Research Speak Week Ended – 14th May, 2010

Market Commentary
After a unidirectional move that we have witnessed in the market over the period of last 9-10 months, the market
seems to have moved in a zone where it is taking a breather. We expect that the market is going to remain lagard
for next couple of weeks and can go down to test 4800 or there about and as such investors are expected to remain
cautious for the time being and are advised not to take aggressive position in stocks. The latest development in the
EU is likely to act as sentiment dampner in the short term and as consequence there can be some profit booking in
the Emerging countries driven by risk aversion. As we have seen in last week that Greece bail out plan has been
sanctioned by the EU and IMF and a total dolout for the country has been pegged at upto €750 billion, of which
two thirds will be provided by eurozone members and one third by the IMF. Of the eurozone's €500 billion share,
€60 billion are readily available since they draw on an existing facility. The remaining €440 billion are to be
sourced through an SPV and are subject to the same conditions and approval process as the joint loan to Greece.
The underlying assumption is that the total financing needs for Portugal, Ireland and Spain were to be covered until
2012, the size of the package would need to be about €600 billion. In this regard, the €750 billion package—in
addition to the ECB liquidity facilities and Quantitative Easing (QE)—comfortably covers the worst case scenario
and should thus help fight contagion. In addition, the relatively high interest rates on joint loans should serve as an
incentive for eurozone members to put their fiscal house in order without recurring to the facility. However, in this
respect PIIGS as a whole has to adopt adequate austerity measure with imposition of higher tax rate and cutting
down on government expenditure.

What we understand is that even with this debt replacement plan Greece will still continue to contract for at least 2-
3 financial year and optimistically speaking after that they will be able to return to growth if at all. Which means
that for the time being there is going to be demand contraction that will happen in the near term. In the medium
term this replacing of one debt with that of the other kind of strategy will not succeed and eventually more
quantitative easing will have to happen. This means Euro as a currency will undergo rapid devaluation due to
contagion and eventually the scenario that Euro will disappear and a total collapse of EU does not look far fetched.
We feel that the current step is just going to delay the process of this plausable eventuality.

The emerging market in Asia (fundamentally speaking not so much in case of India) and the commodities space is
going to get hit by this phenomenon as people in the near term will have this perception that export for these
countries to EU region is going to go down substantially and commodity prices would correct significantly.

However, in our opinion as more QE happens all over the world over a slightly longer time horizon (4-5 years) the
price of all commodities in nominal terms will have to adjust upwards to reflect the depreciation of currencies. As
such post correction resource companies can be a good buy for strategic portfolio.

Coming back to Indian Market, in addition to the overseas headwinds there are couple of these things which are
more country specific that one has to recon while taking investment decision. 1) the monsoon expectation,
2)international commodity prices 3)valuation & earning expectation and 5)Foreign Fundflows

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Monsoon Expectation

This year monsoon in the Indian peninsula is expected to be normal to above normal as per the meteorological
prediction. According to the study, the El Nino event of 2009-10 has concluded, with all the major indicators now
below the threshold levels. Historically, about 40 per cent of El Nino events are immediately followed by a La
Nina. The Current conditions below the surface of the Pacific Ocean show large volumes of cooler than normal
water, indicating that further cooling of the surface is likely. The majority of climate model predictions suggest the
tropical Pacific will cool further during the coming months, with possible development of La Nina conditions.

As far as the Indian Ocean behavior is concerned it now favours the development of a weak positive dipole event
(Indian Ocean Dipole, or IOD). The IOD replicates El Nino-La Nina locally in the Indian Ocean. It is positive
when the warming takes places in the West Indian Ocean relative to the east, and vice versa. A positive IOD has
been found to propel the Indian monsoon, with surplus rains for the west coast and northwest India. As per the
Tokyo-based Research Institute for Global Change (RIGC) the outlook for the monsoon suggests surplus rain or
even floods to India, Indonesia, East Asia, parts of Australia, northeast Brazil and East Africa. June-July-August
would see surplus rains over northwest India, east India and the northern reaches of northeast India. However, rains
are likely to be weak over central India, and only slightly better along the coast even as the coastal Arabian Sea is
tipped to witness heavy rains.

