Strategy - 2010-07-14

14 July 2010
Strategy
STRATEGY REVIEW
Staying Bullish, Sensex Target of 22,680 Analyst contact

R. Murali Krishnan
Tel: +91 22 3043 3301
Positive stance continues - Expect markets to be volatile on muralikrishnan@ambitcapital.com
global cues - recommend BUY on corrections
Research Team
8.2% GDP growth est. for FY10-11 build in ~5.4% inflation expectation Tel.: +91 22 3043 3000
Credit growth: Systemic credit growth upped 19%, riding on 3G and BWA
auction, and is likely to stay strong YoY. Expect 22% credit growth for FY11.
Interest rates: Systemic interest rates likely to rise with next regulatory push.
We expect policy rates to rise 75bps with lending rates lagging deposit rates.
Fiscal deficit: Expect consolidation at ~5% of GDP: We believe the
government’s attitude towards fiscal discipline and the excess cash flows
available warrant a sharp reduction in its borrowing programme.
Strong corporate earnings growth: Our Sensex EPS for FY11E is Rs1,053
and for FY12E, Rs1,260. We note the index is trading at 17x FY11EPS. Our
EPS estimates are ahead of consensus by1.8% and 1.2% for FY11E and FY12E.
Volatility measures: Indian IVs:US VIX has been on a decline through the
Euro market crisis — points to relatively lower risk aversion for Indian equities.
MSCI India index has outperformed MSCI ACWI index on a 12-month relative
basis while MSCI EM has underperformed.
Sensex trading band: Sensex valuations
(1) Sensex dividend discount model: Indicates the range 16,360-21,189.
We believe the 7.5-8.0% 10-year bond yield could mark peaking of current
interest rate cycle; (2) P/BV: Positive divergence in the premium.
Currently the Sensex is trading at 2.8x P/BV FY11, 17% disc. to its LT average
P/BV of 3.4x. When it reverts to the mean, an index level of 21,250 is implied;
(3) PE basis: On our FY12E earnings of Rs1,260, we expect the index to trade
between 17,640-22,680. On projecting the Sensex on earnings yield and
current 10-yr bond yield, we do not expect the market to go below 16,100 in
FY10, except on a global sell-off.
Our model portfolio plays out India’s domestic consumption story:
Domestic consumption is strong and resilient but rate sensitive. We expect
domestic consumption to pan out more rapidly and domestic sectors/stocks
that reflect this will witness expansion in valuation premium v/s the markets.
Large cap companies with low leverage will continue to command similar
premium valuations. We recommend — focus on large caps and larger niche
mid-caps: We are OVERWEIGHT Industrials, Consumer Discretionary, Consumer
Staples, Financials (upgraded from Neutral), Healthcare and Software and
UNDERWEIGHT Energy, Materials, Telecom and Utilities.
Risks to equity markets: Market risk = the widening deficit in global
economies and escalating credit concerns that suggest risks to sovereign
defaults. Global aversion would impact mid-cap stocks the most, and they
have been the stellar performers. Commodity prices are also at risk given
fallout in the European Union and we expect metal prices to be volatile.
We do not expect substantial earnings downgrades such as in 2008, as the
domestic Indian economy is fairly resilient.
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit
Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to disclaimer section on the last page for further important disclaimer.
Ambit Capital Pvt Ltd Strategy
Sensex Valuations
Median PER to Asian peer currently at premium
Sensex dividend discount model – Indicates a range of 16,360 – 21,189
Sensex valuations P/BV indicates a level of 21,250
On a P/E basis we have a Sensex target of 22,680 (18x FY12E EPS of Rs1260)
Median PER to Asian peers currently at marginal premium

 Sensex PER premium/discount to MSCI Emerging markets is currently trading
at 26% premium compared with its peak of 58.1% on 26 January 2010.
 Our Sensex EPS for FY11E is Rs1,053 and for FY12E, Rs1,260. Sensex earnings
growth is expected to increase from 25.6% in FY11E to 19.6% in FY12E. We
expect margin improvement to continue for a few quarters.
Exhibit 1: Median of India’s prem/disc to Asian markets (%)
Sensex %prem/disc.to EM
70
60
50
40
30
20
10
0
(10)
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
(20)
Source: Ambit Capital research, Bloomberg
Exhibit 2: BSE-30 sector valuation Exhibit 3: India market valuation

PAT Growth (%) P/E (x) FY10 FY11E FY12E
Sector FY10-11E FY11-12E FY11E FY12E Sensex EPS 839 1,053 1,260
Auto 39.0 22.2 15 12 P/E 21.4 17.1 14.3
Consumer 14.7 14.7 23 21 EPS Growth (%) 25.6 19.6
Oil&Gas 39.8 13.3 12 10 Excl. financials 641 839 999
Real estate 32.1 43.5 20 14 P/E 28.1 21.4 18.0
Financials 27.1 26.8 19 16 EPS Growth (%) 30.9 19.0
Healthcare 22.0 21.3 22 18 Excl. Energy 646 826 993
Power 15.2 22.5 17 14 P/E 27.8 21.8 18.1
Construction 23.6 25.9 23 18 EPS Growth (%) 27.9 20.2
Software 11.0 16.5 20 17 Source: Ambit Capital research, Bloomberg
Cement (15.9) 15.8 12 10
Metals 134.6 18.8 10 9
Telecom (15.8) 19.0 12 10
BSE 30 Index 28.5 19.1 17 14
Strategy 14 July 2010 2

Sensex dividend discount model – indicates a range of 16,360-

21,189
Exhibit 4: Sensex value Exhibit 5: Sensex PER (x) FY11E Exhibit 6: Sensex PER (x) FY12E
Risk premium of 6.0% FY11e EPS (INR) = 1,053.0 FY12e EPS (INR) = 1,260.0
Rf 7.0% Rf 7.5% Rf 8.0% Rf 7.0% Rf 7.5% Rf 8.0% Rf 7.0% Rf 7.5% Rf 8.0%
10% 22,644 17,848 14,660 10% 21.5 16.9 13.9 10% 18.0 14.2 11.6
growth rate
growth rate
growth rate
Dividend
Dividend
Dividend
11% 24,030 18,894 15,484 11% 22.8 17.9 14.7 11% 19.1 15.0 12.3
12% 25,503 20,007 16,360 12% 24.2 19.0 15.5 12% 20.2 15.9 13.0
13% 27,070 21,189 17,289 13% 25.7 20.1 16.4 13% 21.5 16.8 13.7
Source: Ambit Capital research Source: Ambit Capital research Source: Ambit Capital research
The above tables depict sensitivity analysis of the Sensex to various discount rates
and dividend growth rates.
As can be seen from exhibit 4, we believe the 10-year bond yield of 7.5% to 8.0%
could mark the peaking out of the current interest rate cycle. In such a scenario,
the Sensex range works out between 16,360 to 21,189, based on 12% and 13%
dividend growth rate.
Corresponding FY11E and FY12E Sensex PERs are given in exhibits 5 and 6. FY11E
PER of 15.5x and FY12E PER of 13x at 8% 10-year G-sec rate levels.
Sensex valuations – P/BV
Positive divergence in P/BV premium
Exhibit 7: Sensex value Exhibit 8: Sensex PER (x) FY11E Exhibit 9: Sensex PER (x) FY10E
8 8 8.0 Sensex P/B ratio
7 7 7.0
6 6 6.0
5 5 5.0
4 4 4.0
3 3 3.0
2 2 2.0
1 1 1.0
0 0 0.0
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
MSCI EM P/B Sensex P/B ratio Sensex P/B

MSCI ACWI P/B Sensex P/B ratio P/B Mean
+Std Dev from mean
The current Sensex P/BV premium to the MSCI EM has come off from the highs of
165% to 81%, lower than the last 5-year average premium of 91%. Currently the
Sensex is trading at 2.8x P/BV FY11, a 17% discount to its long-term average P/BV
of 3.4x. The 1-year forward P/BV at 2.8x would imply 21% upside to revert to the
long-term mean at 3.4x, implying an index level of 21,250 (at 6250 estimated
book value).

Model Portfolio Recommendations and Suggested

Weights
Exhibit 10: Ambit India Model Portfolio sector weightings - current versus previous
Sector MSCI Current Ambit Earlier Ambit Current Earlier
weight Portfolio Portfolio weightings weightings
weights weights
Industrials 7.06% 11.5% 12.0% Overweight Overweight
Consumer Discretionary 6.55% 7.6% 7.4% Overweight Overweight
Consumer Staples 5.72% 6.0% 7.0% Overweight Overweight
Materials 11.44% 6.9% 6.3% Underweight Underweight
Energy 15.54% 14.1% 15.4% Underweight Underweight
Healthcare 3.99% 4.9% 3.9% Overweight Overweight
Financials 24.73% 25.5% 24.5% Overweight Neutral
Information Technology 17.11% 17.4% 19.0% Overweight Overweight
Telecom 0.86% 0.0% 0.0% Underweight Underweight
Utilities 6.99% 6.0% 4.5% Underweight Underweight

Exhibit 11: Model portfolio

Symbol Ambit Price (Rs.) MSCI Wgt. Previous Recommended
Rating 13-Jul-10 Ambit Wgt. Ambit Wgt.
Industrials 7.06% 12.00% 11.50%
BHEL BHEL IN Equity Buy 2,468 2.42% 7.00% 6.50%
LARSEN LT IN Equity Not Rated 1,838 3.20% 3.00% 3.00%
Crompton Greaves CRG IN EQUITY Buy 265 0% 2.00% 2.00%
Consumer Discretionary 6.55% 7.38% 7.58%
Maruti MSIL IN Equity Buy 1,409 0.85% 1.50% 1.50%
Bajaj Auto BJAUT IN Equity Buy 2,396 0.90% 1.70% 1.70%
Sun TV SUNTV IN Equity Buy 435 0% 1.50% 1.50%
Mahindra & Mahindra MM IN EQUITY Not rated 631 1.43% 1.30% 1.50%
Hero Honda HH IN Equity Hold 1,980 1.38% 1.38% 1.38%
Consumer Staples 5.72% 7.00% 6.00%
ITC ITC IN Equity Buy 299 2.85% 4.00% 3.00%
Nestle NEST IN Equity Buy 2,999 0% 3.00% 3.00%
Materials 11.44% 6.32% 6.92%
Tata Steel TATA IN Equity Buy 512 1.21% 3.00% 2.50%
Sesa Goa SESA IN Equity Not Rated 357 1.00% 1.32% 1.00%
Hindustan Zinc HZ IN Equity Not Rated 986 0% 2.00% 2.00%
Hindalco HNDL IN EQUITY Buy 152 1.42% 0.00% 1.42%
Energy 15.54% 15.39% 14.14%
Reliance Industries RIL IN Equity Buy 1,075 11.89% 13.00% 10.00%
ONGC ONGC IN Equity Not Rated 1,274 2.14% 2.39% 2.14%
Cairn CAIR IN Equity Buy 317 0.98% 0.00% 2.00%
Healthcare 3.99% 3.90% 4.90%
Cipla CIPLA IN Equity Buy 336 0.96% 2.00% 2.00%
Lupin LPC IN Equity Not Rated 1,880 0% 1.90% 1.90%
Sun Pharma SUNP IN Equity Buy 1,747 0.9% 0.00% 1.00%
Financials 24.73% 24.50% 25.50%
HDFC Bank HDFCB IN Equity Buy 2,074 4.70% 6.00% 5.50%
HDFC HDFC IN Equity Buy 3,064 5.40% 6.50% 6.00%
PNB PNB IN Equity Buy 1,055 0% 3.00% 3.00%
Andhra Bank ANDB IN Equity Buy 138 0% 1.00% 1.00%
Bank of Baroda BOB IN Equity Buy 714 0% 0.00% 2.00%
ICICI Bank ICICIBC IN Equity Sell 900 5.87% 4.00% 4.00%
Axis Bank AXSB IN Equity Sell 1,300 2.21% 1.50% 1.50%
SBI SBIN IN Equity Sell 2,435 1.29% 1.00% 1.00%
Orbit Corporation ORB IN EQUITY Buy 143 0% 1.50% 1.50%
Information Technology 17.11% 19.00% 17.40%
Infosys INFO IN Equity Buy 2,790 11.33% 12.50% 11.90%
TCS TCS IN Equity Buy 775 3.13% 6.50% 5.50%
Telecom 0.86% 0.00% 0.00%
R.com RCOM IS Equity Sell 189 0.86% 0.00% 0.00%
Utilities 6.99% 4.50% 6.04%
Tata Power TPWR IN Equity Hold 1,329 1.10% 2.50% 2.50%
Power Trading Corporation POWF IN Equity Buy 108 0% 2.00% 2.00%
GAIL India GAIL IN Equity Hold 466 1.54% 0.00% 1.54%

Changes to the Model Portfolio – Adding Cairn

India, GAIL, Bank of Baroda and Hindalco
Cairn India: Our Oil & Gas analyst, Saeed Jaffery recently upgraded Cairn India
to BUY from HOLD with a target price of Rs360. It is our top pick in the upstream
segment and the target price is based on the long term crude price of US$80/bbl,
and is an average of NAV and EV/EBITDA-based valuation methodology. The
primary reason for our crude outlook is the optimistic demand outlook, pegging
demand at 86.4mnb/d for CY10E compared with 84.8mnb/d in CY09(E). The key
risk remains deterioration in European economic growth, which could lower
demand and hence impact prices.
We believe Cairn is not a single asset play and the Rajasthan block could continue
to surprise on the upside given the recent resource update. We expect the
company to generate cash up to US$2bn by FY12E as production from the
Rajasthan block approaches its peak. The stage is set for a ramp up: The Mangala
field, currently producing 60kbopd, is planned to go up to 1,125kbopd by
4QFY11E and then we expect Bhagyam and Aishwariya to commence production
by 1QFY12E. We ascribe a one-year EV/EBITDA of 5.8x to arrive at a multiple-
based fair value of Rs370/share and a NAV-based Rs350/share, corresponding to
an average value of Rs360/share.
Gas Authority of India (GAIL): As per our analyst, Saeed Jaffery, GAIL has been
experiencing the overhang of lack of clarity on tariffs. We had expressed this
concern in our report dated 16 December 2009 (GAIL - Ease the gas pedal). With
the PNGRB having clarified the tariff structure, he believes this has not only
improved revenue visibility for GAIL but has also set a precedence in the method
of tariff calculation going forward. The tariffs for existing HVJ-GREP-DVPL and
DVPL/GREP upgradation, which have been calculated separately, have come in at
Rs1.36/scm on a blended basis against our expectation of Rs1.02/scm. PNGRB has
assumed a remaining asset life of 13 years and a net fixed asset value of
Rs36.03bn as of 31 March 2008 for tariff calculations of the existing HVJ-GREP-
DVPL pipeline.
Based on the above assumptions and incorporating the normative rate of return,
the regulator has fixed a tariff of Rs25.46/mmbtu v/s the existing Rs28.48/mmbtu,
a downward revision of ~10%. For DVPL/GREP upgradation, the applicable capex
and economic life have been assumed at Rs91.65bn and 25 operating years. With
the above assumptions the tariff for the pipeline has been stipulated to be at
Rs53.65/mmbtu (88% higher than old HVJ tariff).
The regulator has made it clear that the new rate would be applicable only to the
new customers or incremental volumes contracted by existing customers. As we
move into FY11E, our target price undergoes a marginal upward revision to Rs440
(from Rs430 earlier) as a result of a change in the discounting factor. We upgrade
the stock from SELL to HOLD on the back of: a) our sector outperformer stance on
GAIL (given least EPS sensitivity to under-recoveries); b) upside risks to our target
price from deregulation; and c) being a defensive play, especially during times of
volatility.
HIndalco: Our Metals and Mining analyst, Chandrani De has initiated coverage
with a BUY and a price target of Rs185. Her view is that global aluminium
production and consumption volumes suggest that aluminium prices are not ahead
of their fundamentals. Low commercial inventory too lend support to aluminium
prices. We believe that a watch over LME inventory is warranted, but it is unlikely
that a large part of it will enter the system simultaneously. A greater risk from the
Euro economic outlook will keep the metal prices volatile. While the historical peak
prices of US$3,200/t are unlikely to be repeated soon, at the current estimated
consumption levels, the cost curve provides support at US$1,900-$2,000/t. Over
FY10-14E, the company’s domestic capacities for alumina and aluminium are
being expanded by 32% and 34% respectively. The commissioning of Utkal and
Mahan projects as well as improved visibility on other projects should be a
significant stock price driver, in our opinion. Helped by strong demand growth in

South America and Asia, Novelis’ shipments should rise by ~3% p.a. over FY10-
12E while improved cost improvements should further boost profitability. We have
a target price of Rs185 based on SOTP valuation. The stock currently trades at
6.9EV/EBITDA and 13.6x P/E on FY11E basis.
Bank of Baroda: Our Banking analyst, V. Krishnan has a BUY on the stock on the
back of its consistent performance on the domestic book as well as better-than-
anticipated fundamentals on the increased overseas exposure. The margins of the
bank have been trending up sequentially from the June 2009 quarter. We expect
the bank to report stable growth in the core fee income. The investment book for
the bank is largely insulated from rising interest rate risk. It is one of the few banks
to report near stable asset quality with net NPA of 0.35% and provision coverage
of 75%. We value the bank at 1.6x FY11E ABVPS.
Sun Pharma: Our Analyst Anshuman Gupta has initiated with a buy on the stock.
He believes the company has an impressive ANDA pipeline with exclusivity
opportunity upsides. He believes Caraco issue resolution in sight: He expects Sun’s
US revenues to grow at the rate of 24% CAGR between FY10 and FY12E to
Rs19.2bn. We believe that Caraco should be able to shift some products to
another site or restart operations in the next 3-6 months. The India business is
expected to result in Rs27bn in 2012. Growth of the company will be driven by its
focus on specialty doctors and chronic therapies, overall domestic market growth,
strengthening of existing brands and expansion of field force. He expects the
international markets to grow with a CAGR of 20% over FY10-FY12 higher than
the CAGR growth of 10% during FY08-FY10. The appointment of Mr. Sundaram as
CEO with an objective of driving global market business should serve as a catalyst
for Sun’s international business. The fundamentals of the business are improving
as he believes that Caraco issues should get resolved in the next 3-6 months and
the Taro acquisition could also see positive newsflow in FY11. Sun Pharma’s core
business is valued at Rs2,046 at 22x FY12 EPS estimates of Rs93 and upsides from
the Taro acquisition at Rs21(0.5x Rs42/share). We believe that there is more
certainty of growth for Sun Pharma and hence we initiate coverage on the stock
with a BUY and TP of Rs2,067, which is 15 % upside.

Sector Recommendations
CONSUMER DISCRETIONARY - OVERWEIGHT
AUTOMOBILES
The Indian auto industry continues to benefit from the robust domestic demand.
Strong retail sales have resulted in capacity constraints for most auto
manufacturers. Macro factors such as improving urban consumer sentiment,
availability of retail finance and largely under-penetrated rural markets, support
the rising aspiration levels of the Indian consumer. Expectation of normal
monsoons and upcoming festive season would ensure near-term demand
momentum remains upbeat. In the current scenario, we expect commodity cost
inflation pressures to be partially mitigated through pricing action by auto
manufacturers. Competitive intensity is on the rise but not disruptive. We continue
to remain Overweight on the Auto Sector.
Our Top BUYS – Maruti and Bajaj Auto. We have a HOLD on Hero Honda
and M&M (NOT RATED).
MEDIA
We are Overweight and our relative performance is for Broadcasters. Improving
macro-economic scenario and resurgence in consumer demand is expected to
result in increased corporate adspend leading to higher ad revenue for both
broadcasting and print companies.
 Apart from ad revenue growth that is expected to grow in excess of 15%,

broadcasting companies are also expected to continue to benefit from
improved subscription revenue growth, driven by increasing digitalisation.
 In the print segment, vernacular newspapers continue to perform better versus

English dailies due to higher dependence on local/regional advertising. Also,
lower newsprint prices would result in higher margins. Hence, we maintain our
positive outlook on the Media sector.
Our Top BUY: Sun TV
Exhibit 12: Stock performance

Share Free Relative Performance to
Company Bloomberg Mcap EPS P/E
Price Float Index (%)
Rs (US$bn) (%) FY10 FY11E FY12E FY10 FY11E FY12E 1m 3m 6m 12m
Bajaj Auto BJAUT IN 2409 7.5 46.9 129.0 142.0 164.0 18.7 17.0 14.7 (0.1) 15.6 37.3 78.6
Hero Honda HH IN 1975 8.5 70.1 112.0 122.0 135.0 17.6 16.2 14.6 (6.7) (2.0) 21.3 6.5
Mahindra MM IN 638 7.9 67.9 45.1 39.1 45.3 14.1 16.3 14.1 0.1 22.7 4.1 38.5
Maruti MSIL IN 1409 8.7 34.4 86.4 96.2 113.0 16.3 14.7 12.5 (1.2) 2.3 (5.0) (3.9)
Sun TV SUNTV IN 429 3.6 7.7 13.2 16.4 19.7 32.5 26.2 21.7 (0.1) 0.5 13.2 43.2

CONSUMER STAPLES - OVERWEIGHT

 Topline growth momentum should sustain as consumer confidence remains
healthy and monsoon trends so far have been normal. Food inflation impact is
marginal on the sector.
 Pricing adjustments which have been moderate over last 12-18 months could
see improvement in 2HFY11 if current demand trends are sustained.
 Raw material cost inflation trends (except in certain food categories) are
benign and this trend will support expansion in gross margins. Advertising cost
trends are also moderate however promotion spends in certain categories
(Home and Personal care) remain high and this will continue to exert pressure
on margins for companies operating in these segments.
Our top BUYS: ITC and NESTLE. We have a HOLD on HUL

ITC ITC IN 300 24.6 58.5 10.7 12.8 14.8 28.1 23.4 20.2 1.4 12.4 19.0 9.5
Nestle NEST IN 2982 6.2 35.4 73.2 85.0 101.3 40.7 35.1 29.4 (2.1) 10.1 15.7 11.7

ENERGY – UNDERWEIGHT
Oil to trade in US$75-US$85/bbl band: We believe that crude oil would broadly be
trading in US$75-US$85/bbl range during CY10E and CY11E. The primary reason
being, an optimistic demand outlook, pegging the demand at 86.4mnb/d for
CY10E compared with 84.8mnb/d in CY09 (source: IEA), and the signaling by
OPEC, which has often stated its comfort level with crude oil price being in the
US$75/bbl range.
GRMs to improve: We model for Singapore complex margins of US$6/bbl by
FY12E, from the current US$3.5/bbl, given: a) back-ended CY10E global recovery
would provide support of product demand, particularly middle distillates; and b)
improvement in light-heavy spread.
Cairn India/RIL - TOP PICK within upstream : We rate Cairn India (CIL) as our
top pick in the upstream segment, recommending a BUY with 12-month target
price of Rs360, implying 16% upside from current levels. Our target price, based
on long term crude price of US$80/bbl, is an average of NAV and EV/EBITDA-
based valuation methodology.
We believe RIL is best levered to improvement in GRMs going forward. Our
sensitivity analysis suggests a 5% change in earnings for every US$1/bbl change in
GRMs. We model for RIL's realised margins to increase from US$6.7/bbl in FY10 to
US$9.5/bbl in FY12E. We have a BUY recommendation on the stock with a 12-
month target price of Rs1,270, implying upside of 19% from current levels.
Deregulation - PSU upstream better placed: We believe that the recent APM
gas price hike would improve earnings of ONGC/OIL India by ~20% going
forward. We also believe that the move could set precedence to the much-needed
reforms in petroleum product pricing. Given that is could potentially re-rate the
sector; we would advise playing this theme through the upstream players
(ONGC/OIL/GAIL) rather than downstream players (IOC, HPCL, BPCL) as risk-
reward is relatively favourable.
Top BUYS are Reliance, Cairn India and ONGC

Reliance RIL IN
1,056 74.0 55.8 49.4 67.0 83.4 21.4 15.8 12.7 (4.0) (6.7) (5.4) (10.4)
ONGC ONGC IN
1,278 58.6 12.5 92.2 111.9 127.3 13.9 11.4 10.0 3.1 20.8 4.2 (2.5)
Cairn CAIR IN
312 12.7 20.2 5.5 21.3 45.3 56.3 14.6 6.9 (1.5) (0.4) 1.9 10.4

FINANCIALS OVERWEIGHT
In the near term, our outlook on the banking sector remains cautious. However,
our medium-term outlook on the sector remains positive.
 The recent pick up in credit demand has been largely on the back of the 3G
auctions. We believe that the industry is yet to witness a broad based credit
offtake across sectors. As a result credit is slow to pick up, deposits are being
let go and we expect systemic interest rates to rise with the next regulatory
push (to bridle inflationary expectations and realign the interest rates at near-
normal levels)
 Macro theme remains intact - hence, we continue to believe that credit
demand will surely pick up at some stage in the cycle
 Banks will prefer garnering deposits while interest rates are still low and
subsequently deploy them at later stages of the interest rate cycle
 Banks' margins are likely to stay under pressure, with a rise in lending rates
likely to lag that in the deposit rates
 Treasury profits to remain muted on the back of rising interest rates
 Asset quality remains a concern and we would get a clear picture post
2HFY11, when the moratorium on restructured assets would come to an end.
As a result, provisioning costs could further drag profitability.
Within our coverage universe, among the PSU banks, we maintain our preference
for PNB, BoB, and Andhra Bank while we are Underweight SBI. Within the private
sector banking universe, we prefer HDFC Bank over Axis Bank and ICICI Bank.
REAL ESTATE – Upgrade to Neutral from negative
We upgrade our negative stance to Neutral. CY2010 will be driven by: 1)
improving domestic economy; (2) continued balance sheet improvements by
enhancing the debt-equity ratio; (3) reduction in debtors; (4) improved hiring in
the IT/ITES sector, which is the key driver for residential property demand (still
substantially below peak levels); and (5) we see a bottoming out in the
commercial/retail property markets, which we believe will see a slow but steady
uptick in the leasing/sales volumes.
Risks: 1) Rising interest rates; and 2) Overcapacity in residential segment would
result in limited pricing upside – however, developers have shifted focus to
residential properties to maintain cash flows in the scenario of weak demand for
commercial properties. An offshoot of this will be overcapacity and since the focus
is to a large extent on the affordable housing segment (objective: to maintain cash
flows) there will be substantial pressure on margins too.
We are Neutral on large caps, DLF, Unitech in spite of their huge
underperformance to the Sensex but have a BUY on HDIL, Orbit and Purvankara
as our Top Picks.

Company Bloomberg Price Mcap Free Float EPS P/E Relative Perf to Index (%)
HDFC Bank HDFCB IN 2,049 20.2 75.3 64.4 90.2 110.4 31.8 22.7 18.6 0.2 4.4 17.4 11.9
HDFC Ltd HDFC IN 3,003 18.7 90.3 99.0 112.9 136.7 30.3 26.6 22.0 1.7 5.7 14.0 2.8
ICICI Bank ICICIBC IN 893 21.4 57.7 36.1 48.2 59.3 24.7 18.5 15.1 0.5 (7.8) 3.0 7.0
Andhra Bk ANDB IN 136 1.4 37.8 21.6 27.4 n.a. 6.3 5.0 n.a. (4.6) 16.3 24.3 30.3
BOB BOB IN 715 5.6 37.8 81.4 106.3 106.5 8.8 6.7 6.7 (6.7) 10.6 28.5 39.1
PNB PNB IN 1,056 7.1 32.4 119.1 136.9 n.a. 8.9 7.7 n.a. (2.9) 6.2 10.7 29.1
Orbit ORB IN 138 0.3 46.2 18.4 24.3 27.3 7.5 5.7 5.1 5.3 (5.0) (15.5) 59.7
SBI SBIN IN 2,401 32.7 28.8 144.4 177.5 215.4 16.6 13.5 11.1 (2.4) 14.2 5.8 17.1
Axis Bank AXSB IN 1,288 11.2 85.1 65.9 79.1 113.3 19.6 16.3 11.4 (1.6) 9.0 19.3 31.4

INDUSTRIALS – OVERWEIGHT
 With power demand likely to grow at over 8% in the next ten years, the
country will continue to experience power shortage ahead, resulting in strong
demand for power generation equipment. The Indian power equipment
market, with demand exceeding 25GW per annum, will continue to be in short
supply.
 Powergrid, the largest state distributor, is targeting to expand inter-regional

transmission capacity from 20GW to 38GW
 Corporate capex has also started showing signs of a revival, which should
translate to accelerating order flows for industrial capital goods manufacturers
 The Indian T&D market will see strong growth of over 15% in next five years,
due to ongoing investments by the states that augment their distribution
networks.
Our top BUYS are BHEL, Larsen & Toubro (Not Rated) and Crompton
Greaves

BHEL BHEL IN 2,444 25.6 27.9 88.1 113.0 136.7 27.8 21.6 17.9 (2.8) (3.7) 0.8 (7.3)
Larsen LT IN 1,826 23.6 59.0 90.2 68.1 84.0 20.3 26.8 21.7 3.6 13.2 5.6 1.3
Crompton CRG IN 261 3.6 54.7 12.8 13.8 16.1 20.3 19.0 16.2 1.5 (5.1) 2.5 25.1

MATERIALS – UNDERWEIGHT
Outlook on Metals space: Positive, bias towards ferrous space
Across metals, global demand is expected to increase with greater contribution
continuing to come from China, followed by Emerging markets. So companies with
a geographic exposure to the domestic Indian market will likely see better volume
growth. The other theme amongst metal companies will be the capacity additions
among major players. Between metals, we have a preference for the ferrous
sector, as over the medium-term, higher interest rates could dampen speculative
activity in exchange-traded metals, which are also plagued by the higher risk of
inventory overhang.
CEMENT
Cement demand is in line with our expectation
We have been surprised by the resilience in cement prices. However, we continue
to believe that the increase in supply will lead to pricing pressure. We maintain our
SELL recommendation on the sector.

