,769 11,872 7.8 2.1 15.0 2.8 19.6 28.4 8.8 142
Mcap (Rs b) 178.7
12/10E 77,596 12,976 8.5 9.3 13.8 2.5 18.9 25.9 8.4 133
Mcap (USD b) 3.9
12/11E 88,372 13,876 9.1 6.9 12.9 2.2 18.0 24.7 7.2 125

„ We expect dispatches to grow 15% YoY (~5% QoQ) to 5.56MT and average realizations to decline 1.3% YoY (flat
QoQ) to Rs3,776/ton. Volume growth would be driven by recently commissioned new capacities.

„ Net sales are likely to grow 13.6% YoY to Rs21b. We expect EBITDA margin to expand 270bp YoY (~10bp QoQ)
to 28.7%, benefiting from lower reliance on purchased clinker. EBITDA is likely to grow 26% YoY (~6% QoQ) to
Rs6b, whereas recurring PAT is estimated to grow 30% YoY (~9% QoQ) to Rs4.2b.

„ Ambuja would benefit from commissioning of new capacities at Chattisgarh (~2.2MT by end-2QCY10) and Himachal
Pradesh (~2.2MT in 1QCY09), which will not only drive volume growth but also profitability (due to lower reliance
on purchased clinker).

„ We are downgrading our EPS estimates by 2.1% for CY10 to Rs8.5 and by 2.3% for CY11 to Rs9.1. Valuations at
13.8x CY10E earnings and an EV of 8.4x CY10E EBITDA are a fair reflection of business fundamentals. Maintain
Neutral.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E DECEMBER CY09 CY10 CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Sales Volume (m ton) 5.10 4.83 4.10 4.77 5.27 5.56 4.80 5.47 18.80 21.09
YoY Change (%) 6.3 10.3 4.6 1.5 3.3 15.1 17.1 14.5 5.6 12.2
Realization (Rs/ton) 3,619 3,828 3,929 3,714 3,776 3,776 3,576 3,576 3,764 3,679
YoY Change (%) 5.0 7.1 11.1 7.7 4.4 -1.3 -9.0 -3.7 7.7 -2.3
QoQ Change (%) 5.0 5.8 2.6 -5.5 1.7 0.0 -5.3 0.0
Net Sales 18,456 18,474 16,110 17,729 19,902 20,978 17,167 19,550 70,769 77,596
YoY Change (%) 11.5 18.2 16.2 9.3 7.8 13.6 6.6 10.3 259.6 197.7
EBITDA 5,228 4,797 4,300 4,344 5,701 6,025 3,648 4,292 18,669 19,666
Margins (%) 28.3 26.0 26.7 24.5 28.6 28.7 21.2 22.0 26.4 25.3
Depreciation 686 704 719 860 767 900 1,025 1,145 2,970 3,837
Interest 52 52 52 68 108 80 75 75 224 338
Other Income 416 692 433 556 546 800 500 654 2,097 2,500
PBT before EO Item 4,905 4,732 3,962 3,972 5,372 5,845 3,048 3,726 17,571 17,991
Extraordinary Inc/(Exp) 0 0 462 0 726 0 0 0 462 726
PBT after EO Exp/(Inc) 4,905 4,732 4,423 3,972 6,098 5,845 3,048 3,726 18,033 18,717
Tax 1,565 1,486 1,238 1,560 1,476 1,724 899 1,118 5,849 5,217
Rate (%) 31.9 31.4 28.0 39.3 24.2 29.5 29.5 30.0 32.4 27.9
Reported Profit 3,341 3,247 3,185 2,412 4,622 4,121 2,149 2,608 12,184 13,500
Adj PAT 3,341 3,247 2,852 2,412 3,874 4,216 2,198 2,687 11,872 12,976
YoY Change (%) 1.2 6.7 21.3 -17.4 16.0 29.9 -22.9 11.4 2.2 9.3
E: MOSL Estimates
Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 88
 Results Preview
SECTOR: CEMENT

Birla Corporation
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BJUT IN Buy
REUTERS CODE
S&P CNX: 5,269 BRLC.BO Previous Recommendation: Buy Rs362
Equity Shares (m) 77.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/TON

52 Week Range (Rs) 422/187 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) EBITDA (US$)

03/09A 17,907 3,235 42.0 -17.8 8.6 2.2 25.1 27.9 5.1 82
1,6,12 Rel Perf (%) -5/ 15/68
03/10A 21,570 5,572 72.4 72.2 5.0 1.6 31.1 34.6 2.6 53
Mcap (Rs b) 27.9
03/11E 22,290 4,815 62.5 -13.6 5.8 1.3 21.8 28.1 2.3 42
Mcap (USD b) 0.6
03/12E 24,843 4,938 64.1 2.6 5.6 1.1 18.7 24.2 3.0 49

„ During 1QFY11, we expect Birla Corporation's revenues to grow 11.7% YoY to Rs5.48b. Volumes are likely to grow
20% YoY (~12% QoQ decline) to 1.45MT, whereas cement realizations are likely to decline 6.7% YoY (flat QoQ) to
Rs3,468/ton.

„ Lower realizations would translate into 580bp YoY (~120bp QoQ) improvement in EBITDA margin to 30%. As a
result, EBITDA is likely to grow 6% YoY (~5% QoQ) to Rs1.65b, translating into 17% YoY decline in PAT to
Rs1.29b.

„ Birla Corp's volume growth would pick up from 2QFY11, as its brownfield expansion (~1.5MT) in Madhya Pradesh
is expected to commission from April 2010.

„ We are downgrading our EPS estimates by 5% for FY11 to Rs62.5 and by 1.6% for FY12 to Rs64.1. The stock
trades at 5.8x FY11E and 5.6x FY12E EPS - at a discount to comparable peers. We believe the discount is not
justified and valuations, based on earnings as well as replacement cost, are compelling. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Cement Sales (m ton) 1.21 1.22 1.50 1.66 1.45 1.30 1.60 1.85 5.59 6.20
YoY Change (%) 1.8 9.9 7.0 3.6 19.7 6.4 6.8 11.8 5.6 11.0
Cement Realization 3,717 3,813 3,448 3,468 3,468 3,268 3,268 3,376 3,592 3,347
YoY Change (%) 20.0 23.7 17.6 6.4 -6.7 -14.3 -5.2 -2.7 15.7 -6.8
QoQ Change (%) 14.0 2.6 -9.6 0.6 0.0 -5.8 0.0 3.3
Net Sales 4,904 5,057 5,589 6,020 5,478 4,628 5,609 6,575 21,570 22,290
YoY Change (%) 23.9 36.0 23.6 5.5 11.7 -8.5 0.4 9.2 20.5 3.3
Total Expenditure 3,148 3,122 3,964 4,284 3,833 3,360 4,153 4,565 14,519 15,911
EBITDA 1,756 1,935 1,624 1,736 1,645 1,268 1,456 2,010 7,051 6,380
Margins (%) 35.8 38.3 29.1 28.8 30.0 27.4 26.0 30.6 32.7 28.6
Depreciation 133 137 144 143 145 165 170 173 556 653
Interest 60 64 60 86 75 80 82 83 270 320
Other Income 519 249 215 400 350 250 200 435 1,383 1,235
Profit before Tax 2,082 1,983 1,636 1,907 1,775 1,273 1,404 2,189 7,608 6,642
Tax 528 463 513 532 488 350 386 602 2,036 1,826
Rate (%) 25.4 23.3 31.4 27.9 27.5 27.5 27.5 27.5 26.8 27.5
Adjusted PAT 1,553 1,521 1,123 1,375 1,287 923 1,018 1,587 5,572 4,815
Margins (%) 31.7 30.1 20.1 22.8 23.5 19.9 18.1 24.1 25.8 21.6
YoY Change (%) 69.2 154.7 38.0 52.2 -17.1 -39.3 -9.4 15.4 72.2 -13.6
E: MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 89
 Results Preview
SECTOR: CEMENT

Grasim Industries
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 GRASIM IN
Buy
REUTERS CODE
S&P CNX: 5,269 GRAS.BO Previous Recommendation: Buy Rs1,795
Equity Shares (m) 91.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/TON
END* (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) EBITDA (US$)
52 Week Range (Rs) 2,952/1,741
03/09A 184,039 21,867 238.5 -18.9 7.5 1.4 21.1 20.7 4.8 87
1,6,12 Rel Perf (%) -32/ -27/-46
03/10A 203,789 30,355 331.1 38.8 5.4 1.1 23.2 24.4 2.6 41
Mcap (Rs b) 164.6
03/11E* 212,965 23,426 255.5 -22.8 7.0 1.0 15.0 19.1 2.3 31
Mcap (USD b) 3.5
03/12E* 238,035 26,004 283.6 11.0 6.3 0.9 14.7 19.4 1.6 36
* Consolidated; Demerger of cement business assumed w.e.f 1 April 2010

„ We expect Grasim (standalone) to post sales growth of 3.5% YoY to Rs31.5b in 1QFY11 despite hive-off of sponge
iron business with effect from 22 May 2009. However, strong momentum in VSF would be negated by pressure on
margins in cement business, translating into flat margins YoY (~220bp YoY improvement). Higher depreciation and
interest cost would restrict PAT to Rs5.39b - flat YoY.
„ Cement volumes are likely to grow 7.8% YoY (~1% QoQ) to 5.26MT. However, 7.8% YoY decline (flat QoQ) in
realizations to Rs3,378/ton would translate into 860bp YoY (~180bp QoQ) decline in PBIDT margins to 25.9%.
„ VSF business production would be impacted by suspension of operations at Nagda plant from 4 June 2010 due to
water shortage. VSF volumes are likely to grow 6.8% YoY and realizations would increase 15.5% YoY (~1% QoQ)
to Rs113/kg. Higher realizations would dilute cost inflation in pulp and sulphur. Operating margins for the VSF
business are likely to improve by 810bp YoY (~100bp QoQ) to 35.8%.
„ We are downgrading our EPS estimates by 7.7% to Rs255.5 for FY11 and by 7.1% to Rs283.6 for FY12. The stock
is quoting at very attractive valuations of 9.8x FY11E consolidated EPS, 1.4x FY11E BV and an EV of 3.2x FY11E
EBITDA. Implied valuation of cement business is US$60/ton. Maintain Buy.
QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 30,453 29,838 30,519 33,702 31,520 30,707 32,318 35,054 124,627 129,600
YoY Change (%) 18.1 11.0 14.8 16.4 3.5 2.9 5.9 4.0 15.1 4.0
EBITDA 8,853 10,162 9,860 9,031 9,152 7,988 8,658 10,457 37,921 36,254
Margins (%) 29.1 34.1 32.3 26.8 29.0 26.0 26.8 29.8 30.4 28.0
Depreciation 1,370 1,359 1,424 1,490 1,515 1,560 1,580 1,611 5,643 6,266
Interest 475 505 504 590 605 595 585 579 2,075 2,364
Other Income 620 1,432 888 1,329 500 1,500 1,200 1,550 4,253 4,750
PBT before EO Items 7,628 9,729 8,820 8,280 7,532 7,333 7,693 9,817 34,456 32,375
Extraordinary Inc/(Exp) 3,447 0 0 0 0 0 0 0 3,447 3,447
PBT after EO Items 11,075 9,729 8,820 8,280 7,532 7,333 7,693 9,817 37,903 35,822
Tax 2,322 2,986 2,861 2,250 2,147 2,090 2,193 2,798 10,420 9,227
Rate (%) 21.0 30.7 32.4 27.2 28.5 28.5 28.5 28.5 27.5 25.8
Reported PAT 8,752 6,743 5,959 6,030 5,385 5,243 5,501 7,019 27,483 26,595
Adj. PAT 5,392 6,743 5,959 6,030 5,385 5,243 5,501 7,019 24,123 23,235
YoY Change (%) 4.9 60.7 80.8 56.7 -0.1 -22.2 -7.7 16.4 46.3 -3.7
VSF Business Snapshot
Volume (ton) 67,418 73,993 81,306 85,714 72,000 80,000 85,000 88,626 302,092 325,626
YoY Change (%) 18.8 18.3 51.2 31.0 6.8 8.1 4.5 3.4 26.7 7.8
Realization (Rs/ton) 97,543 105,217 109,600 111,644 112,644 109,644 107,144 107,238 106,481 109,000
YoY Change (%) -4.3 3.4 13.4 28.7 15.5 4.2 -2.2 -3.9 10.2 2.4
PBIDT 1,981 3,548 4,037 3,632 3,230 3,323 3,431 3,442 13,215 13,425
PBIDT Margin (%) 27.7 41.8 41.9 34.8 35.8 34.1 33.9 33.9 37.0 34.4
E: MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 90
 Results Preview
SECTOR: CEMENT

India Cements
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ICEM IN
Buy
REUTERS CODE
S&P CNX: 5,269 ICMN.BO Previous Recommendation: Buy Rs109
Equity Shares (m) 307.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/TON
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) EBITDA (US$)
52 Week Range (Rs) 156/97
03/09A 34,268 4,851 17.7 -27.3 6.1 0.8 15.7 16.8 4.9 76
1,6,12 Rel Perf (%) -10/ -10/-45
03/10A 37,713 3,253 10.9 -38.5 10.0 0.8 8.3 10.4 6.4 82
Mcap (Rs b) 33.5
03/11E 39,565 1,431 4.8 -56.0 22.7 0.8 3.4 5.5 9.0 73
Mcap (USD b) 0.7
03/12E 47,502 2,308 7.7 61.4 14.1 0.7 5.3 7.7 6.5 70

„ We expect India Cement to report 5% YoY sales de-growth to Rs9b, impacted by 16.4% YoY decline in realizations
(flat QoQ) to Rs3,125/ton. However, volumes would grow 11.7% YoY (~7% QoQ decline) to 2.75MT. We estimate
revenues of Rs300m from IPL.

„ Higher contribution from IPL would translate into EBITDA margin improvement of 160bp QoQ (~15.3pp YoY
decline) to 14.7%. EBITDA is likely to decline 54% YoY (~5% QoQ growth) to Rs1.32b. This coupled with higher
depreciation and tax provisioning would result in 79% YoY decline in PAT to Rs277m.

„ The operating environment for India Cement has deteriorated further, with severe pricing pressure in its key markets
of South India, impacted by new capacities and muted demand.

„ We are downgrading our EPS estimates by 34% to Rs4.8 for FY11 and by 14% to Rs7.7 for FY12. The stock quotes
at 22.7x FY11E EPS and an EV of 9x FY11E EBITDA - valuations are attractive. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales Dispatches (m ton) 2.46 2.79 2.76 2.95 2.75 3.10 3.00 3.42 10.96 12.27
YoY Change (%) 3.9 15.0 38.1 27.0 11.7 11.1 8.7 15.7 20.2 11.9
Realization (Rs/ton) 3,736 3,438 3,028 3,125 3,125 2,925 2,925 3,125 3,304 3,083
YoY Change (%) 8.6 -4.1 -16.6 -16.2 -16.4 -14.9 -3.4 0.0 -8.1 -6.7
QoQ Change (%) 0.2 -8.0 -11.9 3.2 0.0 -6.4 0.0 6.8
Net Sales 9,535 9,894 8,641 9,643 9,040 9,351 9,204 11,971 37,713 39,565
YoY Change (%) 13.9 4.6 14.8 8.5 -5.2 -5.5 6.5 24.1 10.1 4.9
EBITDA 2,863 2,977 1,165 1,260 1,326 936 1,014 2,596 8,266 5,871
Margins (%) 30.0 30.1 13.5 13.1 14.7 10.0 11.0 21.7 21.9 14.8
Depreciation 571 572 573 616 620 635 660 678 2,331 2,593
Interest 385 374 299 369 370 375 380 414 1,426 1,539
Other Income 68 55 119 129 75 60 130 115 370 380
PBT before EO Expense 1,976 2,086 412 404 411 -14 104 1,619 4,878 2,120
Extra-Ord Expense -210 13 -117 -122 0 0 0 0 -436 0
PBT 2,186 2,074 528 526 411 -14 104 1,619 5,313 2,120
Tax 745 704 180 143 134 -5 34 526 1,770 689
Rate (%) 34.1 34.0 34.1 27.1 32.5 32.5 32.5 32.5 33.3 32.5
Reported PAT 1,441 1,369 348 383 277 -10 70 1,093 3,543 1,431
Adj PAT 1,302 1,378 271 294 277 -10 70 1,093 3,253 1,431
YoY Change (%) -16.7 -10.9 -61.3 -71.8 -78.7 -100.7 -74.2 271.4 -32.9 -56.0
Margins (%) 13.7 13.9 3.1 3.1 3.1 -0.1 0.8 9.1 8.6 3.6
E: MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 91
 Results Preview
SECTOR: CEMENT

Shree Cement
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SRCM IN
Buy
REUTERS CODE
S&P CNX: 5,269 SHCM.BO Previous Recommendation: Buy Rs2,023
Equity Shares (m) 34.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/TON
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) EBITDA (US$)
52 Week Range (Rs) 2542/1140
03/09A 27,106 5,983 171.7 107.8 11.8 5.8 63.6 35.0 7.6 173
1,6,12 Rel Perf (%) -5/ 6/51
03/10A 36,321 7,097 203.7 18.6 9.9 3.8 46.6 31.9 4.8 101
Mcap (Rs b) 70.5
03/11E 41,014 6,982 200.4 -1.6 10.1 2.8 32.4 23.3 5.0 93
Mcap (USD b) 1.5
03/12E 51,130 7,532 216.2 7.9 9.4 2.2 26.7 22.8 3.9 79

„ We expect sales to decline 1% YoY to Rs9.14b in 1QFY11, driven by 83% YoY growth in merchant power revenues.
Cement volumes are likely to remain muted at 2.55MT, while realizations should decline 4.4% YoY (~1% QoQ) to
Rs3,325/ton. We estimate surplus power sales of Rs660m (110m units).

„ Higher merchant power sales coupled with stable cement business profitability would result in margin improvement
of 120bp QoQ (~10.4pp YoY decline) to 35.7%. Cement business EBITDA/ton is likely to decline 26% YoY (flat
QoQ) to Rs1,157/ton.

„ We expect depreciation to increase to ~Rs1.6b, as new 50MW power plant is capitalized during the quarter. As a
result, recurring PAT would de-grow 46.8% YoY to Rs1.57b.

„ We are downgrading our EPS estimates by 6.4% to Rs200.4 for FY11 and by 5.7% to Rs216.2 for FY12. The stock
trades at attractive valuations of 10.1x FY11E EPS and an EV of 5x FY11E EBITDA. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales Dispatches (m ton) 2.55 2.48 2.56 2.67 2.55 2.60 2.85 3.15 10.25 11.15
YoY Change (%) 32.8 23.1 21.7 10.8 0.1 4.8 11.2 18.1 21.3 8.8
Realization (Rs/ton) 3,479 3,447 3,205 3,355 3,325 3,125 3,125 3,242 3,373 3,203
YoY Change (%) 8.7 13.0 5.2 6.2 -4.4 -9.4 -2.5 -3.4 8.4 -5.0
QoQ Change (%) 10.2 -0.9 -7.0 4.7 -0.9 -6.0 0.0 3.7
Net Sales 9,224 8,996 8,660 9,440 9,138 9,274 10,500 12,101 36,321 41,014
YoY Change (%) 50.2 43.2 30.3 17.2 -0.9 3.1 21.2 28.2 34.0 12.9
EBITDA 4,250 4,082 3,353 3,255 3,259 2,941 3,518 4,526 15,025 14,245
Margins (%) 46.1 45.4 38.7 34.5 35.7 31.7 33.5 37.4 41.4 34.7
Depreciation 973 998 947 2,786 1,600 1,500 1,450 1,503 5,704 6,053
Interest 152 155 115 662 220 225 235 230 1,291 910
Other Income 473 316 160 212 520 300 200 425 1,284 1,445
PBT before EO Exp 3,599 3,245 2,451 20 1,959 1,516 2,033 3,219 9,313 8,727
Extra-Ord Expense 42 29 14 549 22 15 15 18 634 70
PBT 3,557 3,215 2,436 -529 1,937 1,501 2,018 3,201 8,679 8,657
Tax 645 326 762 185 387 300 404 654 1,918 1,745
Rate (%) 18.1 10.1 31.3 -34.9 20.0 20.0 20.0 20.4 22.1 20.2
Reported PAT 2,911 2,889 1,674 -714 1,549 1,201 1,615 2,547 6,761 6,912
Adj PAT 2,946 2,915 1,684 26 1,567 1,213 1,627 2,561 7,097 6,968
YoY Change (%) 153.0 153.2 31.8 -98.9 -46.8 -58.4 -3.4 9611.5 18.6 -1.8
Margins (%) 31.9 32.4 19.4 0.3 17.1 13.1 15.5 21.2 19.5 17.0
E:MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 92
 Results Preview
SECTOR: CEMENT

UltraTech Cement
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 UTCEM IN
Buy
REUTERS CODE
S&P CNX: 5,269 ULTC.BO Previous Recommendation: Buy Rs933
Equity Shares (m) 274.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/TON
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) EBITDA (US$)
52 Week Range (Rs) 1,172/656
03/09A 63,831 9,770 78.5 -3.0 11.9 3.2 31.0 29.2 15.9 118
1,6,12 Rel Perf (%) -9/ 3/9
03/10A 70,497 10,932 87.8 11.9 10.6 2.5 26.6 28.2 13.2 112
Mcap (Rs b) 255.9
03/11E * 158,415 17,287 63.0 -28.2 14.8 2.3 15.5 19.9 7.7 121
Mcap (USD b) 5.5
03/12E * 179,502 20,025 73.0 15.8 12.8 2.0 16.6 21.6 6.5 109
* Consolidated; Merger of cement business assumed w.e.f 1 April 2010

„ We expect net sales (standalone) to decline 9% YoY to Rs17.7b, impacted by 1% YoY volume de-growth to 5.27MT
and 10.2% YoY decline (flat QoQ) in realizations to Rs3,174/ton. RMC business revenues are likely to grow 36%
YoY to Rs1b.

„ Decline in realizations would drive 11.4pp YoY decline (~420bp YoY improvement) in EBITDA margin to 25.3%.
EBITDA is likely to decline 37% YoY (~11% YoY growth) to Rs4.5b. PAT would decline 42% YoY to Rs2.4b.

„ Post merger of Grasim's cement assets into UltraTech (by 2QFY11), UltraTech would become the largest cement
company in India and the 10th largest in the world, with 49.4MT capacity.

„ We are downgrading our EPS estimates (post-merger) by 14.9% to Rs63 for FY11 and by 13.9% to Rs73 for FY12.
The stock trades at 14.8x FY11E EPS and an EV of 7.7x FY11E EBITDA. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q* 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales (m ton) 5.31 4.16 5.04 5.70 5.27 4.58 5.50 6.31 20.21 21.7
YoY Change (%) 24.4 4.6 10.2 6.6 -0.8 10.1 9.1 10.7 9.4 7.1
Realization (Rs/ton) 3,534 3,548 3,107 3,174 3,174 2,974 2,974 3,094 3,326 3,058
YoY Change (%) 6.3 5.9 -8.5 -4.8 -10.2 -16.2 -4.3 -2.5 1.0 -8.1
QoQ Change (%) 6.0 0.4 -12.4 2.2 0.0 -6.3 0.0 4.0
Net Sales 19,528 15,408 16,518 19,094 17,748 14,440 17,304 20,566 70,497 70,057
YoY Change (%) 30.5 10.4 1.3 2.6 -9.1 -6.3 4.8 7.7 10.4 -0.6
EBITDA 7,168 4,700 3,836 4,027 4,483 2,748 2,834 4,033 19,711 14,097
Margins (%) 36.7 30.5 23.2 21.1 25.3 19.0 16.4 19.6 28.0 20.1
Depreciation 936 967 985 993 1,000 1,030 1,050 1,060 3,881 4,140
Interest 330 299 262 285 280 285 270 265 1,175 1,100
Other Income 342 308 300 259 350 425 400 275 1,227 1,450
PBT after EO Expense 6,244 3,743 2,888 3,007 3,553 1,858 1,914 2,983 15,882 10,307
Tax 2,067 1,234 928 721 1,119 585 603 940 4,949 3,247
Rate (%) 33.1 33.0 32.1 24.0 31.5 31.5 31.5 31.5 31.2 31.5
Reported PAT 4,178 2,509 1,960 2,286 2,434 1,272 1,311 2,043 10,932 7,060
Adj PAT 4,178 2,509 1,960 2,286 2,434 1,272 1,311 2,043 10,932 7,060
YoY Change (%) 57.6 52.8 -17.8 -26.1 -41.7 -49.3 -33.1 -10.6 10.0 -35.4
E: MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 93
 Results Preview
QUARTER ENDING JUNE 2010

Engineering
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME In 1QFY11, we expect the engineering companies under our coverage to post revenue
ABB
growth of 21% YoY, adjusted EBITDA growth of 24% YoY and adjusted net profit
growth of 14% YoY.
BHEL
„ Capital Goods Index, growth accelerates: Recent IIP data and the Capital Goods
Index show signs of improvement in industrial activity. IIP growth in April 2010 was
Crompton Greaves
17.6% and the Capital Goods Index rose by 73%, largely led by a base effect.
Revenue in the industrial segment of our engineering universe grew 20% in 4QFY10
Larsen & Toubro
and for FY10 as a whole growth was muted at 5%. Hence the growth in the IIP/
Capital Goods Index translates into revenue growth for companies with a lag effect.
Siemens
„ Execution momentum to continue in 1QFY11: The engineering sector’s 4QFY10

Thermax
revenue grew 23% YoY. In 1QFY11, we expect revenue to grow 21% YoY, given a
pick up in execution in the power and infrastructure segments. The growth
improvement is largely driven by BHEL, L&T and Crompton. We expect them report
revenue growth of 29%, 19% and 18% YoY respectively. Order intake growth in
4QFY10 was up 62% YoY for the universe resulting in aggregate BTB of 2.1x.
„ 1QFY11 EBITDA margins to rise 30bp YoY, RM prices have increased: In
1QFY11, we expect EBITDA margins to remain stable. Margin improvement is
expected for BHEL (+119bp) and Crompton Greaves (+32bp) YoY. Prices of steel
and copper have more than doubled since their lows in 3QFY09 and 4QFY09, and
would lead to increased raw material costs for BHEL, L&T etc on projects under
fixed price contracts (35-40% of the order backlog).
„ Valuations fair, maintain Neutral: Our engineering sector universe trades at FY11
P/E of 23x and P/BV of 5.3x. We expect earnings CAGR of 24% over FY10-12 and
RoE of 25% in FY11. We estimate our engineering universe factors in most of the
execution pick up resulting in accelerated earnings momentum in late FY11 and
FY12. We retain our Neutral view on the sector and maintain our Buy ratings on
ABB and BHEL.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Engineering
ABB 873 Buy 16,555 10.0 13.7 1,159 -9.5 3915.3 788 -5.8 1086.7
BHEL 2,451 Buy 72,117 28.9 -46.8 8,491 43.4 -75.8 5,548 22.4 -75.5
Crompton Greaves 254 Neutral 13,806 17.7 -14.7 2,092 20.2 -22.7 1,308 14.0 -31.4
Larsen & Toubro 1,761 Neutral 87,813 19.3 -34.3 9,572 21.7 -48.0 6,529 12.9 -51.2
Siemens 728 Neutral 21,575 12.5 -3.1 2,697 4.9 -5.7 1,749 1.4 -4.4
Thermax 709 Neutral 6,172 14.8 -49.4 802 16.4 -45.3 507 9.1 -48.9
Sector Aggregate 218,038 20.5 -34.8 24,813 23.7 -59.0 16,430 13.4 -59.7

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com)

July 2010 94
 Engineering

Capital Goods Index rise indicative of industrial capex revival

CAPITAL GOOD INDEX (% YOY): GROWTH ACCELERATES, BASE EFFECT PERSISTS

73
Although the index growth of

54
45
39
73% reflects a pick-up in

31

28
24
23
22

21
industrial capex, it follows a

21

20

21
18

18
18

16

13
12

13
12

12

12
12
11

11
-7% decline in April 2009

8
7
4

4
3

2
1

May 09 -3
-7
Mar 09 -8
Mar '07

May '07

Mar '08
Jul '07

Nov '07

Nov 08
Jan '08

May 08

July 08

Jan 09

July 09

Nov 09

Jan 10

Mar 10
Sep '07

Sep 08

Sept 09
IIP GROWTH (% YOY): WELL INTO RECOVERY MODE

18

18
16
15
14
12

12
11
11

From August 2009 IIP

10

10
9
9

9
8

8
growth rates have averaged
8
7

7
6
6

6
5

5
5

13% YTD and for FY10 it was

4
3

2
1

1
11%, largely driven by

1
capital goods
0

-1

-1
Mar 09 -1
May '07

Mar '08
Jul '07

Nov '07

Jan '08

May 08

July 08

Nov 08

Jan 09

May 09

July 09

Nov 09

Jan 10

Mar 10
Sept 09
Sep '07

Sep 08

Source: Company/MOSL

Execution momentum to continue in 1QFY11

PACE OF PROJECT EXECUTION REMAINS SOUND IN 1QFY11

44%
From lows of 3.2% revenue
growth in 3QFY10, expect 33%
revenue growth of 21%
22%
revenue in 1QFY11
11%

0%
1QFY05
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11

Source: Company/MOSL

BHEL, L&T TOP REVENUE GROWTH IN 1QFY11 (% YOY)

1QFY10 1QFY11E FY10

We expect BHEL to report ABB -7 10 -6
revenue growth of 29% YoY BHEL 29 29 25
Crompton Greaves 8 18 15
and L&T at 19% YoY
Larsen & Toubro 7 19 9
in 1QFY11 Siemens 6 13 3
Industry 11 21 13
Source: Company/MOSL

July 2010 95
 Engineering

EBITDA margins to improve, NPM to decline given increased depreciation,

lower other income

MARGIN IMPROVEMENT OF 30BP YOY IS EXPECTED IN 1QFY11

18.3
EBITDA Margin (%) Net Profit Margin (%)

17.0

16.0
15.6

15.4
In 1QFY11, we expect margin

14.2

14.2

14.2
13.6

13.2

13.2
13.0

12.6
improvement for BHEL

11.6

11.3
11.4

11.0
9.6
(+119bp) and Crompton

9.1
8.6

8.4
8.0
7.4

12.5
12.2
6.7

11.8
11.7
(+32bp) YoY

11.2

10.8
10.5
4.6

10.0

9.9
9.8

9.7

9.0
8.8
8.6

8.4

8.0
7.7

7.5
7.0

7.1

6.6

6.3
5.6

5.0
1QFY05 3.7
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
Source: Company/MOSL

Commodity prices more than double since lows of 4QFY09 (US$/ton)

STEEL PRICES RANGE-BOUND, COPPER PRICES MORE THAN DOUBLE SINCE 4QFY09

10,000 Steel (USD/Tonne; RHS) Copper (USD/Tonne) 1,200

Steel and copper prices have 7,500 900

more than doubled since
their lows in 3Q and 4QFY09 5,000 600

2,500 300

0 0
1QFY05
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
Source: Company/MOSL 1QFY11

Initial improvements in order intake

4QFY10 ORDER INTAKE (RSB): BETTER BUSINESS ENVIRONMENT BOOSTS AWARDS

ABB BHEL Crompton Greaves Larsen & Toubro Siemens

Order intake in the January- 500
March 2010 quarter
375
improved 62% YoY for our
engineering universe, to 250
Rs522b
125

0
1QFY07

2QFY07

3QFY07

4QFY07

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

Source: Company/MOSL

July 2010 96
 Engineering

ORDER INTAKE (RS B): FY10 SECTOR INTAKE GROWTH OF 16% YOY
FY10 order intake for FY08 FY09 FY10 YOY

companies like ABB and 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q (%)

Siemens was weak due to ABB* 20.0 27.0 22.1 18.9 12.6 23.0 21.1 18.9 23.8 16.9 -26.7
BHEL 109.3 137.3 159.3 148.0 159.5 146.3 128.0 80.2 155.9 226.3 54.6
poor pick up of capex in
Crom.Greaves 9.2 11.1 13.8 14.0 10.2 14.6 11.5 17.0 14.0 20.6 41.2
process related industries L&T 130.2 119.8 122.3 124.5 146.3 120.7 95.7 183.7 177.9 238.4 97.5
and price-driven competition Siemens** 18.8 23.4 20.9 24.1 20.5 18.1 23.5 26.3 51.8 20.5 13.1
on T&D projects * YE Dec, ** YE Sept Source: Company/MOSL

ORDER BACKLOG (RS B) AND BTB (X)

ORDER BOOK (MAR 09) REVENUES (TTM, MAR 10) BOOK TO BILL (X)

ABB 88 63 1.4
BHEL offers the best BHEL 1,438 329 4.4
earnings visibility Crompton Greaves 64 94 0.7
Larsen & Toubro 1,002 367 2.7
Siemens 134 84 1.6
Source: Company/MOSL

Industrial business: execution improves, order intake yet to pick-up

INITIAL SIGNS OF REVENUE TRACTION IN THE INDUSTRIAL SEGMENT

Revenues (Rs b) Revenue Grow th(%), (RHS)

In the January-March 2010 60.0 70.0
quarter, the industrial
45.0 50.0
business rebounded with
revenue growth of 22.7% YoY 30.0 30.0
against de-growth of 1.5%
YoY in 9MFY10 15.0 10.0

0.0 -10.0
1QFY05
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
INDUSTRIAL EBIT MARGINS DECLINE 109BP IN JAN - MAR 10, IMPACTED BY MTM ON FOREX HEDGE
14.9
14.4

The industrial segment's

12.7
12.6
12.5

12.3

EBIT margins in January-

12.2
12.1

12.1
11.5

11.5
11.5
11.3

11.1

11.2

11.1

March 2010 declined 109bp

10.7

10.4
10.2

to 10.4%, given MTM forex

8.8
8.8

8.7
8.6

provisions on hedging
derivatives, largely for ABB
6.6

and Siemens
1QFY05
2QFY05
3QFY05

4QFY05
1QFY06
2QFY06

3QFY06
4QFY06
1QFY07

2QFY07
3QFY07
4QFY07

1QFY08
2QFY08
3QFY08

4QFY08
1QFY09
2QFY09

3QFY09
4QFY09
1QFY10

2QFY10
3QFY10
4QFY10

Source: Company/MOSL

July 2010 97
 Engineering

RELATIVE PERFORMANCE - 3M (%) Valuations fair, maintain Neutral

Sensex Our engineering sector universe trades at FY11E P/E of 23x and P/BV of 5.3x. We
M OSt Engineering Index
108 expect earnings CAGR of 24% over FY10-12 and RoE of 25% in FY11. We estimate that
104 our engineering universe factors in most of the execution pick up, resulting in accelerated
100
earnings momentum in late FY11 and FY12. We retain our Neutral view on the sector and
maintain our Buy ratings on ABB and BHEL.
96
Mar-10

May-10

Jun-10
Apr-10

ENGINEERING SECTOR UNIVERSE TRADES AT FY11E P/E OF 23X

75 70 Engg PAT Gr (LHS) Engg P/E (x) - RHS 53

RELATIVE PERFORMANCE - 1YR (%) 55 53 51
M OSt Engineering Index 50 36 41
35
Sensex 26 23
132 18 16 19 20
25 12 29
122
112 0 17
102
92 -25 -18 -14 5
-19
May-95

May-96

May-97

May-98

May-99

May-00

May-01

May-02

May-03

May-04

May-05

May-06

May-07

May-08

May-09

May-10
Jun-09

Mar-10
Dec-09

Jun-10
Sep-09

Source: Company/MOSL
COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Engineering
ABB 873 Buy 16.7 20.1 33.9 52.2 43.5 25.7 34.0 28.0 16.1 15.6 16.3 23.1
BHEL 2,451 Buy 95.7 118.8 155.5 25.6 20.6 15.8 17.6 12.5 9.6 32.5 32.5 34.0
Crompton Greaves 254 Neutral 12.9 14.4 17.6 19.7 17.7 14.4 18.4 14.8 11.8 39.2 34.8 33.3
Larsen & Toubro 1,761 Neutral 61.7 71.9 89.2 28.6 24.5 19.7 23.0 20.7 16.4 19.7 17.8 18.8
Siemens 728 Neutral 13.7 23.3 26.9 53.1 31.3 27.0 22.6 16.5 15.0 12.7 24.9 24.9
Thermax 709 Neutral 21.8 24.8 32.0 32.6 28.6 22.1 21.0 18.4 14.5 27.0 28.7 32.1
Sector Aggregate 28.5 23.4 18.2 20.6 16.2 12.5 26.1 25.5 27.3

July 2010 98
 Results Preview
SECTOR: ENGINEERING

ABB
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ABB IN Buy
REUTERS CODE
S&P CNX: 5,269 ABB.BO Previous Recommendation: Buy Rs873
YEAR NET SALES PAT EPS EPS GR. P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 211.9 END (RS M) (RS M) (RS) (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 887/641 12/08A 68,370 5,325 25.1 8.3 34.1 8.6 28.4 46.2 2.6 23.1
1,6,12 Rel Perf (%) -4/ 12/-8 12/09A 62,372 3,546 16.7 -33.4 38.5 5.6 15.6 24.3 2.1 24.8
Mcap (Rs b) 185.0 12/10E 70,436 4,252 20.1 19.9 43.5 6.6 16.3 25.6 2.5 28.0
Mcap (USD b) 4.0 12/11E 86,378 7,188 33.9 69.0 25.7 5.4 23.1 35.8 2.0 16.1

„ Order backlog at the end of 1QCY10 was Rs87b, up 25% YoY, BTB ratio was 1.4x TTM revenue, having increased
from 0.9x in CY08. This was driven by an increased share of projects in the order book, which entails a comparatively
higher execution period.
„ Order intake during 1QCY10 was worth Rs17b, down 27% YoY. Excluding mega projects, the management stated
that order intake is up 40% YoY.
„ 1QCY10 revenue growth was up 4.5% YoY, but was down 23% QoQ. Sluggish growth in the power systems
(revenue down 14.5% YoY in 1QCY10 and down 25% in CY09) impacted revenue growth through CY09. For
2QCY10 we expect revenue growth of 10% YoY. Poor order intake, project withdrawals and extended thresholds of
revenue and margin recognition led to revenue and PAT de-growth of 9% and 33% respectively in CY09.
„ 1QCY10 EBITDA margins were 0.2%, down 892bp YoY. This contraction was due to a decline in power systems
where EBIT margins were negative 12.7% v/s 6.3% YoY. For power products they were down 437bp YoY at 8.3%.
Cost escalations of Rs400m on one project which is 96% complete, forex loss of Rs695m, exit from rural electrification
(to be completed by Dec 2010), price driven competition in the product business, etc have been some of the reasons
for the margin decline. For 2QCY10, we expect EBITDA margins of 7%, down 150bp YoY as cost escalations, forex
loss, etc will be limited.
„ 1QCY10 PAT declined 92% YoY and for CY09 it was down 34%. For 2QCY10 we expect PAT to decline 6% as
profitability in the power systems (20% of revenue) continues to be a drag. For CY10, we expect PAT decline of 6%
given margin contraction of 150bp to 7%.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E DECEMBER CY09 CY10 CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Sales 13,931 15,050 14,538 18,852 14,559 16,555 16,864 22,458 62,372 70,436
Change (%) (9.3) (6.9) (4.3) (13.0) 4.5 10.0 16.0 19.1 -8.8 12.9
EBITDA 1,271 1,281 1,223 1,279 29 1,159 2,007 3,123 5,287 6,318
Change (%) -26.4 -32.7 -9.3 -52.3 -97.7 -9.5 64.0 144.1 -31.0 19.5
As % of Sales 9.1 8.5 8.4 6.8 0.2 7.0 11.9 13.9 8.5 9.0
Depreciation 109 125 127 125 120 130 132 137 485 519
Interest 103 80 44 26 38 55 50 107 254 250
Other Income 143 209 159 215 212 220 240 222 726 894
PBT 1,202 1,284 1,212 1,343 83 1,194 2,065 3,101 5,274 6,443
Tax 419 448 381 480 17 406 702 1,066 1,728 2,191
Effective Tax Rate (%) 34.8 34.9 31.4 35.7 20.4 34.0 34.0 34.4 32.8 34.0
Repoted PAT 783 836 831 864 66 788 1,363 2,035 3,546 4,252
Adj. PAT 783 836 831 864 66 788 1,363 2,035 3,546 4,252
Change (%) -33.4 -35.1 -10.4 -55.3 -91.5 -5.8 64.1 135.6 -33.4 19.9
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com)

July 2010 99
 Results Preview
SECTOR: ENGINEERING

BHEL
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BHEL IN
Buy
REUTERS CODE
S&P CNX: 5,269 BHEL.BO Previous Recommendation: Buy Rs2,451
Equity Shares (m) 489.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 2,585/1,940
03/09A 267,880 35,671 72.9 42.1 20.7 5.7 30.1 46.9 2.4 15.1
1,6,12 Rel Perf (%) -1/ 2/-8
03/10A 335,728 46,839 95.7 31.3 24.9 7.3 32.5 51.4 3.3 17.1
Mcap (Rs b) 1,199.8
03/11E 423,138 58,156 118.8 24.2 20.6 6.1 32.5 54.6 2.7 12.5
Mcap (USD b) 25.9
03/12E 547,768 76,118 155.5 30.9 15.8 4.8 34.0 56.0 2.1 9.6

„ For 1QFY11, we expect revenue of Rs72b, up 29% YoY led by steady execution as 4QFY10 order backlog was
Rs1,438b, up 23% YoY. We expect FY11 backlog to be Rs1,604b, up 12% YoY and revenue growth of 26.4% YoY.

„ For 1QFY11 adjusted EBITDA margins are expected to be 11.8%, an expansion of 120bp YoY, driven by operating
leverage.

„ Of the overall order book of Rs1,438b at the end of FY10, 80% was from the power business, 13% from industry and
the rest from export markets. BHEL started receiving orders from its JVs with various SEBs for the supply of super-
critical BTG. It received Rs63b BTG order from the Karnataka Power Corporation in April 2010.

„ For 1QFY11 we expect PAT growth of 23% YoY and for FY11 24%. We expect an EPS and revenue CAGR of 27%
and 28% over FY10-12.

„ In 1QFY11 BHEL signed an agreement with Sheffield Forgemasters, UK for JV to make forgings for turbines and
generators with up to 1,000MW rating.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales (Net) 55,957 66,252 71,003 135,591 72,117 83,256 89,396 178,369 328,803 415,557
Change (%) 29.3 24.0 17.9 28.6 28.9 25.7 25.9 31.5 25.3 26.4
EBITDA 5,920 12,318 15,617 28,728 8,491 15,190 18,330 46,074 62,583 88,086
Change (%) 28.8 51.6 36.1 43.2 43.4 23.3 17.4 60.4 41.4 40.8
As a % Sales 10.6 18.6 22.0 21.2 11.8 18.2 20.5 25.8 19.0 21.2
Adjusted EBITDA 5,920 12,318 15,617 35,074 8,491 15,190 18,330 46,074 68,929 88,086
Change (%) 9.3 35.6 24.5 47.3 43.4 23.3 17.4 31.4 35.5 27.8
As a % Sales 10.6 18.6 22.0 25.9 11.8 18.2 20.5 25.8 21.0 21.2
Interest 43 45 69 178 110 110 165 165 335 550
Depreciation 961 934 1,038 1,647 1,600 1,608 1,602 1,611 4,580 6,421
Other Income 2,271 1,955 1,933 2,080 1,755 1,838 1,922 2,841 8,239 8,356
PBT 7,187 13,294 16,443 28,983 8,536 15,310 18,485 47,140 65,907 89,471
Tax 2,481 4,715 5,717 9,887 2,988 5,359 6,470 16,499 22,800 31,315
Effective Tax Rate (%) 34.5 35.5 34.8 34.1 35.0 35.0 35.0 35.0 34.6 35.0
Reported PAT 4,706 8,579 10,726 19,096 5,548 9,952 12,015 30,641 43,106 58,156
Change (%) 22.4 39.3 35.7 41.7 17.9 16.0 12.0 60.5 37.4 34.9
Adj. PAT 4,533 8,579 11,096 22,633 5,548 9,952 12,015 30,641 46,839 58,156
Change (%) 3.5 26.6 29.0 42.2 22.4 16.0 8.3 35.4 31.3 24.2
Change (%) 97.1 9.1 22.0 36.7 7.5 26.6 29.0 22.7 31.5 23.1
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com)

July 2010 100

 Results Preview
SECTOR: ENGINEERING

Crompton Greaves
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 CRG IN
Neutral
REUTERS CODE
S&P CNX: 5,269 CROM.BO Previous Recommendation: Buy Rs254
Equity Shares (m) 641.6 YEAR NET SALES PAT* EPS* EPS GR. P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 280/146
3/09A 46,107 5,599 8.7 53.2 29.1 5.5 36.6 52.9 1.4 10.0
1,6,12 Rel Perf (%) 4/ 4/29
3/10A 52,840 8,247 12.9 47.3 19.7 7.5 39.2 54.7 2.3 14.2
Mcap (Rs b) 162.9
3/11E 62,621 9,227 14.4 11.9 17.7 7.3 34.8 51.0 2.5 14.8
Mcap (USD b) 3.5
3/12E 75,477 11,298 17.6 22.5 14.4 5.7 33.3 49.3 2.0 11.8
* Consolidated; pre-exceptionals

„ In 1QFY11 we expect Crompton Greaves to report standalone revenue of Rs14b, up 18% YoY and for FY11 Rs62b
up 19%. In 1QFY11, we expect PAT of Rs1.31b, up 14% YoY and for FY11 Rs6.8b, up 18.3%.

„ The consolidated order backlog at the end of 4QFY10 was Rs64b, down 2.5% YoY. The international business has
a backlog of Rs30b and forms 46% of the consolidated backlog. Management has guided for a standalone revenue
growth of 18-20% YoY and for the international business, the FY11 growth guidance is +5% YoY in local currency.
In FY10 Crompton emerged as the biggest player in the 765kV market with 45% share in transformers and reactor
orders from PGCIL.

„ In 4QFY10 international business revenue declined 19% YoY (including ~10% decline due to volumes dip) and PAT
growth was 20% YoY mainly due to a 440bp expansion in EBITDA margins. In FY10, revenue declined 6.5% and
PAT grew 49% due to EBITDA margin expansion of 320bp to 10.9%. In FY11 we expect this business to post 7%
revenue decline and stable PAT as risks to revenues in the EU has increased.

„ 4QFY10 EBITDA margins for the standalone business were 16.7%, up 80bp due to a drop in other expenditure by
337bp YoY. In 1QFY11 we expect margins of 15.2%, up 40bp YoY and for FY11 of 16.7%, up 50bp.

„ We expect Crompton to post consolidated FY11 earnings of Rs14.4 (up 12%) and Rs17.6 (up 23%) in FY12 and
EPS CAGR of 17% over FY10-12.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 11,735 12,686 12,238 16,182 13,806 14,404 15,046 19,365 52,840 62,621
Change (%) 8.4 16.8 13.3 18.8 17.7 13.5 22.9 19.7 14.6 18.5
EBITDA 1,740 2,094 2,036 2,707 2,092 2,348 2,445 3,574 8,578 10,458
Change (%) 26.1 46.7 46.9 24.9 20.2 12.1 20.1 32.0 34.8 21.9
As of % Sales (Adj) 14.8 16.5 16.6 16.7 15.2 16.3 16.3 18.5 16.2 16.7
Depreciation 128 129 132 129 132 138 145 174 519 589
Interest -6 0 11 38 44 44 44 44 44 175
Other Income 84 99 167 337 97 113 201 395 688 805
PBT 1,702 2,064 2,060 3,281 2,013 2,279 2,457 3,751 9,106 10,499
Tax 555 703 705 970 704 798 860 1,313 2,933 3,675
Effective Tax Rate (%) 32.6 34.1 34.2 29.6 35.0 35.0 35.0 35.0 32.2 35.0
Reported PAT 1,147 1,361 1,354 2,311 1,308 1,481 1,597 2,438 6,173 6,825
Adj PAT 1,147 1,361 1,354 1,907 1,308 1,481 1,597 2,438 5,770 6,825
Change (%) 29.1 47.1 59.8 45.7 14.0 8.8 17.9 27.8 46.0 18.3
E: MOSL Estimates
Satyam Agarwal (AgarwalS@MotilalOswal.com)/Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com)

July 2010 101

 Results Preview
SECTOR: ENGINEERING

Larsen & Toubro

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 LT IN Neutral
REUTERS CODE
S&P CNX: 5,269 LART.BO Previous Recommendation: Neutral Rs1,761
YEAR NET SALES PAT * EPS* EPS GR. P/E* P/BV ROE ROCE EV/ EV/
Equity Shares (m) 601.8
END (RS M) (RS M) (RS) (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,844/1,305
3/09A 339,264 30,046 51.5 31.1 19.8 4.8 24.5 26.0 1.9 16.7
1,6,12 Rel Perf (%) 3/ 3/-7
3/10A 370,347 37,110 61.7 20.2 24.1 4.7 19.7 23.7 2.5 19.6
Mcap (Rs b) 1,060.0
3/11E 451,425 43,257 71.9 16.6 24.5 5.0 17.8 20.5 2.5 20.7
Mcap (USD b) 22.9
3/12E 577,789 53,699 89.2 24.1 19.7 4.3 18.8 20.9 2.0 16.4
* Consolidated; EPS is fully diluted

„ In 1QFY11 order intake announced till date was Rs63b. Order intake in 4QFY10 was Rs238b and in 3QFY10 it was
Rs177b. Order backlog at the end of 4QFY10 was Rs1,002b (up 42% YoY) and BTB ratio was 2.7x TTM revenue.
We project FY11 intake of Rs891b (up 28%).

„ Major orders announced in 1QFY11 include (a) construction of offshore platforms for GSPC in the KG-D6 basin
worth Rs10b, (b) construction of the Krishnagiri-Walajahpet national highway on a BOT basis for Rs14b, (c) buildings
and factories worth Rs14b, and (d) sewage and water treatment works for the public works authorities, worth
Rs8.5b.

„ In 1QFY11 we expect EBITDA margins of 11%, up 30bp YoY and for FY11, margins of 11.6%, down 60bp.

„ The EBG business posted 4QFY10 revenue growth of 25% YoY, MIP grew by 10% YoY. Demand for industrial
automation continues to stay weak in developed markets including the Middle East.

„ The management has guided for 20% revenue growth and 25% intake growth in FY11. We factor in revenue and
PAT CAGR of 25% and 20% over FY10-12.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 73,627 78,662 80,714 133,749 87,813 99,288 100,857 160,274 366,752 448,233
Change (%) 6.7 2.3 -6.1 27.8 19.3 26.2 25.0 19.8 9.0 22.2
EBITDA 7,863 7,846 9,561 18,406 9,572 9,135 11,094 22,020 44,559 51,821
Margin (%) 10.7 10.0 11.8 13.8 10.9 9.2 11.0 13.7 12.1 11.6
Adjusted EBITDA 7,863 7,846 9,561 18,406 9,572 9,135 11,094 22,020 44,559 51,821
Adjusted Margin (%) 10.7 10.0 11.8 13.8 10.9 9.2 11.0 13.7 12.1 11.6
Depreciation 937 1,001 1,045 1,162 1,200 1,215 1,310 1,465 4,146 5,190
Interest 1,096 1,310 1,339 1,356 1,390 1,410 1,400 1,436 5,053 5,636
Other Income 2,683 2,702 2,844 5,401 2,550 2,900 2,700 3,096 12,699 11,246
Extraordinary Inc/(Exp) 10,199 120 626 961 0 0 0 0 10,748 0
Reported PBT 18,712 8,357 10,646 22,249 9,532 9,410 11,084 22,216 58,807 52,241
Tax 2,730 2,707 3,058 7,914 3,002 2,964 3,492 6,989 16,409 16,447
Effective Tax Rate (%) 14.6 32.4 28.7 35.6 31.5 31.5 31.5 31.5 27.9 31.5
Reported PAT 15,982 5,650 7,589 14,335 6,529 6,446 7,593 15,227 42,398 35,794
Adjusted PAT 5,783 5,530 6,103 13,374 6,529 6,446 7,593 15,227 30,790 35,794
Change (%) 17.9 10.5 -4.7 25.6 12.9 16.6 24.4 13.9 14.2 16.3
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com)

July 2010 102

 Results Preview
SECTOR: ENGINEERING

Siemens
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SIEM IN
Neutral
REUTERS CODE
S&P CNX: 5,269 SIEM.BO Previous Recommendation: Neutral Rs728
Equity Shares (m) 337.2 YEAR NET SALES PAT* EPS* EPS GR. P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 765/376
9/09A 84,585 4,623 13.7 -11.3 53.1 4.1 12.7 39.2 1.3 10.4
1,6,12 Rel Perf (%) -1/ 24/29
9/10E 95,889 7,856 23.3 69.9 31.3 7.2 24.9 41.4 2.4 16.5
Mcap (Rs b) 245.6
9/11E 112,036 9,086 26.9 15.7 27.0 6.3 24.9 39.1 1.9 15.0
Mcap (USD b) 5.3
9/12E 129,344 11,539 34.2 27.0 21.3 5.4 27.3 42.1 1.5 11.6
*Consolidated

„ In 3QFY10 (September year ending), we expect Siemens to post revenue of Rs21b, up 12.5% YoY, EBITDA of
Rs2.6b (up 5% YoY), and net profit of Rs1.7b (up 1.4% YoY). In 2QFY10, the industry segment posted revenue
growth of 25% YoY and revenue in the energy segment fell 29% YoY. PAT fell 19% as margins declined 178bp to
13%.

„ The order book at end of 2QFY10 was Rs134b (up 39% YoY, and 1% QoQ). In 2QFY10, order intake was Rs22b
(up 18% YoY, 58% QoQ). During the quarter Siemens signed an agreement with Delhi Metro Rail to build coaches
and complete signaling systems for line two.

„ In 2QFY10, EBIT margins for the industry segment improved by 90bp YoY to 6.2% and the energy segment posted
margins of 16.4%, down 188bp YoY. The industry segment posted considerable margin erosion across all divisions
like drives (down 350bp YoY), and the mobility division posted margins of 11% against -32% a year earlier due to the
completion of the Mumbai railway order. In the energy segment, power generation posted margins of 58% due to
margin recognition threshold levels on projects and hence they remain one-offs.

„ PGCIL orders totaling Rs5.7b in FY10 in the 765kV substation space have been awarded to Siemens.

„ We expect Siemens to post FY10 consolidated EPS of Rs24 (up 70% YoY) and for FY11, Rs27 (up 16%).

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E SEPTEMBER FY09 FY10 FY09 FY10E

1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE

Total Revenues 16,399 23,830 19,177 25,180 18,666 22,261 21,575 33,387 84,585 95,889
Change (%) -14.6 10.6 5.3 2.2 13.8 -6.6 12.5 32.6 1.2 13.4
EBITDA 1,702 3,489 2,571 2,469 3,633 2,861 2,697 4,616 10,231 13,808
Change (%) 10.0 2,192.9 -3.1 -28.2 113.4 -18.0 4.9 87.0 31.3 35.0
As % of Revenues 10.4 14.6 13.4 9.8 19.5 12.9 12.5 13.8 12.1 14.4
Depreciation 181 184 199 213 212 237 252 228 778 929
Interest Income 165 94 118 87 157 136 165 236 464 675
Other Income 2,233 30 125 -47 0 0 0 0 2,341 0
Extra-ordinary Items 0 0 2,059 0 0 0 0 0 2,059 0
PBT 3,919 3,429 4,674 2,296 3,579 2,760 2,610 4,624 14,318 13,553
Tax 613 1,174 1,304 780 1,214 930 861 1,740 3,870 4,745
Effective Tax Rate (%) 15.6 34.2 27.9 34.0 33.9 33.7 33.0 37.6 27.0 35.0
Reported PAT 3,306 2,255 3,370 1,516 2,365 1,830 1,749 2,884 10,448 8,809
Adjusted PAT 1,193 2,255 1,725 1,516 2,365 1,830 1,749 2,884 5,912 8,809
Change (%) 9.5 13,428.5 2 -33 98.2 -18.9 1.4 90.2 -5.8 49.0
E: MOSL Estimates
Satyam Agarwal (AgarwalS@MotilalOswal.com)/Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com)

July 2010 103

 Results Preview
SECTOR: ENGINEERING

Thermax
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 TMX IN
Neutral
REUTERS CODE
S&P CNX: 5,269 THMX.BO Previous Recommendation: Neutral Rs709
Equity Shares (m) 119.2 YEAR NET SALES PAT* EPS* EPS GR.* P/E* P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 750/382
03/09A 32,644 2,889 24.2 0.5 27.4 8.2 33.7 48.7 2.3 18.3
1,6,12 Rel Perf (%) -5/ 18/57
03/10A 31,855 2,592 21.8 -10.3 30.6 8.5 27.0 40.7 2.4 19.7
Mcap (Rs b) 84.5
03/11E 36,304 2,952 24.8 13.9 26.9 7.5 28.7 43.3 2.1 17.2
Mcap (USD b) 1.8
03/12E 41,072 3,817 32.0 29.3 20.8 6.3 32.1 46.5 1.8 13.5
* Consolidated

„ In 1QFY11 we expect revenue of Rs61b, up 15% YoY, EBITDA of Rs802m, up 16.5% and margins of 13% (up 20bp
YoY). We expect net profit of Rs507m, up 9% YoY. In FY11 we expect revenue growth of 14% and margins of 12%
(up 30bp) and PAT growth of 12%.

„ Thermax's consolidated order book at the end of 4QFY10 was Rs59b (up 94% YoY, up 6.3%QoQ) and BTB ratio
was 1.9x. The energy division contributed Rs51b and the environment division contributed Rs8.2b to the order
backlog. The signing of a JV agreement with Babcox & Wilcox and a settlement with Purolite of Rs1.14b for patent
infringement in the ion exchange business will pave the way for Thermax to grow these businesses.

„ Thermax could also probably bid for NTPC's bulk tendering of super-critical boilers after the tie-up with B&W. The
JV with B&W (51:49) will have peak production capacity of 3GW, to be set up over 18 months, and will employ about
500 people.

„ Thermax's revenue is increasingly becoming skewed towards the second half of the year due to the inherent nature
of utility orders with longer threshold limits for margin recognition.

„ Our consolidated EPS for FY11 and FY12 is Rs25 (up 14%) and Rs32 (up 29%) respectively. Our estimates factor
in revenue and PAT CAGR of 14% and 21% over FY10-12 respectively.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 5,376 6,678 7,483 12,193 6,172 7,261 7,987 14,884 31,730 36,304
Change (%) -25.0 -15.5 -5.9 28.6 14.8 8.7 6.7 22.1 -2.4 14.4
EBITDA 689 667 894 1,466 802 888 955 1,697 3,716 4,341
Change (%) -24.4 -16.5 -7.6 10.0 -16.4 -63.5 -76.7 -57.7 -7.4 16.8
As of % Sales 12.8 10.0 11.9 12.0 13.0 12.2 12.0 11.4 11.7 12.0
Depreciation 95 104 104 101 103 103 103 103 404 412
Interest 5 1 6 3 10 10 15 15 15 50
Other Income 103 267 74 179 91 114 136 114 623 454
Extra-ordinary Items 0 0 0 -1,149 0 0 0 0 -1,149 0
PBT 692 829 858 392 780 888 973 1,692 2,771 4,334
Tax 227 288 292 549 273 311 341 592 1,356 1,475
Effective Tax Rate (%) 32.8 34.7 34.1 140.0 35.0 35.0 35.0 35.0 49.0 34.0
Reported PAT 465 541 565 -157 507 577 633 1,100 1,414 2,858
Change (%) -27.0 -5.0 -21.8 -116.6 9.1 6.7 11.9 -801.6 -50.8 102.1
Adj PAT 465 541 565 992 507 577 633 1,100 2,563 2,858
Change (%) (27.0) (5.0) (21.8) 6.7 9.1 6.7 11.9 10.9 (10.4) 11.5
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Navneet Iyengar (Navneet.Iyengar@MotilalOswal.com)

July 2010 104

 Results Preview
QUARTER ENDING JUNE 2010

FMCG
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Expect lower YoY growth in 1QFY11: We expect slowdown in sales and profit growth
Asian Paints
of our FMCG coverage universe on YoY basis. Sales growth will decline from 21% in
Britannia Industries 4QFY10 to 14.8% in 1QFY11 mainly due to lower realizations in a few categories.
EBITDA will grow by 8.9% v/s 17.9% in 4QFY10 and 23% in 1QFY10. We estimate
Colgate Palmolive 110bp decline in EBITDA margin on YoY basis due to high input costs and price-based
Dabur India
competition. PAT growth is estimated at 7.6% v/s 15.9% in 4QFY10 and 20% in FY10.

GSK Consumer
Volume growth steady, low price increases impact sales growth: FMCG volume
growth has been steady in most categories despite high food inflation (currently ruling at
Godrej Consumer Products 16.5%). However, some slowdown has been visible in toilet soaps, shampoo and
toothpaste. FMCG companies desisted from price increases, rather some categories like
Hindustan Unilever
detergents, soaps and shampoos have seen price cuts. We expect steady volume growth
ITC but lower sales growth due to lower realization growth.

Marico A normal monsoon will aid demand growth, margin expansion: A normal monsoon
will be a key trigger for the sector. On one hand, it will boost the incomes of small and
Nestle India
marginal farmers in rural India, while on the other, resulting decline in food inflation will
United Spirits benefit the urban lower income class. The lower income sections in both urban and rural
India will report demand resurgence. Increase crop output and lower prices of agri
inputs will also boost the profitability of processed food companies.

Valuations challenging; play selectively for long haul: FMCG companies are trading
near their peak valuations even as current quarter profitability is under pressure. We
expect competitive intensity to increase further, as long-term potential will continue to
attract new players (both domestic and foreign) in various categories. We continue to
prefer niche plays which face low competition. We remain positive on ITC, Nestle and
Colgate for the long term. Britannia remains a favored play among mid-caps.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

FMCG
Asian Paints 2,393 Neutral 16,939 16.0 -9.7 2,880 4.4 -7.4 1,859 5.6 -3.0
Britannia 1,872 Buy 8,556 17.0 -8.0 402 -32.9 LP 277 -49.0 302.6
Colgate 848 Buy 5,391 15.2 4.4 1,443 17.8 0.2 1,131 10.1 7.3
Dabur 200 Buy 8,801 18.5 3.7 1,382 16.9 -14.7 1,058 15.7 -20.5
Godrej Consumer 342 Buy 7,592 73.0 49.1 1,465 69.6 36.3 967 38.7 5.4
GSK Consumer 1,814 Buy 5,672 21.0 -12.5 828 11.0 -37.8 641 16.1 -33.3
Hind. Unilever 267 Neutral 49,079 9.0 12.0 6,675 -6.7 12.1 5,039 -6.1 19.4
ITC 302 Buy 46,151 11.7 -10.1 15,701 13.2 -3.0 10,124 15.2 -1.5
Marico 126 Buy 7,594 9.0 26.1 1,025 6.3 20.7 692 15.3 19.8
Nestle 2,908 Buy 14,151 17.0 -4.4 2,717 3.8 -10.6 1,865 4.7 -5.4
United Spirits 1,300 Buy 14,775 19.0 18.0 2,719 22.5 49.9 1,194 12.9 110.0
Sector Aggregate 184,700 14.8 1.6 37,237 8.9 2.6 24,846 7.6 4.1

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 105

 FMCG

Expect lower YoY growth in 1QFY11

We expect slowdown in sales and profit growth of our FMCG coverage universe on YoY
basis. Sales growth will decline from 21% in 4QFY10 to 14.8% in 4QFY10 mainly due to
lower realizations and price cuts in a few categories. EBITDA will grow by 8.9% v/s
17.9% in the previous quarter and 23% in 1QFY10. We estimate 110bp decline in EBITDA
margin on YoY basis due to high input costs and price-based competition. PAT growth is
estimated at 7.6% v/s 15.9% in 4QFY10 and 20% in FY10.

Volume growth steady in most categories despite high food inflation

FMCG volume growth has been steady in most categories despite high food inflation
(currently ruling at 16.5%). However, some slowdown has been visible in toilet soaps,
shampoo and toothpaste. Food inflation has impacted purchasing power of low income
groups in both urban and rural India. We note that food accounts for 40% of the monthly
spend of an average Indian; this proportion is much higher for low income consumers who
contribute a major chunk to the incremental volume growth in FMCG.

Steady volume growth in this environment indicates higher allocation for FMCG in the
non-food spends. We expect volume growth to remain steady in 1QFY11 also. We estimate
4.5% decline in cigarette volumes (14% increase in consumer spends) for ITC due to
17% increase in excise duty; United Spirits’ volume growth will suffer due to lower volumes
in Andhra Pradesh (20% of sales) on account of renewal of retail licenses.
FMCG: TOILET SOAPS, SHAMPOO AND CIGARETTE VOLUME GROWTH SUFFERS

QUARTER ENDING DEC-08 MAR-09 JUN-09 SEP-09 DEC-09 MAR-10 JUN-10E

Asian Paints 2.0 13.0 11.5 17.5 25.0 16.0 15.0

Colgate (Toothpaste) 14.0 15.2 14.0 18.0 15.0 11.0 13.0
Dabur 14.0 13.0 16.0 13.0 14.5 12.0 14.5
Godrej Consumer
Soaps 19.0 34.0 15.0 16.0 11.0 0.0 3.0
Hair Color 7.0 13.0 14.0 35.0 11.0 14.0 12.0
GSK Consumer 13.0 20.0 12.0 9.0 10.0 13.0 12.0
Hindustan Unilever 2.3 -4.2 2.0 1.0 5.0 10.9 12.0
ITC (cigarette) -3.5 -3.0 5.0 7.5 8.5 8.8 -4.5
Marico
Parachute 9.0 N.A 14.0 10.0 8.0 10.0 9.0
Hair Oil 14.0 N.A 9.0 17.0 10.0 27.0 25.0
Saffola 3.0 N.A 13.0 22.0 18.0 13.0 14.0
United Spirits 19.0 24.0 17.0 11.1 12.3 16.0 11.5
Source: Company/MOSL

FOOD INFLATION HURTING LOWER INCOME STRATA (%)…

20

15 16.5

10

7.5
5
2.1
0

-5
Mar-02

Dec-02

Jun-04

Mar-05

Dec-05

Jun-07

Mar-08

Dec-08

May-10
Sep-03

Sep-06

Aug-09

Source: Bloomberg

July 2010 106

 FMCG

Pricing actions mixed – HUL, P&G cut prices, ITC, Britannia increase prices
FMCG players have been cautious on increasing prices despite increase in input costs.
However, ITC has increased cigarette prices by 15% post excise duty increase (10.2% of
MRP) in the budget, displaying strong pricing power. Product categories that have seen
price cuts in the last six months include toilet soaps (selective), mid-priced detergents,
shampoos and hair oils. The price reductions have mainly been in the form of actual
reductions as well as higher quantities being offered at the same price. Categories like
biscuits, glucose and malted food drinks have seen price increases. Major pricing actions
during the quarter include sharp reduction in detergent cake prices by both HUL and P&G
and consumer offers in shampoos by P&G. Dabur has increased Amla oil and glucose
prices by 5%.

DETERGENTS AND SHAMPOOS HAVE SEEN PRICE CUT IN 1QFY11 (RS)

JUN-10 MAR’10 JUN-09 3M (%) 12M (%)

Detergents Powder(Rs/Kg)
Wheel 30 30 30 0 0.0
Rin 50 50 70 0 -28.6
Surf Excel Blue 110 110 124 0 -11.3
Tide Natural 40 40 0
Tide 56 56 70 0 -20.0
Detergent Cake (Rs/100gm)
Wheel Bar 2 2.5 2.5 -20 -20.0
Rin Shakti Bar 4 5.0 6 -20 -33.3
Tide bar 5 3.6 9 39 -44.4
Toilet Soaps (Rs/100gm)
Lux 16.4 16.4 18 0 -9.1
Lifebuoy 12.5 12.5 13.3 0 -6.2
Godrej No 1 11 11 10 0 9.0
Santoor 18 18
Toothpaste (Rs/200gm SKU)
Pepsodent 57 57 61 0 -5.9
Colgate (CDC) 56 56 56 0 0.0
Shampoo (Rs/100gm)
Pantene 49 66 59 -25 -16.9
Head & Shoulders 59 77 69 -23 -14.5
Clinic Plus 47 47 44 0 6.8
Sunsilk 56 56 54 0 3.7
Source: Company/MOSL

New launches gathering momentum…

Competitive intensity is increasing, as the Indian FMCG market is attracting the attention
of all global players; domestic players are also increasing their aggressiveness in launching
new products and variants. We have seen increasing number of product launches by
players like J&J (Neutrogena), Glaxo (Horlicks Cookies), ITC (Lucky Strike cigarettes,
Vivel Deo Spirit and Vivel Active Fair), Garnier (deodorant), HUL (Sure anti-perspirant),
Marico (Saffola oats), Britannia (Milk Bikis Almond and cookies). Processed foods and
skin care are attracting maximum attention from the marketers. The premium segment
seems to be attracting attention, more so from new MNC entrants. HUL has launched a
Rs1,000 variant in its Pure IT water purifier while ITC launched small filters on a test
market basis.