If these predictions stand correct, there is going to be a substantial production of crop that will put a lead in for
article price appreciating and would keep the inflationary expectation under check. Which might also mean a
benign interest rate regime and hence more capacity enhancement. Thus, if monsoon is in line with expectation and
then it really augers well for the market. Assuming if there is not too much flood in crop producing area.

International Commodity Prices

With China consciously slowing down their economy and austerity measure in EU and with the expectation that
USD vis-à-vis Euro and other major currencies may strengthen in the short term, the international commodity
prices and especially crude oil prices are going to be down for the time being. This augurs well for an economy
like India where majority of its import relates to crude oil and lower price of oil will mean less inflation in the
system and lower subsidy burden for the government which in turn would be able to spend the money for
infrastructure development and other developmental activities. Lower steel and other base metal prices would
mean lower capital cost for the government and companies based out of India.

Valuation & Earning Expectation

The current market PEs and individual stock PEs appears to be fully valued however if the aforementioned
scenario comes to effect, we expect that there is going to be significant amount of earnings upgrade that is going to
come through and post correction the prices may start to look very attractive. However, we do not expect that
going forward there is going to be a broadbased rally however 2011 is going to be more of a stock picker’s market
and a good selection of large and mid cap stock will lead investors to earn good profit from the market.

Foreign Flows

As discussed earlier we expect that the sentiment are going to be down for the time being as such there is going to
be some kind of selling pressure from the FIIs in the short term. However, with the absence of growth elsewhere in

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the world and with more and more QE, India is going to emerge as one of the most attractive FII destination. With
the renewed thrust on infra projects and better economic outlook we expect that Indian market may emerge as an
outperformer in the global context

Sector to watch out for

As before we maintain our positive view on sectors like banking, infrastructure, capital goods, cooling solutions,
pharma and on selective auto companies in the sector.

Banking
SBI Result Update

State Bank of India, has reported 32% dip in the Net Profit at Rs 1866.60 crore, despite healthy 39% increase in
Net Interest Income at Rs 6721.44 crore for the quarter ended March 2010. Higher provisions towards wage
revisions and pension, coupled with spurt in provisions for NPAs have hampered the growth in Net Profit.

Operating expense increased by 41% to Rs 6036.09 crore and pulled Operating profit down by 2% to Rs 5193.88
crore. Further 69% increase in provisions for bad loans to Rs 2186.77 crore has deteriorated growth in the Net
profit.

On the consolidated front, the bank has not disclosed quarterly results. However, by deriving results from full year,
the bank has reported 21% dip in the Net Profit at Rs 2619.72 crore on the back of 43% jump in NII to Rs 9672.83
crore, for quarter ended March 2010. 46% spike in the operating expenses to Rs 12237.60 crore coupled with 59%
jump in Provisions and cont ingencies has dented the growth in Net Profit.

Asset Quality:

? For the quarter ended March 2010, SBI has reported sequential improvement in asset quality, but reported
higher NPA's on y-o-y basis. Gross NPA has increased by 24% on y-o-y basis and 4% on q-o-q basis to Rs
19534.89 crore for quarter ended March 2010. The Net NPA has increased by 12% on y-o-y basis and
declined marginally by 4% on q-o-q basis to Rs 10870.17 crore.
? % Gross NPA stood at 3.05% in Q4FY10 as against 2.86% in Q4FY09 and 3.11% in Q3FY10. The % Net
NPA declined from 1.88% in Q3FY10 and 1.79% in Q4FY09 to 1.72% in Q4FY10.
? Provision coverage ratio excluding AUCA stood at 44.36% while including AUCA stood at 59.23% as on
quarter and Year ended March 2010.
? Return on assets for the quarter has declined to 0.69% in Q4FY10 as against 1.1% in Q4FY09 and 0.94%
in Q3FY10. For FY10, ROA has declined to 0.88% from 1.04% a year ago.