Tata Steel TATA IN 498 9.5 56.7 (3.4) 67.6 67.1 (144.5) 7.4 7.4 (0.0) (27.6) (22.7) 6.2
Hindustan
HZ IN
Zinc 972 8.8 5.5 95.7 123.0 141.0 10.2 7.9 6.9 (4.1) (22.8) (27.4) 30.6
Sesa Goa SESA IN 356 6.6 41.0 31.6 48.1 54.8 11.3 7.4 6.5 (4.4) (22.3) (14.6) 43.7
Hindalco HNDL IN 150 6.1 69.8 6.1 10.9 13.7 24.4 13.7 10.9 2.0 (17.4) (13.5) 54.6

HEALTHCARE – OVERWEIGHT
Positive growth momentum to continue
 Indian domestic businesses have become more attractive after the acquisition
of Piramal Healthcare's business. Indian Pharma market is an attractive
proposition for Big Pharma companies as domestic businesses are
complementary to their business. This could lead to further M&A activity in
India as Big Pharma eyes higher penetration and larger portfolios to tap the
Indian market.
 Big Pharma will also be seen looking for more partnerships with generic
companies that have the requisite manufacturing and R&D capabilities for: (1)
API and Finished Dosage supplies for the regulated and the Emerging markets;
(2) Biosimilars; and (3) Contract Research and Manufacturing.
 Launch of new products in US, India and other Emerging markets will be an
ongoing process and will act as a key growth driver for all Indian companies.
Entry into newer geographies and new product approvals should lead to
higher growth.
 We maintain our positive stance on the sector, which has been one of the
better performers relative to the market.

Cipla CIPLA IN 336 5.8 49.4 12.5 15.2 18.5 26.9 22.1 18.2 (5.3) 0.1 (3.9) (3.6)
Lupin LPC IN 1,904 3.6 59.1 76.6 94.7 113.3 24.8 20.1 16.8 (3.1) 16.6 31.6 80.5
Sun pharma SUNP IN 1,742 7.7 36.3 65.2 77 92.8 26.7 22.6 18.8 (1.5) (3.5) 7.7 17.6

UTILITIES – UNDERWEIGHT
POWER
 Generation capacity at 51% of planned addition reflects a huge shortfall.
 Strong capacity addition will be the growth driver.
 However, fuel shortage is a key constraint. With coal demand at 404mn

tonnes (FY09) and domestic supply at 363mn tonnes, there is already a
shortfall, which is being met by imported coal.
 Merchant power producers are also aggressively adding capacities. Stable

pricing environment and fuel linkages are key growth drivers.
 We anticipate that capacity additions on tariff-based bidding norms as well as

through UMPPs, will lead to competitive pressures that lag the plan schedule.
 We are positive on transmission and distribution.
 Capacities that will come up are mostly state driven and captive capacity that
lacks distribution network and depends on the grid to evacuate power.
GAS SECTOR
 While apprehensive about efficient utilization of LNG capacities in the country
going forward, we are convinced of the robust growth story in domestic gas
supplies, which are expected to double over FY09-FY12E. This augurs well for
gas transmission companies such as GAIL, which would be a key beneficiary of
this growth.
 Commencement of KG-D6 gas, concomitant with GAIL's Rs300bn network

expansion plan encompassing addition of 7,000km of gas pipelines, we
reckon would result in 37% CAGR volume growth over FY09-FY12E for the
company.
Our top BUYS are Tata Power and Power Trading Corporation. We have a
HOLD on GAIL

Tata Power TPWR IN 1,316 6.7 58.2 39.8 21.5 31.6 33.1 61.1 41.6 1.0 (2.6) (14.1) (6.8)
GAIL GAIL IN 465 12.6 27.7 26.2 25.9 32.7 17.7 18.0 14.2 (3.8) 12.6 5.6 12.4
PTC PTCIN IN 106 0.7 63.5 3.2 5.3 6.6 32.9 20.0 16.0 (2.3) (4.9) (10.7) (5.9)

SOFTWARE – OVERWEIGHT
 Key drivers for IT spend growth: Improved macro-economic variables since
FY09, analysis of top 40 outsourcers and recent 1Q FY11 Infosys results
suggest strong demand environment ahead. We see above-average growth
opportunities in: (a) verticalwise: BFSI sector (driven by M&A, risk and
compliance); and (b) Serviceswise: Infrastructure management services (IMS)
where India’s penetration is a mere 2%.
 View on longer term issues: We expect India’s demographic advantage to

be a compelling case for offshoring in the long term. While other issues such
as industry consolidation in the global technology landscape have started
emerging, we do not foresee any near-term impact on the offshoring
competitive landscape.
 Demand currently not been hit by the Eurozone crisis: While the manner
in which the Eurozone crisis evolves would require to be closely monitored, our
interaction with companies reveals that business momentum on the ground
continues to be positive. Moreover, we believe that since Europe as a region
has been relatively less mature in the adoption of offshoring, ISPs exposure to
discretionary spending would also be on the lower side v/s the US. We
continue to maintain our positive stance on tier-1 ISPs and believe strong
volume growth would offset most of the currency woes in the near term.
Risks
 Macro shocks
 Rupee appreciation; we factor in a margin decline of 240-300 bps across our

coverage universe over FY10-12E.
Our top BUYS are Infosys and TCS

Infosys INFO IN 2,896 35.6 78.9 108.8 119.7 148.4 26.6 24.2 19.5 4.7 7.4 8.7 26.7
TCS TCS IN 792 33.2 23.5 35.1 39.3 45.7 22.6 20.1 17.3 0.5 0.0 3.9 52.8

TELECOM – UNDERWEIGHT
The Indian mobile segment been adding more than 15-16mn subscribers each
month and is one of the fastest growing market in the world. It is also the second
largest mobile market in world only after China. The growth is expected to
continue due to (1) lower mobile penetration in rural areas (2) continuously
declining cost of mobile ownership and (3) increasing usage of multiple sim due to
attractive pricing propositions.
The heightened competition, however, has led to severe tariff drop in the industry.
This coupled with the rising cost structure has resulted in profitability being under
pressure.
The recently held 3G and BWA spectrum auction helped government mobilize
Rs1062bn (3G Rs677bn and BWA Rs388bn). Bharti won 3G spectrum in 13 circles
and BWA spectrum in 4 circles (cash outflow of Rs156bn), Vodafone grabbed 3G
in 9 circles (Rs116bn), RCom got 3G in 13 circles (Rs86bn) whereas Idea acquired
3G spectrum in 11 circles (Rs57.7bn). It is to be noted that Vodafone, RCom and
Idea did not get BWA spectrum.
Going forward, we believe that incremental revenues from 3G services would not
be commensurate with the incremental opex incurred towards running the 3G
network in terms of NOC and selling and marketing expense. Earnings will be
further impacted due to increase in amortization and interest expenses after the
deployment of 3G network. The impending implementation of MNP may also
impact profitability of the companies. We remain negative on the telecom sector
and maintain SELL on Bharti Airtel, RCom and Idea Cellular.

Sensex performance relative to Asian equity

markets
 Strong corporate earnings in FY12E: Auto,

Infrastructure/Construction, Real estate, Power & Financials likely
key drivers of Sensex profits in FY12E
 CYTD-10 India and EMs: Indonesia, Thailand, MSCI Asia - top

performing markets
 12-month total return performance – Indonesia & Thailand best

performing in EM basket
 Market dynamics — strong foreign flows
 MSCI India relative outperformance to MSCI EM and MSCI ACWI

Indices
 The current 3M avg. 10-yr US G-secs yield less Fed rate is

trending downward. This has resulted in FII flows to India and
Emerging markets.
 MSCI India is trading at P/E premium over the ACWI world index
 The ratio of Indian IVs to the US VIX has been on a decline

through the European crisis. This indicates relatively lower risk
aversion

Market Performance
Auto, Infrastructure/Construction, Real estate,
Power & Financials likely key drivers of Sensex
profits in FY12E
Top 10 Sensex companies would account for 64.8% of Sensex PAT in FY11E and
64.1% in FY12E. Most of the increase in PAT contribution and earnings growth in
FY12E arises from Financials, Power, Real Estate, Healthcare,
Infrastructure/Construction. Visibility of earnings of the Top 10 would support
19.6% FY12E growth.
Exhibit 21: Sensex Sectoral PAT –FY11E Exhibit 22: Sensex Sectoral PAT –FY12E
FY11E PAT contrib.(%) Increase/Decrease over FY10 FY12E PAT contrib.(%) Increase/Decrease over FY11E
PAT Contrib. (%) In FY11E PAT Contrib. (%) In FY12E
Healthcare Healthcare
Cement Cement
Real estate Real estate
Construction Construction
Consumer Consumer
Auto Auto
Telecom Telecom
Power Power
Metals Metals
Software Software
Financials Financials
Oil&Gas Oil&Gas
(10) 0 10 20 30 40 (10) 0 10 20 30
Source: Ambit Capital research Source: Ambit Capital research
Exhibit 23: Top10 contri.67%of PAT Exhibit 24: Top10 contri.64.8%of PAT Exhibit 25: Top10 contri.64.1%of PAT
Company FY10 Company FY11E Company FY12E
ONGC 14.5 ONGC 16.0 ONGC 14.2
Reliance Inds. 12.1 Reliance Inds. 13.1 Reliance Inds. 13.4
SBI 6.9 SBI 6.6 SBI 7.5
Bharti Airtel 6.8 NTPC 5.6 NTPC 5.8
NTPC 6.5 Bharti Airtel 4.6 Bharti Airtel 4.4
TCS 5.2 TCS 4.4 TCS 4.2
Infosys Tech. 4.7 Infosys Tech. 4.0 Infosys Tech. 4.2
RCOM 3.5 Tata Steel 3.9 Sterlite ind 3.8
Wipro 3.5 Sterlite ind 3.4 BHEL 3.3
BHEL 3.2 BHEL 3.2 Tata Steel 3.3

Sensex performance relative to Asian equity

markets
 Thailand and Indonesia are the best performing Asian markets in CYTD10
 Strong global clues keep Asian markets buoyant
 Indices performance in CY10
 Market dynamics – strong foreign flows
Indices performance CYTD 2010 – Indonesia, Thailand & MSCI Asia

— top performing markets
Exhibit 26: 1M abs. perf. (%) Exhibit 27: CYTD abs. perf. (%) Exhibit 28: 1Yr abs. perf. (%)
( ) ( ) y ( )
(5.0) 0.0 5.0 10.0 (30) (20) (10) 0 10 20 (40) (20) 0 20 40 60
Shanghai Zinc ($/MT) Shanghai

Gold ($/t oz.) Shanghai Nikkei 225
Silver ($/t oz.) Aluminium ($/MT) LME Steel ($/MT)
LME Steel ($/MT) Copper ($/MT) Taiwan
UK -FTSE 100 Nikkei 225 Hang Seng
NASDAQ Brazil MSCI World
Nikkei 225 MSCI World MSCI Asia Apex 50
Brent Oil ($/barrel) MSCI ACWI MSCI ACWI
Mexico Hang Seng Korea
US -Dow Jones Taiwan Aluminium ($/MT)
Brazil UK -FTSE 100
Zinc ($/MT)
MSCI World MSCI EM
UK -FTSE 100
MSCI ACWI MSCI Asia Apex 50
Brent Oil ($/barrel)
Hang Seng NASDAQ
US -Dow Jones
Korea Brent Oil ($/barrel)
NASDAQ
Aluminium ($/MT) US -Dow Jones
Singapore
MSCI EM Mexico
MSCI EM
MSCI India LME Steel ($/MT)
Brazil
Indonesia Singapore
India - Sensex
MSCI Asia Apex 50 MSCI India
India - Sensex India - Nifty
Singapore
Korea Gold ($/t oz.)
Zinc ($/MT)
India - Nifty MSCI India
India - Nifty
Silver ($/t oz.) Mexico
India - Sensex
Copper ($/MT) Gold ($/t oz.) Silver ($/t oz.)
Thailand Thailand Copper ($/MT)

Taiwan Indonesia Thailand
Indonesia

12-month total return performance – Indonesia & Thailand best

performing in EM basket
Exhibit 29: Global Indices: avg. total return 12months (%)
All Basic Cons. Cons. Health Oil & Technolo Teleco Utilitie
Country Financials Industrials
Sectors Materials Goods Services Care Gas gy m. s
Brazil 28.6 36.7 45.2 57.1 28.1 n.a. 48.3 7.5 n.a. 12.9 28.7
Shanghai (0.8) (3.4) 23.2 19.8 (17.8) 37.2 3.0 0.9 39.2 (20.5) (9.0)
China 15.7 12.4 92.3 26.3 16.5 n.a. 24.1 17.6 34.9 5.7 15.8
India 30.1 52.5 44.5 n.a. 26.7 36.0 34.0 17.6 80.3 (34.2) 3.6
Indonesia 65.2 36.4 114.1 83.0 53.2 88.8 81.5 (11.8) 24.7 40.1 25.7
Japan (2.7) (3.9) (4.4) 3.6 (24.3) (1.3) 7.4 (30.2) 7.8 3.2 5.8
Korea 36.3 50.7 59.3 42.6 22.8 7.8 17.4 12.5 40.7 11.0 9.5
Mexico 41.4 107.4 41.9 36.9 45.9 n.a. 40.9 n.a. n.a. 28.8 n.a.
Nasdaq 36.2 36.1 38.6 48.1 23.4 27.1 32.1 53.8 36.0 54.3 13.5
Singapore 34.0 n.a. 23.4 46.7 29.0 n.a. 49.5 n.a. n.a. 7.4 n.a.
Taiwan 25.8 29.3 39.0 22.4 4.0 15.7 34.1 10.0 29.4 10.2 19.0
Thailand 45.6 81.1 73.9 58.5 50.6 29.9 69.6 15.4 46.5 12.2 19.7
U.S. 16.4 40.1 15.4 17.1 28.7 14.8 43.4 (5.9) 16.7 3.3 n.a.
U.K. 29.8 46.4 32.3 36.5 28.0 18.6 36.6 9.3 62.4 31.2 20.4
From Jan 2010 average returns — Automobiles, Banks, Healthcare, Industrials,

Personal Household and Technology — stellar performers. Basic Resources,
Telecom and Utilities have been relative laggards
Exhibit 30: India Indices performance (%)

Total Return % 1m Jan 2010 to 12 July 2010
India Indices Performance Sensex Nifty BSE100 BSE200 BSE500 Sensex Nifty BSE100 BSE200 BSE500
Absolute Index Perf. 7.1 7.0 6.7 6.8 6.9 2.1 2.9 3.0 4.1 4.7
Automobiles & Parts 9.3 14.0 23.8 60.1 124.8 (8.8) 13.0 50.2 121.6 317.4
Banks 16.0 23.3 47.4 110.9 184.4 21.7 67.3 119.4 397.2 697.8
Basic Resources 25.4 27.8 39.5 103.6 269.7 (49.5) (67.3) (139.2) (176.3) (54.3)
Chemicals n.a. n.a. 3.1 31.8 270.0 n.a. n.a. 2.0 75.8 522.9
Construction & Materials 13.4 11.1 47.0 88.7 263.0 (10.3) 13.2 (1.8) 18.9 185.5
Financial Services 9.7 9.7 35.9 74.4 164.2 10.8 10.9 74.4 95.1 208.8
Food & Beverage 0.0 0.0 9.2 78.7 282.5 0.0 0.0 19.3 (135.0) (145.0)
Health Care 18.0 18.5 26.5 38.6 263.3 6.0 5.9 77.3 186.4 680.0
Industrial Goods & Services 20.9 26.0 77.6 186.7 575.1 15.0 51.3 145.2 224.2 647.9
Insurance n.a. 0.0 0.0 (5.5) (5.5) n.a. 0.0 0.0 (30.2) (30.2)
Media n.a. n.a. 6.0 46.5 154.3 n.a. n.a. 17.5 4.0 (20.4)
Oil & Gas 13.5 59.6 150.1 187.7 256.6 6.8 4.6 (4.2) 24.0 37.6
Personal & Household Goods 13.5 13.3 22.6 62.0 251.1 21.6 21.4 (0.4) 150.4 391.0
Retail n.a. n.a. 0.0 20.6 47.9 n.a. n.a. 0.0 21.5 (35.4)
Technology 21.9 22.1 25.8 77.8 438.7 13.1 10.7 11.8 (72.2) (130.9)
Telecommunications 26.9 66.6 92.3 107.4 117.1 5.5 2.9 (6.5) (21.1) (12.8)
Travel & Leisure n.a. n.a. 8.6 15.4 71.8 n.a. n.a. 4.2 (8.2) (92.3)
Utilities 17.8 32.7 41.5 84.6 120.5 (18.2) (12.8) (6.7) 13.6 66.7

Market dynamics — strong foreign flows

Demand-supply : Higher institutional participation pushing up trading volumes
Exhibit 31: FIIs’ net inflows in equity Exhibit 32: MFs’ net inflows in equity
(Inflow USD Net Inflows In Equity (Index) (Inflo w USD mn) Net Inflows In Equity (Index)
6,000 ) 25,000 200 25,000
150 20,000
4,000 20,000
100
2,000 15,000 50 15,000
0 10,000 0 10,000
(50)
(2,000) 5,000 5,000
(100)
(4,000) 0 (150) 0
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
FIIs Sensex Index (RHS) MFs Sensex Index (RHS)
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
 Strong foreign inflows since Apr’09-Mar’10 at US$23bn as against -US$11bn

during FY09 has resulted in robust market performance
 FIIs continue to be net buyers of Indian equities
 MFs are also participating but have turned sellers for Jan-May 2010.
 US$1.7bn inflows during Q1FY10
Exhibit 33: FIIs investments
99,500 FIIs Investments 32,000

79,500 24,000
59,500 16,000
8,000
39,500 0
19,500 (8,000)
(500) (16,000)
Apr 10-Jun 10
2008-09
2009-10
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Cumulative Net Investment $mn FIIs Net Investments $mn (RHS)

MSCI India relative outperformance to MSCI EM

and MSCI ACWI Indices
 US 10-yr G-sec less Fed rate v/s MSCI index
 US 10-yr G-sec less Fed rate – impacts FII flows to EMs
 ACWI world Index v/s MSCI India
 Volatility measures – India v/s US
US 10-yr G-sec less Fed rate v/s MSCI index
Exhibit 34: MSCI India v/s MSCI ACWI Exhibit 35: MSCI EM v/s MSCI ACWI
110 4 60 4
90 50
70 40
2 30 2
50 20
30 10
0
10 0 (10) 0
(10) (20)
(30) (30)
(40)
(50) -2 (50) -2
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
12M relative return MSCI India vs MSCI ACWI (LHS) 12M relative return MSCI EM vs MSCI ACWI (LHS)
10yr US GSec yield less fed rate (RHS) 10yr US GSec yield less fed rate (RHS)
Source: Ambit Capital research, Bloomberg Source: Ambit Capital research, Bloomberg
Exhibit 36: MSCI India PE Relative to MSCI ACWI Index
50 MSCI India PE Relative to MSCI ACWI Index 50

40 40
30 30
20 20
10 10
0 0
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
MSCI India (LHS) MSCI ACWI
MSCI India has traded at a P/E discount to the MSCI ACWI; the discount has
reduced post elections
 MSCI India index has outperformed MSCI ACWI index on a 12-month relative
basis while MSCI EM has underperformed
 Anecdotally, the US yield curve has been a lead indicator of the economic
cycle. With the yield spread trending flat with an upward bias, risk appetite for
EMs may weaken resulting in India’s relative outperformance to moderate
against the MSCI World index.

US 10-yr G-sec less Fed rate – hits FII flows to EMs
Exhibit 37: US yield curve vs. FII net flows India Exhibit 38: US yield curve vs. FII net flows EM
US yield curve vs. FII net flows India US yield curve vs s FII net flows in EM
150 4 300 4
100 3 200
3
100
50 2
0 2
0 1 -100 1
-50 - -200
0
-300
-100 (1)
-400 -1
Mar-01
D e c-01
S e p-02
Jun-03
Mar-04
D e c-04
S e p-05
Jun-06
Mar-07
D e c-07
S e p-08
Jun-09
Mar-10
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
3M avg 10yr US GSec yield less fed rate (RHS, %)
3M FII net flows (LHS, US$ mn) 3M avg 10yr US GSec yield less fed rate (RHS, %)
3M FII net flows (LHS, US$ mn)
Since 2001, FII data suggests that the US yield curve has predictive abilities in
signaling net FII flows
During the US inverted yield curve regime, we saw large FII inflows and vice versa
The movement in the capital resulted in MSCI India and MSCI EM outperforming
the MSCI ACWI Index
The current 3M avg. 10-yr US G-sec yield less Fed rate is trending downward. This
has resulted in FII flows to India and Emerging markets.
ACWI world Index v/s MSCI India
Exhibit 39: 6m forward Sensex relative return to ACWI Exhibit 40: MSCI India % prem./disc.to ACWI Index
30.0 6m forward Sensex relative return to ACWI %

MSCI India %prem/disc.to ACWI Index
25.0 120
20.0 100
80
15.0 60
10.0 40
5.0 20
0.0 0
(5.0) (20)
(10.0) (40)
(15.0) (60)
(80)
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
MSCI India is trading at P/E premium over the ACWI world index
Sensex has underperformed ACWI world index as it has delivered a negative 6-
month forward relative returns v/s ACWI index

Volatility measures – India v/s US
Exhibit 41: US VIX Exhibit 42: India IVs
100 100
80 80
60
60
VIX
40
VIX
32.8%
20 40
0 20
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
0
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Date
US VIX 200 dma Date
 US VIX rose sharply in May to levels of 48; this is the same peak that the index
had recorded in a lot of previous crises notably LTCM, 9/11, Asian currency
crisis, to name a few
 After a long time, this measure has sustained above its 200DMA (which is at
around 23), indicating some return of risk aversion
 Currently it has dipped below the historically important level of 30 and its
sustenance below this level, and eventually a move below the 200DMA, are
necessary for a sustained US equity upmove
 Indian IVs followed suit in May but the rise was more modest — to around 33
Exhibit 43: India IVs US VIX Exhibit 44: Leverage

3.0
2.0
2.5 1.8
1.6
2.0 1.4
Ratio
1.2
1.5
1.0
1.0 0.8
0.6
0.5 0.4
0.2
-
0.0
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Date
Date
Source: Ambit Capital research Note: The above chart is derived from Market Futures of adjusted for
Nifty levels; Source: Ambit Capital research
 The ratio of Indian IVs to the US VIX has been on a decline through the
European crisis. This indicates relatively lower risk aversion for Indian equities
in this crisis; no doubt then that this is being reflected in equity market
performance as well with India outperforming the US and European equities.
 Market leverage (on the derivatives side) is low and well below the January
2008 peak thus indicating no speculative excesses

Macro economic trends

 GDP growth estimates of 8.2% for FY11E
 Inflation expectation of ~5.4% for FY11E
 Credit growth estimated at 22% YoY
 Fiscal deficit expected at 5% of GDP compared with budget

estimates of 5.5%
 Big bang reforms – Auto fuel re-deregulation
 Monsoons — not a concern

Economy – GDP estimates at 8.2% in

FY11E
Our estimates for FY11E build in a combination of the following factors:
 Inflation in agricultural products (~7%) as well as manufactured products
 Pass-through of higher interest rates to the manufacturing sector

Our revised FY11E GDP growth estimate of 8.2% build in inflation expectation of
~5.4% for full year 2010-11. This differs from the Union Budget 2011 expectation
of 8.5% real GDP growth and 4% inflation. In fact, the Economic Advisory Council
(EAC) to the PM has projected an 8.2% real GDP growth for 2010-11.
We expect Industry to continue to exhibit the highest growth at 9.5%, albeit a tad
lower than what was witnessed during FY10. On a YoY basis, we expect
Agriculture and Services to register strong growth at 3.5% and 8.9% respectively
(exhibit 45).
Exhibit 45: GDP growth by sector for FY11E (%)
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Agriculture Industry Services Total
FY10 FY11
Source: CSO, Ambit Capital research
Agriculture
We expect agricultural growth to benefit from a favorable base effect comparison,
and clock in with 3.5% YoY growth in FY11E. Our agricultural growth estimate is
marginally different from that of the EAC, primarily on account of higher food
article inflation that we have factored into our model. Our FY11E Agriculture
growth estimates currently factor in 6.6% food article inflation.
Industry — yet another bumper year ahead

We expect Industry to exhibit near double-digit growth during FY11E, largely on
the back of the Manufacturing sector, which is likely to witness an extremely strong
first half (exhibit 46).

Exhibit 46: Industry growth by segment - FY11E (%)

12.0
10.0
8.0
6.0
4.0
2.0
Mining Manufacturing Electricity, Gas & Industry
Water Supply
FY10 FY11
We continue to believe that the higher-than-anticipated IIP growth (exhibit 47) is

reflective of the underlying high capacity utilization, which is likely to manifest in
high non-food manufacturing inflation going forward.
Exhibit 47: IIP growth has been steaming ahead recently - likely to trend lower
20%
16%
12%
8%
4%
0%
-4%
Jun
Jan
May
Nov
Aug
Sep
Feb
Dec
Apr
Mar
Jul
Oct
FY09 FY10 FY11
We expect a large part of inflation in Industry to emerge in the Mining segment. In

line with our policy expectation for higher systemic interest rates, we are biased in
favour of believing that the recent trend of elevated growth in Manufacturing,
and as a corollary, Industry, is susceptible to reversal of the interest rate
cycle.
Services - ‘lifting’ the trajectory in construction

We expect Services to exhibit near 9% growth for FY11E, largely on back of the
Construction sector, which is likely to witness an extremely strong 1H (exhibit 48).
Exhibit 48: Services growth by segment - FY11E (%)
12.0
10.0
8.0
6.0
4.0
Construction Transport & Financing / Community / Services
Comm Real estate Social
FY10 FY11

Inflation – estimated at ~5.4%

Although YoY inflation in food articles continues to be in mid-teens (exhibit 49-
50), the last two weeks have witnessed steady week-on-week decline in prices
across all food articles (exhibit 51-52).
Exhibit 49: YoY inflation in food articles in mid-teens; Exhibit 50: Week-on-week inflation in food articles (%)
may moderate on normal monsoons - Jan’10-Jun’10 - intermittent moves
25.0 2.0% Food Articles
20.0
1.5%
1.0%
15.0
0.5%
10.0
0.0%
5.0 -0.5%
0.0 -1.0%
(5.0)
-1.5%
02Jan10
16Jan10
30Jan10
13Feb10
27Feb10
13Mar10
27Mar10
10Apr10
24Apr10
08May10
22May10
05Jun10
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Series1 Apr-10
Source: Ministry of Commerce, Ambit Capital research Source: Ministry of Commerce, Ambit Capital research
Even within food articles, all key categories have been showing a consistent week-
on-week decrease in prices over the last couple of weeks. Exhibits capture the
index movement in the following categories — cereals, milk, rice, fruits, vegetables
and wheat.
Exhibit 51: Week-on-week inflation across categories of Exhibit 52: Week-on-week inflation across categories of
food articles (%) - Jan’10-Jun’10 food articles (%) - Jan’10-Jun’10
1.6% Cereals 1.2% Rice

1.2% 0.8%
0.8%
0.4% 0.4%
0.0% 0.0%
-0.4%
-0.8% -0.4%
-1.2% -0.8%
02Jan10
16Jan10
30Jan10
13Feb10
27Feb10
13Mar10
27Mar10
10Apr10
24Apr10
08May10
22May10
05Jun10
02Jan10
16Jan10
30Jan10
13Feb10
27Feb10
13Mar10
27Mar10
10Apr10
24Apr10
08May10
22May10
05Jun10
3.0% Wheat 4.0% Pulses
2.0% 2.0%
1.0%
0.0%
0.0%
-2.0%
-1.0%
-2.0% -4.0%
-3.0% -6.0%
02Jan10
16Jan10
30Jan10
13Feb10
27Feb10
13Mar10
27Mar10
10Apr10
24Apr10
08May10
22May10
05Jun10
27Mar10
10Apr10
24Apr10
08May10
22May10
02Jan10
16Jan10
30Jan10
13Feb10
27Feb10
13Mar10
05Jun10
48.0% Vegetables 12.0% Fruits

36.0% 6.0%
24.0%
0.0%
12.0%
-6.0%
0.0%
-12.0% -12.0%
-24.0% -18.0%
13Feb10
27Feb10
02Jan10
16Jan10
30Jan10
13Mar10
27Mar10
10Apr10
24Apr10
08May10
22May10
05Jun10
02Jan10
16Jan10
30Jan10
13Feb10
27Feb10
13Mar10
27Mar10
10Apr10
24Apr10
08May10
22May10
05Jun10

With the IMD predicting near-normal monsoons this year, inflation in food articles
is expected to cool off even further - partly owing to supply conditions being
addressed (as a result of the normal crop) and partially due to the higher base of
YoY inflation that we witnessed in 2HFY10.
However, we believe that policymakers are closely monitoring the monthly WPI,
particularly with reference to inflation exhibited by the non-food manufactured
products category. We expect the RBI to continue with its policy rate normalization
in this fiscal. Although we expect no inter-policy regulatory move as a base case,
we cannot rule out such a move in the event of a sustained double-digit inflation
or higher-than-anticipated non-food inflation.
Exhibit 53: YoY inflation in non-food primary articles Exhibit 54: YoY inflation in manufactured products (%) at
(%) above 6% - cause for concern
30.0 14.0
25.0 12.0
20.0 10.0
15.0 8.0
10.0
6.0
5.0
4.0
0.0
2.0
(5.0)
(10.0) 0.0
(15.0) (2.0)
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Series1 Series1
Credit growth – Projected at 22% YoY

Thanks to the 3G and BWA auction bonanza, systemic credit growth rose above
19% as of the week ended 4th June 2010. Credit growth is likely to stay strong
from a YoY perspective.
Exhibit 55: YoY business growth Exhibit 56: : Weekly run rate - incr adv (Rs bn)
35 800
28 600
21 400
14 200
7 0
0 (200)
(400)
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
13-Oct-07
13-Oct-08
13-Apr-07
13-Jan-08
13-Jan-09
13-Oct-09
13-Jul-07
13-Apr-08
13-Jul-08
13-Apr-09
13-Jan-10
13-Jul-09
13-Apr-10
YoY dep growth (%) YoY adv growth (%)
Source:RBI, Ambit Capital research Source: RBI, Ambit Capital research
Highlighted below are some key trends emerging from credit growth patterns:
Moderating pace of deposit mobilization: Banks have been shedding deposits
recently while growing their loan portfolio (thanks predominantly to the 3G
auction). This is reflected in the C-D ratio (above 72% once again) trending
northward.