July 2010 107

 FMCG

NEW PRODUCT LAUNCHES TO INTENSIFY COMPETITION

COMPANY CATEGORY BRAND VARIANT

Britannia Biscuits Milk Bikis Almond Cookies

Cookies Elachi cookies
GSK Consumer Biscuits Horlicks Cookies
Garnier Deo Garnier Minerals
HUL Skin Care Sure Roll on
Water Pure IT Compact
ITC Skin Creams Vivel Active Fair
Cigarettes Lucky Strike
Cigarette Capstan, Berkeley, Scissors Rs1.5/stick variant
Johnson’s Facial Scrub Neutrogena
Marico Oats Saffola
Wipro Deo Santoor
Source: Company/MOSL

…in a scenario of rising media inflation

FMCG companies have seen significant increase in ad spends in FY10. The media industry
indicated 48% increase in ad spend by the FMCG industry in CY09, as the operating
environment was favorable and ad rates were benign due to lower inventory utilization.
However, media inventory utilization levels have improved significantly and leading players
have increased ad rates by 8-15% in the last few months. This could pose a challenge in
the coming quarters, as increasing competition will require higher ad spends from the
industry in a rising media inflation scenario. We factor in moderate increase in absolute ad
spends by FMCG companies post high ad spends of FY10.

AD SPENDS IS LIKELY TO DECLINE (%)

COMPANY FY08 FY09 FY10 FY11E

Britannia Inds 32.5 17.5 27.0 12.0

Colgate 24.0 6.0 10.0 13.0
Dabur* 15.5 16.1 35.9 9.4
GSK Consumer 14.4 18.0 55.6 15.2
Hind. Unilever 11.8 15.7 41.4 10.0
Marico 15.0 2.6 35.2 13.5
Nestle India 24.0 12.9 37.6 24.8
United Spirits 4.2 14.4 27.3 13.5
Source: Company/MOSL

Input costs mixed; agri input prices likely to soften

Prices of major raw materials are showing a mixed trend. Palm fatty acid (PFA) prices
are up 41% since October 2009. LAB prices are down 8% since December 2009. Sugar
and wheat prices have softened 35% and 10%, respectively from the peak. Input costs for
paints (titanium dioxide and mineral turpentine oil) are up by 6.5% in three months. We
expect agri input prices to remain soft if the monsoon is normal post the sharp increase last
year.

July 2010 108

 FMCG

IMPACT OF INPUT PRICE CHANGES

INPUT PRICE TREND UNIT 52 WEEK CURRENT IMPACT COMPANIES

YOY H/L PRICE

LAB Up Rs/Kg 90/71 84 Negative HUL

Soda Ash Down Rs/75Kg 1,038/837 838 Positive HUL
Palm Fatty Acid Up US$/MT 700/319 700 Negative HUL, Godrej Consumer
Wheat Up Rs/Qtl 1,304/1,137 1,304 Negative Nestle, ITC and Britannia
Milk Up Index 266/233 266 Negative Nestle, GSK Consumer
Copra Down Rs/Qtl 3,825/2,900 3,255 Positive Marico
Source: MOSL

PALM FATTY ACID: ~ UP 41% SINCE OCTOBER 2009 LAB PRICES: DOWN 8% SINCE DECEMBER

850 140
713
683 119
700 120
USD/MT

109
629

Rs/Kg
550 100
94.1

400 80 86

340 79.1
250 67
60
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Sep-06

Sep-07

Sep-08

Sep-09
May-06

May-07

May-08

May-09

May-10

Jul-09
Jun-07

Feb-09
Jan-07

Sep-08

Dec-09
Nov-07

May-10
Aug-06

Apr-08
HDPE: TRENDING CRUDE SUGAR PRICES: 35% DECLINE IN 4 MONTHS

2,250 4,600
4,105

1,850 3,800
USD/MT

INR/Qtl

1,670 1,285
1,450 3,000

1,230 2,655
1,240
1,050 2,200

1,848
650 1,400
Jun-09

Jun-10
Jun-09

Feb-09

Feb-10
Feb-10
Jan-09

Sep-09

Nov-09
May-08

May-10

Oct-08

Oct-09
Oct-08
Aug-08

Apr-09

COPRA PRICES: MOVING IN NARROW BAND TITANIUM DIOXIDE: INCHING UP

5,000 260
239
4,450 235
223
Rs/Qtl

3,900 210
3,555 3,550

3,350 185
163
2,800
160
Jun-08

Jun-09

Jun-10
Feb-09

Feb-10
Dec-08

Dec-09
Oct-08

Oct-09
Aug-08

Aug-09
Apr-08

Apr-09

Apr-10

Jul-06

Jul-07

Jul-08

Jul-09
Jan-07

Jan-08

Jan-09

Jan-10
Oct-06

Oct-07

Oct-08

Oct-09
Apr-07

Apr-08

Apr-09

Apr-10

Source: Bloomberg/MOSL

July 2010 109

 FMCG

Valuations challenging; play selectively for long haul

FMCG companies are trading near their peak valuations even as current quarter profitability
is under pressure. We expect competitive intensity to increase further, as long-term potential
will continue to attract new players (both domestic and foreign) in various categories. We
continue to prefer niche plays which face low competition. We remain positive on ITC,
Nestle and Colgate for the long term. Britannia remains a favored play among mid-
caps.

RELATIVE PERFORMANCE - 3M (%) RELATIVE PERFORMANCE - 1YR (%)

Sensex MOSt FMCG Index MOSt FMCG Index Sensex

118 150

111 135

104 120

97 105

90 90

Jun-09

Mar-10
Dec-09

Jun-10
Sep-09
May-10
Mar-10

Jun-10
Apr-10

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

FMCG
Asian Paints 2,393 Neutral 79.9 86.5 104.6 29.9 27.7 22.9 19.0 17.4 14.4 48.2 41.2 39.9
Britannia 1,872 Buy 68.9 88.4 116.8 27.2 21.2 16.0 29.8 16.7 12.1 42.2 44.2 46.1
Colgate 848 Buy 29.7 32.3 38.1 28.6 26.2 22.3 22.4 19.2 16.3 156.0 120.1 114.4
Dabur 200 Buy 5.8 6.6 8.2 34.8 30.2 24.5 27.2 22.6 18.6 45.8 41.5 40.0
Godrej Consumer 342 Buy 11.7 15.2 18.4 29.3 22.5 18.6 24.6 17.7 15.0 50.3 52.4 49.8
GSK Consumer 1,814 Buy 55.4 64.6 79.1 32.8 28.1 22.9 22.1 19.9 15.7 25.7 25.4 26.1
Hind. Unilever 267 Neutral 9.4 9.5 11.3 28.2 28.2 23.7 20.0 19.9 16.5 64.0 71.5 74.4
ITC 302 Buy 10.6 12.4 14.6 28.4 24.4 20.7 17.0 14.7 12.4 28.9 28.5 28.5
Marico 126 Buy 4.0 4.7 5.9 31.7 26.6 21.3 20.6 17.9 14.7 37.3 32.3 30.0
Nestle 2,908 Buy 72.4 81.4 99.3 40.2 35.7 29.3 26.8 24.1 19.8 120.0 116.0 120.0
United Spirits 1,300 Buy 28.0 43.1 61.0 46.3 30.1 21.3 16.4 15.6 12.3 8.3 11.4 14.1
Sector Aggregate 30.3 26.6 22.1 19.5 17.3 14.4 35.7 35.2 35.7

July 2010 110

 Results Preview
SECTOR: FMCG-PAINTS

Asian Paints
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 APNT IN Neutral
REUTERS CODE
S&P CNX: 5,269 ASPN.BO Previous Recommendation: Neutral Rs2,393
Equity Shares (m) 95.9 YEAR NET SALES ADJ. PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 2,465/1,081
3/09A 54,632 4,014 41.8 -3.9 57.2 17.6 33.4 39.4 3.9 31.6
1,6,12 Rel Perf (%) 6/35/ 90
3/10A 64,193 7,666 79.9 91.0 29.9 13.3 48.2 56.1 3.3 17.5
Mcap (Rs b) 229.5
3/11E 75,359 8,295 86.5 8.2 27.7 10.5 41.2 50.4 2.7 16.0
Mcap (USD b) 5.0
3/12E 87,958 10,037 104.6 21.0 22.9 8.4 39.9 50.7 2.3 13.2

„ We expect Asian Paints to report net sales of Rs17b in 1QFY11, a growth of 16% YoY. We estimate 15% volume
growth in domestic decorative paints; value growth reflects the impact of increase in excise duty and price changes.
„ We estimate 120bp YoY decline in gross margin to 43% (44.2% in 4QFY10) and 190bp YoY decline in EBITDA
margin to 17% (16.6% in 4QFY10).
„ We expect 4.4% YoY increase in EBITDA and 5.6% YoY increase in PAT.
„ Decorative paints demand remains robust in most parts of the country; tier-II and tier-III cities are growing faster
than big cities.
„ Input cost index has increased by 6% in the last three months while excise duty has increased 2%. The company has
increased prices by 4.1% from 1 May, which will partially neutralize the impact of increase in costs.
„ We expect competitive intensity to increase in the coming quarters, as Akzo India (earlier ICI India) and Kansai
Nerolac are adopting aggressive strategies to increase their presence in the high growth Indian market.
„ The stock is trading at 27.7x FY11E and 22.9x FY12E earnings. Maintain Neutral.
QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Volume Growth % * 11.5 17.5 25.0 16.0 15.0 14.0 16.0 15.0 17.5 15.0
Titanium Dioxide Price Index # 106 106 103 105 108 110 112 114 105 111
Net Sales 14,602 17,239 16,200 18,768 16,939 19,998 19,035 19,388 66,809 75,359
Change (%) 17.6 16.9 22.6 31.7 16.0 16.0 17.5 3.3 22.3 12.8
Raw Material/Packing Material 8,191 9,798 9,127 10,464 9,655 11,439 10,945 11,161 37,580 43,199
Gross Profit 6,411 7,441 7,073 8,304 7,284 8,559 8,090 8,227 29,230 32,160
Gross Margin (%) 43.9 43.2 43.7 44.2 43.0 42.8 42.5 42.4 43.8 42.7
Operating Expenses 3,653 4,213 3,892 5,195 4,404 5,119 4,759 4,951 16,954 19,233
% of Sales 25.0 24.4 24.0 27.7 26.0 25.6 25.0 25.5 25.4 25.5
EBITDA 2,758 3,228 3,181 3,109 2,880 3,440 3,331 3,276 12,276 12,926
Margin (%) 18.9 18.7 19.6 16.6 17.0 17.2 17.5 16.9 18.4 17.2
Change (%) 60.2 54.6 191.0 73.6 4.4 6.6 4.7 5.4 83.4 5.3
Interest 72 64 79 69 58 62 66 62 285 248
Depreciation 198 200 197 241 225 230 232 232 836 919
Other Income 156 247 167 208 170 185 178 235 778 768
PBT 2,645 3,211 3,072 3,006 2,767 3,333 3,211 3,217 11,934 12,528
Tax 844 1,065 955 868 858 1,033 963 1,029 3,731 3,884
Effective Tax Rate (%) 31.9 33.2 31.1 28.9 31.0 31.0 30.0 32.0 31.3 31.0
PAT before Minority 1,801 2,146 2,117 2,138 1,909 2,299 2,248 2,188 8,203 8,644
Minority Interest 40 89 133 221 50 80 100 119 483 349
Adjusted PAT 1,761 2,057 1,985 1,917 1,859 2,219 2,148 2,069 7,720 8,295
Change (%) 64.9 55.4 232.8 86.8 5.6 7.9 8.2 7.9 92.4 7.4
Exceptional / Prior Period Items 1 -627 -1 -9 0 0 0 0 -636 0
Reported PAT 1,760 2,684 1,986 1,926 1,859 2,219 2,148 2,069 8,356 8,295
E: MOSL Estimates; * Domestic Decotrative Paints; # FY08 avareage as 100

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 111

 Results Preview
SECTOR: FMCG

Britannia Industries
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BRIT IN Buy
REUTERS CODE
S&P CNX: 5,269 BRIT.BO Previous Recommendation: Buy Rs1,872
Equity Shares (m) 23.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,922/1,497
03/09A 31,122 2,011 84.2 9.7 22.2 5.0 24.4 36.4 1.2 13.9
1,6,12 Rel Perf (%) 2/ 14/-2
03/10A 34,014 1,634 68.9 -18.2 27.2 10.5 42.2 28.2 1.2 24.8
Mcap (Rs b) 44.7
03/11E 38,993 2,112 88.4 28.4 21.2 8.6 44.2 37.7 1.0 13.8
Mcap (USD b) 1.0
03/12E 44,626 2,791 116.8 32.2 16.0 6.7 46.1 43.6 0.9 9.8

„ We expect Britannia to report sales of Rs8.6b, a growth of 17% YoY. Volume growth is likely to be in double digits,
realizations will increase in low to mid-single digits due to grammage reduction and price increases.

„ We estimate EBITDA margin at 4.7% as against -1.2% in 4QFY10, a considerable improvement QoQ (though down
350bp YoY), given the benefits of declining sugar and wheat prices.

„ We expect EBITDA to decline 33% YoY to Rs402m, and PAT to decline 49% YoY to Rs277m due to interest on
bonus debentures.

„ Britannia has gone aggressive, with Rs5 pack of its flagship GoodDay, which should enable it to compete with ITC’s
Sunfeast. In addition, it has launched Milk Bikis Almond cookies and Britannia Elachi cookies to upgrade consumers.
We expect competitive intensity to remain high, as GSK Consumer is entering the premium cookies segment.

„ Sugar prices have declined by 35% from the peak while wheat prices are lower by 10%. We expect lower input costs
to boost margins in the coming quarters; YoY expansion would be visible from 3QFY11.

„ The stock trades at 21.2x FY11E and 16x FY12E EPS. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 7,312 8,585 8,814 9,303 8,556 10,130 10,136 10,171 34,014 38,993
YoY Change (%) 5.5 2.4 7.7 22.1 17.0 18.0 15.0 9.3 9.3 14.6
Raw Material Cost 5,070 5,918 6,418 7,168 6,246 7,243 6,994 6,950 24,573 27,433
Gross Profit 2,243 2,668 2,396 2,134 2,310 2,887 3,142 3,221 9,441 11,561
Margins (%) 30.7 31.1 27.2 22.9 27.0 28.5 31.0 31.7 27.8 29.6
Other Exp 1,643 1,930 2,017 2,250 1,908 2,229 2,260 2,279 7,840 8,676
% of Sales 22.5 22.5 22.9 24.2 22.3 22.0 22.3 22.4 23.0 22.3
Total Exp 6,713 7,848 8,434 9,418 8,153 9,472 9,254 9,229 32,413 36,109
EBITDA 599 737 380 -116 402 658 882 942 1,601 2,885
Margins (%) 8.2 8.6 4.3 -1.2 4.7 6.5 8.7 9.3 4.7 7.4
YoY Growth (%) 4.1 9.9 -42.1 -116.9 -32.9 -10.7 132.2 -914.3 -44.2 57.2
Depreciation 91 94 95 96 98 101 103 105 376 407
Interest 8 9 8 17 90 94 96 102 42 382
Other Income 153 126 113 161 120 115 125 120 553 480
PBT 653 762 390 -67 334 578 808 855 1,736 2,575
Tax 109 101 29 -136 57 102 146 158 103 464
Rate (%) 16.7 13.3 7.4 201.9 17.1 17.6 18.1 18.5 5.9 18.0
Adjusted PAT 544 660 361 69 277 477 662 696 1,634 2,112
YoY Change (%) 18.7 10.7 -31.4 -84.0 -49.0 -27.8 83.4 912.3 -18.8 29.3
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 112

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SECTOR: FMCG

Colgate Palmolive
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 CLGT IN Buy
REUTERS CODE
S&P CNX: 5,269 COLG.BO Previous Recommendation: Buy Rs848
Equity Shares (m) 136.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 862/542
03/09A 16,948 2,902 21.3 25.2 34.3 46.1 153.3 150.2 5.7 28.7
1,6,12 Rel Perf (%) 13/ 27/28
03/10A 19,625 4,038 29.7 39.1 24.7 30.6 156.0 154.0 4.9 19.3
Mcap (Rs b) 115.3
03/11E 22,620 4,396 32.3 8.9 22.7 24.6 120.1 119.3 4.2 16.5
Mcap (USD b) 2.5
03/12E 26,128 5,178 38.1 17.8 19.3 20.0 114.4 113.8 3.6 13.9

„ We expect sales to grow 15% YoY to Rs 5.4b; volume growth at 13%.

„ We estimate 410bp YoY expansion in gross margin to 60.3%, mainly due to the merger of subsidiaries. EBITDA
margin is likely to increase 60bp YoY to 25.9%.

„ We expect PBT to increase by 17.5% YoY; however, 520bp increase in tax rate to 23% will curtail PAT growth to
10%.

„ Competitive intensity is increasing, as HUL is aggressively pushing Pepsodent to prevent steady erosion in its market
share. We expect increase in ad spends.

„ We believe that Colgate will be able to grow at above market average rates in oral care due to strong brand and its
presence across price segments.

„ Colgate remains the best pure play on the growth potential in the oral care segment in India. The stock is trading at
22.7x FY11E and 19.3x FY12E EPS. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Toothpaste Volume Gr. (%) 14.0 18.0 15.0 11.0 13.0 12.0 13.5 15.0 14.0 13.5
Net Sales 4,680 4,873 4,906 5,166 5,391 5,511 5,667 6,051 19,625 22,620
YoY Change (%) 14.8 18.1 17.0 13.4 15.2 13.1 15.5 17.1 15.8 15.3
COGS 2,050 2,076 2,100 1,543 2,143 2,210 2,289 2,452 7,768 9,094
Gross Profit 2,630 2,797 2,806 3,623 3,248 3,301 3,377 3,599 11,856 13,525
Gross Margin (%) 56.2 57.4 57.2 70.1 60.3 59.9 59.6 59.5 60.4 59.8
Other Operating Expenses 1,579 1,847 1,798 2,376 1,995 2,133 2,131 2,287 7,599 8,545
% to Sales 33.7 37.9 36.6 46.0 37.0 38.7 37.6 37.8 38.7 37.8
Other Operating Income 174 156 203 194 190 170 210 212 727 782
EBITDA 1,226 1,106 1,212 1,441 1,443 1,338 1,457 1,524 4,985 5,763
Margins (%) 25.3 22.0 23.7 26.9 25.9 23.6 24.8 24.3 24.5 24.6
Depreciation 56 58 56 206 80 80 85 86 376 331
Interest 5 1 5 4 4 5 6 5 15 20
Financial Other Income 86 66 74 28 110 80 90 55 254 335
PBT 1,251 1,113 1,225 1,259 1,469 1,333 1,456 1,488 4,848 5,747
Tax 223 216 166 204 338 320 342 350 810 1,350
Rate (%) 17.8 19.4 13.6 16.2 23.0 24.0 23.5 23.5 16.7 23.5
PAT 1,028 897 1,059 1,055 1,131 1,013 1,114 1,138 4,038 4,396
YoY Change (%) 42.9 41.3 36.2 36.9 10.1 13.0 5.2 7.9 39.2 8.9
Extraordinary Expenses 0 0 -105 -89 0 0 0 0 -194 0
Reported PAT 1,028 897 1,164 1,144 1,131 1,013 1,114 1,138 4,233 4,396
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 113

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SECTOR: FMCG

Dabur India
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 DABUR IN Buy
REUTERS CODE
S&P CNX: 5,269 DABU.BO Previous Recommendation: Buy Rs200
Equity Shares (m) 864.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 206/115
03/09A 28,054 3,912 4.5 17.1 42.5 20.3 47.7 44.5 5.8 34.7
1,6,12 Rel Perf (%) 3/ 22/43
03/10A 33,657 5,015 5.8 28.3 33.4 15.3 45.8 46.9 4.9 26.2
Mcap (Rs b) 172.8
03/11E 39,851 5,735 6.6 14.2 29.0 11.9 41.5 47.8 4.1 21.7
Mcap (USD b) 3.7
03/12E 46,778 7,053 8.2 23.0 23.5 9.4 40.0 47.2 3.4 17.8

„ We expect Dabur India to report net sales of Rs8.8b, up 18.5% YoY, with 14.5% volume growth. We estimate 20bp
decline in EBITDA margin, with lower ad spends neutralizing the impact of lower gross margins. PBT is likely to
increase 19.5% YoY; 180bp increase in tax rate will reduce the PAT growth to 15.7%.

„ Glucose, juices and oral care will be the key drivers in the domestic market. International business will maintain high
double-digit growth in sales. Vatika shampoo will report yet another quarter of subdued performance.

„ Dabur has increase the prices of Amla Oil, glucose and Babool Gel – full benefits will be reflected in the coming
quarters.

„ Increase in price of HDPE is likely to impact margins; although decline in sugar prices provide some solace.

„ The stock is trading at 29x FY11E and 23.5x FY12E EPS. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Volume Growth (%) 16.0 13.0 14.0 12.0 15.0 14.0 13.0 16.0 15.0 14.5
Net Sales 7,427 8,480 9,262 8,488 8,801 10,092 10,836 10,123 33,657 39,851
YoY Change (%) 23.0 22.7 18.9 16.0 18.5 19.0 17.0 19.3 20.0 18.4
Total Exp 6,244 6,726 7,489 6,868 7,419 8,013 8,756 8,165 27,327 32,352
EBITDA 1,182 1,754 1,773 1,620 1,382 2,079 2,081 1,958 6,330 7,499
Margins (%) 15.9 20.7 19.1 19.1 15.7 20.6 19.2 19.3 18.8 18.8
YoY Growth (%) 35.7 40.6 37.5 25.0 16.9 18.5 17.3 20.9 34.5 18.5
Depreciation 123 139 146 149 152 161 182 189 557 684
Interest 37 33 37 25 28 32 35 39 132 134
Other Income 78 107 59 143 115 127 80 158 387 480
PBT 1,101 1,690 1,650 1,589 1,317 2,013 1,944 1,889 6,028 7,162
Tax 190 286 271 258 250 413 365 369 1,006 1,397
Rate (%) 17.3 16.9 16.4 16.2 19.0 20.5 18.8 19.5 16.7 19.5
Minority Interest -4 11 1 0 9 5 6 10 8 30
Adjusted PAT 914 1,392 1,378 1,331 1,058 1,595 1,572 1,510 5,015 5,735
YoY Change (%) 29.4 29.1 27.0 27.6 15.7 14.6 14.1 13.5 27.5 15.7
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 114

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SECTOR: FMCG

GlaxoSmithKline Consumer
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SKB IN Buy
REUTERS CODE
S&P CNX: 5,269 GLSM.BO Previous Recommendation: Buy Rs1,814
Equity Shares (m) 42.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,895/902
12/08A 15,431 1,883 44.8 16.3 40.5 9.2 24.8 38.4 4.2 27.4
1,6,12 Rel Perf (%) 3/ 37/78
12/09A 19,213 2,328 55.4 23.6 32.8 7.7 25.7 39.6 3.2 19.8
Mcap (Rs b) 76.4
12/10E 23,510 2,717 64.6 16.7 28.1 6.5 25.4 38.9 2.6 18.0
Mcap (USD b) 1.6
12/11E 27,681 3,327 79.1 22.4 22.9 5.5 26.1 40.0 2.2 14.1

„ We expect GSK Consumer to report net sales of Rs5.7b, a YoY growth of 21%.

„ Volume growth is likely to remain strong at 12%, aided by increasing penetration and per capita consumption, and 5%
price increase from January 2010.

„ We estimate 130bp decline in EBITDA margin due to increased excise duty and high input costs of milk and sugar.
Higher ad spends on new launches like Foodles will also impact margins.

„ The company is increasing focus on new launches; it has extended Horlicks Foodles to South and East India.

„ It has entered the cookies segment, which is 15% of Rs100b biscuits market. This will mark the entry of Horlicks
into the high growth (20-25% CAGR) high margin segment of the biscuit industry.

„ GSK will continue to strengthen leadership in the malted foods category; success of non-MFD products will determine
medium-term growth prospects.

„ The stock has seen a major re-rating in the past one year; future returns would be a function of growth in existing
segments and success of new launches.

„ GSK is currently trading at 28.1x CY10E and 22.9x CY11E EPS. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E DECEMBER CY09 CY10 CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

MFD Volume Growth (%) 14.0 12.0 6.0 16.0 12.5 12.0 13.5 10.0 10.0 12.0
Net Sales 5,394 4,687 4,951 4,181 6,484 5,672 6,089 5,265 19,213 23,510
YoY Change (%) 31.3 24.5 17.2 25.4 20.2 21.0 23.0 25.9 24.5 22.4
Total Exp 4,207 3,941 4,165 3,814 5,154 4,843 5,194 4,859 16,127 20,050
EBITDA 1,187 746 786 368 1,331 828 895 406 3,086 3,460
Margins (%) 22.0 15.9 15.9 8.8 20.5 14.6 14.7 7.7 16.1 14.7
YoY Change (%) 46.7 36.6 24.6 -8.6 -6.7 11.0 13.9 10.4 29.2 12.1
Depreciation 106 105 105 104 96 112 115 125 420 448
Interest 13 11 10 9 6 10 12 17 43 45
Other Income 256 228 213 218 236 280 310 336 916 1,162
PBT 1,324 858 884 473 1,465 986 1,078 599 3,539 4,129
Tax 485 307 283 136 503 345 361 202 1,211 1,411
Rate (%) 36.6 35.7 32.1 28.8 34.4 35.0 33.5 33.6 34.2 34.2
PAT 839 552 600 337 962 641 717 398 2,328 2,717
YoY Change (%) 48.4 19.6 13.2 3.4 14.6 16.1 19.5 18.1 23.6 16.7
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 115

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SECTOR: FMCG

Godrej Consumer Products

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 GCPL IN Buy
REUTERS CODE
S&P CNX: 5,269 GOCP.BO Previous Recommendation: Buy Rs342
Equity Shares (m) 308.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 373/160
03/09A 13,957 1,824 5.9 -16.1 57.8 15.8 30.4 27.2 6.3 43.4
1,6,12 Rel Perf (%) -5/ 30/74
03/10A 20,412 3,396 11.0 86.2 31.1 15.0 50.3 48.1 5.2 25.0
Mcap (Rs b) 105.5
03/11E 38,090 4,994 15.4 39.7 22.2 12.0 52.4 54.8 3.4 18.0
Mcap (USD b) 2.3
03/12E 45,248 6,334 19.5 26.8 17.5 9.4 49.8 51.1 2.9 15.3
* Estimates from FY10 factor in 49% consolidation for Godrej Saralee

„ We expect consolidated net sales of Rs7.6b, a growth of 73% YoY; sales include the benefits of recent acquisitions
like Megasari, Godrej Home Care (earlier GSL), Issue Group and Argencos.

„ We estimate 40bp decline in EBITDA margin. Higher interest burden (acquisitions) will curtail PAT growth to 38%.

„ We expect low single digit volume growth in toilet soaps due to high base effect and slow industry growth; hair color
sales will increase in mid-teens due to gains from rising penetration and price increases.

„ GCPL has acquired Megasari (Indonesia), Issue Group and Argencos (Argentina), Tura (Nigeria), and the balance
stake in Godrej Saralee. We estimate total acquisition cost at Rs26b.

„ We believe that GCPL is now an emerging markets play, with focus on personal wash, hair care and household care
in Asia, Latin America and Africa. We believe integrating operations would be a key factor to watch out for in the
coming quarters.

„ The stock is trading at 22.2x FY11E and 17.5x FY12E EPS. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Palm Oil Price Index* 78 103 91 94 91

Net Sales 4,389 5,756 5,176 5,092 7,592 10,165 9,955 10,378 20,412 38,090
YoY Change (%) 21.4 65.4 51.3 48.1 73.0 76.6 92.3 103.8 46.2 86.6
EBITDA 864 1,119 1,014 1,075 1,465 1,942 1,881 2,004 4,073 7,292
Margins (%) 19.7 19.4 19.6 21.1 19.3 19.1 18.9 19.3 20.0 19.1
Depreciation 52 68 56 61 99 108 117 106 236 430
Interest -56 26 20 27 150 135 130 125 17 540
Other Income 8 139 111 122 6 8 11 15 379 40
PBT 876 1,164 1,049 1,110 1,222 1,707 1,645 1,788 4,199 6,362
Tax 179 234 198 192 255 365 360 387 803 1,368
Rate (%) 20.5 20.1 18.8 17.3 20.9 21.4 21.9 21.6 19.1 21.5
PAT 697 930 851 918 967 1,341 1,285 1,401 3,396 4,994
YoY Change (%) 78.2 112.3 112.4 54.5 38.7 44.2 51.0 52.7 86.2 47.1
E: MOSL Estimates; * Palm Fatty Acid Distillate with a 3 month lag (FY08 average as 100)

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 116

 Results Preview
SECTOR: FMCG

Hindustan Unilever
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HUVR IN Neutral
REUTERS CODE
S&P CNX: 5,269 HLL.BO Previous Recommendation: Neutral Rs267
Equity Shares (m) 2,177.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 306/218
03/09A* 167,617 20,636 9.5 18.4 28.1 26.6 121.3 122.8 2.6 17.5
1,6,12 Rel Perf (%) 6/ -1/-20
03/10A 177,253 20,590 9.4 -0.4 28.2 17.1 64.0 82.5 3.0 18.9
Mcap (Rs b) 580.4
03/11E 198,129 20,630 9.5 0.2 28.2 19.0 71.5 89.8 2.6 18.8
Mcap (USD b) 12.5
03/12E 225,073 24,577 11.3 19.1 23.7 16.7 74.4 95.5 2.3 15.5
* EPS for 12 months (April 2008-March 2009)

„ We expect HUL to report 9% YoY increase in sales for 1QFY11 to Rs49b, with volume growth at ~12% (1QFY10
volume growth of 2%). Volume growth at 12% YoY is led by (1) impact of higher grammage in detergents and
shampoo sachets, (2) price reductions in toilet soaps, and (3) increased brand building and trade promotions.
„ Gross margin is likely to decline 90bp YoY to 48.6%, led by higher input costs and impact of price cuts in laundry,
soaps and shampoo. We estimate 230bp decline in EBITDA margin due to the impact of higher ad spend and royalty
payments to the parent. 50% increase in financial other income will curtail PAT decline at 6.7%.
„ HUL has increased ad spend significantly in FY10 (up 41.4% to 13.5% of sales); we see no let up in the trend as it
continues to invest aggressively in brand building.
„ We believe that sales and profit trend in soaps and detergents will be a key factor to watch out for. Price war with
P&G had resulted in 1.9% sales decline and 24% EBIT decline in 4QFY10, though the full impact of price war was
yet to be reflected.
„ We have EPS estimates of Rs9.5 for FY11 and Rs11.3 for FY12. The stock is currently trading at 28.2x FY11E and
23.7x FY12E earnings. Maintain Neutral.
QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Volume Growth (%) 2.0 1.0 5.0 11.0 12.0 12.0 9.0 7.0 4.8 10.0
Palm Fatty Acid 81 120 110 130 167 163 163 163 110 164
Net Sales (incl service inc) 45,026 42,692 45,732 43,802 49,079 47,346 51,906 49,798 177,253 198,129
YoY Change (%) 6.3 3.9 4.4 8.5 9.0 10.9 13.5 13.7 5.4 11.8
COGS 23,198 21,512 22,111 22,175 25,717 24,951 26,057 25,922 88,779 102,648
Gross Profit 21,828 21,181 23,622 21,627 23,361 22,395 25,849 23,876 88,474 95,481
Margin (%) 48.5 49.6 51.7 49.4 47.6 47.3 49.8 47.9 49.9 48.2
Operating Exp 14,678 14,661 15,747 15,672 16,687 16,240 17,804 17,359 60,975 68,090
% to Sales 32.6 34.3 34.4 35.8 34.0 34.3 34.3 34.9 34.4 34.4
EBITDA 7,150 6,520 7,875 5,955 6,675 6,155 8,045 6,517 27,500 27,392
YoY Change (%) 12.5 16.6 3.1 -0.1 -6.7 -5.6 2.2 9.4 7.6 -0.4
Margins (%) 15.9 15.3 17.2 13.6 13.6 13.0 15.5 13.1 15.5 13.8
Depreciation 425 462 450 503 515 534 561 578 1,840 2,188
Interest 52 15 2 1 21 27 31 33 70 112
Other Income 335 473 389 284 500 620 540 500 1,481 2,160
PBT 7,009 6,515 7,812 5,735 6,639 6,214 7,993 6,406 27,071 27,252
Tax 1,643 1,520 1,822 1,513 1,600 1,460 1,918 1,644 6,481 6,622
Rate (%) 23.4 23.3 23.3 26.4 24.1 23.5 24.0 25.7 23.9 24.3
Adjusted PAT 5,367 4,995 5,990 4,221 5,039 4,754 6,075 4,763 20,590 20,630
YoY Change (%) -0.6 9.4 -1.8 -7.6 -6.1 -4.8 1.4 12.8 0.7 0.2
Extraordinary Inc/(Exp) 65 -710 501 1,591 0 0 0 0 1,430 0
Reported Profit 5,432 4,285 6,491 5,812 5,039 4,754 6,075 4,763 22,020 20,630
YoY Change (%) -2.7 -21.6 5.4 47.1 -7.2 10.9 -6.4 -18.1 4.1 -6.3
E: MOSL Estimates
Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 117

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SECTOR: FMCG

ITC
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ITC IN Buy
REUTERS CODE
S&P CNX: 5,269 ITC.BO Previous Recommendation: Buy Rs302
Equity Shares (m) 3,774.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 308/187
03/09A 155,827 32,636 8.6 4.6 34.9 7.7 23.8 32.8 6.7 20.3
1,6,12 Rel Perf (%) 6/ 17/33
03/10A 183,822 40,610 10.8 24.4 28.1 7.9 30.3 41.3 5.6 16.1
Mcap (Rs b) 1140.4
03/11E 204,315 46,951 12.4 15.6 24.3 6.7 29.5 40.0 5.0 14.2
Mcap (USD b) 24.6
03/12E 234,108 55,045 14.6 17.2 20.7 5.7 29.2 40.2 4.3 11.8

„ We expect ITC to post revenue growth of 11.7% YoY to Rs46.1b in 1QFY11. EBITDA is likely to increase 13.2%
YoY, with 40bp margin expansion. We estimate PAT growth of 15.2% YoY to Rs10.1b, aided by 10% increase in
other income and 80bp lower tax rate.
„ We expect the cigarette business to report 4.5% volume decline in 1QFY11 following a sharp ~17% increase in
excise duty and 15% price increase by ITC. We estimate 8% increase in EBIT, led by 250bp margin expansion. ITC
has entered the 59mm filter cigarette segment, the benefits of which will be reflected in the coming quarters.
„ We estimate 18% increase in New FMCG sales and 22% decline in EBIT loss. ITC has launched Vivel Deo Spirit
and Fiama Di Wills gel bars. It has also entered the skin creams segment, with Vivel Active Fair.
„ The paper and paperboard unit is likely to sustain another quarter of strong growth due to low base effect (3.5%
decline in EBIT in 1QFY10). Agri business will report moderate sales growth and small decline in EBIT due to higher
margins in 1QFY10.
„ Hotels occupancies have increased to ~70%; however the ARR (average revenue per room) remains lower YoY.
We estimate 20% increase in sales and 50% increase in EBIT (65% decline in 1QFY10) on a low base.
„ The stock is currently trading at 24.3x FY11E EPS of Rs12.4 and 20.7x FY12E EPS of Rs14.6. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Cigarette Vol Gr (%) 5.5 7.5 8.5 8.8 -4.5 -2.5 2.5 4.5 8.3 0.0
Net Sales 41,329 43,453 45,802 51,316 46,151 49,500 52,500 60,103 183,822 208,254
YoY Change (%) 5.1 12.5 18.7 28.7 11.7 13.9 14.6 17.1 16.3 13.3
Total Exp 27,456 27,552 28,725 35,137 30,450 31,200 32,300 40,612 120,792 134,562
EBITDA 13,873 15,901 17,076 16,180 15,701 18,300 20,200 19,490 63,031 73,691
Growth (%) 19.5 30.8 23.9 24.6 13.2 15.1 18.3 20.5 24.7 16.9
Margins (%) 33.6 36.6 37.3 31.5 34.0 37.0 38.5 32.4 34.3 35.4
Depreciation 1,516 1,484 1,549 1,539 1,620 1,700 1,750 1,799 6,087 6,869
Interest 58 182 109 185 42 140 130 183 534 495
Other Income 876 684 1,591 592 960 650 1,250 411 3,743 3,271
PBT 13,175 14,920 17,010 15,048 14,999 17,110 19,570 17,920 60,153 69,599
Tax 4,388 4,821 5,569 4,766 4,875 5,475 6,262 5,659 19,543 22,272
Rate (%) 33.3 32.3 32.7 31.7 32.5 32.0 32.0 31.6 32.5 32.0
Adjusted PAT 8,787 10,099 11,442 10,282 10,124 11,635 13,308 12,261 40,610 47,327
YoY Change (%) 17.4 25.8 26.7 27.1 15.2 15.2 16.3 19.2 24.4 16.5
Sales Growth (YoY, %)
Cigarettes 14.4 15.3 17.0 15.0 3.0 6.0 9.0 11.0 19.8 8.6
FMCG - Others 9.5 14.0 23.6 25.0 18.0 17.0 14.0 14.0 20.9 15.7
EBIT Growth (YoY, %)
Cigarettes 17.1 24.3 15.5 16.5 8.0 11.5 15.0 16.5 18.0 12.8
FMCG - Others (loss) -18.6 -27.3 -27.3 -24.0 -22.0 -17.0 -17.0 -24.0 -27.7 -20.0
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 118

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SECTOR: FMCG

Marico
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 MRCO IN Buy
REUTERS CODE
S&P CNX: 5,269 MRCO.BO Previous Recommendation: Buy Rs126
Equity Shares (m) 609.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 135/70
03/09A 23,884 2,038 3.3 28.5 37.6 14.4 44.9 42.5 2.8 22.3
1,6,12 Rel Perf (%) 15/ 19/50
03/10A 26,608 2,454 4.0 20.4 31.2 10.1 37.3 49.7 2.5 17.6
Mcap (Rs b) 76.5
03/11E 30,519 2,845 4.7 17.1 26.6 7.4 32.3 47.1 2.1 15.2
Mcap (USD b) 1.7
03/12E 36,077 3,555 5.9 24.9 21.3 5.5 30.0 45.3 1.7 12.4

„ We expect Marico to report net sales of Rs7.6b, up 9% YoY. Volume growth should remain robust at 13%; value
growth would be impacted by price reductions effected in key categories.
„ Marico had cut prices of Parachute by 5-17% in small packs for smooth up-trading from loose oil to branded oil. The
company has also initiated sales promotion schemes in large packs of Parachute and Shanti Amla oil, which will
impact margin.
„ Raw material prices continued to be benign during the quarter as the prices of copra (though higher on YoY basis) and
safflower oil remained benign.
„ We estimate 100bp decline in gross margin and 30bp decline in EBITDA margin. 300bp decline in tax rate will enable
the company to post 15.3% PAT growth.
„ International business continues to be strong with steady sales growth and margin expansion. Kaya will continue to
be under pressure.
„ Presence of strong brands and lower threat of entry of MNC's in coconut oil makes Marico one of the most consistent
performers in FMCG. The stock trades at 26.6x FY11E EPS and 21.3x FY12E EPS. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Volume Growth (%) 14.0 15.0 14.0 14.0 13.0 13.5 14.5 13.5 14.0 13.5
Net Sales 6,967 6,922 6,696 6,023 7,594 7,683 8,035 7,207 26,608 30,519
YoY Change (%) 16.8 14.4 7.8 7.3 9.0 11.0 20.0 19.7 11.4 14.7
COGS 3,501 3,262 3,167 2,646 3,896 3,880 3,993 3,428 12,577 15,198
Gross Profit 3,466 3,660 3,528 3,377 3,698 3,803 4,042 3,778 14,031 15,321
Gross Margin (%) 49.7 52.9 52.7 56.1 48.7 49.5 50.3 52.4 52.7 50.2
Other Expenditure 2,501 2,711 2,540 2,527 2,673 2,781 2,885 2,779 10,240 11,118
% to Sales 35.9 39.2 37.9 42.0 35.2 36.2 35.9 38.6 38.5 36.4
EBITDA 965 950 988 849 1,025 1,022 1,157 999 3,791 4,203
Margins (%) 13.8 13.7 14.8 14.1 13.5 13.3 14.4 13.9 14.2 13.8
YoY Change (%) 27.5 28.5 24.8 15.9 6.3 7.6 17.1 17.6 24.7 10.9
Depreciation 99 179 166 157 125 135 147 157 601 564
Interest 86 56 64 50 55 60 65 71 257 251
Other Income 31 42 56 53 42 50 59 54 183 205
PBT 811 757 814 695 887 877 1,004 825 3,116 3,594
Tax 210 133 183 117 195 158 231 135 643 719
Rate (%) 25.9 17.5 22.5 16.9 22.0 18.0 23.0 16.3 20.6 20.0
Minority Interest 0 0 9 0 6 5 8 11 19 30
Adjusted PAT 600 624 622 578 692 719 765 680 2,454 2,845
YoY Change (%) 29.6 32.4 22.2 -2.7 15.3 15.2 23.0 17.6 20.4 15.9
Exceptional Items -41 0 0 -57 -9 -8 -5 -8 -61 -30
Reported PAT 560 624 613 520 683 711 760 672 2,393 2,815
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 119

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SECTOR: FMCG

Nestle India
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 NEST IN Buy
REUTERS CODE
S&P CNX: 5,269 NEST.BO Previous Recommendation: Buy Rs2,908
Equity Shares (m) 96.4 YEAR NET SALES ADJ. PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 3,065/1,701
12/08A 43,242 5,650 58.6 31.0 49.6 57.3 119.4 169.9 6.2 31.1
1,6,12 Rel Perf (%) -5/ 15/40
12/09A 51,294 6,976 72.4 23.5 40.2 46.6 120.0 165.2 5.2 25.9
Mcap (Rs b) 280.3
12/10E 60,574 7,847 81.4 12.5 35.7 40.1 116.0 157.0 4.4 23.3
Mcap (USD b) 6.0
12/11E 72,413 9,577 99.3 22.1 29.3 34.0 120.0 161.3 3.7 19.2

„ We expect Nestle to report net sales of Rs14.2b in 2QCY10, a growth of 17% YoY. We expect the company to
sustain volume growth in mid teens.
„ EBITDA will likely increase 3.8% on account of 240bp decline in margins. Higher input costs of milk and sugar, low
price increases, and higher ad spend will impact profitability.
„ We believe that prepared dishes will continue to be the key volume growth driver for the company. The instant
noodles category (~80% of prepared dishes sales) has seen the entry of GSK Consumer (Foodles) and HUL (Knorr
Soupy noodles), which would require increased innovation and ad spends from Nestle.
„ The chocolates and confectionary category is likely to return to double-digit volume growth, as the inflationary impact
in sugar is waning and SKUs have stabilized after frequent changes of last year.
„ Monsoons could be a key factor to watch out for in Nestle. Good monsoons can lower milk price inflation (milk
constitutes 45% of raw material cost) and boost demand. We believe Nestlé’s margins had bottomed out in 1QCY10
and the coming quarters could see recovery.
„ The stock is trading at 35.7x CY10 EPS and 29.3x CY11E EPS. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E DECEMBER CY09 CY10E CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Net Sales 12,659 12,095 13,022 13,518 14,798 14,151 15,366 16,258 51,294 60,574
YoY Change (%) 16.0 16.8 17.6 24.0 16.9 17.0 18.0 20.3 18.6 18.1
Total Exp 9,562 9,478 10,380 11,537 11,758 11,434 12,447 13,431 40,956 49,069
EBITDA 3,097 2,618 2,642 1,981 3,040 2,717 2,920 2,828 10,338 11,505
Margins (%) 24.5 21.6 20.3 14.7 20.5 19.2 19.0 17.4 20.2 19.0
YoY Growth (%) 24.4 34.2 27.5 -6.7 -1.8 3.8 10.5 42.7 19.7 11.3
Depreciation 256 264 286 307 310 315 322 335 1,113 1,282
Interest 2 6 2 5 6 3 2 4 14 14
Other Income 103 88 88 106 91 104 115 84 385 395
PBT 2,943 2,436 2,443 1,775 2,816 2,503 2,711 2,574 9,596 10,604
Tax 864 654 659 442 845 638 651 623 2,620 2,757
Rate (%) 29.4 26.9 27.0 24.9 30.0 25.5 24.0 24.2 27.3 26.0
Adjusted PAT 2,078 1,782 1,784 1,333 1,971 1,865 2,060 1,951 6,976 7,847
YoY Change (%) 22.2 43.5 34.6 -3.4 -5.2 4.7 15.5 46.4 23.5 12.5
Extraordinary Inc/(Exp) -105 -102 44 -204 48 -79 -109 -329 -367 -469
Reported PAT 1,973 1,680 1,828 1,129 2,019 1,786 1,951 1,622 6,609 7,378
YoY Change (%) 23.2 38.7 38.8 -6.7 2.3 6.3 6.8 43.7 23.8 11.6
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 120

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SECTOR: FMCG

United Spirits
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 UNSP IN Buy
REUTERS CODE
S&P CNX: 5,269 UNSP.BO Previous Recommendation: Buy Rs1,300
Equity Shares (m) 117.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1514/810
03/09A 54,681 1,875 23.0 24.9 56.6 5.1 7.8 9.9 3.0 19.1
1,6,12 Rel Perf (%) 9/ -1/19
03/10A 64,771 3,287 28.0 22.0 46.3 3.8 8.3 13.0 2.7 16.4
Mcap (Rs b) 153.1
03/11E 69,502 5,056 43.1 53.8 30.1 3.5 11.4 13.2 2.6 15.7
Mcap (USD b) 3.3
03/12E 81,495 7,150 61.0 41.4 21.3 3.0 14.1 15.8 2.2 12.3

„ We expect Untied Spirits to register 19% growth in topline to Rs14.8b in 1QFY11. EBITDA margins are likely to
expand by 50bp to 18.4% due to 3% lower ENA prices and partial booking of ad-spends on IPL in 4QFY10.
„ EBITDA should increase 22% to Rs2.7b. However, 46% increase in interest burden (higher working capital and
conversion of W&M acquisition debt to rupee debt) will curtail PAT growth to 12.9% YoY.
„ We expect IMFL volumes to increase by 11.5% in 1QFY11, as low offtake in Andhra Pradesh will impact volume
growth. We note that Andhra Pradesh volumes will be impacted due to renewal of licenses – Andhra Pradesh
accounts for 20% of United Spirits’ volumes.
„ ENA prices are estimated at Rs147/case for 1QFY11 and the current ruling prices are Rs141/case. The impact of
further reduction will be reflected in the coming quarter. We expect ENA prices to trend lower post 2QFY11 as
sugarcane production is likely to increase by 25% in the current year.
„ We expect volume growth of 13.8% in FY11 and 15% in FY12. We estimate 130bp margin expansion in FY11 due to
higher realizations and expected softening in ENA prices. We believe that United Spirits continues to be the best bet
in the liquor space in India due to wide product portfolio and dominating market share. Success of successful branding
strategy in W&M would be a key variable to watch out for in the medium term. The stock is trading at 30.1x FY11E
EPS of 43.1 and 21.3x FY12E EPS of Rs61. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Volume Growth (%) 17.0 10.0 12.3 16.0 11.5 15.0 14.5 14.0 13.5 13.8
ENA Price/Case 150 150 151 152 145 141 125 125 151 135
Net Sales 12,417 10,801 13,468 12,521 14,775 13,150 16,100 14,894 49,207 58,919
YoY Change (%) 22.5 19.7 30.8 37.9 19.0 21.8 19.5 18.9 27.9 19.7
Total Exp 10,198 8,980 11,256 10,708 12,056 10,783 13,138 12,502 52,697 48,479
EBITDA 2,219 1,821 2,212 1,813 2,719 2,367 2,962 2,392 8,065 10,440
Margins (%) 17.9 16.9 16.4 14.5 18.4 18.0 18.4 16.1 16.4 17.7
Depreciation 80 83 93 114 115 117 120 45 370 397
Interest 592 751 747 1,023 870 840 800 788 3,112 3,298
PBT from Operations 1,547 987 1,372 677 1,734 1,410 2,042 1,560 4,583 6,746
YoY Change (%) 1 -25 207 -14 12 43 49 131 13 47
Other Income 63 109 85 146 75 120 100 149 422 444
PBT 1,610 1,097 1,456 822 1,809 1,530 2,142 1,709 5,004 7,190
Tax 553 401 488 254 615 536 728 559 1,695 2,438
Rate (%) 34.4 36.5 33.5 30.9 34.0 35.0 34.0 32.7 33.9 33.9
PAT 1,057 696 968 569 1,194 995 1,414 1,151 3,309 4,753
YoY Change (%) -9.8 -25.9 216.6 2.2 12.9 42.9 46.0 102.4 11.3 43.6
Extraordinary Inc/(Exp) 700 0 0 0 0 0 0 0 700 0
Reported PAT 1,757 696 968 569 1,194 995 1,414 1,151 4,009 4,753
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com) / Nikhil Kumar N (Nikhil.N@MotilalOswal.com)

July 2010 121

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QUARTER ENDING JUNE 2010

Information Technology
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Infosys to outperform on revenue growth for third consecutive quarter: We
HCL Technologies
expect Infosys to post the best 1QFY11 results among the top tier universe with US
Infosys dollar revenue growth of 5.3% QoQ, ahead of its guided range of 2.6-3.4%. TCS and
Wipro are expected to follow with growth of 4.7% QoQ and 3.7% QoQ respectively.
MphasiS
Growth is expected to be broad-based, led by BFSI, with improved traction in
Patni Computer Manufacturing/discretionary service lines. The US is expected to lead growth. Cross
TCS currency impacts to depress US$ revenues by 1-1.5%.

Tech Mahindra
EBITDA margins to fall due to wage inflation, currency movement: We expect
Wipro EBITDA margins to fall by 90-130bp QoQ at the top three IT players due to cross
currency movements and wage inflation, with declines at Infosys expected to be lower.
HCL Tech is expected to decline by 60bp due to impact of global customer meet related
expenses and higher contractor charges. Improved utilization at Infosys and TCS, along
with staggering of wage inflation in 1QFY11 and promotions in 2QFY11 at TCS, will
cushion the margin impact.

Expect Infosys FY11 EPS guidance of Rs117, revenue growth guidance of 17-
19%: For FY11 we expect Infosys to give a US dollar revenue growth guidance of 17-
19% (v/s 16-18% earlier) and an EPS guidance of Rs116-117 (v/s Rs111 at the top-end
earlier). Caution on guidance might be due to uncertainty about the European crisis. We
expect Infosys and Wipro to guide for 4-5% QoQ growth in 2QFY11.

Prefer Infosys, HCL Tech, Mphasis: We expect IT demand to revive in FY11 with
20-23% volume growth and expect 1QFY11 results to reinforce this expectation. We
prefer playing the sector through companies gaining from [1] a pick-up in discretionary
demand, [2] better operational scope, and [3] greater MNC offshoring. We like Infosys,
HCL Tech and Mphasis on these parameters. Amongst the other top tier companies, we
prefer TCS over Wipro.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Information Technology
HCL Technologies 358 Buy 32,641 12.2 6.1 5,999 -4.0 2.8 2,982 -3.7 -7.2
Infosys 2,778 Buy 62,780 14.7 5.6 20,782 11.3 2.8 15,871 3.9 6.9
MphasiS 571 Neutral 12,857 16.3 5.3 3,073 5.3 -2.5 2,660 16.0 -0.5
Patni Computer 511 Buy 7,906 2.3 2.1 1,541 -6.6 -9.0 1,352 -1.2 -9.7
TCS 762 Neutral 81,204 12.7 5.0 23,243 18.5 0.5 18,512 21.8 -4.1
Tech Mahindra 738 Neutral 11,713 5.2 -1.0 2,641 -5.9 -5.3 1,501 67.4 -19.5
Wipro 391 Neutral 73,726 15.4 5.7 13,771 7.3 3.5 12,074 19.5 -0.1
Sector Aggregate 282,828 13.3 5.1 71,473 10.4 1.9 55,444 15.0 -0.1

Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com)

July 2010 122

 Information Technology

Cross currency impacts to depress US dollar revenue: In 1QFY11 the rupee has
stayed stable on average against the US dollar and the Euro and the GBP have depreciated
against the US dollar by 8% and 4.3% respectively. The negative impact of cross currency
movements is expected to be 1-1.5%. HCL Tech is expected to be worst affected and
Infosys is expected to be least affected.

Upgrades to be driven by pricing up-ticks, deal renegotiation win-rate: We expect

1QFY11 results and commentary to provide greater clarity on [1] the possibility of pricing
increases, driven by a growth skew towards discretionary service lines like Package
Implementation/products/consulting. and [2] market share gains in impending deal
renegotiations (v/s MNC incumbents). We see these factors as key determinants for the
next level of upgrades in the sector.

Consistent QoQ revenue growth for top companies

We expect consistent 3.7-5.3% QoQ revenue growth for the top three IT companies in
1QFY11, despite a 1-1.3% negative impact of cross currency movements. We expect
Infosys to post the highest sequential growth at 5.3%, followed by TCS with 4.7% and
Wipro with 3.7%. Revenue growth of 6% QoQ or higher, despite the impact of cross
currency movements would be taken positively. HCL Tech might under-perform peers on
revenue growth with 3.6% QoQ growth, partly contributed by higher cross currency impacts
(1.5%) and lower BPO revenue (1% negative impact).

INFOSYS REVENUE GROWTH TO OUTPERFORM FOR THE THIRD CONSECUTIVE QUARTER (QOQ US$)

TCS Infosys Wipro

8%

4%

0%

-4%

-8%
1QFY11E
1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

Source: Company/MOSL

EBITDA margin moderation due to wage inflation, currency movement

We expect EBITDA margin declines of 90-130bp for the top three IT companies due to
[1] wage inflation, and [2] cross-currency movement. We expect utilization improvement
at TCS and Infosys and SGA leverage at TCS to cushion the margin declines.

Individual company expectations:

„ TCS: We expect wage inflation (10% offshore, 2-4% in developed markets and 2-
10% in emerging markets), along with cross-currency movement to lead to moderation
of EBITDA margins by 130bp. Improvement in utilization, SGA leverage on the reset
of higher provisions for doubtful debts and staggering of wage inflation in 1QFY11 and
promotions in 2QFY11 will restrict EBITDA margin declines.

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 Information Technology

„ Infosys: We expect EBITDA margins to decline by 90bp (v/s guidance of 250bp) to

33.1%, largely due to wage inflation (13% offshore and 2-3% onsite). Margin declines
will be lower than guided due to better rupee realizations (US$/INR average of 46 v/
s guidance of 44.5), higher than guided growth of 5.3% QoQ (v/s 2.6-3.4%) and
improved utilization.
„ Wipro: We expect a decline of 130bp in IT services EBIT margins due to a residual
impact of one month of wage inflation (effective February 2010), cross-currency
movement and a growth skew towards emerging markets/IMS and BPO.
„ HCL Tech: We expect HCL Tech’s EBITDA margin to decline by 60bp due to
impact of one off expense items like global customer meet related expenses and higher
contractor charges in their EAS segment. A fall in BPO revenue is another key margin
depressant.

Future margin impacts of promotions at TCS in 2QFY11 and the possibility of a wage hike
at Wipro will be closely watched. We expect EBITDA margins to be largely resilient at
top tier IT players in FY11, with declines of 0-60bp, unless the rupee appreciates materially.

WAGE INFLATION, CROSS-CURRENCY MOVEMENT DEPRESS EBITDA MARGINS

Infosys TCS Wipro (overall) HCLT

38%
34.1% 34.6% 35.5%
33.6% 34.0% 33.1%
33%
28.7% 29.7% 29.9%
27.2% 28.6%
26.2%
28%
21.5% 23.0% 22.1% 21.6% 21.9%
23% 21.2%

20.6% 21.5% 21.8%

18% 20.3%
19.0% 19.7%

1QFY11E
4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

Source: Company/MOSL

FY11 revenue, earnings guidance expectations at Infosys

We expect Infosys’ 1QFY11 revenue to grow 5.3% QoQ, ahead of its guidance of 2.6-
3.4%. Our expectations build a basic EPS of Rs27.8 in 1QFY11 v/s guidance of Rs.24.4
at the higher end. We expect the company to guide for FY11 US dollar revenue growth of
17-19%. We also expect Infosys to guide for higher end FY11 EPS guidance of Rs117.

We expect Wipro’s revenue to be in line with its guided range of 2-4.2% QoQ growth at
3.7% QoQ. This is above the top end of its guidance, adjusting for negative cross currency
impacts of 1.2%. We expect Infosys and Wipro to guide US dollar revenue growth of 4-
5% QoQ in 2QFY11.

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 Information Technology

INFOSYS GUIDANCE V/S EXPECTATIONS

1QFY11G FY11G FY11RG 1QFY11E FY11E COMMENTS

INR Revenue (b) 59.2-59.6 248-252.4 258.5-263.1 62.8 272.5

Sequential Growth (%) -0.4 to 0.3 9-11 13.7-15.7 5.6 19.8 Expect rupee growth guidance upgrade
of 4.7%
EBITDA Margin (%) 31.5 33.1 33.6 33.1 34.0 Expect EBITDA margins to decline by
60bp (v/s guidance of 150bp)
Decline 250bp 150bp 100bp 90bp 60bp Mix based pricing increases could
provide upsides
INR EPS 24.3-24.4 106.8-111.3 116-117 27.8 123.8 Expect higher end EPS to be upgraded by 5%
US$ Revenue (b) 1.33-1.34 5.57-5.67 5.62-5.72 1.37 5.93
Sequential Growth (%) 2.6-3.4 16-18 17-19 5.3 23.3 Expect increase of 1% in US dollar revenue
growth guidance
US$ EPS Guidance 0.55-0.56 2.4-2.5 2.5-2.55 0.60 2.69 Expect ~2% increase in US dollar EPS
guidance
INR/US$ 44.5 44.5 46.0 46.0 46.0 Implies currency appreciation of 2.7% v/s
6% guided earlier
Note: RG implies revised guidance after 1QFY11 Source: Company/MOSL

1QFY11 GUIDANCE EXCHANGE RATE ASSUMPTIONS

GUIDED AT EUR GBP AUD INR/US$

Infosys 1.35 1.51 0.92 44.50

Wipro 1.46 1.63 0.91 46.64
Actual (average) 1.27 1.49 0.88 45.66
Source: Company/MOSL

We expect Infosys to guide cautiously on FY11 US dollar revenue growth on the uncertainty
of the impact of the European crisis on its clients. A guidance exceeding 21% would be
taken positively. Commentary on pricing, deal pipeline, hiring and further wage hikes at
Wipro (given wage hike differentials) will be keenly watched.

Cross currency impact to depress US dollar revenue; USD/INR stable

The key currency impacts are:
„ Cross currency negative impact of 1-1.5% across companies, based on their European
invoicing proportions. Infosys will be hit less and HCL Tech will be hit hardest. The
euro appreciated by 8%, GBP by 4.3% and the AUD by 2.3%, on average, against the
US dollar in 1QFY11.
„ The US dollar has, on average, stayed stable against the rupee, so substantial revenue
contributions (60-70%) were largely unaffected by currency movements.

1QFY11 CURRENCY HIGHLIGHTS (IN INR)

RATES (INR) CHANGE (QOQ, %)

US$ EUR GBP AUD US$ EUR GBP AUD

Average 45.7 58.0 68.0 40.3 -0.6 -8.7 -4.9 -2.9

Closing 46.6 56.8 70.1 39.9 3.7 -6.2 2.9 -3.0

1QFY11 CURRENCY HIGHLIGHTS (IN US$)

RATES (US$) CHANGE (QOQ, %)

EUR GBP AUD EUR GBP AUD

Average 1.27 1.49 0.88 -8.0 -4.3 -2.3

Closing 1.22 1.50 0.86 -9.7 -0.9 -6.6
Source: Company/MOSL

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What will stocks react positively to?

NEAR TERM UNDER-PERFORMANCE OF IT STOCKS V/S SENSEX

RELATIVE ABSOLUTE

COMPANY 1M 3M 6M 12M YTD 1M 3M 6M 12M YTD

Sensex 0 0 0 0 0 9 2 8 23 2
Infosys (0) (1) 4 35 5 8 1 12 58 8
TCS 2 (4) 1 87 4 11 (3) 9 110 6
Wipro (1) (6) (5) 59 (1) 8 (5) 2 82 2
HCLT (3) 2 1 79 2 6 4 9 102 5
Cognizant (0) 3 11 85 16 8 5 18 108 18
Source: Company/MOSL

The top three stocks under-performed the Sensex over the past three months as business
improvements have been built into estimates and valuations range from 17-19x FY12E
earnings. With our assumptions already building in volume growth of 20-23% in FY11,
absolute upsides from current levels will be driven by:
[1] Pricing upticks: Growth skew towards discretionary service lines like Package
Implementation/products/consulting would be key determinants of a pricing uptick.
[2] Guidance increases suggesting growth trajectory moving from 20-25% to 25-
30%. We believe an increase in Infosys guidance to 21% or beyond would be taken
positively.
[3] Market share gains on impending deal renegotiations, where incumbents are
MNC vendors. US$37b worth of deals are expected to come up for renegotiation
over 3-6 months. With most of the deals being Infrastructure Management Services
(IMS) focused, a sudden acceleration in deal wins or deal ramp-ups in IMS would be
keenly watched.
[4] Improvement in Europe
[5] Shift towards long term transformational deals v/s short-term ROI focused deals.

We remain positive on the long term outlook for the IT industry with favorable business
proposition, huge market potential with limited penetration and ability of Indian IT companies
to scale up to take opportunities. However, near term stock performance could be clouded
by uncertainty on Europe, caution on discretionary demand recovery, wage inflation
concerns and fair valuations. We see progressive improvement over the course of FY11
and would be buyers on any intermittent disappointments.
GROWTH CONTINUANCE IN BFSI/MANUFACTURING KEY TO UPGRADES AGGREGATE VERTICAL GROWTH (QOQ)

BFSI Retail Telecom Manufacturing

15%
Sustenance of growth in BFSI/manufacturing
10% and recovery in telecom key to further upsides

5%

0%

-5%

-10%
3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

Source: Company/MOSL

July 2010 126

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RELATIVE PERFORMANCE - 3M (%) Prefer Infosys, HCL Tech, Mphasis

Sensex We expect IT demand to revive in FY11 with 20-23% volume growth, against flattish
M OSt IT Index
revenue growth in FY10. We expect cost efficiencies to be sustained despite wage inflation
102
100 pressures, with margin decline expectation of 0-60bp in FY11. We believe discretionary
97 pick-up is a matter of time and prefer stocks with higher correlation to pick-up in
95 discretionary spending and greater operational scope. Consequently, we prefer Infosys
92
and HCL Tech among large caps.
Jun-10
Mar-10

May-10
Apr-10

Aggressive MNC offshoring is a continuing trend to save market share against Indian
RELATIVE PERFORMANCE - 1YR (%) offshorers. We prefer Mphasis among mid-caps as a clear play on this trend. We would
M OSt IT Index be buyers into intermittent disappointments in the sector as the long term trends towards
Sensex
200 offshoring are positive.
170 ? Infosys is our preferred IT pick because [1] it is best suited to capitalize on discretionary
140 demand (43% contribution from Package Implementation and Application
110
Development), and [2] it has the best operational scope across utilization, fixed bid, a
80
skew towards higher margin discretionary segments, lowest European exposure and
Jun-09

Jun-10
Mar-10
Sep-09

Dec-09

lowest tax increases; [3] it is expected to lead US dollar revenue (CAGR of 22.4%
over FY10-12) and EPS growth (18% CAGR over FY10-12) v/s its peers. Maintain
Buy.
? We are positive on HCL Tech due to [1] continued traction in IMS (22% of revenue),
[2] expected pick-up in lagging segments like Engineering Services (ERS)/Enterprise
Application Services (EAS) (40% of revenue); [3] HCL Tech’s large deals prowess
in a returning deals scenario; [4] the BPO lag on margins will reduce in future.
Valuations are attractive at 13.8x FY11E and 12.2x FY12E. Maintain Buy with a
target price of Rs445.
? Mphasis is our preferred mid-cap pick on [1] volumes compensating for price cuts,
[2] pricing at or below market average rates after impending pricing cuts in 3QFY10
limits significant further price erosion, [3] possible beat on growth expectations of US
dollar revenue CAGR of 25% (higher than top tier peers) over FY09-11 on aggressive
offshoring from HP to save its market share. With valuations at 11.1x FY11E (Y/E
October), we believe upsides are possible after clarity on the quantum and impact of
pricing cuts in 3QFY10. Maintain Neutral, target price of Rs670.
? Among large caps, we prefer TCS to Wipro because of its [1] greater participation in
BFSI trend strengthening, [2] better operational scope, [3] wider geographical and
services footprint, and [4] better client profile.
The appreciation of the rupee is the key risk to earnings and valuations.
COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Information Technology
HCL Technologies 358 Buy 18.1 25.9 29.5 19.8 13.8 12.2 9.9 8.3 7.0 19.8 23.7 22.4
Infosys 2,778 Buy 107.4 123.7 149.9 25.9 22.5 18.5 18.5 15.2 12.5 29.7 27.5 27.6
MphasiS 571 Neutral 50.1 51.5 54.4 11.4 11.1 10.5 9.6 8.4 7.5 37.9 29.2 24.2
Patni Computer 511 Buy 36.1 43.8 45.3 14.2 11.7 11.3 7.3 6.3 5.1 15.7 16.1 14.6
TCS 762 Neutral 35.1 39.5 42.6 21.7 19.3 17.9 16.7 14.3 12.5 37.4 32.1 27.5
Tech Mahindra 738 Neutral 45.0 59.9 64.8 16.4 12.3 11.4 6.9 6.9 6.0 31.6 29.7 25.3
Wipro 391 Neutral 18.6 21.8 24.1 21.0 17.9 16.2 15.4 12.9 10.9 26.6 23.9 21.6
Sector Aggregate 21.7 18.7 16.5 15.4 13.1 11.1 26.4 24.6 22.7
* FY10 corresponds to CY09 and so on.

July 2010 127

 Results Preview
SECTOR: INFORMATION TECHNOLOGY

HCL Technologies
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HCLT IN Buy
REUTERS CODE
S&P CNX: 5,269 HCLT.BO Previous Recommendation: Buy Rs358
Equity Shares (m) 685.0 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 449/164
6/09A 106,014 12,008 17.8 16.9 20.1 4.2 22.0 17.3 2.4 11.2
1,6,12 Rel Perf (%) -9/ -6/69
6/10E 124,037 11,937 17.3 -2.4 20.6 3.5 19.1 13.8 2.0 9.9
Mcap (Rs b) 245.5
6/11E 145,471 17,989 25.9 49.3 13.8 2.9 23.9 19.8 1.6 8.2
Mcap (USD b) 5.3
6/12E 167,659 20,598 29.4 13.7 12.2 2.4 22.5 19.8 1.3 6.9
* After ESOP charges; # Axon consolidated in December 2008

„ HCL Tech is expected to post US dollar revenue of US$710m, up 3.6% QoQ. Cross currency impacts are expected
to depress revenue by 1.5%.
„ Rupee revenue is expected at Rs32.6b, up 6.1% QoQ and up 12.2% YoY, driven by translation at a higher INR/US$
rate of 46 in 4QFY10 (v/s 44.9 in 3QFY10)
„ EBITDA margin is expected to decrease by 60bp QoQ to 18.4% (including the impact of ESOP charges). This is due
to impact of global customer meet related expenses and higher contractor charges.
„ HCL Tech had forward covers of US$458m as of March 2010. We expect the company to book forex losses of
Rs1.1b (US$23.8m) in 4QFY10. This is higher than guided forex losses of US$18.8m due to the rupee's depreciation.
„ We expect HCL Tech to post net profit (after ESOP charges) of Rs3b against Rs3.2b in 3QFY10, down 7.2% QoQ.
„ The stock trades at 13.8x FY11E and 12.2x FY12E earnings estimates (after ESOP charges). Maintain Buy with a
target price of Rs445.
„ Key things to watch for: Large deal flow, Engineering Services/Enterprise Application Services recovery, BPO
outlook and wage inflation in 1QFY11.
„ Key risks: Slower ramp-up in large deals, deterioration in hi-tech manufacturing demand, currency volatility.