Business Highlights:

? Total business grew by 12% from Rs 12906.13 billion in March 2009 to Rs 14455.96 billion as on end of
March 2010.
? Deposits of the Bank went up by 8% from Rs 742073 crore in Mar 09 to Rs 804116 crore in Mar 10.
Deposits growth was driven by CASA growth of 26.76% and retail TD growth of 17.64%, despite

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 shedding of high cost bulk deposits by 50.15%. CASA ratio has improved from 39.29% as on March 2009
to 46.67% as on March 2010, a growth of 741 bps.
? Market share in total deposits as on Mar 10 was at 16.31% as against 17.70% as on Mar 09, a decline
of139 bps on y-o-y basis. The market share in low cost demand deposits stood at 17.51% (17.43% as on
Mar 09) is up by 8 bps.
? Gross Advances moved up 17% from Rs 548540 crore in March 09 to Rs 641480 crore in Mar 10. Market
share in advances as on Mar 10 stood at 16.28% as against 15.99% as on Mar 09, an increase of 29 bps on
y-o-y basis.
? Credit Deposit Ratio is up to 73.56% as at the end of Mar 10 from 66.63% at the end of Mar 09, an
increase of 693 bps, bucking the industry trend as the credit deposit ratio for ASCB has come down from
72.32% as on Mar 09 to 72.22% as on Mar 10. Incremental CD ratio during FY10 was 157%.
? Large and Mid Corporate advances have grown from Rs 193311 crore in Mar 09 to Rs 221892 crore in
Mar 10 registering a growth of 15%.
? Home loans grew by 32% from a level of Rs 54063 crore in Mar 09 to Rs 71193 crore in Mar 10.
? Agri advances have grown by 17% from Mar 09 to Mar 10. Total disbursements under Agri Advances
were Rs 34179 crore during FY 10. Credit extended to 12.32 lac new farmers during the year.
? International advances up by 12.49% from Rs 86301 crore in Mar 09 to Rs 97071 crore in Mar 10 despite
hardening of the rupee.
? Net Interest Margin (cumulative) improved from 2.56% as on 31st Dec 09 to 2.66% as on 31st March 10;
NIM for the quarter has improved to 2.96% in Q4FY10 from 2.82% in Q3FY10 and 2.39 % in Q4FY09.
? Average Cost of Deposits has been brought down by 50 bps to 5.80% as on Mar 10 from 6.30% as on
Mar 09. Sequentially, cost of deposits has come down by 12 bps from 5.92% as on Dec 09.
? Yield on advances (YOA ) at 9.66% in FY10 is lower by 49 bps as compared to 10.15% in FY09 drive n
by an average reduction of 87 bps in PLR during the year and nearly 70% of the growth in advances being
sub-PLR during the year.
? As per Basel II the CRAR of the Bank is at 13.39% as at the end of Mar 2010, compared to 14.25% last
year, with Tier 1 at 9.45%.
? Out of the standard restructured assets of Rs16796 crore restructured under RBI dispensation, Rs 1616
crore have slipped into NPA category up to Mar 10, taking the slippage ratio for these to 9.62%.

Quarterly performance:

For the quarter ended March 2010, State bank of India has reported strong growth of 39% in NII to Rs 6721.44
crore mainly on the back of 10% dip in the Interest Expended to Rs 11244.15 crore, while the Interest earned has
moved up by 4% to Rs 17965.59 crore. Interest from advances has increased by 7% to Rs 12967.32 crore while
Income from investments has moved up by 5% to Rs 4452.33 crore. Other income has declined marginally by 4%
to Rs 4508.53 crore owing to 72% dip in profit on sale of investments on higher base. Excluding profit on sale of
investments, other income was up by 27%. Thus Net Total Income was up by 17% to Rs 11229.97 crore. The
contribution of other income to net total income has reduced to 40.1% from 49.4% in previous year.