For three of the last four weeks, banks have continued to shed deposits while
growing their loan book, which reflects in the increasing C-D ratio at a systemic
level.
Exhibit 57: Increasing C-D ratio (%) - growing loans while shedding deposits
76
74
72
70
68
66
64
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Source: RBI, Ambit Capital research
Lack of broad-based credit demand: The system, although low on liquidity

right now, was demanding lesser funds from the RBI (through the repo window)
with every passing day, reflecting lack of broad-based credit pick-up at this stage.
Low systemic liquidity is only a temporary phenomenon, which was reflected in the
reducing demand for liquidity infusion through the repo window, as also in the
high cash balances maintained by banks at an aggregate level (even as a
percentage of the balance sheet, this number is trending up). With the government
having received funds from the BWA auction, banks are once again absorbing
funds from the RBI through the repo window.
Exhibit 58: Net liquidity infusion (absorption) through the LAF window(s) (Rs bn)
1,000
800
600
400
200
0
(200)
(400)
(600)
2005
2105
2405
2505
2605
2805
3105
0106
0206
0306
0406
0706
0806
0906
1006
1106
1406
1506
1606
1706
1806
2106
2206
2306
2406
2506
2806
2906
3006
0207
0507
0607
0707
0807
0907
1207
1307
LAF1 LAF2
Source: RBI, Ambit Capital research
So, how do we expect banks to react?

1. Macro theme remains intact — hence, we continue to believe that credit
demand will surely pick up at some stage in the cycle
2. Banks will prefer to garner deposits while interest rates are still low and
subsequently deploy them at later stages of the interest rate cycle
3. Systemic interest rates are likely to rise with the next regulatory push
While we expect policy rates to inch up by 75bps in the fiscal, we expect end-
March 2011 systemic credit growth at just below 22%. We believe that systemic
interest rates are likely to begin responding to policy moves from the July 2010
policy onward, with lending rates lagging the rise in deposit rates.

Budget Mathematics – Expect fiscal consolidation at ~5% of GDP

Although interest rates are likely to be broadly governed by the prevailing
domestic inflationary conditions, benchmark yields are also likely to adjust to the
Union government’s borrowing programme. The budgeted estimates for
borrowing (as stated in Union Budget 2010-11) were based on a range of
assumptions for GDP growth, inflation and capital receipts arising out of
disinvestment proceeds.
Exhibit 59: Union Budget — provisional estimates (Rsbn)

Union Govt - P&L (Rs bn) 2006-07A 2007-08A 2008-09A RE 2009-10 BE 2010-11
Direct tax receipts 2,306.38 3,127.49 3,343.49 3,870.08 4,300.00
Indirect tax receipts 2,428.74 2,803.98 2,709.50 2,460.87 3,166.51
Gross tax receipts 4,735.12 5,931.47 6,052.99 6,330.95 7,466.51
Less: States' share 1,223.30 1,536.00 1,619.79 1,679.92 2,125.57
Tax revenue 3,511.82 4,395.47 4,433.20 4,651.03 5,340.94
Non-tax revenue 832.05 1,023.17 969.4 1,121.91 1,481.18
Revenue receipts 4,343.87 5,418.64 5,402.60 5,772.94 6,822.12
Recoveries of loans 58.93 51 61.39 42.54 51.29
Other receipts 5.34 387.95 5.66 259.58 400
Borrowings and other liabilities 1,425.73 1,269.12 3,369.92 4,140.41 3,814.08
Capital receipts 1,490.00 1,708.07 3,436.97 4,442.53 4,265.37
Total receipts 5,833.87 7,126.71 8,839.57 10,215.47 11,087.49
Interest payments 1,502.72 1,710.30 1,922.04 2,195.00 2,486.64

Defence 516.82 542.19 733.05 884.4 873.44
Major subsidies 571.25 709.26 1,297.08 1,310.25 1,162.24
Non-Plan revenue expenditure 3,721.91 4,208.61 5,590.24 6,419.44 6,435.99
Non-Plan capital expenditure 413.36 867.28 496.97 644.27 920.58
Non-Plan expenditure 4,135.27 5,075.89 6,087.21 7,063.71 7,356.57
Plan revenue expenditure 1,424.18 1,735.72 2,347.74 2,644.11 3,151.25
Plan capital expenditure 274.42 315.1 404.61 507.65 579.67
Plan expenditure 1,698.60 2,050.82 2,752.35 3,151.76 3,730.92
Total expenditure 5,833.87 7,126.71 8,839.56 10,215.47 11,087.49
Revenue expenditure 5,146.09 5,944.33 7,937.98 9,063.55 9,587.24

Capital expenditure 687.78 1,182.38 901.58 1,151.92 1,500.25
Revenue deficit 802.22 525.69 2,535.38 3,290.61 2,765.12

Fiscal deficit 1,425.73 1,269.12 3,369.91 4,140.41 3,814.08
Interest payments (non-plan RE) 1,502.72 1,710.30 1,922.04 2,195.00 2,486.64
Primary deficit -76.99 -441.18 1,447.87 1,945.41 1,327.44
Source: India Budget documnets, Ambit Capital research

Exhibit 60: Union Budget 2011 — common sized to nominal GDP at market prices (%)
P&L common-sized to GDP (%) 2006-07A 2007-08A 2008-09A RE 2009-10 BE 2010-11
Direct tax receipts 5.4 6.3 6 6.3 6.2

Indirect tax receipts 5.7 5.7 4.9 4 4.6
Gross tax receipts 11.1 12 10.9 10.3 10.8
Less: States' share 2.9 3.1 2.9 2.7 3.1
Tax revenue 8.2 8.9 8 7.5 7.7
Non-tax revenue 1.9 2.1 1.7 1.8 2.1
Revenue receipts 10.1 11 9.7 9.4 9.8
Recoveries of loans 0.1 0.1 0.1 0.1 0.1
Other receipts 0 0.8 0 0.4 0.6
Borrowings and other liabilities 3.3 2.6 6 6.7 5.5
Capital receipts 3.5 3.5 6.2 7.2 6.2
Total receipts 13.6 14.4 15.9 16.6 16
Interest payments 3.5 3.5 3.4 3.6 3.6

Defence 1.2 1.1 1.3 1.4 1.3
Major subsidies 1.3 1.4 2.3 2.1 1.7
Non-Plan revenue expenditure 8.7 8.5 10 10.4 9.3
Non-Plan capital expenditure 1 1.8 0.9 1 1.3
Non-Plan expenditure 9.7 10.3 10.9 11.5 10.6
Plan revenue expenditure 3.3 3.5 4.2 4.3 4.5
Plan capital expenditure 0.6 0.6 0.7 0.8 0.8
Plan expenditure 4 4.1 4.9 5.1 5.4
Total expenditure 13.6 14.4 15.9 16.6 16
Revenue expenditure 12 12 14.2 14.7 13.8

Capital expenditure 1.6 2.4 1.6 1.9 2.2
Source: India Budget documents, Ambit Capital research
Exhibit 61: Deficit indicators (% of nominal GDP at market prices) — budgeted estimates
Deficit indicators 2006-07A 2007-08A 2008-09A RE 2009-10 BE 2010-11
Revenue deficit 1.9 1.1 4.5 5.3 4
Fiscal deficit 3.3 2.6 6 6.7 5.5
Interest payments (non-plan RE) 3.5 3.5 3.4 3.6 3.6
Primary deficit -0.2 -0.9 2.6 3.2 1.9
As we mentioned, the budgeted estimates were based on certain stated

assumptions of GDP growth, inflation as well as the potential resources mobilized
from non-tax revenues. Key macro-economic variables are tabulated in exhibit 62.
Exhibit 62: Key macro-economic variables — backdrop for Union Budget 2011
Macro-economic variables 2006-07A 2007-08A 2008-09A RE 2009-10 BE 2010-11
Nominal GDP (Rs bn) 42,839.79 49,478.57 55,744.49 61,641.78 69,347.00
Real GDP (Rs bn) 38,746.32 42,479.18 44,653.60 47,671.42 51,723.49
Nominal GDP growth (%) 15.5 12.7 10.6 12.5

Real GDP growth (%) 9.6 5.1 6.8 8.5
Implied inflation (%) 5.3 7.2 3.6 4

We look at the Union Budget 2011 in light of the higher-than-anticipated

proceeds from the 3G and BWA auctions (actual proceeds at ~3x that which was
anticipated) to see the potential impact on deficit indicators. The government has
so far mobilized ~Rs1,060bn from the combined 3G/BWA auction as against the
anticipated Rs350bn in the budgeted estimates (excess proceeds up to Rs710bn).
Mathematically, the deficit indicators are generally normalized to the nominal GDP
at market prices.
Fiscal deficit = Govt. borrowings *100/nominal GDP at market prices
Our analysis suggests that the deficit indicators are less elastic to the denominator
(nominal GDP) than to the numerator (absolute borrowings). Although
policymakers have ruled out any immediate changes to the government’s
budgeted borrowing programme (the numerator), our analysis suggests that deficit
indicators can certainly drop to more comfortable levels by end-March 2011 if the
government borrowing programme were to undergo downward adjustments.
Ceteris paribus, lowering the government borrowing by ~Rs100bn, would bring
down the fiscal deficit percentage by 14-15bps on an average. On the other hand,
higher nominal GDP growth by even as much as 50bps has only a 2bps impact on
the fiscal deficit percentage.
Exhibit 63: Sensitivity of fiscal deficit (% of GDP) to assumptions on nominal GDP

growth (%) and reduction in borrowings (Rs bn)
4.4 12.5 13 13.5 14.1 15
50 5.4 5.3 5.3 5.3 5.3
100 5.3 5.3 5.3 5.2 5.2
150 5.2 5.2 5.2 5.2 5.1
200 5.2 5.1 5.1 5.1 5
300 5 5 5 4.9 4.9
400 4.9 4.8 4.8 4.8 4.8
500 4.7 4.7 4.7 4.7 4.6
600 4.6 4.6 4.5 4.5 4.5
700 4.4 4.4 4.4 4.4 4.3
Source: Ambit Capital research
We believe the government borrowing programme may not be reduced by the

complete ~Rs710bn cushion available from excess proceeds. This is primarily
owing to the following reasons:
 The disinvestment target of Rs400bn is ambitious, especially given the volatile

equity market conditions. Although media reports and the respective ministries
have been suggesting a robust pipeline of PSUs ready for listing, there may be
a downside risk to this disinvestment target emanating from market timing and
execution delays.
 Revenue receipts, particularly tax receipts (direct as well as indirect taxes), are
based on sustained global growth assumptions. These may not materialize to
the extent envisaged in the event of global growth being disrupted as a result
of concerns over the Eurozone. To put this in perspective, the exchequer
expects direct taxes to grow a little over 11% while indirect taxes are expected
to grow at ~29% in the current fiscal.
 The Union Budget 2011 does not provide for any auto fuel subsidies in the
current fiscal. Our Oil & Gas team believes that the government may have to
bear a first quarter burden of ~Rs100bn for under-recoveries in the system.
Also, the government may have to bear subsidy burden on cooking fuels for
the next three quarters to the extent of Rs150bn - total fuel subsidy burden of
~Rs250bn that has not been provided for in the budget.
Hence, although the excess cash flows with the government and its attitude
towards fiscal discipline warrant a sharp reduction in the borrowing programme,
uncertainties concerning certain other assumptions may force the Union

government to be more conservative. We opine the government may wish to lower
the deficit indicators from projected levels (5.5% of GDP) to ~5% of the GDP. As
can be seen from exhibit 63 the government would need to reduce its borrowing
programme by ~Rs300bn in order to achieve this deficit target under our base
case assumptions of GDP growth and inflation for the full fiscal (FY11E).
Exhibit 64: Key macro-economic variables - crystal gazing into BE 2012-13 on

ACPL estimates
Macro-economic variables 2008-09A RE 2009-10 BE 2010-11 BE 2011-12 BE 2012-13
Nominal GDP (Rs bn) 55,744.49 62,311.71 71,097.66 80,340.36 91,186.31
Real GDP (Rs bn) 44,653.60 48,072.22 52,014.14 56,435.34 61,514.53
Nominal GDP growth (%) 12.7 11.8 14.1 13 13.5

Real GDP growth (%) 5.1 7.7 8.2 8.5 9
Implied inflation (%) 7.2 3.8 5.5 4.5 4.5
Exhibits 62, 63 and 64 are based on Ambit Capital research’s estimates of

nominal and real GDP growth as well as the implied inflation (GDP deflator) for
FY11E. Our estimates for 2011-12 and 2012-13 are derived from the medium-
term fiscal policy statement given in Union Budget 2011.
Exhibit 65: Deficit indicators (% of nominal GDP) - crystal gazing into BE 2012-13
Deficit indicators 2008-09A RE 2009-10 BE 2010-11 BE 2011-12 BE 2012-13
Revenue deficit 4.5 5.3 3.9 3.4 2.7
Fiscal deficit 6 6.6 5.4 4.8 4.1
Interest payments
3.4 3.5 3.5 2.7 2
(non-plan RE)
Primary deficit 2.6 3.1 1.9 2.1 2.1

Big Bang Reforms - Price hikes

across the board; Auto-fuels
deregulated – Positive for Fiscal and
PSU OMC’s
The Empowered Group of Ministers (EGoM), approved a) market-driven pricing of
auto-fuels (petrol, diesel) b) raising of cooking fuel (Kerosene, LPG) prices by 11%-
33%. Complete pricing freedom on petrol with immediate effect implies a price
hike of Rs3.5/ltr. While the government has increased diesel prices by Rs2/ltr, de-
regulation of the same is expected in the foreseeable future. We note that even
after the price hike, diesel losses stand at Rs1.5/ltr.
OMCs not to bear any under-recoveries? Issues related to subsidy sharing

have not been addressed by the EGoM, though loss on sale of cooking fuels and
diesel (at least for now) would mean under-recoveries in the system. However,
comments coming from the Oil Secretary, Mr. S Sundareshan, seem to suggest
that OMCs would be fully compensated for losses by the govt. and the upstream.
Under-recovery to reduce by Rs140bn: The reform measures undertaken are

likely to result in reduction of Rs140bn in gross under-recoveries for 9MFY11E.
Our gross under-recovery estimate for FY11E now stands at Rs500bn (v/s earlier
estimate of Rs640bn, which had already factored in a hike of Rs4/ltr for petrol and
Rs2/ltr for diesel post 1QFY11), with 1QFY11E under-recovery at Rs180bn. Given
our expectation of complete de-regulation of diesel prices by 1QFY12E, our
estimates for FY12E under-recoveries sharply reduce from Rs720bn to Rs410bn.
OMCs earnings upgrade significant; upstream uncertain: We upgrade

earnings of IOC/HPCL/BPCL 20%/40%/90% based on full compensation of under-
recoveries by govt./upstream going forward. We had earlier assumed OMCs to
bear 10% of the total gross under-recoveries. As far as ONGC is concerned, our
EPS estimates for FY11E and FY12E have increased by 6% and 8% respectively, to
factor in improvement in net realisations. However considering that current market
price factors in a fair amount of the positives coming from de-regulation, we
maintain our HOLD on OMCs
While we were expecting de-regulation in petrol, intent on the part of the
government to free diesel pricing has taken us by surprise. We were also enthused
by the price increase affected in cooking fuel prices, particularly kerosene. We
note that kerosene price was last revised in March ’01.
The reform measures undertaken are likely to result in reduction of Rs22bn in
gross under-recoveries for 9MFY11E, and consequently reduce our FY11E
estimates by 22%.
Exhibit 66: Under-recoveries
Old New % change
(Rs bn)
FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
Petrol 47.88 51.73 56.01 47.88 21.43 - 0.00% -58.60% -100.00%
Diesel 96.31 165.31 189.01 96.31 111.74 - 0.00% -32.40% -100.00%
LPG 177.29 212.71 257.22 177.29 191.34 234.75 0.00% -10.00% -8.70%
SKO 138.84 212.09 209.39 138.84 177.98 178.38 0.00% -16.10% -14.80%
Total 460.32 641.84 711.63 460.32 502.48 413.13 0.00% -21.70% -41.90%

When will diesel price be de-regulated?

Given the fact that diesel prices have not been completely linked to market forces
yet, we crystal gaze into how the policymakers may intend to plan the transition.
We believe that the govt. would find it easier to implement the complete de-
regulation of diesel prices under two scenarios:
 Cooling off in prevailing crude prices
 Cooling off in reported inflation numbers

While the first condition depends largely on global factors, our analysis suggests
that the current selling price of diesel is pegged to a crude price of US$72/bbl. In
the event of crude prices moderating to ~US$72/bbl, de-regulation in diesel
prices could be a possibility.
However in the event of crude prices stabilizing at the current levels, a price hike
to the tune of Rs1.5/ltr would be warranted to link diesel prices to market. Given
the high indirect inflation impact of diesel price hikes, we expect the government
to push for de-regulation once inflation cools off.
Our in-house economic team expects headline inflation to peak towards the end
of Jul’10 and begin descending towards the 7% levels by Nov’10. Hence expecting
the government to act post Nov ’10, we model for diesel price de-regulation by
1QFY12E.
De-regulation to de-rail at higher crude prices

The government’s clarification on the fact that the centre would intervene in the
pricing of auto-fuels in case crude price rises very sharply, in our view implies that
the de-regulated scenario would hold until crude breaches US$100/bbl. Market
pricing in auto-fuels beyond US$100/bbl would imply 20%-25% higher prices.
Exhibit 67: Crude & auto fuel price sensitivity
Rs/ltr
$/bbl
Petrol Diesel
80 55 40.7
85 56.8 42.5
90 58.7 44.3
95 60.6 46
100 62.5 47.8
105 64.4 49.6
110 66.3 51.4
Subsidy sharing still unclear

Notwithstanding the slew of petroleum pricing reform measures announced by the
EGoM, one of the key issues, subsidy sharing, was left unaddressed. Given that
expectations were running high, lack of clarity is a disappointment.
However, comments coming from the Oil Secretary, Mr. S Sundareshan, seem to
suggest that OMCs would be fully compensated for losses by the govt. and the
upstream.
Against the existing formula of the upstream completely sharing losses on auto-
fuels, marginal to nil losses in auto-fuel sales going forward would mean the new
formula would have to accommodate sharing of cooking fuels under-recoveries.
We expect complete compensation of cooking fuel losses to the OMCs by the
government and upstream.
While a concrete subsidy sharing formula is difficult in our view (given various
moving parts), we understand that the Oil and Finance Ministry would be working
together to devise a subsidy sharing formula going forward.
We propose a modified subsidy sharing formula

While commenting on the sharing ratio would be speculative, we believe that
implementation of subsidy sharing on the lines of the one proposed by the Parikh
committee report is a high possibility. However, given the fact that cooking fuel
prices were not increased in the same proportion as proposed by the committee
report, we believe that changes will have to be made to crude price ranges and
rate of tax.
Exhibit 68: Upstream share of crude dollar

Rate of tax (% of incremental price)
Price range (US$/bbl)
Parikh report Ambit estimates
30-40 - 10%
40-50 - 25%
50-60 - 40%
60-70 20% 55%
70-80 40% 70%
80-90 60% 85%
>90 80% 100%
Hence given this belief, we incorporate this modified subsidy sharing model to
estimate earnings for our PSU Oil & Gas universe (ONGC/GAIL/IOC/HPCL/BPCL)
Exhibit 69: Subsidy sharing

Old New
FY11E FY12E FY11E FY12E
Crude price ($/bbl) 80 80 80 80
Total under-recovery 641.8 720.6 502.5 413.3

Under-Recovery Sharing
Upstream 217 245 201.5 207.4
ONGC 178 200.9 166.9 163.9
GAIL 15.2 17.2 16 17.9
OIL 23.9 27 18.5 25.6
Government 360.65 403.8 301.03 205.9
OMCs 64.1 71.8 - -

South-west Monsoons Rainfall 2010

After deficient monsoons last year, the scenario is significantly better this year.
Cumulative rainfall countrywide (1 June 2010-7 July 2010) is at 10% below
normal rainfall versus 16% below normal one week ago. As of today, out of 36
geographic subdivisions, 25 have received excess or normal rainfall. Progress of
the monsoons was slow in the month of June, but last week the monsoons
progressed to north and north-west India ahead of the expected timeline.
Exhibit 70: Rainfall distribution for past years
1000 110
105
800
100
600 95
90
400 85
80
200
75
0 70
2000 2006 2007 2008 2009 2010E
S W Mons oon R ainfall (L HS ) (In mm) % of Normal rainfall (R HS )
Regionwise distribution
Due to fast progress of monsoons to north and north-west India in last week,
rainfall situation has improved dramatically in that region. Broad regionwise
distribution of rainfall is as follows:
Exhibit 71: Regionwise rainfall distribution
Regions States Rainfall Distribution
South and South Kerala, TN, Karnataka, AP, Maharashtra
Excess to Normal (100 to 150%)
West India and South Gujarat
North Gujarat Rajasthan Haryana,
North and North
Punjab, J&K, HP, Delhi Uttarakhand and Excess to Normal (100 to 150%)
West India
Western UP
Central and MP, Eastern UP, Chattisgarh, Bihar,
Deficient to Scanty (40 to 80%)
Eastern India Jharkhand, Orissa and WB
Normal to Deficient (75% to
North East Assam, Meghalaya and other NE states
110%)
Although most of the country is receiving good rainfall, central and eastern India
are areas of concerns as the rainfall activity has been low.
Impact on crop output

Good rainfall in south and south-west augurs well for crops like rice, oilseeds,
cotton and spices. Crops like maize, millets and sugarcane are also expected to
witness good output following rains in north and north-west India. Low rainfall in
central and eastern India is likely to have some impact on rice crop. Importantly,
rainfall in tea-growing areas has been good despite low rainfall in eastern India.
Concerns
As heavy rainfall continues in north India, flood warnings have been issued in
states of Punjab, Haryana and Delhi. It might delay sowing of seeds. Further, IMD
expects the monsoons to weaken in August which may impact crop productivity.

Rainfall: Temporal and spatial distribution

Exhibit 72: Normal Temporal Distribution in MM Exhibit 73: Normal Spatial Distribution in MM
350 35.0% 1600

300 30.0% 1400
250 25.0% 1200
200 20.0% 1000
150 15.0% 800
100 10.0% 600
50 5.0% 400
0 0.0% 200
June July August September 0
Northwest Central Southern North Total
Monthly Rainfall (mm) (LHS) % of Total (RHS) India India Peninsula East India
Exhibit 74: Normal Temporal Distribution in MM Exhibit 75: Normal Spatial Distribution in MM
Months Monthly Rainfall (mm) (LHS) % of Total (RHS) Region Normal Spatial Distribution (mm)
June 162 18.2% Northwest India 612
July 293 32.8% Central India 994
August 262 29.4% Southern Peninsula 723
September 175 19.6% North East India 1427
Total 892 100.0% Total 892
 Temporal distributions peg Long Period Average rainfall at 892mm, with July
and August being the key months accounting for 33% and 29% rainfall
respectively
 Spatial distribution has a north east and central India bias

Rainfall trends: Indicate imminent shortfall

Exhibit 76: Past year trends for rainfall distribution Exhibit 77: Weekwise progression normal v/s actual
100 110
90 100
80
70 90
60 80
50
40 70
30 60
CY1998
CY1999
CY2000
CY2001
CY2002
CY2003
CY2004
CY2005
CY2006
CY2007
CY2008
CY2009
CY2010*
% Met Divisions with Normal Rainfall (LHS)
% Long Period Average (RHS)
 Cumulative seasonal rainfall over 1 June- 7th July 2010, at 204mm, is 10%
below the Long Period Average of 227mm for the stated period.
 % of districts with normal/excess rainfall stands at 69% for the stated period
and the meteorological department now forecasts shortfall of rainfall up to 5%
for full year CY2010 v/s Long Period Average.