QUARTERLY PERFORMANCE (US GAAP) (RS MILLION)

Y/E JUNE FY09 FY10 FY09 FY10E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE

Revenues 23,623 24,691 28,615 29,085 30,314 30,325 30,757 32,641 106,014 124,037
Q-o-Q Change (%) 8.9 4.5 15.9 1.6 4.2 0.0 1.4 6.1 38.8 17.0
Direct Expenses 14,567 15,178 18,207 18,328 19,349 19,749 20,619 21,872 66,280 81,589
Sales, General & Admin. Exp. 4,019 4,332 4,503 4,508 4,279 4,432 4,304 4,771 17,362 17,786
Operating Profit 5,037 5,181 5,905 6,249 6,686 6,144 5,834 5,999 22,372 24,663
Margins (%) 21.3 21.0 20.6 21.5 22.1 20.3 19.0 18.4 21.1 19.9
Other Income 558 1,206 -24 -116 -63 -133 -141 -68 1,624 -405
Forex Gain / (Loss) -904 -1,205 -2,016 -886 -1,504 -1,257 -626 -1,094 -5,011 -4,481
Depreciation & Amort. 908 971 1,417 1,197 1,418 1,361 1,099 1,155 4,493 5,033
PBT bef. Extra-ordinary 3,783 4,211 2,448 4,050 3,701 3,393 3,968 3,682 14,492 14,744
Provision for Tax 422 667 470 955 687 665 754 700 2,514 2,806
Rate (%) 11.2 15.8 19.2 23.6 18.6 19.6 19.0 19.0 17.3 19.0
Minority Interest -14 1 -17 0 1 0 0 0 -30 1
PAT after ESOP Chrg 3,375 3,543 1,995 3,095 3,013 2,728 3,214 2,982 12,008 11,937
Q-o-Q Change (%) 264.9 5.0 -43.7 55.1 -2.6 -9.5 17.8 -7.2 15.9 -0.6
Rep. PAT excl ESOP Charge 3,562 3,729 2,178 3,307 3,199 2,956 3,438 3,198 12,776 12,791
Q-o-Q Change (%) 152.6 4.7 -41.6 51.8 -3.3 -7.6 16.3 -7.0 13.6 0.1
US$ Revenues 505 512 564 607 630 652 685 710 2,188 2,676
Q-o-Q Change (%) 0.1 1.3 10.3 7.6 3.8 3.4 5.1 3.6 16.4 22.3
E: MOSL Estimates; Axon is consolidated since December 2008
Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com)

July 2010 128

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SECTOR: INFORMATION TECHNOLOGY

Infosys
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 INFO IN Buy
REUTERS CODE
S&P CNX: 5,269 INFY.BO Previous Recommendation: Buy Rs2,778
Equity Shares (m) 573.9 YEAR NET SALES PAT* EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 2,875/1,635
3/09A 216,930 58,800 102.5 29.5 27.1 8.7 36.7 40.2 6.9 20.7
1,6,12 Rel Perf (%) 0/ 6/36
3/10A 227,420 61,340 107.4 4.7 25.9 6.9 29.7 33.7 6.4 18.4
Mcap (Rs b) 1,594.1
3/11E 272,550 70,442 123.7 15.1 22.5 5.7 27.5 32.4 5.2 15.2
Mcap (USD b) 34.4
3/12E 320,386 85,632 149.9 21.2 18.5 4.7 27.6 31.8 4.2 12.4

„ We expect Infosys' consolidated revenue to grow by 5.3% QoQ in US dollar terms to US$1,365m. Infosys had
guided for 1QFY11 US dollar revenue growth of 2.6-3.4% QoQ. In rupee terms, revenues are expected to grow by
5.6% QoQ to Rs62.8b.
„ Our revenue growth estimates factor in 6.1% QoQ volume growth and negative pricing impact of 0.7% (combination
of mix and cross currency impacts).
„ Cross currency impacts are expected to be 1% on the GBP and euro depreciation v/s the US dollar.
„ EBITDA margin is expected to decline QoQ by 90bp to 33.1% due to wage inflation and the impact of cross
currency movements. EBITDA at Rs20.8b is expected to grow by 2.8% QoQ and 11.3% YoY.
„ Infosys held hedges worth US$515m as of March 2010. We expect Infosys to book other income of Rs2.7b in
1QFY11 against Rs2.1b in 4QFY10.
„ Net profit is expected to decline by 1.8% QoQ to Rs15.9b implying an EPS of Rs27.8, ahead of Infosys' higher end
basic EPS guidance of Rs24.4. We expect Infosys to guide for FY11 US dollar revenue growth of 17-19%, FY11
higher end EPS of Rs117 and 2QFY11 US dollar revenue growth of 4-5%.
„ The stock trades at 22.5x FY11E and 18.5x FY12E earning estimates. Maintain Buy.
„ Key things to watch for: Continued discretionary traction, pricing commentary and hiring updates.
„ Key risks: Delay in discretionary spends, increased attrition, currency volatility.
QUARTERLY PERFORMANCE (INDIAN GAAP) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Revenues 54,720 55,850 57,410 59,440 62,780 67,025 69,998 72,747 227,420 272,550
Q-o-Q Change (%) -2.9 2.1 2.8 3.5 5.6 6.8 4.4 3.9 4.8 19.8
Direct Expenses 29,150 29,630 30,090 31,840 34,213 36,128 37,544 38,732 120,710 146,617
SG&A 6,890 6,890 6,940 7,380 7,785 8,177 8,540 8,875 28,100 33,377
Operating Profit 18,680 19,330 20,380 20,220 20,782 22,720 23,914 25,140 78,610 92,556
Margins (%) 34.1 34.6 35.5 34.0 33.1 33.9 34.2 34.6 34.6 34.0
Other Income 2,690 2,360 2,310 2,080 2,736 2,619 2,888 2,981 9,430 11,223
Depreciation 2,220 2,320 2,310 2,200 2,356 2,385 2,412 2,437 9,050 9,790
PBT bef. Extra-ordinary 19,150 19,370 20,380 20,100 21,162 22,954 24,390 25,683 78,990 93,989
Provision for Tax 3,880 3,970 4,550 5,250 5,290 5,739 6,098 6,421 17,650 23,547
Rate (%) 20.3 20.5 22.3 26.1 25.0 25.0 25.0 25.0 22.3 25.1
PAT before EO 15,270 15,400 15,830 14,850 15,871 17,216 18,293 19,262 61,340 70,442
Q-o-Q Change (%) -4.4 0.9 2.8 -6.2 6.9 8.5 6.3 5.3 4.3 14.8
Extra-ordinary Items 0 0 0 1,320 0 0 0 0 1,320 0
PAT aft. Minority and EO 15,270 15,400 15,830 16,170 15,871 17,216 18,293 19,262 62,660 70,442
Q-o-Q Change (%) -5.3 0.9 2.8 2.1 -1.8 8.5 6.3 5.3 4.6 12.4
Diluted EPS 26.6 26.8 27.7 26.0 27.8 30.1 32.0 33.7 107.4 123.7
US$ Revenues 1,122 1,154 1,232 1,296 1,365 1,457 1,522 1,581 4,804 5,925
Q-o-Q Change (%) 0.1 2.9 6.8 5.2 5.3 6.8 4.4 3.9 3.0 23.3
E: MOSL Estimates
Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com)

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SECTOR: INFORMATION TECHNOLOGY

Mphasis
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 MPHL IN Neutral
REUTERS CODE
S&P CNX: 5,269 MBFL.BO Previous Recommendation: Neutral Rs571
Equity Shares (m) 209.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 796/331
10/08A* 19,065 2,954 14.1 98.4 23.7 8.3 39.1 37.9 3.6 17.8
1,6,12 Rel Perf (%) -19/ -23/24
10/09A 42,638 9,086 43.2 79.4 13.2 5.1 48.1 48.8 2.6 9.8
Mcap (Rs b) 119.4
10/10E 50,366 10,530 50.1 15.9 11.4 3.7 37.9 38.4 2.1 8.4
Mcap (USD b) 2.6
10/11E 61,807 10,820 51.5 2.8 11.1 2.9 29.2 32.6 1.6 6.7
*Financial year end changed to YE Oct from March in FY08 (corresponds to 7month period)

„ We expect Mphasis to post US dollar revenue of US$277m, up 2.3% QoQ.

„ Mphasis is expected to post rupee revenue of Rs12.9b in 3QFY10, up 5.3% QoQ. Higher rupee revenue growth on
better rupee realization and forex gains in revenue.
„ We expect ITO (IT outsourcing) to continue to lead growth at Mphasis. Applications are expected to be flattish due
to the impact of pricing cuts (assumed at 5%) in 3QFY10.
„ EBITDA margin is expected to decline by 190bp QoQ to 23.9% in 3QFY10 due to a pricing cut in applications.
„ EBITDA is expected to decline by 2.4% QoQ to Rs3.1b and grow at 5.3% YoY.
„ Net profit is expected to be sequentially flat at Rs2.7b and grow at 16% YoY.
„ The stock trades at 11.4x FY10E and 11.1x FY11E earnings estimates. Maintain Neutral with a target price of
Rs670.
„ Key things to watch for: Quantum and impact of pricing cuts, hiring outlook and impact of restoration of fixed wage
inflation.
„ Key risks: Further adverse pricing renegotiations with HP, further declines in BPO and attrition.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E OCTOBER FY09 FY10 FY09 FY10E

1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE

Revenues 9,777 10,485 11,056 11,321 11,916 12,205 12,857 13,388 42,638 50,366
Q-o-Q Change (%) NA 7.2 5.4 2.4 5.3 2.4 5.3 4.1 129.5 18.1
Direct Expenses 6,118 6,555 6,986 7,242 7,794 8,077 8,675 9,103 26,901 33,628
Sales, General & Admin. Exp. 1,067 1,111 1,150 1,134 983 978 1,109 1,156 4,463 4,227
Operating Profit 2,592 2,818 2,919 2,945 3,139 3,150 3,073 3,128 11,274 12,511
Margins (%) 26.5 26.9 26.4 26.0 26.3 25.8 23.9 23.4 26.4 24.8
Other Income 64 153 32 226 330 275 362 134 476 1,101
Depreciation 486 552 514 471 458 402 446 465 2,022 1,771
PBT bef. Extra-ordinary 2,170 2,419 2,438 2,700 3,011 3,023 2,989 2,797 9,726 11,841
Provision for Tax 70 174 145 251 325 350 329 308 641 1,311
Rate (%) 3.2 7.2 6.0 9.3 10.8 11.6 11.0 11.0 6.6 11.1
PAT bef. Extra-ordinary 2,100 2,245 2,292 2,449 2,686 2,673 2,660 2,489 9,085 10,530
Q-o-Q Change (%) NA 6.9 2.1 6.8 9.7 -0.5 -0.5 -6.4 178.5 15.9
US$ Revenues 199 212 232 232 257 271 277 289 875 1,094
Q-o-Q Change (%) 196.2 6.6 9.2 0.3 10.5 5.4 2.3 4.3 101.7 25.0
E: MOSL Estimates

Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com)

July 2010 130

 Results Preview
SECTOR: INFORMATION TECHNOLOGY

Patni Computer Systems

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 PATNI IN Buy
REUTERS CODE
S&P CNX: 5,269 PTNI.BO Previous Recommendation: Buy Rs511
Equity Shares (m) 128.4 YEAR NET SALES PAT* EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 624/240
12/08A 31,991 3,671 28.6 -11.9 17.9 2.5 13.0 12.6 1.6 9.9
1,6,12 Rel Perf (%) -14/ 7/73
12/09A 31,620 4,660 36.1 26.3 14.2 1.9 15.7 15.2 1.5 7.3
Mcap (Rs b) 65.6
12/10E 32,879 5,830 43.8 21.3 11.3 1.7 16.1 15.7 1.3 6.4
Mcap (USD b) 1.4
12/11E 37,010 6,030 45.3 3.4 11.0 1.5 14.6 14.3 1.0 5.1
* Reflects adjusted PAT

„ We expect Patni to post US dollar revenue of US$172m, flat QoQ, in line with its guidance of US$171m-172m.
„ Rupee revenue is expected to grow by 2.1% QoQ to Rs7.9b in 2QCY10.
„ EBITDA margin is expected to be down by 240bp at 19.5% against 21.9% in 1QCY10. This is due to wage inflation
of 12-14% offshore and 2-4% onsite.
„ EBITDA is expected to fall by 9% QoQ and 6.5% YoY to Rs1.54b
„ Expected other income is Rs384m against Rs413m in 1QCY10.
„ We expect net profits (before EOI) to decline by 9.7% QoQ to Rs1.35b.
„ The stock trades at 11.3x CY10E and 11x CY11E earnings estimates. Maintain Buy, target price of Rs592.
„ Key things to watch for: Ramp-up in Universal American deal, large deal announcements, hiring trends and
attrition and 3QCY10 guidance.
„ Key risks: Persistent stake sale rumours could affect growth, client concentration, attrition, currency volatility and
delays in deal announcements.

QUARTERLY PERFORMANCE (US GAAP) (RS MILLION)

Y/E DECEMBER CY09 CY10 CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Revenues 7,955 7,729 8,040 7,896 7,745 7,906 8,323 8,905 31,620 32,879
Q-o-Q Change (%) -7.2 -2.8 4.0 -1.8 -1.9 2.1 5.3 7.0 -1.2 4.0
Direct Expenses 5,143 4,851 4,922 4,697 4,596 4,962 5,256 5,571 19,612 20,385
Sales, General & Admin. Expenses 1,380 1,229 1,456 1,524 1,457 1,403 1,459 1,533 5,589 5,851
Operating Profit 1,432 1,649 1,662 1,675 1,693 1,541 1,608 1,801 6,418 6,643
Margins (%) 18.0 21.3 20.7 21.2 21.9 19.5 19.3 20.2 20.3 20.2
Other Income -202 339 74 272 413 384 404 425 482 1,626
Depreciation 288 294 308 278 280 277 291 312 1,169 1,160
PBT bef. Extra-ordinary 941 1,694 1,428 1,669 1,825 1,648 1,721 1,915 5,732 7,109
Provision for Tax 180 326 260 305 328 297 310 345 1,072 1,279
Rate (%) 19.1 19.2 18.2 18.3 18.0 18.0 18.0 18.0 18.7 18.0
Net Income bef. Extra-ordinary 761 1,368 1,168 1,363 1,497 1,352 1,411 1,570 4,660 5,830
Q-o-Q Change (%) -2.5 79.9 -14.7 16.8 9.8 -9.7 4.4 11.3 27.0 25.1
Extra-ordinary Items 0 0 -548 -515 0 0 0 0 0 0
Net Income aft. Extra-ordinary 761 1,368 1,716 1,879 1,497 1,352 1,411 1,570 4,660 5,830
Q-o-Q Change (%) -2.5 79.9 25.4 9.5 -20.3 -9.7 4.4 11.3 2.6 25.1
US$ Revenues 156 162 167 170 172.3 171.9 181 194 656 719
% Chg (QoQ) -11.4 3.5 3.3 1.8 1.3 -0.3 5.3 7.0 -8.8 9.6
E: MOSL Estimates

Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com)

July 2010 131

 Results Preview
SECTOR: INFORMATION TECHNOLOGY

Tata Consultancy Services

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 TCS IN Neutral
REUTERS CODE
S&P CNX: 5,269 TCS.BO Previous Recommendation: Neutral Rs762
Equity Shares (m) 1,957.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 844/361
3/09A 278,129 51,367 26.2 3.0 29.0 9.5 36.4 44.2 5.3 20.4
1,6,12 Rel Perf (%) -1/ 0/78
3/10A 300,289 68,730 35.1 33.8 21.7 7.1 37.4 41.0 4.8 16.7
Mcap (Rs b) 1,490.5
3/11E 346,256 77,290 39.5 12.5 19.3 5.5 32.1 36.0 4.1 14.3
Mcap (USD b) 32.2
3/12E 394,471 83,353 42.6 7.8 17.9 4.4 27.5 32.0 3.5 12.5

„ TCS is expected to post revenue of US$1,765m, growth of 4.7% QoQ. In rupee terms, we expect revenue of
Rs81.2b, growth of 5% QoQ and 12.7% YoY. Expect 1.3% negative cross currency impact on US dollar revenue.

„ EBITDA margin is expected to be 28.6%, down by 130bp QoQ led by wage inflation, cushioned by utilization
improvement and SGA leverage.

„ Utilization (including trainees) is expected to increase by 270bp to 77%, after strong hiring in 4QFY10.

„ SG&A expenses (including depreciation) as a percentage of sales are expected to decline to 17.6% v/s 18.4% in
4QFY10 due to a higher revenue base and normalization of bad debt provisions.

„ We expect other income at Rs0.9b against Rs1.6b in 4QFY10.

„ The tax rate will progressively increase over FY11 to 18%, building tax rates of 15.5% in 1QFY11

„ Net profit is expected to grow to Rs18.5b, de-growth of 4.1% QoQ.

„ The stock trades at 19.3x FY11E and 17.9x FY12E earnings estimates. Maintain Neutral.

„ Key things to watch for: Promotion impacts in 2QFY11, BFSI traction and a change to hiring guidance.

„ Key risks: Slower growth in BFSI, sluggishness in Manufacturing, and currency volatility.
QUARTERLY PERFORMANCE (US GAAP) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Revenues 72,070 74,351 76,503 77,365 81,204 85,203 88,421 91,429 300,289 346,256
Q-o-Q Change (%) 0.5 3.2 2.9 1.1 5.0 4.9 3.8 3.4 8.0 15.3
Direct Expenses 38,208 39,215 39,841 39,980 43,691 46,037 47,752 49,389 157,243 186,869
Sales, General & Admin. Exp. 14,243 13,794 13,945 14,264 14,270 14,678 15,204 15,546 56,246 59,698
Operating Profit 19,619 21,342 22,717 23,121 23,243 24,487 25,465 26,494 86,800 99,689
Margins (%) 27.2 28.7 29.7 29.9 28.6 28.7 28.8 29.0 28.9 28.8
Other Income 194 -144 570 1,636 933 730 900 1,067 2,255 3,629
Depreciation 1,727 1,811 1,829 1,841 1,898 1,983 2,052 2,117 7,209 8,051
PBT bef. Extra-ordinary 18,086 19,387 21,458 22,916 22,277 23,233 24,312 25,445 81,846 95,268
Provision for Tax 2,655 2,909 3,241 3,284 3,453 4,066 4,376 4,835 12,088 16,730
Rate (%) 14.7 15.0 15.1 14.3 15.5 17.5 18.0 19.0 14.8 17.6
Minority Interest 228 239 242 320 312 312 312 312 1,029 1,248
Net Income after. EO 15,203 16,239 17,975 19,312 18,512 18,855 19,624 20,299 68,729 77,290
Q-o-Q Change (%) 15.7 6.8 10.7 7.4 -4.1 1.9 4.1 3.4 33.8 12.5
US$ Revenues 1,480 1,538 1,635 1,686 1,765 1,852 1,922 1,988 6,339 7,527
% Chg (QoQ) 3.3 3.9 6.3 3.1 4.7 4.9 3.8 3.4 5.4 18.7
E: MOSL Estimates

Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com)

July 2010 132

 Results Preview
SECTOR: INFORMATION TECHNOLOGY

Tech Mahindra
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 TECHM IN Neutral
REUTERS CODE
S&P CNX: 5,269 TEML.BO Previous Recommendation: Neutral Rs738
Equity Shares (m) 130.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,158/617
3/09A 44,647 10,147 77.6 31.9 9.5 4.6 57.6 56.9 1.8 6.7
1,6,12 Rel Perf (%) 5/ -28/-23
3/10A 46,254 7,546 45.0 -42.0 16.4 3.1 31.6 31.5 3.1 6.3
Mcap (Rs b) 96.4
3/11E 48,519 9,483 59.9 33.0 12.3 2.6 29.7 24.2 2.6 6.3
Mcap (USD b) 2.1
3/12E 52,974 10,012 64.8 8.3 11.4 2.0 25.3 22.6 2.0 5.5

„ Tech Mahindra's revenue of US$255m is expected to decline by 1.5% QoQ, depressed by the impact of cross
currency movements of 2.5% on US dollar revenue and a ramp-down in BT to normalized revenue run rate of
GBP72m (v/s GBP76m in 4QFY10).
„ We expect Tech Mahindra to post 1% QoQ rupee revenue de-growth in 1QFY11 to Rs11.7b.
„ Reported EBITDA margin of 22.5% is expected to contract by 110bp QoQ due to the GBP depreciation of 4.3%
(57% of revenue from Europe, largely the UK). The company has postponed wage inflation to 2QFY11. Adjusted
EBITDA margin (excluding the impact of restructuring charge) is expected to decline by 110bp to 19.2%. Restructuring
charges assumed at Rs0.5b per quarter.
„ Other income is expected to be Rs0.4b (v/s Rs0.7b) in 4QFY10.
„ The tax rate is expected to be about 17% v/s 19.2% in 4QFY10.
„ We expect net profit to decline by 15.5% QoQ to Rs1.9b.
„ The stock trades at 12.3x FY11E and 11.4x FY12E earnings including Satyam excluding restructuring charge. Neutral.
„ Key things to watch for: BT revenues, growth in the non-BT portfolio and wage inflation. The hardware component
on new Telecom deals could lead to revenue volatility on a QoQ basis.
„ Key risks: Dependence on BT (46% of revenue), growth skew towards lower margin BPO and telco rollouts,
Satyam financials and legal issues and currency volatility.
QUARTERLY PERFORMANCE (INDIAN GAAP) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Revenues 11,130 11,418 11,873 11,833 11,713 12,006 12,246 12,553 46,254 48,519
Q-o-Q Change (%) 5.9 2.6 4.0 -0.3 -1.0 2.5 2.0 2.5 3.6 4.9
Direct Cost 6,838 6,986 7,514 7,373 7,433 7,904 8,006 8,147 28,711 31,490
Other Operating Exps 1,487 1,507 1,552 1,672 1,640 1,621 1,653 1,695 6,218 6,609
Operating Profit 2,805 2,925 2,807 2,788 2,641 2,482 2,587 2,711 11,325 10,420
Margins (%) 25.2 25.6 23.6 23.6 22.5 20.7 21.1 21.6 24.5 21.5
Other Income -261 270 6 739 383 211 183 175 754 951
Interest 571 843 459 311 297 285 273 260 2,184 1,116
Depreciation 296 312 331 399 410 420 429 439 1,338 1,698
PBT bef. Extra-ordinary 1,677 2,040 2,023 2,817 2,316 1,987 2,068 2,186 8,557 8,557
Provision for Tax 268 345 285 542 394 338 352 372 1,440 1,455
Rate (%) 16.0 16.9 14.1 19.2 17.0 17.0 17.0 17.0 16.8 17.0
Net Income aft. Extra-ordinary 1,317 1,690 1,729 2,269 1,916 1,643 1,711 1,808 7,005 7,079
Q-o-Q Change (%) -42.9 28.3 2.3 31.2 -15.5 -14.2 4.1 5.7 -31.0 1.1
Effect of Restructuring Fees 420 415 430 404 415 415 415 415 1,669 1,660
Adjusted Net Income 897 1,275 1,299 1,865 1,501 1,228 1,296 1,393 5,336 5,419
Q-o-Q Change (%) -61.1 42.2 2.0 43.5 -19.5 -18.2 5.5 7.5 -47.4 1.6
US$ Revenues 228 237 254 259 255 261 266 273 977 1,055
Q-o-Q Change (%) 7.7 3.9 7.3 1.9 -1.5 2.5 2.0 2.5 -0.9 8.0
E: MOSL Estimates
Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com)

July 2010 133

 Results Preview
SECTOR: INFORMATION TECHNOLOGY

Wipro
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 WPRO IN Neutral
REUTERS CODE
S&P CNX: 5,269 WIPR.BO Previous Recommendation: Neutral Rs391
Equity Shares (m) 2,443.3 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 452/217
3/09A 256,891 38,677 15.9 22.1 24.6 6.4 28.0 23.2 3.7 18.1
1,6,12 Rel Perf (%) -7/ -7/51
3/10A 271,957 45,647 18.6 17.4 21.0 4.8 26.6 21.8 3.4 15.4
Mcap (Rs b) 954.2
3/11E 316,714 52,903 21.8 17.2 17.9 3.8 23.9 20.5 2.8 12.9
Mcap (USD b) 20.6
3/12E 365,751 59,140 24.1 10.5 16.2 3.2 21.6 19.7 2.3 10.9

„ We expect Wipro's IT services segment to post US dollar revenue growth of 3.7% QoQ to US$1,209m, within its
guided revenue of US$1,190m-1,215m (2-4.2% QoQ).
„ This is above its top-end guidance, excluding the negative impact of 1.2% due to cross-currency movements.
„ Wipro is expected to post consolidated revenue growth of 5.7% QoQ to Rs73.7b due to expectations of stronger
traction in its IT products business.
„ Global IT services volumes are expected to grow by 4.7% QoQ.
„ We expect Wipro to guide for US dollar revenue growth of 4-5% QoQ in 2QFY11.
„ Consolidated EBIT margin is expected to decline to 18.7% from 19.1%. IT services EBIT margins are expected to
moderate by 120bp to 23% on a skew towards emerging markets business, wage inflation (one month impact) and
cross-currency movements.
„ Expected EBIT is Rs13.8b, a growth of 3.5% QoQ and 7.3% YoY.
„ We expect 1QFY11 consolidated net profit to be flat at Rs12.1b.
„ At CMP the stock trades at 17.9x FY11E and 16.2x FY12E. Maintain Neutral.
„ Key things to watch for: The possibility of a further wage hike, attrition and next quarter outlook.
„ Key risks: Fixed-price project overruns, delay in Telecom recovery, currency volatility.
CONSOLIDATED QUARTERLY PERFORMANCE (IFRS) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q* 1Q 2Q 3Q 4Q

IT Services and Products 55,603 61,835 61,762 61,496 65,373 70,840 70,641 75,300 240,696 282,155
Other Businesses 8,265 7,102 7,618 8,276 8,352 8,441 8,958 8,809 31,261 34,560
Revenues 63,868 68,937 69,380 69,772 73,726 79,281 79,599 84,108 271,957 316,714
Q-o-Q Change (%) -2.2 7.9 0.6 0.6 5.7 7.5 0.4 5.7
Y-o-Y Change (%) 5.7 5.6 5.3 6.9 15.4 15.0 14.7 20.5 5.9 16.5
Direct Expenses 43,247 47,522 47,766 47,764 50,826 54,856 54,369 57,513 186,299 217,564
SG&A 7,791 8,466 8,472 8,701 9,129 9,625 9,771 10,158 33,430 38,683
EBIT 12,830 12,949 13,142 13,307 13,771 14,800 15,459 16,438 52,228 60,468
Margins (%) 20.1 18.8 18.9 19.1 18.7 18.7 19.4 19.5 19.2 19.1
Other Income 355 681 721 1,612 928 1,202 1,318 1,447 3,369 4,895
Forex Gain/(Loss) -1,406 240 394 57 48 0 0 0 -715 48
Income from Equity Investees 114 112 128 176 176 176 176 176 530 704
PBT 11,893 13,982 14,385 15,152 14,922 16,178 16,953 18,061 55,412 66,115
Provision for Tax 1,740 2,217 2,321 3,015 2,802 3,040 3,188 3,398 9,293 12,428
Rate (%) 14.6 15.9 16.1 19.9 18.8 18.8 18.8 18.8 16.8 18.8
Minority Interest 49.0 58.0 31.0 46.0 46.0 46.0 46.0 46.0 184.0 184.0
Net Income 10,104 11,707 12,033 12,091 12,074 13,092 13,720 14,617 45,935 53,503
Q-o-Q Change (%) 0.9 15.9 2.8 0.5 -0.1 8.4 4.8 6.5 18.5 16.5
US$ Revenues (IT Services) 1,033 1,065 1,127 1,166 1,209 1,276 1,337 1,390 4,391 5,212
Q-o-Q Change (%) -1.2 3.1 5.8 3.5 3.7 5.5 4.7 4.0 1.6 18.7
E: MOSL Estimates

Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com)

July 2010 134

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QUARTER ENDING JUNE 2010

Infrastructure
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME
Hindustan Construction
IVRCL
Jaiprakash Associates
Nagarjuna Construction
Simplex Infrastructure
Book-to-Bill ratio near recent highs, but composition poor
„ For the construction sector, BTB ratio as at March 2010 was 3.5x, up from 3x in
March 2009. But excluding Andhra irrigation projects, which are slow moving, the
sector BTB ratio is 3x, similar to March 2009 levels. Excluding in-house BOT projects
awarded in 2HFY10 (where execution is to some extent contingent on fund raising,
and thus slow moving), BTB as at March 2010 was 2.5x. Thus, we believe a higher
BTB ratio is unlikely to result in improved execution in 1QFY11.
„ The macro environment has showed initial signs of improvement with strong order
intake expected from sectors like roads, power (thermal, hydro, etc), urban
infrastructure (UI), ports and irrigation.

Andhra projects impact 1QFY11 execution, NCC/IVRCL revenue growth

expected at 20%+
„ We expect 1QFY11 revenue growth of 13.6% YoY against 9.6%YoY in FY10.
Execution in FY10 was impacted by slow execution in Andhra Pradesh (particularly
in irrigation and real estate projects), labor scarcity and scarce government finances
(particularly in the states). A lower base effect will lead to improved 1QFY11
execution.
„ We expect HCC and Simplex to post muted revenue growth of 6% and 6.9%
respectively in 1QFY11. For HCC, revenue growth is impacted given increased
intake from hydro power projects (which entail a higher gestation period), in-house
BOT projects (execution ramp up contingent on fund raising to some extent) and
slowdown in Andhra irrigation projects.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Infrastructure
Hindustan Construction 116 Buy 10,220 6.0 -6.1 1,172 1.9 -4.7 270 0.5 -21.1
IVRCL Infra. 183 Neutral 13,095 20.6 -30.7 1,244 24.9 -37.2 437 24.6 -48.5
Jaiprakash Associates 129 Buy 24,918 20.5 -25.5 6,477 19.6 -24.1 2,028 -7.0 -17.1
Nagarjuna Construction 188 Buy 12,074 20.7 -20.7 1,232 19.4 -19.4 493 28.9 -20.7
Simplex Infra. 481 Buy 11,862 6.9 -5.3 1,198 7.2 -6.9 395 53.8 -14.1
Sector Aggregate 72,169 15.9 -20.7 11,323 16.6 -22.2 3,623 5.4 -23.2

Satyam Agarwal (AgarwalS@MotilalOswal.com)

July 2010 135

 Infrastructure

EBITDA margins expected to be stable, NPM to improve due to cut in

interest costs
„ In FY10, EBITDA margins for most construction companies improved (industry
margins up 37bp). We expect sustained profitability at higher levels in 1QFY11 driven
by improved execution and benefits from lower commodity price inventory. We expect
EBITDA margins of 10.3% (maintained) in 1QFY11.
„ PAT margins in 1QFY11 are expected to improve by 55bp YoY to 3.4%, due to a 85bp
YoY decline in interest costs (as a percentage of revenue). Interest costs declined
largely for HCC, Simplex and Nagarjuna Construction.

Exposure to Andhra Pradesh

„ The Andhra Pradesh government has set in motion the hiving off Telangana into a
separate state. This along with the deterioration in state finances led to execution
delays. Among key construction companies with large order books from Andhra
Pradesh are: Patel (25.9%), IVRCL (18%) and HCC (20.1%). In FY10, most of
these companies posted a slowdown in execution, partly given political changes in
Andhra Pradesh, which impacted project execution.
„ Based on our recent meeting with the Andhra Pradesh Irrigation Department, we
understand that execution in FY11 will be impacted as a large part of the budgeted
spending will be directed towards outstanding dues and 39 projects in which over 75%
of the work has been completed. Execution is expected to pick up from FY12 in a
more moderate manner, given that the contractual execution time for most irrigation
projects has been increased.

ORDER BOOK COMPOSITION (RS B)

ORDER BOOK FROM AP % ORDER BOOK

HCC 38 20.0
IVRCL 39 18.4
NCC 12 7.8
RELATIVE PERFORMANCE - 3M (%)
Patel Engineering 22 25.9
Sensex Simplex Negligible Negligible
M OSt Infrastructure Index Source: Company/MOSL
105
100
95 Key risks in FY11: funding constraints, higher commodity prices, interest
90 rates
85
„ We believe the key risks for the construction sector are: increased commodity prices,
Mar-10

May-10

Jun-10
Apr-10

a possible increase in interest rates and funding constraints. While the commodity
prices have corrected from their recent peaks, the average prices in FY11 are expected
RELATIVE PERFORMANCE - 1YR (%) to be higher.
M OSt Infrastructure Index
„ Interest costs as a percentage of revenue is 2.8% and compares with NPM of 3.4%.
Sensex
130 Thus earnings are highly sensitive to interest rate movements.
110 „ Most construction companies including HCC and IVRCL plan equity fund raising as
90
part of project SPVs/holding companies. The equity fund raising could be through a
70
50 combination of PE investments, QIP and structured transactions. Any delay in fund
Jun-09

Dec-09

Mar-10

Jun-10
Sep-09

raising could also impact execution as in-house projects account for a meaningful part
of the order book.

July 2010 136

 Infrastructure

TREND IN ORDER BOOK (RS B)

1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 YOY (%)

HCC 94 96 91 102 102 108 122 164 154 155 157 188 15
IVRCL 95 96 110 127 124 138 143 145 139 150 173 212 46
NCC 78 90 98 114 122 124 124 122 139 143 148 154 26
Patel 50 54 55 60 60 60 71 72 74 70 63 85 18
Simplex 70 71 89 100 100 107 102 101 100 105 106 115 14
Aggregate 387 407 442 502 507 537 562 604 606 623 648 753 25
% Growth (QoQ) 10.3 5.3 8.7 13.7 1.0 5.7 4.8 7.3 0.4 2.8 4.0 16.3
Source: Companies

TREND IN REVENUE (RS B)

1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 YOY (%)

HCC 7 5 8 11 9 6 8 10 10 9 9 11 5.7
IVRCL 7 7 10 13 9 11 12 16 11 12 12 19 16.2
NCC 8 7 8 13 10 11 10 11 10 11 12 15 38.7
Patel 3 2 3 5 4 3 3 8 5 4 4 11 38.7
Simplex 6 6 7 8 10 10 13 14 11 10 11 13 (9.8)
Aggregate 31 27 35 49 42 42 46 59 46 46 48 68 3.6
Source: Companies

TREND IN EBIDTA MARGINS (%)

1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 YOY (%)

HCC 10.8 11.0 12.9 12.6 10.2 12.0 12.1 14.7 13.0 12.5 12.2 11.3 -335
IVRCL 8.9 8.0 11.1 10.5 8.8 8.0 9.1 8.7 9.2 9.4 9.8 8.0 -72
NCC 10.4 12.6 11.1 8.7 9.4 10.3 8.8 7.6 10.3 10.2 9.9 10.0 240
Patel 10.9 17.8 17.9 16.5 14.3 18.5 20.8 11.1 15.2 18.3 18.6 12.0 92
Simplex 10.0 10.0 10.0 8.5 10.8 9.8 9.1 8.1 10.1 10.4 9.1 10.3 219
Industry 10.2 10.7 11.4 10.4 10.3 10.4 10.4 9.7 10.8 10.7 10.6 10.0 31
Source: Companies

QUARTERLY INTEREST COSTS (RS M, % OF REVENUE)

1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10

HCC 322.0 341.9 407.9 452.3 390.6 492.0 572.7 649.8 613.0 499.1 496.5 443.0
% Revenues 4.4 6.2 5.5 4.4 4.4 7.1 6.5 6.3 6.4 5.8 5.3 4.1
IVRCL 56.9 76.0 176.8 207.7 193.9 304.2 419.1 391.8 389.4 353.7 368.4 525.4
% Revenues 0.8 1.1 1.8 1.6 2.1 2.7 3.5 2.4 3.6 2.9 3.1 2.8
NCC 145.2 233.3 166.9 174.0 238.5 274.6 237.6 212.8 346.3 322.3 305.7 348.1
% Revenues 1.9 3.4 2.1 1.4 2.5 2.6 2.3 1.9 3.5 3.0 2.6 2.3
Patel Engg 27.1 27.5 29.5 131.9 145.0 162.5 195.0 150.0 241.5 252.9 210.2 390.1
% Revenues 0.8 1.2 1.1 2.6 3.7 5.3 6.1 2.0 5.1 6.3 5.0 3.7
Simplex Infra 247.0 251.0 295.6 213.7 274.5 324.2 435.8 392.3 347.6 288.6 262.1 213.7
% Revenues 4.2 4.4 4.2 2.2 2.7 3.2 3.4 2.8 3.1 2.8 2.5 1.7
Total 798 930 1,077 1,180 1,242 1,557 1,860 1,797 1,938 1,717 1,643 1,920
% Revenues 2.2 2.9 2.7 2.0 3.0 3.7 4.0 3.0 4.2 3.8 3.4 2.8
Source: Company/MOSL

We are positive on the sector

We are positive on the construction sector, given expected improvement in BTB ratio,
stable margins and value unlocking opportunities. Adjusted for the value of BOT/real
estate projects, sector P/E is an attractive 11.6x FY12E earnings. Our top picks are NCC
and Simplex.

July 2010 137

 Infrastructure

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Infrastructure
GMR Infrastructure 57 Neutral 1.2 1.2 1.4 47.9 49.6 42.1 15.3 14.0 9.4 6.4 5.9 13.8
GVK Power & Infra 44 Buy 1.0 1.8 3.1 43.0 24.1 14.4 21.7 15.5 10.8 5.0 8.6 12.8
Hindustan Construction 116 Buy 3.4 4.3 6.1 33.7 26.9 19.0 10.0 8.2 6.6 6.9 8.1 10.5
IVRCL Infra. 183 Neutral 7.8 9.5 12.5 23.5 19.2 14.6 11.5 9.5 7.7 11.5 13.2 15.4
Jaiprakash Associates 129 Buy 1.6 4.1 4.1 81.2 31.8 31.2 18.3 16.9 10.9 4.0 8.6 8.0
Nagarjuna Construction 188 Buy 9.2 11.7 14.3 20.4 16.1 13.1 11.7 9.9 8.3 9.8 10.4 12.1
Simplex Infra. 481 Buy 24.8 34.3 45.5 19.4 14.0 10.6 7.4 6.3 5.4 12.8 15.6 17.7
Sector Aggregate 38.4 27.4 19.3 16.5 14.2 10.2 8.8 11.0 13.7

July 2010 138

 Results Preview
SECTOR: INFRASTRUCTURE

Hindustan Construction
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HCC IN Buy
REUTERS CODE
S&P CNX: 5,269 HCNS.BO Previous Recommendation: Buy Rs116
Equity Shares (m) 303.3 YEAR NET SALES PAT EPS EPS GR. P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 162/89
3/09A 33,137 843 3.3 19.0 19.4 1.6 8.4 12.0 1.1 8.6
1,6,12 Rel Perf (%) 4/ -24/-8
3/10A 36,442 1,044 3.4 4.6 33.7 2.3 8.3 9.0 1.6 13.3
Mcap (Rs b) 35.2
3/11E 42,476 1,306 4.3 25.1 26.9 2.2 8.3 9.4 1.4 11.3
Mcap (USD b) 0.8
3/12E 54,103 1,851 6.1 41.7 19.0 2.0 11.0 11.5 1.2 9.2
* Fully Diluted

„ In 1QFY11, we expect HCC to post revenue (excluding JVs) of Rs9.8b, up 12% YoY; EBIDTA of Rs1.2b (up 1.9%
YoY) and net profit of Rs270m (maintained YoY). Revenue growth has been impacted by poor execution in Andhra
Pradesh projects. As certain hydro power projects including the Kishanganga project (Rs27b) bagged in 2HFY09
have not crossed the margin recognition threshold of 10%. We expect 1QFY11 EBITDA margins of 11.5%, down
150bp YoY.
„ Order book at the end of 4QFY10 was Rs188b (+15% YoY and +20% QoQ), BTB ratio was 5.2x TTM revenue. We
believe the current order book should drive revenue and EPS CAGR of 22% and 38% over FY10-12.
„ Order announcements in 1QFY11 so far are worth Rs13b, including (1) Sainj Hydroelectric Project (100MW), and
(2) Rajasthan Atomic Power Plants, Unit 7 and 8 (2 X 700MW). The company was L1 in projects, totaling Rs44b at
the end of 4QFY10 of which hydro power projects were Rs28b, nuclear power was Rs9b, and transport was Rs8b.
„ In 1QFY11, HCC completed acquisition of 66% stake in Karl Steiner AG (KSAG), the second largest operator in the
Swiss property market. The stake acquisition will be through the issuance of new shares for CHF35m (US$33m)
cash investment in KSAG by HCC. Also, the company has approved the sale of 74% stake in 247 Park at an
enterprise value of Rs7.8b (for the entire project), resulting in net cash inflow of Rs2.9b to HCC after project debt
repayment.
„ The J&K High Court upheld the award of Sawalkote hydro power project to the HCC consortium (HCC's share of
Rs19.4b). The project has been part of HCC's order book for the past 3.5-4 years. We understand that construction
activity will take ~1 year to commence as the state government will have to tie up funding for the project.
QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q* 4Q 1Q 2Q 3Q 4Q

Sales (Excl JV) 8,725 7,825 9,026 10,867 9,770 8,495 10,619 13,592 36,442 42,476
Change (%) 0.8 20.6 10.2 10.9 12.0 8.6 17.7 25.1 10.0 16.6
Gross Sales 9,641 8,622 9,450 10,883 10,220 9,005 11,219 14,493 38,630 44,937
Change (%) 7.7 23.6 7.9 5.7 6.0 4.4 18.7 33.2 10.4 16.3
EBITDA 1,151 881 1,017 1,230 1,172 1,028 1,359 1,839 4,279 5,399
Change (%) 26.3 5.0 -4.1 -22.7 1.9 16.7 33.7 49.5 -2.8 26.2
As of % Sales 13.0 12.5 12.2 11.3 11.5 13.6 13.3 12.7 12.2 13.0
Depreciation 301 315 322 201 325 330 340 348 1,139 1,343
Interest 613 499 496 443 460 515 540 648 2,052 2,163
Other Income 19 28 41 42 15 12 10 19 130 56
PBT 256 95 240 628 402 195 489 862 1,218 1,949
Tax 74 40 92 198 133 64 161 285 404 643
Effective Tax Rate (%) 28.8 42.0 38.5 31.6 33.0 33.0 33.0 33.0 33.2 33.0
Reported PAT 182 55 147 430 270 131 328 578 814 1,306
Adj PAT 268 280 218 342 270 131 328 578 1,108 1,306
Change (%) 37.2 NA 32.8 -42.9 0.5 -53.3 50.3 69.0 21.5 17.9
E: MOSL Estimates; 1QFY10 adustments of Rs50m towards political donation and Rs53m towards Bandra Worli Sealink Inauguration

Satyam Agarwal (AgarwalS@MotilalOswal.com)

July 2010 139

 Results Preview
SECTOR: INFRASTRUCTURE

IVRCL Infrastructure
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 IVRC IN Neutral
REUTERS CODE
S&P CNX: 5,269 IVRC.BO Previous Recommendation: Neutral Rs183
Equity Shares (m) 269.7 YEAR NET SALES PAT EPS EPS GR. P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 212/143
3/09A 48,819 2,290 8.5 10.5 12.1 1.5 13.4 13.7 0.8 9.7
1,6,12 Rel Perf (%) 17/ 1/-17
3/10A 54,923 2,109 7.8 -7.9 20.8 2.4 11.5 13.8 1.1 11.5
Mcap (Rs b) 49.5
3/11E 67,154 2,571 9.5 21.9 19.2 2.4 13.2 14.8 1.0 10.3
Mcap (USD b) 1.1
3/12E 81,493 3,380 12.5 31.5 14.6 2.1 15.4 17.2 0.8 8.3

„ Order book as at 4QFY10 was Rs212b representing a BTB ratio of 3.9x TTM revenue. Including L1, order book is
Rs234b. A large part of intake in 4QFY10 pertains to in-house road BOT projects. For FY11, the management has
guided for closing the order book at Rs320b and revenue of ~Rs70b. Thus implied BTB is 4.6x. This will be a
meaningful increase.
„ In-house BOT projects, including a recent Goa-Maharashtra project award of Rs31b contributes Rs60b to the order
book. Equity commitment on these projects is ~Rs15b, of which 25-35% has to be invested upfront at the time of
financial closure. Thus the pick up in execution to some extent is contingent on fund raising, as these projects are
expected to contribute ~15% of revenue in FY11.
„ In 4QFY10, margins expanded 157bp due to a decline in commodity prices. For IVCRL, road projects account for
13% of revenue. As these projects are largely fixed price contracts, lower cost of commodities helped margin
expansion.
We believe 1QFY11 revenue and margins will be robust, largely given the base effect. However, interest costs will be
an important number to watch out for, given that interest cost in 4QFY10 was Rs525m (up from Rs368m in 3QFY10).
This was despite a cut in debt from Rs19.4b in December 2009 to Rs16b in March 2010. The management stated that
a large part of this increase was due to non-fund charges given a higher quantum of project bids and increased
mobilization advances.
„ Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 10,860 12,178 11,840 18,904 13,095 14,102 15,445 24,511 53,783 67,154
Change (%) 17.0 7.1 -0.5 16.2 20.6 15.8 30.4 29.7 10.2 24.9
EBITDA 996 1,145 1,156 1,982 1,244 1,312 1,514 2,446 5,278 6,515
Change (%) 21.5 25.4 6.5 36.7 24.9 14.6 31.0 23.4 23.7 23.4
As of % Sales 9.2 9.4 9.8 10.5 9.5 9.3 9.8 10.0 9.8 9.7
Depreciation 129 133 139 141 144 146 152 218 542 660
Interest 389 354 368 525 465 440 530 621 1,637 2,056
Other Income 39 57 39 20 38 40 30 48 155 156
PBT 516 715 688 1,335 673 766 862 1,655 3,254 3,955
Tax 165 227 229 486 236 268 302 579 1,108 1,384
Effective Tax Rate (%) 32.0 31.8 33.4 36.4 35.0 35.0 35.0 35.0 34.0 35.0
Reported PAT 351 488 458 850 437 498 560 1,076 2,147 2,571
Adj PAT 351 488 458 850 437 498 560 1,076 2,147 2,571
Change (%) -19.3 -18.9 -1.5 6.4 24.6 2.0 22.2 26.6 -7.9 19.8
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)

July 2010 140

 Results Preview
SECTOR: INFRASTRUCTURE

Jaiprakash Associates
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 JPA IN Buy
REUTERS CODE
S&P CNX: 5,269 JAIA.BO Previous Recommendation: Buy Rs129
Equity Shares (m) 1,911.8 YEAR NET SALES PAT EPS* EPS GR.* P/E* P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 180/110
3/09A 57,642 8,970 4.7 47.1 27.5 2.3 15.9 10.3 6.1 20.8
1,6,12 Rel Perf (%) 2/ -12/-34
3/10A 96,402 9,255 4.8 3.2 26.7 3.0 12.4 17.0 3.7 14.0
Mcap (Rs b) 247.0
3/11E 116,896 10,275 5.4 11.0 24.0 2.7 11.9 11.4 3.1 12.4
Mcap (USD b) 5.3
3/12E 117,130 12,006 6.3 16.8 20.6 2.5 12.6 11.2 2.9 11.1
* Not Fully Diluted; FCCB outstanding of Rs14b at conversion price of Rs166/sh (dilution of ~5%)

„ In 1QFY11 we expect Jaiprakash to post revenue of Rs22.8b, up 10% YoY, EBITDA of Rs6b (up 4% YoY) and net
profit of Rs1.6b, down 25% YoY.

„ JPA plans to enter the fertilizer industry and contribute Rs2b towards an initial equity contribution in the venture,
through its subsidiary, Jaypee Fertilizers & Industries.

„ Jaypee Infratech (83% stake by JPA) raised Rs22.5b through an IPO to part finance the equity funding requirement
for the Yamuna Expressway project development. Project cost for development of the six-lane expressway connecting
Greater Noida to Agra is Rs97b, which will be funded by debt (Rs67b), equity (Rs29b) and RE deposit (Rs1b).

„ Jaiprakash Power Ventures (JPVL), an 88% subsidiary of JPA, raised US$200m through an FCCB issue to part fund
its equity contribution towards power projects under construction in 4QFY10.

„ We expect Jaiprakash to post standalone net profit of Rs7.3b in FY11 (down 22% YoY) and Rs12b in FY12 (up 65%
YoY). The stock trades at a reported PER of 34x FY11E and 20x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 20,671 18,243 28,524 33,452 24,918 23,046 30,136 38,796 100,889 116,896
Change (%) 79.9 54.3 115.8 60.5 20.5 26.3 5.7 16.0 74.7 15.9
EBITDA 5,417 4,558 7,739 8,535 6,477 5,940 8,276 8,505 26,248 29,198
Change (%) 73.5 31.1 213.0 21.1 19.6 30.3 6.9 -0.3 62.8 11.2
As of % Sales 26.2 25.0 27.1 25.5 26.0 25.8 27.5 21.9 26.0 25.0
Depreciation 1,017 1,100 1,109 1,334 1,350 1,400 1,450 1,517 4,561 5,717
Interest 2,219 2,588 2,762 2,989 3,000 3,100 3,150 3,203 10,558 12,453
Other Income 3,229 10,298 1,153 126 900 950 1,200 1,315 14,805 4,365
Extra-ordinary income 0 0 -2,110 -10 0 0 0 0 -2,119 0
PBT 5,410 11,168 2,911 4,327 3,027 2,390 4,876 5,100 23,816 15,393
Tax 498 2,466 1,879 1,890 999 789 1,609 1,721 6,733 5,118
Effective Tax Rate (%) 9.2 22.1 64.6 43.7 33.0 33.0 33.0 33.7 28.3 33.2
Reported PAT 4,912 8,702 1,032 2,438 2,028 1,601 3,267 3,379 17,083 10,275
Adj PAT 2,181 1,161 3,141 2,447 2,028 1,601 3,267 3,379 8,931 10,275
Change (%) 71.4 -42.8 49.2 -22.4 -7.0 37.9 4.0 38.1 4.3 15.1
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com) / Nalin Bhatt (NalinBhatt@MotilalOswal.com)

July 2010 141

 Results Preview
SECTOR: INFRASTRUCTURE

Nagarjuna Construction
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 NJCC IN Buy
REUTERS CODE
S&P CNX: 5,269 NGCN.BO Previous Recommendation: Buy Rs188
Equity Shares (m) 256.6 YEAR NET SALES* PAT* EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 197/114
3/09A 47,002 1,788 7.0 -1.4 27.0 1.3 9.4 10.2 0.9 10.1
1,6,12 Rel Perf (%) 12/ 12/24
3/10A 57,120 2,370 9.2 32.5 20.4 1.6 9.8 12.7 1.1 11.2
Mcap (Rs b) 48.3
3/11E 69,987 3,003 11.7 26.7 16.1 2.0 10.4 11.5 1.2 12.1
Mcap (USD b) 1.0
3/12E 86,667 3,678 14.3 22.5 13.1 1.8 12.1 12.8 1.0 10.1
* For construction segment (consolidated, including international business)

„ NCC's order book in 4QFY10 was Rs154b (up 26% YoY). Order intake was Rs88b in FY10 (after a Rs9b cancellation
of a Dubai real estate project). This is encouraging as large part of the intake was driven by projects to be executed
over the next 2 -2.5 years.
„ Order announcements in 1QFY11 were worth Rs8b, largely comprising buildings. For FY11, the management has
guided for order intake of Rs150b, including Rs50b EPC from an in-house power project of 1,320MW. The business
plan indicates intake from: buildings worth Rs32b, water/irrigation Rs21b and transport Rs20b.
„ We are expecting improved execution in 1QFY11 with revenue of Rs12b, up 21% YoY and because of a base effect.
In FY10 revenue growth was 15%, and execution was impacted given the election period and subdued order intake
in FY09 (~Rs46b v/s Rs76b in FY08). NCC's orders from Andhra Pradesh account for 10% of the order book and
hence receivables from the state are manageable at just Rs500m-600m.
„ NCC was recently awarded a Rs15b NHAI road project in West Bengal. This win comes after 3-4 years.
„ 1,320MW thermal power plant in Andhra Pradesh is expected to achieve financial closure soon. For the EPC
contract, EBITDA margins are expected at 11-12% and PBT margin at 7-8%. The company participated in a Case-
1 bid and signed a PPA with Karnataka to supply 400MW at Rs3.89/unit for 25 years. Successful fund raising in the
project SPV will be an important trigger.
„ Interest costs in 4QFY10 were Rs348m, debt as at March 2010 was Rs15.3b against Rs12.4b in March 2009. The
increase in debt is despite raising US$75m through a QIP (in September 2009).
„ Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 10,004 10,670 11,870 15,227 12,074 12,633 14,755 19,323 47,778 58,785
Change (%) 3.0 1.1 15.6 38.7 20.7 18.4 24.3 26.9 15.1 23.0
EBITDA 1,032 1,089 1,181 1,527 1,232 1,251 1,535 2,023 4,834 6,040
Change (%) 12.7 0.4 31.4 82.3 19.4 14.9 30.0 32.5 29.4 24.9
As of % Sales 10.3 10.2 9.9 10.0 10.2 9.9 10.4 10.5 10.1 10.3
Depreciation 127 129 133 136 143 152 160 214 525 669
Interest 346 322 306 348 365 390 475 584 1,322 1,814
Other Income 20 8 14 12 12 14 19 21 48 66
Extra-ordinary income 0 0 0 496 0 0 0 0 496 0
PBT 579 646 756 1,551 736 723 919 1,247 3,530 3,624
Tax 196 206 277 525 243 238 303 412 1,204 1,197
Effective Tax Rate (%) 33.9 32.0 36.7 33.8 33.0 33.0 33.0 33.1 34.1 33.0
Reported PAT 382 439 479 1,026 493 484 615 834 2,326 2,427
Adj PAT 382 439 479 622 493 484 615 834 1,922 2,427
Change (%) 3.1 3.8 31.8 62.7 28.9 10.2 28.6 34.2 24.9 26.3
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)

July 2010 142

 Results Preview
SECTOR: INFRASTRUCTURE

Simplex Infrastructure
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SINF IN Buy
REUTERS CODE
S&P CNX: 5,269 SINF.BO Previous Recommendation: Buy Rs481
Equity Shares (m) 49.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 563/310
3/09A 46,627 1,318 26.6 29.1 11.2 1.6 15.9 16.7 0.6 6.6
1,6,12 Rel Perf (%) -4/ -14/4
3/10A 44,538 1,226 24.8 -7.0 17.9 2.2 12.8 13.4 0.7 7.0
Mcap (Rs b) 23.8
3/11E 53,675 1,698 34.3 38.5 14.0 2.0 15.6 15.6 0.6 6.4
Mcap (USD b) 0.5
3/12E 67,764 2,251 45.5 32.6 10.6 1.7 17.7 18.2 0.5 5.4

„ For 1QFY11, we expect Simplex to post revenue of Rs11.9b, up 7% YoY and net profit of Rs395m, up 54% YoY. The
increase in profit will be driven largely by lower interest costs and stable depreciation, resulting in earnings leverage.
„ The order book for Simplex is Rs115b (up 14% YoY and 8% QoQ), and compares with a largely stagnant order book
of Rs100b-105b from 1QFY09 to 3QFY10. Order intake in 4QFY10 was Rs21.4b (up 86% YoY, up 76% QoQ),
driven by improved intake in the domestic market. In FY10, thermal power contributed 37% of the intake and
buildings (largely residential), 25%. This is also positive for margins and the working capital cycle, given that a large
part of private sector projects are on a negotiated basis (and not on L1).
„ In FY10, the working capital cycle improved by 6-7 days on improved inventory management. In FY09, Simplex
incurred capex of Rs4b, and in FY10 capex declined to Rs880m. Debt as at the end of March 2010 was Rs13b,
similar to that in December 2009 (Rs13b), September 2009 (Rs12.9b) and March 2009 (Rs12.2b).
„ The management said revenue growth would be up 15-20% in FY11. This compares with revenue de-growth of 5%
in FY10. Also, EBITDA margins in FY11 are expected to sustain. FY10 margins were up 80bp and were a reflection
of increased focus in selecting orders. Improved revenue growth in FY11 will also lead to better fixed cost absorption.
„ Over FY10-12 we expect Simplex to post revenue of 21% CAGR and net profit of 35%.
„ Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Income 11,097 10,252 10,668 12,521 11,862 11,540 13,419 16,854 44,538 53,675
Change (%) 9.0 2.0 (16.0) (9.8) 6.9 12.6 25.8 34.6 (5.0) 20.5
EBITDA 1,118 1,065 969 1,287 1,198 1,119 1,342 1,654 4,440 5,314
Change (%) 0.2 7.8 (16.2) 14.6 7.2 5.1 38.5 28.5 3.8 308.2
As % of Sales 10.2 10.7 9.5 10.5 10.3 10.0 10.4 10.2 10.2 10.2
Other Income 14 30 44 30 25 30 55 72 116 182
Interest 348 289 262 214 235 265 320 415 1,112 1,235
Depreciation 381 383 391 379 390 405 415 478 1,534 1,688
PBT 404 423 359 724 598 479 662 833 1,911 2,572
Tax 147 144 129 265 203 163 225 283 685 875
Tax / PBT (%) 36.4 34.0 35.8 36.6 34.0 34.0 34.0 34.0 35.8 34.0
PAT 257 279 231 459 395 316 437 550 1,226 1,698
Adjusted PAT 257 279 231 459 395 316 437 550 1,226 1,698
As % of Sales 2.3 2.7 2.2 3.7 3.3 2.7 3.3 3.3 2.8 3.2
Change (%) (39.0) (7.7) (23.7) 53.8 53.8 13.3 89.3 19.7 (7.4) 38.5
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)

July 2010 143

 Results Preview
QUARTER ENDING JUNE 2010

Media
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Broadcasting to exhibit strong growth; print stable

Deccan Chronicle
We expect broadcasting companies grow strongly in 1QFY11 led by 1) higher ad rates,
2) increased inventory utilization, and 3) higher DTH revenue. Including the impact of
H T Media
consolidation of Regional GEC and Taj TV into Zee Entertainment, aggregate revenue
and PAT growth would be ~40%. Our print media universe is expected to post revenue
Jagran Prakashan
and EBITDA growth of 10-12% YoY, though aggregate profit growth is likely to be flat
YoY due to higher taxes and lower other income.
Sun TV Network

Zee Entertainment
Star Plus regains no. 1 position by a wide margin in Hindi GEC
Star Plus has regained its number one slot and consolidated its leadership position in the
Hindi GEC space. During the week ended 19 June 2010, Star Plus clocked GRP of 443
v/s 276 for Colors and 231 for Zee TV. During 1QFY11, Star Plus had an average
channel share of 24.6% in Hindi GEC v/s 20.7% for Colors and 19.3% for Zee TV. We
note that the rating and channel share differential has started widening over the past
seven weeks. If the ratings differential v/s Star Plus sustains, there could be pressure on
ad rates as well as programming costs for Zee/Color going forward.

HINDI GEC CHANNEL SHARE (COMPRISES ~30% OF OVERALL GENRE)

Star Plus Colors Zee TV Imagine Sony

35
31
27

19 19
16
11
9
7
3
Week 17 2009

Week 21 2009

Week 25 2009

Week 29 2009

Week 33 2009

Week 37 2009

Week 41 2009

Week 45 2009

Week 49 2009

Week 5 2010

Week 09 2010

Week 13 2010

Week 17 2010

Week 21 2010

Week 25 2010
Week 1 2009

Week 5 2009

Week 9 2009

Week 13 2009

Week 1 2010

Source: Exchange4 Media/MOSL

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Media
Deccan Chronicle 122 Buy 2,305 6.4 20.3 1,159 9.4 42.6 707 -8.1 988.4
HT Media 151 Neutral 3,774 12.6 -2.0 755 9.3 -18.7 430 16.4 -13.2
Jagran Prakashan 121 Neutral 2,573 11.0 8.9 846 20.0 33.8 518 4.6 42.3
Sun TV 412 Neutral 4,065 41.3 3.7 3,278 46.6 -0.9 1,676 39.9 1.6
Zee Entertainment 291 Buy 6,631 39.3 2.1 2,081 77.8 13.3 1,488 46.1 16.9
Sector Aggregate 19,348 25.1 4.3 8,119 38.5 8.0 4,820 25.1 25.2

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 144

July 2010
0
20
40
60
80

0
13
26
39
52
0
12
24
36
48

0
90
180
270
360
Week 1 2009 Week 1 2009 Week 1 2009
1QFY06
Week 5 2009 Week 5 2009 Week 5 2009
2QFY06
Week 9 2009 Week 9 2009 Week 9 2009
3QFY06
Week 13 2009 Week 13 2009 Week 13 2009
4QFY06

Gemini TV
Week 17 2009 Week 17 2009 Week 17 2009
Sun TV

1QFY07

2QFY07 Week 21 2009 Week 21 2009 Week 21 2009

Udaya TV
3QFY07 Week 25 2009 Week 25 2009 Week 25 2009

4QFY07 Week 29 2009 Week 29 2009 Week 29 2009

1QFY08 Week 33 2009 Week 33 2009 Week 33 2009

Suvarna
Vijay TV

2QFY08
Week 37 2009 Week 37 2009 Week 37 2009
3QFY08
Week 41 2009 Week 41 2009 Week 41 2009
Eenadu TV(ETV Telugu)

Commissioned programming hrs (LHS)

4QFY08
Week 45 2009 Week 45 2009 Week 45 2009
TAMIL GEC CHANNEL SHARE (COMPRISES ~6% OF OVERALL GENRE)

1QFY09
TELEGU GEC CHANNEL SHARE (COMPRISES ~5% OF OVERALL GENRE)

KANNADA GEC CHANNEL SHARE (COMPRISES ~3% OF OVERALL GENRE)

Week 49 2009 Week 49 2009 Week 49 2009

ETV Kannada
2QFY09
Week 1 2010 Week 1 2010 Week 1 2010
3QFY09
Kalaignar TV

Week 5 2010 Week 5 2010

Zee Telugu

4QFY09 Week 5 2010

1QFY10 Week 09 2010 Week 09 2010 Week 09 2010

2QFY10 Week 13 2010 Week 13 2010

Zee Kannada

Week 13 2010

BALAJI TELEFILMS: TREND IN PROGRAMMING RATES - CONTENT COST LIKELY BOTTOMED OUT

Rate per hr (RHS - Rs m)

3QFY10 Week 17 2010 Week 17 2010 Week 17 2010
4QFY10 Week 21 2010
Maa Telugu

Week 21 2010 Week 21 2010

Zee Tamizh

Week 25 2010

0.0
1.0
2.0
3.0
4.0
Week 25 2010 Week 25 2010

145
Source: Exchange4 Media/MOSL
Media
 Media

Reliance ADAG may enter broadcasting space in partnership with CBS

R-ADAG group company Reliance Broadcast Network is proposing to enter a 50:50 JV
with CBS of the US for owning/operating a portfolio of TV channels. While the JV will
initially focus on the English GEC space, which constitutes just ~0.1% share of the overall
market, the parties will also explore owning/operating Hindi/regional general entertainment
channels. The Hindi GEC genre is estimated to have an overall share of ~30% and the
regional GEC is estimated to have a share of ~20% of viewership. Entry of Reliance
broadcast network in Hindi and the regional space can increase the competitive intensity
significantly. The CBS group is the largest television network in the US and was earlier
part of Viacom, which has 50% in Colors.

Advertising growth gaining traction

The ad revenue outlook for the industry is getting better driven by increased inventory
utilization. New deals are taking place at higher rates given higher inventory utilization
across the broadcasting industry. Zee has hiked rates by 8-15% in its annual contracts and
we believe rate hikes for the quarterly contracts could be higher given already high utilization
of 90-95% for main channel inventory. We expect hardening in ad rates, going forward,
which will fully reflect in FY12. Robust GDP growth and buoyant consumer sentiment
should support growth in advertising revenue.

DTH continues to drive growth for broadcasters

DTH subscriber base additions could surprise positively in FY11 driven by the higher
number of sports events in FY11. The entry of new players in the market (Reliance Big
TV in 2QFY09, Bharti Digital TV in 3QFY09 and Videocon D2H in 1QFY10) has played
a key role in expanding the DTH subscriber market. While the DTH industry added ~8m
subscribers in FY10, the additions could accelerate to more than 10m in FY11 due to the
higher number of sports events.
INDUSTRY DTH SUBSRIBER BASE, ADDITION TREND

DTH subscribers (m) Quarterly subscriber adds (m)

3.1

2.0 2.1
2.2
1.8
1.6
1.2
1.0

7 8 11 13 15 17 19 21

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10

DTH REVENUE TREND FOR ZEEL, SUN TV (RS B)

Zee Sun 4.8

4.4
3.6 3.3
2.3
1.8
1.2
0.8

FY09 FY10 FY11E FY12E

Source:www.Indiatimes.com

July 2010 146

 Media

Print media to witness heightened competition; newsprint prices rise

Print media companies are expected to see increased competition. Regional media is
expected to grow at a faster pace and print is no exception. This is prompting Hindi print
companies to enter new geographies to increase their share of consumers, which would
form a base to provide a wider footprint to advertisers. Prabhat Khabar has reduced it
cover price in Jharkhand from Rs4 to Rs2, triggering a price war even before the launch
of Dainik Bhaskar in the state. We believe such aggressive moves will impair the
profitability of not only the incumbents but also new entrants in the near term.

Newsprint prices have firmed up by ~30% from their bottom in August 2009 and are
quoting at ~US$625/mt. But the strengthening rupee has helped print companies to
neutralize the impact of rising newsprint prices, though depreciation of the rupee can
increase costs and impact profit margins in the coming quarters. We believe the best
margins of the print media companies are behind us given increased competition and
firming newsprint prices.
NEWSPRINT PRICES FIRMING UP (US$/MT)

880

760

640

520

400
Jun-07

Oct-07

Dec-07

Feb-08

Jun-08

Oct-08

Dec-08

Feb-09

Jun-09

Oct-09

Dec-09

Feb-10
Apr-07

Apr-08

Apr-09

Apr-10
Aug-07

Aug-08

Aug-09

TREND IN QOQ GROWTH (%)

New sprint Price (US$) INR/US$ New sprint Price (Rs)

20
RELATIVE PERFORMANCE - 3M (%)
10
Sensex
M OSt M edia Index
110 0
105 -10
100
95 -20
90 -30
Mar-10

May-10

Jun-10
Apr-10

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

Source:Bloomberg
RELATIVE PERFORMANCE - 1YR (%)

M OSt M edia Index Sector outlook

Sensex
215 We believe the media industry's growth rates will perk up significantly in the coming
180 quarters as higher ad inventory utilization and ad rates will translate into higher revenue.
145 We believe print media companies have seen the best of their margins and could see
110
growth rates coming down as players enter new territories and cut cover prices. The
75
broadcasting space looks attractive due to rising subscription revenues from DTH, the
Jun-09

Mar-10
Dec-09

Jun-10
Sep-09

digitization drive from cable companies and improving outlook on advertising. Zee
Entertainment and Sun TV are the best stocks to play the broadcasting space.

July 2010 147

 Media

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Media
Deccan Chronicle 122 Buy 10.8 13.4 15.9 11.3 9.1 7.7 5.9 4.8 3.9 20.9 23.1 24.3
HT Media 151 Neutral 5.7 7.6 9.2 24.6 19.4 16.7 12.4 10.2 8.6 14.5 15.1 15.6
Jagran Prakashan 121 Neutral 5.8 6.5 6.9 20.8 18.7 17.6 12.2 11.1 10.4 28.7 30.0 31.8
Sun TV 412 Neutral 14.4 18.0 22.1 28.6 22.9 18.6 14.2 11.1 9.0 28.2 28.1 27.8
Zee Entertainment 291 Buy 10.5 12.6 16.1 27.7 23.1 18.0 22.2 15.7 12.0 12.9 15.1 17.7
Sector Aggregate 24.8 20.1 16.4 14.3 11.2 9.1 18.7 20.5 21.9

July 2010 148

 Results Preview
SECTOR: MEDIA

Deccan Chronicle
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 DECH IN Buy
REUTERS CODE
S&P CNX: 5,269 DCHL.BO Previous Recommendation: Buy Rs122
Equity Shares (m) 245.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 180/55
03/09A 8,149 1,401 5.7 -48.5 21.3 2.6 12.2 17.6 3.7 11.2
1,6,12 Rel Perf (%) -6/ -30/30
03/10A 8,925 2,608 10.8 88.3 11.3 2.7 20.9 26.7 3.0 5.9
Mcap (Rs b) 29.9
03/11E 9,850 3,241 13.4 24.3 9.1 2.4 23.1 29.5 2.5 4.8
Mcap (USD b) 0.6
03/12E 10,944 3,848 15.9 18.7 7.7 2.1 24.3 32.7 2.1 3.9

„ We expect Deccan Chronicle to post 6.4% YoY growth in revenue to Rs2.3b in 1QFY11. Growth will be led mainly
by an increase in ad revenue.

„ DCHL will continue to benefit from lower newsprint prices. However the prices are sequentially higher by ~6%. We
estimate an EBITDA of Rs1.16b and PAT of Rs707m. We assume 33.5% tax rate in 1QFY11 against 25% a year
earlier.

„ DCHL continues to be a pure English print media play in the south Indian markets of Hyderabad, Chennai and
Bangalore. We expect ad markets in these cities to remain robust due to steady recovery in the IT industry (these
cities are IT hubs).