The Operating expenses have increased by 41% to Rs 6036.09 crore in quarter under review. Employee cost has
leaped up by 53% to Rs 3591.6 crore on account of salary of new employees, increase in DA, Provision from wage
revision and additional provision for pension. The other operating expenses have increased by 26% to Rs 2444.33
crore owing to higher expenses incurred in opening of new branches and ATM's, financial inclusion and HR
initiatives. As a result cost to income ratio has spurred up by 890 bps to 53.7% and dented growth in operating
profit down by 2% to Rs 5193.88 crore. Further, 71% jump in provisions and contingencies to Rs 2349.40 crore
has pulled down PBT by 27% to Rs 2844.48 crore. Loan loss provisions constituted 93% of the provisions and

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contingencies at Rs 2186.77 crore up by 69% on y-o-y basis. Finally 470 bps increase in effective tax rate to 34.4%
has made Net Profit stand down by 32% to Rs 1866.60 crore.

Yearly Performance:

For the year ended March 2010, Net Profit of the bank has reported flat growth at Rs 9166.05 crore over 13%
increase in the Net Interest Income to Rs 23671.44 crore. Cumulative NIM, which had declined from 2.93% in
FY09 to 2.30% in June 09 has improved sequentially to 2.43% in Sep 09, 2.56% in Dec 09 and 2.66% in Mar 10.
Interest income on advances has increased by 9% to Rs 50632.64 crore, despite fall in yield by 49 bps from
10.15% as on Mar 09 to 9.66% as on Mar 10 owing to reduction in peak PLR by 200 bps and average PLR by 87
bps during FY 10 over FY 09. Income from resource operations increased by 13% as yields was low during FY 10
due to liquidity overhang. Growth in Interest expenses on deposits was contained at 14% during FY 10 against
40.13% growth during FY 09, through strategic shedding of high cost bulk deposits, which are down to just 1.79%
of total deposits as compared to 10.74% a year ago and growth of 26.76% y-o-y in CASA deposits. Other income
has increased by 18% to Rs 14968.15 crore, despite profit on sale of investments coming down by Rs 451 crore.
Fee income is up by 27% on y-o-y basis. Forex income has increased by 35%. Other Income (excluding profit on
sale of investments) is up by 27%.

The operating expenses have leaped up by 30% to Rs 20318.68 crore mainly driven by five key costs given below:
(a) During Q4FY09, nearly 27,000 new employees came on board in various categories, the full impact of which
on staff expenses was felt during FY10. The Bank has recruited 3,350 employees in FY10.

(b) Rs 627 crore arrears were provided during FY10, for wage revision pertaining to previous years

(c) Additional contribution for pension at Rs1998 crore against Rs1469 crore last year.

(d) Additional expenses of Rs 59 crore is provided on Financial Inclusion.

(e) An expenditure of Rs 347 crore incurred on opening of 1,049 new branches and installing 7,788 new ATMs
during the year.

As a result, Operating profit has been up by meager 2% to Rs 18320.91 crore. Further the total provisions
including taxation has increased by 4% to Rs 9154.86 crore. This includes 6% dip in provision for taxation at Rs
4960.03 crore and more than double loan loss provisions at Rs 5147.85 crore (up by 108%). Thus Net Profit
reported muted growth at Rs 9166.05 crore.

Consolidated yearly performance:

For the year ended March 10, consolidated Net Profit has increased by 7% to Rs 11733.83 crore on the back of
15% rise in the Net interest Income to Rs 33443.22 crore. Other income leaped up by 58% to Rs 33771.10 crore
and led Net total income up by 33% to Rs 67214.32 crore. Operating expenses shot up by 62% to Rs 42415.39
crore and restricted operating profit to marginal growth of 2% at Rs 24798.93 crore. Total provisions including
taxation remained flat at Rs 12785.29 crore. The bank has accounted Nil EO as against Rs 370.57 crore and led
PAT before minority interest up by 8% to Rs 12013.64 crore. Finally, Minority Interest has increased by 28% to Rs
279.81 crore and left Net Profit up by 7% to Rs 11733.83 crore.