STOCK RECOMMENDATIONS

Banking, Financial Services & Insurance July 14, 2010
Andhra Bank
Bloomberg: ANDB IN Equity Recommendation: BUY
Reuters: ADBK.BO No Change
COMPANY UPDATE
Going Strong Analyst contact

Krishnan ASV
Valuation and Recommendation: Andhra Bank reported fairly good numbers Tel: +91 22 3043 3205
on the operational front for FY10 and we continue to back the bank as one of vkrishnan@ambitcapital.com
safest and consistent-performing investments in the mid-cap banking space. We
Poonam Saney
expect good return ratios — RoA of ~1.3%, RoE of ~27%, with dividend yield of
Tel .: +91 22 3043 3216
~5%. At CMP of Rs136, the stock trades at 1.2x FY11 ABVPS of Rs110. We
poonamsaney@ambitcapital.com
recommend investors to stay invested and Buy on dips with a TP of Rs150.
Business to grow at a higher pace than the system: Andhra Bank continues Recommendation
to focus on restructuring both sides of the balance sheet by shedding high cost CMP: Rs136
bulk deposits and shedding low-yielding assets. Having grown its loan book and
Target Price (Period): Rs150
deposit base by 31% and 27% respectively during FY10, we expect the bank to
exhibit a 26% and 24% growth in advances and deposits respectively during Previous TP: Rs140
FY11E. A major proportion of the growth in advances is expected to come from Upside (%) 10
the SME and retail segments (predominantly comprises of gold loan, home loan ABVPS (FY11E): Rs110
and educational loan). We expect the bank’s CASA ratio to marginally dip from Change from previous (%) 5
the current levels of 30%.
Stock Information
Strong core operating income at 27% for FY11: We have built in healthy
27% YoY growth in NII for FY11E, over and above the 35% YoY growth that the Mkt cap: Rs66,130mn/US$1,417mn
bank witnessed last year. Although management remains confident of 52-wk H/L: Rs145/74
maintaining margins at 3.2%, we expect marginal dip in NIMs, as a result of the
expected rise in funding costs and lending rates moving up with a lag. We expect 3M Avg. daily vol. (mn): 3
the bank’s core fee income to grow at 27% as against over 30% during FY10. Beta (x): 1.0
Overall good asset quality with a provision cover of 80%: During FY10, the BSE Sensex: 17937
asset quality of the bank witnessed marginal deterioration with a couple of large Nifty: 5383
infrastructure accounts slipping into NPAs in Q4FY10 (due to non-closure of CDR
proceedings). The restructured advances stood at ~5% of gross advances, with Stock Performance (%)
relatively low slippages compared with the system. We have built in marginal
1M 3M 12M YTD
deterioration in asset quality with gross and net NPAs at 0.7% and 0.1%
respectively for FY11 and provision coverage of over 80%. However, given the Absolute 0.3 16.9 73.0 30.7
consistent asset quality that Andhra Bank has demonstrated, we believe that our Rel. to Sensex -4.6 16.3 30.3 27.3
estimates on asset quality parameters are subject to upside risks.
Performance (%)
Adequate capital till FY11: Our FY11E estimates are based on internal 20,000 150
accrual-led growth and assume no capital infusion. The CAR currently stands at 18,000 130
13.9% with Tier I at 8.18% and the management is keen on maintaining Tier-I at 16,000 110
over 8%. The bank has submitted its resource plan until FY12 to the Union 14,000 90
Government and is confident of receiving funds during FY11E. 12,000 70

10,000 50
Exhibit 1: Key financials Jul-09 Dec-09 M ay-10
Sensex A ndhra B ank
Rs bn FY08 FY09 FY10 FY11E
Net interest income 13.4 16.27 21.95 27.84 Source: Bloomberg, Ambit Capital research
Operating profit 10.57 12.88 18.10 23

Net profit 5.76 6.53 10.46 13.3
RoE (%) 18 18.9 25.9 27
RoAA (%) 1.1 1 1.3 1.3
Dividend Yield (%) 3 3.3 3.7 4.4
EPS (Rs) 11.9 13.5 21.6 27.4
Adjusted BVPS (Rs) 65.9 73.6 89.3 109.8
P/E (x) 11.4 10.1 6.3 5.0
P/ABV (x) 2.1 1.8 1.5 1.2
Source: Company, Ambit Capital research
Ambit Capital Pvt Ltd Andhra Bank
Technical View
Exhibit 1: Andhra Bank
Source: MetaStock
 Andhra Bank is trading in downward channel.

 We expect the stock to correct further and target 130 levels.
Derivatives View
Exhibit 2: Andhra Bank
OI P rice( F&O)
160 7,000,000
140 6,000,000
5,000,000
120
4,000,000
100
OI
3,000,000
80
2,000,000
60 1,000,000
40 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Andhra bank has witnessed sharp OI decline since last two expiries with
ranged price movement; rollovers have been very week in June expiry when
compared to 3 months’ average. Going forward we expect the stock to face
stiff resistance at 140 levels; on the way down support lies at 125.
Andhra Bank July 14, 2010 43

Axis Bank
Bloomberg: AXSB IN Equity Recommendation: SELL
Reuters: No Change
COMPANY UPDATE
Trim positions Analyst contact

Krishnan ASV
Valuation and Recommendation: At CMP of Rs1,289, the stock trades at 2.8x Tel: +91 22 3043 3205
our FY11E ABVPS est. of Rs461. Given current valuations, we believe the market vkrishnan@ambitcapital.com
is factoring in the most optimistic scenario for Axis Bank and the key risks to Poonam Saney
earnings are not being appropriately priced in. We recommend investors to use
Tel .: +91 22 3043 3216
any near-term rally to trim positions in the stock from a risk-reward perspective. poonamsaney@ambitcapital.com
Advances growth faster than the system, but at the cost of asset quality:
Over the last few years, Axis Bank has indeed demonstrated its ability to grow Recommendation
much faster than the system. Our FY11E estimates currently factor in a 26% CMP: Rs1,289
growth in the bank’s loan portfolio - reasonably faster than the ~21% growth
Target Price (Period): Rs1,230
that we expect at a system level. Although the high skew of Axis Bank’s loan
Previous TP: Rs1,120
book towards large and mid-corporate entities lends some comfort, we are
worried about the visible deterioration in the reported asset quality in these asset Downside (%) (5)
classes. We have built in: (i) deposit growth of about 23% for FY11 slightly higher ABVPS (FY11): Rs461
than growth witnessed in FY10; and (ii) an optimistic scenario of CASA ratio to
be largely maintained at the current levels of 47% witnessed during FY10. Stock Information
Margins to sustain at 3.2%-3.4%: While Axis Bank reported margins at over Mkt cap: Rs524,908mn/US$11,249mn
4% during Q4FY10, we expect NIMs to moderate from current levels to a steady- 52-wk H/L: Rs1,320/705
state ~3.2%-3.4% in FY11E. Our estimates are based on: a) diminishing impact
3M Avg. daily vol. (mn): 4
of fresh equity issuance; b) increasing interest rate environment where lending
rates are likely to rise with a lag; and c) sluggish growth in credit demand. Beta (x): 1.2
Non-interest income to moderate due to vulnerable investment book: We BSE Sensex: 17937
expect core fee income growth trends to sustain (the bank reported a broad- Nifty: 5383
based core fee income growth of 20% during FY10). However the overall non
interest income may moderate as the investment (trading) book is highly Stock Performance (%)
susceptible to an increase in interest rates. The near-term MTM risk for the bank 1M 3M 12M YTD
remains high given the high proportion of high-duration AFS portfolio.
Absolute 3.4 9.5 74.5 30.2
NPA accretion picks up pace; spillover from restructured assets a key Rel. to Sensex -1.6 9.0 31.4 26.8
risk: In the previous four consecutive quarters, Axis Bank has witnessed
consistent increase in absolute gross NPAs. Also, the skew of BBB - corporates Performance (%)
has been gradually increasing within the overall credit mix. Though restructured 20,000 1500
assets are at about 2% of the current gross advances, management has guided 18,000 1300
for 25% slippages from this portfolio. We are also cautious on recent slippages in 16,000 1100
the corporate book. Consequently, we have built in further deterioration in the 14,000
12,000
900
700
asset quality with gross and net NPAs at 1.3% and 0.3% respectively for FY11. 10,000 500
Jul-09 Dec-09 M ay-10
Sensex A xis B ank
Exhibit 1: Key financials
Source: Bloomberg, Ambit Capital research
Net interest income 25.86 36.86 50.05 66.96
Operating profit 22.26 37.25 52.40 66.93
Net profit 10.71 18.15 25.15 35.15
RoE (%) 17.6 19.1 19.1 19.9
RoAA (%) 1.2 1.4 1.5 1.7
EPS (Rs) 33.5 50.7 65.9 86.7
Adjusted BVPS (Rs) 238.2 275.9 413.6 461.7
P/E (x) 38.5 25.4 19.6 14.9
P/ABV (x) 5.4 4.7 3.1 2.8
Ambit Capital Pvt Ltd Axis Bank
Technical View
Exhibit 1: Axis Bank
Source: MetaStock
 The momentum indicators of Axis bank are in buy mode.

 The MACD has turned into buy signal and we expect the stock to target 1320
levels.
Derivatives View
Exhibit 2: Axis Bank
OI P rice( F&O)
1,400 7,000,000
1,300 6,000,000
1,200
5,000,000
1,100
4,000,000
1,000
OI
3,000,000
900
2,000,000
800
700 1,000,000
600 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 AxisBank has been in a rising trend since last 2 quarters and is currently
trading close to its all time high of 1310; going forward we expect the stock to
consolidate at current levels before resuming a fresh rally; support for the
stock lies at 1220.
Axis Bank July 14, 2010 45

Auto & Auto Ancillaries July 14, 2010
Bajaj Auto
Bloomberg: BJAUT IN Equity Recommendation: Under Review
Reuters: BAJA.BO No Change
COMPANY UPDATE
Strong Volumes And Improved Analyst contact

Navin Matta
Market Share Tel .: +91 22 3043 3228

navinmatta@ambitcapital.com
Vijay Chugh
Volume growth momentum to continue: We expect new launches and higher Tel: +91 22 3043 3054
urban demand to drive domestic motorcycle volume growth at 16% p.a. for the vijaychugh@ambitcapital.com
next two years. Correspondingly, we see Bajaj Auto's domestic market share
increasing to 26% in FY12E. We expect above average three-wheeler domestic Recommendation
growth, driven by conversion to cleaner fuels, as mandated in several states. CMP: Rs2,409
Export demand has revived, which we believe is set to grow at a faster pace with
greater focus on African and LATAM countries. We forecast overall volume EPS (FY11): Rs144
growth of 17% p.a. for the next two years. Change from previous (%) 1.4
Variance from consensus (%) 3.6
Emerging product mix to drive stability in EBITDA margin profile: In the past,
frequent alterations to product mix has resulted in considerable swing in Bajaj Stock Information
Auto’s EBITDA margin trend, consequently resulting in low predictability of its
Mkt cap: Rs348,528mn/US$7,469mn
volume growth and margin trends. However, with up to 25% revenue
contribution from the two-wheeler executive segment, we expect higher stability 52-wk H/L: Rs2,509/982
in profitability trends going forward. 3M Avg. daily vol. (mn): 0
Valuation and outlook: Our earnings forecast is above consensus by 11% for Beta (x): 0.9
FY11 and FY12 respectively, primarily due to our higher-than-street volume
BSE Sensex: 17937
growth estimates. The management guidance for volume growth provides
further upside to our estimates. Bajaj Auto currently trades at 13.7x FY12E EPS, Nifty: 5383
which is at 8% discount to Hero Honda. In our view, strong volume growth and
market share expansion momentum in addition to further improvement in FCF Stock Performance (%)
and return ratios make a strong case for further bridging of the valuation gap. 1M 3M 12M YTD
Absolute 5.0 16.1 137.3 37.3
Key risks Rel. to Sensex -0.1 15.6 78.6 33.7
 Higher-than-expected competitive intensity would reduce pricing power; and
Performance (%)
 Sharp increase in commodity cost from current levels. 20,000 3000
18,000 2500
Exhibit 1: Key financials 16,000 2000
14,000 1500
Particulars FY09 FY10P FY11E FY12E
12,000 1000
Net sales 88,104 119,210 144,577 166,255 10,000 500
EBITDA 11,921 25,926 29,025 33,368 Sensex B ajaj A uto
Adj net profit 6,565 17,036 20,786 24,057
EPS 60 129 144 166
EPS growth % 0.4 116.5 11.4 15.7
P/E (x) 40.5 18.7 16.8 14.5
EV/EBITDA (x) 29.6 13.0 11.3 9.4
Dividend yield % 0.9 1.7 1.7 2.1
ROE % 35.1 58.8 57.8 47.4
ROCE % 34.4 61.1 51.7 52.5
Ambit Capital Pvt Ltd Bajaj Auto
Technical View
Exhibit 1: Bajaj Auto
Source: MetaStock
 Bajaj Auto looks goof on chart and as long as stock is above 2340 it could
target 2550.
 The momentum indicators are in buy side and on hourly chart the stock has
witnessed positive divergence indicates more room for an upside
Derivatives View
Exhibit 2: Bajaj Auto
OI P rice( F&O)
2,500 1,200,000
2,300
1,000,000
2,100
800,000
1,900
1,700 600,000
OI
1,500
400,000
1,300
200,000
1,100
900 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock has been in a very strong uptrend after breaking past 2200 levels.
We, however, think that in the short term, the stock is likely to take a breather
and pause around the 2500 levels. A correction till around 2350 levels looks
likely in the counter.
Bajaj Auto July 14, 2010 47

Engineering & Capital Goods July 14, 2010
Bharat Heavy Electricals

Bloomberg: BHEL IN Equity Recommendation: BUY
Reuters: BHEL.BO No Change
COMPANY UPDATE
Analyst contact
Impressive Growth Outlook Mehul Mukati
Tel: +91 22 3043 3211
BHEL has posted impressive results for FY10: Revenues grew 23% for the mehulmukati@ambitcapital.com
year, while profit grew 37%. We expect earnings momentum to remain strong
over the next two years at 22% CAGR. The stock is trading at 21x FY11E
earnings, in line with 3-year median PE. With likely acceleration in order flows,
the stock should re-rate and trade at a premium to its recent valuations and the
broad market. We upgrade the stock to BUY. Recommendation
Impressive results: During the year, BHEL posted 21% growth in gross sales CMP: Rs2,444
and 37% growth in net profit. We estimate full year EBITDA at 18% compared Target Price (Period): Rs2,860
with 15.8% in FY09. During the quarter, revenue and profit grew by 25% and
40%. Margins remained steady (estimate) at around 19% during the period
versus 18.5% in the same period last year. Upside/Downside (%) 17
EPS (FY11E): Rs113
Order book growth better than expected: The company received new orders Change from previous (%) 0
worth Rs590bn versus Rs596bn in the previous year. During the period, the Variance from consensus (%) 1.7
company bagged a large number of power project orders from the private
sector, aggregating 14,690MW, which is a positive indicator. We expect the Stock Information
company to receive over 18GW of new orders during the year, further
enhancing earnings visibility. Mkt cap: Rs1,196,509mn/US$25,641mn
52-wk H/L: Rs2,585/1,923
Earnings to grow at a CAGR of 22%: Due to improved outlook on order flows
and margins, we are upgrading earnings estimates for FY11E by 5%. On the 3M Avg. daily vol. (mn): 1
back of an all-time-high order backlog of Rs1,430bn, we estimate BHEL's Beta (x): 0.9
revenues to grow at a CAGR of 20% over the next two years. Over the same
period, we expect the company's earnings to grow at a CAGR of 22%. EBITDA BSE Sensex: 17937
margins are likely to expand from 18% in FY10 to 20.0% in FY12E. Nifty: 5383
Valuations not stretched; trading near its 3-year median PE: We expect
Stock Performance (%)
the premium to historical averages as well as the market to expand on account
of: (a) higher demand for power equipment, pegged at around 25-30GW p.a., 1M 3M 12M YTD
indicating that Indian power equipment market will continue to be in short Absolute 2.2 -3.3 23.1 1.7
supply; and (b) growing uncertainty about the quality of Chinese equipment, Rel. to Sensex -2.8 -3.7 -7.3 -1.0
putting BHEL in a favourable position. BHEL presently trades at 21.5x our FY11E
EPS. We upgrade our target price to Rs2,806, based on 25x FY11E. Performance (%)
20,000 3000
Exhibit 1: Key financials 18,000
16,000 2500
Year to March FY08 FY09 FY10 FY11E FY12E
14,000 2000
Operating income 193,046 262,123 328,803 389,235 477,804 12,000
10,000 1500
EBITDA 37,821 42,309 62,583 80,385 96,255
EBITDA (%) 19.2 15.8 18.6 20.3 19.8 Sensex B HEL
Net profit 28,593 31,382 43,107 55,295 66,938
EPS (Rs) 58.4 64.1 88.1 113 136.7
RoE (%) 29.2 26.5 29.9 30.8 29.7
RoCE (%) 45 40.5 45.4 46.5 44.6
P/E (x) 40.7 37.1 27.0 21.1 17.4
P/BV (x) 10.8 9.0 7.3 5.8 4.6
Ambit Capital Pvt Ltd Bharat Heavy Electricals
Technical View
Exhibit 1: BHEL
Source: MetaStock
 BHEL is trading above all the key averages and on daily chart the stock has
witnessed bullish moving average crossover.
 The stock looks strong and one should buy the stock with an upside target of
2530.
 On the downside support is at 2250
Derivatives View
Exhibit 2: BHEL
OI P rice( F&O)
2,600 3,500,000
2,500 3,000,000
2,400 2,500,000
2,300 2,000,000
OI
2,200 1,500,000
2,100 1,000,000
2,000 500,000
1,900 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock after a long period of consolidation is finally showing signs of

moving up. There is good support on the way down around 2370 levels for the
stock. The rolls have been good at 84% and the stock looks positive for a
target of 2600 on the upside.
Bharat Heavy Electricals July 14, 2010 49

Bank of Baroda
Bloomberg: BOB IN Equity Recommendation: BUY
Reuters: BOB.BO No Change
COMPANY UPDATE
Strong fundamentals - Healthy overseas Analyst contact

Krishnan ASV
Tel: +91 22 3043 3205
At CMP of Rs715, the stock trades at 1.4x our FY11E ABVPS of Rs510. Given
vkrishnan@ambitcapital.com
consistent performance of the domestic book as well as better than-anticipated
fundamentals on the increased overseas exposure, we reiterate our BUY Poonam Saney
recommendation on the stock with a TP of Rs830. We value the bank at 1.6x our Tel .: +91 22 3043 3216
FY11E ABVPS of Rs510, implying upside of ~16% from current levels. poonamsaney@ambitcapital.com
Robust business growth: Bank of Baroda (BoB) has witnessed healthy business Recommendation
growth in both the domestic and international book. As per the management,
CMP: Rs715
although overall credit demand seems to have picked up across many segments,
lending to the corporate sector (other than infrastructure) is yet to exhibit a Target Price (Period): Rs830
similar pick up. Our FY11E estimates factor in a YoY growth of 21% in the Previous TP: Rs690
deposit base and a ~24% YoY growth in the loan book. Upside (%) 16
Global NIMs at about 2.7%: The margins of the bank have been trending up ABVPS (FY11E): Rs510
sequentially since the Jun’09 quarter. As banks witness a more widespread and Change from previous (%) 8%
genuine pick-up in credit demand towards the end of FY11E, we believe that the
bank, in line with the rest of the system, may witness marginal pressure on the Stock Information
margins in the near term. Our FY11E estimates build in blended NIMs of 2.7%. Mkt cap: Rs260,469mn/US$5,582mn
Comfortable non-interest income: We expect the bank to report stable 52-wk H/L: Rs755/370
growth in the core fee income. The investment book for the bank is largely 3M Avg. daily vol. (mn): 1
insulated from the rising interest rate risk (SLR securities form ~87% of the total
investment book, of which ~80% is in HTM, non HTM book duration 2.18 yrs). Beta (x): 0.9
BSE Sensex: 17937
Healthy asset quality: During FY10, BoB has been one of the few banks to
report a near stable asset quality, with the gross and net NPA ratio at 1.4% and Nifty: 5383
0.35% respectively and provision coverage of 75%. We are comfortable with the
bank’s overall asset quality - on the domestic as well as the overseas book. Stock Performance (%)
During the past 24 months, the bank has restructured assets up to Rs51bn (<3% 1M 3M 12M YTD
of the loan book), a predominant portion of which is on the wholesale book Absolute -1.9 11.1 84.8 39.1
(~52%). Of the restructured pool, assets to the tune of Rs4.2bn (large accounts
Rel. to Sensex -6.7 10.6 39.1 35.5
above Rs2.5mn) have slipped into the NPA category over the last 24 months.
Healthy overseas book: We believe the bank’s overseas book is one of its Performance (%)
strengths.. Nearly 2/3rds the book is India-linked and the bank has nil or near- 20,000 800
negligible exposure to Portugal/Greece/Spain. The overseas book has delivered 18,000
600
RoA of 1.42% and RoE of 24% in FY10. Gross NPA on this book stood at 0.47%. 16,000
14,000 400
10,000 200
Rs bn FY08 FY09 FY10 FY11E Jul-09 Dec-09 M ay-10
Net interest income 39.12 51.23 59.40 72.32 Sensex B ank o f B aro da
Operating profit 30.29 43.05 49.36 64.75 Source: Bloomberg, Ambit Capital research
Net profit 14.36 22.27 30.58 38.86
RoE (%) 14.6 18.7 21.1 22.7
RoAA (%) 0.9 1.1 1.2 1.3
Dividend Yield (%) 1.2 1.3 1.5 1.5
EPS (Rs) 39.3 60.9 81.4 106.3
Adjusted BVPS (Rs) 288.6 338.8 403.4 509.7
P/E (x) 18.2 11.7 8.8 6.7
P/ABV (x) 2.5 2.1 1.8 1.4
Ambit Capital Pvt Ltd Bank of Baroda
Technical View
Exhibit 1: BoB
Source: MetaStock
 The daily momentum indictors of BOB are in Sell mode.

 As long as the stock is below 732 it can drag till 660.
 We advise to use any rise as a Selling opportunity.
Derivatives View
Exhibit 2: BoB
OI P rice( F&O)
800 3,000,000
750
2,500,000
700
650
2,000,000
600
550 1,500,000
OI
500
1,000,000
450
400
500,000
350
300 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Bank of Baroda had been trading in a rising trend since last 2 quarters with
good OI build up in June; on the rollovers front we have seen strong rolls in
June series as compared to last 3 & 6 months average. Of late however the
stock has consolidated while BankNifty has moved up, thus giving away some
of its earlier outperformance. We now think that the stock is ready to renew its
outperformance over BankNifty and is likely to target 800 levels in the short to
medium term.
Bank of Baroda July 14, 2010 51

Oil & Gas July 14, 2010
Cairn India
Bloomberg: CAIR IN Equity Recommendation: BUY
Reuters: CAIL.BO No Change
COMPANY UPDATE
Going concern valuation justified: While the market perceives Cairn India Analyst contact
(CIL) as a single asset play, the exploratory potential of the Rajasthan block Saeed Jaffery
(currently at 250mmboe), in our view, would continue to surprise us on the Tel .: +91 22 3043 3203
upside. This would justify a ‘going concern’ valuation. saeedjaffery@ambitcapital.com
Peak production by 1QFY13: Mangala, currently producing at 30kbpd, is Nitin Tiwari

expected to ramp-up to peak production of 150kbpd by end-3QFY11 once Tel: +91 22 3043 3252
nitintiwari@ambitcapital.com
Trains 2 & 3 get commissioned by 1QFY11. Bhagyam, and then Aishwariya,
would commence production on start of Train 4 in 2QFY12E, implying MBA peak
production of 210kbps by 1QFY13E. Recommendation
CMP: Rs312
CIL to generate cashflows of US$2bn post FY11E: Cairn currently generates
close to US$170-200mn from its operations at Ravva/Cambay and Mangala. Target Price (Period): Rs360
This cashflow profile is set to change in circa FY12E, when production from Previous TP: -
Rajasthan block approaches its peak. We estimate both CIL’s production and Upside(%) 15
earnings to jump 8x over FY10E-12E, implying cash generation of US$2bn, EPS (FY11E): Rs21.3
starting FY12E. Change from previous (%) -
Further resource upside a possibility: CIL, in its recent resource update, has Variance from consensus (%) -11.3
increased its discovered resource base in Rajasthan block from 3.7bn boe to
4.0bn boe. While the MBA resource remains unchanged at 2.1bn boe, the Stock Information
Balmer Hill and other field STOIIP has been increased from 1.6bn to 1.9bn boe, Mkt cap: Rs591,783mn/US$12,682mn
with a risked recoverable resource of 140mmboe (7% recovery rate). Also, the
52-wk H/L: Rs321/207
company has disclosed unrisked prospective resource of 2.5bn boe in the block,
with a risked estimate at 250mmboe (75% oil; 25% gas). Given the company’s 3M Avg. daily vol. (mn): 5
track record, we believe that upsides exist to the risked resource estimates of Beta (x): 1.0
250mn boe.
BSE Sensex: 17937
Maintain BUY: We marginally reduce our target price to Rs360 (earlier Rs370)
Nifty: 5383
to factor in FY10 balance sheet actuals and a slightly more conservative
production ramp-up. Our target price, and hence our BUY recommendation is
based on long term crude price of US$80/bbl, a 9% premium to current prices.
The recent slide in prices is a concern given CIL’s earnings leverage to crude 1M 3M 12M YTD
prices – US$1/bbl change causes ~2% change in EPS. We continue to believe Absolute 3.5 0.1 46.6 10.5
that crude oil would broadly be trading in US$75-85/bbl range, given: a) Rel. to Sensex -1.5 -0.4 10.4 7.6
optimistic demand outlook; b) marginal cost economics. Key risks to our
recommendation remain deterioration in European economic growth, which Performance (%)
could potentially result in lower oil demand and hence lower oil prices. Key risks 20,000 350
to our recommendation remain deterioration in European economic growth, 18,000 300
which could potentially result in lower oil demand and hence lower oil prices. 16,000
250
14,000
12,000 200
Rs, mn CY07 FY09 FY10 FY11E FY12E Jul-09 Dec-09 M ay-10
Sensex Cairn India
Total income 10,123 14,327 16,230 81,554 155,339
Gross profit 1,891 6,980 7,720 60,818 121,254 Source: Bloomberg, Ambit Capital research
Net profit (246) 8,035 10,511 40,441 85,942
EPS, Rs (0.1) 4.2 5.5 21.3 45.3
Debt/ Equity 0.0 0.1 0.1 0.1 0.2
EBITDA mgn(%) 18.7 48.7 47.6 74.6 78.1
EV/EBIDTA 300.0 81.3 73.5 9.3 4.7
P/E (x) N.M. 72.2 55.2 14.4 6.8
RoE (%) (0.1) 2.6 3.2 11.4 21.2
RoCE (%) (0) 1.3 1.7 13.5 22.9
Ambit Capital Pvt Ltd Cairn India
Technical View
Exhibit 1: Cairn India
Source: MetaStock
• The daily MACD is in sell mode signaling more room for downside.
• The stock can correct till 300 and then to 290.
• On the upside resistance for the stock is at 320.
Derivatives View
Exhibit 2: Cairn India
OI P rice( F&O)
340 20,000,000
18,000,000
320
16,000,000
300 14,000,000
12,000,000
280
10,000,000
OI
260
8,000,000
240 6,000,000
4,000,000
220
2,000,000
200 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Cairn witnessed very strong rolls of over 88% this expiry with a good positive
roll cost. We think that the stock looks very positive and any downsides are
likely to be limited to 300 levels with a potential upside target of 335-340..
Cairn India July 14, 2010 53

Pharmaceuticals July 14, 2010
Cipla
Bloomberg: CIPLA IN EQUITY Recommendation: BUY
Reuters: CIPL.BO
COMPANY UPDATE
Good Going
Analyst contact
Anshuman Gupta
Tel: +91 22 3043 3286
 Launch of EU inhalers to lead momentum: Cipla has launched the anshumangupta@ambitcapital.com
Salbutamol inhaler in Europe and should launch eight inhaler products Vijay Chugh
with a total addressable market of Rs120bn through five partners before Tel .: +91 22 3043 3054
the end of FY13. We project revenues of Rs495mn (FY11E) and vijaychugh@ambitcapital.com
Rs1,877mn (FY12E) and EPS of Re1.0 for FY12E.
Recommendation
 Domestic business revival is key: Product launches in the last two years
and new product launches in the coming quarters should contribute to CMP: Rs336
future growth. Cipla is also ramping up its domestic sales force by adding Target Price (Period): Rs370
600 representatives and together with new product launches we believe
Previous TP: Rs400
that domestic business should see a revival. We expect overall domestic
business growing at 14-16% over FY11E-12E. Upside (%) 10
EPS (FY11E): Rs15.2
 R&D (technical knowhow) income to rebound in FY11E-12E: We
expect R&D income to rebound in the coming quarters ~Rs3bn annually, Stock Information
which is an indicator of strong US/EU generic pipeline in the coming
years. This ensures the company’s readiness to capture the generics boom
as the US/Europe approach a patent cliff. We expect formulations export 52-wk H/L: Rs364/251
revenue to grow at 15% CAGR to FY12 to reach Rs.30bn in FY12E driven
by launches in the US/Europe.
Beta (x): 0.6
 Potential upsides from Big Pharma licensing deals and biosimilar
launches in India: The company is in talks with Big Pharma companies BSE Sensex: 17937
such as Pfizer, GSK etc. for potential licensing deals in Emerging markets. Nifty: 5383
This should serve as a potential catalyst for future growth in export
revenues. The launch plan for biosimilars in India is on track and is a long- Stock Performance (%)
term growth driver for the company. 1M 3M 12M YTD
Absolute -0.5 0.6 28.0 0.3
Rel. to Sensex -5.3 0.1 -3.6 -2.4
Y/E March (Rsmn) FY08 FY09 FY10 FY11E FY12E
Income from operations 42,157 52,343 56,300 63,987 73,494 Performance (%)
EBITDA 8,316 12,183 13,602 16,570 19,330 20,000 400
EBITDA Margins (%) 19.7 23.3 24.2 25.9 26.3
18,000 350
16,000
Adj PAT 7,010 7,723 10,030 12,238 14,847 14,000
300
250
EPS (Rs) 9.0 9.9 12.5 15.2 18.5
12,000
10,000 200
ROE (%) 18.7 17.8 17.2 18.2 19.0 Jul-09 Dec-09 M ay-10
ROCE (%) 19.0 16.1 20.0 22.2 22.9 Sensex Cipla
PE (x) 37.1 33.7 26.8 22.0 18.1 Source: Bloomberg, Ambit Capital research
Price/BV(x) 6.9 6.0 4.6 4.0 3.4
Ambit Capital Pvt Ltd Cipla
Technical View
Exhibit 1: Cipla
Source: MetaStock
 The stock is trading in upward channel with support at 325