„ The stock trades at a P/E of 9.1x FY11E and 7.7x FY12E. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 2,166 2,509 2,334 1,917 2,305 2,694 2,624 2,227 8,925 9,850
Change (%) 11.9 10.8 8.7 6.3 6.4 7.4 12.5 16.2 9.5 10.4
EBITDA 1,059 1,387 1,266 813 1,159 1,504 1,459 1,127 4,525 5,250
Change (%) 12.4 79.3 132.8 92.6 9.4 8.4 15.2 38.7 68.7 16.0
As of % Sales 48.9 55.3 54.3 42.4 50.3 55.8 55.6 50.6 50.7 53.3
Depreciation 99 102 102 126 102 108 109 112 429 432
Interest 111 111 113 116 95 95 95 95 452 380
Other Income 71 75 75 73 102 119 116 99 292 436
PBT 920 1,249 1,127 644 1,064 1,420 1,372 1,019 3,937 4,874
Tax 150 250 350 579 356 476 460 341 1,329 1,633
Effective Tax Rate (%) 25.0 20.0 31.1 89.9 33.5 33.5 33.5 33.5 33.8 33.5
Reported PAT 770 999 777 65 707 944 912 677 2,608 3,241
Adj PAT 770 999 777 65 707 944 912 677 2,608 3,241
Change (%) 26.3 120.7 202.6 -20.2 -8.1 -5.5 17.5 942.2 86.2 24.3
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 149

 Results Preview
SECTOR: MEDIA

H T Media
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HTML IN Neutral
REUTERS CODE
S&P CNX: 5,269 HTML.BO Previous Recommendation: Neutral Rs151
Equity Shares (m) 234.2 YEAR NET SALES PAT CON. EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 174/81
03/09A 13,591 200 0.9 -28.2 176.4 3.9 9.4 9.9 2.6 18.6
1,6,12 Rel Perf (%) -4/ 5/36
03/10E 14,379 1,435 5.7 50.3 24.6 3.6 14.5 16.3 2.4 12.4
Mcap (Rs b) 35.3
03/11E 15,376 1,823 7.6 16.6 19.4 3.2 15.1 18.4 2.1 10.2
Mcap (USD b) 0.8
03/12E 17,036 2,123 9.2 16.5 16.7 2.8 15.6 19.3 1.8 8.6

„ We expect HT Media to post revenue of Rs3.8b up 12.6% YoY. Strong traction in Hindustan will be a key driver of
ad revenue.

„ The company will benefit from lower newsprint prices though the prices have increased sequentially by ~6%. Cost
rationalization and some benefit of lower newsprint prices will boost consolidated EBITDA to Rs755m. We estimate
adjusted PAT of Rs430m.

„ Its Hindi daily Hindustan continues to do well due to strong traction in the regional advertising market. HT Media
continues to be impacted by strong competition in Mumbai and Delhi. Hindustan Media Ventures has filed for DRHP
and an IPO would unlock value in the company.

„ We believe HT Media will be impacted by reduced cover prices in Jharkhand and the entry of DB Corp in Bihar and
Jharkhand.

„ The stock trades at a P/E of 19.4x FY11E and 16.7x FY12E. Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 3,351 3,471 3,661 3,851 3,774 3,831 3,984 3,788 14,379 15,376
Change (%) 3.2 3.9 5.9 12.5 12.6 10.4 8.8 -1.6 5.8 6.9
EBITDA 691 646 746 929 755 770 809 874 2,804 3,208
Change (%) 4.2 62.1 241.8 270.1 9.3 19.2 8.5 -5.9 179.6 14.4
As of % Sales 20.6 18.6 20.4 24.1 20.0 20.1 20.3 23.1 19.5 20.9
Depreciation 163 175 165 180 175 189 190 194 707 749
Interest 78 75 72 71 50 50 49 49 295 198
Other Income 65 39 19 45 73 74 77 73 159 296
Extra-ordinary Expense 45 40 14 15 45 46 47 50 76 188
PBT 470 396 514 708 557 559 599 654 1,885 2,369
Tax 146 82 160 223 173 173 186 203 537 734
Effective Tax Rate (%) 31.1 20.6 31.2 31.5 31.0 31.0 31.0 31.0 NA 31.0
PAT 324 314 354 485 385 386 413 451 1,348 1,635
Exceptional Items 45 40 14 15 45 46 47 50 76 188
Minority Interest 0 0 5 -5 11
Reported PAT 324 314 359 480 385 386 413 451 1,359 1,635
Adj PAT 369 354 373 495 430 432 460 501 1,435 1,823
Change (%) -14.1 92.8 LP 531.6 16.4 22.0 23.5 1.2 617.5 27.0
E: MOSL Estimates; Consolidated Nos from 3QFY10

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 150

 Results Preview
SECTOR: MEDIA

Jagran Prakashan
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 JAGP IN Neutral
REUTERS CODE
S&P CNX: 5,269 JAGP.BO Previous Recommendation: Neutral Rs121
Equity Shares (m) 301.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 142/66
03/09A 8,234 916 3.0 -6.7 39.9 6.5 16.4 18.7 4.1 21.8
1,6,12 Rel Perf (%) 3/ -8/36
03/10E 9,419 1,759 5.8 92.0 20.8 6.0 28.7 33.4 3.6 12.2
Mcap (Rs b) 36.5
03/11E 10,705 1,949 6.5 10.8 18.7 5.8 30.0 34.2 3.3 11.1
Mcap (USD b) 0.8
03/12E 12,475 2,182 6.9 6.6 17.6 5.8 31.8 35.7 3.0 10.4

„ Jagran Prakashan is expected to post 1QFY11 revenue of Rs2.6b, up 11% YoY, driven by higher ad rates and volume
growth.

„ We estimate a 250bp increase in EBITDA margins on a high base of newsprint prices. Besides, increasing pricing
pressure in the UP market will impact the company's circulation revenue.

„ We estimate a 5% increase in adjusted PAT to Rs518m due to lower other income.

„ We note circulation prices are coming under pressure in UP, the largest market for Jagran Prakashan. Besides, cover
prices in Jharkhand have also been cut. Entry of DB Corp in Bihar and Jharkhand can impair profit growth in the
coming quarters.

„ The stock trades at a P/E of 18.7x FY11E and 17.6x FY12E. Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Revenue 2,319 2,468 2,269 2,363 2,573 2,758 2,717 2,656 9,419 10,705
Change (%) 12.3 18.3 9.6 17.4 11.0 11.7 19.7 12.4 14.4 13.7
EBITDA 705 832 653 633 846 940 804 629 2,823 3,221
Change (%) 42.0 119.1 117.1 62.2 20.0 13.0 23.2 -0.5 80.1 14.1
As of % Sales 30.4 33.7 28.8 26.8 32.9 34.1 29.6 23.7 30.0 30.1
Depreciation 124 130 119 135 143 151 159 166 507 619
Interest 14 15 13 24 15 12 12 16 66 55
Other Income 157 50 70 66 75 78 83 88 343 325
PBT 724 738 590 540 763 855 716 536 2,592 2,872
Tax 229 235 193 176 245 275 230 172 833 923
Effective Tax Rate (%) 31.7 31.9 32.7 32.6 32.1 32.1 32.1 32.1 32.1 32.1
Adj PAT 495 503 397 364 518 580 486 364 1,759 1,949
Change (%) 56.4 121.5 156.9 66.8 4.6 15.5 22.4 0.0 92.0 10.8
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 151

 Results Preview
SECTOR: MEDIA

Sun TV Network
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SUNTV IN Neutral
REUTERS CODE
S&P CNX: 5,269 SUTV.BO Previous Recommendation: Neutral Rs412
Equity Shares (m) 394.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 453/210
3/09A 10,364 4,164 10.6 13.5 39.0 9.1 24.4 44.2 15.3 19.8
1,6,12 Rel Perf (%) -7/ 21/53
3/10A 13,950 5,674 14.4 36.3 28.6 8.1 28.2 52.8 11.3 14.2
Mcap (Rs b) 162.3
3/11E 17,160 7,076 18.0 24.7 22.9 6.4 28.1 52.6 8.9 11.1
Mcap (USD b) 3.5
3/12E 20,147 8,712 22.1 23.1 18.6 5.2 27.8 51.5 7.3 9.0

„ We expect the company to post 1QFY11 revenue of Rs4.1b, up 41% YoY, EBITDA of Rs3.3b, up 47% YoY, and
PAT of Rs1.67b, up 40% YoY.

„ We expect advertising revenue to grow 50% YoY and stay flat sequentially at Rs2.6b.

„ We expect DTH subscription revenue to increase 96% YoY and 12% QoQ to Rs706m.

„ We believe Sun TV continues to be one of the best broadcasting plays due to its strong presence in south India (part
of a faster growth regional advertising pie).

„ The stock trades at a P/E of 22.9x FY11E and 18.6x FY12E. Neutral.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Revenue 2,877 3,204 3,951 3,919 4,065 4,256 4,438 4,401 13,950 17,160
Change (%) 28.7 34.7 45.9 42.0 41.3 32.9 12.3 12.3 38.4 23.0
EBITDA 2,236 2,436 3,125 3,308 3,278 3,390 3,534 3,602 11,105 13,803
Change (%) 32.9 38.1 55.3 46.6 46.6 39.2 13.1 8.9 43.9 24.3
As of % Sales 77.7 76.0 79.1 84.4 80.6 79.6 79.6 81.8 79.6 80.4
Depreciation 550 571 885 848 868 909 921 934 2,854 3,632
Interest 6 2 2 2 3 3 3 3 12 10
Other Income 142 115 84 85 121 127 132 131 425 512
PBT 1,822 1,978 2,322 2,542 2,528 2,605 2,743 2,796 8,664 10,672
Tax 624 672 803 892 852 878 924 942 2,990 3,597
Effective Tax Rate (%) 34.3 34.0 34.3 35.3 33.7 33.7 33.7 33.7 34.5 33.7
Reported PAT 1,198 1,306 1,519 1,651 1,676 1,727 1,819 1,854 5,674 7,076
Adj PAT 1,198 1,306 1,519 1,651 1,676 1,727 1,819 1,854 5,674 7,076
Change (%) 16.8 37.3 35.4 44.7 39.9 32.3 19.7 12.3 36.2 24.7
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 152

 Results Preview
SECTOR: MEDIA

Zee Entertainment Enterprises

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 Z IN Buy
REUTERS CODE
S&P CNX: 5,269 ZEE.BO Previous Recommendation: Buy Rs291
Equity Shares (m) 484.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 315/160
3/09A 21,773 4,365 10.1 14.8 28.9 3.8 13.9 18.2 6.0 23.7
1,6,12 Rel Perf (%) -4/ 8/52
3/10A 21,966 4,686 10.5 4.3 27.7 3.7 12.9 17.8 6.2 22.3
Mcap (Rs b) 140.6
3/11E 28,456 6,093 12.6 19.9 23.1 3.4 15.1 22.0 4.7 15.7
Mcap (USD b) 3.0
3/12E 33,127 7,822 16.1 28.4 18.0 3.1 17.7 25.8 3.9 12.0

„ We expect Zee Entertainment (ZEEL) to post 39.3% YoY growth in 1QFY11 revenue due to an 84.8% increase in
advertising revenue and 8.1% YoY increase in subscription revenue. Ad revenue growth will be driven by higher
inventory utilization and ad rates in the Hindi GEC and consolidation of regional GECs of ZNL.

„ DTH revenue will continue to drive growth in subscription revenue. We expect subscription revenue to comprise
39% of total 1QFY11 revenue.

„ We estimate 78% increase in EBIDTA due to a 680bp expansion in margins. Adjusted PAT is estimated at Rs1.5b, up
46% YoY.

„ Zee TV will clock an average channel share of 19.3% in Hindi GEC in 1QFY11 with a GRP of ~250. However
channel share and GRP for Star Plus has increased sharply in the past few weeks.

„ The stock trades at a P/E of 23.1x FY11E and 18x FY12E. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Advertsing Revenue 1,980 2,476 2,707 3,517 3,658 3,877 4,147 3,940 10,680 15,622
Subscription Revenue 2,410 2,435 2,467 2,513 2,604 2,747 2,891 3,093 9,824 11,335
Other Sales and Services 370 494 135 463 369 373 377 379 1,462 1,498
Net Sales 4,759 5,405 5,309 6,493 6,631 6,998 7,414 7,412 21,966 28,455
Change (%) -12.2 -5.5 -2.7 26.4 39.3 29.5 39.6 14.2 1.1 29.5
Prog, Transmission & Direct Exp 2,392 2,229 2,306 2,609 2,792 3,015 3,256 3,461 9,536 12,523
Staff Cost 390 442 372 689 585 588 591 598 1,893 2,362
Selling and Other Exp 808 1,226 1,059 1,358 1,174 1,238 1,307 1,369 4,451 5,088
EBITDA 1,170 1,508 1,573 1,836 2,081 2,156 2,261 1,985 6,087 8,482
Change (%) -18.9 1.3 31.0 52.8 77.8 43.0 43.8 8.1 14.2 39.4
As of % Sales 24.6 27.9 29.6 28.3 31.4 30.8 30.5 26.8 27.7 29.8
Depreciation 75 77 76 56 85 86 89 92 284 353
Interest 91 84 65 110 11 11 11 11 350 44
Other Income 325 291 323 291 204 215 228 228 1,230 875
Extraordinary Items 313 -11 302 0
PBT 1,329 1,638 2,067 1,950 2,189 2,274 2,388 2,108 6,985 8,959
Tax 416 529 603 662 700 728 764 675 2,210 2,867
Effective Tax Rate (%) 31.3 32.3 32.0 33.9 32.0 32.0 32.0 32.0 31.6 32.0
Reported PAT 913 1,109 1,464 1,288 1,488 1,546 1,624 1,434 4,775 6,092
Minority Interest -105.8 -32 -100 25 -212.2 0.0
Adj PAT after Minority Int. 1,019 1,141 1,251 1,274 1,488 1,546 1,624 1,434 4,685 6,092
Change (%) -17.8 -6.7 22.5 37.4 46.1 35.5 29.8 12.6 6.2 30.0
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 153

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QUARTER ENDING JUNE 2010

Metals
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Steel volumes to shrink sequentially, cost increases to put pressure on
Hindalco margins
Mounting inventories with producers have dashed hopes of an early recovery in steel
Hindustan Zinc prices. Steel producers, who held on to prices in April and May in the hope that prices
would recover due to rising costs, have lost market share to traders, who cut prices in
JSW Steel
line with the changing market reality. With diminishing hope of an early recovery in
prices, and continued production growth in China, steel producers around the world
Nalco
began to cut prices since the start of June. But cost increases are more certain due to
recently negotiated quarterly prices of iron ore and coking coal. Squeezed by price cuts
Sesa Goa
and cost pressure, margin contraction for steel producers is likely. In 1QFY11, margins
will be hit hardest for SAIL, followed by JSW Steel and Tata Steel India.
SAIL

Falling steel prices have impacted volumes in 1QFY11. We expect total steel volumes by
Sterlite Industries
the three key Indian producers to decline 5% YoY to 5.3mt (down 20% QoQ). SAIL
Tata Steel
sold just 1.35mt in April and May, making it virtually impossible for the company to
achieve even YoY flat sales of 2.7mt in 1QFY11.

JSW Steel also accumulated inventories in April and May. We expect 1QFY11 sales of
1.45mt (up 9.8% YoY) for JSW. Tata Steel's sales were flattish YoY at 450,000 tons in
April and 462,000 tons in May. We expect sales of 1.42mt in 1QFY11 (flat YoY). Price
cuts in June should induce sales. Indian steel demand is robust due to strong growth in
end-user segments excluding seasonality.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Metals
Hindalco 149 Buy 164,331 36.6 -6.8 18,396 13.1 -2.0 6,816 782.8 57.6
Hindustan Zinc 966 Buy 17,851 18.0 -29.9 10,068 31.1 -35.0 8,338 16.0 -32.7
JSW Steel 1,043 Buy 50,776 29.6 -2.4 11,420 52.9 -14.2 4,806 396.6 -21.7
Nalco 425 Sell 13,772 47.2 -15.3 4,548 171.7 -15.9 2,976 135.3 -24.0
Sesa Goa 367 Buy 23,819 135.5 -1.5 14,735 225.2 -2.0 11,396 169.9 -6.0
Sterlite Inds. 168 Buy 65,379 42.8 -9.5 16,382 60.5 -25.0 10,724 59.4 -22.3
SAIL 196 Neutral 86,642 -5.3 -30.1 14,205 -24.3 -54.1 9,444 -29.4 -53.8
Tata Steel 490 Neutral 290,891 24.9 5.8 50,076 LP 8.9 27,529 LP 19.3
Sector Aggregate 713,461 26.4 -6.8 139,830 110.9 -16.2 82,030 461.4 -14.8

Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 154

 Metals

SALEABLE STEEL ('000 TONS)

Y/E MARCH FY09 FY10 FY11

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1QE

Tata Steel India

Production 1,187 1,330 1,235 1,624 1,542 1,519 1,688 1,732 1,542
Change (YoY %) 11.5 3.9 -0.9 28.1 30.0 14.2 36.7 6.7
Sales 1,159 1,220 1,072 1,791 1,418 1,457 1,596 1,698 1,418
Change (YoY %) 11.4 0.1 -13.8 40.0 22.3 19.4 49.0 -5.2
SAIL
Production 2,947 3,180 3,000 3,258 3,060 3,140 3,100 3,300 2,400
Change (YoY %) -1.4 -2.2 -10.7 -5.3 3.8 -1.3 3.3 1.3 -21.6
Sales 2,650 2,650 2,400 3,600 2,790 3,030 2,900 3,400 2,400
Change (YoY %) 4.7 -11.7 -20.3 -5.3 5.3 14.3 20.8 -5.6 -14.0
JSW Steel
Production 976 1,001 782 966 1,376 1,540 1,469 1,615 1,450
Change (YoY %) 21.7 14.3 -18.2 -2.7 41.0 53.8 87.9 67.2 5.4
Sales 817 837 711 928 1,321 1,454 1,425 1,520 1,450
Change (YoY %) 13.2 3.7 -18.0 -8.1 61.7 73.7 100.4 63.8 9.8
3 Key Producers Total
Production 5,110 5,511 5,017 5,848 5,978 6,199 6,257 6,647 5,392
Change (YoY %) 5.2 1.9 -9.8 2.6 17.0 12.5 24.7 13.7 -9.8
Sales 4,626 4,707 4,183 6,319 5,529 5,941 5,921 6,618 5,268
Change (YoY %) 7.8 -6.3 -18.3 3.8 19.5 26.2 41.6 4.7 -4.7
Source: WSA

Steel mills cut prices due to inventory pile-up; imports continue

„ According to SteelPrices-India, HRC (CR-grade) prices dropped 9% MoM to Rs32,250/
ton (during the week ended 28 June, 2010), and they were down 3% YoY. We hear
from mills that HRC is being sold to bulk buyers at a further 5% discount. SAIL has
cut HRC prices (via discounts) by a total of Rs2,800/ton in two tranches since 1 June
2010. Other players have offered similar or bigger price cuts.
„ Traders are reported to be selling imported HRC at about Rs29,000/ton to liquidate
stocks; 150,000 tons of imports were expected to arrive in June.
„ Despite price cuts, dispatches have not recovered, as the price outlook remains weak
due to over-production and demand weakness in Europe and China. Key Indian
producers are contemplating further price/production cuts to deal with mounting
inventories.
„ In May, Chinese crude steel production grew by 1.3% MoM (up 21% YoY) to 56.14mt.
The growth in China's HRC production was sharper by 7.6% MoM (up 36% YoY) to
13mt in May.

INDIAN STEEL PRICES (RS/KG): LONG PRODUCTS & INPUTS

MoM -1%
5.8 45 Sponge iron
QoQ -16%
Iron ore for DRI - Barbil

5.4 40 Raipur YoY 34%

5.0 35 HMS 80:20 MoM 2%
QoQ -4%
4.6 30 Mandi
YoY 23%
4.2 25 Pencil Ingot MoM 0%
Mandi QoQ -9%
3.8 20
YoY 11%
3.4 15 Rebar MoM 1%
3.0 10 12mm Mandi QoQ -6%
YoY 13%
Jun-09

Oct-09

Dec-09

Feb-10

Jun-10
Aug-09

Apr-10

Iron ore for MoM 0%

DRI - Barbil QoQ 16%
YoY 62%
Source: WSA

July 2010 155

 Metals

INDIAN STEEL PRICES (RS/KG): FLAT PRODUCTS

48 HRC tube MoM -5%

grade QoQ -1%
44 Mum YoY 17%
HRC MoM -7%
40
CR-grade QoQ -9%
Delhi YoY -3%
36
CRC 0.63 MoM -5%
32 DSK Delhi QoQ -3%
YoY 6%
28 GP 0.63 MoM -6%
May-09

May-10
Jun-09
Jul-09

Oct-09

Jan-10
Feb-10
Mar-10

Jun-10
Nov-09
Dec-09
Sep-09
Apr-09

Aug-09

Apr-10
Delhi QoQ -5%
YoY 11%

INDIA: MONTHLY CRUDE STEEL PRODUCTION

India YoY(%)
6.0 35

5.0 23
(m tons)

YoY (%)
4.0 11

3.0 -1

2.0 -13
May-05

Nov-05
Feb-06
May-06

Feb-07
May-07
Nov-06

May-08
Nov-07
Feb-08

Nov-08
Feb-09
May-09

May-10
Nov-09
Feb-10
Aug-05

Aug-06

Aug-07

Aug-08

Aug-09
Source: WSA

Iron Ore prices stabilizing at US$150/ton

Spot iron ore prices corrected in 1QFY11 from a peak of US$189/dmt (cfr China basis for
63.5% grade) in early April to US$150 over a few weeks. The fall in prices has been
sharp due to weakening steel prices in China and debt problems in Europe.

We understand from industry sources that spot purchases of iron ore has reduced and
Chinese mills have resorted to buying iron ore largely on quarterly contract terms, leaving
spot prices to fall freely. Since current quarterly contracts are priced at US$110-120/dmt,
which translates into cfr of US$135-145/dmt, there is very little room for spot prices to fall
further. If spot prices fall below contract prices, spot purchases will pick up and support
prices. Chinese traders have already started showing some interest with enquiries. China
is overtly dependent on iron ore imports. Of the global trade of ~900mt in 2009, China
imported 628mt or 70% market share. Imports meet nearly two-thirds of China's annual
iron ore requirements. Over Jan-May 2010, Chinese iron ore imports increased 8.3% YoY
to 262mt. Therefore, we believe iron ore prices are close to bottoming out in the near
term.

Sea freight from India to China has remained low on a YoY basis at US$15-16/dmt. Thus,
iron ore export realization of mining companies in India is likely to be higher because of the
dual benefit of weakening sea freight and hardening prices.

July 2010 156

 Metals

INDIAN IRON ORE (63% FE) PRICES FOR SHIPMENT TO CHINA (US$/TON)

CIF FOB
200

160

120

80

40

Oct-09
Jan-09

Feb-09

Mar-09

May-09

Jun-09

Nov-09

Dec-09
Jul-09

Jan-10

Feb-10

Mar-10

May-10

Jun-10
Sep-09
Apr-09

Aug-09

Apr-10
Source: WSA

RELATIVE PERFORMANCE - 3M (%)

Sensex Non-Ferrous Metals

M OSt M etals Index
110
Margins to decline QoQ due to lower prices, higher costs
100
Margins of non-ferrous metals companies are likely to decline 200-300bp sequentially as
90
base metals have also declined sequentially. Average zinc and lead LME prices are down
80
11% QoQ at US$2,062/ton. Hindustan Zinc's margins will also decline and the benefits of
Mar-10

May-10

Jun-10
Apr-10

expanded capacity will flow in the subsequent quarters. Sale of surplus concentrate will
add to the bottom line.
RELATIVE PERFORMANCE - 1YR (%)

M OSt M etals Index Average aluminum LME prices are down 3% QoQ at US$2,128/ton. Energy costs for
Sensex
200 aluminum smelters will remain a concern going forward. Aluminum players reported
160 improvement in margins in the past two quarters due to higher LME prices and the rise of
120 product premiums. But going forward, costs will continue to be high. Volume growth is
80
expected to remain muted for Nalco and Hindalco in FY11, as the next capacity expansion
(for Hindalco) will kick-in in 2HFY12.
Jun-09

Mar-10
Dec-09

Jun-10
Sep-09

From 2QFY11, Nalco will benefit from expanded alumina capacity.

QUARTERLY AVERAGE BASE METAL PRICES ON LME (USD/TON)

QUARTER ZINC ALUMINIUM COPPER LEAD ALUMINA

AVG. QOQ % YOY % AVG. QOQ % YOY % AVG. QOQ % YOY % AVG. QOQ % YOY % AVG. QOQ % YOY %

1QFY11 2,056 -11 36 2,125 -3 39 7,051 -3 50 1,976 -12 30 335 3 61

4QFY10 2,307 3 91 2,199 8 57 7,274 9 108 2,235 -3 91 327 7 72
3QFY10 2,241 26 84 2,037 11 8 6,677 14 69 2,313 19 83 306 13 10
2QFY10 1,780 18 -1 1,836 20 -35 5,856 24 -23 1,942 28 1 270 29 -34
1QFY10 1,509 25 -30 1,530 9 -49 4,708 35 -43 1,520 30 -35 209 10 -49
4QFY09 1,208 -1 -51 1,401 -26 -50 3,494 -11 -55 1,173 -7 -60 190 -32 -51
3QFY09 1,219 -32 -54 1,885 -34 -25 3,948 -48 -46 1,265 -34 -61 279 -32 -19
2QFY09 1,798 -16 -44 2,839 -5 9 7,571 -9 -1 1,915 -18 -38 408 -1 17
1QFY09 2,150 -13 -42 2,995 8 7 8,323 8 10 2,330 -20 7 411 5 14
Source: LME

July 2010 157

 Metals

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Metals
Hindalco 149 Buy 4.2 12.7 17.0 35.5 11.7 8.7 7.0 7.0 6.0 6.2 18.9 20.5
Hindustan Zinc 966 Buy 95.6 111.2 126.3 10.1 8.7 7.6 6.0 4.4 3.2 22.2 20.7 19.2
JSW Steel 1,043 Buy 59.4 79.8 145.4 17.5 13.1 7.2 9.8 9.5 4.1 12.3 13.7 19.0
Nalco 425 Sell 12.9 18.2 20.9 32.9 23.4 20.4 20.9 13.3 10.9 8.0 10.4 11.0
Prakash Inds 166 Buy 21.6 23.6 39.6 7.7 7.0 4.2 7.4 5.4 3.6 21.9 21.7 29.0
SAIL 196 Neutral 16.4 12.8 15.9 11.9 15.3 12.3 7.6 10.1 8.5 20.0 14.0 15.2
Sesa Goa 367 Buy 31.6 61.2 67.3 11.6 6.0 5.5 8.4 3.3 2.3 33.8 40.5 31.3
Sterlite Inds. 168 Buy 24.0 17.0 22.8 7.0 9.9 7.4 7.4 5.2 3.2 10.9 13.7 15.7
Tata Steel 490 Neutral -9.3 63.7 67.6 -52.7 7.7 7.3 11.2 7.0 6.5 -9.7 35.2 28.5
Sector Aggregate 16.9 10.5 8.4 8.5 6.8 5.2 12.1 16.6 17.2
Tata Steel and Sterlite numbers are consolidated

July 2010 158

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SECTOR: METALS

Hindalco
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HNDL IN Buy
REUTERS CODE
S&P CNX: 5,269 HALC.BO Previous Recommendation: Buy Rs149
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 1,962.8 END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 188/68
3/09A 656,252 4,853 2.8 -81.8 53.6 3.4 6.4 -0.1 0.7 16.1
1,6,12 Rel Perf (%) -2/ -7/53 3/10A 607,221 8,293 4.2 50.7 35.5 2.2 6.2 8.1 0.8 7.0
Mcap (Rs b) 291.6 3/11E 642,319 24,984 12.7 204.6 11.7 2.2 18.9 8.2 0.8 7.0
Mcap (USD b) 6.3 3/12E 657,142 33,341 17.0 33.4 8.7 1.8 20.5 8.7 0.8 6.0

Consolidated

„ Net sales to grow 39% YoY: 1QFY11 net sales are expected to grow 39% YoY to Rs54b (flat QoQ) due to higher
metals prices. Production of copper and aluminum is expected to remain flat YoY at 79ktons and 134ktons respectively.
„ EBITDA to grow 44% YoY: EBITDA is expected to grow 44% YoY (3% QoQ) due to higher metal prices, rise of
product premiums and up-tick in by-product prices.
„ Adjusted PAT to grow 77% YoY: Profit after tax will grow 77% YoY to Rs5.9b (down 14% QoQ) on higher
aluminum metal prices and sturdy copper business performance.
„ Utkal Alumina visibility improves; maintain Buy: The visibility of Utkal Alumina refinery project is improving.
Hindalco achieved financial closure for the project with capex of Rs56b. We believe the volatility of Hindalco's
earnings eased due to Novelis' turnaround. We expect the stock to outperform due to reduced volatility in earnings
and rising visibility of green-field projects and bauxite mines.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 38,905 49,124 54,743 54,434 54,027 52,947 53,161 47,159 197,206 207,294
Change (YoY %) -16.3 -13.6 33.0 44.3 38.9 7.8 -2.9 -13.4 8.2 5.1
Total Expenditure 32,757 42,912 46,697 45,790 45,161 44,759 44,846 39,353 168,156 174,118
EBITDA 6,148 6,213 8,046 8,644 8,866 8,189 8,315 7,806 29,050 33,176
Change (YoY %) -35.2 -37.5 3.3 175.1 44.2 31.8 3.3 -9.7 -4.3 14.2
As % of Net Sales 15.8 12.6 14.7 15.9 16.4 15.5 15.6 16.6 14.7 16.0
EBITDA - Aluminium 5,542 3452 5420 6622 7197 6316 6455 6272 21,035 26,240
EBITDA-Copper 606 2,761 2,626 2,022 1,827 2,031 2,018 1,692 8,015 7,568
Interest 682 663 729 705 705 705 705 705 2,780 2,822
Depreciation 1,653 1,659 1,676 1,684 1,637 1,642 1,659 1,667 6,672 6,605
Other Income 753 573 496 777 768 584 506 792 2,599 2,650
PBT (before EO item) 4,566 4,464 6,136 7,031 7,292 6,426 6,456 6,225 22,197 26,399
Extra-ordinary Income 1,430 -121 -570 -290 449
PBT (after EO Item) 5,996 4,343 5,566 6,741 7,292 6,426 6,456 6,225 22,646 26,399
Total Tax 1,190 903 1,295 102 1,313 1,157 1,162 1,121 3,489 4,752
% Tax 26.1 20.2 21.1 1.4 18.0 18.0 18.0 18.0 15.4 18.0
Reported PAT 4,806 3,441 4,271 6,639 5,980 5,269 5,294 5,105 19,156 21,647
Adjusted PAT 3,376 3,562 4,841 6,929 5,980 5,269 5,294 5,105 18,707 21,647
Change (YoY %) -51.6 -50.5 -11.1 157.8 77.1 47.9 9.4 -26.3 -16.1 15.7
Consolidated Financials
Net Sales 120,330 151,793 158,845 176,254 164,331 161,638 155,696 160,654 607,221 642,319
EBITDA 16,271 16,335 18,168 18,766 18,396 17,719 17,845 17,336 69,541 71,296
Adjusted PAT 772 958 2,238 4,326 6,816 6,105 6,127 5,937 8,293 24,985
Avg LME Aluminium (USD/T) 1,505 1,827 2,037 2,189 2,150 2,000 2,000 2,000 1,904 2,038
E: MOSL Estimates

Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 159

 Results Preview
SECTOR: METALS

Hindustan Zinc
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HZ IN Buy
REUTERS CODE
S&P CNX: 5,269 HZNC.BO Previous Recommendation: Buy Rs966
Equity Shares (m) 422.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,325/533
3/09A 56,803 27,276 64.6 -38.0 15.0 2.8 19.0 16.4 5.5 11.4
1,6,12 Rel Perf (%) -6/ -21/42
3/10A 81,245 40,414 95.6 48.2 10.1 2.2 22.2 23.5 3.5 6.0
Mcap (Rs b) 408.1
3/11E 95,075 46,966 111.2 16.2 8.7 1.8 20.7 22.0 2.6 4.4
Mcap (USD b) 8.8
3/12E 103,959 53,355 126.3 13.6 7.6 1.5 19.2 19.8 1.9 3.2
Consolidated

„ Volume growth, metal price appreciation to drive top line: 1QFY11 net sales are expected to increase by 18%
YoY to Rs17.8b (down 30% QoQ) due to a 2% volume growth and 36% rise in metal prices. Refined zinc and lead
production is expected to be 3% higher at 158k tons. Average zinc and lead prices are ~35% higher YoY (down 11%
QoQ) on the LME.

„ EBITDA to grow 31% YoY: EBITDA is expected to grow 31% YoY to Rs10b (down 35% QoQ) and margins are
expected to improve by 5.6pp YoY due to higher price realizations and increased sales volumes.

„ Expansion on track, PAT to grow 16% YoY: HZL commissioned a 210ktpa zinc smelter at Dariba in 4QFY10
and a 100ktpa lead smelter, along with a 160MW CPP at Dariba is expected to be complete in 2QFY11. We expect
the bottom line to grow by 16% YoY to Rs8.3b.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Zn & Pb ('000 tons) 155 152 167 169 158 195 205 220 643 778
Change (YoY %) 6.4 13.5 0.5 1.5 2.1 28.1 22.5 30.4 5.0 21.0
Net Sales 15,122 18,183 22,491 25,449 17,851 23,752 26,332 27,140 81,245 95,075
Change (YoY %) -8.0 1.6 110.4 101.5 18.0 30.6 17.1 6.6 43.0 17.0
EBITDA 7,679 10,755 13,861 15,482 10,068 14,179 15,792 16,221 47,776 56,260
Change (YoY %) -21.5 9.5 354.4 178.9 31.1 31.8 13.9 4.8 74.7 17.8
As % of Net Sales 50.8 59.1 61.6 60.8 56.4 59.7 60.0 59.8 58.8 59.2
Interest 32 54 77 277 49 49 49 49 439 196
Depreciation 748 771 817 1,006 1,102 1,102 1,102 1,102 3,343 4,407
Other Income 1,946 1,537 1,319 1,345 1,505 1,684 1,839 2,023 6,146 7,050
PBT (after EO Item) 8,845 11,467 14,286 15,543 10,422 14,712 16,480 17,093 50,141 58,707
Total Tax 1,657 2,118 2,799 3,153 2,084 2,942 3,296 3,419 9,727 11,741
% Tax 18.7 18.5 19.6 20.3 20.0 20.0 20.0 20.0 19.4 20.0
Reported PAT 7,188 9,349 11,487 12,390 8,338 11,769 13,184 13,675 40,414 46,966
Adjusted PAT 7,188 9,349 11,487 12,390 8,338 11,769 13,184 13,675 40,414 46,966
Change (YoY %) -15.2 -2.6 211.4 124.7 16.0 25.9 14.8 10.4 48.2 16.2
Avg LME Zinc (USD/T) 1,509 1,780 2,241 2,311 2,050 2,200 2,200 2,200 1,960 2,163
Avg LME Lead (USD/T) 1,520 1,942 2,313 2,254 2,007 2,200 2,200 2,200 2,007 2,152
E: MOSL Estimates

Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 160

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SECTOR: METALS

JSW Steel
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 JSTL IN Buy
REUTERS CODE
S&P CNX: 5,269 JSTL.BO Previous Recommendation: Buy Rs1,043
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 216.1
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,350/475
3/09A 159,348 10,174 54.4 -31.8 19.2 2.6 13.5 7.7 2.2 12.0
1,6,12 Rel Perf (%) -5/ 1/53
3/10A 189,572 11,117 59.4 9.3 17.5 2.2 12.3 9.6 1.9 9.1
Mcap (Rs b) 225.4
3/11E 232,526 14,931 79.8 34.3 13.1 1.8 13.7 8.8 1.7 8.8
Mcap (USD b) 4.9 3/12E 316,490 31,436 145.4 82.2 7.2 1.4 19.0 17.3 1.0 4.1
Consolidated

„ Expect 10% YoY volume growth: Average steel price realization is expected to increase 2% QoQ to Rs35,018/ton
in 1QFY11 due to higher prices in April and May despite cuts in June. Realizations will also rise because of an
improved product mix due to the commissioning of new HRC mills. Net sales are expected to grow 29.6% YoY to
Rs50.7b due to a 10% growth in volumes (at 1.45mt).

„ EBITDA to grow 53% YoY: Coking coal costs will rise in 1QFY11 due to an increase in contract prices, though the
impact of carry over tonnage will be minimal due to large volume growth. Margins are expected to decline sequentially
by 3pp to 22.5% due to higher costs and flat growth in realizations.

„ Product mix improvement, strong volume growth: JSW has superior volume growth than its peers, increasing
raw material integration, strategic location advantage of its iron ore belt and superior project execution skills. Although
new hot strip mills will improve the product mix in the near term, raw material cost increases will put pressure on
margins. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales ('000 tons) 1,321 1,454 1,425 1,520 1,450 1,600 1,600 1,750 5,720 6,400
Change (YoY %) 61.7 73.7 100.4 63.8 9.8 10.0 12.3 15.1 73.7 11.9
Realization (Rs per ton) 29,650 31,080 32,372 34,243 35,018 31,817 32,803 34,627 31,912 33,557
Net Sales 39,168 45,190 46,130 52,050 50,776 50,907 52,485 60,597 182,538 214,765
Change (YoY %) 6.7 5.9 65.6 56.4 29.6 12.6 13.8 16.4 29.9 17.7
EBITDA 7,467 11,070 11,180 13,308 11,420 7,096 9,996 14,150 43,024 42,662
As % of Net Sales 19.1 24.5 24.2 25.6 22.5 13.9 19.0 23.4 23.6 19.9
EBITDA (Rs per ton) 5,652 7,613 7,846 8,755 7,876 4,435 6,248 8,086 7,522 6,666
Interest 2,206 2,298 2,178 1,944 2,369 2,417 2,465 2,514 8,627 9,765
Depreciation 2,718 2,805 2,860 2,851 3,008 3,095 3,150 3,141 11,234 12,394
Other Income 54 615 16 0 55 627 16 0 685 699
PBT (before EO Item) 2,597 6,582 6,157 8,513 6,098 2,211 4,397 8,496 23,849 21,202
EO Items 2,360 0 1,026 962 0 0 0 0 4,348 0
PBT (after EO Item) 4,957 6,582 7,183 9,475 6,098 2,211 4,397 8,496 28,197 21,202
Total Tax 1,556 2,066 2,041 2,306 1,220 442 879 1,699 7,969 4,240
% Tax 31.4 31.4 28.4 24.3 20.0 20.0 20.0 20.0 28.3 20.0
Reported PAT 3,400 4,515 5,142 7,169 4,879 1,769 3,518 6,796 20,227 16,962
Preference Dividend 72 72 72 72 72 72 72 72 290 290
Adjusted PAT 968 4,443 4,044 6,135 4,806 1,697 3,445 6,724 15,590 16,672
Change (YoY %) -77.9 -23.2 861.0 2,443.1 396.6 -61.8 -14.8 9.6 43.9 6.9
E: MOSL Estimates

Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 161

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SECTOR: METALS

Nalco
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 NACL IN Sell
REUTERS CODE
S&P CNX: 5,269 NALU.BO Previous Recommendation: Sell Rs425
Equity Shares (m) 644.3 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 526/246
3/09A 50,945 12,610 19.6 -23.5 21.7 2.8 12.9 13.6 4.6 14.0
1,6,12 Rel Perf (%) -1/ 7/17
3/10A 51,580 8,326 12.9 -34.0 32.9 2.6 8.0 7.5 4.6 20.9
Mcap (Rs b) 274.1
3/11E 56,114 11,729 18.2 40.9 23.4 2.4 10.4 11.7 4.2 13.3
Mcap (USD b) 5.9
3/12E 62,091 13,463 20.9 14.8 20.4 2.2 11.0 12.8 3.5 10.9
Consolidated

„ Revenue to grow 47% YoY: 1QFY11 net sales are expected to grow 47% YoY to Rs13.7b due to higher metal
volumes and better alumina and metal realizations. We expect metal sales volumes to increase by 19% YoY to
111,000 tons. LME aluminum prices are hovering 43% higher YoY (flat QoQ) at US$2,150 and alumina is up 77% at
US$330.
„ EBITDA to grow 172% YoY: EBITDA is expected to increase 172% YoY to Rs4.5b (down 16% QoQ) due to
higher alumina and aluminum prices. Surplus alumina is sold in the ratio of 60:40 (contract to spot). FY11 contracted
alumina realization is at 15% of the LME aluminum price. Margins are expected to remain flat sequentially at ~33%
for 1QFY11 and come under pressure in subsequent quarters.
„ Refinery expansion benefits in 2HFY11, slow execution on green-field projects: The benefit of alumina
expansion is likely to materialize in 2HFY11, metal production is expected to improve by 4% to 450,000 tons for
FY11. Nalco is working on several green-field projects in India and abroad, but it will take significant time for these
projects to contribute to earnings.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Alumina Production ('000 tons) 352 380 405 455 356 383 409 459 1,592 1,607
Aluminium Prod. ('000 tons) 105 103 111 113 111 112 113 114 431 450
Aluminium Sales ('000 tons) 93 106 118 119 111 112 113 114 436 450
Avg LME Aluminium (USD/ton) 1,505 1,827 2,037 2,189 2,150 2,000 2,000 2,000 1,890 2,038
Alumina Exports (USD/ton) 208 250 266 339 330 321 321 321 270 323
Net Sales 9,353 11,791 14,176 16,260 13,772 13,536 13,994 14,813 51,580 56,114
Change (YoY %) -36.3 -23.3 36.8 44.4 47.2 14.8 -1.3 -8.9 -0.1 8.8
Total Expenditure 7,679 10,374 11,215 10,849 9,223 9,473 9,721 10,114 40,118 38,532
EBITDA 1,674 1,417 2,961 5,411 4,548 4,063 4,273 4,699 11,462 17,583
Change (YoY %) -77.3 -77.9 11.5 466.2 171.7 186.7 44.3 -13.2 -34.1 53.4
As % of Net Sales 17.9 12.0 20.9 33.3 33.0 30.0 30.5 31.7 22.2 31.3
Interest 11 8 1 1 0 0 0 0 22 0
Depreciation 756 764 789 878 896 914 932 950 3,188 3,692
Other Income 1,012 1,402 617 658 723 796 875 963 3,689 3,357
PBT 1,918 2,046 2,787 5,189 4,376 3,945 4,216 4,711 11,941 17,248
Total Tax 654 451 1,236 1,275 1,400 1,262 1,349 1,508 3,615 5,519
% Tax 34.1 22.1 44.3 24.6 32.0 32.0 32.0 32.0 30.3 32.0
Reported PAT 1,265 1,595 1,552 3,915 2,976 2,683 2,867 3,203 8,326 11,729
Adjusted PAT 1,265 1,595 1,552 3,915 2,976 2,683 2,867 3,203 8,326 11,729
Change (YoY %) -75.9 -64.1 -29.3 371.5 135.3 68.2 84.8 -18.2 -34.9 40.9
E: MOSL Estimates

Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 162

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SECTOR: METALS

Sesa Goa
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SESA IN Buy
REUTERS CODE
S&P CNX: 5,269 SESA.BO Previous Recommendation: Buy Rs367
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 831.0
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 494/175
3/09A 49,591 19,880 25.3 29.0 14.5 6.1 42.2 51.6 5.2 10.2
1,6,12 Rel Perf (%) 9/ -10/74
3/10A 58,583 26,291 31.6 25.3 11.6 3.9 33.8 30.9 4.5 8.4
Mcap (Rs b) 304.9 3/11E 107,248 50,885 61.2 93.5 6.0 2.4 40.5 44.3 2.0 3.3
Mcap (USD b) 6.6 3/12E 128,733 55,902 67.3 9.9 5.5 1.7 31.3 34.9 1.3 2.3
Consolidated

„ Realization to grow 24% QoQ: Sesa Goa's realization per ton is expected to increase 112% YoY to US$84/ton (up
24% QoQ) due to higher iron ore prices. Average spot prices of iron ore in China CIF for 1QFY11 are expected to
be ~US$167/ton. We expect sales volumes to grow 22% YoY to 5.8mt. Thus, we expect 1QFY11 net sales grow
135% YoY (flat QoQ) to Rs23.8b.

„ Robust EBITDA growth: 1QFY11 EBITDA is expected to increase 225% YoY to Rs14.7b (flat QoQ) due to
higher volumes and better realizations. Weakening sea freight and higher ore prices will boost Sesa Goa's export
realizations.

„ Strong growth in earnings due to higher volumes, prices: We expect PAT to grow 170% YoY to Rs11.4b due
to higher ore prices and volumes. We believe Sesa Goa will be able to achieve strong earnings growth in the next few
years due to well planned volume growth and a competitive cost structure. A strong balance sheet will help the
company to grow inorganically. Besides, current quarterly contracts are priced at US$110-120/dmt, which translates
into CFR prices of US$135-145/dmt. Hence there is very little room for spot ore prices to fall further. We believe iron
ore prices are close to bottoming out in the near term. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 10,115 5,387 18,892 24,189 23,819 9,264 35,157 39,007 58,583 107,248
Change (YoY %) -21.7 -37.6 38.9 67.6 135.5 72.0 86.1 61.3 18.1 83.1
Total Expenditure 5,584 3,860 8,531 9,159 9,085 5,116 13,476 13,324 27,135 41,001
EBITDA 4,531 1,527 10,360 15,030 14,735 4,148 21,682 25,683 31,448 66,247
Change (YoY %) -44.5 -62.6 85.1 99.5 225.2 171.6 109.3 70.9 23.9 110.7
As % of Net Sales 44.8 28.3 54.8 62.1 61.9 44.8 61.7 65.8 53.7 61.8
Interest 20 20 251 227 224 222 220 218 517 884
Depreciation 152 202 225 166 178 239 266 196 745 879
Other Income 752 893 1,325 1,291 1,279 1,292 1,305 1,318 4,260 5,195
PBT (after XO Item) 5,110 2,198 11,210 15,928 15,612 4,979 22,501 26,588 34,446 69,680
Total Tax 869 503 2,906 3,777 4,184 1,334 6,030 7,126 8,056 18,674
% Tax 17.0 22.9 25.9 23.7 26.8 26.8 26.8 26.8 23.4 26.8
Reported PAT before MI 4,241 1,694 8,304 12,151 11,428 3,645 16,471 19,462 26,390 51,006
Minority Interest 18 30 29 22 31 28 30 30 99 120
Reported PAT 4,223 1,665 8,275 12,129 11,396 3,616 16,441 19,432 26,291 50,885
Change (YoY %) -34.5 -48.7 75.8 121.5 169.9 117.2 98.7 60.2 32.2 93.5
E: MOSt Estimates

Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 163

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SECTOR: METALS

Steel Authority of India

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SAIL IN Neutral
REUTERS CODE
S&P CNX: 5,269 SAIL.BO Previous Recommendation: Neutral Rs196
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 4,130.4
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 259/139
3/09A 437,545 62,369 15.1 -26.3 13.0 2.9 22.0 25.5 1.6 8.2
1,6,12 Rel Perf (%) -5/ -19/10
3/10A 413,565 67,796 16.4 8.7 11.9 2.4 20.0 20.5 1.8 7.6
Mcap (Rs b) 808.7
3/11E 439,645 52,789 12.8 -22.1 15.3 2.1 14.0 14.7 1.8 10.1
Mcap (USD b) 17.4
3/12E 491,365 65,717 15.9 24.5 12.3 1.9 15.2 16.9 1.8 8.5
Consolidated

„ Volumes to decline by 22%: 1QFY11 net sales are expected to decline 5% YoY to Rs86.6b due to lower sales
volumes. SAIL sold only 1.35mt in April and May 2010, which almost makes it impossible for the company to achieve
even YoY flat sales in 1QFY11. We expect sales volumes to decline 27% sequentially to 2.4mt. SAIL has undertaken
price cuts via discounts by Rs2,800/ton in two tranches since 1 June 2010 to align steel prices with global prices and
mitigate rising cheaper imports.

„ Margins to come under pressure due to rising costs: We expect EBITDA per ton to decline 12% YoY to
Rs5,919 due to rising raw material prices. Although average realization for 1QFY11 per ton is expected to be 10%
higher YoY at Rs36,101, expenditure per ton is expected to increase 16% YoY because of higher input costs.

„ No volume growth in saleable steel capacity in FY11, maintain Neutral: SAIL is one of the few virtual debt-
free companies in the Indian metals space and has full integration of iron ore. However in the absence of significant
near term volume growth, steel prices are the sole trigger for earnings growth. We expect steel prices to remain
flattish QoQ in 1QFY11 and costs will go up due to higher raw material costs. Realizations will fall sharply in 2QFY11
due to a price cut undertaken in June, and costs of coking coal will rise further. Hence, margins will come under
severe pressure. Maintain Neutral.
QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)
Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales (m tons) 2.79 3.03 2.90 3.40 2.40 3.00 3.30 3.90 12.12 12.60
Change (YoY %) 5.3 14.3 20.8 -5.6 -14.0 -1.0 13.8 14.7 7.3 4.0
Realization (Rs per ton) 32,806 33,132 34,621 36,465 36,101 33,101 34,101 36,101 34,348 34,863
Change (YoY %) -21.2 -28.3 -6.9 8.9 10.0 -0.1 -1.5 -1.0 -12.3 1.5
Net Sales 91,528 100,391 100,400 123,983 86,642 99,302 112,533 140,793 416,301 439,270
Change (%) -17.0 -18.0 12.5 2.8 -5.3 -1.1 12.1 13.6 -5.9 5.5
EBITDA 18,756 23,884 25,784 30,971 14,205 12,117 18,008 33,482 99,394 77,813
As % of Net Sales 20.5 23.8 25.7 25.0 16.4 12.2 16.0 23.8 23.9 17.7
EBITDA per ton 6,723 7,882 8,891 9,109 5,919 4,039 5,457 8,585 8,201 6,176
Interest 828 735 1,101 1,347 1,015 1,081 1,125 1,191 4,011 4,412
Depreciation 3,269 3,322 3,390 3,384 3,228 3,438 3,579 3,789 13,366 14,034
Other Income 5,400 5,362 4,068 4,429 4,208 4,391 4,757 4,940 19,259 18,296
PBT (after EO Inc.) 20,059 25,189 25,361 30,668 14,170 11,989 18,061 33,442 101,277 77,663
Total Tax 6,798 8,554 8,605 9,819 4,676 3,956 5,960 11,036 33,777 25,629
% Tax 33.9 34.0 33.9 32.0 33.0 33.0 33.0 33.0 33.4 33.0
Reported PAT 13,261 16,635 16,756 20,849 9,494 8,033 12,101 22,406 67,500 52,034
Adjusted PAT 13,369 16,788 16,903 20,440 9,444 7,991 12,038 22,289 67,500 52,034
Change (YoY %) -36.4 -18.2 101.1 34.5 -29.4 -52.4 -28.8 9.0 3.6 -22.9
E: MOSL Estimates

Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 164

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SECTOR: METALS

Sterlite Industries
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 STLT IN Buy
REUTERS CODE
S&P CNX: 5,269 STRL.BO Previous Recommendation: Buy Rs168
Equity Shares (m) 3,360.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 232/134
3/09A 211,442 34,847 24.6 -19.9 6.8 0.9 13.7 9.9 2.0 12.3
1,6,12 Rel Perf (%) 1/ -23/-6
3/10A 246,825 40,407 24.0 -2.2 7.0 0.8 10.9 9.3 1.9 10.1
Mcap (Rs b) 565.4
3/11E 309,368 56,870 17.0 -29.1 9.9 1.3 13.7 11.0 1.5 7.3
Mcap (USD b) 12.2
3/12E 331,382 76,089 22.8 33.5 7.4 1.2 15.7 14.2 1.2 4.2
Consolidated

„ Higher metal prices to boost top line: 1QFY11 net sales are expected to grow 43% YoY to Rs65.4b due to higher
metal prices and volumes. Copper cathode production is expected to increase 10% YoY to 85ktons and refined zinc
is expected to increase 5% to 146ktons.
„ EBITDA to grow 60% YoY: EBITDA is expected to grow 60% YoY due to strong copper, aluminum and zinc
prices. We expect EBIT of the zinc business to grow 28% YoY to Rs8.9b and aluminum (Balco) EBIT is expected to
grow 70% YoY to Rs1.3b.
„ Bottom line to grow 59%: Profit after tax is expected to increase 59% YoY to Rs10.7b helped by better performance
from zinc, surplus power at Balco and a stable copper business.
„ Awaiting triggers, outlook positive: Although commissioning of the first unit (600MW) of Sterlite Energy has
been delayed by two months, our outlook on this new stream of business is positive as the project has received full
coal linkages, which are expected to keep the cost of power generation low. Volumes and earnings of the metals
businesses are also expected to grow. Profitability of VAL remains low due to pending clearance of bauxite mines,
which is expected to get environmental clearance in the near term. We value the stock at Rs273 based on a sum of
the parts valuation. It trades at a P/E of 7.4x FY12E and EV/EBITDA of 4.2x FY12E. Re-iterate Buy.
QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 45,789 61,291 67,467 72,278 65,379 70,293 81,887 91,809 246,825 309,368
Change (YoY %) -20.6 -10.0 48.7 64.0 42.8 14.7 21.4 27.0 14.7 25.3
Total Expenditure 35,580 47,637 49,746 50,423 48,997 50,621 57,404 63,452 183,386 220,475
EBITDA 10,209 13,654 17,722 21,855 16,382 19,672 24,483 28,356 63,439 88,893
Change (YoY %) -44.1 -26.3 213.5 160.4 60.5 44.1 38.2 29.7 24.8 40.1
As % of Net Sales 22.3 22.3 26.3 30.2 25.1 28.0 29.9 30.9 25.7 28.7
Interest 712 576 929 1,206 1,156 1,077 2,138 2,640 3,424 7,011
Depreciation 1,736 1,734 1,782 2,246 2,735 2,735 3,511 3,898 7,498 12,879
Other Income 3,783 3,887 3,715 5,486 4,971 5,583 5,670 5,539 16,872 21,763
PBT (before XO Item) 11,544 15,231 18,726 23,890 17,462 21,443 24,505 27,357 69,390 90,766
Extra-ordinary Exp. 0 -234 -2,735 0 0 0 0 0 -2,970 0
PBT (after XO Item) 11,544 14,997 15,991 23,890 17,462 21,443 24,505 27,357 66,420 90,766
Total Tax 2,305 2,593 2,903 4,528 3,268 4,197 4,511 5,540 12,330 17,516
% Tax 20.0 17.3 18.2 19.0 18.7 19.6 18.4 20.3 18.6 19.3
Reported PAT 9,239 12,403 13,087 19,361 14,194 17,246 19,994 21,817 54,091 73,250
Minority interest 3,219 3,677 4,803 5,541 3,727 4,605 5,129 5,494 17,241 18,955
Loss/(profit) of Associates -707 -863 971 11 -258 -644 -773 -901 -588 -2,575
Adjusted PAT 6,727 9,823 10,049 13,809 10,724 13,285 15,638 17,224 40,407 56,870
Change (YoY %) -41.6 -23.7 107.0 253.4 59.4 35.2 55.6 24.7 21.9 40.7
Avg LME Aluminium (USD/T) 1,530 1,836 2,037 2,199 2,150 2,000 2,000 2,000 1,901 2,038
Avg LME Copper (USD/T) 4,640 5,856 6,637 7,274 7,075 7,075 7,075 7,075 6,102 7,075
Avg LME Zinc (USD/T) 1,509 1,780 2,241 2,307 2,050 2,200 2,200 2,200 1,959 2,163
E: MOSL Estimates
Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 165

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SECTOR: METALS

Tata Steel
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 TATA IN Neutral
REUTERS CODE
S&P CNX: 5,269 TISC.BO Previous Recommendation: Neutral Rs490
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 887.4
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 737/331
3/09A 1,473,293 90,454 101.9 16.9 4.8 3.7 76.7 15.3 0.6 5.2
1,6,12 Rel Perf (%) -7/ -22/1
3/10A 1,023,931 -8,255 -9.3 -n/a- -52.7 5.1 -9.7 4.5 0.9 11.2
Mcap (Rs b) 434.9
3/11E 1,145,399 56,569 63.7 -n/a- 7.7 2.7 35.2 9.5 0.8 7.0
Mcap (USD b) 9.4
3/12E 1,143,679 59,965 67.6 6.0 7.3 2.1 28.5 9.4 0.8 6.5
Consolidated

„ Standalone: 1QFY11 net revenue is expected to increase 7% YoY to Rs59.8b due to similar growth in average
realization with flat volumes. We expect sales of 1.42mt in 1QFY11 (flat YoY). Average 1QFY11 steel price realization
is expected to increase 7% YoY to Rs39,253/ton due to higher prices in April and May despite cuts in June. Iron ore
and coking coal costs are unlikely to increase in 1QFY11 due to old inventories and contracts. We expect EBITDA
per ton to increase by Rs2,954 YoY to Rs15,089 (a sequential drop of Rs1,599/ton).

„ Corus: For Corus and other foreign subsidiaries, we expect EBITDA per ton to expand from US$75/ton in 4QFY10
to US$130/ton in 1QFY11 due to nearly US$160/ton increase in realizations. There will, however, be raw material
cost increases. The depreciation of the euro and GBP will reduce fixed costs to small extent.

„ Maintain Neutral: We expect a sharp drop in margins in subsequent quarters as steel prices have come off their
highs of May 2010 and raw material prices have increased. Maintain Neutral.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

Standalone Financials 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales ('000 tons) 1,418 1,457 1,596 1,698 1,418 1,530 1,676 1,782 6,169 6,406
Change (YoY %) 22.3 19.4 49.0 -5.2 5.0 5.0 5.0 17.7 3.9
Avg Realization (Rs/tss) 36,717 35,652 36,534 39,649 39,253 36,253 37,253 39,253 37,225 38,013
Net Sales 56,156 56,921 63,749 73,394 59,853 60,558 67,937 76,135 250,220 264,483
Change (YoY %) -8.9 -16.9 32.8 12.9 6.6 6.4 6.6 3.7 2.9 5.7
EBITDA 17,422 19,222 23,106 29,770 22,219 17,501 20,151 26,684 89,521 86,555
(% of Net Sales) 31.0 33.8 36.2 40.6 37.1 28.9 29.7 35.0 35.8 32.7
EBITDA(Rs/tss) 12,135 12,664 13,725 16,688 15,089 10,794 11,322 14,291 13,993 12,746
Interest 3,422 3,920 4,157 3,585 3,513 3,443 3,374 3,307 15,084 13,638
Depreciation 2,532 2,564 2,622 3,115 3,208 3,304 3,403 3,506 10,832 13,421
Other Income 463 761 936 1,378 510 837 1,029 1,516 3,538 3,892
PBT (before EO Inc.) 11,932 13,499 17,263 24,449 16,008 11,590 14,402 21,388 67,143 63,388
EO Income(exp) 163 4,837 5,000
PBT (after EO Inc.) 11,932 13,499 17,426 29,286 16,008 11,590 14,402 21,388 72,143 63,388
Total Tax 4,034 4,470 5,508 7,663 4,189 3,033 3,769 5,596 21,675 16,587
Reported PAT 7,898 9,029 11,918 21,623 11,819 8,557 10,634 15,791 50,468 46,801
Adjusted PAT 7,898 9,029 11,755 16,786 11,819 8,557 10,634 15,791 45,468 46,801
Change (YoY %) -55.9 -57.7 98.2 145.5 49.6 -5.2 -9.5 -5.9 -12.6 2.9
Consolidated Financials
Net Sales 232,923 253,950 262,020 275,038 290,891 268,749 278,629 307,130 1,023,931 1,145,399
EBITDA -299 3,718 31,043 45,964 50,076 17,200 25,056 40,514 80,427 132,846
Reported PAT -22,385 -27,198 4,323 24,052 27,344 9 8,000 19,973 -21,208 55,326
Adjusted PAT -19,899 -17,959 6,521 23,083 27,529 414 8,355 20,271 -8,255 56,569
E: MOSL Estimates; tss=ton of steel sales

Sanjay Jain (SanjayJain@MotilalOswal.com)/Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com)

July 2010 166

 Results Preview
QUARTER ENDING JUNE 2010

Oil & Gas

BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Definite steps towards price deregulation; subsidy sharing still unclear: The
BPCL
government took two important decisions during 1QFY11, making it a historic quarter
for the Oil and Gas sector. In May 2010, the government increased APM gas price by
Cairn India 100% to US$4.2/mmbtu in a single step, indicating its desire to move towards uniform
pricing. Then it announced major reforms - full deregulation of petrol prices, phased
Chennai Petroleum deregulation of diesel prices, and steep price hikes for kerosene (33%) and LPG (11%).
Consequently, greater clarity is expected on the sharing of under-recoveries.
GAIL

GRMs suppressed due to oversupply in middle distillates: After averaging at the

Gujarat State Petronet 8-year low in 3QFY10 at US$1.9/bbl, Reuters' Singapore GRM rebounded in 4QFY10
to US$5/bbl. However, with increase in refinery utilization rates (currently 89%), gasoline
HPCL and naphtha cracks came under pressure, bringing 1QFY11 GRMs below US$4/bbl.
Unless there are major refinery closures and the global economy remains strong, we
IOC expect refining margins to remain subdued.

Indraprastha Gas Petchem margins strong, but oversupply to pressurize margins in 2HFY11:
Polymer prices declined 2-4% QoQ while polyester prices were flat to marginally positive.
MRPL Petchem margins were under pressure vis-à-vis 4QFY10, owing to just 1% reduction in
naphtha prices. Also, with start-up of new capacities in China and the Middle East,
ONGC petchem markets are expected to be in oversupply by 2HFY11.

Reliance Industries
Valuation and view: Subsidy sharing is still the overhang on upstream and OMCs,
though the market expects the government to announce an underwriting policy to decide
the mechanism. Despite the subsidy concern, we remain positive on ONGC, GAIL and
the OMCs. Our near-term view on the refining and petrochemical cycle is bearish and
we believe this could adversely impact margins of RIL and other refiners.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Oil & Gas

BPCL 621 Buy 323,334 26.8 -13.9 6,208 -16.7 -44.9 2,707 -55.9 -61.5
Cairn India 312 Buy 10,143 395.0 46.0 8,261 525.0 125.0 4,372 109.0 78.0
Chennai Petroleum 251 Buy 52,959 -6.4 -3.1 472 -89.9 LP -526 PL -
GAIL 483 Buy 76,433 26.9 17.2 13,672 28.3 3.8 7,942 21.1 -12.8
Gujarat State Petronet 100 Buy 2,684 27.3 4.1 2,523 29.5 6.4 1,040 29.1 -3.6
HPCL 401 Buy 273,611 13.1 -12.6 4,048 -62.8 -69.2 1,582 -75.6 -79.1
Indraprastha Gas 257 Neutral 3,216 38.3 11.7 1,091 28.5 18.0 609 26.2 18.4
IOC 377 Buy 671,498 14.5 -13.1 25,195 -39.2 -65.5 12,537 -66.0 -77.4
MRPL 73 Sell 88,436 49.6 1.7 1,696 -71.5 -37.3 652 -80.6 -45.5
ONGC 1,264 Buy 146,098 -1.8 -0.7 79,573 -16.2 -2.8 34,862 -28.1 -7.7
Reliance Inds. 1,063 Buy 564,709 81.1 -1.9 94,037 47.3 2.9 47,710 30.1 1.3
Sector Aggregate 2,209,843 28.0 -8.0 233,808 -4.2 -20.2 110,802 -26.3 -34.2

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 167

 Oil & Gas

GRM continues to remain subdued led by Gasoline, Naphtha and Fuel oil
cracks
Singapore complex GRM at ~US$3.6/bbl; Petchem margins down QoQ; Oil averaged
US78.5$/bbl;

YoY comparison (v/s 1QFY10)

„ Average Brent price was up 33% at US$78.5/bbl v/s US$59.2/bbl; Dubai crude was
also up 33% at US$77.9/bbl v/s US$59.8/bbl.
„ Benchmark Singapore complex average refining margin was down 7% at ~US$3.8/
bbl v/s US$4.1/bbl.
„ Polymer and polyester prices up, polymer margins down and polyester margins up.

Polymer margins: PE margins down 1.7%; PP margins flat.

Polyester intermediate margins: PTA margins down 11%; MEG margins up 80%.
Integrated polyester margins: POY margins up 6%; PSF margins up 11%.

QoQ comparison (v/s 4QFY10)

„ Average Brent price was up 2.7% at US$78.5/bbl v/s US$76.7/bbl; Dubai crude was
up 2.8% at US$77.9/bbl v/s US$75.9/bbl.
„ Singapore complex margins averaged US$3.8/bbl, down 27% from US$4.9/bbl.
„ Polymer and petchem margins were lower.

Polymer margins: PE margins down 5%; PP margins down 2%.

Polyester intermediate margins: PTA margins down 2.3%; MEG margins down 16%.
Integrated polyester margins: POY margins up 1%; PSF margins up 5%.

Government moves towards deregulation; increases APM gas price

The Empowered Group of Ministers (EGoM) concluded their meeting on fuel price
deregulation on a positive note. Key announcements with respect to all controlled products
were as follows:
„ Petrol: Retail prices to be market-determined; as per the latest fortnight data, price
hike is ~Rs3.5/liter.
„ Diesel: Though EGoM has decided to eventually deregulate diesel prices, currently it
has decided to increase price by just Rs2/liter.
„ LPG: Domestic LPG cylinder price to be hiked by Rs35/cylinder (current loss is
Rs262/cylinder).
„ Kerosene: PDS kerosene price to be hiked by Rs3/liter from Rs9/liter to Rs12/liter
(current loss is Rs17.9/liter).

Clarity yet to emerge on subsidy sharing

„ Post the EGoM decisions, there would still be under-recovery in the system and no
clarity has been provided on subsidy sharing. The government press release states,
"Even after the above measures, the government and the public sector oil companies
are expected to bear an estimated under-recovery burden of about Rs530b on the four
sensitive petroleum products during FY11". This implies that the state-owned oil
marketing companies (OMCs) will continue to bear a part of the under-recoveries.

July 2010 168

 Oil & Gas

„ In FY10, upstream companies (ONGC, GAIL and Oil India) shared 100% of auto fuel
losses while kerosene and LPG losses were borne by the government (83%) and
downstream companies (17%).
„ For FY11, we change our assumption for upstream sharing from 100% of auto fuel
under-recoveries to 1/3rd of gross under-recoveries. We assume that downstream
companies will bear 11% of total under-recoveries; the government will bear the rest.

We expect under-recoveries of Rs458b in FY11. Our estimates factor in Brent crude

price of US$75/bbl and an exchange rate of Rs46/US$.

PETROL DE-REGULATED; DIESEL TO FOLLOW

PRODUCT DECISION REMARKS

Petrol Prices to be de-regulated; Under recovery becomes nil; petrol constituted

immediate price hike of Rs3/ltr
Diesel Prices will be de-regulated over time;
immediate price hike of Rs2/ltr
PDS Kerosene Price hiked by Rs3/ltr
Dom. LPG Price hiked by Rs35/cylinder
* Impact will be only for the rest 9 months
10-12% of gross under recoveries
Rs2/ltr hike reduces diesel under recovery by
~114b for FY11
Rs3/ltr hike reduces kerosene under recovery
by ~27b for FY11
Rs35/cyl hike reduces LPG under recovery
by ~23b for FY11
Source: Company/MOSL

HISTORICAL AD-HOC SUBSIDY SHARING

FY06 FY07 FY08 FY09 FY10 FY11E

Gross Under Recoveries (Rs b)

Petrol 27 20 73 52 52 22
Diesel 126 188 353 523 93 84
PDS Kerosene 144 179 191 282 174 177
Domestic LPG 102 107 156 176 143 176
Total 400 494 773 1,033 461 459
Sharing (Rsb)
Oil Bonds/Cash 115 241 353 713 260 256
Upstream 140 205 257 329 145 153
OMC's Sharing 138 48 163 (9) 56 50
Total 400 494 773 1,033 461 459
Sharing (%)
Oil Bonds 29 49 46 69 56 56
Upstream 35 42 33 32 31 33
OMC's sharing 35 10 21 (1) 12 11
Total 100 100 100 100 100 100
Source: Company/MOSL

1QFY11 GRM at ~US$3.6/bbl; strong economic growth, refinery closures

key for sustainability
Refining margins worldwide had reached historical lows in 2HCY09 (~US$1/bbl in October
2009), resulting in many refineries becoming unviable. In response to the lower refining
margins, many refiners worldwide either reduced their operating rates or shut down their
facilities. Hence, there was a steep recovery in GRMs in 4QFY10. However, due to
similar lack of demand growth, GRMs were suppressed in 1QFY11 and remained at
~US3.6/bbl (v/s US$4.9/bbl in 4QFY10).

July 2010 169

 Oil & Gas

As US refiners increased utilization levels in 1QFY11 (from 77% in January 2010 to

~89% in April 2010), gasoline and fuel oil cracks fell, because increased supply was not
matched by commensurate growth in demand. Naphtha cracks fell in 1QFY11, as demand
from petchem declined due to large maintenance shutdown in Asia (~1mmtpa) coupled
with higher supply (led by increased refinery utilization rates).