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Performance of associates and subsidiaries:

? Associate Banks' net profit increased by 17.74% from Rs 2774 crore to Rs 3266 crore in FY10. Operating
profit of all associate banks increased by 20% from Rs 5495 crore to Rs 6598 crore.
? SBI Life has recorded a profit of Rs 276 crore in FY10 as against a loss of Rs 26 crore in FY09. AUM of
the company as on March 31, 2010 stood at Rs 28703 crore, a YOY growth of 94%. Market share of SBI
life amongst private insurers increased to 18.34% from 16.00% as on March 09.
? SBI Capital Markets has posted a PAT of Rs150 crore during FY10 as against Rs 75 crore in FY09
(excluding extraordinary income of Rs 74.98 crore), a y-o-y growth of 100%, driven by an increase of 73%
in Fee income. SBI Caps has crossed the milestone of Rs 100000 crore in syndication.
? SBI DFHI has recorded a net profit of Rs 89 crore during FY 10 which is the highest in last six years.
? SBI Cards has Net loss before tax during FY10 to Rs.154 crore against a loss of Rs 185 crore during FY09,
a decline of 17% on y-o-y basis.

As our readers must have noticed, we have never recommended SBI, though we have been positive over the
banking industry. We remain bullish on the sector as a whole, however, differentiating between sector under and
outperformers is very important. We believe that the huge sub standard book and massive high cost deposits that
the bank was sitting on has played a significant role on its profitability and will continue to put downward pressure
on the bank’s results. We expect the stock to be sector underperformer and would instead recommend investors to
switch to better positioned lower valued banks like PNB, J&K Banks, Indian Bank, Federal Bank, HDFC Ltd and
Bank of Baroda.

Considering annual Standalone EPS of FY10 at Rs 144.4, the PE stands at 15 times. On standalone basis, at a Book
Value (BV) per share of Rs 1038.8 and Adjusted Book Value (ABV) of Rs 801.4 for the year ended March 2010,
the P/BV and P/ABV of the bank works out to 2.1 and 2.7 respectively

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Sector and Stock Updates
Bajaj Auto

Bajaj Auto came out with splendid set of numbers for FY10 and Q4FY10 on the back of strong performance of all
its businesses –motorcycles, 3-wheelers and exports. Domestic motorcycles of the company have witnessed a
growth of 40% at 17,81,768 during the year as against the industry growth of 26%.As a result the company has
managed to improve its market share from 21.9% in FY09 to 24.3% in FY10. Exports has also shown a good
growth of 23% during the year at Rs 3246 crores.Net sales has grown strongly in Q4FY10 and FY10 by 84% and
34% respectively on account of robust volume growth. However, the average realisation/vehicle declined by 1.8%
YoY on account of the product mix tilting towards the 100cc bike. On a sequential basis, the average realization
was up by 3% on account of higher production at Pantnagar and better product mix (lower volumes of Platina and
higher volumes of Pulsar sold during the quarter). Other expenditure/vehicle declined by Rs490/vehicle QoQ due
of better cost control and benefit of lower advertisement and promotional expenditure on account of robust demand
for it’s newly launched products. As a result, EBITDA margins expanded by nearly 1% QoQ at 22.9% and
EBITDA/Vehicle im proved by 7% QoQ. Due to lower tax rate at 28.1% in Q4FY10, compared to 29.8% in
Q3FY10, the Adj. PAT grew by 12% QoQ and 300% YoY, thereby, resulting in the highest ever quarterly profit
for the company.