 On closing below 325 the downtrend would begin.
 Therefore as long as the stock is above 325 Cipla could target around 375.
Derivatives View
Exhibit 2: Cipla
OI P rice( F&O)
380 8,000,000
360 7,000,000
340
6,000,000
320
5,000,000
300
4,000,000
OI
280
3,000,000
260
2,000,000
240
220 1,000,000
200 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Cipla looks one of the best picks in the pharma space. While 350 will act as a
major resistance in the short term, we think that any downsides should be
limited to 320 levels for the stock. Any dips should be used to buy into the
stock for an upside target of 360/400 in the short to medium term.
Cipla July 14, 2010 55

Crompton Greaves
Bloomberg: CRG IN Equity Recommendation: BUY
Reuters: 0 No Change
COMPANY UPDATE
Play On Global T&D Spend

Analyst contact
Mehul Mukati
Tel: +91 22 3043 3211
Crompton Greaves (CG), market leader in the Indian transformer market and a mehulmukati@ambitcapital.com
significant participant in European and American T&D space through Pauwels
and Ganz, is among the best plays on global T&D spend. With a capacity of
70,000 MVA, CG is among the world's top ten and the fastest growing
transformer manufacturing companies. The company derives 45% of sales from
the international market. In the domestic market, power, industrial products and Recommendation
consumer products contribute 27%, 12% and 17% to sales.
CMP: Rs261
Ahead of competition in 765KV transformers segment: Crompton Greaves Target Price (Period): Rs317
is the only Indian company to receive orders to supply 765KV transformers and
Previous TP: Rs317
reactors. Equipped with a modern facility to manufacture extra high-voltage
transformers and orders in hand, the company is well ahead of competition in Upside (%) 22
this space. We expect the company to maintain a high 35-40% share in this EPS (FY11E): Rs16.1
segment. Change from previous (%) 0
Strong domestic growth: We expect strong volume growth in domestic Stock Information
business; led by power and consumer segments. The industrial products
business is showing signs of recovery and will contribute to growth in FY11. Mkt cap: Rs167,269mn/US$3,585mn
Despite intensifying competition in the power T&D business, particularly 52-wk H/L: Rs280/146
transformers, the company has improved margins considerably in FY10. Though
there is limited upside to margins from the prevailing level, the company is best
positioned to maintain them based on better cost structure and a high degree of Beta (x): 1.0
indigenisation. BSE Sensex: 17937
Muted international sales, strong margins to boost earnings: Due to Nifty: 5383
sluggish growth in distribution transformer sales (nearly one-thirds the total),
Crompton Greaves' international business is expected to slow down Stock Performance (%)
considerably in FY11. However, we believe, growth in power transformers will 1M 3M 12M YTD
remain steady in the next two years. We expect margins to further improve in
Absolute 6.7 -4.6 66.2 6.8
FY11, boosting overseas earnings.
Rel. to Sensex 1.5 -5.1 25.1 4.0
Earnings outlook and Valuation: We expect CG to post earnings CAGR of
23% over FY09-12, led by 12% revenue growth and 2.5% improvement in Performance (%)
EBITDA margin during the same period. The stock is currently trading at 15x
21,000 1500
FY11E earnings. We remain positive on the stock and see substantial returns
1000
over the next one year. 14,000
500
FY09 FY10E FY11E FY12E Oct-08 Feb-09 Jul-09

Sensex TPWR (RHS)
Net Sales 87,373 91,409 102,480 118,677
EBIDTA 9,956 12,770 14,533 16,981 Source: Bloomberg, Ambit Capital research
EBITDA (%) 11.4% 14.0% 14.2% 14.3%

Net Profit 5,625 8,241 8,823 10,331
EPS (Rs) 8.8 12.8 13.8 16.1
ROE % 35.6% 37.7% 30.1% 27.5%
ROCE % 38.9% 41.3% 37.5% 35.7%
P/E (x) 30.4 20.8 19.4 16.6
Ambit Capital Pvt Ltd Crompton Greaves
Technical View
Exhibit 1: CGL
Source: MetaStock
 Stock is witnessing negative divergence on hourly chart and this is a bearish

indication.
 Advise o use any rise as selling opportunity with downside target of 258
 On the upside stop loss will be at 275.
Derivatives View
Exhibit 2: CGL
OI P rice( F&O)
300 3,000,000
280
2,500,000
260
240
2,000,000
220
200 1,500,000
OI
180
1,000,000
160
140
500,000
120
100 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock in line with other capital goods peers saw strong rolls at 80% last
expiry with significant positive roll cost. The stock has very strong support
around the 250 mark. One should look to buy into the stock for a target of
300.
Crompton Greaves July 14, 2010 57

GAIL
Bloomberg: GAIL IN Equity Recommendation: HOLD
Reuters: GAIL.BO Upgraded from Sell
COMPANY UPDATE
Upgrade to HOLD: As we move into FY11E, our target price undergoes a Analyst contact
marginal upward revision to Rs440 (from Rs430 earlier) as a result of a Saeed Jaffery
change in the discounting factor. Although our revised target price offers only Tel: +91 22 3043 3203
a limited upside (2%) from current levels, we upgrade the stock from 'SELL' to saeedjaffery@ambitcapital.com
'HOLD' on the back of a) our sector outperformer stance on GAIL (given least Nitin Tiwari
EPS sensitivity to under-recoveries), b) upside risks to our target price from
Tel .: +91 22 3043 3252
deregulation and c) being a defensive play, especially during times of nitintiwari@ambitcapital.com
volatility.
Clarity on tariffs removes the overhang: GAIL has been experiencing the Recommendation
overhang of lack of clarity on tariffs. We had expressed this concern in our CMP: Rs465
report on GAIL dated 16 December 2009 (Ease the gas pedal). With the Target Price (Period): Rs440
PNGRB having clarified tariff structure, we believe this has not only improved
Previous TP: -
revenue visibility for GAIL but has also set precedence in the method of tariff
calculation going forward. PNGRB has taken a contrarian view to GAIL's Downside (%) (5)
proposal of including new capex in the DVPL-GREP upgradation for calculation EPS (FY11): Rs25.9
of tariff. Consequently, tariffs for existing HVJ-GREP-DVPL and DVPL/GREP Change from previous (%) -
upgradation, which have been calculated separately, have come in at Variance from consensus (%) (8)
Rs1.36/scm on a blended basis against our expectation of Rs1.02/scm. We
however believe that the positive surprise has been factored in the current Stock Information
stock price. Mkt cap: Rs589,906mn/US$12,641mn
Subsidy burden likely to increase: Given our crude price assumption of 52-wk H/L: Rs517/306
US$80/bbl for FY11E-12E, we model for GAIL’s subsidy payout at Rs15.2bn
and Rs17.1bn for FY11E and FY12E respectively, implying an increase of 15%-
30% over FY10. While the management has indicated that it is hopeful of it Beta (x): 0.7
being exempted from subsidy burden, we are less sanguine on the same BSE Sensex: 17937
(given that the company produces LPG). Having said that, we note that GAIL’s
EPS sensitivity to rising crude prices, and hence under-recoveries, is the lowest Nifty: 5383
among the PSU Oil & Gas (ONGC, OIL, OMCs) – US$1/bbl change in crude
price changes GAIL’s EPS by 3% v/s ONGC/OIL EPS change of ~7%. Stock Performance (%)
1M 3M 12M YTD
4Q results in line: Reported EBITDA and PAT came in at Rs13.6bn (+25%
Absolute 1.1 13.1 49.3 12.5
YoY) and Rs9.1bn (+44% YoY) for 4QFY10, against our expectation of
Rs13.6bn and Rs8.6bn. Earnings growth was driven predominantly by higher Rel. to Sensex -3.8 12.6 12.4 9.6
earnings from the petrochemical and LPG/LHC business. Transmissions
earnings growth, was however subdued as the company provided for lower Performance (%)
HVJ/DVPL tariffs in the quarter. Subsidy payout for the quarter came in at 20,000 500
Rs3.38bn (after adjusting for over-provisioning of Rs530mn in 3QFY10), as 18,000

400
16,000
against nil in 4QFY09. 14,000 300
12,000
Rs, mn FY08 FY09 FY10 FY11E FY12E
Sensex GA IL (India)
Total income 188,385 246,632 271,623 298,122 312,968
Gross profit 42,642 43,630 55,797 59,932 74,721
Net profit 27,636 28,263 33,278 32,856 41,506
Earning per share, Rs 21.8 22.3 26.2 25.9 32.7
Debt/ Equity 0.3 0.3 0.2 0.3 0.3
EBITDA margin(%) 23 18 21 20 24
EV/EBIDTA 13 12 10 9 7
P/E (x) 20 19 17 17 13
RoE (%) 22 20 20 17 19
RoCE (%) 15 13 15 13 14
Ambit Capital Pvt Ltd GAIL
Technical View
Exhibit 1: GAIL
Source: MetaStock
 The MACD is witnessing negative divergence.

 Expect the stock to correct till 450.
Derivatives View
Exhibit 2: GAIL
OI P rice( F&O)
510 6,000,000
460 5,000,000
410
4,000,000
360
3,000,000
OI
310
2,000,000
260
210 1,000,000
160 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Gail after a long period of consolidation had broken out and moved higher in
the April-June period. We now expect the stock to trade ranged with 440 as a
key support and 500 as a stiff resistance on the way up.
GAIL July 14, 2010 59

HDFC Bank
Bloomberg: HDFCB IN Equity Recommendation: HOLD
Reuters: HDBK.BO No Change
COMPANY UPDATE
Consistent Performer
Analyst contact
Krishnan ASV
Tel: +91 22 3043 3205
Valuation and Recommendation: We currently have a ‘HOLD’ vkrishnan@ambitcapital.com
recommendation on HDFC Bank. At its CMP of Rs2044, HDFC Bank trades at 4x Poonam Saney
our FY11E ABVPS of Rs515. We rate HDFC Bank highly within our coverage Tel .: +91 22 3043 3216
universe for its consistent performance across critical operating parameters. Key poonamsaney@ambitcapital.com
business parameters such as CASA/branch and Business/branch are trending
higher towards the pre-CBOP merger levels. We view these as levers that HDFC Recommendation
Bank can further improve in order to enhance its return ratios. We expect the
CMP: Rs2044
bank to report RoA and RoE 1.7% and 18% respectively during FY11E.
Healthy business growth: We have built in a credit growth of 27% (higher
Previous TP: Rs1915
than the indicative system growth of about 20%) and a similar growth in the
deposit base at 28% during FY11E. We expect the bank’s CASA ratio to Upside (%) 1
moderate and settle in the range ~48-50% during FY11E. ABVPS (FY11E): Rs515
Change from previous (%) 2
Healthy NIMs at ~4% FY11: On the back of healthy traction in CASA
mobilization, we believe that HDFC Bank would report margins in the range
Stock Information
3.9%-4.2% during FY11E. We expect adjustments in asset yields to lag the
upward movement in systemic deposit rates. Mkt cap: Rs942,113mn/US$20,189mn
Improved asset quality on all parameters: While most banks within the 52-wk H/L: Rs2,056/1,333
system witnessed strain on their asset quality ratios, HDFC Bank actually 3M Avg. daily vol. (mn): 1
witnessed a steady improvement on this front. As of Mar’10, gross NPAs were
Beta (x): 0.9
brought down to 1.4% from ~2% last year while the net NPAs were at 0.3% as
against 0.6% during FY09. Going forward, we expect the bank’s gross and net BSE Sensex: 17937
NPA ratios to improve further to 1.1% and 0.3% respectively during FY11, with a Nifty: 5383
provision coverage ratio of over 70%. We also draw comfort from a low
restructured book (at 0.3% of gross advances), of which only 0.1% has slipped Stock Performance (%)
into NPA.
1M 3M 12M YTD
Fairly de-risked from MTM risk: The SLR book stands at Rs510bn, of which Absolute 5.3 4.9 48.6 20.4
11% is in the AFS category with a duration of 1.5yrs while 8% is in HFT with a Rel. to Sensex 0.2 4.4 11.9 17.2
duration of 0.5yrs. As such the overall book is fairly de-risked from the likely
upward movement in yields. Performance (%)
20,000 2500
Exhibit 1: Key Financials 18,000
2000
Rs bn FY08 FY09 FY10 FY11E 16,000
14,000
Net interest income 52.28 74.21 83.87 109.32 12,000
1500
Operating profit 37.65 51.79 64.30 81.63 10,000 1000

Net profit 15.9 22.45 29.49 42.18
Sensex HDFC B ank
RoE (%) 17.7 17.2 16.3 18.1
RoAA (%) 1.4 1.4 1.5 1.7
Dividend Yield (%) 0.4 0.5 0.6 0.5
EPS (Rs) 44.9 52.8 64.4 90.2
Adjusted BVPS (Rs) 301.5 312.3 444.3 514.9
P/E (x) 45.5 38.7 31.7 22.7
P/ABV (x) 6.8 6.5 4.6 4.0
Ambit Capital Pvt Ltd HDFC Bank
Technical View
Exhibit 1: HDFC Bank
Source: MetaStock
 The RSI is trading above 70 marks indicating the stock is in overbought zone.
 MACD is also in sell mode.
 Sell the stock with downside target of 1910-1850.
Derivatives View
Exhibit 2: HDFC Bank
OI P rice( F&O)
2,100 4,500,000
4,000,000
1,900
3,500,000
1,700 3,000,000
2,500,000
1,500
OI
2,000,000
1,300 1,500,000
1,000,000
1,100
500,000
900 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock has seen very aggressive long build-up in its current run-up past the
recent highs of 2000 levels. With 2000 serving as a strong support the stock is
likely to target 2150 levels in the short term.
HDFC Bank July 14, 2010 61

HDFC
Bloomberg: HDFC IN Equity Recommendation: HOLD
Reuters: HDFC.BO No Change
COMPANY UPDATE
Too Fast Too Furious

Analyst contact
Krishnan ASV
Valuation and recommendation: At its CMP of Rs3,003, the stock quotes at Tel: +91 22 3043 3205
5.1x and 4.5x our FY11E and FY12E standalone ABVPS estimates of Rs585 and vkrishnan@ambitcapital.com
Rs673 respectively. In our estimates we have factored in, a) likely loss of Poonam Saney
medium-term market share to PSU banks and aggressive HFCs and b) Lag in Tel .: +91 22 3043 3216
transmission of higher interest rates and hence, stable full-year margins during poonamsaney@ambitcapital.com
FY12E (vis-à-vis FY11E). Our estimates do not factor in conversion of warrants
(issued during FY10) over the period FY10-FY12E.Given the steep run-up in the Recommendation
stock over the last quarter, we believe that the near-term positives have been
CMP: Rs3003
priced in. Recommend ‘HOLD’, with a target price of Rs3,150.
Approvals pick up pace - augurs well for growth: HDFC’s growth outlook
(from the core mortgage lending business) during FY10 had been an overhang
on the stock, especially since the time PSU banks were coerced during Dec’08 Upside (%) 5.5
into offering home loans at subsidized rates (single-digit rates). Given the ABVPS (FY11E): Rs585
differential in interest rates offered by PSU banks (as part of the limited period Change from previous (%) 4.5
scheme) and HDFC, we were skeptical about the incremental growth in HDFC’s
loan book. However, the pace of growth in approvals/disbursements picked up Stock Information
ahead of our expectations during Q4 FY10. Mkt cap: Rs872,536mn/US$18,698mn
HDFC witnessed its fastest pace of loan book growth for the last 24 months 52-wk H/L: Rs3,040/1,950
(since the Mar’08 quarter) during Q4FY10. We do not expect HDFC to go
overboard in terms of growth and hence, have built in sub-20% loan book
CAGR over FY10-FY12E. We also expect the core lending business to mirror the Beta (x): 1.0
up-trend in approvals and disbursements with a lag over the next few months. BSE Sensex: 17937
Healthy operating profit: We believe that HDFC would be able to report a Nifty: 5383
healthy operating profit over the next two years and have built in a growth of
18% and 21% for FY11 and FY12 respectively. The healthy growth is a fallout of Stock Performance (%)
the expectations of a strong NII growth of about 21% over the next two years as 1M 3M 12M YTD
well as good other income growth.
Absolute 6.9 6.2 36.6 12.2
Asset quality uncompromised: Despite the systemic stress anticipated across Rel. to Sensex 1.7 5.7 2.8 9.3
the BFSI space, HDFC has been able to marginally improve its asset quality
during FY10 as against FY09. Dual rate schemes notwithstanding, we believe Performance (%)
that the company would continue to accord a higher priority to maintaining or 20,000 3500
improving its asset quality further. In our estimates we have built in higher gross 18,000 3000
and net NPA levels in absolute terms. We expect the gross and net NPA ratio to 16,000
2500
14,000
be at 1% and 0.3% respectively. 12,000 2000
10,000 1500
Exhibit 1: Key Financials Jul-09 Dec-09 M ay-10
Rs bn FY08 FY09 FY10 FY11E FY12E Sensex HDFC
Net interest income 27.53 32.12 33.87 43.18 52.36 Source: Bloomberg, Ambit Capital research
Operating profit 27.55 32.39 39.15 46.54 56.45
Net profit 18 22.83 28.25 32.44 39.37
RoE (%) 27.8 18.2 20 20.1 21.3
RoAA (%) 3.4 2.6 2.7 2.7 2.7
Dividend Yield (%) 0.9 1.1 1.3 1.4 1.4
EPS (Rs) 68.3 79.5 99 112.9 136.7
Adjusted BVPS (Rs) 416.7 451.6 520.8 585.3 673.2
P/E (x) 44.0 37.8 30.3 26.6 22.0
P/ABV (x) 7.2 6.6 5.8 5.1 4.5
Ambit Capital Pvt Ltd HDFC
Technical View
Exhibit 1: HDFC
Source: MetaStock
 HDFC has witness sharp fall in past couple of days.

 The RSI is trading below in neutral zone mark.
 Recommend to use such fall as buying opportunity with stop loss at 2880.
Derivatives View
Exhibit 2: HDFC
OI P rice( F&O)
3,200 3,500,000
3,000
3,000,000
2,800
2,500,000
2,600
2,400 2,000,000
OI
2,200 1,500,000
2,000
1,000,000
1,800
500,000
1,600
1,400 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 This stock had seen good longs last series in the run-up till 3000 levels in
June. The stock then consolidated for a while and is now looks all set to break
out past the recent highs of 3025 which can then fuel further upsides in the
counter. 2900 will be a good support for the stock on the way down.
HDFC July 14, 2010 63

Hero Honda
Bloomberg: HH IN Equity Recommendation: HOLD
Reuters: HROH.BO No Change
COMPANY UPDATE
Time Of Reckoning
Analyst contact
Navin Matta
Tel .: +91 22 3043 3228
Competition intensifies: Hero Honda has come off a 2-year period of strong navinmatta@ambitcapital.com
volume increase of 17% CAGR and earnings growth of 51% p.a. We believe the
Vijay Chugh
benign competitive environment conferred higher pricing power, which in
Tel: +91 22 3043 3054
addition to the tax incentives was effectively exploited to improve profitability.
vijaychugh@ambitcapital.com
On a high base, we forecast deceleration in earnings growth at 10% p.a. over
FY10-12E, as higher competitive intensity and elevated cost pressures adversely Recommendation
impact profitability.
CMP: Rs1,975
Moderation in domestic motorcycle volume growth: In our view, Hero
Honda's volume growth outperformance in the FY07-09 period could be
attributed to a combination of factors including low levels of competition and Previous TP: Rs2,125
strong rural demand. Going forward, competition is likely to intensify, Upside(%) 10
particularly in the executive segment, where Hero Honda holds above 70% EPS (FY11): Rs122
share. We expect the company to cede 270bps market share of the domestic Change from previous (%) 1.8
motorcycle segment over next two years. Variance from consensus (%) 4.2%
Increasing cost pressure and marginal headroom for tax incentive gains
Stock Information
to drive margins lower: We expect Hero Honda's pricing power to be
moderated by higher competitive intensity. With increase in commodity costs, Mkt cap: Rs394,344mn/US$8,451mn
emission upgrade expenses and higher excise duty, we forecast EBITDA margin 52-wk H/L: Rs2,075/1,292
to contract 110bps by FY12. Further, the Haridwar facility is already operating
at 75% capacity utilisation, which would limit gains from tax incentives beyond 3M Avg. daily vol. (mn): 1
FY11. Beta (x): 0.6
Valuation and outlook: Although the demand environment remains strong, BSE Sensex: 17937
we expect volume growth for Hero Honda to remain at below industry growth Nifty: 5383
levels. With a slowdown in earnings momentum and forecasted market share
loss, we see valuations remaining at mid-cycle levels. Notwithstanding the Stock Performance (%)
above, we note that Hero Honda's strong balance sheet and free cash flows
1M 3M 12M YTD
limit any major downside risk to the stock. We maintain our HOLD
recommendation with a price target of Rs2,166 (16x FY12E EPS). Absolute -1.9 -1.6 41.4 19.6
Rel. to Sensex -6.7 -2.0 6.5 16.4
Particulars FY09 FY10 FY11E FY12E Performance (%)
20,000 2500
Net Sales 123,569 158,313 180,499 199,278 18,000
EBIDTA 17,475 27,377 29,740 32,982 16,000 2000
14,000
Adj Net Profit 12,817 22,318 24,341 27,040 1500
12,000
EPS 64 112 122 135 10,000 1000
EPS Growth % 32.4 74.1 9.1 11.1

Sensex Hero Ho nda
P/E (x) 30.8 17.7 16.2 14.6
EV/EBIDTA (x) 20.6 12.6 11.7 10.1
Dividend Yield % 1.0 5.6 2.0 2.3
ROE % 37.8 61.5 57.8 46.7
ROCE % 48.2 72.9 67.7 55.8
Source: Ambit Capital research, company
Ambit Capital Pvt Ltd Hero Honda
Technical View
Exhibit 1: Hero Honda
Source: MetaStock
 As long as the stock is trading below 2120 the stock looks weak.
 On the upside resistance for the stock is at 2120.
 Daily MACD is in sell mode and this could drift the stock toward 1906.
Derivatives View
Exhibit 2: Hero Honda
OI P rice( F&O)
2,300 4,000,000
2,100 3,500,000
3,000,000
1,900
2,500,000
1,700
2,000,000
OI
1,500
1,500,000
1,300
1,000,000
1,100 500,000
900 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock has seen some signs of short build-up in the last few trading sessions
as the price broke below the important 2000 mark. Good support on the way
down now stands at 1850-1900 level. Expect the stock to trade ranged in the
1850-2050 range in the medium term.
Hero Honda July 14, 2010 65

Metals & Mining July 14, 2010
Hindalco Industries
Bloomberg: HNDL IN Equity Recommendation: BUY
Reuters: HALC.BO No Change
COMPANY UPDATE
Project Visibility Key

Analyst contact
Chandrani De, CFA
Tel: +91 22 3043 3210
Domestic expansions — closer to the harvesting time: Over FY10-14E, the chandranide@ambitcapital.com
company's capacities for alumina and aluminium are being expanded by 32%
and 34% CAGR respectively. While the benefits of these expansions will mostly
accrue FY13E onward, commissioning of Utkal and Mahaan projects and
improved visibility on the other projects will likely be a significant stock price
driver, in our opinion. Recommendation
Domestic copper business — volumes and byproducts are key: We have a CMP: Rs150
muted outlook on the Tc/Rc margins over the next two years as we believe that Target Price (Period): Rs185
smelter capacity additions expected in China will result in continued metal
Previous TP: Rs185
deficit. We expect that business profitability will be helped by volume growth
and improvement in byproduct realizations. EBITDA contribution from this Upside(%) 23
business is expected to be largely stable in FY11E and FY12E at ~Rs8bn. Adj. EPS (FY11E): Rs10.9
Novelis — back on track: While we expect volume growth to be subdued in Stock Information
developed markets, South America and Asia are expected to register healthy
demand growth, and overall shipments should rise ~3% p.a. over the next two Mkt cap: Rs286,065mn/US$6,130mn
years. An improved competitive environment and cost improvements should 52-wk H/L: Rs193/68
boost profitability further; and conclusion of price ceiling contracts is significantly
positive.
Beta (x): 1.4
Valuation — current price offers 23% upside; recommend BUY: We initiate
coverage on Hindalco with a BUY rating. Our target price (TP) of Rs185 (March BSE Sensex: 17937
2011) is based on a sum-of-the-parts (SOTP) valuation. At its current price, the Nifty: 5383
stock is trading at 6.9 EV/ EBITDA and 13.8 P/E on FY11E basis. The main risks
to our view are delay in expansion plans, a decrease in aluminium prices and Stock Performance (%)
appreciation of the rupee against the dollar. Our earnings forecasts assume 1M 3M 12M YTD
aluminum prices to be US$2,150/t for FY11E and US$2,250/t for FY12E, and Absolute 7.2 -17.1 105.4 -7.1
an INR/USD rate of 46.5 in both the years. A 5% dip in aluminum price will lead
Rel. to Sensex 2.0 -17.4 54.6 -9.5
to a 4% cut in FY12E EBITDA while 5% appreciation in the exchange rate will
lead to 6% dip in FY12E EBITDA.
Performance (%)
18,000 175
Y/E Mar FY 2008 FY 2009 FY 2010 FY 2011E FY 2012E 16,000
125
Net sales (Rs mn) 600,128 656,252 607,221 701,028 753,625
14,000
75
12,000
EBITDA (Rs mn) 66,351 53,580 70,094 77,685 86,871 10,000 25
Adj Net profit (Rs mn) 16,452 27,169 10,861 20,857 26,197
Sensex HINDA LCO
EBITDA margin % 11.1 8.2 11.5 11.1 11.5
Adjusted EPS FD (Rs) Source: Bloomberg, Ambit Capital research
12.7 18.0 6.1 10.9 13.7
P/E Adj (x) 11.8 8.3 24.5 13.8 11.0
EV/EBITDA (x) 7.6 9.9 7.5 6.9 6.5
Dividend yield (%) 1.2 0.9 0.9 1.1 1.4
Ambit Capital Pvt Ltd Hindalco Industries
Technical View
Exhibit 1: Hindalco
Source: MetaStock
 The RSI is trading in neutral on daily chart of Hindalco.