Sequential decline in Singapore GRMs

Refinery shutdowns worldwide have been to the tune of ~2mmbbl/d during the last year
(~2.2% of the global refining capacity of ~90mmbbl/d). Global refinery utilization rates
have increased from 77% to 89% in the last few months, causing GRMs to decline.

GRM recovery in 4QFY10 and decline in 1QFY11 was primarily led by gasoline, naphtha
and fuel oil (which together constitute 62% of Reuters Singapore product slate). GRM
decline in 1QFY11 was arrested to some extent due to improvement in diesel cracks
(US$11.2/bbl in 1QFY11 v/s US$8.7/bbl in 4QFY10). Since most of the closures were
temporary, few plants came online to gain from the improved GRMs. Also, demand did not
increase in line with the supply of gasoline and fuel oil; hence their cracks were suppressed.

STRONG QOQ JUMP IN SINGAPORE GRM

Singapore Refining Margins (US$/bbl) Monthly Quarterly

12

10

8
US$5.6/bbl
US$5.0/bbl
6

0
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Source: Bloomberg/Reuters/MOSL

Further, new refining capacity of 5mmbbl/d is expected to commence operations in the

next three years (1.6mmbbl/year). Notwithstanding the margin scenario, we expect majority
of the planned capacity to come up in FY11/12, as (1) they are in the final stags of completion,
and (2) new refiners have higher complexity and would have a better chance to sustain in
the low GRM regime.

Improving light-heavy differentials

After remaining subdued for last few months, light-heavy differentials have once again
started to widen. In 1QFY11, Arab light-heavy differential averaged US$2.7/bbl (v/s US$1.7/
bbl in 4QFY10 and US$1.9/bbl in 1QFY10) while WTI-Maya differential stood at US$9.8/
bbl (v/s US$8.8/bbl in 4QFY10 and US$4/bbl in 1QFY10). Improving light-heavy spreads
augur well for complex refiners like RIL.

July 2010 170

 Oil & Gas

UPTICK IN LIGHT-HEAVY SPREADS

12.5 25
Arab L-H WTI - Maya (RHS)
10.0 20

7.5 15

5.0 10

2.5 5

0.0 0
May-02

May-03

May-04

May-05

May-06

May-07

May-08

May-09

May-10
Source: IEA

Expect margin pressure on petchem in 2HFY11

Petchem margins are likely to be under pressure due to the new capacities in the Middle
East (ME) and China. It is expected that global nameplate ethylene capacity will increase
by 7.2% in CY10 and 5.3% in CY11, whereas demand is expected to increase by 4.5% in
CY10. Propylene capacity is expected to grow by 5.4% in CY10 and 3.4% CY11 against
expected demand growth of 3.3% in CY10.

Though domestic players are protected to some extent due to (1) freight cost advantage,
and (2) India's duty structure, we believe the ME supplies will eventually impact their
margins in 2HFY11.
KEY PRODUCT SPREADS

SIMPLE SPREADS INTEGRATED SPREADS

PE PP PVC PTA MEG POY PSF

1QFY10 42.2 40.0 21.2 28.3 12.1 45.3 41.4

2QFY10 41.9 37.2 20.5 26.6 15.6 45.6 41.9
RELATIVE PERFORMANCE - 3M (%) 3QFY10 38.1 32.8 16.7 22.8 17.1 42.3 39.0
Sensex
4QFY10 43.6 40.9 20.5 25.8 25.9 47.6 43.6
M OSt Oil & Gas Index 1QFY11E 41.5 40.1 20.7 25.2 21.7 48.0 45.9
110 QoQ (%) -4.8 -1.9 1.1 -2.3 -16.2 0.9 5.2
105 YoY (%) -1.7 0.4 -2.3 -10.7 80.2 6.1 10.9
100 Source: Company/MOSL
95
90
Valuation and view
Mar-10

May-10

Jun-10
Apr-10

Subsidy sharing is still the overhang on upstream and OMCs, though the market expects
the government to announce an underwriting policy to decide the mechanism. Despite the
RELATIVE PERFORMANCE - 1YR (%) subsidy concern, we remain positive on ONGC, GAIL and the OMCs. Our near-term
M OSt Oil & Gas Index view on the refining and petrochemical cycle is bearish and we believe this could adversely
Sensex
130 impact margins of RIL and other refiners.
120
110 Key assumptions
100
„ Our crude price assumption for FY11 and onwards is US$75/bbl.
90
„ We believe Benchmark Singapore Reuters GRM will remain subdued. We model US$4/
Jun-09

Mar-10
Dec-09

Jun-10
Sep-09

bbl in FY11 and US$4.5/bbl in FY12.

„ We have considered 15-20% drop in petchem margins in 2HFY11 for RIL and GAIL.

July 2010 171

 Oil & Gas

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Oil & Gas

BPCL 621 Buy 45.2 60.6 64.6 13.8 10.3 9.6 14.9 9.0 7.4 11.8 14.4 13.9
Cairn India 312 Buy 5.5 25.4 43.9 56.2 12.2 7.1 61.2 8.0 4.7 3.2 13.5 20.4
Chennai Petroleum 251 Buy 32.7 25.9 27.4 7.7 9.7 9.2 7.5 6.9 7.0 18.5 10.9 10.9
GAIL 483 Buy 24.8 30.6 34.5 19.5 15.8 14.0 13.1 10.2 9.3 18.7 20.1 19.7
Gujarat State Petronet 100 Buy 7.4 7.8 13.9 13.5 12.8 7.2 6.9 6.1 4.0 29.4 24.8 33.8
HPCL 401 Buy 38.4 34.6 37.1 10.4 11.6 10.8 8.5 8.5 7.1 11.7 9.8 9.9
Indraprastha Gas 257 Neutral 15.4 19.1 20.0 16.7 13.4 12.8 9.5 7.6 6.9 28.6 29.4 25.9
IOC 377 Buy 44.5 34.3 43.1 8.5 11.0 8.8 9.7 7.2 5.7 21.8 15.0 17.1
MRPL 73 Sell 6.0 1.7 4.4 12.1 43.5 16.6 10.2 20.5 12.4 20.6 5.3 13.2
ONGC 1,264 Buy 90.7 122.5 141.2 13.9 10.3 9.0 5.5 4.4 3.7 20.0 23.5 23.0
Reliance Inds. 1,063 Buy 54.8 69.0 83.4 19.4 15.4 12.7 13.0 9.8 8.2 13.4 14.9 15.6
Sector Aggregate 16.0 13.1 10.6 9.6 7.2 5.9 14.9 16.2 17.4

July 2010 172

 Results Preview
SECTOR: OIL & GAS

BPCL
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BPCL IN Buy
REUTERS CODE
S&P CNX: 5,269 BPCL.BO Previous Recommendation: Buy Rs621
Equity Shares (m) 361.5 YEAR NET SALES ADJ. PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END * (RS B) (RS B) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 658/407
03/09A 1,366 6.3 17.5 -58.1 35.4 1.7 4.8 5.9 0.3 13.9
1,6,12 Rel Perf (%) 4/ 0/27
03/10A 1,238 16.3 45.2 157.6 13.7 1.6 11.8 3.9 0.4 14.9
Mcap (Rs b) 224.6
03/11E 1,340 21.9 60.6 34.2 10.2 1.4 14.4 7.9 0.3 9.0
Mcap (USD b) 4.8
03/12E 1,328 23.4 64.6 6.7 9.6 1.3 13.9 9.5 0.3 7.4
* Consolidated

„ We expect BPCL to report net profit of Rs2.7b as against Rs7b in 4QFY10 and Rs6b in 1QFY11. We estimate
EBITDA at Rs6.2b (v/s Rs11.2b in 4QFY10 and Rs7.5b in 1QFY11).

„ We assume that OMCs will bear 11% of the total under-recoveries - Rs5b in 1QFY11 (v/s Rs9.2b in 1QFY10).
Further, we assume that the upstream segment will bear 1/3 of the total under-recoveries while the government will
compensate for the rest.

„ As in previous quarters, BPCL's profitability will depend more on the subsidy sharing than on business fundamentals.
Post its meeting on 25 June 2010, the EGoM deregulated petrol prices and increased prices of diesel, kerosene and
LPG.

„ On the operational front, we expect throughput at 5.5mmt (down 3% QoQ and up 32% YoY).

„ The stock is trading at 9.6x FY12E consolidated EPS of Rs64.6 and 1.3x FY10E BV. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 254,928 270,710 321,612 375,513 323,334 327,411 327,540 331,004 1,222,763 1,309,290
Change (%) -34.7 -28.4 0.9 41.7 26.8 20.9 1.8 -11.9 -9.6 7.1
EBITDA 7,454 -1,163 6,228 11,275 6,208 9,881 9,690 10,628 23,794 36,408
Change (%) nm -94.6 -59.1 -72.9 -16.7 nm 55.6 -5.7 -13.1 53.0
% of Sales 2.9 -0.4 1.9 3.0 1.9 3.0 3.0 3.2 1.9 2.8
Depreciation 2,311 3,088 3,816 3,208 3,250 3,275 3,295 3,305 12,423 13,125
Interest 2,866 2,673 2,513 2,059 2,419 2,306 2,250 2,025 10,110 9,000
Other Income 7,028 4,424 4,873 6,078 3,514 4,023 3,742 2,901 22,402 14,179
PBT 9,306 -2,500 4,771 12,087 4,053 8,323 7,887 8,199 23,664 28,462
Tax 3,165 -912 980 5,052 1,346 2,765 2,620 2,723 8,284 9,454
Rate (%) 34.0 36.5 20.5 41.8 33.2 33.2 33.2 33.2 35.0 33.2
PAT 6,141 -1,588 3,791 7,035 2,707 5,559 5,267 5,475 15,379 19,008
Change (%) nm -94.0 -52.6 -80.6 -55.9 nm 38.9 -22.2 118.6 23.6
Adj. PAT 6,141 -1,588 3,791 7,035 2,707 5,559 5,267 5,475 15,379 19,008
Key Assumption (Rs b)
Gross Under Recovery 11 22 30 38 46 18 18 17 101 98
Upstream Sharing 2 9 12 15 15 6 6 6 36 33
Oil Bonds 0 0 15 38 25 10 10 9 53 55
Net Under/(Over) Recovery 9 14 3 -14 5 2 2 2 12 10
As a % of Gross 85.5 61.8 11.0 -36.5 11.0 10.6 10.5 10.4 12.2 11
E: MOSL Estimates

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 173

 Results Preview
SECTOR: OIL & GAS

Cairn India
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 CAIR IN Buy
REUTERS CODE
S&P CNX: 5,269 CAIL.BO Previous Recommendation: Buy Rs312
Equity Shares (m) 1,894.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 321/201
03/09A 14,326 8,082 4.3 N.M. 73.0 1.8 2.6 2.5 40.0 61.7
1,6,12 Rel Perf (%) 5/ 10/16
03/10A 16,230 10,511 5.5 30.1 56.1 1.7 3.2 2.5 36.9 61.1
Mcap (Rs b) 590.3
03/11E 84,706 48,172 25.4 358.3 12.2 1.6 13.5 15.3 7.0 8.0
Mcap (USD b) 12.7
03/12E 133,587 83,263 43.9 72.8 7.1 1.3 20.4 23.2 4.1 4.6
Consolidated

„ We estimate Cairn India to report net sales of Rs10.1 (v/s Rs6.9b in 4QFY10), led by additional revenues from
Rajasthan crude sales. Rajasthan crude sales commenced from 3QFY10 and hence YoY numbers would not be
comparable.
„ We estimate EBITDA at Rs8.3b v/s Rs3.7b in 4QFY10. We expect the EBITDA margin to improve once crude
transportation pipeline is completely operational, (currently ~60000 bpd) as it would replace the current trucking cost
of ~US$8/bbl by US$1/bbl.
„ We estimate net oil and gas sales of 26kbpd (v/s 13.4kbpd in 4QFY10) from Rajasthan field and total net sales of
40kboepd (v/s 27.4kboepd in 4QFY10). We build gross oil sales from Rajasthan block at 94.1kbpd (net 65.9kbpd) in
our estimates for FY11.
„ We model long term Brent crude price of US$75/bbl in our estimates and take a discount of 12.5% (~US$9.4/bbl) for
quality and customs duty on crude at 2.5%.
„ Cairn's earnings will see a substantial jump over sequential quarters as the production from Rajasthan block ramps
up. Our current FY12 EPS of Rs44 is based on Brent price of US$75/bbl and at Brent price of US$85/bbl EPS would
stand increased to Rs51.5. The stock currently trades at 7.1x FY12E EPS of Rs43.9. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 2,050 2,298 4,955 6,928 10,143 18,146 25,497 30,921 16,230 84,706
Change (%) -35.1 -43.1 54.5 228.6 -29.2 785.4 1,009.6 524.1 13.3 421.9
Inc/Dec in Stock -155 -259 -652 700 0 0 0 0 -366 0
Staff Cost 215 211 407 268 297 300 305 310 1,102 1,212
Operating Expenses 668 1,013 1,727 2,282 1,584 2,262 2,865 3,269 5,689 9,980
EBITDA 1,321 1,333 3,473 3,678 8,261 15,584 22,327 27,342 9,805 73,514
% of Net Sales 64.5 58.0 70.1 53.1 81.5 85.9 87.6 88.4 60.4 86.8
D,D & A (inc. w/off) 722 508 740 1,601 2,800 3,050 3,170 3,591 3,570 12,611
Interest 7 9 260 19 536 726 919 1,088 295 3,269
Other Income (Net) 572 1,056 999 879 540 635 691 662 3,505 2,528
Forex Fluctuations 718 0 0 0 0 0 0 0 718 0
Exceptional Items -1,637 1,637 0 0 0 0
PBT 244 3,510 3,472 2,938 5,465 12,443 18,929 23,326 10,164 60,163
Tax -210 -1,185 562 486 1,093 2,489 3,786 4,623 -348 11,991
Rate* (%) nm -33.8 16.2 16.5 nm 20.0 20.0 19.8 -3.4 19.9
PAT 454 4,695 2,910 2,452 4,372 9,954 15,143 18,702 10,511 48,172
Adj. PAT 2,092 1,873 2,910 2,452 4,372 9,954 15,143 18,702 10,511 48,172
Sales - Cairn's Share (kboepd)
Ravva and Cambay 15.9 14.4 13.8 14.1 14.0 14.0 14.0 14.0 14.6 14.0
Rajasthan 0.0 4.2 10.8 12.3 26.0 54.8 80.5 102.7 6.8 66.0
E: MOSL Estimates; * Excluding forex fluctuations

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 174

 Results Preview
SECTOR: OIL & GAS

Chennai Petroleum Corporation

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 MRL IN Buy
REUTERS CODE
S&P CNX: 5,269 CHPC.BO Previous Recommendation: Buy Rs251
Equity Shares (m) 149.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 299/152
03/09A 319,639 -431 -2.9 -104.0 -86.9 1.2 -12.2 -6.4 0.2 -34.2
1,6,12 Rel Perf (%) -9/ 13/20
03/10A 246,251 4,879 32.7 NM 7.7 1.1 18.5 14.4 0.3 7.5
Mcap (Rs b) 37.4
03/11E 285,956 3,856 25.9 -21.0 9.7 1.0 10.9 11.6 0.3 6.9
Mcap (USD b) 0.8
03/12E 308,862 4,082 27.4 5.9 9.1 1.0 10.9 11.0 0.3 7.0

„ We expect CPCL to report net loss of Rs526m (v/s adj. net loss of Rs951m in 4QFY10 and profit of Rs2.5b in
1QFY10).

„ The significant YoY decline in profit would be led by lower refining margins (46%) and lower throughput (25%).
Regional benchmark Singapore GRM is down 12% from US$4.1/bbl in 1QFY10 to US$3.6/bbl. On the operational
front, we expect refinery throughput 2mmt (up 7% QoQ and down 25% YoY) due to plant shutdown.

„ Oil prices have been lower by US$7/bbl and hence we may see inventory losses. We expect CPCL to report GRM
of US$3.7/bbl v/s reported GRM of US$6.88/bbl in 1QFY10 and US$4.3/bbl in 4QFY10.

„ We expect refining margin to remain subdued in the short-term, as 1.2-1.6mmbbl new refining capacity is likely to
come online in the next few months. For CPCL, we have built GRM of US$4.4/bbl for FY11 and US$4.7/bbl for
FY12. The stock trades at 9.2x FY12E EPS of Rs27.4 and an EV of 7x FY12E EBITDA. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 56,604 69,971 68,498 54,653 52,959 77,996 77,702 77,300 249,726 285,956
Change (%) -49.7 -32.0 21.9 13.6 -6.4 11.5 13.4 41.4 -21.9 14.5
EBITDA 4,677 3,218 1,204 -568 472 3,173 3,356 3,356 8,532 10,358
% of Sales 8.3 4.6 1.8 -1.0 0.9 4.1 4.3 4.3 3.4 3.6
Change (%) -60.0 -702.6 -106.7 -110.9 -89.9 -1.4 178.7 nm -59.6 21.4
Depreciation 665 679 683 644 700 740 740 756 2,671 2,936
Interest 279 316 354 425 458 520 535 543 1,374 2,056
Other Income 884 -115 891 690 160 162 169 179 2,351 670
PBT 4,617 2,109 1,059 -947 -526 2,075 2,250 2,236 6,838 6,035
Tax 1,570 717 -1,145 -336 0 689 747 743 805 2,180
Rate (%) 34.0 34.0 nm 35.5 0.0 33.2 33.2 33.2 11.8 36.1
PAT 3,047 1,392 2,204 -611 -526 1,386 1,503 1,493 6,032 3,856
Change (%) -56.7 nm nm -122.5 -117.3 nm nm -344.5 -46.3 -36.1
Adj PAT* 2,515 1,545 1,769 -951 -526 1,386 1,503 1,493 4,879 3,856
GRM (US$/bbl) 6.9 4.2 3.4 4.3 3.7 4.5 4.7 4.7 6.1 4.7
Throughput (mmt) 2.7 2.7 2.7 1.9 2.0 3.0 3.0 3.0 10.0 11.0
E: MOSL Estimates; * Adjusted for forex gain/loss

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 175

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SECTOR: OIL & GAS

GAIL (India)
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 GAIL IN Buy
REUTERS CODE
S&P CNX: 5,269 GAIL.BO Previous Recommendation: Buy Rs483
Equity Shares (m) 1,268.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE *EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 517/275
03/09A 237,760 38,824 30.6 52.6 13.4 3.5 19.0 24.8 2.2 10.6
1,6,12 Rel Perf (%) -1/ 14/50
03/10A 249,337 31,398 24.8 -19.1 16.6 3.1 18.7 23.9 2.1 10.3
Mcap (Rs b) 612.4
03/11E 325,019 38,824 30.6 23.7 13.4 2.7 20.1 23.2 1.8 8.5
Mcap (USD b) 13.2
03/12E 374,827 43,769 34.5 12.7 11.9 2.4 19.7 18.5 1.5 8.0
*Adjustment for investments

„ We expect GAIL to report net profit of Rs7.9b (down 13% QoQ; up 20% YoY). The significant QoQ drop in PAT
would be due to lower petchem margins (down 12%) and higher subsidy (up191%). YoY improvement in performance
despite higher subsidy is led by higher LPG prices (up 47%), improved petchem margins (up 38%) and higher gas
transmission volumes (up 19%).
„ GAIL's transportation volumes for 1QFY11 are likely to be an average 115mmscmd as compared to 114.8mmscmd
in 4QFY10 and 96.7mmscmd in 1QFY10. Volume growth over the last 12 months is driven by KG-D6 gas (commenced
production in April 2009).
„ We have built in subsidy sharing of Rs6.4b in 1QFY11 (v/s Rs3.4b in 4QFY10 and Rs747m in 1QFY10). LPG
business EBIT (pre-subsidy) would be down 8% QoQ and up 52% YoY primarily due to higher realizations YoY. We
expect petchem sales volumes to decline 4% QoQ (but grow 14% YoY); petchem EBIT would be down 12.5% QoQ,
but up 48% YoY due to higher realizations.
„ Adjusted for investments, the stock trades at 11.9x FY12E EPS of Rs34.5. We have a Buy rating on the stock.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 60,214 62,022 61,880 65,221 76,433 81,832 83,033 83,721 249,337 325,019
Change (%) 5.1 1.2 6.5 6.8 26.9 31.9 34.2 28.4 4.9 30.4
EBITDA 10,655 10,173 12,696 13,168 13,672 16,484 16,512 16,714 46,691 63,382
% of Net Sales 17.7 16.4 20.5 20.2 17.9 20.1 19.9 20.0 18.7 19.5
Change (%) -23.9 -28.9 377.3 37.5 28.3 62.0 30.1 26.9 15.2 35.7
Depreciation 1,404 1,416 1,409 1,389 1,900 1,925 1,950 1,986 5,618 7,761
Interest 179 179 142 200 440 450 470 480 700 1,840
Other Income 798 1,689 1,438 1,486 560 1,060 1,060 1,672 5,411 4,353
PBT 9,870 10,268 12,582 13,064 11,892 15,169 15,153 15,921 45,784 58,134
Tax 3,312 3,135 3,983 3,956 3,950 5,039 5,033 5,288 14,386 19,311
Rate (%) 33.6 30.5 31.7 30.3 33.2 33.2 33.2 33.2 126.0 33.2
PAT 6,558 7,132 8,599 9,108 7,942 10,130 10,119 10,632 31,398 38,824
Change (%) -26.9 -30.3 239.3 44.6 21.1 42.0 17.7 16.7 12.0 23.7
Adj PAT 6,558 7,132 8,599 9,108 7,942 10,130 10,119 10,632 38,824 38,824
Subsidy Sharing (Rs b) 0.7 4.6 4.6 3.4 6.4 2.6 2.5 2.3 13.8 13.3
EPS (Rs) 5.2 5.6 6.8 7.2 6.3 8.0 8.0 8.4 30.6 30.6
Key Assumptions
Gas Trans.Volume (mmsmd) 97 107 109 115 115 115 124 130 107 121
Petchem Sales ('000MT) 92 88 120 109 105 105 120 125 409 455
E: MOSL Estimates

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 176

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SECTOR: OIL & GAS

Gujarat State Petronet

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 GUJS IN Buy
REUTERS CODE
S&P CNX: 5,269 GSPT.BO Previous Recommendation: Buy Rs100
Equity Shares (m) 562.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 104/47
03/09A 4,875 1,234 2.2 23.5 45.4 2.2 4.6 10.4 11.5 16.1
1,6,12 Rel Perf (%) 3/ 1/80
03/10A 9,920 4,138 7.4 235.5 13.5 7.4 3.5 29.4 25.6 7.0
Mcap (Rs b) 56.0
03/11E 11,162 4,387 7.8 6.0 12.8 7.8 2.9 24.8 24.7 6.1
Mcap (USD b) 1.2
03/12E 16,195 7,786 13.9 77.5 7.2 13.9 2.1 33.8 32.7 4.0
*Our EPS numbers consider No provision towards "Social Contribution Fund"

„ We expect GSPL to report a topline of Rs2.7b and net profit of Rs1b (down 3% QoQ and up 29% YoY).

„ GSPL is likely to deliver volumes of 37.4mmscmd for 1QFY11 as against 36.4mmscmd in 4QFY10 and 25.3mmscmd
in 1QFY10.

„ PNGRB regulations require application from GSPL for authorization, post which the Board shall approve tariff. We
believe it will take at least one year from here for final tariff approval. Also, we believe there would be a 10-20%
reduction in GSPL's network tariff, with the PNGRB reducing its EBITDA margin from 92% to <85%.

„ GSPL has raised an EOI for four major cross-country pipelines. PNGRB has being postponing / delaying the bidding
process for the last six months; it has now decided to open the bids in July. If GSPL wins any of the pipeline bids, it
will need to raise additional funds considering that each pipeline would cost over Rs50b.

„ GSPL trades at 7.2x FY12E EPS of Rs13.9. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 2,108 2,548 2,685 2,579 2,684 2,713 2,833 2,931 9,920 11,162
Change (%) 76.4 114.8 128.6 95.4 27.3 6.5 5.5 13.7 103.5 12.5
EBITDA 1,948 2,443 2,531 2,371 2,523 2,550 2,663 2,754 9,293 10,490
% of Net Sales 92.4 95.9 94.3 91.9 94.0 94.0 94.0 93.9 93.7 94.0
Change (%) 81.1 138.5 149.0 110.1 29.5 4.4 5.2 16.2 118.9 12.9
Depreciation 550 587 596 632 716 750 775 800 2,365 3,041
Interest 245 250 218 225 340 360 380 388 938 1,468
Other Income 68 59 33 121 90 150 160 187 280 587
PBT 1,221 1,665 1,750 1,634 1,557 1,590 1,668 1,754 6,270 6,569
Tax 415 564 597 555 517 528 554 582 2,131 2,182
Rate (%) 34.0 33.9 34.1 34.0 33.2 33.2 33.2 33.2 34.0 33.2
PAT 806 1,101 1,154 1,079 1,040 1,062 1,114 1,171 4,138 4,387
Change (%) 146.8 287.8 317.4 210.9 29.1 -3.5 -3.4 8.6 235.5 6.0
EPS (Rs) 1.4 2.0 2.1 1.9 1.9 1.9 2.0 2.1 7.4 7.8
Transmission Volumes (mmscmd) 25.3 31.1 35.1 36.4 37.4 37.4 38.8 40.8 32.0 38.6
Implied Tariff (Rs/mscm) 914.9 891.2 830.8 786.8 789.3 789.3 793.0 797.6 855.9 792.3
E: MOSL Estimates

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 177

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SECTOR: OIL & GAS

HPCL
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HPCL IN Buy
REUTERS CODE
S&P CNX: 5,269 HPCL.BO Previous Recommendation: Buy Rs401
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 339.0
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 425/293
03/09A 1,246,943 4,355 12.8 -40.0 31.2 1.3 4.1 8.8 0.2 8.0
1,6,12 Rel Perf (%) 10/ 1/13
03/10A 1,076,375 13,014 38.4 198.8 10.4 1.2 11.7 8.7 0.2 8.5
Mcap (Rs b) 136.0
03/11E 1,152,707 11,718 34.6 -10.0 11.6 1.1 9.8 7.6 0.2 8.5
Mcap (USD b) 2.9
03/12E 1,143,682 12,594 37.1 7.5 10.8 1.0 9.9 8.3 0.2 7.1

„ We expect HPCL to report net profit of Rs1.6b as against Rs7.6b in 4QFY10 and Rs6.5b in 1QFY10.

„ We assume that OMCs will bear 11% of the total under-recoveries - Rs5b in 1QFY11 (v/s Rs9.2b in 1QFY10).
Further, we assume that the upstream segment will bear 1/3 of the total under-recoveries while the government will
compensate for the rest.

„ As in previous quarters, HPCL's profitability will depend more on the subsidy sharing than on business fundamentals.
Post its meeting on 25 June 2010, the EGoM deregulated petrol prices and increased prices of diesel, kerosene and
LPG. However, there is no clarity on sharing of net under-recoveries.

„ On the operational front, we expect throughput of 3.95mmt (up 1% QoQ and down 3.7% YoY).

„ The stock is trading at 10.8x FY12E EPS of Rs37.1 and 1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 241,976 244,566 276,620 313,213 273,611 291,166 286,528 301,403 1,076,375 1,152,707
Change (%) -30.3 -31.0 -5.9 24.5 13.1 19.1 3.6 -3.8 -13.7 7.1
EBITDA 10,876 -4 1,421 13,139 4,048 7,420 7,576 6,922 25,432 25,966
% of Net Sales 4.5 0.0 0.5 4.2 1.5 2.5 2.6 2.3 2.4 2.3
Change (%) -364.6 -100.0 -69.9 -75.8 -62.8 nm 433.1 -47.3 -12.1 2.1
Depreciation 2,629 2,833 3,007 3,175 3,200 3,400 3,550 3,610 11,644 13,760
Interest 2,702 2,493 2,202 1,640 1,851 2,050 1,950 1,809 9,038 7,660
OI (incl. Oper. other inc) 4,403 3,237 4,373 4,450 3,372 3,492 3,278 2,859 16,463 12,999
PBT 9,948 -2,094 585 12,774 2,369 5,462 5,354 4,361 21,213 17,546
Tax 3,457 -727 271 5,236 787 1,814 1,778 1,449 8,237 5,828
Rate (%) 34.8 34.7 46.3 41.0 33.2 33.2 33.2 33.2 38.8 33.2
PAT 6,491 -1,367 314 7,538 1,582 3,648 3,575 2,912 12,977 11,718
Change (%) nm -95.8 nm -85.2 -75.6 nm 1,037.4 -61.4 126.0 -9.7
Adj. PAT 6,491 -1,367 314 7,575 1,582 3,648 3,575 2,912 13,014 11,718
Key Assumptions (Rs b)
Gross Under Recovery 12 22 29 37 45 19 19 18 100 100
Upstream Sharing 2 8 10 14 15 6 6 6 33 34
Oil Bonds/Cash Subsidy 0 0 19 37 25 11 11 10 56 56
Net Under Recovery 10 15 1 -13 5 2 2 2 12 11
Net Sharing (%) 85 66 3 nm 11 11 11 11 12 11
E: MOSL Estimates

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 178

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SECTOR: OIL & GAS

Indian Oil Corporation

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 IOC IN Buy
REUTERS CODE
S&P CNX: 5,269 IOC.BO Previous Recommendation: Buy Rs377
YEAR NET SALES ADJ. PATADJ. EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 2,406.3
END (RS B) (RS B) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 395/257
03/09A 2,861 26.0 10.9 -67.1 34.6 2.0 5.8 8.2 0.5 18.3
1,6,12 Rel Perf (%) 7/ 21/19
03/10A 2,501 107.1 44.5 308.4 8.5 1.6 21.8 16.1 0.5 9.7
Mcap (Rs b) 907.9
03/11E 2,572 82.5 34.3 -23.0 11.0 1.6 15.0 13.6 0.5 7.3
Mcap (USD b) 19.6
03/12E 2,347 103.6 43.1 25.6 8.8 1.4 17.1 17.3 0.4 5.7
*Consolidated

„ We expect IOC to report net profit of Rs12.5b as against Rs55.6b in 4QFY10 and Rs36.8b in 1QFY10.

„ We assume that OMCs will bear 11% of the total under-recoveries - Rs5b in 1QFY11 (v/s Rs9.2b in 1QFY10).
Further, we assume that the upstream segment will bear 1/3 of the total under-recoveries while the government will
compensate for the rest.

„ As in previous quarters, IOC's profitability will depend more on the subsidy sharing than on business fundamentals.
Post its meeting on 25 June 2010, the EGoM deregulated petrol prices and increased prices of diesel, kerosene and
LPG. However, there is no clarity on sharing of net under-recoveries.

„ On the operational front, we expect throughout of 13.2mmt (down 1% QoQ but up 6% YoY).

„ The stock is trading at 8.8x FY12E consolidated EPS of Rs43.1 and 1.4x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 586,252 607,461 697,082 772,299 671,498 686,569 683,662 695,613 2,663,094 2,737,343
Change (%) -33.7 -29.6 -0.9 29.6 14.5 13.0 -1.9 -9.9 -12.6 2.8
EBITDA 41,409 4,314 3,457 72,986 25,195 35,439 35,421 38,875 122,166 134,930
% of Net Sales 7.1 0.7 0.5 9.5 3.8 5.2 5.2 5.6 4.6 4.9
Change (%) 331.2 nm -89.3 -15.3 -39.2 721.5 924.6 -46.7 195.0 10.4
Depreciation 7,598 7,805 7,996 8,872 8,900 9,100 9,300 9,344 32,271 36,644
Interest 3,340 3,477 4,091 4,357 4,425 3,850 3,960 4,665 15,265 16,900
Other Income 23,625 10,306 13,798 18,703 6,903 11,594 10,857 9,105 66,432 38,458
PBT 54,096 3,337 5,168 78,460 18,773 34,083 33,018 33,971 141,061 119,845
Tax 17,267 493 -1,798 22,893 6,236 11,322 10,968 11,284 38,855 39,809
Rate (%) 31.9 14.8 -34.8 29.2 33.2 33.2 33.2 33.2 27.5 33.2
PAT 36,828 2,844 6,966 55,568 12,537 22,762 22,050 22,687 102,206 80,035
Change (%) 787.2 nm -76.5 -16.1 -66.0 700.4 216.5 -59.2 177.5 -21.7
Key Assumptions (Rs b)
Gross Under Recovery 32 60 76 92 122 49 46 44 586 259
Upstream Sharing 2 18 23 32 41 16 15 14 182 75
Oil Bonds 0 0 45 107 68 27 26 24 404 152
Net Under Recovery 30 42 8 -48 14 6 5 5 0 32
As a % of Gross 93 70 11 -52 11 11 11 11 0 12
E: MOSL Estimates

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 179

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SECTOR: OIL & GAS

Indraprastha Gas
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 IGL IN Neutral
REUTERS CODE
S&P CNX: 5,269 IGAS.BO Previous Recommendation: Neutral Rs257
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 140.0
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 270/126
03/09A 8,528 1,726 12.3 -1.1 20.8 5.3 27.4 38.7 4.1 11.6
1,6,12 Rel Perf (%) 4/ 29/68
03/10A 10,781 2,155 15.4 24.9 16.7 4.4 28.6 40.3 3.4 9.5
Mcap (Rs b) 35.9
03/11E 15,921 2,672 19.1 24.0 13.5 3.6 29.4 41.2 2.3 7.6
Mcap (USD b) 0.8
03/12E 17,938 2,806 20.0 5.0 12.8 3.1 25.9 36.3 2.0 6.9

„ We expect IGL to deliver volumes of 2.24mmscmd in 1QFY11, reporting a PAT of Rs609m (v/s Rs515m in 4QFY10
and Rs483m in 1QFY10).

„ IGL is getting 0.25mmscmd gas from KG-D6, which will ramp up to 0.5mmscmd in the coming quarters.

„ We expect CNG volumes to grow by 16% YoY to 2.01mmscmd and PNG volumes to grow by 16% YoY to
0.22mmscmd.

„ IGL raised CNG price by Rs5.6/kg and thereby passed on the entire APM gas price hike (US$2/mmbtu to US$4.2/
mmbtu). The company has consistently proven its ability to pass on increases in APM gas price to its customers, thus
protecting its EBITDA margins.

„ IGL currently operates 193 CNG stations, which it intends to increase to 250 in FY11.

„ The new PNGRB regulations entitle IGL to earn 14% post-tax (21% pre-tax) RoCE on its network tariff. However,
final commodity price is not controlled. We do not expect any cut in IGL's gas selling prices.

„ The stock trades at 12.8x FY12E EPS of Rs20. Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 2,326 2,731 2,846 2,878 3,216 4,078 4,228 4,398 10,781 15,921
Change (%) 21.9 26.9 29.7 26.5 38.3 49.3 48.6 52.8 26.4 47.7
Raw Material Consumed 1,041 1,242 1,283 1,382 1,527 2,137 2,239 2,380 4,949 8,283
Staff Cost 62 70 79 96 83 85 88 98 308 354
Other Exp (incl Stock Adj) 373 419 450 475 515 653 672 695 1,717 2,534
EBITDA 849 1,000 1,034 925 1,091 1,204 1,229 1,225 3,808 4,749
% of Net Sales 36.5 36.6 36.3 32.1 33.9 29.5 29.1 27.9 35.3 29.8
Change (%) 12.4 17.5 52.6 28.9 28.5 20.4 18.8 32.5 26.9 24.7
Depreciation 186 194 197 198 250 260 265 260 775 1,035
Other Income 64 50 53 45 69 70 72 73 211 286
PBT 727 856 890 771 912 1,015 1,035 1,037 3,244 4,000
Tax 244 288 301 256 303 337 344 344 1,089 1,329
Rate (%) 33.6 33.7 33.8 33.2 33.2 33.2 33.2 33.2 33.6 33.2
PAT 483 568 589 515 609 678 692 693 2,155 2,672
Change (%) 10.5 13.1 53.9 27.6 26.2 19.4 17.3 34.5 24.9 24.0
Gas Volumes (mmscmd)
CNG 1.74 1.91 1.94 1.98 2.01 2.14 2.23 2.37 1.89 2.19
PNG 0.19 0.18 0.18 0.21 0.22 0.24 0.24 0.26 0.19 0.24
Total 1.93 2.10 2.12 2.18 2.24 2.38 2.47 2.63 2.08 2.43
E: MOSL Estimates

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 180

 Results Preview
SECTOR: OIL & GAS

MRPL
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 MRPL IN Sell
REUTERS CODE
S&P CNX: 5,269 MRPL.BO Previous Recommendation: Sell Rs73
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 1,752.6
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 94/64
03/09A 382,438 11,926 8.3 23.2 8.8 2.7 28.0 25.3 0.3 6.2
1,6,12 Rel Perf (%) 3/ -7/-36
03/10A 315,210 10,585 6.0 -27.3 12.1 2.3 20.6 11.9 0.5 10.2
Mcap (Rs b) 128.6
03/11E 352,860 2,955 1.7 -72.1 43.5 2.3 5.3 3.5 0.5 20.5
Mcap (USD b) 2.8 03/12E 359,381 7,738 4.4 161.8 16.6 2.1 13.2 7.7 0.6 12.4

„ We expect MRPL to report net profit of Rs652m (v/s adjusted net profit of Rs1.2b in 4QFY10 and profit of Rs3.4b
in 1QFY10). Lower YoY decline is due to large drop in operating GRMs.

„ We estimate GRM of US$3.9/bbl v/s reported GRM of US$5.25/bbl in 4QFY10 and US$7.98/bbl in 1QFY10.

„ On the operational front, we expect refinery throughput at 3.1mmtpa (up 1% QoQ and 9% YoY). MRPL has
upgraded its facilities to make Euro-IV compliant fuels and is planning to revamp capacity to 15mmtpa in FY12.

„ For MRPL, we have built in GRM of US$4.3/bbl for FY11 and US$5/bbl for FY12. The stock trades at 16.6x FY12E
EPS of Rs4.4 and EV of 12.4x FY12E EBITDA. Sell.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 59,114 78,495 90,605 86,996 88,436 86,710 89,130 88,584 315,210 352,860
Change (%) -45 -42 20 33 50 10 -2 2 -17.6 11.9
Raw Material (incl. inv chg) 52,144 74,035 86,674 83,298 85,528 83,257 85,344 84,798 296,151 338,926
Staff Cost 287 214 273 185 220 240 270 325 959 1,055
Other Expenditure 728 1,035 824 808 992 1,084 1,146 1,294 3,395 4,515
EBITDA 5,955 3,210 2,834 2,705 1,696 2,130 2,370 2,167 14,704 8,363
% of Net Sales 10.1 4.1 3.1 3.1 1.9 2.5 2.7 2.4 4.7 2.4
Change (%) -57 128 nm -71 -72 -34 -16 -20 -30.4 -43.1
Depreciation 963 975 990 966 950 975 1,050 1,176 3,893 4,151
Interest 302 302 289 262 300 490 510 702 1,155 2,002
Other Income 1,291 737 2,293 2,402 530 540 580 566 6,723 2,216
PBT 5,981 2,671 3,848 3,880 976 1,205 1,390 855 16,380 4,426
Tax 2,095 1,033 1,308 1,350 324 400 462 284 5,786 1,470
Prior Year Tax Adjustment 0 9 0 0 0 0 0 0 9 0
Rate (%) 35.0 38.7 34.0 34.8 33.2 33.2 33.2 33.2 35.3 33.2
PAT 3,885 1,630 2,539 2,531 652 804 929 571 10,585 2,956
Change (%) -54.0 553.7 nm -58.4 -83.2 -50.6 -63.4 -77.4 -11.2 -72.1
Adj. PAT* 3,365 1,586 1,314 1,197 652 804 929 571 7,462 2,956
EPS 1.9 0.9 0.7 0.7 0.4 0.5 0.5 0.3 4.3 1.7
GRM (US$/bbl) 8.0 3.6 4.5 5.3 3.9 4.3 4.5 4.5 5.3 4.3
Throughut (mmt) 2.85 3.19 3.40 3.06 3.10 3.15 3.25 3.25 12.5 12.8
E: MOSL Estimates

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 181

 Results Preview
SECTOR: OIL & GAS

ONGC
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ONGC IN Buy
REUTERS CODE
S&P CNX: 5,269 ONGC.BO Previous Recommendation: Buy Rs1,264
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 2,138.9
END (RS B) (RS B) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,291/965
03/09A 1,046 198 92.5 -0.4 13.7 3.0 23.4 22.7 2.4 5.8
1,6,12 Rel Perf (%) 8/ 4/1
03/10A 1,018 194 90.7 -2.0 13.9 2.6 20.0 19.4 2.4 5.5
Mcap (Rs b) 2,703.6
03/11E 1,182 262 122.5 35.0 10.3 2.2 23.5 22.8 2.0 4.5
Mcap (USD b) 58.3 03/12E 1,263 302 141.2 15.3 9.0 1.9 23.0 22.3 1.7 3.8
Consolidated

„ We expect ONGC to report net profit of Rs34.9b (v/s adjusted net profit of Rs37.8b in 4QFY10 and Rs48.5b in
1QFY10). We estimate EBITDA at Rs79.6b (down 3% QoQ and 16% YoY).
„ We estimate gross realization at US$80.5/bbl v/s US$79.2/bbl in 4QFY10 and US$60.6/bbl in 1QFY10 and net
realization at US$50.5/bbl v/s US$51.4/bbl in 4QFY10 and US$58.3/bbl in 1QFY10.
„ In FY10, upstream (ONGC, GAIL and OIL) shared 100% subsidy towards auto fuel under-recoveries. Of this,
ONGC shared 80%, while the rest was shared by OIL and GAIL. Post government initiatives towards fuel price
deregulation, we build 1/3rd of total under-recoveries to be borne by upstream companies, of which 80% would be
shared by ONGC. We assume that ONGC will share Rs56.5b (US$10.6/bbl) in 1QFY11.
„ The government has increased APM gas price from US$1.9/mmbtu to US$4.2/mmbtu in 4QFY10, applicable from
June 2010. This has a positive impact of 12% on FY11E EPS.
„ Our Brent price assumption is US$75/bbl in FY11 and US$75/bbl over the long term. The stock trades at 9x FY12E
consolidated EPS of Rs141.2. Buy.

QUARTERLY PERFORMANCE (STANDALONE) (RS BILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 148.8 150.8 153.1 147.1 146.1 190.8 190.7 191.0 599.9 718.6
Change (%) -25.8 -13.4 23.1 7.4 -1.8 26.5 24.5 29.8 -5.7 19.8
EBITDA 95.0 86.8 91.3 81.8 79.6 115.4 114.7 125.4 355.0 435.0
% of Net Sales 63.9 57.6 59.6 55.6 54.5 60.5 60.1 65.6 59.2 60.5
Change (%) -19.2 3.2 82.7 41.6 -16.2 32.9 25.5 53.2 14.7 22.5
D,D & A 31.8 23.6 46.8 44.5 37.6 36.6 35.6 38.4 146.6 148.2
Interest 0.1 0.0 0.0 0.6 0.0 0.0 0.0 0.0 0.7 0.2
Other Income 10.4 12.5 1.6 17.6 10.3 10.5 11.7 12.1 42.1 44.5
PBT 73.6 75.7 46.2 54.4 52.2 89.3 90.7 99.0 249.9 331.2
Tax 25.1 25.2 15.7 16.1 17.3 29.7 30.1 32.9 82.2 110.0
Rate (%) 34.1 33.3 34.0 29.6 33.2 33.2 33.2 33.2 32.9 33.2
PAT 48.5 50.5 30.5 38.3 34.9 59.6 60.6 66.1 167.7 221.2
Change (%) -26.5 4.9 39.1 73.5 -28.1 18.1 99.0 72.6 6.1 31.9
Adjusted PAT 48.5 50.9 30.5 37.8 34.9 59.6 60.6 66.1 161.3 221.2
Key Assumptions (US$/bbl)
Fx Rate (Rs/US$) 48.8 48.5 46.6 46.0 45.7 46.3 46.0 46.0 47.5 46.0
Gross Oil Realization 60.6 70.5 76.7 79.2 80.5 76.1 76.2 75.8 71.7 77.1
Subsidy 2.3 14.1 19.0 27.7 30.0 12.0 11.6 11.0 15.8 16.1
Net Oil Realization 58.3 56.4 57.7 51.4 50.5 64.1 64.6 64.8 55.9 61.0
Subsidy (Rs b) 4.3 26.3 35.0 50.0 56.5 22.9 22.0 20.9 28.9 30.6
E: MOSL Estimates

Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 182

 Results Preview
SECTOR: OIL & GAS

Reliance Industries
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 RIL IN Buy
REUTERS CODE
S&P CNX: 5,269 RELI.BO Previous Recommendation: Buy Rs1,063
YEAR NET SALES PAT EPS P/E ADJ. EPS ADJ.P/E P/BV ROE ROCE EV/
Equity Shares (m) 3,286.2
END (RS B) (RS B) (RS) (X) (RS) (X) (X) (%) (%) EBITDA
52 Week Range (Rs) 1,185/841
03/09A 1,418 153 52.6 20.2 57.6 18.5 2.2 15.7 12.5 15.7
1,6,12 Rel Perf (%) -2/ -2/-14
03/10A 1,925 162 49.6 21.4 54.8 19.4 2.3 13.4 11.3 13.0
Mcap (Rs b) 3,494.1
03/11E 2,172 205 62.5 17.0 69.0 15.4 2.0 14.9 13.4 9.8
Mcap (USD b) 75.4 03/12E 2,186 249 75.6 14.1 83.4 12.7 1.9 15.6 14.3 8.2
All adjusted per share info and valuation ratios are adjusted for treasury shares held by company

„ We expect RIL to report net profit of Rs47.7b (v/s Rs47.1b in 4QFY10 and Rs36.7b in 1QFY10). Strong YoY and
QoQ performance would be led by ramp-up of KG-D6 volumes (63mmscmd v/s 19mmscmd).
„ KG-D6 volumes are steady at 63mmscmd since December 2009.
„ The Supreme Court gave a judgment favoring RIL in the RIL-RNRL trial, enabling RIL to retain gas selling price of
US$4.2/mmbtu. RIL has planned large investments in setting up offgas cracker, IGCC and petrochemical capacity at
Jamnagar. Also, RIL has committed significant investments in acquiring strategic partnership in Shale gas assets in
USA (US$3b) and broadband wireless access business (~US$2.9b).
„ We build GRM of US$7.6/bbl for FY11 and US$8.5/bbl for FY12 (includes upside of US$0.8/bbl on account of KG-
D6 gas use). We expect polymer and fiber spreads (over naphtha) to decline in 2HFY11 as the new capacities in the
Middle East and China get commissioned.
„ RIL trades at 12.7x FY12E EPS of Rs83.4. We remain positive on RIL, given its large E&P potential and new
initiatives in organic business as well as inorganic (telecom, shale gas assets, etc) business. Maintain Buy.
QUARTERLY PERFORMANCE (STANDALONE) (RS BILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 311.9 468.5 568.6 575.7 564.7 538.1 538.1 531.2 1,924.6 2,172.0
Change (%) -25.0 4.6 80.1 103.0 81.1 14.9 -5.4 -7.7 31.6 12.9
EBITDA 63.8 72.2 78.4 91.4 94.0 103.1 100.2 104.3 305.8 401.6
% of Net Sales 20.5 15.4 13.8 15.9 16.7 19.2 18.6 19.6 15.9 18.5
Change (%) 4.3 11.5 46.3 68.0 47.3 42.8 27.7 14.1 30.7 31.3
Depreciation 18.8 24.3 28.0 33.9 34.0 34.8 35.0 35.4 105.0 139.2
Interest 4.6 4.6 5.5 5.3 5.2 5.8 6.0 6.2 20.0 23.1
Other Income 7.1 6.3 5.1 6.2 5.9 5.4 5.5 5.6 24.6 22.4
PBT 47.6 49.5 50.1 58.3 60.8 67.9 64.7 68.3 205.5 261.7
Tax 10.9 11.0 10.0 11.2 13.1 14.7 14.0 14.9 43.1 56.6
Rate (%) 22.9 22.2 20.0 19.3 21.5 21.6 21.6 21.8 21.0 21.6
Adj. PAT 36.7 38.5 40.1 47.1 47.7 53.2 50.7 53.4 162.4 205.1
Change (%) -10.8 -6.6 14.5 20.3 30.1 38.1 26.6 13.4 3.8 26.3
Key Assumptions (US$/bbl)
GRM 7.5 6.0 5.9 7.5 7.0 7.8 7.8 8.0 6.7 7.7
Singapore GRM 4.1 3.2 1.9 5.0 3.6 4.0 4.0 4.2 3.6 4.0
Premium/(disc) to Singapore 3.4 2.8 4.0 2.5 3.4 3.8 3.8 3.8 3.2 3.7
KG-D6 Gas Prodn (mmscmd) 19.3 32.0 48.0 59.7 63.0 70.0 70.0 77.0 39.8 70.0
KG-D6 Gas Price (US$/mmbtu) 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2
Segmental EBIT Breakup (Rs b)
Refining 13.0 13.5 13.8 19.9 18.5 20.7 20.7 21.4 60.1 81.4
Petrochemicals 21.1 22.0 20.6 22.2 21.8 21.5 18.4 17.8 85.8 79.5
E&P, others 10.2 12.4 14.9 17.1 19.8 26.0 26.0 29.7 54.6 101.5
Total 44.3 47.8 49.2 59.2 60.0 68.3 65.2 68.9 200.5 262.4
E: MOSL Estimates; *RPL numbers are included in FY10
Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Milind Bafna (Milind.Bafna@MotilalOswal.com)

July 2010 183

 Results Preview
QUARTER ENDING JUNE 2010

Pharmaceuticals
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME
Topline to grow 12.8%, EBITDA by 20.5% led by Sun Pharma, Divis, Lupin
Aventis Pharma For 1QFY11, we expect topline growth of 12.8% for our pharmaceuticals universe with
Biocon EBITDA growth at 20.5%. Adjusted PAT is expected to grow by 30.1% YoY. The strong
Cadila Healthcare EBITDA growth will be led mainly by a strong performance by Sun Pharma, Divis Lab
Cipla and Lupin primarily due to a low base. Excluding the impact of these three companies,
Dishman Pharma
core EBITDA for our universe is likely to grow by 8.4%.
Divi’s Laboratories AGGREGATES 1QFY11 - EXCLUDING ONE-OFFS

PHARMA UNIVERSE YOY GROWTH (%) EBITDA MARGINS

Dr Reddy’s Labs.
AGGREGATES SALES EBITDA ADJ PAT JUNE'10 JUNE'09 CHG (BP)
GSK Pharma
MNC Pharma 12.6 8.4 8.7 29.4 30.5 -113
Glenmark Pharma Big 4 Generics 8.1 23.8 49.8 17.5 15.3 222
CRAMS 14.9 23.4 5.0 21.8 20.3 150
Jubilant Organosys
Second Tier generics 19.9 18.3 32.9 20.2 20.5 -29
Lupin Sector Aggregate 12.8 20.5 30.1 19.8 18.6 127
Piramal Healthcare Note – the numbers exclude one-offs to facilitate comparison of core operations

Ranbaxy Labs.
AGGREGATES 1QFY11 – INCLUDING ONE-OFFS

Sun Pharmaceuticals PHARMA UNIVERSE YOY GROWTH (%) EBITDA MARGINS

AGGREGATES SALES EBITDA ADJ PAT JUNE'10 JUNE'09 CHG (BP)

MNC Pharma 12.6 8.4 8.7 29.4 30.5 -113

Big 4 Generics 14.3 40.5 71.7 21.6 17.6 403
CRAMS 14.9 23.4 5.0 21.8 20.3 150
Second Tier generics 23.0 33.1 32.9 22.2 20.5 168
Sector Aggregate 16.6 32.2 41.4 22.3 19.6 264
Source: Industry/MOSL

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Pharmaceuticals
Aventis Pharma 1,870 Neutral 2,785 11.5 10.8 483 -8.7 32.7 480 1.9 33.0
Biocon 321 Buy 5,918 19.3 -9.9 1,145 13.1 -12.1 698 22.3 -13.4
Cadila Health 640 Buy 10,542 16.7 24.5 2,342 15.0 23.7 1,502 19.6 26.5
Cipla 347 Buy 15,083 9.6 9.7 3,830 3.9 36.8 2,710 12.1 26.1
Divis Labs 767 Buy 2,881 40.0 -8.3 1,131 69.6 -25.3 899 51.4 -31.1
Dishman Pharma 217 Neutral 2,328 2.3 -6.1 508 -4.6 2.5 229 -41.5 14.9
Dr Reddy’ s Labs 1,484 UR 17,556 -3.5 6.9 2,721 -27.8 26.9 2,064 20.7 23.8
Glenmark Pharma 273 Neutral 7,343 35.1 3.6 2,316 90.8 29.9 949 77.5 -7.5
GSK Pharma 2,169 Buy 5,179 13.2 -4.3 1,857 14.0 -7.2 1,463 11.1 -9.3
Jubiliant Organosys 339 Neutral 10,367 15.7 4.7 1,988 22.6 -8.1 1,058 -15.9 -22.9
Lupin 1,918 Buy 13,446 23.9 4.7 2,456 26.5 -1.4 1,852 32.2 -16.0
Piramal Healthcare 494 Neutral 9,141 11.3 -2.9 1,774 14.0 -18.0 1,064 25.1 -33.5
Ranbaxy Labs 453 Neutral 18,103 -4.5 11.0 1,204 -0.9 -27.9 399 99.7 -25.2
Sun Pharma 1,793 Buy 9,375 19.0 -15.5 2,771 64.5 -19.1 2,785 182.6 -11.7
Sector Aggregate 130,049 10.5 3.7 26,526 14.9 1.2 18,153 30.1 -5.4
Note: Historic numbers include one-offs and hence YoY comparison may not give the correct picture

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 184

 Pharmaceuticals

Key highlights for core 1QFY10 performance will include:

1. Low base leading to strong operating performance for Sun Pharma and Divis Lab at
the EBITDA level compared with 1QFY10 when these companies posted low EBITDA
due to factors such as lower domestic formulation sales for Sun Pharma and inventory
de-stocking impact for Divis Lab.
2. Lackluster performance by large companies including Cipla, Dr Reddy’s and Ranbaxy
owing to muted revenue growth and significant YoY appreciation of the rupee against
the US dollar and the Euro.

Piramal deal commands attractive valuation

The recent deal between Abbott and Piramal Healthcare (PIHC) came as a positive
surprise not because of the sell-off per se but the kind of valuation the business fetched.
This is one of the most expensive valuations that any Indian pharmaceutical business
would have got in the recent past. PIHC sold its domestic formulations business (excluding
the OTC and ophthalmic portfolio) to Abbott for US$3.72b. In FY10 this business generated
revenue of Rs18.2b. We estimate EBITDA of this business at Rs5b. The deal values
PIHC’s domestic formulations business at ~8x sales and ~29x EV/EBITDA based on
FY10 numbers.

Domestic formulations: MNC interest to continue

We expect many such deals between MNCs and Indian companies in future as MNCs
are focusing on emerging markets to grow their businesses as regulated markets are
stagnating. India, with a vast population, rising incomes, growing healthcare infrastructure
and low penetration, offers an attractive proposition for MNCs looking to expand in emerging
markets. Besides, most large MNCs have a presence/market share in the Rs400b domestic
formulations market, which is growing at ~15%.

MNCS HAVE MARKET SHARE OF LESS THAN 25% IN INDIAN FORMULATION INDUSTRY
COMPANY REVENUE (RS M) MARKET SHARE (%)

Abbott* 27,481 6.86

GSK Pharma 17,431 4.35
Pfizer 9,033 2.26
Sanofi Aventis 8,073 2.02
Novartis 6,845 1.71
Wyeth 3,097 0.77
AstraZeneca 2,397 0.6
Note: Based on revenues of 12 months ending Dec’09; * Including the recent acquisition of Piramal
Helathcare’s domestic business Source: Company/MOSL

July 2010 185

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INCREASING MNC ENGAGEMENT IN INDIA

COMPANY INDIA SALES HAS ENGAGEMENT IN INDIA INCREASED RECENTLY

PRESENCE FORCE

Pfizer Yes Added 550 MRs in Yes, made an open offer to minority shareholders.
2009, plans to add Plans a ramp-up in its global generic business by 2012
an equal number
in 2010
GSK India Yes Plans to add 150-200 Yes, looking for inorganic growth opportunities/
MRs a year partnerships
Novartis Yes NA Yes, made an open offer to minority shareholders
Sanofi Yes Yes Acquired majority stake in Shantha Biotech, valuing it
-Aventis at US$780m; increased stake in listed entity by 10%
Merck Yes, Rapid addition to MR Yes, has aggressive ramp-up plans for India
(USA) recent strength in the past
entry two years
Eli Lilly Yes NA
Abbott Yes NA Acquired Piramal Healthcare’s domestic formulations
business and Solvay, making it the number one
player in the market with ~7% share. Plans to have
Indian revenue of US$2.5b in 10 years.
Daiichi Through Plans to hire 1500 Acquired majority stake in Ranbaxy in 2008
Ranbaxy MRs in CY10 valuing it at US$8b
Takeda No NA Plans India entry. May look at acquisitions/tie-ups
with Indian companies
Astra Yes Plans to double MR Yes, significant addition to sales force
Zeneca strength by CY10
Source: Companies/MOSL

Mixed news-flow for generics relating to Para IV/low competition products

Para IV/low competition products are becoming increasingly regular for large Indian generic
companies. In the past few years Indian companies launched and filed several Para IV/
low competition products and generated strong one time profits out of them. In 1QFY11,
Sun Pharma and Dr Reddy’s faced negative news on this front, which impacted potential
profits. But Glenmark and Cipla saw some positive developments.

US jury rules against Sun’s generic Protonix; Sun stops sales in the US
A US jury determined that Nycomed’s US Patent No. 4,758,579 for Protonix, Wyeth/
Nycomed’s US$2.5b anti-ulcer brand, is valid. The verdict on the double-patenting alleged
by Sun Pharma and Teva will be delivered by the US District Court judge in the near
future (timelines not known but expected in the next few weeks). In case the judge rules
in favour of Sun and Teva, it will be sufficient to invalidate the patent and overrule the jury
ruling. The jury’s verdict is a negative development for Sun and Teva as it has raised the
possibility of potential patent infringement damages. We estimate Sun’s damages at
US$179m if the District Court and Federal Circuit Court rulings are unfavorable.

After this ruling, Sun stopped selling generic Protonix in the US as a risk mitigation measure.
Teva also withdrew from the market. Sun had earned revenue of ~US$140m and PAT of
US$84m in FY10 from the drug.

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Eloxatin: Sun will have to stop selling the product from 30 June 2010
Sun will have to stop selling generic Eloxatin from 30 June 2010 after a district court
verdict. Sun appealed in a higher court against the verdict, but, until a verdict comes, Sun
will have to suspend sales of the product in the US. The district court verdict came after
three generic companies, Teva, Sandoz and Fresenius, entered into an out-of-court
settlement with Sanofi for their US patent litigation related to Eloxatin. The settlement
mandated that generic companies would withdraw their generic versions of Eloxatin from
the US on 30 June 2010 and re-enter the market in August 2012 under license from
Sanofi.

Dr Reddy’s receives a setback on Allegra D-24; launch delayed

Dr Reddy’s Lab (DRRD) received a setback related to its Para IV pipeline as the US
district court of New Jersey granted Sanofi’s and Albany Molecular Research’s motion
for a preliminary injunction for Allegra D-24 (Sanofi’s US$180m anti-allergy brand). While
DRRD plans to appeal this order, it will be restrained from launching generic Allegra D-24
until it wins the appeal. Earlier, a US court judge restrained DRRD from launching generic
Allegra D-24 until 25 June 2010 and asked Sanofi (the innovator) to deposit US$20m
(US$5m per week for four weeks) as security.

We believe that after DRRD’s appeal against the district court verdict, it will take five to
six months for a decision, implying that the potential launch will be delayed by at least six
months. DRRD will be able to undertake an “at-risk” launch only if it wins the appeal. We
had estimated one time PAT of Rs1.4b for FY11 and Rs841m for FY12 from this opportunity
for DRRD. Hence we have reduced the NPV value by Rs13/share from our estimates
related to this opportunity.

DRRD’s pipeline of Para IV/low competition product opportunities has grown stronger
over the period as in past few months, three more such opportunities have been added to
the existing pipeline for FY11, taking the total number of products to five (excluding Allegra
D-24) with potential PAT upside of Rs2.7b for FY11 and Rs2.2b for FY12. We believe a
few more such opportunities will become visible over 12 months given the company’s
intention to ramp-up its US generic business to US$1b by FY13 compared with FY10
revenue of ~US$355m.

DRRD - ONE-TIME PAT CONTRIBUTION (RS M)

PRODUCT LAUNCH STATUS FY11E FY12E

Omeprazole OTC Launched 652 1,051

Generic Arixtra Awaiting US FDA approval 683 881
Generic Allegra D-24 NA - -
Generic Lotrel Launched 485 -
Generic Prograf Launched 768 -
Generic Accolate Potential at-risk launch in December 2010 75 289
Total 2,663 2,222
Source: Company/MOSL

July 2010 187

 Pharmaceuticals

Glenmark might undertake “at-risk” launch of Tarka in US; settles Zetia litigation
We believe Glenmark is likely to undertake an “at-risk” launch of generic Tarka (Abbott/
Sanofis’ US$64m anti-hypertensive brand) in the US shortly. Abbott and Sanofi-Aventis
had requested the US court to block the launch of Glenmark’s generic version until August
2010. The US court has not complied, implying that Glenmark has the option to undertake
an “at-risk” launch since the 30-month stay period has expired, resulting in Glenmark
receiving final US FDA approval. The actual patent trial is expected to commence from
August 2010. Glenmark had challenged the innovator’s patent on Tarka expiring in 2015
through its Para-IV FTF filing.

A small size of the product with US$64m of annual revenue will also help Glenmark to
undertake an “at-risk” launch since the potential damages (if Glenmark loses the patent
litigation) will not be very high. As of now, Glenmark is the only generic company that has
filed for the product and is ready to enter the market and is eligible for a 180-day exclusivity
in the market. Assuming no further competition over 12 months and an authorized generic
from Sanofi/Abbott, we expect Glenmark to generate one-time PAT of ~US$9m from this
opportunity.

Glenmark Pharma also settled out-of-court with Merck (US) for its patent litigation on
generic Zetia (Merck’s US$1.4b anti-cholesterol drug). Glenmark had challenged Merck’s
patents expiring in 2017 through it Para-IV FTF filing. The court case for the litigation was
to commence in June 2010 in the US. Under the settlement agreement, Glenmark will be
able to launch its generic version of Zetia on 12 December 2016 or earlier under certain
circumstances, ahead of the 25 April 2017 expiration of Merck’s patent exclusivity. While
the settlement ensures a confirmed launch for Glenmark, it also delays its entry to 2016.
Hence, while the monetization of this opportunity is confirmed, the time-line for it gets
stretched to 2016.

Cipla’s generic partners win patent litigation on Advair (Seretide) in Germany

A few generic companies, Mylan, Neolab, Hexal and Ivax, have won a court ruling against
GSK related to patent litigation on Advair (also known as Seretide) in Germany (US$250m
market). GSK indicated it would appeal the ruling in the German higher court.

We believe some of these generic companies are likely to be Cipla’s partners for the
launch of inhalers in Europe, including the generic version of Advair/Seretide. While this is
a positive development for Cipla, we believe that the launch of generic Advair in Germany
is some time away as the final regulatory approval is still awaited by Cipla’s partners.
Unlike a normal generic, getting regulatory approval for inhalers is a time-consuming and
difficult process given the technical challenges for the product and the inhaler device. For
example, despite positive patent verdicts in both the UK and Ireland for the same drug,
generic launches are yet to take place pending final regulatory approvals. Cipla will supply
this product in the UK through its partner after it receives regulatory approval. We expect
approval for generic Advair/Seretide to come through for some European countries in
2HFY11/FY12.

July 2010 188

 Pharmaceuticals

CRAMS: Companies have guided for strong performance in FY11

Over the past four to five quarters, the performance of the global CRAMS industry has
suffered due to:
1. A severe round of inventory de-stocking undertaken by large innovator companies,
leading to lower contract manufacturing revenue for CRAMS companies.
2. After the credit crises of 2008, mid-sized and small-sized research companies faced a
liquidity crunch, resulting in a cut-down in many of their research projects. This has
partly impacted custom synthesis contracts for CRAMS players.

In line with the global industry trend, the CRAMS business of Indian companies was also
adversely impacted. However, we believe this is likely to reverse in FY11 due to:
1. Growing pharmaceutical demand: The overall end-consumer demand for
pharmaceutical products continues to grow steadily. Hence, inventory de-stocking will
ultimately get aligned with demand, after which the innovators will have to commence
outsourcing again. We believe this reversal is likely to be visible partly in FY11 and
fully by FY12.
2. Improving credit situation: While the mid and small-sized research companies
continue to face funding issues, we note that over the past few quarters the global
credit situation is gradually improving. This will eventually open up funding channels
for these companies. While the custom synthesis business from such companies is
under pressure, we expect a gradual improvement over two years.

Companies guide for strong top-line growth in FY11

All the major CRAMS companies have guided for strong double digit growth in revenue
for FY11 though on a lower base of FY10.

STRONG GROWTH GUIDANCE

COMPNAY FY10 REVENUES (RS M) REVENUE GROWTH GUIDANCE (%)

Divi’s Lab 9,416 25-30

Piramal Healthcare 8,850 10-15
Dishman Pharma 9,154 20
Jubilant Organosys* 21,320 -
*Only CRAMs segment revenue is included Source: Company/MOSL

Currency appreciation to partly temper top-line growth

The rupee has appreciated by 6.4% YoY against the US dollar and ~12% against the euro.
This is likely to temper top-line growth partly for larger Indian players with higher exposure
to the US dollar. Among larger Indian companies, DRL (hedges of US$414m) and Cipla
are inadequately hedged given their significant net US-dollar exposure. Ranbaxy with
US$1b of hedges is adequately hedged (though some of the hedges are at unfavorable
rates) and Sun Pharma’s net US dollar exposure is not very high.

July 2010 189

 Pharmaceuticals

INR V/S US$ (RS/US$) INR V/S EURO (RS/EURO)

56 74

52 68

48 62

44 56

40 50

Jan-09
Feb-09
Mar-09

May-09
Jun-09
Jul-09

Oct-09

Feb-10
Nov-09
Dec-09
Jan-10

Mar-10

May-10
Jun-10
Sep-09
Aug-09
Apr-09

Apr-10
Jul-09
Jan-09
Feb-09
Mar-09

May-09
Jun-09

Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10

May-10
Jun-10
Sep-09
Apr-09

Aug-09

Apr-10

Source: Bloomberg

Sun Pharma, Lupin, Divi's, Jubilant to post operational improvement

From our coverage universe, we expect Sun Pharma, Divi's Lab, Lupin and Glenmark to
record strong EBITDA growth in 1QFY11 and Ranbaxy and Dr Reddy’s Lab are expected
to post flat EBITDA excluding Para IV/low competition products. We attribute the following
company-specific reasons for this performance:
1. Cipla: muted operational performance due lower export growth, higher staff cost and
appreciation of the rupee against the US dollar.
2. Sun Pharma: strong growth in EBITDA will be due to robust growth in revenue on a
low base and expansion in EBITDA margins due to a favorable product mix.
3. Lupin: higher topline growth, better product-mix and low base will lead to higher
EBITDA.
4. Glenmark: strong operational performance led by higher topline growth due to out-
licensing income.
5. Divi's Labs: strong operational performance led by top-line growth reflects an end to
inventory de-stocking, an improved product mix and higher operating leverage.
6. Dr. Reddy’s Labs: flat EBITDA will be due to muted topline growth, which will be
impacted by de-growth in regulated markets’ generic business and rupee appreciation
versus the euro and the US dollar.
7. Ranbaxy Labs: core business is likely to be under pressure due to the severe impact
of the US FDA action on the company’s US business. However, earnings from generic
Valtrex and licensing income for Flomax will boost reported PAT.

MNC Pharma: GSK to continue with double-digit topline growth

We expect our MNC pharmaceutical universe (Aventis and GSK) to record 12.6% YoY
topline growth for the quarter, mainly led by 13.2% YoY growth by GSK Pharma. GSK’s
EBITDA is likely to grow in line with topline growth and we expect adjusted PAT growth
of 11.1% mainly due to lower other income.

July 2010 190

 Pharmaceuticals

RELATIVE PERFORMANCE - 3M (%) Sector view

Sensex Generics
M OSt P harmaceuticals Index „ Emerging markets to help to improve profitability gradually from 2010 onwards
111
„ New launches imperative for driving growth in core US business
104
„ Differentiation becoming imperative – low competition/patent challenge products,
97
brands, NCE research will be key differentiators
90
„ Increasing MNC interest in the generics space may lead to large acquisitions/supply
Mar-10

May-10

Jun-10
Apr-10

arrangements with Indian companies

„ Top picks – Cipla and Lupin.
RELATIVE PERFORMANCE - 1YR (%)

M OSt P harmaceuticals Index CRAMS (Contract Research & Manufacturing Services)

Sensex
„ Favorable macro trends – India is on the threshold of significant contract manufacturing
200
170 opportunity to grow ~3.7x over 2007-12
140 „ Inventory de-stocking impacted performance over the past four to five quarters. Expect
110
recovery from FY11
80
„ Top picks – Divi's Lab.
Jun-09

Mar-10
Dec-09

Jun-10
Sep-09

MNC Pharma
„ Portfolio realignment in favor of lifestyle products to drive growth in the short to
medium term
„ Branded generics, patented products and in-licensing to drive long-term growth
„ Parents’ commitment to listed entity is imperative
„ Top pick – GSK Pharma.

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Pharmaceuticals
Aventis Pharma 1,870 Neutral 68.4 75.9 88.8 27.4 24.6 21.1 25.2 21.7 17.7 17.1 17.1 18.0
Biocon 321 Buy 14.7 16.9 20.1 21.9 19.0 16.0 13.5 11.7 10.3 16.7 16.8 17.3
Cadila Health 640 Buy 24.9 29.6 35.8 25.7 21.6 17.8 17.3 14.6 12.3 36.6 33.2 31.2
Cipla 347 Buy 12.7 14.6 17.4 27.3 23.8 19.9 19.4 16.8 14.8 17.3 17.3 17.9
Divis Labs 767 Buy 25.8 31.1 38.5 29.8 24.7 19.9 25.1 20.2 15.7 22.4 22.6 23.2
Dishman Pharma 217 Neutral 14.2 15.6 19.2 15.2 13.9 11.3 12.2 10.0 8.2 15.3 14.9 16.0
Dr Reddy’ s Labs 1,484 UR 6.3 54.6 61.6 234.0 27.2 24.1 22.3 21.2 19.1 2.5 20.7 20.1
GSK Pharma 2,169 Buy 59.6 69.8 80.3 36.4 31.1 27.0 25.2 21.9 18.7 28.7 30.2 31.4
Glenmark Pharma 273 Neutral 11.6 14.6 18.6 23.4 18.6 14.7 15.3 11.4 10.7 14.1 14.7 15.8
Jubiliant Organosys 339 Neutral 28.6 32.5 33.7 11.9 10.4 10.0 10.7 8.6 7.6 29.5 25.8 21.4
Lupin 1,918 Buy 76.6 94.4 110.5 25.0 20.3 17.3 21.1 17.2 14.5 40.1 37.0 33.7
Piramal Healthcare 494 Neutral 23.4 25.6 30.3 21.1 19.3 16.3 15.9 13.5 11.2 32.5 28.4 27.7
Ranbaxy Labs 453 Neutral 3.6 6.6 8.7 125.5 68.8 52.1 36.7 13.6 24.7 3.5 17.0 6.2
Sun Pharma 1,793 Buy 65.5 61.3 74.8 27.4 29.3 24.0 24.1 25.1 20.3 12.6 14.7 15.9
Sector Aggregate 33.4 23.0 20.9 20.4 16.6 15.1 16.3 20.2 19.1

July 2010 191

 Results Preview
SECTOR: PHARMACEUTICALS

Aventis Pharma
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HOEC IN Neutral
REUTERS CODE
S&P CNX: 5,269 HOEC.BO Previous Recommendation: Neutral Rs1,870
Equity Shares (m) 23.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,980/1,040
12/08A 9,833 1,662 72.2 15.1 25.9 5.3 20.4 31.9 3.9 20.5
1,6,12 Rel Perf (%) -8/ 19/43
12/09A 9,744 1,574 68.4 -5.3 27.4 4.7 17.1 26.3 3.8 25.2
Mcap (Rs b) 43.1
12/10E 10,788 1,748 75.9 11.0 24.6 4.2 17.1 25.6 3.4 21.7
Mcap (USD b) 0.9
12/11E 12,036 2,046 88.8 17.1 21.1 3.8 18.0 27.0 2.9 17.7

„ We expect topline to grow 11.5% YoY in 2QCY10 to Rs2.8b, led by 14.8% YoY growth in the domestic formulations
business.
„ EBITDA is likely to de-grow 8.7% YoY to Rs483m; EBITDA margin would contract by 380bp YoY mainly due to
increase in other expenditure.
„ We estimate PAT growth of 1.9% YoY for the quarter at Rs480m due to muted growth in topline and pressure on
operating margins.

We believe Aventis Pharma (APL) will be one of the key beneficiaries of the patent regime in the long-term. The parent
has a strong R&D pipeline, with 49 products undergoing clinical trials, of which 17 are in Phase-III or pending approvals.
Some of these are likely to be launched in India. However, APL's profitability has declined significantly in the last three
years, with EBITDA margin declining from 25% for CY06 to 15.2% for CY09, mainly impacted by lower topline growth
and higher staff & promotional expenses. RoE has declined from 28.6% to 17.1% in the same period. We expect APL to
post EPS of Rs75.9 for CY10 (up 11%) and Rs88.8 for CY11 (up 17%), leading to 14% EPS CAGR for CY09-11. The
stock currently trades at 24.6x CY10E and 21.1x CY11E EPS. We believe the stock price performance will be muted in
the short-term until clarity emerges on growth drivers for exports. We maintain our Neutral recommendation, with a
target price of Rs1,780 (20x CY11E EPS).

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E DECEMBER CY09 CY10 CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Net Sales 2,289 2,499 2,585 2,371 2,514 2,785 2,867 2,622 9,744 10,788
YoY Change (%) 5.5 0.5 4.3 -12.2 9.8 11.5 10.9 10.6 -0.9 10.7
Total Expenditure 1,899 1,970 2,189 2,209 2,150 2,302 2,389 2,270 8,267 9,111
EBITDA 390 529 396 162 364 483 477 352 1,477 1,676
Margins (%) 17.0 21.2 15.3 6.9 14.5 17.3 16.7 13.4 15.2 15.5
Depreciation 42 43 44 44 43 49 50 56 173 198
Interest 0 0 0 1 0 0 0 0 1 0
Other Income 320 249 289 253 226 285 307 321 1,111 1,139
PBT after EO Items 668 735 641 371 547 719 735 616 2,415 2,617
Tax 263 264 203 103 186 239 244 200 833 869
Effective Tax Rate (%) 39.4 35.9 31.7 27.8 34.0 33.2 33.2 32.5 34.5 33.2
Reported PAT 405 471 438 268 361 480 491 416 1,582 1,748
Adj PAT 405 471 438 268 361 480 491 416 1,582 1,748
YoY Change (%) 17.4 12.7 -1.8 -37.7 -10.9 1.9 12.0 55.5 -3.3 10.5
Margins (%) 17.7 18.8 16.9 11.3 14.4 17.2 17.1 15.9 16.2 16.2
E: MOSL Estimates

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 192

 Results Preview
SECTOR: PHARMACEUTICALS

Biocon
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BIOS IN Buy
REUTERS CODE
S&P CNX: 5,269 BION.BO Previous Recommendation: Buy Rs321
Equity Shares (m) 200.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 329/194
03/09A 16,087 930 4.7 -79.3 69.0 4.3 6.2 6.2 4.1 20.3
1,6,12 Rel Perf (%) 5/ 12/19
03/10A 23,678 2,933 14.7 215.2 21.9 3.7 16.7 15.7 2.7 13.5
Mcap (Rs b) 64.2
03/11E 27,363 3,387 16.9 15.5 19.0 3.2 16.8 16.2 2.3 11.7
Mcap (USD b) 1.4
03/12E 31,489 4,024 20.1 18.8 16.0 2.8 17.3 17.1 1.9 10.3

„ We expect Biocon's 1QFY11 topline to grow 19.3% YoY to Rs5.9b, led by all the three segments. German subsidiary,
AxiCorp's revenues are likely to grow 21.4% YoY to Rs2.3b due to strong base business and supply of Metformin
under AOK contract. Contract research revenues are likely to grow 16.9% YoY on the back of gradual scale-up of
the BMS contract. Biopharma revenues should record 18.4% YoY growth.
„ Despite strong topline growth, we expect EBITDA margin to contract by 100bp YoY, led by 32% YoY increase in
other expenditure due to scale-up of domestic formulations business, increase in R&D expenses and rupee appreciation.
„ We expect adjusted PAT to grow 22.3% YoY to Rs698m, primarily led by strong topline growth, increase in other
income and lower tax rate.

Key growth drivers for FY11 will be: (1) traction in the company's Insulin initiative, (2) ramp-up in contract research
business, and (3) incremental contribution from immunosuppressant API supplies. However, higher R&D costs, increased
depreciation and higher expenses linked to the scale-up of the domestic formulations business will continue to temper
earnings growth. Option values include separate listing of Syngene and potential out-licensing of the oral insulin NCE. We
estimate EPS of Rs16.9 for FY11 (up 15.5%) and Rs20.1 for FY12 (up 18.8%) - 17% earnings CAGR for FY10-12.
Growth will be led by 20% CAGR for contract research revenues and 23% CAGR for the insulin & immunosuppressant
business. The stock currently trades at 19x FY11E and 16x FY12E earnings. We maintain Buy with a target price of
Rs340 (17x FY12E EPS).

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 4,959 5,800 6,351 6,568 5,918 6,841 7,185 7,419 23,678 27,363
YoY Change (%) 87.9 31.0 45.6 40.9 19.3 17.9 13.1 13.0 47.2 15.6
Total Expenditure 3,946 4,668 5,084 5,265 4,772 5,507 5,782 5,958 18,963 22,019
EBITDA 1,013 1,132 1,267 1,303 1,145 1,334 1,403 1,461 4,715 5,343
Margins (%) 20.4 19.5 19.9 19.8 19.4 19.5 19.5 19.7 19.9 19.5
Depreciation 324 351 360 366 386 394 403 427 1,401 1,610
Interest 56 52 27 34 47 48 49 52 169 195
Other Income 94 124 64 88 119 156 119 124 370 519
PBT 727 853 944 991 831 1,047 1,071 1,107 3,515 4,057
Tax 142 94 107 144 133 168 182 187 487 669
Rate (%) 19.5 11.0 11.3 14.5 16.0 16.0 17.0 16.9 13.8 16.5
Minority Interest 14 17 24 41 0 0 0 0 96 0
PAT 571 742 813 807 698 880 889 920 2,933 3,387
YoY Change (%) 283.5 194.4 191.3 219.3 22.3 18.5 9.4 14.1 215.2 15.5
Margins (%) 11.5 12.8 12.8 12.3 11.8 12.9 12.4 12.4 12.4 12.4
E: MOSL Estimates

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 193

 Results Preview
SECTOR: PHARMACEUTICALS

Cadila Healthcare
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 CDH IN Buy
REUTERS CODE
S&P CNX: 5,269 CADI.BO Previous Recommendation: Buy Rs640
Equity Shares (m) 204.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 679/223
03/09A 29,275 3,229 15.8 12.9 40.6 11.0 26.9 23.6 4.8 23.3
1,6,12 Rel Perf (%) -4/ 44/137
03/10A 36,869 5,092 24.9 57.7 25.7 8.2 36.3 26.4 3.8 17.3
Mcap (Rs b) 131.0
03/11E 43,093 6,067 29.6 19.1 21.6 6.3 33.2 27.8 3.2 14.6
Mcap (USD b) 2.8
03/12E 50,147 7,340 35.8 21.0 17.9 5.0 31.2 28.9 2.7 12.2

„ Cadila's 1QFY11 topline is likely to record 16.7% YoY growth to Rs10.5b, led by 21.4% YoY growth in exports
(contributing 47.6% of revenues). We expect the company's consumer business in India to record 15.3% YoY growth
and the domestic formulations business to grow 11% YoY to Rs4.1b.
„ EBITDA margin is likely to decline by 30bp YoY to 22.2% due to adverse revenue mix, rupee appreciation and higher
staff costs.
„ PAT is likely to record 19.6% YoY growth to Rs1.5b, led by strong topline growth and higher other income.

Cadila's future performance will be led by increased traction in its international businesses, ramp-up in supplies to Hospira
and recovery in the domestic formulations business. Besides, a de-risked business model should ensure good long-term
potential. We expect RoE of more than 30% over the next two years. Based on our revised estimates, we expect Cadila
to post EPS of Rs29.6 in FY11 (up 19.1%) and Rs35.8 in FY12 (up 21%) - 20% CAGR over FY10-12. The stock trades
at 21.6x FY11E and 17.9x FY12E consolidated earnings. We reiterate Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Revenues 9,036 9,458 9,910 8,465 10,542 11,034 11,149 10,368 36,869 43,093
YoY Change (%) 29.4 25.0 32.3 17.0 16.7 16.7 12.5 22.5 25.9 16.9
Total Expenditure 6,998 7,401 7,810 6,572 8,199 8,607 8,773 8,067 28,782 33,646
EBITDA 2,037 2,057 2,100 1,893 2,342 2,427 2,375 2,301 8,087 9,447
Margins (%) 22.5 21.7 21.2 22.4 22.2 22.0 21.3 22.2 21.9 21.9
Depreciation 296 311 334 398 377 385 393 417 1,339 1,573
Interest 229 206 217 170 192 196 200 212 821 800
Other Income 28 16 63 52 81 81 81 81 159 325
PBT before EO Income 1,540 1,556 1,612 1,378 1,854 1,927 1,864 1,754 6,086 7,399
EO Exp/(Inc) 9 26 11 0 0 0 0 0 46 0
PBT after EO Income 1,531 1,530 1,601 1,378 1,854 1,927 1,864 1,754 6,039 7,399
Tax 242 176 255 68 278 289 261 208 741 1,036
Rate (%) 15.8 11.5 15.9 4.9 15.0 15.0 14.0 11.8 12.3 14.0
Minority Int/Adj on Consol 40 35 49 123 74 74 74 74 247 296
Reported PAT 1,248 1,319 1,297 1,187 1,502 1,564 1,529 1,472 5,052 6,067
Adj PAT 1,256 1,342 1,307 1,187 1,502 1,564 1,529 1,472 5,092 6,067
YoY Change (%) 40.0 39.0 115.8 18.5 19.6 16.6 17.0 24.0 57.7 19.1
Margins (%) 13.9 14.2 13.2 14.0 14.2 14.2 13.7 14.2 13.8 14.1
E: MOSL Estimates; Quarterly numbers don’t add up to full year numbers due to restatement

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 194

 Results Preview
SECTOR: PHARMACEUTICALS

Cipla
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 CIPLA IN Buy
REUTERS CODE
S&P CNX: 5,269 CIPL.BO Previous Recommendation: Buy Rs347
Equity Shares (m) 802.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 363/240
03/09A 52,343 7,768 10.0 10.6 34.7 6.2 17.9 17.1 5.5 23.5
1,6,12 Rel Perf (%) 1/ -1/12
03/10A 56,300 10,193 12.7 26.8 27.3 4.7 17.3 20.8 4.9 19.4
Mcap (Rs b) 278.5
03/11E 62,898 11,705 14.6 14.7 23.8 4.1 17.3 21.1 4.4 16.8
Mcap (USD b) 6.0
03/12E 71,459 14,003 17.4 19.4 19.9 3.6 17.9 20.2 3.8 14.8

„ Cipla's 1QFY11 topline is likely to grow 9.6% YoY to Rs15b, led by 11.8% YoY growth in the domestic formulations
business. Exports are likely to report muted growth of 6.4% YoY due to conscious reduction in the low-margin ARV
business. Further, a ~6% YoY appreciation of the INR v/s the USD will temper topline growth.
„ EBITDA margin is likely to contract by 140bp YoY primarily due to increase in staff cost and rupee appreciation.
„ While EBITDA is likely to grow 4% YoY, we expect PAT to record 12% YoY growth to Rs2.7b due to higher
depreciation charges, lower interest cost and higher other income.

We believe that Cipla has one of the strongest generics pipelines among Indian companies. After a long delay, we believe
Cipla's CFC-free inhaler pipeline will gradually get commercialized in Europe and upsides from high-margin opportunities
like Seretide could come through over the next two years (our estimates do not include these upsides). Its large
manufacturing infrastructure, strong chemistry skills and huge inhaler capacity make it a partner of choice for global
MNCs that are ramping up their generics and emerging market presence. This coupled with its low-risk strategy and one
of the strongest capex in the company's history should ensure good long-term potential. Temporary slowdown in overall
growth, US-FDA compliance and increasing working capital requirements remain our key concerns. We expect Cipla to
record EPS of Rs14.6 for FY11 and Rs17.4 for FY12, translating into 17% CAGR for FY10-12. The stock quotes at
23.8x FY11E and 19.9x FY12E earnings. We maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Revenues 13,760 14,408 14,385 13,747 15,083 15,984 15,800 16,031 56,300 62,898
YoY Change (%) 14.0 6.4 7.2 3.3 9.6 10.9 9.8 16.6 7.6 11.7
Total Expenditure 10,075 10,695 10,346 10,946 11,252 11,850 11,477 11,988 42,063 46,568
EBITDA 3,685 3,713 4,039 2,801 3,830 4,134 4,323 4,043 14,237 16,330
Margins (%) 26.8 25.8 28.1 20.4 25.4 25.9 27.4 25.2 25.3 26.0
Depreciation 458 478 457 495 557 580 604 628 1,888 2,368
Interest 105 84 44 5 0.4 0.4 0.4 0.4 237 2
Other Income -150 203 -62 251 158 164 171 178 242 671
Profit before Tax 2,972 3,354 3,477 2,552 3,431 3,718 3,890 3,593 12,355 14,631
Extra-Ord Expense -950 -950 0
PBT after EO Expense 2,972 3,354 3,477 3,502 3,431 3,718 3,890 3,593 13,305 14,631
Tax 555 618 587 726 720 669 778 759 2,485 2,926
Rate (%) 18.7 18.4 16.9 28.4 21.0 18.0 20.0 21.1 20.1 20.0
Reported PAT 2,417 2,737 2,890 2,776 2,710 3,049 3,112 2,834 10,820 11,705
Adj PAT 2,417 2,737 2,890 2,149 2,710 3,049 3,112 2,834 10,193 11,705
YoY Change (%) 72.6 80.7 29.4 -17.9 12.1 11.4 7.7 31.9 31.2 14.8
Margins (%) 17.6 19.0 20.1 15.6 18.0 19.1 19.7 17.7 18.1 18.6
E: MOSL Estimates

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 195

 Results Preview
SECTOR: PHARMACEUTICALS

Dishman Pharma
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 DISH IN Neutral
REUTERS CODE
S&P CNX: 5,269 DISH.BO Previous Recommendation: Neutral Rs217
Equity Shares (m) 81.3 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 275/162
03/09A 10,624 1,463 18.0 20.4 12.1 2.5 22.7 15.2 2.3 9.3
1,6,12 Rel Perf (%) -5/ -10/-12
03/10A 9,154 1,157 14.2 -21.0 15.2 2.2 15.3 11.4 2.7 12.2
Mcap (Rs b) 17.6
03/11E 10,564 1,271 15.6 9.9 13.9 1.9 14.9 11.6 2.3 10.0
Mcap (USD b) 0.4
03/12E 12,684 1,565 19.2 23.1 11.3 1.7 16.0 13.0 2.0 8.2

„ We expect a muted 2.3% YoY topline growth for Dishman in 1QFY11 to Rs2.3b due to decline in the revenue of
CarbogenAMCIS (CA), adverse impact of the ongoing inventory corrections undertaken by customers, pricing
pressure in QUATs segment and ~12% appreciation of the INR v/s the EUR. CRAMS business from Indian facilities
is likely to report strong growth of 69% YoY to Rs906m on a low base while CarbogenAMCIS revenues are likely to
decline 27%YoY to Rs838m due to reduced early phase R&D activity by customers. Marketable Molecule business
is likely to report a decline of 2%YoY to Rs585m due to ongoing pricing pressure in QUATs segment and adverse
impact of inventory de-stocking.
„ EBITDA margins are likely to decline by 160bp YoY to 21.8% due to reduction in high margin contract research
business at CarbogenAMCIS and appreciation of the INR v/s the EUR and USD.
„ We expect the bottomline to decline 41.5% YoY to Rs229m, reflecting muted topline growth, EBITDA margin
contraction and lower other income.
The macro environment for the CRAMS business remains favorable, given India's inherent cost advantages and chemistry
skills. We believe that Dishman will benefit from increased outsourcing from India, given its strengthening MNC relations.
However, the adverse business environment for CA and EUR depreciation will continue to impact earnings growth in
FY11. We expect Dishman to record a CAGR of 18% in revenues, 22% in EBITDA and 16% in EPS over FY10-12, led
mainly by its Indian CRAMS operations. The stock currently trades at 13.9x FY11E and 11.3x FY12E earnings. RoE will
continue to be at 15% till new facilities and CRAMS contracts ramp up. We maintain our Neutral rating, with a price
target of Rs231 (12x FY12E earnings).
QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 2,277 2,174 2,223 2,479 2,328 2,466 2,744 3,025 9,154 10,564
YoY Change (%) -3.5 -13.7 -21.2 -15.2 2.3 13.4 23.4 22.0 -13.8 15.4
Total Expenditure 1,745 1,677 1,710 1,984 1,821 1,887 2,081 2,309 7,116 8,098
EBITDA 532 498 513 495 508 579 663 716 2,038 2,466
Margins (%) 23.4 22.9 23.1 20.0 21.8 23.5 24.2 23.7 22.3 23.3
Depreciation 145 174 141 135 158 165 179 186 594 688
Interest 104 99 85 100 112 108 108 104 388 432
Other Income 155 59 32 25 26 28 30 31 270 115
PBT after EO Income 438 284 319 285 263 334 406 458 1,326 1,461
Tax 9 25 30 -10 34 43 53 59 54 190
Deferred Tax 37 14 -32 96 0 0 0 0 115 0
Rate (%) 10.5 14.0 -0.6 29.9 13.0 13.0 13.0 13.0 12.8 13.0
Prior Period Adjustment 1 5 -10 -12 0 0 0 0 -17 0
Reported PAT 391 240 331 212 229 290 353 398 1,174 1,271
Adj PAT 392 244 321 200 229 290 353 398 1,157 1,271
YoY Change (%) 41.5 725.7 -19.3 -73.7 -41.5 18.8 10.2 99.6 -21.0 9.9
Margins (%) 17.2 11.2 14.4 8.0 9.8 11.8 12.9 13.2 12.6 12.0
E: MOSL Estimates
Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 196

 Results Preview
SECTOR: PHARMACEUTICALS

Divi's Laboratories
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 DIVI IN Buy
REUTERS CODE
S&P CNX: 5,269 DIVI.BO Previous Recommendation: Buy Rs767
Equity Shares (m) 132.2 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 784/452
03/09A 11,803 4,166 32.2 19.5 23.8 8.0 39.6 40.6 8.6 19.6
1,6,12 Rel Perf (%) 0/ 15/15
03/10A 9,416 3,403 25.8 -19.9 29.8 6.7 24.7 27.3 10.8 25.1
Mcap (Rs b) 101.4
03/11E 12,005 4,107 31.1 20.7 24.7 5.6 24.6 27.6 8.4 20.2
Mcap (USD b) 2.2
03/12E 15,095 5,093 38.5 24.0 19.9 4.6 25.4 29.9 6.7 15.6

„ We expect revenue growth of 40% YoY for Divi's in 1QFY11 to Rs2.9b on a very low base. 1QFY10 revenues were
impacted by inventory de-stocking undertaken by customers and lack of funding to small and biotech companies. We
expect a strong recovery in CRAMS and API revenues in FY11. The company commissioned its carotenoids facility
in June 2009 and we expect a gradual scale-up in revenues from this initiative over the next two years.
„ While EBITDA is likely to grow 70% YoY to Rs1.1b, EBITDA margin is likely to expand by 680bp to 39.2%,
reflecting the improved product mix and benefit of operating leverage.
„ We expect adjusted PAT to grow by 51.4% YoY to Rs899m, reflecting strong revenue growth and margin expansion.

Divi's will be a key beneficiary of increased outsourcing from India, leading to 22% earnings CAGR for FY10-12. We
estimate RoCE and RoE of 20%+ for the next few years, led by traction in the high-margin CRAMS business and
incremental contribution from the carotenoids business. We expect the company to report EPS of Rs31.1 in FY11 and
Rs38.5 in FY12. The stock trades at 24.7x FY11E and 19.9x FY12E earnings. We reiterate Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Op Revenue 2,058 2,253 1,963 3,141 2,881 2,941 2,941 3,241 9,416 12,005
YoY Change (%) -22.6 -31.8 -25.9 -1.5 40.0 30.5 49.8 3.2 -20.2 27.5
Total Expenditure 1,392 1,200 1,304 1,628 1,750 1,691 1,764 1,772 5,364 6,978
EBITDA 667 1,053 659 1,513 1,131 1,250 1,177 1,469 4,052 5,027
Margins (%) 32.4 46.7 33.6 48.2 39.2 42.5 40.0 45.3 43.0 41.9
Depreciation 129 131 133 123 150 156 162 169 515 637
Interest 8 30 18 7 7 7 7 7 28 28
Other Income 143 55 262 43 71 75 78 81 343 304
PBT before EO Income 673 947 771 1,427 1,046 1,162 1,085 1,374 3,853 4,667
EO Income -540 0 0 540 0 0 0 0 0 0
PBT after EO Income 132 947 771 1,967 1,046 1,162 1,085 1,374 3,853 4,667
Tax 87 83 104 135 146 139 174 101 408 560
Deferred Tax 2 17 -11 34 0 0 0 0 42 0
Rate (%) 67.5 10.5 12.0 8.5 14.0 12.0 16.0 7.3 11.7 12.0
Reported PAT 43 848 678 1,799 899 1,022 912 1,274 3,403 4,107
Adj PAT 594 848 678 1,305 899 1,022 912 1,274 3,403 4,107
YoY Change (%) -38.4 -37.8 -14.7 25.2 51.4 20.6 34.4 -2.4 -18.3 20.7
Margins (%) 28.9 37.6 34.6 41.5 31.2 34.8 31.0 39.3 36.1 34.2
E: MOSL Estimates

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 197

 Results Preview
SECTOR: PHARMACEUTICALS

Dr Reddy's Laboratories
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 DR IN
Under Review
REUTERS CODE
S&P CNX: 5,269 REDY.BO Previous Recommendation: Buy Rs1,484
Equity Shares (m) 168.4 YEAR NET SALES PAT EPS EPS ADJ. P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,515/696
03/10A 68,179 334 2.0 721.7 5.8 2.5 2.5 3.7 22.3
1,6,12 Rel Perf (%) 8/ 24/73 03/11E 75,047 9,187 54.6 26.2 5.6 20.7 17.7 3.5 21.2
Mcap (Rs b) 249.9 03/11E* 80,498 11,850 70.4 20.7
03/12E 85,213 10,377 61.6 13.0 23.2 4.8 20.1 19.0 3.1 19.1
Mcap (USD b) 5.4
03/12E* 91,154 12,599 74.8 6.3 19.5
* Includes one-off upsides. Adj P/E for core estimate is adjusted for DCF value of FTFs & bonus
debentures

„ We expect DRL’s topline (excluding Para IV products) to grow by 9% YoY to Rs17.6b in 1QFY11, led by 21.1%
YoY growth in the branded formulation business to Rs5.9b. The growth will be impacted by a 6.8% YoY decline in
regulated markets generic business (excluding Para IV products). Global API and custom pharma business is estimated
to grow by 14.8% YoY. Including the Para IV products, topline is expected to grow 4.6% YoY.
„ Excluding the contribution from Para IV/low competition products, EBITDA is likely to remain flat at Rs2.7b and
EBITDA margins are expected to decline by 140bp YoY to 15.5%, partly due to the appreciation of the rupee against
the euro and the US dollar.
„ Adjusted PAT is expected to grow by 21% YoY to Rs Rs2.1b. Reported PAT (including the contribution from Para
IV/low competition products) is expected to grow 6.3% YoY to Rs2.6b.
Traction in the branded formulations and US businesses and focus on improving profitability will be key growth drivers
for DRRD over the next two years. We estimate core EPS of Rs54.6 for FY11 and Rs61.6 for FY12 adjusting for the
impact of proposed bonus debentures. We expect core EPS CAGR of 22% over FY08-12 (FY09/10 EPS suffered due
to Betapharm write-offs). Including upsides from visible Para-IV/low-competition opportunities, we expect EPS of
Rs70.4 for FY11 and Rs74.8 for FY12. Our core estimates exclude the upsides from patent challenges/low-competition
opportunities in the US (current DCF value of Rs27/share for visible opportunities). The DCF value for issuance of bonus
debentures is Rs26.5/share. DRRD trades at 26.2x FY11E and 23.2x FY12E core earnings adjusted for DCF value of
FTFs and the proposed bonus debentures.
GLOBAL QUARTERLY PERFORMANCE (US GAAP) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Gross Sales 18,189 18,368 17,296 16,424 17,556 19,024 19,595 18,872 70,277 75,047
YoY Change (%) 21.0 13.7 -6.0 -17.3 -3.5 3.6 13.3 14.9 1.2 6.8
EBITDA 3,767 2,749 2,860 2,145 2,721 3,234 3,429 2,998 11,521 12,383
Margins (%) 20.7 15.0 16.5 13.1 15.5 17.0 17.5 15.9 16.4 16.5
Depreciation & Amortization 507 329 8,977 269 259 270 275 297 10,082 1,100
Other Income -89 348 123 232 24 18 15 2 614 59
Profit before Tax 3,171 2,768 -5,994 2,108 2,487 2,983 3,169 2,703 2,052 11,341
Tax 726 595 -777 441 423 597 665 470 985 2,155
Rate (%) 22.9 21.5 13.0 20.9 17.0 20.0 21.0 17.4 48.0 19.0
Reported PAT 2,445 2,173 -5,217 1,667 2,064 2,386 2,503 2,233 1,067 9,186
Net Profit 2,445 2,173 -5,217 1,667 2,600 3,306 3,093 2,852 1,067 11,849
One Time & EO (Exp)/Inc 734 0 0 0 536 920 590 618 734 2,663
Adjusted PAT 1,711 2,173 -5,217 1,667 2,064 2,386 2,503 2,233 333 9,186
YoY Change (%) 26.9 79.1 -681.6 -115.1 20.7 9.8 34.0 -104.5 2,661.0
Margins (%) 9.4 11.8 -30.2 10.1 11.8 12.5 12.8 11.8 0.5 12.2
E: MOSL Estimates; DRL commcenced IFRS reporting wef 2QFY09. Past financials are as per US GAAP. Estimates do not include one-off
upsides.

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 198

 Results Preview
SECTOR: PHARMACEUTICALS

GlaxoSmithKline Pharmaceuticals
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 GLXO IN Buy
REUTERS CODE
S&P CNX: 5,269 GLAX.BO Previous Recommendation: Buy Rs2,169
Equity Shares (m) 84.7 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 2,271/1,150
12/08A 16,604 4,484 52.9 12.2 41.0 11.9 29.1 44.0 10.1 28.9
1,6,12 Rel Perf (%) -2/ 31/55
12/09A 18,708 5,049 59.6 12.6 36.4 10.4 28.7 43.0 8.8 25.2
Mcap (Rs b) 183.7
12/10E 21,140 5,909 69.8 17.0 31.1 9.4 30.2 44.6 7.7 21.9
Mcap (USD b) 4.0
12/11E 24,099 6,802 80.3 15.1 27.0 8.5 31.4 46.5 6.7 18.7

„ We expect GSK's 2QCY10 topline to grow 13.2% YoY to Rs5.2b, led by double-digit growth in priority products (60-
70% of sales). DPCO products (~27% of sales) are likely to record single-digit revenue growth.
„ EBITDA is likely to grow 14% YoY to Rs1.9b while EBITDA margin is likely to expand 30bp YoY to 35.9%.
„ We expect PAT to grow 11% YoY, lower than the growth in topline mainly due to lower other income on high base.

We believe GSK is one of the best plays on the IPR regime in India, with plans to launch nine patented/low-competition
products during CY08-10, of which seven have already been launched. The parent is fully committed to the listed entity,
which is evident from the fact that it is proposing to launch most of the patented products through the listed entity. GSK's
topline growth is improving gradually and we expect the company to record 13-14% growth for the next two years. We
believe that this growth trajectory will improve further in the long term, and post CY13, GSK will outperform the average
industry growth of 12-13%. Given the high profitability of operations, we expect sustainable double-digit earnings growth
and RoE of ~30%. This growth is likely to be funded through miniscule capex (Rs400m/year). GSK deserves premium
valuations due to strong parentage (giving access to large product pipeline), brand-building ability and likely positioning in
the post patent era. We expect GSK to record EPS of Rs69.8 (up 17%) in CY10 and Rs80.3 (up 15.1%) in CY11. The
stock trades at 31.1x CY10E and 27x CY11E earnings. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E DECEMBER CY09 CY10 CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Net Sales 4,572 4,574 5,118 4,444 5,411 5,179 5,708 4,842 18,708 21,140
YoY Change (%) 8.5 9.9 11.8 21.9 18.4 13.2 11.5 9.0 12.7 13.0
Total Expenditure 2,926 2,945 3,230 3,060 3,410 3,322 3,614 3,333 12,162 13,679
EBITDA 1,645 1,629 1,888 1,384 2,001 1,857 2,094 1,508 6,546 7,461
Margins (%) 36.0 35.6 36.9 31.1 37.0 35.9 36.7 31.2 35.0 35.3
Depreciation 37 40 40 48 38 44 48 52 164 182
Other Income 300 419 233 253 438 352 366 310 1,206 1,466
PBT before EO Expense 1,908 2,009 2,081 1,587 2,402 2,165 2,413 1,766 7,585 8,744
Tax 644 696 684 737 790 702 782 562 2,762 2,836
Deferred Tax 11 -4 -14 -219 0 0 0 0 -226 0
Rate (%) 34.3 34.5 32.2 32.7 32.9 32.4 32.4 31.8 33.4 32.4
Adjusted PAT 1,253 1,317 1,411 1,068 1,612 1,463 1,630 1,204 5,049 5,909
YoY Change (%) 3.5 14.8 6.9 19.4 28.6 11.1 15.6 12.7 12.6 17.0
Margins (%) 27.4 28.8 27.6 24.0 29.8 28.2 28.6 24.9 27.0 28.0
Extra-Ord Expense -178 73 0 31 0 0 0 0 -74 0
Reported PAT 1,432 1,243 1,411 1,037 1,612 1,463 1,630 1,204 5,123 5,909
E: MOSL Estimates

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 199

 Results Preview
SECTOR: PHARMACEUTICALS

Glenmark Pharmaceuticals
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 GNP IN Neutral
REUTERS CODE
S&P CNX: 5,269 GLEN.BO Previous Recommendation: Neutral Rs273
Equity Shares (m) 269.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 304/202
03/09A 20,865 1,125 4.2 -64.3 64.4 4.3 7.0 8.0 4.5 27.8
1,6,12 Rel Perf (%) -6/ -5/-4
03/10A 24,616 3,310 11.6 174.9 23.4 3.1 14.1 12.7 3.7 15.3
Mcap (Rs b) 73.7
03/11E 29,791 4,162 14.6 25.7 18.6 2.6 14.7 13.6 3.0 11.4
Mcap (USD b) 1.6
03/12E 33,507 5,274 18.6 26.7 14.7 2.2 15.8 15.3 2.6 10.7

„ We expect Glenmark's 1QFY11 topline to grow 35.1% YoY, primarily led by Rs920m of NCE outlicensing income.
Excluding this, revenues would grow by 18% YoY to Rs6.4b, led by strong double-digit growth in the domestic
formulations business and semi-regulated markets. US business is likely to report 8% YoY growth.
„ EBITDA is likely to grow 91% YoY to Rs2.3b, primarily due to outlicensing income while EBITDA margin is likely to
expand by 920bp to 31.5%. Excluding the outlicensing income, we estimate EBITDA margin at 21.7%.
„ We expect Glenmark to report adjusted PAT of Rs949m, a growth of 77.5% YoY, largely due to low base.

Glenmark has differentiated itself among Indian pharmaceuticals companies through its significant success in NCE
research (resulting in licensing income of US$137m till date). It has been aggressively adding new NCEs to its pipeline,
which will put pressure on its operations in the short-to-medium term - it will have to fund the R&D expenses for these
NCEs on its own. We expect core EPS of Rs14.6 for FY11 (up 25.7%) and Rs18.6 for FY12 (up 26.7%). The stock
currently trades at 18.6x FY11E and 14.7x FY12E earnings, with 14-16% RoE. High debt of Rs18b implies that fund-
raising for the generics subsidiary is imperative for de-leveraging the balance sheet. We maintain Neutral, with a target
price of Rs278 (15x FY12E EPS).

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Income 5,437 5,903 6,184 7,091 7,343 7,024 7,198 8,227 24,616 29,791
YoY Change (%) 18.0 5.2 6.4 51.3 35.1 19.0 16.4 16.0 19.3 21.0
EBITDA 1,214 1,563 1,404 1,783 2,316 1,712 1,808 2,071 5,963 7,906
Margins (%) 22.3 26.5 22.7 25.1 31.5 24.4 25.1 25.2 24.2 26.5
Depreciation 312 362 363 169 351 366 381 395 1,206 1,492
Interest 438 456 368 378 370 356 342 328 1,640 1,395
Other Income 76 262 312 72 450 98 123 147 722 819
PBT before EO Expense 540 1,007 985 1,308 2,046 1,089 1,208 1,495 3,839 5,838
Tax 85 198 44 202 297 174 181 224 529 876
Deferred Tax -80 0 0 80 0 0 0 0 0 0
Rate (%) 0.9 19.6 4.5 21.5 14.5 16.0 15.0 15.0 13.8 15.0
Reported PAT 535 809 941 1,026 1,749 914 1,027 1,271 3,310 4,962
Adj PAT 535 809 941 1,026 949 914 1,027 1,271 3,310 4,162
YoY Change (%) -42.1 -14.2 61.2 77.5 13.0 9.2 23.9 194.3 25.7
Margins (%) 9.8 13.7 15.2 14.5 12.9 13.0 14.3 15.5 13.4 14.0
E: MOSL Estimates; Adj PAT incl. capitalized R&D exp & excl. NCE upsides. Financials for 4Q will not tally with reported nos due to re-
statement of pre. quarters

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 200

 Results Preview
SECTOR: PHARMACEUTICALS

Jubilant Organosys
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 JOL IN Neutral
REUTERS CODE
S&P CNX: 5,269 JUBO.BO Previous Recommendation: Neutral Rs339
Equity Shares (m) 158.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 413/155
03/09A 35,180 2,832 19.2 -29.3 17.7 3.9 22.5 8.2 2.5 13.1
1,6,12 Rel Perf (%) -7/ -3/80
03/10A 37,813 4,215 28.6 48.8 11.9 3.1 29.5 13.6 2.2 10.7
Mcap (Rs b) 53.8
03/11E 43,389 5,153 32.5 13.6 10.4 2.2 25.8 14.3 1.8 8.6
Mcap (USD b) 1.2
03/12E 48,963 5,354 33.7 3.9 10.1 2.1 21.4 14.8 1.7 7.6

„ We expect Jubilant's 1QFY11 topline to grow 15.7% YoY, led by contract manufacturing of sterile injectables segment
and API business. However, growth would be partly tempered due to 12% YoY decline in agri and performance
polymer business.
„ EBITDA is likely to grow by 22.5% YoY to Rs2b while EBITDA margin is likely to expand by 110bp YoY to 19.2%
due to favorable product mix.
„ We expect PAT to decline by 16% YoY to Rs1.1b on account of high depreciation cost (low base due to change in
accounting policy) and lower other income (absence of forex gains).

We believe Jubilant is well positioned to exploit the expected increase in outsourcing from India. Customer inventory de-
stocking for CRAMS companies is coming to an end and we expect growth to rebound. Over the past few years, Jubilant
has made two large acquisitions in North America. While this has strengthened its presence in the sterile segment, it has
also resulted in a highly leveraged balance sheet. We believe that some of the past acquisitions (like Draxis) have been
made at expensive valuations, resulting in extended payback periods. We believe Jubilant needs to focus on its core
business of CRAMS (management has indicated that it is in the process of hiving off some of the non-core businesses
into a separate subsidiary). High debt, large FCCB redemption (US$271m over next 12 months including YTM) and
lower return ratios remain an overhang. We expect the company to record EPS of Rs32.5 for FY11 (growth of 13.6%)
and Rs33.7 for FY12 (up 3.9%), translating into 12.7% CAGR over FY10-12. The stock quotes at 10.4x FY11E EPS and
10.1x FY12E EPS. Maintain Neutral.
QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 8,964 9,331 9,615 9,903 10,367 10,786 11,030 11,205 37,813 43,389
YoY Change (%) 8.4 -0.8 5.7 17.7 15.7 15.6 14.7 13.1 7.5 14.7
Total Expenditure 7,342 7,480 7,364 7,740 8,379 8,588 8,422 8,694 29,926 34,083
EBITDA 1,622 1,851 2,251 2,163 1,988 2,199 2,608 2,511 7,887 9,306
Margins (%) 18.1 19.8 23.4 21.8 19.2 20.4 23.6 22.4 20.9 21.4
Depreciation 308 308 313 318 495 517 538 559 1,247 2,108
Interest 407 363 390 345 324 312 299 287 1,505 1,222
Other Income 562 -362 -280 125 94 98 102 106 44 399
PBT 1,469 818 1,268 1,624 1,263 1,468 1,873 1,771 5,179 6,375
Tax 223 240 225 271 202 323 356 330 959 1,211
Rate (%) 15.2 29.3 17.8 16.7 16.0 22.0 19.0 18.7 18.5 19.0
PAT 1,245 578 1,043 1,353 1,061 1,145 1,517 1,441 4,220 5,163
Minority Interest -13 1 35 -19 3 3 3 3 5 10
Adjusted PAT 1,258 577 1,008 1,372 1,058 1,143 1,514 1,438 4,215 5,153
YoY Change (%) 886.1 - - -61.1 -15.9 98.1 50.2 4.9 79.6 22.3
Margins (%) 14.0 6.2 10.5 13.8 10.2 10.6 13.7 12.8 11.1 11.9
E: MOSL Estimates; Numbers for 4QFY09 & full-year FY09 will be different from reported nos due to re-statement

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 201

 Results Preview
SECTOR: PHARMACEUTICALS

Lupin
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 LPC IN Buy
REUTERS CODE
S&P CNX: 5,269 LUPN.BO Previous Recommendation: Buy Rs1,918
Equity Shares (m) 88.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,938/755
03/09A 37,759 5,015 56.9 50.5 33.7 11.1 37.1 25.6 4.8 28.1
1,6,12 Rel Perf (%) -3/ 30/92
03/10A 47,405 6,816 76.6 34.8 25.0 8.6 40.1 30.2 3.8 21.1
Mcap (Rs b) 170.6
03/11E 55,939 8,393 94.4 23.1 20.3 6.6 37.0 29.9 3.2 17.2
Mcap (USD b) 3.7
03/12E 63,636 9,832 110.5 17.2 17.3 5.2 33.7 29.3 2.8 14.5

„ We expect Lupin's 1QFY11 topline to grow 23.9% YoY, driven primarily by 43% YoY growth in formulations revenues
from advanced markets (excluding Japan) to Rs5.1b. Growth in formulations revenues would be led by generic
Lotrel and 67% YoY growth in branded formulations exports on a low base.
„ EBITDA is likely to grow by 32% YoY while EBITDA margin is likely to expand by 40bp YoY due to low base and
better product mix.
„ We expect PAT to grow by 32.2% YoY to Rs1.9b, reflecting the robust growth in topline and expansion of EBITDA
margins.

Lupin's underlying fundamentals are likely to improve gradually, led by an expanding US generics pipeline, niche/Para-IV
opportunities in the US, strong performance from Suprax, ramp-up in Antara revenues (branded products in US) and
traction in formulation revenues from its European initiative. We expect Lupin's core operations (excluding one-off
upsides) to post 16% revenue CAGR over FY10-12, led by 17% CAGR for the US business and 18% CAGR for the
domestic formulations business. We believe Lupin is gaining critical mass in the US, and its European revenues should
gradually ramp up from FY11. It has 86 ANDAs pending approval in the US, including filings for low-competition
products in the oral contraceptives segment. The stock trades at 20.3x FY11E and 17.3x FY12E EPS with a sustained
30%+ RoE. We maintain Buy with a target price of Rs1,990 (18x FY12E EPS). Our estimates do not include one-time
upsides for the company's FTF pipeline in the US.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 10,856 11,147 12,554 12,848 13,446 13,744 14,325 14,424 47,405 55,939
YoY Change (%) 25.9 22.7 30.5 23.1 23.9 23.3 14.1 12.3 25.5 18.0
Total Expenditure 8,914 9,506 10,090 10,359 10,991 11,279 11,686 11,570 38,869 45,526
EBITDA 1,942 1,641 2,464 2,490 2,456 2,465 2,638 2,854 8,536 10,413
Margins (%) 17.9 14.7 19.6 19.4 18.3 17.9 18.4 19.8 18.0 18.6
Depreciation 231 242 358 408 339 339 368 368 1,239 1,414
Interest 107 91 109 78 102 98 95 83 385 378
Other Income 211 541 155 539 260 312 338 390 1,445 1,300
PBT 1,815 1,848 2,152 2,542 2,274 2,340 2,514 2,793 8,357 9,921
Tax 364 200 504 293 409 374 375 320 1,360 1,478
Rate (%) 20.0 10.8 23.4 11.5 18.0 16.0 14.9 11.5 16.3 14.9
Reported PAT 1,451 1,647 1,648 2,250 1,865 1,965 2,140 2,473 6,997 8,443
Minority Interest 50 43 42 45 13 13 13 13 180 50
Recurring PAT 1,401 1,604 1,606 2,205 1,852 1,953 2,127 2,461 6,816 8,393
YoY Change (%) 25.0 38.8 37.9 40.1 32.2 21.7 32.4 11.6 35.9 23.1
Margins (%) 12.9 14.4 12.8 17.2 13.8 14.2 14.8 17.1 14.4 15.0
E: MOSL Estimates

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 202

 Results Preview
SECTOR: PHARMACEUTICALS

Piramal Healthcare
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 PIHC IN Neutral
REUTERS CODE
S&P CNX: 5,269 NICH.BO Previous Recommendation: Neutral Rs494
YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
Equity Shares (m) 209.0
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 600/293
03/09A 32,811 3,580 17.1 -1.7 28.8 7.8 29.7 21.0 3.5 17.4
1,6,12 Rel Perf (%) -11/ 25/41
03/10A 36,711 4,886 23.4 36.5 21.1 6.1 32.5 21.2 3.1 15.9
Mcap (Rs b) 103.2
03/11E 41,994 5,343 25.6 9.4 19.3 5.0 28.4 21.8 2.8 13.5
Mcap (USD b) 2.2
03/12E 48,015 6,341 30.3 18.7 16.3 4.1 27.7 23.5 2.4 11.2

„ We expect PHL's 1QFY11 topline to grow by 11.3% YoY to Rs9.1b. Domestic formulations business is likely to
report 11.5% YoY growth to Rs4.9b. CRAMs business is likely to grow by 10% YoY, led by 50% YoY growth in
revenues from Indian facilities. Minrad is likely to report strong 24% YoY growth.
„ While EBITDA is likely to grow 14% YoY to Rs1.8b, EBITDA margin would improve by 40bp YoY, reflecting
improved revenue mix and improving profitability of Minrad operations in the US.
„ We expect PAT to grow by 25% YoY to Rs1.1b due to lower depreciation and interest expense.

CRAMS, critical care, pathological laboratories and other businesses will form the residual business for PHL after the
sale of its domestic formulations business. It will focus on: (1) ramp-up of the CRAMS business, (2) improving the
profitability of its Minrad (US) operations, and (3) deployment of the proceeds from the sale. While our fair value
estimate for PHC is Rs572/share, we believe the stock will quote at a discount to fair price, given the prevailing uncertainties.
We maintain our Neutral recommendation.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 8,215 10,000 9,077 9,418 9,141 10,499 10,948 11,407 36,711 41,994
YoY Change (%) 16.0 12.5 9.6 10.7 11.3 5.0 20.6 21.1 11.9 14.4
Total Expenditure 6,658 8,226 7,303 7,255 7,367 8,407 8,652 8,931 29,443 33,356
EBITDA 1,557 1,774 1,774 2,163 1,774 2,092 2,296 2,476 7,268 8,639
Margins (%) 19.0 17.7 19.5 23.0 19.4 19.9 21.0 21.7 19.8 20.6
Depreciation 385 375 434 233 369 421 456 509 1,427 1,756
Interest 254 254 217 192 196 233 242 261 916 931
Other Income 45 15 33 49 0 0 0 120 142 120
PBT before EO Expense 963 1,160 1,157 1,787 1,210 1,438 1,598 1,827 5,067 6,072
Extra-Ord Expense 0 4 0 66 0 4 0 -4 69 0
PBT after EO Expense 963 1,157 1,157 1,721 1,210 1,434 1,598 1,830 4,998 6,072
Tax 113 94 -204 178 121 143 160 183 180 607
Deferred Tax 0 0 0 0 25 30 30 36 0 121
Rate (%) 11.7 8.1 -17.7 10.3 12.1 12.1 11.9 12.0 3.6 12.0
PAT 851 1,063 1,361 1,543 1,064 1,261 1,408 1,611 4,818 5,343
Less: Minority Interest 0 0 -1 0 0 0 -1 2 -2 0
Reported PAT 851 1,063 1,362 1,543 1,064 1,261 1,409 1,609 4,819 5,343
Adj PAT 851 1,066 1,362 1,602 1,064 1,264 1,409 1,606 4,886 5,343
YoY Change (%) 18.7 30.6 127.5 48.7 25.1 18.6 3.4 0.2 36.5 9.4
E: MOSL Estimates; Quarterly numbers don’t add up to full year numbers due to restatement

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 203

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SECTOR: PHARMACEUTICALS

Ranbaxy Laboratories
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 RBXY IN
Neutral
REUTERS CODE
S&P CNX: 5,269 RANB.BO Previous Recommendation: Neutral Rs453
Equity Shares (m) 420.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END* (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 538/236
12/09A 74,688 1,517 3.6 -50.9 93.7 3.3 3.5 8.1 2.9 36.7
1,6,12 Rel Perf (%) 2/ -14/47
12/10E 84,601 9,053 6.6 82.3 51.4 2.7 17.0 15.3 2.4 13.6
Mcap (Rs b) 190.3
12/11E 84,575 3,649 8.7 32.0 39.0 2.4 6.2 6.8 2.4 24.7
Mcap (USD b) 4.1
12/12E 93,741 5,610 13.3 53.7 25.3 2.2 8.6 9.3 2.1 19.0
* All valuation ratios adjusted for Rs123/sh DCF value of FTFs

„ We expect Ranbaxy's 2QCY10 topline to decline 4.5% YoY (excluding generic Valtrex contribution) mainly due to
13% YoY decline in branded formulation markets like Asia Pacific and Middle East. While the US FDA issues are yet
to be resolved, revenues from US are likely to decline by 8.8% YoY. We expect generic Valtrex to contribute Rs3.5b
to Ranbaxy's 2QCY10 revenues, taking the overall topline to Rs21.6b.
„ EBITDA margin is likely to be 6.6%, reflecting the positive impact of the ongoing restructuring and cost-cutting
measures over the past few quarters. However, it would be tempered by increased manpower cost and appreciating
rupee.
„ Adjusted PAT is likely to double to Rs399m on a very low base. PAT including contribution from generic Valtrex
exclusivity (Rs1.7b) and settlement income related to generic Flomax (Rs460m) is likely to be Rs2.5b.

Ranbaxy's para-IV upsides are attracting P/E based valuations. We believe that these are one-off upsides and continue
to value them on DCF basis. Our current DCF value of all potential para-IV upsides is Rs115/share. We expect core EPS
of Rs8.7 in CY11 (assuming some normalization of the core US business) and Rs13.3 for CY12 (assuming full recovery
in the US). Our estimates exclude MTM forex gains and one-off upsides from para-IV opportunities. The stock currently
trades at 39x CY11E core EPS and 25.3x CY12E core EPS. We believe that current valuations are discounting the best
case scenario for both the core business as well as for the para-IV upsides. We maintain Neutral.
QUARTERLY PERFORMANCE (RS MILLION)
Y/E DECEMBER CY09 CY10 CY09 CY10E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Net Income 14,926 18,958 18,858 21,946 26,993 18,103 19,060 20,444 74,688 84,601
YoY Change (%) -12.1 -1.7 1.8 34.1 80.8 -4.5 1.1 -6.8 4.9 13.3
EBITDA -822 1,215 2,427 3,022 9,839 1,204 1,567 2,101 5,842 14,712
Margins (%) -5.5 6.4 12.9 13.8 36.5 6.6 8.2 10.3 7.8 17.4
Depreciation 639 644 654 739 1,005 704 736 756 2,676 3,202
Interest 246 197 121 146 248 230 212 194 710 883
Other Income -816 2,308 -51 2,988 1,697 -748 396 632 4,429 1,977
PBT before EO Expense -2,523 2,682 1,601 5,124 10,283 -478 1,015 1,784 6,884 12,603
Extra-Ord Expense 9,188 -8,137 0 -4,265 -3,872 3,190 0 -68 -3,214 -750
PBT after EO Expense -11,711 10,819 1,601 9,389 14,155 -3,668 1,015 1,852 10,098 13,353
Tax -4,101 3,888 435 6,769 4,524 -1,467 101 151 6,991 3,309
Rate (%) 35.0 35.9 27.2 72.1 32.0 40.0 10.0 8.1 69.2 24.8
Reported PAT -7,610 6,931 1,166 2,620 9,631 -2,201 913 1,701 3,107 10,045
Minority Interest 0 38 35 68 26 0 0 -26 142 0
Adj PAT -385 200 523 -1,545 533 399 913 1,444 -1,207 3,289
YoY Change (%) -137.8 -85.6 235.6 45.7 -238.7 99.7 74.6 -193.4 -181.0 -372.6
Margins (%) -2.6 1.1 2.8 -7.0 2.0 2.2 4.8 7.1 -1.6 3.9
Adj PAT incl one-offs -385 200 523 1,178 6,822 2,527 913 2,973 1,517 13,236
E: MOSL Estimates

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 204

 Results Preview
SECTOR: PHARMACEUTICALS

Sun Pharmaceuticals Industries

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 SUNP IN
Buy
REUTERS CODE
S&P CNX: 5,269 SUN.BO Previous Recommendation: Buy Rs1,793
Equity Shares (m) 207.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,846/1,070
03/10A* 41,028 13,567 65.5 -25.4 27.4 4.6 12.6 18.4 8.0 24.1
1,6,12 Rel Perf (%) 3/ 13/16 03/10A 34,344 9,557 46.1
Mcap (Rs b) 371.4 03/11E 41,750 12,696 61.3 32.8 29.3 4.1 14.7 15.7 7.7 25.1
03/11E* 46,169 14,321 69.1 5.6
Mcap (USD b) 8.0
03/12E 49,788 15,495 74.8 22.0 24.0 3.6 15.9 17.1 6.3 20.3
* Includes Para-IV upsides

„ We expect Sun Pharma's 1QFY11 topline to grow 19% YoY to Rs9.4b due to low base in the domestic formulations
segment owing to the change in distribution set-up and the impact of the US-FDA issues on Caraco. Domestic
formulations business is likely to grow by 73.2% YoY while the export formulations business (except US) is likely to
report 53% YoY growth.
„ EBITDA margin is likely to expand 820bp YoY to 29.6% due to favorable revenue mix, with contribution from the
domestic formulations business at 56% v/s 39% in 1QFY10.
„ Adjusted PAT is likely to grow ~3x YoY to Rs2.8b, albeit on low base and higher other income. Reported PAT
(including contribution of generic Protonix and Eloxatin) is likely to grow by 124% YoY to Rs3.6b.

An expanding generics portfolio and a change in the product mix in favor of high-margin exports are likely to bring in
long-term benefits for Sun Pharma. Key drivers for the future include: (1) a ramp-up in the US business and resolution of
Caraco's cGMP issues, (2) monetization of the para-IV pipeline in the US, and (3) launch of controlled substances in the
US. Based on our revised estimates, we expect core EPS of Rs61.3 for FY11 and Rs74.8 (up 22%) for FY12. Including
para-IV upsides, we expect EPS of Rs69.1 for FY11. The stock trades at 29.3x FY11E and 24x FY12E earnings. We
maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Revenues 7,876 11,852 10,209 11,092 9,375 9,994 10,648 11,733 41,028 41,750
YoY Change (%) -23.1 0.6 11.2 4.3 19.0 -15.7 4.3 5.8 -1.9 1.8
EBITDA 1,684 4,833 3,684 3,427 2,771 3,013 3,264 3,657 13,628 12,706
Margins (%) 21.4 40.8 36.1 30.9 29.6 30.2 30.7 31.2 33.2 30.4
Depreciation 376 379 359 419 382 398 415 431 1,533 1,626
Net Other Income 190 613 325 926 610 652 693 734 2,053 2,689
PBT 1,498 5,067 3,650 3,934 2,999 3,267 3,542 3,960 14,148 13,769
Tax 31 400 261 -13 210 327 283 233 679 1,053
Rate (%) 2.1 7.9 7.1 -0.3 7.0 10.0 8.0 5.9 4.8 7.7
Profit after Tax 1,467 4,667 3,389 3,946 2,789 2,940 3,259 3,727 13,470 12,715
Share of Minority Partner -156 145 0 -29 5 5 5 5 -41 19
Reported PAT 1,623 4,522 3,390 3,975 3,644 3,150 3,493 4,033 13,511 14,321
One-off Upsides 638 1,300 1,251 821 860 215 239 311 4,010 1,624
Adj Net Profit 985 3,222 2,138 3,155 2,785 2,935 3,254 3,722 9,501 12,696
YoY Change (%) -70.2 7.8 -38.8 0.9 182.6 -8.9 52.2 18.0 -26.4 33.6
Margins (%) 12.5 27.2 20.9 28.4 29.7 29.4 30.6 31.7 23.2 30.4
E: MOSL Estimates; Reported PAT includes one-off upsides

Nimish Desai (NimishDesai@MotilalOswal.com) / Amit Shah (Amit.Shah@MotilalOswal.com)

July 2010 205

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QUARTER ENDING JUNE 2010

Real Estate
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME RE recovery continues to gain strength

Anant Raj Industries
The real estate market continues to gain strength in 1QFY11. Residential sales are
DLF healthy across most key India markets, though sharp RE price increases in Mumbai and
HDIL NCR have moderated demand growth. There has been a steady de-freezing of leasing
Mahindra Lifespaces in the commercial offices vertical across key markets. During 1QFY11, we expect our
Phoenix Mills RE universe to post revenue increase of ~32% YoY and 7.5% QoQ, and net profit is
Unitech likely to increase by ~3.1% YoY and ~5.6% QoQ.

Recovery in commercial, retail vertical to gain momentum in 2HFY11

Since October 2009, there have been visible signs of recovery in the commercial and
retail verticals, with rentals in the commercial vertical stabilizing and leasing picking up in
key cities. In 1QFY11, leasing activity picked up across markets such as the NCR,
Bangalore, Chennai and Mumbai particularly in the office segment, and demand for IT
offices remains weak. Industry experts expect the commercial and retail verticals to
gain further momentum in 2HFY11. This should be a key positive for players, like DLF,
which have a significant presence in these segments.

High valuation discount provides margin of safety

The RE stock index has under-performed the benchmark indices by ~34%, since October
2009. We continue to value RE stocks on a premium/discount to NAV basis. Key RE
stocks are available at a significant discount to NAV. While the average discount to
NAV for our universe of RE stocks is ~29%, large companies such as DLF, Unitech and
HDIL are available at 25%, 24% and 35% discount to their NAV respectively. Our top
picks in the RE sector are DLF and Unitech among large caps and Anant Raj, Mahindra
Lifespaces and Phoenix Mills among mid caps.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Real Estate
Anant Raj Inds 118 Buy 660 -20.0 93.6 401 -47.3 52.9 364 -47.2 22.3
DLF 286 Buy 20,562 24.6 3.1 9,964 33.9 -0.4 4,023 1.6 -5.6
HDIL 244 Buy 3,506 18.7 -19.2 1,580 36.1 -30.4 1,157 7.6 -34.9
Mahindra Lifespace 459 Buy 1,145 142.3 13.4 384 269.8 29.5 279 167.6 17.7
Phoenix Mills 209 Buy 395 59.4 14.6 276 46.3 39.5 177 15.4 12.6
Unitech 74 Buy 8,257 60.4 -27.1 2,073 -34.2 -24.0 1,384 17.4 -31.1
Sector Aggregate 34,526 32.0 -7.5 14,679 14.6 -6.8 7,383 3.1 -15.6

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 206

 Real Estate

Divergence between physical RE market, stock performance seems

unsustainable
„ The RE stock index has declined by ~32% since October 2009 and underperformed
the Sensex by ~34%, since October 2009. This underperformance has been driven by
1) macroeconomic concerns about interest rates and liquidity, 2) technical factors
such as a withdrawal of capital-raising plans, 3) concerns regarding execution scale
up, and 4) slower-than-expected recovery in the commercial and retail vertical. Going
forward, we expect this under-performance to be corrected because of (i) abating
macro concerns, (ii) continued strengthening and broad basing of the physical RE
market, and (iii) visible progress on execution.
„ The RE market has continued to gain strength in 1QFY11 across RE verticals.
Residential sales continued to stay healthy across most key markets in India, though
sharp RE price increases in Mumbai and NCR markets moderated demand growth.
There has been a steady de-freezing of leasing in the commercial offices vertical
across key markets.
„ Since October 2009, recovery in the residential vertical has gained strength and has
been encompassing RE verticals such as commercial and retail.
„ We believe the divergence between the physical RE market and RE stock performance
seems unsustainable, going forward.

REAL ESTATE HAS UNDERPERFORMED THE SEXSEX BY ~34% SINCE OCTOBER 2009

Realty Index Sensex Index

120

100

80

60
Oct-09

Oct-09

Oct-09

Nov-09

Nov-09

Dec-09

Dec-09

Jan-10

Jan-10

Feb-10

Feb-10

Mar-10

Mar-10

May-10

May-10

Jun-10
Apr-10

Apr-10

Apr-10

RATES IN THE RESIDENTIAL VERTCIAL

24
21 21
19

15
14
13

10
9

1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10

Source: Company/MOSL

July 2010 207

 Real Estate

Macroeconomic concerns recede

Macroeconomic concerns such as a sharp increase in interest rates and poor liquidity
outlook, contributed strongly to the under-performance of RE stocks, since October 2009.
While some of these concerns have already played out, their magnitude also seems to be
shrinking. Our view on interest rates and liquidity is that the stress is purely a temporary
phenomenon, not expected to last beyond June 2010. We expect an improving
macroeconomic outlook to successfully address RE stocks' under-performance.

Liquidity outlook of key listed companies comfortable

The liquidity outlook for most key listed RE stocks looks comfortable with an average
debt/equity (DER) of ~0.5x. DLF's DER spiked sharply in 4QFY10 (from ~0.5x to 0.7x),
it plans to address the issue through asset sales and REIT listing. Successful implementation
of these plans will be a key positive for DLF.

Valuation discount provide margin of safety

„ The RE stock index has under-performed the benchmark indices by ~34%, since
October 2009. This under-performance has been largely driven by (1) macroeconomic
concerns about interest rates and liquidity, (2) technical factors such withdrawal of
capital raising plans, (3) concerns regarding execution scale up, and (4) slower-than-
expected recovery in the commercial and retail vertical.
„ Given the nascent history of the RE sector in the equity market, the valuation benchmark
is still evolving. We continue to value RE stocks on premium/discount to NAV basis.
Key RE stocks are available at significant discount to NAV. While the average discount
to NAV for our universe of RE stocks is ~29%, large companies such as DLF, Unitech
and HDIL are available at 25%, 24% and 35% discount to NAV respectively. Limited
trading data on RE stocks, indicate high discount to NAV as good entry points for
investors for long term gains.
„ Our top picks in the RE sector are DLF and Unitech among large caps and Anant
Raj, Mahindra Lifespaces and Phoenix Mills among mid caps.

DISCOUNT TO NAV
IBREL

HDIL

Puravankara

DLF

Unitech
Peninsula

Phoenix
Anant Raj

Brigade

Mah Life

-17 -15

-22
-26 -25
-26

-37 -35

-42 -41

Source: Company/MOSL

July 2010 208

 Real Estate

Land deals: momentum picking up

Successful recapitalization of balance sheets and encouraging responses to recent launches
has improved the financial outlook of key RE companies. This, in turn has encouraged
developers to consider land acquisitions at attractive prices. In FY10, the realty market
witnessed positive responses to the recent land auctions. This signals a revival of risk
appetite by real estate developers due to broad-based improvement in the sector outlook.

DETAILS OF KEY LAND TRANSACTIONS IN THE PAST YEAR

LAND DEAL DEAL RESERVE BID PRE-

DEVELOPER DATE AREA SIZE SIZE PRICE PRICE MIUM LOCATION

(ACRES) (USD M) (RS B) (RS M) (RS M) (%)

Lodha-Wadala May-10 7 40.5 1,980 4,050 105% WTT central Mumbai

Seth Developer Feb-10 14 5.9 Golden Tobaco Mill in
Vile Parle (west)
Wadhwa Group Jan-10 18.2 5.7 NA NA NA Hindustan Composite Mills
in Ghatkopar
NAPC Sep-09 0.5 0.2 NA NA NA
Godrej Properties Sep-09 100 Na NA NA NA Acquisition for Godrej
Garden City township to be
spread over 250acres
Piramal Sunteck Aug-09 Na 0.3 NA NA NA Two plots with sizes ranging
from 1,500-3,500 sq mtrs acquired
DB realty-Crown Mill Sep-09 7 125 6.0 6,000 NA - Crown Mill, Prabhadevi, Mumbai
IBREL-Nariman Point Aug-09 4 290 13.8 13,760 10,950 -2042% Nariman Point, Mumbai
DLF-Gurgaon Aug-09 350 360 17.5 17,500 17,000 -286% Sec42, 53 and 53, Gurgaon, NCR
Hiranandani-Banglore Jul-09 135 167 8.0 NA NA - Bangalore (80acres),
Chennai (35acres),
Hyderabad (20acres)
Lodha-Finlay Jul-09 10 145 7.1 7,100 7,080 -28% Finlay Mill, Lower Parel, Mumbai
Anant Raj-Noida Jul-09 39 1.7 NA NA - Noida (1.8msf), Manesar
(1.4msf) and Gurgaon (0.2msf)
Total 646 54.6 - - - -
Source: Company/MOSL

RELATIVE PERFORMANCE - 3M (%)

Sensex
M OSt Real Estate Index DETAILS OF KEY PRIVATE EQUITY DEALS IN CY10
108 DATE INVESTOR(S) TARGET STAKE (%) AMOUNT (US$M)
101 7-Jan-10 JP Morgan Viceroy Hotels 49 15.2
94 14-Jan-10 Kotak Mahindra PE Sunteck Realty NA 23.1
87 22-Jan-10 IL&FS Investment Manager Emerald Lands 27 14.5
80 27-Jan-10 IL&FS Trust Co. IIRF India Realty X, Orbit HighCity 21.6 35.5
Mar-10

May-10

Jun-10
Apr-10

Moltana Holdings
4-Feb-10 Red Fort Capital 3C Company NA NA
8-Feb-10 Temasek Holdings Sobha Development 4 NA
RELATIVE PERFORMANCE - 1YR (%) 10-Feb-10 ICICI Prudential, India Opportunity Shriram Properties 49 8.5
Realty Fund
M OSt Real Estate Index
Sensex 5-Apr-10 IL&FS Investment Manager GK Industrial Park 82 15.6
160 11-May-10 Clearwater Capital Sayaji Hotels NA NA
130 30-Apr-10 Kotak Mahindra PE Dheeraj Insignia NA 33.7
100 6-May-10 Milestone Capital GM Infra Ventures 26 4.5
70 10-Jun-10 IL&FS Milestone Realty 247 HCC Park 74 122.4
40 18-Jun-10 Infinite India Investment Windshield Dev. 100 6
Jun-09

Dec-09

Mar-10

Jun-10
Sep-09

Source: Four-S Database

July 2010 209

 Real Estate

Comparative snapshot for 1QFY11

REVENUE GROWTH PAT GROWTH

93.6 YoY QoQ YoY QoQ

22.3
17.4
15.4
60.4 59.4 7.6
1.6
0.1

24.6
14.6 18.7 (5.6)
3.1

(31.1)
(34.9)
-20.0 -19.2 -47.2
-27.1
Anant Raj DLF Unitech Phoenix Mills HDIL Anant Raj DLF Unitech Phoenix Mills HDIL

EBITDA GROWTH EBITDA MARGINS

52.9 YoY QoQ 46.3 76.9 1QFY11 4QFY10

33.9 39.5 36.1 69.9
60.8
57.4 52.3
50.1
48.5 45.1
(0.4)

25.1 24.1

(24.0)
(34.2) (30.4)
-47.3
Anant Raj DLF Unitech Phoenix Mills HDIL Anant Raj DLF Unitech Phoenix Mills HDIL

STOCK PRICE IN COMPARISON TO 52-WEEK HIGH/LOW QUARTERLY STOCK RETURNS

Up from 52w Low 1QFY11 4QFY10 11%

141
Dow n from 52w High 5% 6%
3% 2%

-2%
-4%
44 42 38 36 41 -12%
28 -15% -14%
20
14 11 -19% -21%
Sensex DLF Unitech HDIL Anantraj Phoenx
Anant Raj DLF Unitech Phoenix Mills HDIL Mill

Source: MOSL
COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Real Estate
Anant Raj Inds 118 Buy 8.1 7.8 13.2 14.6 15.2 9.0 12.9 11.4 6.1 6.7 6.1 9.4
Brigade Enterpr. 135 Buy 4.2 11.9 17.6 32.0 11.3 7.7 33.0 8.5 5.6 4.8 12.4 16.4
DLF 286 Buy 10.0 11.9 16.0 28.5 24.1 17.9 19.9 14.8 12.1 5.6 6.9 9.0
HDIL 244 Buy 15.8 15.7 18.9 15.5 15.6 12.9 15.5 14.3 11.9 8.1 7.6 8.7
Indiabulls Real Estate 153 Neutral -0.6 5.4 12.8 -246.5 28.2 11.9 -60.2 35.7 12.7 -0.2 1.4 3.3
Mahindra Lifespace 459 Buy 19.3 26.9 30.3 23.8 17.1 15.1 18.0 11.4 9.5 7.9 9.9 10.0
Peninsula Land 71 Neutral 10.0 12.0 13.2 7.1 6.0 5.4 5.7 4.4 4.0 24.3 24.8 23.5
Phoenix Mills 209 Buy 4.1 5.7 9.6 51.6 36.6 21.8 48.7 26.2 18.9 3.8 5.1 8.0
Puravankara Projects 105 Neutral 6.8 8.2 9.8 15.4 12.8 10.6 17.9 13.1 8.5 9.8 10.8 11.8
Unitech 74 Buy 2.8 3.2 4.3 26.5 23.2 17.2 21.1 18.7 11.8 6.3 6.7 8.3
Sector Aggregate 25.3 20.8 15.3 20.3 14.9 11.1 5.6 6.7 8.6

July 2010 210

 Results Preview
SECTOR: REAL ESTATE

Anant Raj Industries

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ARCP IN Buy
REUTERS CODE
S&P CNX: 5,269 ANRA.BO Previous Recommendation: Buy Rs118
Equity Shares (m) 294.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 164/82
3/09A 2,508 2,073 7.0 -52.5 16.8 1.0 6.2 8.6 12.2 13.9
1,6,12 Rel Perf (%) 6/ -11/3
3/10A 2,863 2,381 8.1 14.9 14.6 1.0 6.7 8.2 11.7 12.9
Mcap (Rs b) 34.8 3/11E 5,485 2,293 7.8 -3.7 15.2 0.9 6.1 8.2 6.0 11.4
Mcap (USD b) 0.8 3/12E 10,630 3,880 13.2 69.2 9.0 0.8 9.4 13.0 3.1 6.1

„ We expect ARIL’s revenue to decline by 20% YoY to Rs660m and net profit to drop by 47.2% YoY to Rs364m.