 Recommend to use any fall as buying opportunity with an upside target of
160.
Derivatives View
Exhibit 2: Hindalco
OI P rice( F&O)
40,000,000
190
35,000,000
170
30,000,000
150
25,000,000
130
20,000,000
OI
110 15,000,000
90 10,000,000
70 5,000,000
50 0
3-May-10
17-May-10
31-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
20-Oct-09
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
Date
 Hindalco in the last 3 months has corrected very sharply from its highs of 190
to as low at 132 with significant OI build up; however in the June expiry we
witnessed huge short covering in the counter with OI decreasing by close to
50%; expect Hindalco to move higher from hereon but face stiff resistance at
170 levels
Hindalco Industries July 14, 2010 67

Hindustan Zinc
Bloomberg: HZ IN EQUITY Recommendation: NOT RATED
Reuters: HZNC.BO
Wholesome Growth
Analyst contact
Chandrani De, CFA
Tel: +91 22 3043 3210
Low cost gives the company a sustainable competitive advantage: chandranide@ambitcapital.com
Hindustan Zinc (HZL) is among the lowest-cost producers of zinc, with cash
costs of ~US$700/t, on account of its rich reserves of zinc, lead and silver, as Recommendation
well as low manpower costs. The company has total reserves and resources of
CMP: Rs972
299mt, containing 34mt of zinc-lead metal.
EPS (FY11E) 123
Capacity expansion in India to boost organic growth… : The 210ktpa
zinc smelter at Dariba and the 1mtpa zinc concentrator at Rampura Agucha Stock Information
were commissioned during end-FY10, increasing the total zinc and lead
smelting capacity to 964ktpa. The 100ktpa lead smelter project is scheduled Mkt cap: Rs410,807mn/US$8,803mn
for completion in 2QFY11 while the Sindesar Khurd mine project is scheduled 52-wk H/L: Rs1,384/538
for progressive commissioning from 1QFY11. Post completion of these
projects, HZL will be the world’s largest integrated zinc-lead producer with a
total smelting capacity of 1.064mtpa. Beta (x): 1.0
… supplemented by inorganic growth - acquisition of Anglo- BSE Sensex: 17937

American’s zinc assets is value accretive: Vedanta recently acquired the Nifty: 5383
zinc assets of Anglo-American for US$1.34bn, and subject to board approval,
plans to complete the acquisition through HZL. Anglo-American’s zinc Stock Performance (%)
portfolio includes 100% of Skorpian mine in Namibia, 100% in Lisheen mine 1M 3M 12M YTD
in Ireland and 74% in Black Mountain Mining in South Africa. The acquisition
Absolute 0.8 -22.5 73.4 -19.6
increases attributable reserves and resources by 206mt. Anglo’s zinc business
reported an EBITDA margin of 32% in CY09, and the acquisition is expected to Rel. to Sensex -4.1 -22.8 30.6 -21.8
be EPS accretive in FY11 itself.
Performance (%)
Increased silver production to add to profitability: Hindustan Zinc is 20,000 1400
expanding its silver refining capacity to 500tpa by 2013 (production in FY10 18,000 1200
was 176t). This should increase revenues to beyond Rs10bn, and given the low 16,000 1000
cost of the byproduct conversion, also give a significant boost to EBITDA. 14,000 800
12,000 600
Valuation: At the current price, the stock is trading at 5.5x EV/ EBITDA and 10,000 400
7.9x P/E, based on FY11E estimates. Sensex HIND. ZINC
Exhibit 1: Key financials Source: Bloomberg, Ambit Capital research

Particulars FY09 FY10 FY11E FY12E
Net Sales 56,803 80,170 99,714 115,412
EBITDA 27,430 47,920 61,079 72,134
Adj Net Profit 27,276 40,414 51,483 59,420
EPS 65 96 123 141
EBITDA Margin (%) 48.3 59.8 61.3 62.5
P/E (X) 15.1 10.2 7.9 6.9
EV/EBITDA (x) 12.2 7.0 5.5 4.6
ROE % 20.8 23.3 24.0 22.3
Ambit Capital Pvt Ltd Hindustan Zinc
Technical View
Exhibit 1: Hindustan Zinc
Source: MetaStock
 MACD on daily chart is trading in sell mode signaling upside is limited

 On closing below the support levels stock could target 910.
Derivatives View
Exhibit 2: Hindustan Zinc
OI P rice( F&O)
700,000
1,550
600,000
1,350
1,150 500,000
950 400,000
OI
750 300,000
550 200,000
350 100,000
150 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Hindzinc has corrected sharply in last few months and has been trading in a
very narrow range since last couple of weeks; going ahead we expect Hindzinc
to gain momentum above 1000-1020 levels with immediate support at 950.
Hindustan Zinc July 14, 2010 69

ICICI Bank
Bloomberg: ICICIBC IN Equity Recommendation: HOLD
Reuters: ICBK.BO No Change
COMPANY UPDATE
Uncertainty prevails Analyst contact

Krishnan ASV
Valuation and Recommendation: We believe that ICICIB has exhibited better-
Tel: +91 22 3043 3205
than-anticipated asset growth outlook and improved asset quality during FY10,
vkrishnan@ambitcapital.com
and the fact that they have received regulatory concessions on the provision
cover front would help profitability. However, though RBI is yet to approve the Poonam Saney
Bank of Rajasthan (BoR) merger at the highly-priced swap ratio of 1:4.72, we Tel .: +91 22 3043 3216
remain cautious on the bank due to: a) payment of a very high price for BoR’s poonamsaney@ambitcapital.com
branches; and b) uncertainty over what lies ahead in terms of business and asset
quality. Our estimates do not factor the merger; we would factor this post the Recommendation
RBI’s regulatory statutory approval. We maintain our cautious stance on the CMP: Rs890
merger with BoR. At CMP of Rs890, the stock trades at 1.9x FY11E standalone
ABVPS of Rs481. Recommend HOLD at a target price of Rs1,045.
Previous TP: Rs830
Domestic loan growth in line with the industry for FY11: During 4QFY10, Upside (%) 17
for the first time in four quarters, ICICIB has witnessed an increase in its loan ABVPS (FY11E): Rs481
book on a sequential basis. Management has now guided for domestic loan Change from previous (%) 2
book growth in line with the system (at ~20%) and flat overseas loan book for
FY11E. As a result, our revised estimates factor in a blended loan book growth Stock Information
marginally below 14% for ICICI Bank.
Asset quality/provisioning to watch out for: Although the RBI has allowed
52-wk H/L: Rs1,010/606
two quarters of breathing space in terms of an extension to comply with the
mandated provisioning coverage of 70% by March 2011, our earnings are 3M Avg. daily vol. (mn): 9
susceptible to a downward risk emanating from continued NPA accretion. The Beta (x): 1.5
bank's asset quality indicators, although improving, have not yet signaled a
stable trend (of low slippages). Gross NPAs have once again spiked up (in BSE Sensex: 17937
absolute terms) while the gross NPA ratio has breached the 5% level (in line with Nifty: 5383
our expectations). Also we, remain very cautious in terms of asset quality of BoR,
assuming the merger receives RBI’s approval. Stock Performance (%)
FY11 overseas book to remain flat: The bank would continue to grow the 1M 3M 12M YTD
India linked business for the UK subsidiary, thereby growing the balance sheet. Absolute 5.6 -7.4 42.1 1.9
However, the bank is not comfortable in growing the Canada book as yet. Rel. to Sensex 0.5 -7.8 7.0 -0.8
We remain positive on other businesses: The bank’s life insurance business

Performance (%)
clocked in full-year profitability of Rs 2.6bn, for the first time since inception, with
a large chunk of the profits being recorded in 4QFY10. The AMC business has 20,000 1200
18,000
clocked in a PAT of Rs 1.28bn during FY10, owing to the increase in the AUMs, 16,000
1000
which resulted in better earnings. ICICI Securities reported PAT of Rs 1.2bn in 14,000
800
FY10 v/s Rs 40mn in FY09. We remain positive on other businesses of the bank. 12,000 600
10,000 400
Exhibit 1: Key financials (standalone)
Sensex ICICI B ank
Operating Profit 79.61 89.25 97.33 108.83
Net profit 41.58 37.58 40.26 53.73
RoE (%) 11.9 7.9 8 10
RoAA (%) 1.1 1 1.1 1.4
EPS (Rs) 39.2 33.8 36.1 48.2
Adjusted BVPS (Rs) 427.2 404.1 437.6 480.7
P/E (x) 22.7 26.3 24.7 18.5
P/ABV (x) 2.1 2.2 2.0 1.9
Ambit Capital Pvt Ltd ICICI Bank
Technical View
Exhibit 1: ICICI Bank
Source: MetaStock
 The MACD is curving downward buy on hourly chart it is in buy mode.

 On the upside stock can target 900 and therefore any fall should be use as
buying opportunity.
Derivatives View
Exhibit 2: ICICI Bank
OI P rice( F&O)
1,100 18,000,000
16,000,000
1,000
14,000,000
900 12,000,000
10,000,000
800
OI
8,000,000
700 6,000,000
4,000,000
600
2,000,000
500 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 ICICI Bank witnessed a sharp bounce post its recent low of sub 800 levels. The
stock in the June series had witnessed strong rolls with cost of carry on the
negative side; going forward we expect the stock to remain under selling
pressure with stiff resistance at 900-920 levels.
ICICI Bank July 14, 2010 71

Information Technology July 14, 2010
Infosys Technologies
Bloomberg: INFO IN Equity Recommendation: BUY
Reuters: INFY.BO No Change
COMPANY UPDATE
Positive Outlook
Analyst contact
Subhashini Gurumurthy
Tel: +91 22 3043 3264
Strong BFSI-led rebound: The BFSI vertical has led Infosys' strong volume subhashinig@ambitcapital.com
revival. Infosys' lower exposure to failed banks and strong client footprint has
helped it win a majority of the vendor consolidation exercises. Going forward,
we expect it to benefit from uptick in discretionary spend within the BFSI vertical,
with more transformational projects coming its way.
Excellent client mining skills: Infosys has the best account mining skills Recommendation
helping it garner a higher share of clients’ IT spend in the demand upcycle. CMP: Rs2,896
Further, the highest number of US$>1mn clients lends higher earnings visibility. (Mar-2011):
FY11E guidance upgrade infuses confidence on the demand trajectory: Previous TP: Rs3120
Rs3,120
We read Infosys’ FY11E US$ revenue guidance upgrade of 3% ( to +19-21% Upside(%) 8
12
YoY) and increase in gross hiring target by 20% as a big confidence booster, EPS (FY11E):
(FY10): Rs120.2
Rs119.1
particularly in the backdrop of uncertainty in Europe and cross currency Change from previous (%) -0.9-
headwinds. EPS guidance upgrade of 5% (Rs112.2-116.7) was in line with our
estimate, it was relatively lower when viewed in conjunction with the strong Stock Information
revenue guidance upgrade. We believe that there is enough scope for further
upgrades. cap:(mn):
Mkt cap Rs1,661,960mn/US$35,615mn
Rs1,661,960/US$35,615
52-wk H/L: Rs2,912/1,701
Buy with target price of Rs3,120: We continue to believe that strong
offshoring momentum, pick-up in discretionary spending and strong growth in 3M Avg. daily vol. (mn): 2
top-10 clients will drive strong growth in FY11E/12E; and expect Infosys to be a Beta (x): 0.7
strong beneficiary of these trends. The stock currently trades at 23.5x and 18.8x
on FY11E and FY12E EPS. Maintain BUY with a target price of Rs3,120 (21x BSE Sensex: 17937
17,937
FY12E EPS). Nifty: 5383
5,383
Exhibit 1: Key financials Stock Performance (%)

Y/E March FY08 FY09 FY10E FY11E FY12E 1M
1M 3M
3M 12M
12M YTD
YTD
Net Sales 166,920 216,930 227,420 268,827 332,024 Absolute
Absolute 10.1 7.9 68.3 11.3
Sales growth (YoY %) 20.1 30 4.8 18.2 23.5 Rel. to Sensex
Sensex 4.7 7.4 26.7 8.4
EBITDA 52,380 71,950 78,610 88,122 105,999
EBITDA (%) 31.4 33.2 34.6 32.8 31.9
Performance (%)
20,000 3000
Adjusted Net Profit 45,380 58,800 62,260 68,082 84,813
18,000
2500
EPS (Rs) 81.5 104.5 109 119.1 148.4 16,000
2000
14,000
EPS Growth (YoY %) 18.9 28.3 4.2 9.3 24.5 1500
12,000
ROCE (%) 37 40.2 33.5 30.9 31.7 10,000 1000
ROE (%) 37.2 37.4 30.3 26.9 28 Jul-09 Dec-09 M ay-10
Sensex Info sys Tech.
PE (x) 34.3 26.7 25.6 23.5 18.8 S
Price/Book Value (x) 11.5 8.8 6.9 5.8 4.8 ource:Bloomberg,
Source: Bloomberg, Ambit
Ambit Capital research Capital
EV/EBITDA (x) 29.1 20.8 18.5 16.1 12.9
research
Ambit Capital Pvt Ltd Infosys Technologies
Technical View
Exhibit 1: Infosys
Source: MetaStock
 The RSI is in overbought zone and MACD is witnessing negative divergence.

 We advise caution in It stock and expect Infosys to correct till 2720-2620.
Derivatives View
Exhibit 2: Infosys
OI P rice( F&O)
3,000 4,500,000
4,000,000
2,800
3,500,000
2,600
3,000,000
2,400 2,500,000
OI
2,200 2,000,000
1,500,000
2,000
1,000,000
1,800
500,000
1,600 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock has seen fresh longs in the last few sessions in the run-up to its
results. The stock has breached its critical resistance of 2800 and is now likely
to target 3000 in the short to medium term. Any downsides are likely to be
limited to 2800 levels which will be a good entry point for longs.
Infosys Technologies July 14, 2010 73

Consumer Goods July 14, 2010
ITC
Bloomberg: ITC IN Equity Recommendation: BUY
Reuters: ITC.BO No Change
COMPANY UPDATE
Encouraging Performance
Analyst contact
Vijay Chugh
Tel: +91 22 3043 3054
Growth momentum in cigarette business should sustain: Our expectation vijaychugh@ambitcapital.com
is that despite double-digit increase in prices, volume growth should improve Gaurav Jain
after a weak start and hold up reasonably well around long term averages of 3- Tel .: +91 22 3043 3206
4%. No major changes in VAT rates have been noticed after the announcement gauravjain@ambitcapital.com
in Gujarat and this is positive for margins. We expect margin trends to likely stay
positive and estimate topline growth of 14% and EBIT growth of 15% for FY10- Recommendation
12.
CMP: Rs300
Non-Cigarette business performance should remain encouraging: Hotel Target Price (Period): Rs320
business has shown significant turnaround and we expect this trend to continue.
Previous TP: Rs305
FMCG business performance, on both topline and margins, has been
encouraging and we believe this business remains on course to achieve cash Downside (%) (31)
breakeven in FY13. Paper business should see further expansion in capacity by EPS (FY11): Rs12.8
20% and this should help support healthy growth. On an aggregate basis we Change from previous (%) 5
expect the non-cigarette portfolio to deliver topline growth of 16% and EBIT Variance from consensus (%) 4
growth of 30% for FY10-12.
Stock Information
Payout and Subsidiary business performance are other positive
takeaways from earnings: Centenary dividend payout announcement of Mkt cap: Rs1,145,758mn/US$24,553mn
Rs5.5/share was very encouraging, and in our opinion, implies that payout in 52-wk H/L: Rs308/199
the medium term will exceed 50%. Subsidiary business performance (Surya
Nepal and ITC Infotech) was also encouraging despite challenging conditions,
and saw growth of nearly 50% supporting healthy growth in consolidated Beta (x): 0.5
earnings. BSE Sensex: 17937
Outlook and Valuation: Considering the positive momentum seen across Nifty: 5383
business (standalone and subsidiary such as IT), we maintain our positive view
on the stock. Our March 2011 target price of Rs320 implies forward P/E multiple Stock Performance (%)
of 21x and EV/EBIDTA 13x. It is also consistent with our sum-of-the-parts 1M 3M 12M YTD
approach and long term valuation average for the stock.
Absolute 6.5 12.9 45.5 22.2
Exhibit 1: Key financials Rel. to Sensex 1.4 12.4 9.5 18.9
FY09 FY10 FY11E FY12e

Performance (%)
Net Sales 153,880 181,531 211,446 244,049 20,000 350
EBIDTA 53,670 66,472 77,770 91,738 18,000 300
16,000
Net Profit 32,636 40,610 48,735 56,759 250
14,000
EPS 8.4 10.7 12.8 14.9 12,000 200
10,000 150
EPS Growth % 4.8 23.6 19.9 16.3 Jul-09 Dec-09 M ay-10
P/E (x) 34.7 28.1 23.4 20.1 Sensex ITC
EV/EBIDTA (x) 23.0 17.9 15.3 12.4 Source: Bloomberg, Ambit Capital research
ROE % 23.3 28.1 32.6 31.1
ROCE % 36.6 42.2 48.0 55.7
Ambit Capital Pvt Ltd ITC
Technical View
Exhibit 1: ITC
Source: MetaStock
 ITC had smart rally in last two weeks.

 The stock is trading in upward channel and is expected to target 320 on the
upside.
 Advise to use any fall as buying opportunity with stop loss of 280
Derivatives View
Exhibit 2: ITC
OI P rice( F&O)
330 25,000,000
310
290 20,000,000
270
15,000,000
250
OI
230
10,000,000
210
190 5,000,000
170
150 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 ITC has been in a rising trend and is trading close to its all time high levels
with good OI build up. We expect the stock to face significant resistance
around the 306 mark and is likely to come down to 290 levels in the short
term.
ITC July 14, 2010 75

Larsen & Toubro

Bloomberg: LT IN Equity Recommendation: Not Rated
Reuters: LART.BO
COMPANY UPDATE
Outlook Favourable Analyst contact

Mehul Mukati
Larsen & Toubro (L&T) is one of the leading infrastructure players in India with Tel: +91 22 3043 3211
mehulmukati@ambitcapital.com
a presence in EPC, equipment manufacturing, defense equipment as well as
operating infrastructure assets such as power and roads.
Order inflow expected to improve from FY11: We expect order inflows,
which were at Rs1,002bn in FY10 (+43% YoY), to increase to around
Rs1,250bn in FY11. We believe that the growth rate in order inflows are likely Recommendation
to continue in the 15%-20% range over the next 2-3 years.
CMP: Rs1,826
E&C – the largest contributor to revenues and profits: L&T’s E&C division EPS (FY11E): Rs70.5
is by far the largest contributor in both revenue and profits terms, contributing
79% of consolidated revenues and 69% of consolidated EBIT. This division’s Stock Information
revenue has grown at a 40%+ CAGR in the last three years, but we believe
that in the next 2-3 years, the growth would be relatively subdued, at about Mkt cap: Rs1,101,474mn/US$23,604mn
20% CAGR. We expect this on the back of high order inflows, 98% of which 52-wk H/L: Rs1,850/1,305
are orders for this division.
Further, in the past three years EBIT margins have improved from 9.8% in Beta (x): 1.2
FY08 to 12.0% in FY10, thus defying the downtrend.
BSE Sensex: 17937
Power and Shipbuilding to be the next growth drivers: We believe that
Nifty: 5383
power – both generation and equipment – and shipbuilding would be the next
growth drivers for the group. The company has already entered these sectors
with 2.92GW of power generation under construction and an aim to have Stock Performance (%)
5GW by FY15. L&T has already booked over 6GW of power equipment orders. 1M 3M 12M YTD
The boost for the shipbuilding sector would come from the government for Absolute 8.9 13.8 34.6 8.9
defense ships and submarines. Rel. to Sensex 3.6 13.2 1.3 6.0
Valuation: L&T currently trades at 25.8x FY11 consensus EPS of Rs70.5, and
Performance (%)
20.5x FY12 consensus EPS of Rs88.8. We, however, believe that this does not
reflect the potential upgrades to L&T. Further, the company has consistently 20,000 2090
18,000
improved its margin and returns ratios, thus lending comfort to investors. 16,000
1590
1090
14,000
10,000 90
FY06 FY07 FY08 FY09 FY10
Operating Income 16560 205129 294569 404799 439698 Sensex Larsen & To ubro
EBITDA 1584 26146 37063 49586 64387

EBITDA (%) 9.6% 12.7% 12.6% 12.2% 14.6%
Net Profit 1221 17662 22235 29181 34883
EPS (Rs) 44 31 38 50 58
RoE (%) 20.7% 20.9% 16.6%
RoCE (%) 15.4% 13.9% 13.7%
P/E 41.3 58.8 48.2 36.8 31.7
P / BV 10.0 7.7 5.3
Ambit Capital Pvt Ltd Larsen & Toubro
Technical View
Exhibit 1: L&T
Source: MetaStock
 L&T has taken support at 10DMA.

 On breaking 10DMA Stock can target 1700 and then 1640 on the downside.
 MACD on daily chart is in sell mode.
 Advise to remain in short with stop loss at 1850
Derivatives View
Exhibit 2: L&T
OI P rice( F&O)
1,900 8,000,000
1,800 7,000,000
1,700
6,000,000
1,600
5,000,000
1,500
4,000,000
OI
1,400
3,000,000
1,300
2,000,000
1,200
1,100 1,000,000
1,000 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock had seen a good break above 1700 with rising open interest. After a
few sessions of long unwinding, the stock is closing in towards the recent highs
of 1830-1840. Overall we think that the stock will find very good support at
1700-1750 levels and is likely to move higher to 1950-2000 levels in the short
to medium term.
Larsen & Toubro July 14, 2010 77

Pharmaceuticals July 14, 2010
Lupin Laboratories
Bloomberg: LPC IN EQUITY Recommendation: NOT RATED
Reuters: LUPN.BO
COMPANY UPDATE
Analyst contact
Growth Led By Exports Anshuman Gupta

Tel .: +91 22 3043 3286
anshumangupta@ambitcapital.com
The trend across markets has been good with exports leading as well as good
traction witnessed in the domestic markets. Vijay Chugh
Tel: +91 22 3043 3054
Exports have been the key growth driver with the sales driven by US and vijaychugh@ambitcapital.com
Japan. We expect that the export formulations will keep growing at the same
pace and will occupy more than 65% of the total revenues of the company. Recommendation
Improving product mix in favour of branded generics in the US with four CMP: Rs1,904
products now and occupying a majority share of revenues in the US. This will
drive Lupin’s business toward higher growth and profitability, as we expect EPS (FY11E): Rs95
margins to further improve over next two years. Lupin’s foray into the US
generics has been successful, as 8 of the 22 products launched are among the Stock Information
top-3 generic products sold in the US. A very strong pipeline of oral Mkt cap: Rs169,411mn/US$3,630mn
contraceptives will maintain strong growth momentum in the generics business
52-wk H/L: Rs1,974/760
as well.
Among early entrants in the Japanese market, one of the largest
pharmaceutical markets in the world. Generic penetration in this market is still Beta (x): 0.7
low versus the US (~70%) and offers considerable long-term potential. Lupin’s BSE Sensex: 17937
Japanese subsidiary, Kyowa contributed 11% to overall revenues - Rs5.2bn and
Nifty: 5383
is expected to grow by over 20% CAGR in the next two years.
The domestic market recorded growth of 18%, among the highest versus Stock Performance (%)
peers and is expected to grow by 15% CAGR over the next two years driven by 1M 3M 12M YTD
new product launches and increased penetration. Absolute 1.8 17.2 139.8 29.1
Overall, the company has a robust business model with all the geographies Rel. to Sensex -3.1 16.6 80.5 25.7
contributing revenues from its branded, generics and API businesses.
Performance (%)
Valuation: US branded generics, India and Japan remain the key drivers for 20,000 2500
growth. On a consensus earnings forecast of Rs113.4 for FY12E the stock 18,000 2000
discounts its earnings by 16.6x. 16,000
1500
14,000
1000
10,000 500
YE March (Rs mn) FY08 FY09 FY10 FY11 FY12 Jul-09 Dec-09 M ay-10
Operating income 27064 37759 47405 58180 67484 Sensex LUP IN LTD
EBITDA 6361 7588 9839 11793 14131 Source: Bloomberg, Ambit Capital research
EBITDA (%) 23.5 20.1 20.7 20.3 21.0
Net profit 4083 5015 6816 8464 10209
EPS (Rs) 49.6 61.3 76.6 95.0 114.0
RoE (%) 31.9 35.6 30.3 32.8 29.9
RoCE (%) 22.2 23.6 26.0 24.6 25.8
Source: Company, Bloomberg consensus
Ambit Capital Pvt Ltd Lupin Laboratories
Technical View
Exhibit 1: Lupin Laboratories
Source: MetaStock
 The momentum indictor on daily chart is in buy mode signaling more room for
an upside.
 On any decline the stock should be use as a buying opportunity with an upside
target of 2010.
 The reversal will be at 1880.
Derivatives View
Exhibit 2: Lupin Laboratories
OI P rice( F&O)
2,000 800,000
1,900 700,000
1,800
600,000
1,700
1,600 500,000
1,500 400,000
OI
1,400 300,000
1,300
200,000
1,200
1,100 100,000
1,000 0
17-May-10
31-May-10
3-May-10
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Lupin had seen good longs in the June series. The rollovers had been strong
too at 82%. In the last few sessions, however, the stock has seen some
declines; 1850 in our view will be an attractive point to create fresh longs in
the counter for a target of over 2000.
Lupin Laboratories July 14, 2010 79

Mahindra & Mahindra

Bloomberg: MM IN Equity Recommendation: NOT RATED
Reuters: MAHM.BO No Change
COMPANY UPDATE
Dominant UV Player Analyst contact

Navin Matta
Tel: +91 22 3043 3228
M&M has a dominant position in both its operating segments – UVs and Tractors. navinmatta@ambitcapital.com
We believe this would confer higher pricing power to the company to mitigate Vijay Chugh
some portion of the likely cost inflation. Recent commencement of its Chakan
Tel .: +91 22 3043 3054
facility would enable the company to ramp-up volumes in a strong CV upcycle. vijaychugh@ambitcapital.com
Strong growth in the UV business: During the current fiscal, M&M’s UV sales
increased by 40% YoY, driven by strong performance of its key models including Recommendation
the Scorpio, Bolero and Xylo. The company’s domestic market share increased by CMP: Rs638
800bps to 56% during this period. We believe that a revival in urban demand
EPS (FY11E) 38
and availability of retail finance will be key volume drivers over the next year.
Increase in vehicle prices, due to higher excise rates and commodity cost
Stock Information
pressures would moderate volume growth.
Farm segment to witness steady growth: Despite poor monsoons, tractor
sales increased by 47% in FY10. Given the high base, we expect volume growth 52-wk H/L: Rs648/321
to remain steady as increase in MSPs and higher level of construction activity 3M Avg. daily vol. (mn): 4
would be major demand drivers. Further, Powerol segment revenue growth is
Beta (x): 1.2
likely to improve from 2H2010, as demand from the telecom segment is
expected to revive. BSE Sensex: 17937
Well timed foray into the MHCV segment: The Chakan plant has recently Nifty: 5383
commenced operations and as per management, dealerships would be
progressively ramped up along the GQ. Its recent model launch has been Stock Performance (%)
competitively priced compared to that of the incumbents. In view of the 1M 3M 12M YTD
economic recovery, commercial vehicle demand is likely to witness strong Absolute 5.3 23.3 84.0 18.2
growth. The company plans to reach peak capacity in the next five years. Rel. to Sensex 0.1 22.7 38.5 15.0
Valuation: At CMP, the stock is trading at 10.3x FY12 standalone earnings (excl.
the subsidiary value of Rs 170 per share based on 30% holding company Performance (%)
discount), which is at a significant discount to peers. 20,000 700
18,000 600
16,000 500
Particulars FY09 FY10 FY11e FY12e 12,000 300
10,000 200
Net Sales 130,936 186,021 215,392 248,543 Jul-09 Dec-09 M ay-10
EBIDTA 10,926 28,052 31,736 36,818 Sensex M &M
Adj Net Profit 8,470 17,562 22,207 25,235 Source: Bloomberg, Ambit Capital research
EPS 15 32 38 44
EPS Growth % (21.5) 108.5 21.2 14.6
P/E (x) 42.1 20.2 16.7 14.5
EV/EBIDTA (x) 33.3 13.0 11.6 9.9
ROCE % 17.5 26.9 25.7 23.7
Ambit Capital Pvt Ltd Mahindra & Mahindra
Technical View
Exhibit 1: M&M
Source: MetaStock
 M&M has support at 580.