„ ARIL’s planned launch of its key premium residential project at Hauz Khas in 1QFY11, has been delayed due to legal
issues, however, the management is hopeful of launching the project in 2QFY11.

„ During 1QFY10, ARIL launched a ~0.2msf project at Kapasera, Delhi and the project was sold within a month.

„ ARIL plans to launch a mid-income housing project in Manesar in FY11, comprising ~1,000 apartments at average
realizations of Rs2,500/sf.

„ ARIL has a robust business model, with multiple revenue streams and high monetization visibility. We expect revenue
to increase at 54% CAGR and net profit to increase by 19% over FY09-12. Our FY12 NAV for ARIL is Rs205/
share. The stock trades at 0.8x FY12E BV of Rs139/share and 42.4% discount to its FY12E NAV of Rs205/share,
which is attractive compared with its industry peers. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales - Ceramic 20 26 13 19 39 46 50 58 80 194

Rental Income 92 113 135 150 184 230 239 267 490 920
RE Sales/Investments (Net) 713 732 678 298 437 743 1,224 1,967 2,294 4,372
Total Sales 825 871 826 341 660 1,020 1,514 2,292 2,863 5,485
Change (%) 687.2 -44.4 17.0 52.4 -20.0 17.0 83.2 572.5 7.3 91.6
Total Expenditure 65 73 62 79 259 388 647 1,294 278 2,589
EBITDA 760 799 764 262 401 631 866 998 2,585 2,896
Change (%) - -46.6 17.1 83.4 -47.3 -21.0 13.4 280.5 9 12
As of % Sales 92 92 92 77 61 62 57 44 90 53
Depreciation 35 45 43 -16 43 52 54 67 107 215
Interest 0 0 0 48 7 7 9 13 49 36
Other Income 155 137 117 126 141 131 111 121 535 505
Extra-ordinary 11 2 0 -12 0 0 0 0 1 0
PBT 880 890 837 369 492 704 915 1,039 2,964 3,150
Tax 180 176 166 59 129 163 244 321 581 857
Effective Tax Rate (%) 20 20 20 16 26 23 27 31 20 27
Reported PAT 700 714 671 309 364 541 671 718 2,383 2,293
Change (%) 777.8 -43.9 1.3 92.5 -48.1 -24.3 0.0 132.0 6 -4
Adj PAT 689 713 671 297 364 541 671 718 2,382 2,293
Change (%) 788.2 -44.0 1.4 95.3 -47.2 -24.1 0.0 141.4 7 -4
E: MOSL Estimates

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 211

 Results Preview
SECTOR: REAL ESTATE

DLF
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 DLFU IN Buy
REUTERS CODE
S&P CNX: 5,269 DLF.BO Previous Recommendation: Buy Rs286
Equity Shares (m) 1,714.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 491/252
3/09A 100,448 44,696 26.0 -43.4 11.0 2.3 18.5 15.6 6.4 11.4
1,6,12 Rel Perf (%) 2/ -24/-32
3/10A 74,209 17,300 10.0 -61.3 28.5 1.7 5.6 7.6 9.4 19.9
Mcap (Rs b) 490.4 3/11E 93,465 20,470 11.9 18.3 24.1 1.7 6.9 8.4 7.1 14.7
Mcap (USD b) 10.6 3/12E 119,851 27,544 16.0 34.6 17.9 1.7 9.0 10.5 5.4 12.0

„ We expect revenue to grow 24.6% YoY to Rs20.1b and net profit to increase ~2% to Rs4b mainly due to an increase
in residential sales volumes.
„ In 1QFY11, DLF started pre-sales of its key ~4msf project in Lower Parel, Mumbai. We expect DLF to launch 50%
of this project in FY11.
„ The management has issued strong operational guidance for sales and leases across verticals for FY11. It hopes to
sell residential property of 15-18msf and lease 3-4msf of commercial offices in FY11. The management has also
guided for asset sales of ~Rs27b over 12-18 months (primarily expectation of refunds from the government).
„ After 4QFY10 results, we cut our NAV estimate by 9% from Rs428/share to Rs388/share to model (1) higher debt
of ~Rs45b v/s our earlier estimates, (2) delay in residential and commercial launches, and (3) lower stake of DLF in
key projects such as NTC Mills and Mall of India after the merger with a promoter-held entity.
„ We also cut our FY11 PAT estimate by 22.2% to Rs20.4b and FY12 PAT estimate by 10.8% to Rs27.5b to model (1)
significantly higher interest costs, and (2) delay in new launches.
„ Our FY12 expected NAV is Rs388/share. The stock trades at 1.7x FY12E adjusted BV of Rs170/share and 26.3%
discount to its NAV. Progress on debt leveraging and subsequent revival in the commercial and retail verticals could
lead to higher valuation multiples for DLF. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 16,499 17,509 20,258 19,944 20,562 23,366 24,301 25,236 74,210 93,465
Change (%) -56.7 -53.2 48.2 77.7 24.6 33.4 20.0 26.5 -26.1 25.9
Total Expenditure 9,058 8,371 11,825 9,944 10,598 12,043 13,006 12,525 39,198 48,172
EBITDA 7,441 9,138 8,433 10,000 9,964 11,323 11,294 12,711 35,012 45,293
Change (%) -68.3 -58.8 9.2 546.9 33.9 23.9 33.9 27.1 -37.5 29.4
As % of Sales 45.1 52.2 41.6 50.1 48.5 48.5 46.5 50.4 47.2 48.5
Depreciation 734 766 800 947 946 950 970 1,012 3,246 3,878
Interest 2,874 2,486 2,568 3,147 3,737 3,665 3,593 3,378 11,075 14,374
Other Income 961 594 1,260 1,518 430 458 468 515 4,334 1,871
PBT 4,794 6,481 6,325 7,424 5,711 7,166 7,199 8,835 25,024 28,912
Tax 993 1,918 1,684 2,362 1,688 2,026 2,111 2,617 6,957 8,442
Effective Tax Rate (%) 20.7 17.5 26.6 31.8 29.6 28.3 29.3 29.6 27.8 29.2
Reported PAT 3,801 4,563 4,641 5,062 4,023 5,140 5,089 6,218 18,067 20,470
Change (%) -79.9 -76.4 (31.9) - 5.8 12.6 9.6 - -60.0 13.3
P/L of Associat./ Minority Int. -159 166 -38 798 0 0 0 0 767 0
Adj. PAT 3,960 4,397 4,679 4,264 4,023 5,140 5,089 6,218 17,300 20,470
Change (%) (78.8) (77.3) (30.2) 168.1 1.6 16.9 8.8 45.8 -61.3 18.3
E: MOSL Estimates

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 212

 Results Preview
SECTOR: REAL ESTATE

HDIL
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 HDIL IN Buy
REUTERS CODE
S&P CNX: 5,269 HDIL.BO Previous Recommendation: Buy Rs244
Equity Shares (m) 366.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 411/179
3/09A 17,284 7,871 28.6 -62.6 8.5 1.5 15.3 8.6 5.4 12.0
1,6,12 Rel Perf (%) 9/ -34/-15
3/10A 15,021 5,666 15.8 -35.8 15.5 1.2 8.1 5.5 5.7 10.8
Mcap (Rs b) 89.6 3/11E 19,225 5,758 15.7 -0.6 15.6 1.2 7.6 5.6 4.2 9.8
Mcap (USD b) 1.9 3/12E 36,412 6,921 18.9 20.2 12.9 1.1 8.7 6.6 2.3 8.2

„ We expect revenue to grow 18.7% YoY to Rs3.5b and net profit to increase by 7.6% YoY to Rs1.2b. EBITDA
margins will expand to 45.1% v/s 39.3% in 1QFY10.

„ During 1QFY11 HDIL launched its 1.2msf residential project christened Meadows in Goregaon, Mumbai. The
project elicited good response.

„ The Bombay High Court ruling in June 2010, setting aside the Maharashtra State Government’s decision in July 2008
to allow developers to buy 0.33x of floor space index (FSI) directly from the government in Mumbai’s suburbs, was
a major boon for HDIL. TDR prices jumped up from Rs2,600-2,700/sf to ~Rs3,250/sf within a week. HDIL is one of
the key TDR players in Mumbai, with a possible inventory of ~35msf from its MIAL project.

„ HDIL is well placed to benefit from a strong recovery in the Mumbai real estate market (87% of HDIL’s land bank
is in MMR). Our FY12E NAV for HDIL is Rs385/share. The stock trades at 3.8x FY12E adjusted BV of Rs65/share
and at 36.5% discount to its FY12E NAV of Rs385/share. We expect the stock to trade at a 10% discount to its NAV.
Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10* FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 2,954 3,537 4,089 4,341 3,506 3,836 5,917 5,967 15,021 19,225
Change (%) -48.2 -38.0 30.3 21.3 18.7 29.9 44.7 37.5 -13.1 28.0
Total Expenditure 1,792 1,740 2,201 2,070 1,925 2,256 3,395 3,350 7,129 10,924
EBITDA 1,161 1,797 1,888 2,271 1,580 1,579 2,522 2,617 7,893 8,302
Change (%) -75.1 -33.6 98.7 135.3 36.1 -12.1 33.6 15.2 1.4 5.2
As % of Sales 39.3 50.8 46.2 52.3 45.1 41.2 42.6 43.9 52.5 43.2
Depreciation 9 9 12 22 84 88 96 132 724 401
Interest 169 185 190 245 192 196 200 246 462 835
Other Income 233 274 266 304 108 113 123 169 345 512
PBT 1,217 1,876 1,952 2,309 1,412 1,407 2,348 2,408 7,052 7,578
Tax 142 390 324 474 255 273 619 674 1,386 1,820
Effective Tax Rate (%) 11.6 20.8 16.6 20.5 18.1 19.4 26.4 28.0 19.7 24.0
Reported PAT 1,075 1,486 1,628 1,835 1,157 1,134 1,729 1,734 5,666 5,758
Change (%) -66.2 -53.3 115.1 196.3 7.6 5.5 6.3 -5.5 -16.4 1.6
Adjusted PAT 1,075 1,486 1,628 1,778 1,157 1,134 1,729 1,678 5,666 5,758
Change (%) -66.2 -53.3 -12.0 187.2 7.6 5.5 6.3 -5.7 -28.0 1.6
E: MOSL Estimates; * Consolidated Results

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 213

 Results Preview
SECTOR: REAL ESTATE

Mahindra Lifespaces
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 MLIFE IN Buy
REUTERS CODE
S&P CNX: 5,269 MALD.BO Previous Recommendation: Buy Rs459
Equity Shares (m) 40.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 543/225
3/09A 3,418 641 15.7 -3.5 29.2 2.0 6.9 7.8 6.0 28.4
1,6,12 Rel Perf (%) 5/ 33/48
3/10A 4,179 785 19.3 22.7 23.8 1.9 7.9 9.2 5.0 18.0
Mcap (Rs b) 18.7 3/11E 5,454 1,098 26.9 39.8 17.1 1.7 9.9 12.7 4.0 11.4
Mcap (USD b) 0.4 3/12E 6,928 1,238 30.3 12.7 15.1 1.5 10.0 13.6 3.0 9.5

„ We expect consolidated revenue to increase to Rs3.5b and net profit to increase by 2.4x YoY to Rs464m, led by
robust sales volumes. We expect EBITDA margins to expand to 55% in 4QFY10.

„ During 4QFY10, MLL launched phase-II of its residential project at Bhandup, Mahindra Splendor, at Rs6,500/sf,
~8% higher than its phase-I rate of Rs6,000/sf. MLL plans to launch the second phase of its residential development
at the Chennai SEZ of ~0.8msf in FY11. The management had earlier guided for the launch of this project in
4QFY10. This project would consist of mid-income homes priced at Rs2.5m-3.5m/unit. For 9MFY10, its residential
sales amounted to ~Rs3.8b.

„ MLL plans to increase the processing area at the Chennai SEZ by ~100 acres. Of this, it has acquired ~70 acres and
is in the advanced stages of acquiring the remaining ~30 acres. After this acquisition, the area under the Chennai SEZ
would increase to ~1,700 acres (v/s 1,550 acres, currently).

„ Our FY12 SOTP value is Rs552/share: (1) Chennai SEZ at Rs180/share, (2) Jaipur SEZ at Rs174/share, (3) residential
vertical at Rs179/share, and (4) other rental assets at Rs50/share. Our valuations do not include value for: (1) its 52-
acre Thane project, (2) 50-acre commercial land at Chennai SEZ, and (3) two planned new SEZs/industrial parks in
Tamil Nadu and near the Mumbai-Pune Expressway. The stock trades at 1.33x FY12E BV of Rs366/share and at
~17% discount to its SOTP value of Rs552/share. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q CONS. CONS.

Sales 473 635 1,089 1,010 1,145 1,309 1,363 1,636 4,179 5,454
Change (%) -2.0 109.5 95.7 223.4 142.3 106.1 25.2 62.1 22.3 30.5
Total Expenditure 369 488 784 713 761 832 868 1,080 3,008 3,542
EBITDA 104 147 305 296 384 477 496 556 1,171 1,912
As % of Sales 22.0 23.2 28.0 29.4 33.5 36.4 36.4 34.0 28.0 35.1
Depreciation 6 5 5 7 18 22 23 28 66 91
Interest 0 0 0 0 28 30 33 41 93 133
Other Income 43 131 66 51 58 64 66 77 221 265
Extra-ordinary 44 - 0 0 0 - 44 0
PBT 140 229 366 340 396 488 506 563 1,189 1,953
Tax 36 56 86 103 117 141 149 179 383 586
Effective Tax Rate (%) 25.8 24.2 23.5 30.3 29.6 28.8 29.5 31.7 32.3 30.0
Adj. PAT 104 203 280 237 279 376 357 385 785 1,098
Change (%) 6.9 81.3 147.7 74.6 167.6 85.8 27.5 62.4 22.5 40.0
E: MOSL Estimates

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 214

 Results Preview
SECTOR: REAL ESTATE

Phoenix Mills
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 PHNX IN Buy
REUTERS CODE
S&P CNX: 5,269 PHOE.BO Previous Recommendation: Buy Rs209
Equity Shares (m) 144.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 236/87
3/09A 996 768 5.3 68.1 39.5 2.0 5.1 5.1 34.0 56.2
1,6,12 Rel Perf (%) -4/ 8/90
3/10A* 1,158 588 4.1 -23.4 51.6 1.9 3.8 3.4 31.3 48.7
Mcap (Rs b) 30.3 3/11E 1,961 827 5.7 40.8 36.6 1.9 5.1 5.1 18.8 26.2
Mcap (USD b) 0.7 3/12E 3,235 1,387 9.6 67.7 21.8 1.7 8.0 6.6 12.7 18.9

„ We expect revenue to grow 59.4% YoY to Rs395m and net profit to increase 15.4% YoY to Rs177m, led by increased
contribution from Palladium, phase-III of High Street Phoenix (HSP), its retail project in Mumbai.

„ HSP is likely to grow well over FY10-12, driven by (1) re-pricing of old rental contracts of ~150,000sf by ~100% over
FY11-12, (2) start of operations of the 400-room Shangri-La hotel by 3QFY11, (3) leasing of 35,000sf of incremental
commercial space by FY11-12, and (4) addition of phase-4 retail area of ~300,000sf by FY12.

„ In 1QFY11, PML’s market city projects witnessed significant traction in leasing, with (i) Kurla, Mumbai ~50% leased
(was ~22% as on 4QFY10) at average lease rentals of Rs90/sf/mth, (ii) Pune mall 75% leased (was ~55% as on
4QFY10) at average rentals of Rs62/sf/mth, and (iii) Bangalore mall ~60% leased (was ~20% as on 4QFY10) at
average rentals of Rs55/sf/mth. After the completion of these malls, PML will own the largest malls in almost all tier-
1 cities in India, except the NCR.

„ We believe PML is a unique play on the booming domestic consumption story, without retail-specific risks. We have
rolled our NAV one year forward to FY12, which is Rs251/share. The retail vertical forms ~73% of GAV and the
commercial and hotel verticals form ~9% each of GAV. The stock trades at 1.7x its FY12E adjusted book value of
Rs120.1/share and 16.7% discount to our NAV of Rs251/share. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q CONS. CONS.

Sales 248 264 302 345 395 412 538 616 1,158 1,961
Change (%) 19.7 12.6 36.7 61.0 59.4 56.0 78.3 78.7 16.3 69.3
Total Expenditure 59 82 125 147 119 122 138 174 412 553
EBITDA 189 182 177 198 276 290 400 442 746 1,408
Change (%) 21.3 1.5 14.2 51.7 46.3 59.4 125.8 123.2 23.9 88.8
As % of Sales 76.2 68.9 58.7 57.4 69.9 70.4 74.3 71.7 64.4 71.8
Depreciation 24 27 53 59 55 57 60 59 163 231
Interest 10 10 31 35 39 48 54 76 86 218
Other Income 53 83 47 58 50 50 46 32 240 178
PBT 208 228 140 162 231 235 332 339 738 1,138
Tax 55 53 39 4 55 57 79 82 150 273
Effective Tax Rate (%) 26.3 17.5 19.5 2.8 23.6 24.4 23.9 24.2 20.4 24.0
Reported PAT 153 175 102 157 177 178 253 257 588 865
Change (%) 38.9 -54.6 (30.9) 11.8 15.4 1.5 147.9 63.7 -23.4 47.1
Adj. PAT 153 175 102 157 177 178 253 257 588 865
Change (%) 38.9 (54.6) (30.9) 11.8 15.4 1.5 147.9 63.7 -23.4 47.1
E: MOSL Estimates

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 215

 Results Preview
SECTOR: REAL ESTATE

Unitech
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 UT IN Buy
REUTERS CODE
S&P CNX: 5,269 UNTE.BO Previous Recommendation: Buy Rs74
Equity Shares (m) 2,435.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 118/61
3/09A 28,945 9,689 6.0 -41.7 12.3 3.0 18.7 13.2 9.2 16.8
1,6,12 Rel Perf (%) 2/ -12/-33
3/10A 29,568 6,751 2.8 -53.6 26.5 1.9 6.3 6.5 8.0 21.5
Mcap (Rs b) 179.0 3/11E 37,393 7,891 3.2 14.1 23.2 1.7 6.7 6.5 6.0 19.1
Mcap (USD b) 3.9 3/12E 50,971 10,634 4.3 34.8 17.2 1.6 8.3 9.3 4.2 12.1

„ We expect revenue to increase by 60.4% YoY to Rs8.3b and net profit to increase by 17.4% YoY to Rs1.4b.
EBITDA margins are likely to contract by 23.4pp YoY to 25.1%, due to cost revision for old projects.

„ Unitech has guided for FY11 residential sales of 12msf or ~Rs60b. Unitech’s 1QFY11 residential sales run rate was
~0.7msf/month, which is lower than the FY10 average run rate of ~1.3/msf.

„ It has significantly scaled up execution across projects and hopes to deliver ~26msf (22msf of old projects and
~10msf of recent projects) over FY11-13.

„ In 1QFY11, Unitech called off its 50:50 JV with Omkar, its Mumbai partner. The JV had ongoing projects of ~1.2msf.
The management indicated that in future it would adopt the SPV route.

„ Our FY12 NAV for Unitech is Rs95/share. The stock trades at 17.2x FY12E EPS of Rs4.3 and 1.6x FY12E BV of
Rs47/share. Among large-cap RE stocks, Unitech has one of the most comfortable balance sheets, with a low
leverage of ~0.5x and strong earnings visibility of 30% CAGR over FY10-12. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 5,149 5,095 7,745 11,325 8,257 8,235 9,113 11,788 29,313 37,393
Change (%) -50.1 -48.2 58.3 190.2 60.4 61.6 17.7 4.1 1.3 27.6
Total Expenditure 1,998 2,117 5,888 8,599 6,185 5,912 6,060 7,475 18,602 25,633
EBITDA 3,151 2,978 1,857 2,726 2,073 2,322 3,053 4,313 10,712 11,760
Change (%) -48.2 -51.1 -24.0 107.1 -34.2 -22.0 64.4 58.2 -32.8 9.8
As of % Sales 48.5 58.4 24.0 24.1 25.1 28.2 33.5 36.6 36.5 31.5
Depreciation 42 114 79 106 108 129 137 164 341 538
Interest 926 603 148 323 360 396 450 594 2,000 1,800
Other Income 333 172 139 196 232 235 239 354 840 1,060
PBT 2,516 2,432 1,769 2,493 1,837 2,032 2,704 3,908 9,188 10,483
Tax 539 654 373 835 453 492 661 985 2,402 2,591
Effective Tax Rate (%) 21.4 18.5 21.1 33.5 24.7 24.2 24.4 25.2 26.1 24.7
Reported PAT 1,578 1,779 1,395 2,035 1,384 1,540 2,044 2,924 6,787 7,891
Change (%) -62.7 -50.5 1.1 -26.1 -12.3 -13.4 46.5 43.7 -43.3 16.3
Minority 399 -2 -365 3 0 0 0 0 36 0
Adj PAT 1,178 1,777 1,760 2,010 1,384 1,540 2,044 2,924 6,751 7,891
Change (%) -72.2 -50.5 29.4 313.2 17.4 -13.3 16.1 45.5 -30.3 16.9
E: MOSL Estimates

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 216

 Results Preview
QUARTER ENDING JUNE 2010

Retailing
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Estimate 29% increase in sales, 81% increase in adjusted PAT: We estimate our
Pantaloon Retail
retail universe will post 29% YoY increase in sales in the three months to June 2010.
EBITDA will increase 34% led by a 40bp margin expansion. PBT is expected to increase
Titan Industries
80% due to lower interest burden and PAT will increase 81% YoY. We estimate Titan
Industries will post 139% growth in adjusted PAT and Pantaloon Retail PAT will grow
45% YoY.

Consumption sentiment buoyant, store openings pick up: Strong consumption

sentiment has been sustained over the past two quarters due to economic stability and
improved job outlook. There is sustained impulse buying in categories like apparel,
accessories, jewelry and watches. The home retailing segment, helped by a low base and
pent-up demand has picked up well. We note that several global brands have entered
specialty retail, and the brands will expand the retail market in the coming years. Store
openings are picking up across verticals and we expect that the retail space will increase
by more than 30% in 18-24 months.

Gold on an uptrend; low base supports jewelry volumes: The sharp increase in gold
prices during the quarter (up 22% YoY and 7% QoQ) has had virtually no impact on
jewelry volume growth due to low offtake in the base quarter. Sales during Akshaya
Tritiya have been encouraging despite high gold prices. Offtake of studded jewelry was
higher due to its relatively lower price increase than gold jewelry.

Sales traction strong; structural bottlenecks a key impediment: We believe there

is likely to be strong sales traction in the retail sector due to strong same store sales and
faster store openings. However issues such as service tax on lease rentals, funding, FDI
in multi-brand retail and guidelines for cash and carry stores remain a key drag. We
believe the long term outlook looks encouraging despite hiccups. We believe Pantaloon
Retail will emerge stronger after group restructuring with increased focus on its core
business. We maintain Pantaloon as the best theme play.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Retailing
Pantaloon Retail 420 Buy 20,279 22.0 -1.4 2,239 22.2 3.9 529 44.9 -5.4
Titan Industries 2,258 Neutral 12,580 42.5 -4.1 893 81.4 -23.6 541 139.1 -34.8
Sector Aggregate 32,859 29.1 -2.5 3,132 34.7 -5.8 1,070 81.0 -23.0

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Nikhil Kumar(Nikhil.N@MotilalOswal.com)

July 2010 217

 Retailing

Estimate 29% increase in sales and 81% increase in adjusted PAT

We estimate our retail universe will post 29% YoY increase in sales in the three months to
June 2010. EBIDTA will increase 34% due to a 40bp margin expansion. PBT is expected
to increase 80% due to lower interest burden and PAT will increase 81% YoY. We estimate
Titan Industries will post 139% growth in adjusted PAT and Pantaloon Retail PAT will
grow 45% YoY.

Consumption sentiment buoyant, boosts impulse buying

Economic stability and improved job opportunities have helped a strong consumption
sentiment to gather momentum over the past two quarters Demand is robust in the top
eight cities and new store launches in Tier II and Tier III cities are being well received.
Our channel check suggests sustained impulse buying in categories such as apparel,
accessories, jewelry and watches. The home retailing segment, helped by a low base and
pent up demand, is likely to grow by over 20%.

SAME STORE SALES GROWTH IS INCHING UP ACROSS VERTICALS

PANTALOON SSS GROWTH SHOPPERS’ STOP LTL SALES GROWTH

Value Retailing Lifestyle Retailing LTL sales grow th (%)

21.0
13.9
13.2
12.0
10.5 10.6 11.0
14.0
8.8 7.7
6.9 7.5 6.9
6.0
4.9 7.0
3.0 5.0
3.7
1.0
Dec-08

Mar-09

Jun-09

Dec-09

Mar-10
Sep-08

Sep-09

FY07 FY08 FY09 FY10 FY11E FY12E

Source: Company/MOSL

…leading to faster, bigger store openings

Favorable consumption sentiment and lower lease rentals have instilled confidence of
faster breakeven, resulting in faster and bigger store launches by retail companies. We
expect Pantaloon (year ending June) to add ~0.6m square feet in the three months to June,
closing the financial year with 11.5m square feet (excluding home retailing). Its management
guided for 2.5m-3m square feet of area addition in FY11 (2m square feet in FY10).

Shoppers’ Stop is optimistic about faster store launches in two years, in the department
store format (management guidance of 18 stores in 30 months) and Hypermarts (five
stores over FY10-12). Unlisted players like Lifestyle, Globus and Fab India also have
aggressive store launch plans to ride the demand revival. Specialty stores like World of
Titan, Tanishq, Bata and Jubilant Foodworks (Dominos) continue to look at tier-II and
tier-III cities as they explore new growth avenues.

July 2010 218

 Retailing

PANTALOON RETAIL’S STORE LAUNCHES HAVE BEEN ON AN UPTREND

Area Addition (mn sqft) Total Area (mn sqft) 10.9

10.3
9.7 9.6
9.2
8.4 8.4
7.9
7.3

0.6 0.6 0.5 0.8 0.5 0.7 0.6

0.0 -0.1

3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10

Source: Company/MOSL

STORE EXPANSION PLANS INDICATES PRICING OPTIMISM

STORE FORMAT/GROUP STORES OPENING CURRENT STORES PERIOD

Big Bazaar 60 132 18 months

Shoppers Stop 18 30 30 months
Hypercity 5 25 24 months
Globus 6 21 12 months
Dominos ~60 ~300 12 months
World of Titan 40 290 12 months
Tanishq 15 115 12 months
Source: Media Reports/Company

Gold on an uptrend; impulse buying, low base support jewelry volumes

The sharp increase in gold prices during the three months to June (up 22% YoY and 7%
QoQ) has had virtually no impact on jewelry volume growth due to low offtake in the base
quarter. Sale during Akshaya Tritiya was encouraging considering the high gold prices.
We believe traditional consumers are getting used to high gold prices. Sales of studded
jewelry have grown due to relatively stable prices as most studded jewelry have only 25-
30% gold of 18-20 carat. Thus, rising gold prices have not impacted the price of studded
jewelry much.

GOLD PRICES ARE MOVING UP STEADILY (INR/10G)

20,000

17,500

15,000

12,500

10,000
Jun-10
Jun-08

Dec-08

Mar-09

Jun-09

Dec-09

Mar-10
Sep-08

Sep-09

Source: Company/MOSL

July 2010 219

 Retailing

Sales traction strong; structural bottlenecks a key impediment

We believe there is likely to be strong sales traction in the retail sector due to strong same
store sales and faster store openings. Improving consumption sentiment and lower rentals
have encouraged companies to ramp-up expansion plans. However, we are cautious about
near term margins due to mix deterioration (Pantaloon) and initial store launch expenses.
We prefer Pantaloon as a theme play on retail because of its pan-India presence, first
mover advantage and deep understanding of the Indian consumer psyche.

RELATIVE PERFORMANCE - 3M (%) RELATIVE PERFORMANCE - 1YR (%)

Sensex MOSt Retail Index

MOSt Retail Index Sensex
122
200
114 160

106 120

98 80

90 40
Mar-10

Jun-09

Mar-10
May-10

Jun-10

Dec-09

Jun-10
Sep-09
Apr-10

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Retailing
Pantaloon Retail 420 Buy 9.9 14.5 19.0 42.6 29.0 22.1 12.7 10.4 8.8 6.8 9.1 10.7
Titan Industries 2,258 Neutral 58.9 76.2 96.0 38.3 29.7 23.5 26.3 19.8 15.8 34.9 34.5 33.5
Sector Aggregate 40.6 29.3 22.8 17.0 13.5 11.2 12.4 14.8 16.5

July 2010 220

 Results Preview
SECTOR: RETAILING

Pantaloon Retail
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 PF IN Buy
REUTERS CODE
S&P CNX: 5,269 PART.BO Previous Recommendation: Buy Rs420
Equity Shares (m) 211.1 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 455/252
06/09A 63,417 1,406 7.4 -6.6 56.8 3.3 6.1 10.1 1.6 15.5
1,6,12 Rel Perf (%) 7/ 12/12
06/10E 77,754 2,033 9.9 33.5 42.6 2.8 6.8 10.6 1.3 12.4
Mcap (Rs b) 88.6
06/11E 96,398 3,058 14.5 46.9 29.0 2.5 9.1 12.1 1.1 10.1
Mcap (USD b) 1.9
06/12E 114,761 4,020 19.0 31.4 22.1 2.3 10.7 13.4 0.9 8.5

„ We expect Pantaloon’s revenue to grow 22% YoY to Rs20.3b, with double digit SSS growth in value and lifestyle
retailing.

„ We expect marginal deterioration in gross margins (faster growth in value retailing) largely offset by operating
leverage due to economies of scale. We expect EBITDA margins to stay flat at 11%.

„ A 10% decline in interest outgo will enable a 45% increase in PAT to Rs529m.

„ We highlight strong revival in demand in the top eight cities and consumer response to new launches in tier-II and tier-
III cities are encouraging.

„ We expect the company to add 0.6msf in 4QFY10, taking the total area under operation to 11.5msf.

„ We expect the company to finalize the group restructuring in the coming quarter, which would pave the way for
Pantaloon to emerge as a pure retail play.

„ The stock trades at 29x FY11E EPS and 22.1x FY12E EPS. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E JUNE FY09 FY10 FY09 FY10E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE

Net Sales 15,112 15,257 16,421 16,627 17,770 19,128 20,576 20,279 63,417 77,754
YoY Change (%) 39.1 24.4 21.2 20.4 17.6 25.4 25.3 22.0 25.6 22.6
Total Exp 13,563 13,684 14,691 14,795 15,869 17,094 18,420 18,040 56,733 69,424
EBITDA 1,549 1,573 1,730 1,832 1,901 2,034 2,156 2,239 6,684 8,331
Growth (%) 62 44 51.6 29.8 22.8 29.3 24.6 22.2 45.1 24.6
Margins (%) 10.2 10.3 10.5 11.0 10.7 10.6 10.5 11.0 10.5 10.7
Depreciation 319 325 369 388 433 452 465 579 1,401 1,928
Interest 684 742 847 910 869 835 859 818 3,182 3,380
Other Income 12 15 16 18 47 20 14 23 61 105
PBT 557 522 530 553 647 768 847 866 2,162 3,128
Tax 196 187 186 188 209 261 288 337 757 1,095
Rate (%) 33.5 35.8 35.0 34.0 32.3 34.0 34.0 38.9 35.0 35.0
Adjusted PAT 362 335 344 365 438 507 559 529 1,406 2,033
YoY Change (%) 21.8 6.0 7.1 12.2 21.2 51.1 62.7 44.9 11.6 44.6
E: MOSL Estimates

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Nikhil Kumar(Nikhil.N@MotilalOswal.com)

July 2010 221

 Results Preview
SECTOR: RETAILING

Titan Industries
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 TTAN IN Neutral
REUTERS CODE
S&P CNX: 5,269 TITN.BO Previous Recommendation: Neutral Rs2,258
Equity Shares (m) 44.4 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 2,325/1,071
03/09A 38,034 2,055 46.3 36.8 48.8 17.1 37.3 38.8 2.5 29.4
1,6,12 Rel Perf (%) -5/ 58/79
03/10A 46,744 2,615 58.9 27.2 38.3 12.6 34.9 39.4 2.0 24.8
Mcap (Rs b) 100.3
03/11E 60,029 3,381 76.2 29.3 29.7 9.7 34.5 41.9 1.6 18.7
Mcap (USD b) 2.2
03/12E 72,368 4,262 96.0 26.1 23.5 7.4 33.5 43.8 1.3 14.9

„ We expect Titan to post sales of Rs12.6b, up 42.5% YoY, led by strong growth in the jewelry segment.

„ We expect the watch division to post 15% sales growth. An improved sales mix is likely to boost margins by 40bp to
14%.

„ The jewelry division is likely to post strong volume growth (~30%) and 280bp margin expansion due to a low base and
strong demand during the Akshaya Tritiya festival. We estimate jewelry EBIT at Rs593m, up 181% YoY (base
adjusted for gain in inventory value due to change in method of inventory valuation).

„ Titan Eye+ continued with its store openings in June. The division launched a promotional campaign offering a 25%
flat discount on exchange of old eyewear for new ones.

„ Titan has aggressive growth plans for the current year. The company plans to add 15 Tanishq stores (no addition in
FY10), and 40 stores each of World of Titan and Titan Eye+ which will boost growth beyond FY11. We estimate PAT
CAGR of 27.7% over FY10-12. We believe Titan is one of the best plays on urban consumption and specialty retail
segment; however valuations at 29.7x FY11E and 23.5x FY12E are expensive. Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Jewelry Volume Gr (%) -15 -7 5 49 30 23 18 15 8 21

Gold Price Chg YoY (%) 20 22 31 14 23 24 14 12 22 18
Net Sales 8,828 11,468 13,336 13,112 12,580 15,482 16,270 15,697 46,744 60,029
YoY Change (%) 8.9 5.4 30.3 48.9 42.5 35.0 22.0 19.7 22.9 28.4
Total Exp 8,336 10,387 12,264 11,943 11,687 14,088 14,952 14,292 42,929 55,019
EBITDA 493 1,081 1,073 1,169 893 1,393 1,318 1,405 3,815 5,010
Margins (%) 5.6 9.4 8.0 8.9 7.1 9.0 8.1 9.0 8.2 8.3
Depreciation 90 89 91 91 96 100 102 104 360 402
Interest 76 50 29 99 65 70 45 52 254 232
Other Income 10 32 30 47 19 22 26 35 119 102
PBT 337 974 983 1,026 751 1,245 1,197 1,284 3,319 4,478
Tax 111 198 199 196 210 286 287 313 704 1,097
Rate (%) 32.9 20.3 20.3 19.2 28.0 23.0 24.0 24.4 21.2 24.5
Adjusted PAT 226 776 784 829 541 959 910 971 2,615 3,381
YoY Change (%) -31.2 -11.0 86.0 88.2 139.1 23.6 16.1 17.1 27.2 29.3
Extraordinary Income 234 0 -29 -317 0 0 0 0 -112 0
Reported PAT 460 776 754 512 541 959 910 971 2,503 3,381
E: MOSL Estimates; Gold Price change (Average quarterly) post 1QFY11 based on current prices

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)/Nikhil Kumar(Nikhil.N@MotilalOswal.com)

July 2010 222

 Results Preview
QUARTER ENDING JUNE 2010

Telecom
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME
Signs of stability: While 1QFY11 has been marked by several structural changes (3G/
Bharti Airtel
BWA auctions, (re)entry of RIL in telecom sector, adverse TRAI recommendations and
Idea Cellular
Bharti's Zain acquisition), the financial performance for the quarter is likely to be
uneventful. After significant tariff cuts in 3QFY10, tariff environment has been relatively
Reliance Communication stable. With most subscriber migrations to lower tariff plans already through in 4QFY10,
RPM pressure has likely abated. Continued momentum on traffic growth and stable
Tulip Telecom RPM should result in a steady performance for most operators.

No significant tariff cuts; traffic growth strong: We expect a blended RPM decline
of 3-4% QoQ v/s an average decline of 7-8% QoQ in the preceding three quarters. We
expect Bharti (ex-African operations) to report revenue growth of 3.3% QoQ driven by
~7% mobile traffic growth. Idea is expected to post 9.5% consolidated QoQ revenue
growth including the full quarter impact of Spice consolidation (~5% QoQ growth ex-
Spice). Stable industry environment should result in flat QoQ revenue for RCom v/s a
17% decline in the quarterly revenue run rate in FY10.

Margin pressure likely to ease: We expect EBITDA margin to remain largely stable
at ~38% for Bharti and ~32% for RCom. Idea's reported EBITDA margin is expected
to decline ~200bp QoQ to 25.5% due to full quarter consolidation of Spice and one-time
write-backs in 4QFY10.

Reported PAT expected to decline YoY, QoQ: We expect reported PAT to decline
on a YoY and QoQ basis. QoQ PAT decline would be largely driven by higher depreciation
and finance costs. We expect YoY PAT decline of 21-24% for Bharti/Idea and ~80% for
RCom. We have modeled a net finance cost of Rs2.9b for RCom (~5% annualized
finance cost) v/s finance income in comparable quarters. YoY comparisons have a high
base as tariff pressure and competitive intensity had spiked after the Tata Docomo
launch in 2QFY10.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Telecom
Bharti Airtel 263 Buy 103,852 4.5 3.3 39,110 -5.8 2.3 19,787 -21.4 -3.7
Idea Cellular 57 Buy 36,665 23.2 9.5 9,331 8.5 1.0 2,243 -24.5 -15.9
Reliance Comm 193 UR 50,899 -17.2 -0.1 16,151 -34.1 0.8 3,206 -81.5 -71.8
Tulip Telecom 853 Buy 5,366 21.1 1.1 1,491 37.3 -3.5 726 -3.2 -8.6
Sector Aggregate 196,781 0.9 3.4 66,083 -12.7 1.6 25,963 -43.8 -26.7
UR = Under Review

Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 223

 Telecom

Bharti consolidates African operations (Zain) from 8 June 2010: Bharti consolidated
its African operations (Zain Africa) from 8 June 2010. We have not incorporated the
impact of the Zain Africa acquisition into Bharti estimates due to limited availability of
historical financials. Including acquisition, Bharti could report revenue of ~Rs116b (up
~15.8% QoQ), EBITDA of ~Rs42.6b (up ~11.4% QoQ), and PAT of ~Rs19.1b (down
~7% QoQ).

Incremental 3G revenue to constitute 3-4% of wireless by FY12: The 3G auction

concluded with a pan-India 3G winning price at Rs167.5b. Contrary to expectations, Bharti
and Vodafone desisted from bidding for all circles, probably due to a significant increase in
aggregate winning price. Bharti and RCom won 3G spectrum in 13/22 circles and Idea
won spectrum in 11 circles. Among listed companies, Idea's 3G footprint would have the
highest revenue coverage (~83%) followed by Bharti (~70%) and RCom (~53%). We
have incorporated the 3G/BWA payments into our estimates and expect the commercial
launch in 4QFY11. We expect incremental 3G revenue to contribute 3-4% of wireless
revenue in FY12.

Infotel (Reliance Industries) surprise winner in BWA spectrum auction: Infotel

emerged a surprise winner in the BWA auction across 22 circles with a winning price of
Rs128.5b. Reliance will invest ~Rs200b to set up a pan-India network with flexible technology
deployment based on 4G technologies (Wi-Max/LTE). The company believes data is the
next big opportunity in India given low (<1%) broadband penetration. We believe Reliance's
strategy will be disruptive and is based on leading a technology leapfrog to 4G.

Tapering subscriber additions likely reflect lower competition/churn recognition

by new entrants: Industry subscriber additions during April-May 2010 averaged 16.5m/
month v/s 19.6m in 4QFY10. Our channel checks indicate that addressing subscriber
churn has gained prominence for operators given low tariff differentiation in the pay-per-
second regime. Higher focus on subscriber quality is likely leading to lower net adds for
the industry on a reported basis but would reflect lower competitive intensity rather than a
slowdown, in our view. While Bharti and RCom have largely maintained their subscriber
addition run rate, BSNL, Tata Tele and Idea have added only 70% of their average additions
during 2HFY10 while Aircel and Vodafone are adding ~90% of second half average
additions. We highlight that new entrant Uninor reported negative subscriber net additions
in May 2010 on churn recognition (only ~50% of the subscribers added are active).

MNP, adverse licensing/2G spectrum policy, higher leverage remain overhangs:

Mobile Number Portability (MNP) implementation has been postponed to October 2010;
likely pressure on post-paid RPM and subscriber retention costs remain an overhang.
Concerns about implementation of adverse TRAI recommendations (for most operators)
will also drag, pending a final policy decision by the government. We believe that TRAI
recommendations are unlikely to be implemented in their current form. Leverage levels
have increased due to 3G/BWA spectrum pay-outs (for all operators) and the Zain acquisition
(for Bharti). We estimate FY11 net debt/EBITDA at 2.5x for Bharti (including Zain), 3.1x
for Idea, and 4.5x for RCom. However net debt/equity will remain reasonable at 1.2x for
Bharti (including Zain), 1x for Idea, and 0.8x for RCom.

July 2010 224

 Telecom

Growth outlook improves; regulatory/competitive environment challenging;

valuations attractive: While strong voice traffic growth, incremental 3G revenue
opportunity and potential stabilization in tariffs will drive sector revenue growth, a potential
increase in competitive intensity and adverse regulatory developments (like adverse TRAI
recommendations) remain key risks. Bharti and Idea are trading at attractive valuations of
~5.5x FY12 EV/EBITDA, RCom trades at ~50% premium led by expectations of corporate
action (tower business value-unlocking; stake sale to strategic/financial investors).

TRAI recommendations on spectrum management, licensing framework

Telecom regulator, TRAI, released its recommendations on spectrum management and
licensing framework. The recommendations propose significant changes including:
(1) One-time pay-out for spectrum allocation beyond 6.2MHz for GSM operators,
(2) Hike in annual spectrum charges (linked to revenue),
(3) Significant pay-outs for spectrum (linked to 3G auction winning price) and return of
spectrum allocated in 800MHz (CDMA) and 900 MHz (GSM) on license renewal,
(4) Phased decline in license fee (charged as a percentage of AGR),
(5) Tightening of roll-out obligations,
(6) Linking of spectrum allocation beyond the start-up spectrum (4.4MHz for GSM
and 6.2MHz for CDMA) to roll-out obligations (v/s subscriber base currently), and
(7) De-linking of future licenses with spectrum.

The recommendations, except the proposed decline in license fee and incentive for rural
coverage, are negative for incumbents. The recommendations are subject to approval by
the department of telecom (DOT).

WIRELESS SUBSCRIBER NET ADDITIONS (M)

20 20
18 19 19
17 17 16
15 15 14 15 15
14 12
12 12
May-09

May-10
Nov-09

Dec-09
Mar-09

Oct-09

Mar-10
Jan-09

Feb-09

Jun-09

Jul-09

Jan-10

Feb-10
Sep-09
Apr-09

Aug-09

Apr-10

MONTHLY SUBSCRIBER ADDITIONS FOR MAJOR OPERATORS (M)

Bharti Idea (incl. Spice) Vodafone RCOM Tata Teleservices

6.0

4.5

3.0

1.5

0.0
May-08
Jan-08

Jun-08

Nov-09
Dec-09
Feb-08
Mar-08

Jul-08

Oct-08
Nov-08
Dec-08

May-09
Jan-09

Jun-09
Feb-09
Mar-09

Jul-09

Oct-09

Jan-10
Feb-10
Mar-10

May-10
Sep-08

Sep-09
Apr-08

Aug-08

Apr-09

Aug-09

Apr-10

Source: Company/MOSL

July 2010 225

 Telecom

RELATIVE PERFORMANCE - 3M (%) AVERAGE MONTHLY SUBSCRIBER ADDITIONS IN APRIL-MAY 2010 V/S 2HFY10 AVERAGE ADDITIONS (%)

Sensex
M OSt Telecom Index 105 102
91 87 85
106
100 70 68 67
94
45
88 35
82
Jun-10
Mar-10

May-10
Apr-10

BSNL (GSM)
RCom

Uninor
S Tel
Idea (incl.
Bharti

Industry
Vodafone

Aircel

Teleservices
Spice)
Essar

Tata
RELATIVE PERFORMANCE - 1YR (%)

MOSt Telecom Index

Sensex
140
QOQ WIRELESS TRAFFIC GROWTH (%)
115
90 19 Bharti Idea RCOM Vodafone-India
18
65
40 15
Jun-09

Jun-10

14
Mar-10
Sep-09

Dec-09

12 13 13
11 11
10 10 10 10 10
10 10 9
8 9
8
7 7 7
6 6 6 5 5
4 3
2
1

1QFY 09 2QFY 09 3QFY 09 4QFY 09 1QFY 10 2QFY 10 3QFY 10 4QFY 10

TREND IN WIRELESS RPM (RS)

Bharti Idea RCOM Vodafone-India

0.70

0.65

0.60

0.55
0.50

0.45

0.40
1QFY 09 2QFY 09 3QFY 09 4QFY 09 1QFY 10 2QFY 10 3QFY 10 4QFY 10

Source: Company/MOSL

NET DEBT/EBITDA (FY11) NET DEBT/EQUITY (FY11)

4.5 1.2
1.0
3.1
0.8
2.5

RCom Idea Bharti (incl Zain) Bharti (incl Zain) Idea RCom

Source: Company/MOSL

July 2010 226

 Telecom

1QFY11: Summary expectations

WIRELESS KPIS

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11E YOY (%) QOQ (%)

EOP Wireless Subs (m)

Bharti 69 77 86 94 102 111 119 128 137 33 7.1
Idea* 27 30 34 39 43 47 52 64 68 60 6.9
RCOM 51 56 61 73 80 86 94 102 111 39 7.9
Avg. Wireless Subs (m)
Bharti 66 73 82 90 98 106 115 123 132 35 7.2
Idea* 26 29 32 37 41 45 50 58 66 62 13.7
RCOM 48 53 59 67 76 83 90 98 106 40 8.5
ARPU (Rs/Month)
Bharti 350 331 324 305 278 252 230 220 213 -23 -3.0
Idea* 278 261 266 254 232 209 200 185 179 -23 -3.4
RCOM 282 271 251 224 210 161 149 139 131 -38 -5.9
MOU Per Sub.
Bharti 534 526 505 485 478 450 446 468 468 -2 0.0
Idea* 431 421 416 402 399 375 389 398 396 -1 -0.4
RCOM 424 423 410 372 365 340 330 318 308 -15 -3.0
Revenue Per Minute (Rs)
Bharti 0.66 0.63 0.64 0.63 0.58 0.56 0.52 0.47 0.46 -22 -3.0
Idea* 0.65 0.62 0.64 0.63 0.58 0.56 0.51 0.46 0.45 -22 -3.0
RCOM 0.67 0.64 0.61 0.60 0.58 0.47 0.45 0.44 0.42 -26 -3.6
Wireless Traffic (B Min)
Bharti 105 116 124 131 141 144 153 173 185 32 7.2
Idea* 33 36 40 44 49 50 58 68 79 61 15.0
RCOM 61 68 72 75 83 85 89 94 99 18 5.4
* Idea 4QFY10 numbers include one month consolidation with Spice; full merger for 1QFY11

QUARTERLY FINANCIALS (CONSOLIDATED)

1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11E YOY (%) QOQ (%)

Revenue (Rs b)
Bharti 84.8 90.2 96.3 98.2 99.4 98.5 97.7 100.6 103.9 4 3.3
Idea* 21.8 23.0 27.3 29.4 29.8 29.7 31.5 33.5 36.7 23 9.5
RCOM 53.2 56.4 58.5 61.2 61.5 57.0 53.1 50.9 50.9 -17 -0.1
EBITDA (Rs b)
Bharti 35.2 37.0 39.5 40.0 41.5 41.4 39.1 38.2 39.1 -6 2.3
Idea* 7.2 6.0 6.9 8.1 8.6 8.1 8.1 9.2 9.3 9 1.0
RCOM 22.5 23.0 23.5 23.8 24.5 20.2 18.1 16.0 16.2 -34 0.8
EBITDA Margin (%)
Bharti 41.5 41.0 41.0 40.7 41.8 42.1 40.0 38.0 37.7 -410bp -35bp
Idea* 32.9 26.2 25.5 27.6 28.9 27.2 25.8 27.6 25.5 -344bp -214bp
RCOM 42.3 40.8 40.2 38.9 39.9 35.4 34.1 31.5 31.7 -818bp 28bp
PAT (Rs b)
Bharti 20.3 20.5 21.6 22.4 25.2 23.2 22.1 20.6 19.8 -21 -3.7
Idea* 2.6 1.4 2.2 2.7 3.0 2.2 1.7 2.7 2.2 -24 -15.9
RCOM 16.4 16.8 14.8 13.6 17.3 8.2 11.9 11.4 3.2 -81 -71.8
* Idea 4QFY10 numbers include one month consolidation with Spice; full merger for 1QFY11 Source: Company/MOSL

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Telecommunication
Bharti Airtel 263 Buy 24.0 21.0 22.8 11.0 12.5 11.5 6.1 6.6 5.3 24.1 17.0 16.2
Idea Cellular 57 Buy 3.1 1.7 2.3 18.4 32.6 24.3 7.0 7.9 5.7 7.6 4.9 6.2
Reliance Comm 193 UR 23.7 6.2 7.7 8.1 30.9 25.2 7.5 10.3 8.4 12.6 3.2 3.8
Tulip Telecom 853 Buy 84.8 107.6 145.8 10.1 7.9 5.9 6.3 4.8 2.8 34.6 32.6 32.6
Sector Aggregate 10.6 15.8 14.0 6.7 7.6 6.1 16.5 10.2 10.5
UR = Under Review

July 2010 227

 Results Preview
SECTOR: TELECOM

Bharti Airtel
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BHARTI IN
Buy
REUTERS CODE
S&P CNX: 5,269 BRTI.BO Previous Recommendation: Buy Rs263
Equity Shares (m) 3,793.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 467/230
3/09A 369,615 84,699 22.3 26.4 11.8 3.2 31.4 23.8 2.9 7.0
1,6,12 Rel Perf (%) -10/ -19/-57
3/10A 396,150 91,026 24.0 7.4 11.0 2.3 24.1 18.5 2.5 6.1
Mcap (Rs b) 997.6
3/11E 436,624 79,788 21.0 -12.3 12.5 2.0 17.0 14.5 2.5 6.6
Mcap (USD b) 21.5
3/12E 500,239 86,532 22.8 8.5 11.5 1.7 16.2 14.5 2.0 5.3

„ We expect revenue to increase 4.5% YoY and 3.3% QoQ to Rs103.8b excluding the Zain acquisition.

„ EBITDA margin is expected to decline ~30bp QoQ to 37.7%.

„ Mobility revenues are expected to increase 4% YoY and QoQ driven by ~7% traffic growth, partially offset by ~3%
RPM decline. We expect mobile ARPU to decline 23% YoY and 3% QoQ to Rs213. EBITDA margin for the mobile
business is expected at 29%, and flat sequentially.

„ Net profit is expected to decline ~21% YoY and 3.7% QoQ to Rs19.8b. We have not factored in forex losses from
the rupee's depreciation. Bharti had reported a forex gain of Rs1.57b in 4QFY10 due to the rupee's appreciation.

„ Bharti trades at an EV/EBITDA of 6.6x FY11E and 5.3x FY12E (ex-Zain). Maintain Buy.

QUARTERLY PERFORMANCE - (EX-ZAIN, CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Gross Revenue 99,416 98,455 97,722 100,557 103,852 107,013 110,394 115,365 396,150 436,624
YoY Growth (%) 17.2 9.1 1.4 2.4 4.5 8.7 13.0 14.7 7.2 10.2
QoQ Growth (%) 1.2 -1.0 -0.7 2.9 3.3 3.0 3.2 4.5
Total Operating Expenses 57,898 57,039 58,610 62,336 64,743 66,546 68,718 70,515 235,881 270,521
EBITDA 41,518 41,416 39,112 38,222 39,110 40,467 41,676 44,850 160,268 166,103
YoY Growth (%) 17.9 12.0 -0.9 -4.5 -5.8 -2.3 6.6 17.3 5.7 3.6
QoQ Growth (%) 3.8 -0.2 -5.6 -2.3 2.3 3.5 3.0 7.6
Margin (%) 41.8 42.1 40.0 38.0 37.7 37.8 37.8 38.9 40.5 38.0
Net Finance Costs -2,605 428 -1,769 -1,837 -1,479 -437 -1,098 985 -5,783 -2,029
Non-Operating Income 295 396 239 456 410 419 427 436 1,386 1,692
Depreciation & Amortization 14,330 14,796 15,403 15,928 16,775 17,481 16,814 19,425 60,457 70,496
Profit before Tax 30,088 26,589 25,717 24,587 24,224 23,842 26,386 24,875 106,978 99,326
Income Tax Expense / (Income) 4,442 2,873 3,192 3,452 3,876 3,815 4,222 3,980 13,958 15,892
Profit/(Loss) to Min. Shareholders 479 506 426 583 561 552 611 576 1,994 2,302
Reported Net Profit / (Loss) 25,167 23,210 22,099 20,552 19,787 19,475 21,553 20,319 91,026 81,132
YoY Growth (%) 24.3 13.4 2.3 -8.2 -21.4 -16.1 -2.5 -1.1 7.5 -10.9
QoQ Growth (%) 12.4 -7.8 -4.8 -7.0 -3.7 -1.6 10.7 -5.7
Mobile ARPU (Rs/month) 278 252 230 220 213 205 203 203 244 209
QoQ Growth (%) -8.9 -9.4 -8.7 -4.3 -3.0 -4.0 -1.1 0.0
Mobile MOU/sub/month 478 450 446 468 468 459 472 477 460 472
QoQ Growth (%) -1.4 -5.9 -0.9 4.9 0.0 -2.0 3.0 1.0
E: MOSL Estimates; Financials as per US GAAP

Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 228

 Results Preview
SECTOR: TELECOM

Idea Cellular
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 IDEA IN
Buy
REUTERS CODE
S&P CNX: 5,269 IDEA.BO Previous Recommendation: Buy Rs57
Equity Shares (m) 3,299.8 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 85/47
3/09A 101,485 9,008 3.0 -23.7 18.7 1.2 10.4 7.4 2.1 7.5
1,6,12 Rel Perf (%) 0/ -4/-52
3/10A 124,476 9,540 3.1 2.0 18.4 1.5 7.6 5.5 1.9 7.0
Mcap (Rs b) 186.6
3/11E 153,889 5,728 1.7 -43.6 32.6 1.6 4.9 4.5 2.0 7.9
Mcap (USD b) 4.0
3/12E 175,831 7,676 2.3 34.0 24.3 1.5 6.2 5.7 1.6 5.7

„ Idea is expected to post 9.5% consolidated QoQ revenue growth including the full quarter impact of Spice consolidation
(~5% QoQ growth ex-Spice). We expect Idea to post mobile traffic growth of ~15% and RPM decline of ~3%.

„ ARPU is expected to decline by 3.4% QoQ, impacted by the RPM decline.

„ Idea's reported EBITDA margin is expected to decline ~200bp QoQ to 25.5% due to full quarter consolidation of
Spice and one-time write-backs in 4QFY10. We expect margins in established circles of 31%. EBITDA loss in new
circles is estimated to decline from ~Rs1.4b in 4QFY10 to ~Rs1.25b in 1QFY11.

„ Net profit is expected to decline ~25% YoY and ~16% QoQ to Rs2.2b.

„ Idea trades at an EV/EBITDA of 7.9x FY11E and 5.7x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Gross Revenue 29,759 29,739 31,501 33,477 36,665 37,521 39,043 40,659 124,476 153,889
YoY Growth (%) 36.6 29.1 15.3 14.0 23.2 26.2 23.9 21.5 22.7 23.6
QoQ Growth (%) 1.4 -0.1 5.9 6.3 9.5 2.3 4.1 4.1
EBITDA 8,599 8,095 8,141 9,235 9,331 9,213 10,075 10,604 34,070 39,223
YoY Growth (%) 19.4 33.4 16.7 13.9 8.5 13.8 23.8 14.8 20.2 15.1
QoQ Growth (%) 6.1 -5.9 0.6 13.4 1.0 -1.3 9.4 5.2
Margin (%) 28.9 27.2 25.8 27.6 25.5 24.6 25.8 26.1 27.4 25.5
Net Finance Costs 869 740 938 621 872 1,538 1,574 2,990 3,168 6,974
Depreciation & Amortization 4,555 4,796 5,130 5,667 6,021 6,185 6,486 7,332 20,148 26,023
Profit before Tax 3,175 2,559 2,073 2,947 2,438 1,491 2,015 282 10,754 6,226
Income Tax Expense / (Income) 204 357 372 281 195 119 161 23 1,214 498
Net Profit / (Loss) 2,971 2,202 1,701 2,666 2,243 1,372 1,854 259 9,540 5,728
YoY Growth (%) 12.9 52.8 -22.5 -2.8 -24.5 -37.7 9.0 -90.3 5.9 -40.0
QoQ Growth (%) 8.3 -25.9 -22.8 56.7 -15.9 -38.9 35.2 -86.0
Margin (%) 10.0 7.4 5.4 8.0 6.1 3.7 4.7 0.6 7.7 3.7
Mobile ARPU (Rs/month) 232 209 200 185 179 171 167 164 207 169
QoQ Growth (%) -8.7 -9.9 -4.3 -7.5 -3.4 -4.2 -2.3 -2.3
Mobile MOU/sub/month 399 375 389 398 396 388 398 401 383 391
QoQ Growth (%) -0.7 -6.0 3.7 2.3 -0.4 -2.2 2.7 0.7
E: MOSL Estimates

Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 229

 Results Preview
SECTOR: TELECOM

Reliance Communication
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 RCOM IN
Under Review
REUTERS CODE
S&P CNX: 5,269 RLCM.BO Previous Recommendation: Buy Rs193
Equity Shares (m) 2,063.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 320/132
3/09A 229,410 61,552 29.8 11.7 6.5 1.0 18.7 8.9 2.7 6.7
1,6,12 Rel Perf (%) 29/ 9/-58
3/10A 222,457 48,812 23.7 -20.7 8.1 1.0 12.6 5.8 2.7 7.5
Mcap (Rs b) 397.1
3/11E 211,587 12,842 6.2 -73.7 30.9 1.0 3.2 3.0 3.3 10.3
Mcap (USD b) 8.6 3/12E 239,785 15,788 7.7 22.9 25.2 0.9 3.8 3.4 2.8 8.4

„ We expect revenue to decline 17% YoY but stay sequentially flat at Rs50.9b.

„ We expect wireless ARPU to decline by ~6% QoQ to Rs131. We expect RPM to decline by ~4% QoQ to Rs0.42
and MOU to decline by 3% QoQ to 308.

„ EBITDA margin is expected to stay sequentially stable at 31.7%.

„ Pre-minority interest net profit is expected to decline by 82% YoY and 72% QoQ, led mainly by assumption of no
treasury gains.

„ RCom trades at an EV/EBITDA of 10.3x FY11E and 8.4x FY12E. Under review.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Gross Revenue 61,452 57,026 53,052 50,928 50,899 52,363 53,606 54,720 222,457 211,587
YoY Growth (%) 15.5 1.0 -9.3 -16.8 -17.2 -8.2 1.0 7.4 -3.0 -4.9
QoQ Growth (%) 0.4 -7.2 -7.0 -4.0 -0.1 2.9 2.4 2.1
EBITDA 24,525 20,199 18,126 16,020 16,151 16,828 17,249 17,597 78,869 67,825
YoY Growth (%) 9.0 -12.2 -22.9 -32.8 -34.1 -16.7 -4.8 9.8 -15.1 -14.0
QoQ Growth (%) 2.9 -17.6 -10.3 -11.6 0.8 4.2 2.5 2.0
Margin (%) 39.9 35.4 34.2 31.5 31.7 32.1 32.2 32.2 35.5 32.1
Net Finance Costs -6,205 6,551 -4,075 -8,134 2,947 3,535 3,588 3,632 -11,863 13,702
Depreciation & Amortization 11,144 7,144 8,331 10,847 9,476 9,646 9,910 10,159 37,466 39,190
Profit before Tax 19,586 6,504 13,870 13,307 3,728 3,647 3,751 3,806 53,266 14,932
Income Tax Expense / (Income) 2,267 -1,739 2,003 1,923 522 511 525 533 4,454 2,091
Adjusted Net Profit / (Loss) 17,319 8,243 11,867 11,384 3,206 3,136 3,226 3,273 48,812 12,842
YoY Growth (%) 5.6 -50.8 -19.8 -16.3 -81.5 -62.0 -72.8 -71.2 -20.7 -73.7
QoQ Growth (%) 27.4 -52.4 44.0 -4.1 -71.8 -2.2 2.9 1.5
Extraordinary Exp/Minority Interest 953 840 790 -811 300 310 329 348 1,772 1,286
Reported Net Profit / (Loss) 16,366 7,403 11,077 12,195 2,906 2,827 2,898 2,925 47,040 11,556
Wireless ARPU (Rs/month) 210 161 149 139 131 126 121 116 161 124
QoQ Growth (%) -6.3 -23.3 -7.5 -6.7 -5.9 -4.0 -4.0 -4.0
Wireless MOU/sub/month 365 340 330 318 308 302 302 296 334 305
QoQ Growth (%) -1.9 -6.8 -2.9 -3.6 -3.0 -2.0 0.0 -2.0
E: MOSL Estimates

Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 230

 Results Preview
SECTOR: TELECOM

Tulip Telecom
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 TTSL IN
Buy
REUTERS CODE
S&P CNX: 5,269 TULP.BO Previous Recommendation: Buy Rs853
Equity Shares (m) 29.0 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,250/716
3/09A 16,144 2,505 73.7 35.3 11.6 4.3 44.5 17.8 2.0 9.7
1,6,12 Rel Perf (%) -3/ -14/-6
3/10A 19,664 2,755 84.8 15.0 10.1 3.0 34.6 16.4 1.7 6.3
Mcap (Rs b) 24.8
3/11E 24,246 3,495 107.6 26.9 7.9 2.2 32.6 18.4 1.4 4.8
Mcap (USD b) 0.5 3/12E 30,138 4,738 145.8 35.6 5.9 1.7 32.6 21.5 0.8 2.8

„ We expect consolidated revenue to grow 21.1% YoY and 1.1% QoQ to Rs5.37b. The first quarter is a seasonally
weak quarter for Tulip due to a change in contracted rates and lower momentum in connect additions.

„ We expect EBITDA margin to decline ~130bp QoQ to 27.8%. EBITDA is expected to grow 37.3% YoY but decline
3.5% QoQ to Rs1.49b.

„ Reported PAT is expected to decline 3.2% YoY and 8.6% QoQ to Rs726m.

„ Tulip trades at an EV/EBITDA of 4.8x FY11E and 2.8x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Gross Revenue 4,429 4,910 5,009 5,307 5,366 5,867 6,268 6,746 19,664 24,246
YoY Growth (%) 33.2 27.7 15.0 15.0 21.1 19.5 25.1 27.1 21.8 23.3
QoQ Growth (%) -4.0 10.9 2.0 5.9 1.1 9.4 6.8 7.6
Total Operating Expenses 3,343 3,642 3,659 3,762 3,875 4,208 4,462 4,797 14,409 17,342
EBITDA 1,086 1,268 1,350 1,545 1,491 1,659 1,806 1,948 5,255 6,905
YoY Growth (%) 66.0 56.5 48.0 56.0 37.3 30.8 33.8 26.1 56.1 31.4
QoQ Growth (%) 9.6 16.8 6.5 14.4 -3.5 11.3 8.8 7.9
Margin (%) 24.5 25.8 27.0 29.1 27.8 28.3 28.8 28.9 26.7 28.5
Net Finance Costs 158 187 186 185 198 200 201 202 716 801
Non-Operating Income 271 37 104 57 36 39 42 45 468 161
Depreciation & Amortization 353 436 409 155 360 387 415 443 1,353 1,605
Profit before Tax 846 682 858 1,262 968 1,111 1,232 1,348 3,654 4,660
Income Tax Expense / (Income) 96 164 172 467 242 278 308 337 899 1,165
Reported Net Profit / (Loss) 750 518 686 795 726 834 924 1,011 2,755 3,495
YoY Growth (%) 63.2 3.2 41.0 -24.8 -3.2 61.1 34.6 27.2 10.0 26.9
QoQ Growth (%) -29.0 -31.0 32.6 15.9 -8.6 14.8 10.8 9.5
Margin (%) 16.9 10.5 13.7 15.0 13.5 14.2 14.7 15.0 14.0 14.4
E: MOSL Estimates

Shobhit Khare (Shobhit.Khare@MotilalOswal.com)

July 2010 231

 Results Preview
QUARTER ENDING JUNE 2010

Textiles
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME Record margins for upstream companies

Alok Industries
In 1QFY11, the profitability of cotton spinners will continue to stay at record highs. This
is largely due to an advantageous raw material scenario. As a result, even though domestic
Arvind Mills
cotton prices have increased ~30% across varieties, yarn prices have increased more
sharply across various categories, thereby improving spreads for most cotton yarn
Bombay Rayon
spinners.
Raymond
Margins for fabric players under stress
Vardhman Textiles Downstream players such as fabric makers, unable to pass on the sharp increase in yarn
prices entirely, have been facing pressure on their margins. Typically it takes about six
months’ time for fabric makers to pass on the price increases to end users entirely and it
takes another three to four months for garment makers to pass on the raw material price
increases.

Indian exporters favorably placed

Recent events in China, with regard to labor cost inflation and the appreciation of the
yuan are a key positive for Indian exporters. Chinese dominance of the global textile
industry is declining. We believe Indian exporters are well placed to benefit going forward.

EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Textiles
Alok Ind 20 Neutral 12,617 60.5 -14.2 3,496 62.6 -18.3 487 52.3 -48.9
Arvind Mills 33 Neutral 6,189 -8.6 7.5 720 -18.1 8.5 64 -24.8 -58.1
Bombay Rayon 253 Buy 5,120 52.2 8.0 1,280 60.8 11.8 564 51.3 12.0
Raymond 217 Buy 3,366 43.4 0.0 441 LP -1.4 70 LP 96.7
Vardhman Textiles 271 Buy 8,091 30.5 7.0 1,751 59.8 3.6 619 115.6 53.6
Sector Aggregate 35,382 33.3 -2.1 7,688 58.3 -6.5 1,805 125.8 -11.9

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 232

 Textiles

Record spreads for spinners

In 1QFY11, the profitability of cotton spinners will continue to stay at record highs. This is
largely due to an advantageous raw material scenario. As a result, even though domestic
cotton prices have increased ~30% across varieties, yarn prices have increased more
sharply across various categories, thereby improving spreads for most cotton yarn spinners.

FY09 was one of the worst years for the Indian textile industry. It was impacted by
negative factors such as: (1) an appreciating rupee, (2) demand slowdown in the export
market, (3) inventory de-stocking by domestic retailers, and (4) higher depreciation and
interest costs. Most of the factors were reversed in FY10. We expect the fortunes of the
textile industry to improve in FY11.

While the overall textile industry has been in a recovery phase, the cotton spinning industry
is posting record profits. This is largely due to an advantageous raw material scenario –
while the global cotton crop has been poor, there has been a bumper domestic cotton
harvest. As a result, even though domestic cotton prices have increased ~30% across
varieties, yarn prices have increased more sharply across various categories, thereby
improving spreads for most cotton yarn spinners.

The profitability of select cotton spinners that have been carrying a low cotton inventory
improved even more sharply. We believe VTL, the largest domestic cotton spinning company,
is the best proxy to play this trend.

INDIAN COTTON YARN MARGINS HIGHEST

2.0

1.6

1.2

0.8

0.4
Jul-10

Mar-10

Mar-10

Mar-10
Nov-10

Jan-10

May-10

Jul-10

Nov-10

Jan-10

May-10

Jul-10

Nov-10

Jan-10

May-10
Sep-10

Sep-10

Sep-10

Source: Industry/MOSL

July 2010 233

 Textiles

India’s competitive advantage in the yarn segment is likely to sustain in the

medium term

COTTON DEMAND/SUPPLY OUTLOOK

2009-10 2010-11 % CHG.

Producers
China 6,850 7,100 3.6
India 5,100 5,375 5.4
United States 2,654 3,656 37.8
Pakistan 2,032 2,120 4.3
Brazil 1,250 1,450 16.0
Uzbekistan 850 1,000 17.6
African Franc Zone 479 590 23.2
Turkey 380 475 25.0
Australia 363 511 40.8
Others 2,080 2,319 11.5
World Production 22,038 24,596 11.6
Consumers
China 9,650 9,988 3.5
Indian subcontinent 7,541 7,832 3.9
Turkey 1,200 1,200 0.0
Brazil 960 985 2.6
United States 740 718 -3.0
Others 4,114 4,231 2.8
World Consumption 24,205 24,954 3.1
Net Change in Stock -2,167 -358 83.5
Source: Cotton Outlook

COTTON PRICES CONTINUE TO BE HIGH

100

85

70

55

40
Jun-08

Oct-08

Dec-08

Feb-09

Jun-09

Oct-09

Dec-09

Feb-10

Jun-10
Apr-08

Aug-08

Apr-09

Aug-09

Apr-10

Source: Cotton Outlook

Fabric players’ margins under stress

Downstream players such as fabric makers, unable to pass on the sharp increase in yarn
prices entirely, have been facing pressure on their margins. Typically it takes about six
months’ time for fabric makers to pass on the price increases to end users entirely and it
takes another three to four months for garment makers to pass on the raw material price
increases.

July 2010 234

 Textiles

Indian exporters favorably placed

Recent events in China, with regard to labor cost inflation and the appreciation of the yuan
are key positives for Indian exporters. Chinese dominance of the global textile industry is
declining. We believe Indian exporters are well placed to benefit from this in future.
„ Recent studies on the Chinese textile industry indicate that China’s comparative
advantage in the textile industry is declining.
„ China’s share of the global market jumped from 38.8% in 2001 to 47.1% in 2005 but
did not increase since then.
„ This is because China’s share of textile and clothing markets other than the US and
the EU declined from 71.3% in 2006 to 66.8% in 2008.
„ Threats of renewed sanctions on Chinese textile exports to the US have resurfaced
after an introduction of statistical monitoring of Chinese shipments through the
“appropriations bill”, passed by the US Congress. While imposing textile quotas is now
against WTO rules, the agreement on China’s accession to the WTO includes a “product
specific safeguard”, which allows taking sanctions on imports from China until 11
December 2013. The related US legislation is known as “section 421”.
„ Any shift of the global textile trade away from China is likely to benefit its key
competitors such as India, Bangladesh and Sri Lanka.

CHINA'S MARKET SHARE OF GLOBAL TEXTILE & APPAREL MARKET (%)

YEAR WORLD US + EU OTHERS

1999 36.3 18.1 67.0

2000 38.6 19.2 68.9
2001 38.8 19.5 69.4
2002 39.7 21.2 70.0
2003 40.9 23.1 70.7
2004 42.4 25.3 70.4
2005 47.1 32.3 70.9
2006 48.2 34.1 71.3
2007 49.5 37.1 69.7
2008 47.4 39.5 66.8
Source: Company/MOSL

CHINA'S TEXTILE AND APPAREL GROWTH RATE TO THE US (%)

50 Grow th Rate Grow th Rate

40 35 35 47
27
30
32
20 15 15
12 17
19 20
10 15 4 15 3
9 10
0 2
4 2 0
-10
-15
-20
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Company/MOSL

July 2010 235

 Textiles

RELATIVE PERFORMANCE - 3M (%) Valuation and view

Sensex ? Key Indian textile companies have over FY06-09 undertaken capacity expansion plans,
M OSt Textiles Index
106 which allowed them to achieve critical scale.
101 ? FY09 was one of the worst years for the Indian textile industry, which was affected
96 by negative factors such as (1) an appreciating rupee, (2) demand slowdown in the
91
export market and inventory de-stocking by domestic retailers, (3) higher depreciation
86
and interest costs due to the commencement of new capacities along with initial start-
Jun-10
Mar-10

May-10
Apr-10

up costs.
? Most of these capacities are slated to reach full utilization from FY11.
RELATIVE PERFORMANCE - 1YR (%) ? Emerging trends of consolidation are good for the industry
M OSt Textiles Index ? Key textile companies are now in a sweet spot, as they do not have major capital
Sensex
175 expenditure plans in the near term and are likely to enjoy significant free cash flows
145 over the next few years.
115
? Our top pick in the sector is VTL.
85
55
Jun-09

Jun-10
Mar-10
Sep-09

Dec-09

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Textiles
Alok Ind 20 Neutral 3.4 3.9 6.7 5.8 5.1 3.0 6.8 5.6 5.0 9.8 9.2 14.1
Arvind Mills 33 Neutral 2.4 3.0 4.0 13.8 11.1 8.4 6.1 4.9 4.3 2.7 3.3 4.2
Bombay Rayon 253 Buy 14.4 26.4 39.7 17.5 9.6 6.4 14.6 8.2 5.8 10.5 14.5 18.2
Raymond 217 Buy 1.3 5.6 15.7 163.5 38.9 13.8 26.0 8.6 6.3 -2.0 1.3 3.7
Vardhman Textiles 271 Buy 42.5 40.4 45.9 6.4 6.7 5.9 5.1 4.6 3.8 14.8 12.5 12.6
Sector Aggregate 11.1 8.6 5.7 7.9 6.0 5.0 7.7 8.7 11.9

July 2010 236

 Results Preview
SECTOR: TEXTILES

Alok Industries
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ALOK IN
Neutral
REUTERS CODE
S&P CNX: 5,269 ALOK.BO Previous Recommendation: Neutral Rs20
Equity Shares (m) 705.8 YEAR NET SALES PAT EPS* EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 28/16
3/09A 29,664 1,879 2.7 -25.4 7.5 0.2 10.3 6.0 2.3 8.9
1,6,12 Rel Perf (%) 2/ -11/-31
3/10A 43,147 2,425 3.4 29.0 5.9 0.6 9.8 8.2 2.0 6.8
Mcap (Rs b) 14.0
3/11E 54,149 2,764 3.9 14.0 5.1 0.5 9.2 9.0 1.5 5.6
Mcap (USD b) 0.3
3/12E 62,813 4,738 6.7 71.4 3.0 0.4 14.1 10.3 1.4 5.0
*Fully Diluted EPS

„ We expect 1QFY11 revenue to grow 60.5% YoY to Rs12.6b helped by higher capacities across all textile segments.
EBITDA margins are likely to expand to 27.7% from 27.3% in 1QFY10.

„ High yarn prices are likely to negatively impact its fabric business.

„ The management has drawn up restructuring plans, which include creating dedicated verticals for the textile and
retail businesses. The management has been working on early monetization of its real estate portfolio, which could be
a key positive for the stock.

„ The company has ambitious expansion plans for its domestic retail business, which entail introducing international
brands in India and opening 500 H&A retail outlets over three years. After restructuring we expect Alok to emerge
as a large retail play.

„ The stock trades at 5.1x FY11E EPS of Rs3.9 and 3x FY12E EPS of Rs6.7. Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 7,863 9,748 10,825 14,711 12,617 13,267 14,079 14,187 43,147 54,149
Change (%) 44.7 39.6 32.6 61.9 60.5 36.1 30.1 -3.6 45.5 25.5
Total Expenditure 5,713 6,840 7,596 10,430 9,120 9,671 10,260 10,260 30,579 39,312
EBITDA 2,150 2,908 3,228 4,281 3,496 3,596 3,818 3,926.6 12,568 14,837
Change (%) 61.3 69.3 50.6 78.0 62.6 23.7 18 -8.3 65.4 18.0
As % of Sales 27.3 29.8 29.8 29.1 27.7 27.1 27.1 27.7 29.1 27.4
Depreciation 784 846 904 1,028 1,039 1,105 1,127 1,149 3,562 4,421
Interest 886 1,222 1,455 1,816 1,667 1,622 1,590 1,482 5,379 6,362
Other Income 3 10 16 17 16 17 18 21 45 71
PBT 483 851 885 1,454 806 886 1,118 1,316 3,673 4,126
Tax 164 280 304 501 320 272 354 415 1,248 1,361
Effective Tax Rate (%) 33.1 33.2 34.3 34.4 33.1 33.2 31.7 31.6 34.0 33.0
Repoted PAT 319 571 581 953 486 614 764 900 2,425 2,764
Change (%) 6.9 35.5 22.8 33.9 52.5 7.5 31.6 -5.6 29.0 14.0
Adj. PAT 320 570 581 953 487 613 764 900 2,425 2,764
Change (%) 7.3 25.9 16.6 36.0 52.3 7.6 31.6 -5.6 23.6 14.0
E: MOSL Estimates

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 237

 Results Preview
SECTOR: TEXTILES

Arvind Mills
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 ARVND IN
Neutral
REUTERS CODE
S&P CNX: 5,269 ARMI.BO Previous Recommendation: Neutral Rs33
Equity Shares (m) 218.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 44/21
3/09A 27,211 -994 -4.5 -463.2 -7.3 0.4 -5.0 4.7 0.9 8.8
1,6,12 Rel Perf (%) 0/ -16/3
3/10A 32,795 531 2.4 -153.4 13.6 0.4 2.7 6.8 0.8 6.0
Mcap (Rs b) 7.3
3/11E 34,107 658 3.0 23.9 11.0 0.4 3.3 7.9 0.7 4.8
Mcap (USD b) 0.2
3/12E 38,200 872 4.0 32.6 8.3 0.3 4.2 8.3 0.5 4.2

„ We expect Arvind Mills 1QFY11 revenue to decline 8.6% YoY to Rs6.2b.

„ EBITDA margins are likely to decline by 136bp YoY to 11.6%, due to 35-40% increase in cotton yarn prices.

„ We expect the company to report net profit of Rs64m in 1QFY11 against Rs86m in 1QFY10.

„ In 1QFY11 Arvind started to move forward on monetization of its surplus land in Ahmedabad, where it has about
~800 acres of surplus land.

„ Arvind has restructuring plans, which could include relocating part of its commodity grade denim capacity to other
countries and sharpening focus on branded apparel and garment manufacturing.

„ The stock trades at 11x FY11E book value. Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 6,768 5,977 5,439 5,757 6,189 6,584 6,847 6,716 23,942 26,336
Change (%) 24.1 2.9 -9.3 -1.9 -8.6 10.1 25.9 16.6 3.2 10.0
Total Expenditure 5,888 5,162 4,881 5,094 5,469 5,790 5,974 5,745 21,024 22,978
EBITDA 880 816 559 663 720 794 873 971 2,917 3,358
Change (%) 60.2 75.5 -31.6 17.8 -18.1 -2.7 56.2 46.4 13.6 15.1
As % of Sales 13.0 13.6 10.3 11.5 11.6 12.1 12.8 14.5 12.2 12.8
Depreciation 326 283 292 272 303 329 335 322 1,172 1,289
Interest 473 463 381 267 401 437 464 519 1,584 1,821
Other Income 5 82 237 28 66 75 79 79 352 299
Non Recurring Expense 0 0 0 1
PBT 86 152 123 154 82 103 153 209 514 749
Tax 0 0 0 0 18 22 23 26 0 90
Effective Tax Rate (%) 0.0 0.0 0.0 0.0 21.8 21.9 15.3 12.5 0.0 12.0
Reported PAT 86 152 123 154 64 80 129 183 514 659
Change (%) 107.5 826.8 -136.9 -175.3 -94.6 -6.5 -14.8 49.5 -207.4 28.1
Adj. PAT 86 152 123 154 64 80 129 183 514 658
Change (%) 3,328.0 310.8 -139.8 -202.8 -24.8 -47.3 5.7 19.0 -188.0 27.9
E: MOSL Estimates, Restated Quarterly Numbers

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 238

 Results Preview
SECTOR: TEXTILES

Bombay Rayon
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BRFL IN
Buy
REUTERS CODE
S&P CNX: 5,269 BRFL.BO Previous Recommendation: Buy Rs253
Equity Shares (m) 111.9 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 261/140
03/09A 15,145 1,367 19.8 3.8 0.0 0.0 15.2 11.5 0.0 0.0
1,6,12 Rel Perf (%) 23/ 35/13
03/10E 18,015 1,616 14.4 -27.0 17.5 1.5 10.5 7.8 2.7 13.2
Mcap (Rs b) 28.3
03/11E 27,413 3,064 26.4 82.7 9.6 1.3 14.5 11.6 1.8 7.2
Mcap (USD b) 0.6
03/12E 37,665 4,606 39.7 50.3 6.4 1.1 18.2 15.7 1.3 5.1
Consolidated

„ Expect steady QoQ growth in F11; YoY growth to be robust due to base effect: FY11 revenue and profit
numbers for Bombay Rayon should reflect ramp-up of its mega capacity expansion at Maharashtra, both for garments
(30m per annum or 0.1m per day) and fabric (~180m meters per annum). Thus, we expect steady QoQ growth
through FY11. YoY growth will be robust as the Maharashtra expansion was commissioned in a phased manner
beginning 2HFY10. For 1QFY10, we estimate revenue of Rs5.1b, up 52% YoY, and PAT of Rs564m, up 51% YoY.

„ Further expansion of weaving and fabric processing capacity: Bombay Rayon is adding additional weaving
capacity of ~55m meters at Islampur (380 looms for Rs4b), and additional 35m meters of fabric processing capacity
at Tarapur. Both projects are expected to be commissioned in 3QFY11. As Bombay Rayon's garment capacity is
perennially booked, the higher fabric capacity will reduce dependence on external fabric, both grey and yarn-dyed.

„ FY10-12E EPS CAGR of 66%; attractive valuation; maintain Buy: We expect FY10-12E EPS CAGR of 66%
on the back of robust sales growth and margin expansion due to incremental revenue coming from low-cost Maharashtra
facility. Valuation is attractive at less than 9.6x FY11E EPS and 6.4x FY12E EPS. Our target price is Rs264 (10x
FY11E EPS of Rs26.4). Though upside from current levels is low, we maintain our positive stance due to the strong
earnings momentum, which could drive up valuations.

QUARTERLY PERFORMANCE - STANDALONE (INCLUDING ERSTWHILE LEELA LACE FROM 3QFY09) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q CONS. CONS.

Net Sales 3,363 3,864 4,179 4,740 5,120 5,734 6,422 7,537 18,015 27,413
Change (%) N.A. N.A. 21.2 42.3 52.2 48.4 53.7 59.0 18.9 52.2
Total Expenses 2,567 2,946 3,163 3,596 3,840 4,272 4,720 5,530 14,294 20,702
EBITDA 796 919 1,016 1,145 1,280 1,462 1,702 2,007 3,720 6,711
Change (%) N.A. N.A. 20.5 37.1 N.A. N.A. 67.5 75.4 19.3 80.4
EBITDA Margin (%) 23.7 23.8 24.3 24.1 25.0 25.5 26.5 26.6 20.7 24.5
Depreciation 147 149 165 220 260 300 375 420 823 1,515
Interest 210 225 230 270 300 300 300 286 950 1,216
Other Income 51 16 13 77 60 60 55 62 196 287
PBT 490 561 633 731 780 922 1,082 1,364 2,143 4,268
Tax 117 151 161 227 216 255 299 377 519 1,195
Tax/PBT (%) 23.9 26.9 25.4 31.1 27.7 27.7 27.7 27.7 24.2 28.0
PAT 373 410 472 504 564 667 783 987 1,625 3,073
Adj PAT after Min. Int. 373 410 472 504 564 667 783 987 1,616 3,064
Change (%) N.A. N.A. 13.3 100.7 51.3 62.6 65.7 95.9 18.2 89.6
PAT Margin (%) 11.1 10.6 11.3 10.6 11.0 11.6 12.2 13.1 9.0 11.2
E: MOSL Estimates; Note: The company has included Leela Lace numbers from 3QFY09, though the merger is with retrospective effect from
1QFY09. So, 1Q and 2Q are not strictly comparable. Consolidated figures include operations of GURU.

Shrinath Mithanthaya (ShrinathM@MotilalOswal.com)

July 2010 239

 Results Preview
SECTOR: TEXTILES

Raymond
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 RW IN
Buy
REUTERS CODE
S&P CNX: 5,269 RYMD.BO Previous Recommendation: Buy Rs217
Equity Shares (m) 61.4 YEAR NET SALES PAT* EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 272/147
3/09A 25,980 -1,274 -20.7 1,135.3 -10.5 1.1 -8.6 -3.9 1.1 -34.2
1,6,12 Rel Perf (%) -2/ 13/18
3/10A 25,288 82 1.3 -106.4 163.2 1.1 -2.0 2.9 1.1 28.0
Mcap (Rs b) 13.3
3/11E 29,795 343 5.6 320.4 38.8 1.1 1.3 5.6 0.9 9.2
Mcap (USD b) 0.3
3/12E 32,775 965 15.7 181.3 13.8 1.0 3.7 8.3 0.8 6.8
* Consolidated

„ We expect Raymond to post standalone 1QFY11 revenue of Rs3.3b against Rs2.4b a year earlier.

„ EBITDA for 1QFY11 is likely to be Rs441m against Rs66m a year earlier. EBITDA margins are expected to be
13.1% in 1QFY11. The management says Raymond is incurring excess operating costs of ~Rs400m due to non-
closure of its Thane plant.

„ Raymond plans to focus only on the cost competitive Romanian and Indian denim operations.

„ Raymond's decision to close down its loss-making denim operations in the US and Belgium will lower losses it was
incurring in its denim operations. Besides, with the commissioning of Raymond's new 7m meter worsted fabric plant
at Vapi, the chances of faster monetization of its real estate (120 acres in Thane) have increased significantly.

„ The stock trades at 1.1x FY11E book value. We value Raymond's Thane land at a minimum of Rs107/share. Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net Sales 2,348 3,985 3,723 3,365 3,366 3,595 3,901 4,437 13,421 15,300
Change (%) -0.4 -8.1 3.7 -7.3 -74.6 -72.0 66.2 11.3 -2.7 14.0
Total Expenditure 2,413 3,411 3,184 2,917 2,925 3,124 3,390 3,856 11,926 13,295
EBITDA -66 575 539 447 441 471 511 581 1,495 2,004
Change (%) -83.2 14.4 101.5 174.7 -77.8 -72.4 -879.1 1.2 404.5 34.0
As % of Sales -2.8 14.4 14.0 13.3 13.1 13.1 14.0 13.1 11.1 13.1
Depreciation 270 281 281 282 285 310 323 323 1,113 1,241
Interest 232 228 211 174 195 217 222 253 844 886
Other Income 215 155 164 104 120 125 133 123 637 501
Extra-ordinary Items 50 152 -169 -44 45 45 45 45 -12 180
PBT -401 69 380 140 36 24 55 84 187 198
Tax -85 -6 -45 73 10 13 14 15 -63 52
Effective Tax Rate (%) 21.2 -8.5 -11.9 52.3 29.3 53.8 25.5 18.2 25.5 26.5
Reported PAT -316 74 426 67 25 11 41 69 251 146
Adj. PAT after MI -266 181 307 36 70 43 72 100 257 326
Change (%) 87.6 6.0 316.5 -97.3 -126.4 -76.4 127.1 180.0 -178.6 26.5
E: MOSL Estimates

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 240

 Results Preview
SECTOR: TEXTILES

Vardhman Textiles
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 VTEX IN
Buy
REUTERS CODE
S&P CNX: 5,269 MHSP.BO Previous Recommendation: Buy Rs271
Equity Shares (m) 56.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 300/100
3/09A 29,654 919 16.2 -32.0 16.7 1.1 6.6 5.0 1.2 8.2
1,6,12 Rel Perf (%) 0/ 25/101
3/10A 33,777 2,407 42.5 52.7 6.4 0.9 14.8 10.6 1.1 5.1
Mcap (Rs b) 15.3
3/11E 35,763 2,289 40.4 -4.9 6.7 0.8 12.5 10.8 0.9 4.6
Mcap (USD b) 0.3
3/12E 37,902 2,598 45.9 13.5 5.9 0.7 12.6 11.9 0.8 3.9
Consolidated

„ Vardhman's 1QFY11 revenue is likely to grow 30.5% YoY at Rs8.1b. We expect EBITDA margins to increase 397bp
YoY to 21.6%. Adjusted PAT is likely increase 115% YoY to Rs619m, boosted by high cotton yarn margins.

„ Despite a higher domestic cotton crop, cotton yarn margins continue to remain strong due to strong demand for yarn
particularly from China.

„ Vardhman's Rs26b capex plans were largely completed in FY09, while utilization improved only towards the FY10
end. We expect FY11 to the first year of full capacity utilization for VTL.

„ After capacity expansion, Vardhman's spinning capacity increased from 0.5m to 0.75m spindles and its processing
fabric plant capacity increased from 40m to 80m meters.

„ VTL trades at 6.7x FY11E EPS of Rs40.4 and 5.9x FY12E EPS of Rs45.9. Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 6,201 6,752 6,992 7,565 8,091 8,361 8,765 8,496 27,510 33,713
Change (%) -4.7 3.8 8.4 27.8 30.5 34.8 29.8 21.5 12.1 22.5
Total Expenditure 5,105 5,401 5,612 5,875 6,340 6,647 7,053 6,881 21,992 26,921
EBITDA 1,096 1,351 1,380 1,690 1,751 1,714 1,712 1,615 5,517 6,792
Change (%) 27.7 21.6 48.0 102.2 59.8 56.4 26.7 17.0 47.6 23.1
As % of Sales 17.7 20.0 19.7 22.3 21.6 20.5 19.5 19.0 20.1 20.1
Depreciation 539 538 554 577 622 627 679 685 2,209 2,613
Interest 220 182 223 242 290 268 274 285 867 1,117
Other Income 156 3 62 0 35 42 45 46 221 168
Extra-ordinary Items 112 0 0 208 0 0 0 0 320 0
PBT 492 634 665 871 874 861 803 691 2,662 3,230
Tax 93 130 188 323 255 252 243 213 733 963
Effective Tax Rate (%) 18.8 20.5 28.2 37.0 29.2 29.3 30.2 30.8 27.5 29.8
Reported PAT 399 504 478 549 619 608 561 479 1,930 2,267
Adj. PAT 287 504 478 403 619 608 561 479 1,610 2,267
Change (%) -8.5 290.9 187.5 161.7 115.6 111.9 11.2 0.1 154.5 40.8
E: MOSL Estimates

Siddharth Bothra (SBothra@MotilalOswal.com)

July 2010 241

 Results Preview
QUARTER ENDING JUNE 2010

Utilities
BSE Sensex: 17,575 S&P CNX: 5,269 25 June 2010

COMPANY NAME In 1QFY11, we expect companies in our utilities universe to post revenue growth of 12%
CESC
YoY, EBITDA growth of 16% YoY and net profit growth of 4% YoY. Growth in net
profit is lower due to muted capacity addition in FY10 and growth in revenue and EBIDTA
NTPC
is driven by higher tax rates and depreciation (due to higher rates).

Power Grid FY11 to be a key year in terms of capacity addition: As FY11 begins, the key thing
to monitor is capacity addition achievement as targets are high. CEA estimates the total
PTC India capacity addition in FY11 will be 27.6GW, including 2.7GW of projects on “best effort
basis”. This compares with capacity addition of 19.3GW over FY08-10, leading to a
Reliance Infrastructure capacity addition target of 50GW over FY11-12 to meet the Eleventh Plan capacity
addition target of 75GW (including projects on “best effort” basis). The achievement of
Tata Power planned capacity addition in FY11 will therefore be crucial to determine: 1) the demand-
supply scenario over the short term, 2) prices in the near term, and 3) likely capacity
addition in FY12 and the Eleventh Plan.

CPSUs are expected to add maximum capacity of 11,398MW, followed by state and
private sectors at 7,313MW and 6,171MW respectively. NTPC is expected to add
maximum capacity of 4,150MW in FY11 against addition of 1,560MW in FY10.

April-May 2010 thermal generation up 7% YoY: In April-May 2010, all India

generation from thermal projects grew ~7% YoY to 94.6BUs, driven largely by gas-
based projects (gas-based generation up ~31% YoY). Players like GVK, Torrent Power
(Sugen) are key beneficiaries of higher gas-based generation. Coal based generation
was up by ~1%. Hydro power project generation was up by ~15% YoY at 18BUs. Due
to improved gas availability, gas based projects recorded PLF of 77%, up by 16pp YoY in
May 2010. However PLF of coal-based projects de-grew 2.6pp YoY in May 2010.

Short term prices down YoY: Average ST prices in 1QFY11 are expected to be Rs5.1/
unit (down 33% YoY) against Rs3.5/unit in 4QFY10 and Rs7.7/unit in 1QFY10. Weaker
than expected monsoons and higher prices in 1QFY10, boosted FY10 average ST prices,
and 2HFY10 prices were Rs3.5/unit.

Valuation and view: We are Neutral on the sector, given its rich valuations, which
largely factor in the growth factor.
EXPECTED QUARTERLY PERFORMANCE SUMMARY (RS MILLION)

CMP (RS) RECO SALES EBITDA NET PROFIT

25.06.10 JUN.10 VAR. VAR. JUN.10 VAR. VAR. JUN.10 VAR. VAR.

% YOY % QOQ % YOY % QOQ % YOY % QOQ

Utilities
CESC 374 Neutral 8,939 10.5 18.6 2,101 10.6 14.2 1,092 4.0 9.2
NTPC 196 Neutral 134,430 12.0 8.8 37,640 18.5 41.2 23,349 2.5 -6.5
PTC India 101 Neutral 24,215 2.1 94.8 157 6.9 74.5 274 -24.8 76.3
Power Grid Corp. 101 Buy 20,694 27.5 -7.2 17,279 29.9 -5.1 5,823 15.8 -23.1
Reliance Infrastructure 1,168 Buy 30,824 26.0 16.6 3,314 10.6 26.8 3,466 9.5 38.0
Tata Power 1,303 Neutral 18,745 -7.0 4.4 5,061 -20.0 12.7 2,173 7.6 -0.4
Sector Aggregate 237,847 11.8 13.2 65,553 16.2 21.6 36,177 5.1 -5.8

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Nalin Bhatt (NalinBhatt@MotilalOswal.com)/Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

July 2010 242

 Utilities

FY11 to be a key year in terms of capacity addition

As FY11 begins, the key thing to monitor is capacity addition achievement as targets are
high. The CEA estimates total FY11 capacity addition of 27.6GW, including 2.7GW of
projects on “best effort basis”. This compares with capacity addition of 19.3GW over
FY08-10, leading to a capacity addition target of 50GW over FY11-12 to meet the Eleventh
Plan capacity addition target of 75GW (including projects on “best effort” basis).
Achievement of planned capacity addition in FY11 will therefore be crucial to determine:
1) the demand-supply scenario over the short term, 2) prices in near term, and 3) likely
capacity addition in FY12 and the Eleventh Plan. In FY10 the set target was 10,667MW
and 9460MW was achieved, implying achievement of ~90% of the target.

ALL INDIA CAPACITY ADDITION TARGET (FEBRUARY 2010 REVIEW)

21,411
18,661

9,263 9,585

3,454

FY08 FY09 FY10 FY11 FY12

Source: CEA

In FY11 CPSUs are expected to add maximum capacity of 11,398MW; followed by state
and private companies, with 7,313MW and 6,171MW respectively. This tally is bifurcated
into 23,798MW of thermal units, 1,565MW of hydro based units and 2,220MW of nuclear
fuel based units.

FY11 capacity addition

According to CEA, NTPC is expected to add the highest capacity in FY11: 4,150MW in
FY11 v/s addition of 1,560MW in FY10. If it meets the target, it will be the highest capacity
addition NTPC has added to its portfolio so far. Adani and JSW are expected to add
1,320MW and 1,200MW to their existing portfolios of 660MW and 995MW respectively.

PLAYER-WISE CAPACITY ADDITION TARGETS IN FY11 (MW)

4,150

2,400
1,818
1,320 1,200
603 540 525
300

NTPC Sterlite Lanco Adani JSW NHPC KSK Tata RPow er

Energy Infratech Pow er Energy Pow er

Source: CEA

July 2010 243

 Utilities

April-May 2010 all-India generation up ~7% YoY

In April-May 2010, all India generation from thermal projects grew ~7% YoY to 94.6BUs,
driven largely by gas-based projects (gas-based generation up ~31% YoY). Players like
GVK, Torrent Power (Sugen) are key beneficiaries of higher gas-based generation. Coal-
based generation was up by ~1%. Hydro power project generation was up by ~15% YoY
at 18BUs. In May 2010 gas-based projects recorded PLF of 77%, up by 16pp YoY, due to
improved gas availability. However PLF of coal-based projects de-grew ~2.6pp YoY in
May 2010.

GENERATION (BU) UP ~7% YOY IN APRIL-MAY 2010 -

MAY-10 MAY-09 APRIL-MAY 2010 APRIL-MAY 2009 YOY

ALL INDIA PLF GENE- PLF GENE- PLF GENE- PLF GENE- PLF (%)

RATION (%) RATION (%) RATION (%) RATION (%)

Thermal
In May 2010 gas-based Coal & Lignite 47.3 76.5 46.1 79.19 94.6 77.71 93 80.82 1.37
projects recorded PLF of Gas 9.1 77.01 7.1 60.79 18.5 74.37 14 63.13 30.8
Nuclear 1.7 53.31 1.4 50.11 3.5 51.90 3 48.55 18.3
77%, up by 16pp YoY, due to
Hydro 9.7 34.73 8.5 31.56 18.1 32.61 16 29.33 14.7
improved gas availability Bhutan IMP 0.3 NA 0.3 NA 0.4 NA 1 NA (18.0)
Total* 67.7 64.76 63.1 63.32 135 64.5 126 63.8 6.7
Source: CEA

ALL INDIA MAY BASE DEFICIT UP 474BP (%) ALL INDIA MAY PEAK DEFICIT UP 106BP (%)

16.0% FY09 FY10 FY11 20% FY09 FY10 FY11

The base deficit in India rose

in April-May 2010 and 12.0% 16%
peaking power deficit
increased moderately due to
8.0% 12%
higher gas based generation

8%
4.0%
Jun

Feb
Oct

Dec
Aug
Apr
Jun

Feb
Oct

Dec
Aug
Apr

WESTERN REGION DEFICIT HIGHEST AT 18% IN MAY 2010

25% Northern Region Western Region Southern Region Eastern Region

Deficit for the western and

17% 18%
southern regions went up 16% 16% 16%
14% 14%
from 14% and 5% in FY10 to 11% 12% 11%
10%
18% and 7% in May 2010, 9%
7% 8% 7% 7%
6%
respectively 4% 5% 5% 5% 5%
3%

FY07 FY08 FY09 FY10 Apr-10 May-10

Source: CEA

Short term prices down: Average short term prices in 1QFY11 were at Rs5.1/unit
(down 33% YoY) against Rs3.5/unit in 4QFY10 and Rs7.7/unit in 1QFY10. Weaker than
expected monsoons and higher prices in 1QFY10, boosted FY10 average short-term prices
and 2HFY10 prices were ~Rs3.5/unit.
July 2010 244
 Utilities

ST PRICES: DOWN TO RS5.1/UNIT

7.7
6.2

5.4

5.1
3.6

3.5
4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11*

ST VOLUME: UP TO 20.7M UNITS PER DAY

21.2

20.7
18.6
14.5
12.9
9.8

4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11*

Source: IEX; * Till June29

GENERATION FOR KEY PLAYERS: GAS BASED PROJECTS RECORD HIGHER PLF

CAPACITY GENERATION CHG

(MW)* APRIL-MAY-09 APRIL-MAY-10 (%)

Adani Power
- Mundra Phase 1 660.0 0.0 608.2 NA
GVK
- JP 1 & 2 455.4 442.8 545.5 23.2
- Gautami 464.0 158.8 600.1 277.9
GMR
- Barge Mounted 220.0 90.0 0.0
- Chennai 200.0 236.0 207.1 -12.2
- Vemagiri 370.0 439.1 502.1 14.4
JPL
- Chattisgarh 1,000.0 1,410.0 1,503.5 6.6
Rel Infra
- Dahanu 500.0 769.3 762.2 -0.9
- Samalkot (AP) 220.0 234.5 287.8 22.7
- Goa 48.0 32.8 26.3 -19.9
- Kochi 174.0 196.3 130.3 -33.6
Tata Power
- Trombay 1,580.0 1,945.9 1,939.6 -0.3
- Karnataka IPP 0.0 45.3 39.2 -13.5
- TISCO (Jamshedpur) 441.3 455.1 500.7 10.0
Torrent Power
- Existing 500.0 726.0 714.2 -1.6
- Sugen 1,147.5 287.5 1,589.0 452.6
JSW Energy
- Rajwest Unit-I (RWPL JSW) 135 0.0 90.4 NA
- Karnataka 860 292.2 1,150.2 NA
Source: CEA

July 2010 245

 Adani posted PLF of 92% and 72% in April and May respectively
In May 2010, Adani Power (APL) posted generation of 389MUs and PLF of 72% for
Mundra Phase-I of 660MW. The second unit of 330MW was commissioned in March
2010 and thus, generation could have been lower due to the stabilization period. For YTD
Adani power generated 746.9MUs. Unit-2 of Phase-I of its 330MW plant was
commissioned in March 2010.

ADANI POWER: PLANT IN STABILIZING, PLF DOWN MOM

Generation (MUs) PLF (%) 96 92

72
*PLF for March, April is as 60
389
reported by CEA and for the 44 47
43 41
remaining months PLF is 37
225 241
calculated based on reported 209 210 199 220
178
generation 144
Nov-09

Dec-09
Oct-09

Mar-10

May-10
Jan-10

Feb-10
Sep-09

Apr-10
Source: CEA

JSW Energy: May PLF of 102% for Karnataka, 51% for Rajwest
The 860MW Karnataka power project generated 652MUs at a PLF of 102%. Its Raj
West Power 135MW (unit 1) reported PLF of 51% due to non-availability of water. The
management indicated that water supply would be normalized from 1QFY11.

JSW ENERGY: 860MW PLANT REPORTED PLF 100%+

Generation Karnataka860MW Generation Rajw est135MW

PLF Rajw est 135MW PLF Karnataka860MW
102.0
94.5
81.7 80.4
68.0 70.2 72.6
60.3 62.2
54.3 51.0
40.3

54 39 51
385

404

421

386

398

405

465

498

653
Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

May-10
Sep-09

Apr-10

Source: CEA

NTPC: April-May 2010 generation up just 1% YoY

The NTPC thermal plant operated at lower PLF in April-May 2010 compared with that a
year earlier, with generation up just 1% YoY. Generation was up due to a higher gas base
generation and capacity addition.

July 2010 246

 NTPC MAY 2010 PLF (%) DOWN 226BP YOY

FY 09 FY 10 FY 11

100
99

97
96

97

96
96

95
93
93

92
91
90

89
88

89
88

87
86
86
84
84

83
82

82
81
Jul
Jun

Feb
Jan

Mar
Sep

Dec
Nov
May

Oct
Aug
Apr

Source: CEA
RELATIVE PERFORMANCE - 3M (%)

Sensex
M OSt Utilities Index Jindal Power: April-May 2010 power generation up 4.4% YoY
102
Jindal Power (JPL) generation grew by 4.4% YoY to 1,504MUs in April-May 2010 (v/s
100
98
1,440MUs in April-May 2009). This implies PLF of 103% in April-May 2010 v/s 99% for
96 same period last year.
94
Jun-10
Mar-10

May-10
Apr-10

JINDAL POWER: MAY 2010 GENERATION UP 2.9%, PLF 103%

Generation (MUs) LHS PLF (%) RHS

800 120
103
RELATIVE PERFORMANCE - 1YR (%) 97 99 95
600 98 101 96 103 90
M OSt Utilities Index 91 95 93
92
Sensex 77
126 400 71 60
118
110 200 30
102
94 0 0
Jul-09
Jun-09
Feb-09

Feb-10
Jan-09

Jan-10
Mar-09

Mar-10
Sep-08

Dec-08

Sep-09

Dec-09
Nov-08

Nov-09
May-09

May-10
Oct-08

Oct-09
Aug-09
Apr-09

Apr-10
Jun-09

Jun-10
Mar-10
Sep-09

Dec-09

Source: CEA

COMPARATIVE VALUATION

CMP (RS) RECO EPS (RS) P/E (X) EV/EBITDA ROE (%)

25.06.10 FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Utilities
Adani Power 120 Not Rated 0.8 2.8 10.5 153.2 42.4 11.4 143.4 40.9 12.2 3.1 10.8 33.1
CESC 374 Neutral 34.5 36.5 40.2 10.8 10.2 9.3 9.3 9.2 9.5 13.4 12.6 12.4
JSW Energy 127 Not Rated 4.1 4.1 8.7 31.3 31.0 14.6 22.6 15.4 8.3 13.7 13.0 22.8
NTPC 196 Neutral 10.9 11.3 13.4 18.0 17.3 14.6 12.7 10.0 10.2 14.0 14.3 15.4
Power Grid Corp. 101 Buy 5.4 6.0 7.7 18.8 17.0 13.1 12.6 10.9 9.3 14.9 15.0 17.3
PTC India 101 Neutral 3.2 4.2 4.3 31.5 23.7 23.2 37.2 37.7 34.9 5.2 5.9 5.9
Reliance Infra. 1,168 Buy 43.1 56.7 67.3 27.1 20.6 17.4 23.7 17.1 14.4 9.1 9.7 10.1
Reliance Power 168 Not Rated - 4.4 5.7 - 38.4 29.3 - 100.8 66.3 - 7.1 8.6
Tata Power 1,303 Neutral 59.8 85.9 115.9 21.8 15.2 11.2 19.0 17.1 15.8 7.2 8.8 9.2
Sector Aggregate 23.2 19.7 14.7 17.5 14.3 12.6 11.2 11.9 14.5

July 2010 247

 Results Preview
SECTOR: UTILITIES

CESC
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 CESC IN
Neutral
REUTERS CODE
S&P CNX: 5,269 CESC.BO Previous Recommendation: Neutral Rs374
Equity Shares (m) 125.6 YEAR NET SALES PAT EPS* EPS* P/E* P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 452/261
03/09A 30,313 3,682 29.3 23.9 12.8 1.7 13.0 11.0 1.9 9.5
1,6,12 Rel Perf (%) -7/ -6/7
03/10A 32,910 4,330 34.5 17.6 10.8 1.5 13.4 10.9 2.1 9.3
Mcap (Rs b) 46.9
03/11E 36,154 4,584 36.5 5.9 10.2 1.3 12.6 10.3 2.3 9.2
Mcap (USD b) 1.0
03/12E 40,813 5,052 40.2 10.2 9.3 1.2 12.4 9.4 2.4 9.5
* Excl Spencers; fully diluted

„ In 1QFY11, we expect CESC to post revenue of Rs8.9b (up 11% YoY) and net profit of Rs1.1b, up 4% YoY.

„ CESC completed 100% acquisition of Dhariwal Infrastructure in 1QFY11 (Rs3b for 100% stake). Chandrapur
Project (600MW) has achieved financial closure and environment clearance. CoD for the project is expected by
FY13.

„ CESC has invited bids for the construction of a 600MW Haldia unit, and in its project application submitted to the
state regulatory body, CESC has proposed a revision of the capacity to 540MW.

„ In FY10 Spencer Retail posted revenue of Rs9.6b, translating into revenue of Rs795/sq foot/month (v/s Rs695/sq
foot/month in FY09) and EBITDA loss of Rs2.4b. CESC invested Rs1.5b in Spencer in FY10.

„ We expect CESC to post standalone net profit of Rs4.6b in FY11 (up 6% YoY) and Rs5b in FY12 (up 10% YoY),
excluding Spencer. The stock trades at reported PER of 10.2x FY11E and 9.3x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 8,090 9,490 7,970 7,540 8,939 8,968 9,086 9,161 32,910 36,154
Change (%) 3.3 25.7 6.0 1.8 10.5 -5.5 14.0 21.5 8.6 9.9
EBITDA 1,900 2,100 1,880 1,840 2,101 2,152 2,317 2,497 7,540 9,067
Change (%) 55.7 12.3 24.5 21.1 10.6 2.5 23.2 35.7 23.2 20.2
As of % Sales 23.5 22.1 23.6 24.4 23.5 24.0 25.5 27.3 22.9 25.1
Depreciation 480 490 490 520 530 600 630 635 1,980 2,395
Interest 430 460 420 470 475 525 630 693 1,780 2,323
Other Income 280 360 260 360 220 300 330 325 1,440 1,175
PBT 1,270 1,510 1,230 1,210 1,315 1,327 1,387 1,494 5,220 5,523
Tax 220 250 210 210 224 212 243 260 890 939
Effective Tax Rate (%) 17.3 16.6 17.1 17.4 17.0 16.0 17.5 17.4 17.0 17.0
Reported PAT 1,050 1,260 1,020 1,000 1,092 1,115 1,144 1,234 4,330 4,584
Adjusted PAT 1,050 1,260 1,020 1,000 1,092 1,115 1,144 1,234 4,330 4,584
Change (%) 27.3 34.0 4.1 6.4 4.0 -11.5 12.2 23.4 17.5 5.9
E: MOSL Estimates, Standalone Numbers (excl Spencers Retail)

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Nalin Bhatt (NalinBhatt@MotilalOswal.com)/Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

July 2010 248

 Results Preview
SECTOR: UTILITIES

National Thermal Power Corporation

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 NTPC IN
Neutral
REUTERS CODE
S&P CNX: 5,269 NTPC.BO Previous Recommendation: Neutral Rs196
Equity Shares (m) 8,245.5 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/
END* (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 242/188
03/09A 419,238 80,720 9.8 8.9 20.0 2.8 14.7 12.9 4.0 15.8
1,6,12 Rel Perf (%) -8/ -16/-22
03/10A 464,353 89,698 10.9 11.1 18.0 2.6 14.0 13.6 3.7 12.7
Mcap (Rs b) 1,617.3
03/11E 583,293 93,512 11.3 4.3 17.3 2.4 14.3 16.1 2.9 10.0
Mcap (USD b) 34.9
03/12E 663,090 110,664 13.4 18.3 14.6 2.2 15.4 14.3 2.6 10.2
* Pre Exceptional Earnings

„ In 1QFY11 we expect NTPC to post revenue of Rs134.4b (up 12% YoY) and net profit of Rs23.3b, up 2%YoY.

„ NTPC is expected to add 4,150MW of capacity in FY11 and has budgeted for capex of Rs224b (up by 120% on
FY10 revised estimates).

„ NTPC has 17,830MW of capacity under construction and as on FY10 it spent 33% of capex on the projects.

„ NTPC has invited re-tender for 11 sets of supercritical boilers after the disqualification of L&T.

„ NTPC was conferred Maharatna status by the government of India, enabling it to execute investments of lower than
Rs50b or 15% net worth of NTPC.

„ We expect NTPC to post net profit of Rs93.5b in FY11 (up 4% YoY) and Rs110.6b in FY12 (up 18% YoY). The
stock trades at reported PER of 17.3x FY11E and 14.6x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 120,027 107,828 111,837 123,534 134,430 121,306 128,613 198,943 463,226 583,293
Change (%) 25.8 11.6 -0.8 7.9 12.0 12.5 15.0 61.0 10.5 25.9
EBITDA 31,757 32,137 33,653 26,657 37,640 35,785 38,584 67,786 124,204 179,795
Change (%) 31.1 26.1 4.9 20.1 18.5 11.4 14.7 154.3 19.5 44.8
As of % Sales 26.5 29.8 30.1 21.6 28.0 29.5 30.0 34.1 26.8 30.8
Depreciation 6,128 6,438 6,614 7,322 7,300 7,300 7,450 7,598 26,501 29,648
Interest 4,447 5,407 3,418 4,818 5,500 6,000 6,300 6,713 18,089 24,513
Other Income 7,763 7,410 7,791 6,277 6,500 6,750 6,800 7,301 29,241 27,351
PBT 28,945 27,703 31,412 20,794 31,340 29,235 31,634 60,775 108,855 152,985
Tax 7,009 6,183 8,862 618 7,992 7,455 8,304 15,721 21,573 39,472
Effective Tax Rate (%) 24.2 22.3 28.2 3.0 25.5 25.5 26.3 25.9 19.8 25.8
Reported PAT 21,936 21,520 22,550 20,177 23,349 21,780 23,330 45,054 87,282 113,513
Adj. PAT (Pre Exceptional) 22,790 19,845 22,104 24,960 23,349 21,780 23,330 25,053 89,698 93,512
Change (%) 20.1 8.6 8.5 4.5 2.5 9.8 5.5 0.4 11.1 4.3
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Nalin Bhatt (NalinBhatt@MotilalOswal.com)/Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

July 2010 249

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SECTOR: UTILITIES

Power Grid Corporation of India

STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 PWGR IN
Buy
REUTERS CODE
S&P CNX: 5,269 PGRD.BO Previous Recommendation: Buy Rs101
Equity Shares (m) 4,208.8 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 121/95
3/09A 65,798 19,418 4.6 23.3 22.0 2.9 13.8 11.6 10.4 12.4
1,6,12 Rel Perf (%) -9/ -8/-28
3/10A 71,275 22,746 5.4 17.1 18.8 2.7 14.9 8.6 10.4 12.6
Mcap (Rs b) 426.6
3/11E 91,162 25,163 6.0 10.6 17.0 2.4 15.0 9.6 9.2 10.9
Mcap (USD b) 9.2
3/12E 114,960 32,481 7.7 29.1 13.1 2.1 17.3 10.3 8.0 9.3
* Pre-exceptional

„ In 1QFY11, we expect PGCIL to post revenue of Rs20.7b (up 28% YoY) and net profit of Rs5.8b, up 7%YoY.

„ In FY10 the PGCIL board accorded investment approval of Rs133b of projects. For FY11 it plans capex of Rs129b
(up 29% over FY10 revised estimates).

„ The PGCIL board has granted investment approval for projects with a total cost of Rs46.5b during 1QFY11, which
includes a transmission system for development of Pooling Station in the northern part of West Bengal and transfer
of power from Bhutan to NR/WR.

„ CERC accorded approval to PGCIL to proceed with execution of nine high capacity transmission corridors at an
estimated expense of Rs580b for evacuation of power from various generation projects being developed by independent
power producers (IPP).

„ PGCIL plans to offload 20% equity (including 10% of fresh equity) to raise Rs80b. The Cabinet note on a proposed
FPO is to be initiated shortly.

„ We expect PGCIL to post net profit of Rs25.1b in FY11 (up 11% YoY) and Rs32.5b in FY12 (up 29% YoY). The
stock trades at reported PER of 17x FY11E and 13x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 16,230 17,486 15,254 22,305 20,694 21,857 22,118 26,493 71,275 91,162
Change (%) 19.3 10.1 3.2 -0.9 27.5 25.0 45.0 18.8 6.8 27.9
EBITDA 13,299 14,723 12,467 18,205 17,279 18,524 18,856 22,665 58,694 77,324
Change (%) 17.2 8.5 2.0 -2.1 29.9 25.8 51.2 24.5 5.3 31.7
As of % Sales 81.9 84.2 81.7 81.6 83.5 84.8 85.3 85.5 82.3 84.8
Depreciation 4,670 5,819 5,360 3,949 5,500 6,250 6,500 7,203 19,797 25,453
Interest 3,834 4,162 4,119 3,318 5,250 6,000 6,250 7,502 15,432 25,002
Other Income 1,993 751 2,246 -1,229 750 900 1,250 1,434 3,761 4,334
Extraordinary Income/(Expense) -14 8 -4 973 - - - - 963 -11
PBT 6,802 5,485 5,239 8,737 7,279 7,174 7,356 9,393 26,263 31,202
Tax 1,336 885 361 3,271 1,456 1,363 1,423 1,797 5,854 6,039
Effective Tax Rate (%) 19.6 16.1 6.9 37.4 20.0 19.0 19.4 19.1 22.3 19.4
Reported PAT 5,466 4,600 4,877 5,466 5,823 5,811 5,933 7,596 20,409 25,163
Adj. PAT (Pre Exceptional) 5,027 4,881 4,919 7,577 5,823 5,811 5,933 7,596 22,746 25,163
Change (%) 31.1 11.1 17.0 8.1 15.8 19.0 20.6 0.3 17.1 10.6
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Nalin Bhatt (NalinBhatt@MotilalOswal.com)/Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

July 2010 250

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SECTOR: UTILITIES

PTC India
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 PWTC IN
Neutral
REUTERS CODE
S&P CNX: 5,269 PTCI.BO Previous Recommendation: Neutral Rs101
Equity Shares (m) 294.1 YEAR NET SALES PAT* EPS* EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 126/81
03/09A 64,396 910 4.0 73.2 25.2 1.5 6.0 7.4 0.3 85.1
1,6,12 Rel Perf (%) -7/ -15/-16
03/10A 77,703 939 3.2 -20.3 31.5 1.4 5.2 7.2 0.3 36.6
Mcap (Rs b) 29.6
03/11E 97,179 1,247 4.2 32.8 23.7 1.4 5.9 7.3 0.3 35.9
Mcap (USD b) 0.6
03/12E 102,170 1,277 4.3 2.4 23.2 1.3 5.9 7.3 0.2 35.4
* Pre-exceptional

„ In 1QFY11 we expect PTC to post revenue of Rs24.2b (up 2% YoY) and net profit of Rs274m, down by 25% YoY.
For FY11 we expect PTC to sell 62% of volume on a long term PPA, leading to lower volatility in earnings.

„ PTC is expected to add 800MW and 4,000MW to its LT portfolio in FY11 and FY12 respectively.

„ PTC, in a JV with Ashmore, launched the US$750m Energy Infra Fund, to provide equity funding generation,
transmission, distribution, fuel extraction and fuel transport infrastructure assets in India.

„ The PTC board approved in-principle PFS (77% PTC stake) IPO during the current financial year.

„ We expect PTC to post net profit of Rs1.24b in FY11 (up 33% YoY) and Rs1.27b in FY12 (up 2% YoY). The stock
trades at reported PER of 23.7x FY11E and 23.2x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Power Traded (MUs) 4,204 6,388 4,444 3,202 5,045 7,985 4,888 4,480 18,236 22,399
Sales 23,717 24,582 16,975 12,430 24,215 31,940 20,776 20,248 77,703 97,179
Change (%) 97.1 21.0 -19.8 5.5 2.1 29.9 22.4 62.9 19.0 25.1
EBITDA 147 297 103 90 157 240 145 140 627 682
Change (%) 151.0 111.0 280.0 285.2 6.9 -19.3 40.6 55.2 150.8 8.9
As of % Sales 0.6 1.2 0.6 0.7 0.7 0.8 0.7 0.7 0.8 0.7
Depreciation 14 14 16 14 13 13 13 13 55 52
Interest 1 0 2 1 2 5 6 7 4 20
Other Income 280 175 142 136 200 225 250 274 735 949
Extraordinary Income/(Expense) 0 1 0 -3 0
PBT 413 459 229 216 342 447 376 394 1,302 1,559
Tax 79 149 72 77 68 89 75 79 377 312
Effective Tax Rate (%) 19.1 32.5 31.3 35.7 20.0 20.0 20.0 20.0 28.9 20.0
Reported PAT 334 310 158 139 274 357 301 315 926 1,247
Adjusted PAT 364 309 158 155 274 357 301 315 939 1,247
Change (%) 92.7 -7.4 -42.7 -10.6 -24.8 15.6 91.2 102.7 3.1 32.8
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Nalin Bhatt (NalinBhatt@MotilalOswal.com)/Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

July 2010 251

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SECTOR: UTILITIES

Reliance Infrastructure
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 RELE IN
Neutral
REUTERS CODE
S&P CNX: 5,269 RLEN.BO Previous Recommendation: Neutral Rs1,168
Equity Shares (m) 267.2 YEAR NET SALES PAT EPS* EPS P/E* P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,404/951
3/09A 96,965 9,081 34.0 22.0 34.4 2.5 10.2 9.0 2.6 29.0
1,6,12 Rel Perf (%) 4/ 5/-28
3/10A 100,273 11,517 43.1 26.8 27.1 2.0 9.1 8.6 2.5 22.2
Mcap (Rs b) 312.1
3/11E 129,211 15,147 56.7 31.5 20.6 1.6 9.7 10.7 1.7 16.2
Mcap (USD b) 6.7
3/12E 146,016 17,991 67.3 18.8 17.3 1.5 10.1 11.1 1.4 12.9
* Fully Diluted

„ In 1QFY11, we expect RELI to post revenue of Rs30.8b (up 26% YoY) and net profit of Rs3.5m, up 9%YoY.
„ RELI sold 433MW of power generation assets to Rpower for Rs10.9b. Power projects sold comprises of 220MW
Samalkot in Andhra Pradesh, 165MW in Kerala and 48MW in Goa. Now after the de-merger, RELI will own the
500MW Dhanau project and distribution business in Mumbai and Delhi.
„ Reliance Infra has signed a concession agreement with MSRDC (Maharashtra State Road Development Corporation)
to develop 3.4km Phase-II of the Mumbai Sea Link (Worli to Haji Ali) and this is expected to be commissioned by
June 2014. Besides, RELI will get rights over the 5.6km Bandra Worli Sea link at an extra cost of Rs16.4b from
MSRDC.
„ R-Infra also won Rs9.2b worth of road projects (Hosur-Krishnagiri in Tamil Nadu) from NHAI with a concession
period of 24 years to be developed on DBFOT basis.
„ RELI has infrastructure assets (Rs400b under development) in roads, metro, transmission lines, sea links and airports)
and its EPC order book was Rs193b as on FY10.
„ We expect RELI to post net profit of Rs1.24b in FY11 (up 33% YoY) and Rs1.27b in FY12 (up 2% YoY). The stock
trades at reported PER of 20.6x FY11E and 17.3x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales 24,463 26,496 22,875 26,439 30,824 32,855 32,025 33,508 100,273 129,211
Change (%) 6.8 7.1 -15.8 10.7 26.0 24.0 40.0 26.7 1.6 28.9
EBITDA 2,995 3,129 2,354 2,614 3,314 3,368 3,459 3,611 11,182 13,751
Change (%) 4.8 12.9 -24.6 67.6 10.6 7.6 46.9 38.2 8.5 23.0
As of % Sales 12.2 11.8 10.3 9.9 10.8 10.3 10.8 10.8 11.2 10.6
Depreciation 722 740 830 807 775 790 800 805 3,188 3,170
Interest 1,037 740 565 581 726 850 950 1,039 2,922 3,565
Other Income 2,442 1,633 2,156 1,668 2,350 2,700 3,000 3,183 7,898 11,233
PBT 3,678 3,283 3,114 2,895 4,163 4,428 4,709 4,950 12,969 18,249
Tax (incl contingencies) 513 214 333 384 697 753 812 840 1,453 3,102
Effective Tax Rate (%) 13.9 6.5 10.7 13.3 16.8 17.0 17.3 17.0 11.2 17.0
Reported PAT 3,166 3,069 2,781 2,511 3,466 3,675 3,896 4,110 11,517 15,147
PAT (Pre Exceptionals) 3,166 3,069 2,781 2,511 3,466 3,675 3,896 4,110 11,517 15,147
Change (%) 26.5 44.6 -1.5 -33.0 9.5 19.7 40.1 63.7 10.7 31.5
E: MOSL Estimates; Quarterly nos. are on standalone basis

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Nalin Bhatt (NalinBhatt@MotilalOswal.com)/Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

July 2010 252

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SECTOR: UTILITIES

Tata Power
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 TPWR IN
Neutral
REUTERS CODE
S&P CNX: 5,269 TTPW.BO Previous Recommendation: Neutral Rs1,303
Equity Shares (m) 247.3 YEAR NET SALES PAT* EPS* EPS P/E* P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 1,519/995
03/09A 72,362 11,667 52.4 52.4 24.9 3.6 6.6 6.5 4.6 28.9
1,6,12 Rel Perf (%) -1/ -5/-10
03/10A 70,983 14,799 59.8 14.1 21.8 2.7 7.2 8.9 5.1 19.5
Mcap (Rs b) 322.3
03/11E 71,585 21,239 85.9 43.5 15.2 2.6 8.8 8.8 5.1 16.6
Mcap (USD b) 7.0
03/12E 72,790 28,653 115.9 34.9 11.2 2.4 9.2 8.9 5.3 15.4
* Consolidated including share of profit from Bumi Resources, Pre Exceptionals, Fully Diluted

„ In 1QFY11, we expect Tata Power to post revenue of Rs18.7b (down 7% YoY) and net profit of Rs2.1b, up 8% YoY.
„ Tata Power has challenged an order from MERC (Maharashtra Electricity Regulatory Commission) to sell power
from July. Earlier, MERC had directed TPWR to sell 360MW until June 2010 and 200MW until the end of FY11 on
regulated terms to Reliance Infrastructure. The matter is sub-judice and we have assumed merchant capacity for
only six months in our FY11 estimates.
„ Under its Mumbai distribution circle Tata Power increased its customer base from 56k in March 2010 to 75k in June
2010.
„ Tata Power got state approval for land acquisition for 1,600MW Raigad project after five years of opposition and
negotiation with local people.
„ We expect Tata Power to post net profit of Rs21.2b in FY11 (up 43.5% YoY) and Rs28.7b in FY12 (up 35% YoY).
The stock trades at reported PER of 15.2x FY11E and 11.2x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE (STANDALONE) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Total Operating Income 20,156 17,211 15,665 17,951 18,745 17,555 16,448 18,837 70,983 71,585
Change (%) -0.5 -12.1 -11.8 21.8 -7.0 2.0 5.0 4.9 -1.9 0.8
EBITDA 6,323 4,168 3,641 4,491 5,061 5,091 5,346 6,342 18,623 21,840
Change (%) 107.4 57.5 42.2 53.1 -20.0 22.1 46.8 41.2 66.4 17.3
As of % Sales 31.4 24.2 23.2 25.0 27.0 29.0 32.5 33.7 26.2 30.5
Depreciation 1,118 1,184 1,208 1,270 1,300 1,325 1,350 1,402 4,779 5,377
Interest 1,177 1,018 922 950 1,200 1,225 1,250 1,268 4,066 4,943
Other Income 1,076 755 452 533 500 850 950 1,282 2,816 3,582
PBT 5,104 2,721 1,963 2,805 3,061 3,391 3,696 4,955 12,593 15,103
Tax 1,333 889 484 499 888 949 1,072 1,472 3,205 4,381
Effective Tax Rate (%) 26.1 32.7 24.6 17.8 29.0 28.0 29.0 29.7 25.5 29.0
Reported PAT 3,771 1,832 1,479 2,306 2,173 2,442 2,624 3,483 9,388 10,722
Adjusted PAT 2,020 1,589 1,357 2,183 2,173 2,442 2,624 3,483 7,148 10,722
Change (%) 27.5 -19.3 38.7 131.8 7.6 53.7 93.4 59.6 30.6 50.0
E: MOSL Estimates

Satyam Agarwal (AgarwalS@MotilalOswal.com)/Nalin Bhatt (NalinBhatt@MotilalOswal.com)/Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

July 2010 253

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SECTOR: DIVERSIFIED

Sintex Industries
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 BVML IN
Buy
REUTERS CODE
S&P CNX: 5,269 SNTX.BO Previous Recommendation: Buy Rs313
Equity Shares (m) 135.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 337/183
03/09A 31,332 3,057 22.6 40.9 20.3 11.5
1,6,12 Rel Perf (%) 5/ 21/29
03/10A 33,192 3,045 22.5 -0.4 12.9 2.2 18.0 10.7 1.7 10.6
Mcap (Rs b) 42.5
03/11E 40,672 4,041 29.8 32.7 10.1 1.8 18.9 13.4 1.2 7.1
Mcap (USD b) 0.9
03/12E 49,053 5,145 38.0 27.3 7.9 1.5 20.0 10.1 1.0 5.6
Consolidated

„ Expect robust growth on low base: FY10 was a muted year for Sintex that too with 33% of full year revenue and
40% of PAT coming in 4Q alone. Thus, on the low base of 1QFY10, we expect Sintex to record a strong1QFY11
with operating income up 23% YoY, EBITDA margin up 80bp YoY and PAT up 46% YoY.
„ Robust growth in most standalone business segments …: We expect robust growth in almost all of Sintex's
major business segments - monolithic is expected to do well on the back of order backlog of Rs22b, 3x FY10 revenue.
Pre-fabricated structures business should revive with BTS (base telecom station) shelter segment having bottomed
out in FY10. Custom molding segment should see healthy growth on the back of recovery in power and auto sectors.
„ … subsidiaries also expected to perform better: Among subsidiaries, Bright Autoplast is expected to be a
beneficiary of (1) revival in auto sector, and (2) its own expansion in FY10, both in auto and electric parts. Nief
France and Wausaukee USA are expected to see improvement in margins due to procurement of semi-finished
products from India and other integration benefits.
„ Reasonable valuation, maintain Buy: On a muted base of FY10, our estimates indicate EPS CAGR of 30%
through FY12. The stock currently trades at reasonable P/E of ~10x FY11E and less than 8x FY12E. During FY11,
Sintex is likely to complete couple of acquisitions in monolithic and pre-fabricated businesses, which could provide
upsides to our estimates. We value Sintex at 12x FY11E EPS of Rs29.8 to arrive at a target price of Rs358, ~14%
upside from current levels. We maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Operating Income 6,624 7,154 8,478 10,936 8,134 10,168 10,575 11,795 33,192 40,672
YoY Growth (%) -9.1 -2.5 3.4 28.6 22.8 42.1 24.7 7.9 5.9 22.5
EBITDA 874 1,305 1,269 1,932 1,139 1,881 1,851 2,221 5,381 7,092
EBITDA Margin (%) 13.2 18.2 15.0 17.7 14.0 18.5 17.5 18.8 16.2 17.4
YoY Growth (%) -5.3 -2.6 -0.3 16.6 30.3 44.1 45.8 14.9 3.6 31.8
Depreciation 366 372 355 351 360 400 430 458 1,445 1,648
Interest 142 157 175 257 170 200 240 270 731 880
Other Income 159 103 249 122 150 150 150 140 633 590
Extraordinary Items 200 -123 0 168 0 0 0 0 245 0
Profit before Tax 725 757 988 1,613 759 1,431 1,331 1,633 4,083 5,153
Tax Provisions 114 174 260 224 159 301 279 343 772 1,082
Tax / PBT 15.7 23.0 26.3 13.9 21.0 21.0 21.0 21.0 18.9 21.0
PAT before MI 611 583 728 1,390 599 1,131 1,051 1,290 3,311 4,071
Minority Interest 5 10 3 2 7 8 10 5 21 30
Consolidated PAT 606 572 724 1,387 592 1,123 1,041 1,285 3,290 4,041
Adj. Consolidated PAT 406 695 724 1,220 592 1,123 1,041 1,285 3,045 4,041
YoY Growth (%) -28.1 -17.1 2.3 28.9 46.0 61.5 43.7 5.3 -0.4 32.7
E: MOSL Estimates
Shrinath Mithanthaya (ShrinathM@MotilalOswal.com)

July 2010 254

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SECTOR: AGROCHEMICALS

United Phosphorus
STOCK INFO. BLOOMBERG
25 June 2010
BSE Sensex: 17,575 UNTP IN Buy
REUTERS CODE
S&P CNX: 5,269 UNPO.BO Previous Recommendation: Buy Rs192
Equity Shares (m) 439.6 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
END (RS M) (RS M) (RS) GROWTH (%) (X) (X) (%) (%) SALES EBITDA
52 Week Range (Rs) 198/133
03/09A 50,678 5,865 12.7 48.3 15.1 3.2 23.9 20.6 1.9 9.2
1,6,12 Rel Perf (%) 11/ 14/6
03/10A 54,945 5,527 12.0 -5.8 16.0 2.6 18.8 15.8 1.6 9.1
Mcap (Rs b) 84.2
03/11E 62,775 7,317 15.8 32.4 12.1 2.2 21.0 18.7 1.5 7.3
Mcap (USD b) 1.8
03/12E 71,837 8,712 18.8 19.1 10.2 1.9 20.4 19.6 1.2 5.8

„ United Phosphorus (UPL) is expected to report 6% YoY de-growth in consolidated revenues to Rs15.4b, impacted
by ~13% YoY INR appreciation against EUR and 6% appreciation against USD. Revenues benefited from acquisition
of non-mixture Mancozeb business from DuPont (w.e.f June 3, 2010).

„ EBITDA margin is expected to improve by 100bp YoY 20.1%, benefiting from last leg of Cerexagri restructuring and
Mancozeb acquisition. Higher tax provisioning would result in PAT de-growth to 10.7% YoY to Rs1.57b.

„ While operating environment in developed market is slowly improving, United Phoshporus’s financial performance
would be impacted by Rupee appreciation against Euro (~28% of revenues from Europe).

„ We are upgrading our earnings estimates for FY11 by 1.8% to Rs15.8 and FY11 by 3% to Rs18.8, to factor in for
acquisition of non-mixture Mancozeb business from DuPont. Valuations at 9.9x FY11E EPS (fully diluted) and 5.5x
EV/EBITDA, do not reflect growth potential (both organic and inorganic) for the company. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED) (RS MILLION)

Y/E MARCH FY10 FY11E FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Gross Revenues 16,442 11,610 11,580 15,314 15,692 15,337 13,240 18,506 54,946 62,775
YoY Change (%) 25.1 -0.3 5.8 9.4 -4.6 32.1 14.3 20.8 10.5 14.2
Total Expenditure 13,306 9,606 9,545 12,155 12,538 12,218 10,486 14,226 44,612 49,469
EBITDA 3,135 2,005 2,035 3,159 3,154 3,118 2,754 4,280 10,334 13,306
Margins (%) 19.1 17.3 17.6 20.6 20.1 20.3 20.8 23.1 18.8 21.2
Depreciation 501 547 541 558 575 590 600 619 2,147 2,384
Interest 578 405 596 360 590 585 585 593 1,938 2,353
PBT before EO Expense 2,056 1,053 898 2,241 1,989 1,943 1,569 3,068 6,249 8,568
Extra-Ord Expense 0 0 0 0 0 0 0 0 267 0
PBT after EO Expense 2,056 1,053 898 2,241 1,989 1,943 1,569 3,068 5,982 8,568
Tax 268 165 247 134 398 350 471 153 814 1,371
Deferred Tax 0 0 0 0 0 0 0 214 0 214
Rate (%) 13.0 15.7 27.5 6.0 20.0 18.0 30.0 12.0 13.6 18.5
Reported PAT 1,789 888 651 2,107 1,591 1,594 1,098 2,701 5,168 6,983
Income from Associate Co -26 135 -10 89 -16 175 125 51 188 334
Adjusted PAT 1,763 1,023 641 2,196 1,575 1,769 1,223 2,751 5,586 7,317
YoY Change (%) 19.4 -16.2 -0.8 36.0 -10.7 72.8 90.8 25.3 12.9 31.0
Margins (%) 10.7 8.8 5.5 14.3 10.0 11.5 9.2 14.9 10.2 11.7
E: MOSL Estimates

Jinesh K Gandhi (Jinesh@MotilalOswal.com)

July 2010 255

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N O T E S

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