 We advise to sell the stock with target of 580-550 and stop loss at 650.
 The MACD on daily chart is in sell mode signaling more downside from current
levels.
Derivatives View
Exhibit 2: M&M
OI P rice( F&O)
700 9,000,000
650 8,000,000
7,000,000
600
6,000,000
550
5,000,000
500
OI
4,000,000
450
3,000,000
400
2,000,000
350 1,000,000
300 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock had seen aggressive longs in early June as the stock broke past its
resistance of 590-600. Post this the counter saw gradual unwinding with some
price correction to 600 levels indicating long profit booking. The stock is now
again closing in to its recent highs of 640 with slight long build-up. We think
that at these levels one should look to buy into the counter with a stop loss
around 600 levels for an upside target of 700.
Mahindra & Mahindra July 14, 2010 81

Maruti Suzuki
Bloomberg: MSIL IN EQUITY Recommendation: BUY
Reuters: MRTI.BO No Change
COMPANY UPDATE
Seasoned Player
Analyst contact
Vijay Chugh
Tel: +91 22 3043 3054
Over the last six months Maruti has underperformed the BSE Auto index by vijaychugh@ambitcapital.com
25% on the back of heightened concerns regarding market share erosion and Navin Matta
margin pressure on account of commodity cost increases and adverse Tel .: +91 22 3043 3228
currency movements. Although market share loss is given in light of navinmatta@ambitcapital.com
competitive launches (our est. ex-Nano, 280bps decline between FY10-12E),
we believe that Maruti’s domestic volume growth in the passenger car Recommendation
segment over the next two years should remain robust at 13.5% CAGR. We
CMP: Rs1,409
have factored in a rebound in A1 segment volumes in FY12, based on
expectation of a new launch by early CY11. Target Price (Period): Rs1582
Previous TP: -
Robust volume growth despite market share loss: Despite several new
launches in the compact car segment, we believe volume ramp up for the new Upside(%) 12
entrants would take a few years. Maruti’s strong distribution reach of 802 EPS (FY11): Rs96.2
sales outlets and 2,470 service stations continues to be its competitive edge. Change from previous (%) -
The company plans to focus on the largely under-penetrated rural markets, Variance from consensus (%) 2
which currently contribute 16.5% to its domestic volumes (9% in FY09). Further
we note, Maruti’s current product portfolio is fairly diversified with revenue Stock Information
share from the compact car segment accounting for 56% of total sales. Mkt cap: Rs407,175mn/US$8,726mn
Margin levers to partially offset input cost pressure: Maruti’s calibrated 52-wk H/L: Rs1,740/1,040
capacity expansion would ensure high utilization levels over the next two
years. The company has completed its platform rationalization and
upgradation efforts in Q4FY10, which we feel could bring in cost efficiencies Beta (x): 0.8
in the subsequent period. Further with the recent price hike of ~ 1% on BSE Sensex: 17937
blended basis, MSIL would be able to partially offset some portion of
commodity cost increase. Adverse forex movement is likely to impact Nifty: 5383
operating profits by ~2% in FY11E and FY12E, based on Maruti’s unhedged
exposure. Stock Performance (%)
1M 3M 12M YTD
Valuation: Maruti’s current valuations at 12x FY12E is at 15% discount to its
Absolute 3.9 2.8 27.7 -9.7
five years median valuations. Maruti’s recent monthly volume trends highlight
its ability to ramp up production to match the retail demand. Considering Rel. to Sensex -1.2 2.3 -3.9 -12.0
Maruti’s ability to display strong performance during downcycles and its strong
balance sheet and free cash flows, we believe the stock deserves to trade at Performance (%)
mid-cycle valuations. We maintain our BUY recommendation with a price 20,000 1800
target of Rs1,582 (14x FY12E EPS). 18,000

16,000
1600
1400
14,000
10,000 1000
Rs mn FY09 FY10P FY11E FY12E
Net Sales 208,525 296,230 348,935 401,893 Sensex M aruti Suzuki
% chg 18,321 39,543 44,088 51,493 Source: Bloomberg, Ambit Capital research
EBIDTA 12,187 24,976 27,795 32,654
% chg 42 86 96 113
PAT (30) 105 11 17
% chg 33.4 16.3 14.7 12.5
EPS 20.0 8.8 7.8 6.4
ROE % 0.2 0.5 0.6 0.6
ROCE % 13.7 23.7 21.3 20.5
P/E (x) 17.4 31.7 28.9 28.2
EV/EBIDTA (x) 208,525 296,230 348,935 401,893
Ambit Capital Pvt Ltd Maruti Suzuki
Technical View
Exhibit 1: Maruti Suzuki
Source: MetaStock
 Momentum indicators of Maruti are curving downward signaling upside is

limited.
 The stock has also formed rising wedge and this is bearish pattern.
 We expect the stock to target 1300 levels.
Derivatives View
Exhibit 2: Maruti Suzuki
OI P rice( F&O)
1,700 4,500,000
1,600 4,000,000
1,500 3,500,000
1,400
3,000,000
1,300
2,500,000
1,200
OI
2,000,000
1,100
1,500,000
1,000
900 1,000,000
800 500,000
700 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The counter had seen massive shorts coming in in the April-May period as the
stock plunged from 1500 to 1200. Over the last few weeks, the stock has seen
a smooth short covering accompanied rally. We expect the stock to take a
breather around 1400-1440 levels in the short term before moving higher to
1600 levels in the medium term.
Maruti Suzuki July 14, 2010 83

Consumer Goods July 14, 2010
Nestle India
Bloomberg: NEST IN Equity Recommendation: BUY
Reuters: NEST.BO No Change
COMPANY UPDATE
Strong Fundamentals
Analyst contact
Vijay Chugh
Tel: +91 22 3043 3054
Nestle India’s earnings performance in the recent quarter has been below vijaychugh@ambitcapital.com
expectations on account of above-average promotions and cost trends. However Gaurav Jain
sales growth of 17% YoY during the quarter was largely driven by volumes. Tel .: +91 22 3043 3206
Pricing environment during the quarter was worse than expectation on account gauravjain@ambitcapital.com
of increased competitive challenges in certain categories such as dairy
(Britannia). Gross margin decline was marginally higher than expectation, as Recommendation
inflation peaked in several soft commodities such as Sugar, Wheat and Milk.
CMP: Rs2,982
Other costs (include capability building cost in chilled dairy) also continued to
remain above trend as in the previous quarter and were the key negative Target Price (Period): Rs 3,000
takeaways for the quarter. Previous TP: Rs3,000
Outlook: Global and domestic food inflation has peaked in line with Upside/Downside (%) 1%
expectations. New monsoon forecasts are also likely to suggest normal trends EPS (CY10): Rs85
unlike previous year. We also expect domestic demand to sustain supported by Change from previous (%) NA
healthy product innovation and renovation across categories and increased Variance from consensus (%) 3%
thrust on distribution. Accordingly we expect margin trends to normalize in the
20-22% band supported by better product mix and suitable adjustments to Stock Information
pricing. Mkt cap: Rs287,484mn/US$6,161mn
Valuation: Although valuations are rich at (forward P/E multiple of 30x and 52-wk H/L: Rs3,300/1,949
EV/EBIDTA multiple of 20x) we believe they reflect top quartile performance in
both sales and earnings and growth expectations of nearly 18% for CY10-11.
Continued momentum in 1) domestic demand 2) pick-up in exports 3) possible Beta (x): 0.4
moderation in soft commodity prices still remain attractive reasons for BSE Sensex: 17937
ownership.
Nifty: 5383
CY08 CY09 CY10E CY11E
1M 3M 12M YTD
Net Sales 43,242 51,161 59,865 69,813
Absolute 2.9 10.6 48.4 17.0
EBIDTA 8,832 10,771 12,249 14,510
Rel. to Sensex -2.1 10.1 11.7 13.9
Net Profit 5,650 7,100 8,227 9,800
EPS 58.6 73.6 85.3 101.6 Performance (%)
EPS Growth % 31.0 25.7 15.9 19.1 20,000 3500
P/E (x) 50.9 40.5 34.9 29.3 18,000 3000
16,000
EV/EBIDTA (x) 32.3 26.5 23.2 19.5 14,000
2500
2000
Dividend Yield % 1.6 1.7 2.1 2.6 12,000
10,000 1500
ROE % 126.7 130.3 121.6 121.4 Jul-09 Dec-09 M ay-10
ROCE % 176.6 177.5 162.7 162.4 Sensex Nestle India
Source: Company, Ambit Capital research Source: Bloomberg, Ambit Capital research
Ambit Capital Pvt Ltd Nestle India
Technical View
Exhibit 1: Nestle
Source: MetaStock
 Nestle is trading below is key support levels.

 Buy the stock if it closes above 3020 only.
 On the downside support is at 2800 and then 2680.
Nestle India July 14, 2010 85

ONGC
Bloomberg: ONGC IN EQUITY Recommendation: HOLD
Reuters: ONGC.BO No Change
Downgrading ONGC to HOLD: In wake auto-fuel price reforms, we are Analyst contact
revising our target on ONGC from Rs1,170 to Rs1,275, driven predominantly by Saeed Jaffery
improvement our net realisation estimate from US$55/bbl to US$60/bbl. Our Tel: +91 22 3043 3203
analysis suggests that even in the event of a favourable scenario of upstream saeedjaffery@ambitcapital.com
sharing just 33% of the cooking fuel losses, our target price would increase to
Nitin Tiwari
Rs1,400, an upside of 8% from the current levels. Hence given the limited
upside, we downgrade ONGC from BUY to HOLD with a 12-month target price Tel .: +91 22 3043 3252
nitintiwari@ambitcapital.com
of Rs1,275.
Earnings up Rs40bn on APM gas price hike: The Cabinet has approved a Recommendation
hike in APM gas price from US$1.9/mmbtu to US$4.2/mmbtu (pre-royalty CMP: Rs1,278
adjusted), in line with the EGoM-approved KG gas pricing. We note ONGC
currently sells 18bcm of APM gas, implying incremental earnings before tax of
Rs58bn on account of the hike. Providing for tax, net earnings are expected to Previous TP: -
increase by Rs40bn, implying positive EPS impact of Rs19 (21% of cons. FY10E Downside (%) 0
EPS). EPS (FY10): Rs122
Change from previous (%) -
4QFY10 results above expectation; ‘Other income’ the driver: ONGC’s
Variance from consensus (%) 7
4QFY10 PAT (standalone) at Rs37.8bn was higher than our expectation of
Rs33.5bn. This outperformance, we reckon, has been driven predominantly by
Stock Information
higher than anticipated non-operating income which came in at Rs14bn. We
note that the company had under-stated ‘other income’ to the tune of Rs3.6bn Mkt cap: Rs2,733,907mn/US$58,587mn
in 3QFY10, which has been duly provided for in the quarter. The company 52-wk H/L: Rs1,347/934
reported a standalone and consolidated EPS of Rs78.4 and Rs90.7 respectively
for FY10. 3M Avg. daily vol. (mn): 3
Beta (x): 0.9
Production growth subdued; improvement post FY11E: We anticipate
unexciting production growth for FY10E-11E, given a mature production BSE Sensex: 17937
portfolio. IOR/marginal field monetisation concomitant with higher production Nifty: 5383
from OVL should materialise in a growth of 11% YoY in FY12E. Improvement in
OVL volumes would be driven by increased production from Imperial Energy and Stock Performance (%)
Brazil assets.
1M 3M 12M YTD
Exploratory portfolio encouraging: ONGC is India’s largest holder of Absolute 8.3 21.4 29.6 8.5
exploration acreage (at ~60%) with an E&P portfolio of 69 nominations and 94 Rel. to Sensex 3.1 20.8 -2.5 5.6
NELP blocks. The company has stepped up its exploratory efforts over the last
few years, given a mature production profile. This has resulted in a cumulative Performance (%)
43 discoveries in the last two years. Having said that monetisation is some time
20,000 1550
away. 18,000
16,000 1050
12,000
Rs, mn FY08 FY09 FY10 FY11E FY12E 10,000 50
Total income 967,822 1,045,884 1,034,389 1,227,644 1,297,917 Jul-09 Dec-09 M ay-10
Sensex ONGC
Gross profit 413,570 432,249 461,177 578,721 612,133
Net profit 198,703 197,956 194,035 273,803 289,773 Source: Bloomberg, Ambit Capital research
Earning per share, Rs 92.9 92.6 90.7 128.0 135.5
Debt/ Equity 0.0 0.1 0.1 0.1 0.1
EBITDA margin(%) 42.7 41.3 44.6 47.1 47.2
EV/EBIDTA 6.5 6.2 5.8 4.6 4.4
P/E (x) 13.7 13.7 14.0 9.9 9.4
RoE (%) 25.4 21.5 18.7 22.4 20.5
RoCE (%) 37.3 31.3 25.9 32.0 28.7
P/BV 3.5 2.9 2.6 2.2 1.9
Ambit Capital Pvt Ltd ONGC
Technical View
Exhibit 1: ONGC
Source: MetaStock
 The RSI is overbought but MACD has turned into buy mode.
 This signals bullishness in the stock which will target 1350 on the upside.
 But in near term due overbought signs the stock could drift till 1250 which
should use as a buying opportunity.
Derivatives View
Exhibit 2: ONGC
OI P rice( F&O)
1,400 4,000,000
1,300 3,500,000
1,200
3,000,000
1,100
2,500,000
1,000
2,000,000
OI
900
1,500,000
800
1,000,000
700
600 500,000
500 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
The stock had seen good long build-up after the last expiry with a strong surge in
price post the fuel price reforms. Given the sharp run up, the stock can come in for
slight profit booking which can lead the stock lower to 1250-1260 levels.
However, such a dip should be used to buy into the stock for potential upsides of
1400 in the medium term. At this point a switch to reliance is likely to be more
profitable.
ONGC July 14, 2010 87

Real Estate July 14, 2010
Orbit Corporation
Bloomberg: ORB IN Equity Recommendation: BUY
Reuters: ORCP.BO No Change
Well poised Analyst contact

Parikshit Kandpal
Orbit Corporation (OCL) posted FY10 numbers below our estimates (about Tel: +91 22 3043 3201
10%), although profitability continues to improve and the balance sheet is parikshitkandpal@ambitcapital.com
comfortable. With about 1.3mn sq.ft. launches planned for FY11E we expect
good growth traction. We retain BUY with an upgraded TP of Rs230. Our
upgrade is driven by inclusion of Orbit Residency – II (0.25mn sq.ft.), new
project at Napean Sea road (0.55mn sq.ft.) and Orbit Enclave (23,000 sq.ft.).
Recommendation
 OCL has reported growth in FY10 revenue, EBIDTA and PAT of 72%, 40%,
169% YoY at Rs4,871mn, 1,865mn and Rs955mn respectively. Orbit CMP: Rs138
recorded robust EBIDTA margin of 48% for the first time after 3QFY09 Target Price (Period): Rs230
(after four consecutive quarters on a normalized basis). Previous TP: Rs230
 OCL is considering launching about 1.3mn sq.ft., of which about 0.9mn Upside/Downside (%) 234
sq.ft. would be in Mandwa while the balance is in south Mumbai. With the EPS (FY11E): Rs13.6
soft launch (at Rs7,500/sq.ft.) at Mandwa expected in June 2010, project Change from previous (%) -
visibility would improve. Now Mandwa contributes Rs32/share to our
NAV. Stock Information
 OCL also announced a new project - Napean Sea road - with saleable Mkt cap: Rs14,883mn/US$319mn
area of 0.55mn sq.ft. Total acquisition cost would be about Rs6,500mn, of 52-wk H/L: Rs178/62
which Rs1,500mn is already paid. OCL is looking to rope in private equity
for this project. We value this property at Rs27/share (adj. for unpaid land 3M Avg. daily vol. (mn): 4
of Rs5,500mn). This apart, Orbit Residency Park II and Orbit Enclave Beta (x): 1.8
would add another Rs12/share to our NAV.
BSE Sensex: 17937
 Based on valuation of these new projects, our TP is upgraded to Rs230. Nifty: 5383
BS debtors raise concern; net debt/equity at 1x Stock Performance (%)

 Debtors continue to rise (Rs423mn) in 4QFY10, the key reason being 1M 3M 12M YTD
attributable to Villa Orb and Orbit WTC with outstanding debtors of Absolute 10.7 -4.6 112.1 -12.5
Rs705mn (3QFY10, Rs785mn) and Rs2,238mn respectively. OCL expects Rel. to Sensex 5.3 -5.0 59.7 -14.8
to recover these amounts in next 2-3 quarters.
Performance (%)
 The key reason for the delay in recovery is the payment terms — a large
20,000 200
portion of it is back ended. With Villa Orb Annex completely sold; a 18,000
further increase in debtors is likely once it comes under revenue 16,000 150
recognition. 14,000 100
12,000
 Customers’ advances rose by Rs312mn in 4QFY10 due to Orbit Residency 10,000 50
Park I. Debt has gone up by Rs1,076mn mainly due to increase in project Jul-09 Dec-09 M ay-10
debt. Net debt/equity is at 1x, an increase of 6% QoQ. Sensex Orbit Co rp.
Exhibit 1: Key financials Source: Bloomberg, Ambit Capital research

YE March (Rs mn) FY08 FY09 FY10E FY11E FY12E
Operating income 7,055.4 2,835 5,433 6,204 7,348
EBITDA 3,464.6 1,333 2,329 2,565 3,180
Net profit 2,357.7 355.2 1,049.3 1,388.7 1,815.2
Adjusted net profit 2,357.7 355.2 1,049.3 1,388.7 1,557.1
EPS (Rs) 10.3 1.5 4.6 12.2 13.6
RoE (%) 57.6 6.7 14.6 13.6 12.3
RoCE (%) 64.2 12.2 17.6 19.2 26.6
P/E (x) 6.9 46.0 15.6 11.8 10.5
Ambit Capital Pvt Ltd Orbit Corporation
Technical View
Exhibit 1: Orbit Corporation
Source: MetaStock
 Orbit has taken support at its 20DMA.

 We expect stock would target 150 on the upside as the momentum indicators
are turning into Buy mode.
Orbit Corporation July 14, 2010 89

Punjab National Bank

Bloomberg: PNB IN Equity Recommendation: BUY
Reuters: PNBK.BO No Change
COMPANY UPDATE
Best in the PSUs banks

Analyst contact
Krishnan ASV
Tel: +91 22 3043 3205
Valuation and Recommendation: We believe that PNB is one of the best vkrishnan@ambitcapital.com
banks in the PSU banking space and are very positive on the performance of the Poonam Saney
bank going forward. The bank has consistently performed across the Tel .: +91 22 3043 3216
operational parameters and has been able to deliver consistent RoE of about poonamsaney@ambitcapital.com
22% in the last two years. During FY11, we expect the bank to deliver RoA of
1.4% and RoE of ~23%. At CMP of Rs 1,054 the stock trades at 1.6x FY11E Recommendation
ABVPS of Rs 657. We are positive on the stock and recommend BUY with a
CMP: Rs1,054
target price of Rs 1,160 for FY11.
Business to grow faster than the system: PNB being one of the large PSU
banks we expect the bank to grow faster than the system, on the expectations of
revival in the economic growth in the country. During the past three years the Upside (%) 10
bank has grown its advances and deposits at a CAGR of 25% and 22% ABVPS (FY11E): Rs657
respectively. Going forward, we believe that the bank would grow its deposits by
28% and a similar credit growth thus growing higher than the system credit Stock Information
growth. With its dominance in the Indo-Gangetic Plain we believe that the bank Mkt cap: Rs332,913mn/US$7,134mn
would largely be able to maintain its CASA ratio at ~40%.
52-wk H/L: Rs1,145/600
Margins to largely remain at levels of over 3%: Given the expectations of
rise in the deposit rates and the lending rates moving up with a lag effect, we
expect the margins of the bank to take a slight dip from 3.57% as reported in Beta (x): 0.9
FY10. However, the CASA ratio of ~40% would provide cushion to the margins, BSE Sensex: 17937
and we expect the margins to remain over 3%. We have built in NII growth of
~21% for FY11E. Nifty: 5383
Healthy Operating profit growth: We expect the bank to grow the core fee Stock Performance (%)
income at ~30% a similar growth witnessed during FY10. The bank has 1M 3M 12M YTD
improved on the cost-income ratio by 260bps to 40% in FY10 and we expect this Absolute 2.0 6.7 71.4 16.5
ratio to remain at around similar levels thus improving the operating profits. We
Rel. to Sensex -2.9 6.2 29.1 13.4
expect the operating profits of the bank to grow at a healthy pace of about 20%
Comfortable Asset Quality: There has been an increase in the absolute gross Performance (%)
npa levels of the bank mirroring the trend witnessed on a system level. On a 20,000 1300
conservative basis, we have built in an increase in the absolute gross npa levels 18,000 1100
for FY11 and expect the gross and net NPAs of the bank to be around 1.5% and 16,000
900
14,000
0.3% respectively and maintain a provision cover of over 75% during FY11. 12,000 700
10,000 500
Exhibit 1: Key Financials Jul-09 Dec-09 M ay-10
Sensex P unjab Natl B ank
Net interest income 55.34 70.31 85.23 102.37 Source: Bloomberg, Ambit Capital research

Net profit 20.49 30.91 39.05 47.05
RoE (%) 18 23 23 23
RoAA (%) 1.1 1.4 1.4 1.4
Dividend Yield (%) 1.2 1.9 1.9 1.9
EPS (Rs) 65.0 98.0 124 149
Adjusted BVPS (Rs) 366.8 456.4 529.8 657
P/E (x) 16.2 10.8 8.5 7.1
P/ABV (x) 2.9 2.3 2.0 1.6
Ambit Capital Pvt Ltd Punjab National Bank
Technical View
Exhibit 1: PNB
Source: MetaStock
 PNB is trading in overbought zone.

 We expect the stock would correct till 1020 and therefore use any rise as
selling opportunity.
Derivatives View
Exhibit 2: PNB
OI P rice( F&O)
1,100 4,000,000
3,500,000
1,000
3,000,000
900
2,500,000
800 2,000,000
OI
1,500,000
700
1,000,000
600
500,000
500 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 PNB has been witnessing continuous price rise with OI addition over the last
few sessions indicating long build-up. Going forward we expect the stock to
test its recent high of around 1065 and move past it; the positive momentum
should continue and recommend buying at all dips; support for the stock lies
at 1100/ 1080 levels.
Punjab National Bank July 14, 2010 91

Utilities/ Power July 14, 2010
PTC India
Bloomberg: PTCIN IN Equity Recommendation: BUY
Reuters: PTCI.BO No Change
COMPANY UPDATE
Power’ing’ Trade
Analyst contact
Mehul Mukati
Tel: +91 22 3043 3211
PTC India is the country’s largest power trading company with market share of mehulmukati@ambitcapital.com
over 50%. Being the pioneer in the power trading arena, the company has
many advantages over the other newer players. In addition, the company's
differential thinking ensures that it is ahead of the curve in anticipating
emerging trends in the power trading industry.
Recommendation
Growth Drivers
CMP: Rs106
 Burgeoning power trading market: The power trading market in India is Target Price: Rs135
still in a very nascent stage with only about 8.1% of the total power
Previous TP: Rs135
generated being traded, and this is even lower at 4.9% of the total
Upside(%) 27
generation if UI volumes are excluded. We expect bilateral trades to
continue to dominate volumes in the near future on account of the ability to EPS (FY11): Rs5.3
structure volume, pricing and duration for each buyer and seller. Change from previous (%) nil
Variance from consensus (%) -2%
 High volume growth: We expect PTC's volumes to grow at 27% CAGR over
the next three years. Apart from the over 5GW PPAs, investments in power Stock Information
projects through its own balance sheet and through PTC Financial Services
(PFS) and PTC Energy (PEL), would further boost volumes. Mkt cap: Rs31,296mn/US$671mn
52-wk H/L: Rs126/81
 Margins on power trading relaxed: The CERC has relaxed margins on
power trading to a band of 4 to 7 paise/ unit, from the earlier flat margin of 3M Avg. daily vol. (mn): 1
4 paise/ unit fixed in May 2006. We believe that this augurs well for the Beta (x): 0.9
company and that PTC's margins would increase to 6 paise/ unit from FY11.
BSE Sensex: 17937
Earnings Outlook and Valuation Nifty: 5383
At the current market price of Rs103, PTC trades at 15.6x our estimated FY12 Stock Performance (%)
earnings of Rs6.6. We have used a sum-of-the-parts valuation for PTC India.
1M 3M 12M YTD
While the core power trading business is valued at 16x our FY12 earnings of
Rs6.6, PTC Financial Services is valued at Rs12 based on a conservative adj. Absolute 2.7 -4.5 25.0 -5.9
P/BV exit multiple of 1x, and investments in power projects both directly and Rel. to Sensex -2.3 -4.9 -5.9 -8.4
through PEL are valued at Rs15 based on 1.5x FY12 book value.
Performance (%)
We have a BUY rating on PTC India with a target price (TP) of Rs135. 20,000 130
18,000 110
90
14,000
Year to March FY08 FY09 FY10 FY11E FY12E 70
12,000
Operating income 37,897 63,537 77,703 119,663 169,622 10,000 50
EBITDA 204 203 631 1,187 1,697
Sensex P TC India
EBITDA (%) 0.5 0.3 0.8 1 1
Net profit 486 908 950 1,564 1,951 Source: Bloomberg, Ambit Capital research
EPS (Rs) 2.1 4 3.2 5.3 6.6

RoE (%) 5.6 6 5.2 7.1 8.2
P/E (x) 50.1 26.8 33.2 20.2 16.2
P/BV (x) 1.6 1.6 1.5 1.4 1.3
Ambit Capital Pvt Ltd PTC India
Technical View
Exhibit 1: PTC
Source: MetaStock
 PTC has support at 102 and as long as this level is hold stock could witness
fresh round buying till 110.
 The MACD is also in curving upward signaling downside is limited.
Derivatives View
Exhibit 2: PTC
OI P rice( F&O)
130 8,000,000
120 7,000,000
6,000,000
110
5,000,000
100
4,000,000
OI
90
3,000,000
80
2,000,000
70 1,000,000
60 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 PTC has been consolidating in a narrow range since November 2009 with
continuous OI shedding. Going forward 108 is a key resistance on the way up
a break above which can push the stock to 120 levels in the short to medium
term. 100 remains a key support on the way down.
PTC India July 14, 2010 93

Reliance Industries
Bloomberg: RIL IN Equity Recommendation: BUY
Reuters: RELI.BO No Change
COMPANY UPDATE
Significant petchem expansion: RIL is gearing up for significant capacity Analyst contact
expansion in its flagship polyester and petrochemical business. The capacity Saeed Jaffery
expansion, which is almost doubling of current capacity in polyesters, involves Tel: +91 22 3043 3203
setting up an integrated 2.3mtpa PTA plant, 0.54mtpa PET complex at Gandhar, saeedjaffery@ambitcapital.com
and 0.36mtpa PFY plant at Silvassa. The capacity expansion in other Nitin Tiwari
petrochemical products entails setting up a 1.5mtpa of off-gas olefin cracker in
Tel .: +91 22 3043 3252
Jamnagar. The project was envisaged in 2007 but was later shelved due to the nitintiwari@ambitcapital.com
economic downturn.
Oil & Gas exploration to intensify: With a focus of doubling its existing Recommendation
reserves over the next three years, RIL is stepping ups its development efforts in CMP: Rs1,058
KD D6, NEC-25, CB-10 (Cambay basin), and Coal Bed Methane. Target Price (Period): Rs1270
Concomitantly, the company is also increasing its exploratory activity in its
Previous TP: Rs1270
international acreage (Iraq, East Timor – first exploration wells to be drilled).
Aspiring to build a significant position in shale gas, the company would continue Upside (%) 20
to pursue joint venture development activities (on the line of Atlas EPS (FY11E): Rs67.0
Energy/Pionner JV), in order to build a significant upstream presence in North Change from previous (%) 0.0
America. Variance from consensus (%) -2.3
Target ten fold increase in retail business: RIL believes in the opportunities Stock Information
presented by the growing Indian retain sector. Against current revenues of
Rs45bn, the company has set a target of Rs450bn to be achieved over the next Mkt cap: Rs3,459,200mn/US$73,812mn
five years, implying a ten fold increase. 52-wk H/L: Rs1,185/841
Telecom and Power – new business initiatives: With an intend to capitalise 3M Avg. daily vol. (mn): 10
on the domestic growth story while at the same time channelize its annual Beta (x): 1.2
operating cashflows of ~US$8bn from existing business, RIL has announced its
foray in to the Indian Telecom and Power space. Earlier this month, the BSE Sensex: 17834
company announced its acquisition of Infotel Broadband, thereby making an Nifty: 5352
entry into the lucrative domestic wireless broadband market.
Maintain BUY: We believe that the power foray announced by the company
would address some of the concerns related to optimum use of future cashflows 1M 3M 12M YTD
generated by the existing business. The company’s vision of doubling its value Absolute 5.0 -6.0 14.1 -3.0
over the next decade would ensure focus on growth opportunities. We maintain Rel. to Sensex -1.9 -5.4 -12.0 -5.0
our positive stance on the company, and recommend at BUY with a price target
of Rs1270, given a) improving refining environment b) exploratory success in Performance (%)
E&P business. 20,000 1200
18,000 1100
16,000
1000
14,000
10,000 800
Y/E March FY08 FY09 FY10E FY11E FY12E
Jul-09 No v-09 A pr-10
Operating Sensex Reliance Inds.
income 1,371,467 1,462,910 1,933,290 2,147,882 2,261,188
EBITDA Source: Bloomberg, Ambit Capital research
231,446 233,950 301,180 423,163 485,204
EBITDA (%) 195,232 152,790 162,060 223,920 274,024
Net profit 59.5 46.5 49.4 68.2 83.4
EPS (Rs) 0.6 0.6 0.5 0.4 0.4
RoE (%) 16.9 16.0 15.6 19.7 21.5
RoCE (%) 17.6 17.4 13.6 9.6 8.4
P/E (x) 18.2 23.2 21.9 15.8 12.9
P/BV (x) 25.4 14.8 12.3 14.8 15.8
Ambit Capital Pvt Ltd Reliance Industries
Technical View
Exhibit 1: RIL
Source: MetaStock
 Stock has stiff resistance at 1100 to 1120 levels.

 Unless stock is not able to close above this resistance levels we advise to build
short position with downside target of 1010.
Derivatives View
Exhibit 2: RIL
OI P rice( F&O)
1,200 20,000,000
1,150 18,000,000
1,100 16,000,000
1,050 14,000,000
1,000 12,000,000
950 10,000,000
OI
900 8,000,000
850 6,000,000
800 4,000,000
750 2,000,000
700 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock saw very strong rolls this expiry at over 82% with a very positive roll
cost thus providing some early indication of long momentum in the counter.
With a stop loss around 1030, one should look to buy into the stock for upside
of targets of 1150 and1180. At current levels, looks relatively the best bet in
the sector and is likely to outperform broader markets as well.
Reliance Industries July 14, 2010 95

State Bank of India

Bloomberg: SBIN IN Equity Recommendation: Under Review
Reuters: SBI.BO No Change
COMPANY UPDATE
Concerned on asset quality

Analyst contact
Krishnan ASV
Valuation and Recommendation: In its recent results, State bank of India Tel: +91 22 3043 3205
(SBI), exhibited poor performance on the asset quality parameters as well as on vkrishnan@ambitcapital.com
the P&L front except for recording a healthy NII during the 4QFY10. While we Poonam Saney
do anticipate that the bank would be able to significantly improve its Tel .: +91 22 3043 3216
operational profits, we continue to remain very cautious in terms of asset quality poonamsaney@ambitcapital.com
which would impact the profitability and return ratios of the banks. At CMP of Rs
2,400 SBI trades at 2.2x FY11E standalone ABVPS of Rs 1,090. Our target price Recommendation
and recommendation are under review.
CMP: Rs2,400
Business growth in line with the system: SBI grew its deposit side of the Target Price: Under Review
balance sheet at a subdued pace in FY10 as the system was flushed with
liquidity and the credit appetite was limited. We believe that with the
expectations that credit growth would largely pick up in the system during ABVPS (FY11E): Rs1,090
2HFY11 and factoring in liquidity tightening at the system level, SBI would now
grow its balance sheet inline with the system growth going forward. Stock Information
Mkt cap: Rs1,524,165mn/US$32,662mn
Expect healthy operating profits during FY11E: We expect the Net interest
income of the bank to grow at a healthy pace of about 30% during FY11 52-wk H/L: Rs2,630/1,511
supported by a) healthy business growth, b) branches that were opened in the 3M Avg. daily vol. (mn): 4
last couple of years are expected to breakeven, c) comfortable margins and d)
impact of low base of FY10. We expect the bank to witness a marginal dip in Beta (x): 1.0
NIMs, as a result of the expected rise in funding costs and lending rates moving BSE Sensex: 17937
up with a lag, however the CASA ratio of about 45% would help protect the
Nifty: 5383
margins on the downside. As a result the bank would be able to exhibit healthy
operating profits due to healthy NII growth and improved core fee income on
the back of business growth.
1M 3M 12M YTD
Asset quality a concern: While the restructured advances stand at ~3% of the
Absolute 2.6 14.8 55.5 5.8
current loan book, this book has slipped by ~10% during FY10. We have
observed asset quality deterioration across the system during the last quarter Rel. to Sensex -2.4 14.2 17.1 3.0
and as a result we remain cautious on the bank on this parameter. We believe
that SBI may get more affected since it is the largest bank in the system and also Performance (%)
because at the time of the economic slowdown the bank continued to lend 20,000 3000
generously. While the recent news articles suggest that SBI has received an 18,000 2500
16,000
extension upto Sep’11 to comply with the mandated provision cover ratio of 14,000
2000
70%, we are still awaiting an official confirmation to come in the public domain. 12,000 1500
Nevertheless, we remain concerned on the asset quality front and believe that it 10,000 1000
would drag the profitability of the bank going forward. Jul-09 Dec-09 M ay-10
Sensex St B k o f India
Exhibit 1: Key financials (standalone) Source: Bloomberg, Ambit Capital research

Net profit 67.29 91.22 91.66 112.07
RoE (%) 16.8 17.1 14.9 16
RoAA (%) 1 1.1 0.9 0.9
Dividend Yield (%) 0.9 1.2 1.3 1.4
EPS (Rs) 106.6 143.7 144.4 176.5
Adjusted BVPS (Rs) 658.9 762.3 852.7 1,090
P/E (x) 22.5 16.7 16.6 13.6
P/ABV (x) 3.6 3.1 2.8 2.2
Ambit Capital Pvt Ltd State Bank of India
Technical View
Exhibit 1: SBI
Source: MetaStock
 The stock is trading in 2450 to 2200 band.

 The MACD is curving downward and this could drag SBI below 2200.
 Recommends to sell with downside target of 2200
Derivatives View
Exhibit 2: SBI
OI P rice( F&O)
2,600 6,000,000
2,400 5,000,000
2,200
4,000,000
2,000
3,000,000
OI
1,800
2,000,000
1,600
1,400 1,000,000
1,200 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 SBI has been trading range bound since last couple of months; in last few days
the stock has moved close to its recent highs with good long open interest
addition. On a breakout above 2400, the stock will look to target 2600 in the
short to medium term. A failure however would mean the current range of
2200-2400 to continue.
State Bank of India July 14, 2010 97

Sesa Goa
Bloomberg: SESA IN Equity Recommendation: NOT RATED
Reuters: SESA.BO No Change
Levered To Chinese Growth

Analyst contact
Chandrani De, CFA
Tel: +91 22 3043 3210
YTDCY10 sees healthy Chinese steel production growth: In YTDCY10, chandranide@ambitcapital.com
Chinese steel production has grown 24% YoY. While the government’s efforts
to cool property prices and the export tax rebate cancellation will have some
effect, Chinese steel production growth should be healthy, and Sesa with 85%
of its sales being directed to China, should be a direct beneficiary of the
volume growth. Recommendation
Near-term growth driven by iron ore business; capex across segments: CMP: Rs375
Management has reiterated its volume growth guidance of 20-25% p.a.and EPS (FY11E) 49.4
plans to ramp up its iron ore production to 50mt in 2-3 years. By 1QFY12 the
company also plans to increase pig iron capacity to 625ktpa (from 250ktpa Stock Information
currently), and metallurgical coke capacity, to 560ktpa.
Reserves cover 16 years at FY10 production level, acquisitions
52-wk H/L: Rs495/177
expected: In FY10, the company added 43mt to its iron ore mine reserves
through exploration and drilling at its existing mines in Karnataka and Goa. 3M Avg. daily vol. (mn): 17
This, along with the Dempo acquisition, which added 70mt, took the total iron Beta (x): 1.2
ore reserves to 353mt as on March 2010 compared with 240mt as on March
2009. While, at the FY10 production level, the reserves would cover 16 years, BSE Sensex: 17937
acquisitions are expected to augment reserves to ensure adequacy at the Nifty: 5383
expanded 50mtpa production level.
Strong balance sheet to fund acquisitions and capex plans: To fund the
expansions as well as exploration for iron ore, the company raised US$500mn 1M 3M 12M YTD
in FY10 through FCCBs. It has also passed an enabling resolution allowing it Absolute 0.5 -22.0 90.9 -13.4
to raise another Rs60bn through the FCCB/QIP/GDR route. It is well placed to Rel. to Sensex -4.4 -22.3 43.7 -15.7
make acquisitions with strong cash reserves of Rs23.9bn and investments of
Rs45.6bn. The group has a good track record of acquisitions, having acquired Performance (%)
Dempo at a fair price of US$5/t of reserves and resources. 20,000 600
18,000 500
Valuation and risks: At the current price, the stock is trading at 4.8x EV/ 16,000 400
EBITDA and 7.6x P/E on FY11E estimates. The key risks for stock performance 14,000 300
are regulatory policy changes in India, and any significant slowdown in 12,000 200
China’s economic growth. 10,000 100

Sensex SESA GOA LTD
Particulars FY09 FY10 FY11E FY12E Source: Bloomberg, Ambit Capital research
Sales 49,179 58,031 97,304 114,858

EBITDA 27,117 31,448 55,536 63,735
Adj Net Profit 19,881 26,291 43,671 50,204
EPS 25.3 31.6 49.4 56.4
EBITDA Margin (%) 55.1 54.2 57.1 55.5
P/E (x) 14.9 11.9 7.6 6.7
EV/EBITDA (x) 9.9 8.5 4.8 4.2
ROE % 51.9 36.5 40.8 32.6
Ambit Capital Pvt Ltd Sesa Goa
Technical View
Exhibit 1: Sesa Goa
Source: MetaStock
 Sesa Goa stock looks weak.

 The momentum indicators are also curving downward signaling upside limited
 Sell with stop loss of 377 and target of 340-335.
Derivatives View
Exhibit 2: Sesa Goa
OI P rice( F&O)
500 25,000,000
450
20,000,000
400
15,000,000
350
OI
300
10,000,000
250
5,000,000
200
150 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Sesagoa in the last quarter traded very volatile with negative bias. On the OI
front there has been some short covering in the recent past; however the cost
of carry has been continuously negative indicating selling pressure. Going
forward we expect Sesagoa to remain under selling pressure with supply at
higher levels of around 380; immediate support lies at 310-330 levels.
Sesa Goa July 14, 2010 99

Media & Entertainment July 14, 2010
Sun TV Network
Bloomberg: SUNTV IN Equity Recommendation: BUY
Reuters: SUTV.BO No Change
COMPANY UPDATE
Analyst contact
Best Broadcasting Play, BUY Amit K. Ahire
Tel: +91 22 3043 3202
Continues to enjoy market leadership: Sun TV enjoys market leadership in amitahire@ambitcapital.com
the southern Indian market. It is a clear leader in viewership in Tamil Nadu,
Karnataka and Andhra Pradesh states whereas it is No. 2 in the state of Kerala.
Despite competition from other players, the company continues to enjoy highest
viewership in most of the genres. This has led to sustained revenue growth for Recommendation
the company.
CMP: Rs429
Ad revenue exhibits robust growth: On the back of its higher market share Target Price (Period): Rs475
in viewership coupled with a large and diversified channel bouquet, the Previous TP: Rs430
company has maintained strong growth in ad revenue. During FY10, Sun TV
Upside (%) 11
reported ad revenue of Rs7.9bn compared with Rs5.7bn in FY09, a growth of
38%. The growth in ad revenue is driven by higher inventory utilization as well EPS (FY11E): Rs16.4
as an increase in ad rate. We remain positive on Sun TV’s ability to increase ad Variance from consensus (%) -4
revenue going forward as well.
Stock Information
DTH providing strong subscription revenue growth: Sun TV has been one
of the strongest beneficiaries of digitalization. Its DTH subscriber base has
upped to 6mn in 4QFY10 from 4.3mn at end-4QFY09. This coupled with 52-wk H/L: Rs453/210
increased number of channels has resulted in strong revenue growth from DTH 3M Avg. daily vol. (mn): 0
business. The company expects the DTH subscriber base to grow at 30% CAGR
over the next two years. On the back of this, we expect strong growth in Beta (x): 0.8
subscription revenue to continue. BSE Sensex: 17834
Valuation and recommendation: We expect Sun TV continue to benefit from Nifty: 5352
its dominant position in the southern market. We expect higher ad revenue
growth on the back of higher inventory utilization and ad rate hike. Subscription Stock Performance (%)
revenue is also expected to register healthy growth on the back of increased 1M 3M 12M YTD
penetration of DTH services and foray into the international market. Better cost Absolute 9.0 0.5 88.5 24.7
control and turnaround in radio business would lead to higher margins. We
Rel. to Sensex 1.9 1.1 45.4 22.1
expect SUN TV’s EPS to grow at 22% CAGR over FY10E-FY12E. We value the
company at 24x of FY12 EPS and maintain BUY on the stock with a TP of Rs475.
Performance (%)
18,000 450
Key Financials (Rs mn) 2007-08 2008-09 2009-10E 2010-11E 2011-12E 16,000
350
14,000
Operating income 8,699 10,394 14,528 17,972 21,257 250
12,000
EBITDA 5,975 7,368 10,909 13,395 15,770 10,000 150
EBITDA mgn (%) 68.7 70.9 75.1 74.5 74.2 Jul-09 No v-09 A pr-10
Sensex Sun TV Netwo rk
PAT 3,267 3,683 5,199 6,455 7,775
PAT mgn (%) 37.6 35.4 35.8 35.9 36.6 Source: Bloomberg, Ambit Capital research
EPS (Rs) 8.3 9.3 13.2 16.4 19.7

P/E (x) 35.8 17.8 30.9 24.8 20.6
EV/EBITDA (x) 18.7 8.3 14.1 11.4 9.4
EV/Sales (x) 12.8 5.9 10.5 8.5 7
Ambit Capital Pvt Ltd Sun TV Network
Technical View
Exhibit 1: Sun TV Network
Source: MetaStock
 The 20DMA is at Rs400 and this is very strong support,

 The momentum indictors are in neutral zone and therefore advise to use any
fall a buying opportunity.
 The stock can target 440 on the upside.
Derivatives View
Exhibit 2: Sun TV Network
OI P rice( F&O)
460 600,000
440
500,000
420
400,000
400
380 300,000
OI
360
200,000
340
100,000
320
300 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock has been consolidating in the 400-440 range over the last few
months. We expect the stock to test the 440 mark on the way up a breach of
which could lead the stock to 480 levels. A failure however would mean the
range to continue. The lower end of the range at 400 would be an excellent
entry point into the stock.
Sun TV Network July 14, 2010 101

Utilities/ Power July 14, 2010
Tata Power Co.

Bloomberg: TPWR IN Equity Recommendation: HOLD
Reuters: TTPW.BO No Change
COMPANY UPDATE
Gearing Up
Analyst contact
Mehul Mukati
Tel: +91 22 3043 3211
Tata Power Company (TPC) is one of the few companies present across the mehulmukati@ambitcapital.com
power sector value chain, i.e. power generation, transmission and distribution.
We believe this gives the company a distinct advantage and inherent risk
hedge/mitigation mechanism.
Uncommitted/merchant power likely to boost earnings: The 500MW of
Recommendation
uncommitted power from July 2010 could boost earnings. Tata Power has, citing
the Supreme Court order, refused to extend its power supply to RInfra. Further, CMP: Rs1,316
it has increased its retail base in Mumbai to ~75,000, thus requiring more Target Price: Rs1,500
power to be supplied to its own consumers. We thus expect this capacity to be a
mechanism for slightly higher realisations via a combination of sales to its own
distribution network as well as merchant power sales. Upside (%) 14
EPS (FY11E): Rs97.6
All generation projects on track: The management has re-iterated that all its Change from previous (%) nil
under development generation projects are on schedule and there would be no Variance from consensus (%) 0%
delays in commissioning. While the Jamshedpur power plant would be the first
off the block in December 2009, Unit 5 of Mundra UMPP would be the last in Stock Information
March 2013.
Indonesian coal mines provide hedge and upside to Mundra UMPP: We
52-wk H/L: Rs1,519/995
believe TPC having secured fuel supply would help it operate all its plants
optimally, maximizing returns. Moreover, ahead, TPC's fuel mix would change 3M Avg. daily vol. (mn): 1
from 31% liquid fuel capacity to 46% imported coal-based capacity, Beta (x): 1.0
simultaneously morphing from a predominantly distribution-led entity to one
with a presence in all the key segments of the power sector value chain. BSE Sensex: 17834
Nifty: 5352
Investments to cushion funding requirement: TPC's investments are valued
at Rs53.99bn, of which investments within the Tata Group telecom companies
are worth Rs37.0bn or Rs156/share. We believe these investments will provide a
cushion for TPC's incremental funding requirements. 1M 3M 12M YTD
Absolute 8.6 -3.7 19.7 -4.7
Earnings Outlook and Valuation Rel. to Sensex 1.4 -3.2 -7.6 -6.7
We have valued Tata Power on a sum-of-the-parts (SoTP) basis. While the Performance (%)
Mumbai license area and the under-development generation assets are valued
20,000 1600
individually using our DCF methodology, NDPL and Powerlinks Transmission are 18,000 1400
valued on a P/BV multiple of 2.0x and 2.5x respectively. Tata Power Trading on 16,000
1200
a P/E multiple, the Indonesian Coal Mines on an estimated EV/MT of mineable 14,000
1000
reserves, and finally investments are valued on the basis of respective NAV, with 12,000
10,000 800
the telecom investments valued at recent deal values. Jul-09 No v-09 A pr-10
We have a HOLD recommendation and a TP of Rs1,500 Sensex Tata P o wer Co .

Year to March FY08 FY09 FY10E FY11E FY12E
Operating income 108,909 175,875 189,858 218,289 288,324
EBITDA 21,221 36,496 38,353 45,628 59,141
EBITDA (%) 19.5 20.8 20.2 20.9 20.5
Net profit 11,770 15,791 21,386 23,159 29,158
EPS (Rs) 53.3 58.7 90.1 97.6 122.9
RoE (%) 16.2 15.0 19.4 17.1 18.7
P/E (x) 24.8 22.5 14.7 13.5 10.8
P/BV (x) 3.8 3.4 2.7 2.3 2.0
Ambit Capital Pvt Ltd Tata Power Co.
Technical View
Exhibit 2: Tata Power
Source: MetaStock
 The stock has broken out from the key resistance level.
 Now stock could target 1380 on the upside.
 Advise to buy the stock with stop loss at 1300.
Derivatives View
Exhibit 3: Tata Power
OI P rice( F&O)
1,600 3,000,000
1,500
2,500,000
1,400
2,000,000
1,300
1,200 1,500,000
OI
1,100
1,000,000
1,000
500,000
900
800 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 TataPower has been trading in a narrow range since last few months with
good short covering closer to the last expiry; in the last few sessions the stock
has been consolidating around the 1300 mark. We think that the stock is likely
to break out soon and move to higher levels of 1500 in the short to medium
term. 1250 will remain a key support on the way down.
Tata Power Co. July 14, 2010 103

Tata Steel
Bloomberg: TATA IN Equity Recommendation: BUY
Reuters: TISC.BO No Change
COMPANY UPDATE
India Expansion – On Track

Analyst contact
Chandrani De, CFA
Tel: +91 22 3043 3210
For the 2.9mtpa Jamshedpur expansion, all the major orders (for US$2.9bn) chandranide@ambitcapital.com
have been placed, and the company is on track to commission the plant in
3QFY12.
Corus to have better margin resilience with the new pricing system: In
FY11E, we expect sales volume of 15mt, wherein 1HFY11 is likely to be more
Recommendation
robust than 2HFY11, both due to a better demand scenario in 1H and
seasonality factors (winter) in 2H. Our FY12E numbers assume 16.0mt sales CMP: Rs498
volume for Corus. Corus’ 4QFY10 robust EBITDA (US$94/t), and the improved Target Price (Period): Rs650
pricing environment over the past few months (despite the weakness witnessed
Upside(%) 31
in recent weeks) provides a buffer to EBITDA margin, which should be strong in
1QFY11 also. Over the medium term, we expect EBITDA to be US$65/t and EPS (FY11E): Rs68
US$51/t in FY11E and FY12E. We also note that the new quarterly raw material
pricing system eliminates the chances of a repeat of FY2009 wherein Stock Information
realizations crashed but material costs continued to be high. As such, losses Mkt cap: Rs441,611mn/US$9,464mn
similar to 1HFY10 are unlikely to be repeated.
52-wk H/L: Rs739/330
Efforts to deleverage balance sheet to continue: The net debt for the group 3M Avg. daily vol. (mn): 17
fell from US$10.4bn at the end of 3QFY10 to US$9.9bn at the end of March
2010. In FY11, the company plans to repay debt of US$250mn and prepay Beta (x): 1.5
GBP112.5mn, and will continue to evaluate further stake sale. The company has BSE Sensex: 17937
done preferential allotment of 15mn shares (at Rs593/share) and 12mn
Nifty: 5383
warrants to Tata Sons.
Valuations and risks: We have a Buy recommendation with a March 2011 Stock Performance (%)
target price of Rs650, based on a positive outlook of both the Indian operations 1M 3M 12M YTD
and valuations, which in our opinion, do not adequately factor in the positive Absolute 5.1 -27.3 41.0 -19.4
operational improvements in Corus. At the current price, the stock trades at 5.5x
Rel. to Sensex 0.0 -27.6 6.2 -21.5
EV/ EBITDA and 7.4x P/E, on our FY11 estimates. Exchange rates remain a
source of earnings volatility – we estimate that a 1% weakening in the GBP/US$ Performance (%)
rate would lead to a drop of 0.6% and 1.5% in consolidated topline and EBITDA.
20,000 750
18,000 650
Y/E Mar (Rs mn) FY2008 FY2009 FY2010 FY2011E FY2012E 14,000 450
12,000 350
Net revenue 1,315,359 1,473,293 1,023,931 1,186,454 1,318,090 10,000 250
EBITDA 179,931 181,277 80,427 163,716 167,403 Jul-09 Dec-09 M ay-10
Sensex Tata Steel
PAT (Adj.) 62,255 90,454 (3,255) 66,897 66,618
EBITDA margin % Source: Bloomberg, Ambit Capital research
13.7 12.3 7.9 13.8 12.7
EV/ EBITDA 5.1 5.3 11.4 5.5 5.3
ROCE 16.3 16.0 6.2 15.0 14.6
EPS (adj.) 79.3 102.3 (3.4) 67.6 67.1
P/E (adj.) 6.3 4.9 (144.5) 7.4 7.4
Ambit Capital Pvt Ltd Tata Steel
Technical View
Exhibit 1: Tata Steel
Source: MetaStock
 On daily chart the RSI is hovering around oversold zone.

 We recommend buying the stock for an upside target of 550.
 The stop loss for an uptrend will be at 488.
Derivatives View
Exhibit 2: Tata Steel
OI P rice( F&O)
760 35,000,000
660 30,000,000
25,000,000
560
20,000,000
460
OI
15,000,000
360
10,000,000
260 5,000,000
160 0
17-May-10
31-May-10
3-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 Tatasteel has witnessed huge short build up in the last few months with price
correction of more than 30% from its recent high; however since around June
expiry the stock has witnessed bouts of short covering. Going forward some
more short covering can take the stock higher to 525 levels where stiff
resistance is expected.
Tata Steel July 14, 2010 105

Information Technology July 14, 2010
Tata Consultancy Services

Bloomberg: TCS IN Equity Recommendation: BUY
Reuters: TCS.BO No Change
COMPANY UPDATE
Truly Global
Analyst contact
Subhashini Gurumurthy
Tel: +91 22 3043 3264
Primary gainer of the BFSI revival: TCS has been the biggest gainer of the subhashinig@ambitcapital.com
BFSI recovery in FY10. Despite having higher exposure to failed banks during
the BFSI industry consolidation phase, TCS has not only been able to retain
clients but also gain incremental volumes from the vendor consolidation wins.
Leadership in Emerging markets: Versus peers, TCS derives the highest
Recommendation
revenue (US$1.28bn; 20.3% of revenue in FY10) from Emerging markets,
placing it in the best position to capture the incremental spend ensuing from CMP: Rs792
these fast-growing markets. Target Price (Mar-11): Rs910
Developing into a truly global company: TCS has been the most aggressive Previous TP: Rs910
in ramping up its near-shore model with 10 delivery centres in LATAM and Upside(%) 15
~7,000 employees. Not surprisingly, TCS has the largest share of non-Indian EPS (FY11E): Rs39.1
nationals in its workforce - 7.4% versus close to 5% for peers. Change from previous (%) -
Early starter in non-linear initiatives: TCS has been an early starter in
pursuing non-linear initiatives ahead of peers. While peers have started Stock Information
focusing seriously on various non-linear growth models, we believe that TCS' Mkt cap: Rs1,549,532mn/US$33,206mn
formal SBU model and the early advantage gives it an edge.
52-wk H/L: Rs835/383
Margins to decline ahead: While TCS has always been under the scanner for 3M Avg. daily vol. (mn): 3
its margin management capabilities, it has positively surprised the street in cost
management. In fact, TCS has exited 4QFY10 with the best margins since Beta (x): 0.7
2QFY06. However, going forward, we expect margins to decline 290bps over BSE Sensex: 17937
FY10E-12E primarily due to our assumptions of US$/INR appreciation and wage
Nifty: 5383
hikes.
Buy with target price of Rs915: We maintain our BUY rating on TCS with a Stock Performance (%)
target price of Rs915, implying a target PE multiple of 20x, which is at a 5% 1M 3M 12M YTD
discount to Infosys. The stock currently trades at 20.2x and 17.4x on FY11E and Absolute 5.6 0.5 103.0 6.9
FY12E EPS.
Rel. to Sensex 0.5 0.0 52.8 4.1

Performance (%)
FY08 FY09 FY10E FY11E FY12E
20,000 1000
Net sales 228,614 278,129 300,289 340,374 407,447 18,000 800
16,000
Sales growth (YoY%) 22.7 21.7 8 13.3 19.7 600
14,000
EBITDA 59,397 71,781 86,799 91,927 105,900 12,000 400
10,000 200
EBITDA (%) 26 25.8 28.9 27 26
Adj. Net profit 50,191 51,721 68,729 76,563 89,135 Sensex TCS
EPS (Rs) 25.6 26.4 35.1 39.1 45.5
EPS Growth (YoY%) 23.1 3 32.9 11.4 16.4
ROCE (%) 46 43.4 41.3 34.6 32
ROE (%) 46.3 36.2 37.2 32.4 30.1
PE (x) 30.9 30 92.6 20.2 17.4
P/BV (x) 12.5 9.9 7.6 6 4.8
EV/EBITDA (x) 25.6 21.3 17.2 15.9 13.5
Ambit Capital Pvt Ltd Tata Consultancy Services
Technical View
Exhibit 1: TCS
Source: MetaStock
 TCS is also in extremely overstretched levels.

 The downside target will be at 740 and then 730.
 Advise to build short position on every rise.
Derivatives View
Exhibit 2: TCS
OI P rice( F&O)
900 12,000,000
800 10,000,000
700 8,000,000
600 6,000,000
OI
500 4,000,000
400 2,000,000
300 0
3-May-10
17-May-10
31-May-10
4-Nov-09
18-Nov-09
3-Mar-10
17-Mar-10
2-Dec-09
16-Dec-09
4-J an-10
18-J an-10
2-Feb-10
16-Feb-10
1-Apr-10
19-Apr-10
14-J un-10
28-J un-10
12-J ul-10
Date
 The stock has seen good run-up in line with other IT peers in the last few
sessions, although there hasn’t been any significant change in open interest
positions. Expect the stock to face stiff resistance around the 840 mark and is
likely to trade ranged in the 740-840 range. A switch to Wipro at these price
levels might turn out to be more profitable on statistical measures.
Tata Consultancy Services July 14, 2010 107

Explanation of Investment Rating
Investment Rating Expected return

(over 12-month period from date of initial rating)
Buy >15%
Hold 5% to 15%
Sell <5%
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14 July 2010

Staying Bullish, Sensex Target of 22,680 Analyst contact

Median PER to Asian peers currently at marginal premium

Source: Ambit Capital research, Bloomberg

Exhibit 2: BSE-30 sector valuation Exhibit 3: India market valuation

Strategy 14 July 2010 2

Sensex dividend discount model – indicates a range of 16,360-

Sensex valuations – P/BV

Positive divergence in P/BV premium

MSCI EM P/B Sensex P/B ratio Sensex P/B

Strategy 14 July 2010 3

Model Portfolio Recommendations and Suggested

Strategy 14 July 2010 4

Exhibit 11: Model portfolio

Strategy 14 July 2010 5

Changes to the Model Portfolio – Adding Cairn

Strategy 14 July 2010 6

Strategy 14 July 2010 7

 Apart from ad revenue growth that is expected to grow in excess of 15%,

 In the print segment, vernacular newspapers continue to perform better versus

Exhibit 12: Stock performance

Strategy 14 July 2010 8

CONSUMER STAPLES - OVERWEIGHT

Exhibit 13: Stock performance

Strategy 14 July 2010 9

Exhibit 14: Stock performance

Strategy 14 July 2010 10

Exhibit 15: Stock performance

Strategy 14 July 2010 11

 Powergrid, the largest state distributor, is targeting to expand inter-regional

Exhibit 16: Stock performance

Strategy 14 July 2010 12

Exhibit 17: Stock performance

Strategy 14 July 2010 13

Exhibit 18: Stock performance

Strategy 14 July 2010 14

 Strong capacity addition will be the growth driver.

 However, fuel shortage is a key constraint. With coal demand at 404mn

 Merchant power producers are also aggressively adding capacities. Stable

 We anticipate that capacity additions on tariff-based bidding norms as well as

 We are positive on transmission and distribution.

 Commencement of KG-D6 gas, concomitant with GAIL's Rs300bn network

Exhibit 19: Stock performance

Strategy 14 July 2010 15

 View on longer term issues: We expect India’s demographic advantage to

 Rupee appreciation; we factor in a margin decline of 240-300 bps across our

Exhibit 20: Stock performance

Strategy 14 July 2010 16

Strategy 14 July 2010 17

Sensex performance relative to Asian equity

 Strong corporate earnings in FY12E: Auto,

 CYTD-10 India and EMs: Indonesia, Thailand, MSCI Asia - top

 12-month total return performance – Indonesia & Thailand best

 Market dynamics — strong foreign flows

 MSCI India relative outperformance to MSCI EM and MSCI ACWI

 The current 3M avg. 10-yr US G-secs yield less Fed rate is

 The ratio of Indian IVs to the US VIX has been on a decline

Strategy 14 July 2010 18

Source: Ambit Capital research Source: Ambit Capital research

Strategy 14 July 2010 19

Sensex performance relative to Asian equity

 Strong global clues keep Asian markets buoyant

 Indices performance in CY10

 Market dynamics – strong foreign flows