Result Highlights

Pariculars Q4FY10 Q4FY09 %chg FY10 FY09 %chg

Net sales 3290.45 1787.54 84.1 11508.5 8436.94 36.4
PBIDT 772.87 225.81 242.3 2552.66 1106.91 130.6
PAT 528.65 130.21 306 1700.11 654.5 159.8
EPS 36.7 9 307.8 117.7 45.2 160.4

Particulars FY10 FY09 % chg

Motorcycles 2506791 1907853 31.39%
2-wheelers 2511643 1919625 30.84%
3-wheelers 340937 274529 24.19%
Total 2852580 2194154 30.01%
Exports( of the above) 891002 772519 15.34%

Bajaj auto continues to ramp up production at excise-free Pantnagar facility which stood at 1.8 lac units during
Q4FY10 and 5.7 lac units for FY10. We expect the company to report robust volume growth in FY11 of 40% at
4000000 vehicles as compared to 2800000 vehicles on the back of new launches in Pulsar and Discover brands(it
has recently launched Pulsar 135 and Discover 150 motorcycles) and increase in export volumes. The stock is
currently reasonably valued at 14(x) FY11E earnings and we remain optimistic on the prospects of the company
considering the superior growth prospects as compared to its peers, increasing market share, superior margin
profile and continued success of its twin brand strategy of marketing its motorcycles under “Discover” and
“Pulsar”. In our “Research speak” of 4th September we had recommended a “Buy” on the stock due to pickup in

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volume growth and initial success of Discover 100cc motorcycle. The performance of the company has lived upto
our expectations and we advise long term investors to hold on the stock. For fresh entry we recommend investors
to enter the stock at around Rs 2000 level.

Aban Offshore

Aban Offshore Ltd (Aban) lost its prime asset Aban Pearl that was the only semi submersible rig in the company’s
asset portfolio. It was the highest revenue earning asset for the company with a rate of $3,58,000 per day and ~80%
operating margin with the contract extending up to October 2014. With the loss of this asset the earnings visibility
has been severely impacted. This will also delay the recovery for Aban. The loss of the asset would impact the
revenues (11 months) for FY 11 by ~ Rs 505 crore and lead to a drop in EBITDA of ~ Rs 404 crore. It has also
wiped out the future earnings potential from the asset.

Cost for ABAN on account of acquisition was Rs 1150 crores in FY08.The company has been following straight
line depreciation policy with remaining useful life of 20 years for Aban Pearl. Depreciation per year has been
around Rs 58 crores for this semi submersible drillship. The balance value of of this particular asset in books is
about Rs 1029 crores. The insurance claim is about Rs 772 crores (i.e 75% of of asset value).Thus net net
extraordinary loss to the company in FY11E would be about Rs257cr from damage of this Aban Pearl.

After the loss of Aban Pearl, the present fleet of Aban comprises 15 jack-up rigs, three Drillships and one Floating
Production Unit. Out of the current fleet, three vessels are idle and contracts for another two vessels are expiring in
May 2010 and June 2010. Hence, five out of its 19 vessels i.e. almost 1/4 of its fleet would be idle. All the idle
vessels are currently under marketing and are expected to be placed on long-term contracts during the course of
FY11.

Revenue in FY11 for Aban is expected to decline by Rs 505 crore due to the loss of Aban Pearl. However, despite
that, revenue on a YoY basis is expected to rise by 13.4% in FY11 on account of deployment of Deep Driller 1 and
Deep Driller 8 both of which have secured long-term contracts at $118000 per day and $115000 per day
respectively.

The stock has already corrected more than 20% since the news about Aban Pearl broke out on Friday. We believe
that the bad news has been more or less discounted at the current market price of Rs820.

After the loss of this asset, Aban Offshore is likely to close FY12E with topline of about Rs3600Cr and PAT of
about Rs620Cr. This translates to an EPS of Rs144.Thus at CMP of Rs820, the stock is trading at PEx of less than
6.This is perhaps the lowest earmnings multiple enjoyed by a offshore services company globally.

We believe that there are several silver lingings among all these gloomy news. The main trouble spot for the
company has been very high debt equity ratio of about 11 based on FY09 numbers and around 9 based on FY10E
numbers. This is obviously high for any company. But unlike many other companies in many sectors, contracts for
rigs owned by Aban Offshore are fixed for atleast 2-3 years. Hence the company enjoys some amount of leeway as
far debt payment is concerned.Moreover most of its clients have increased its offshore budget in recent times. Thus
few of the ships that are currently idle or near completion of their service contract are likely to be recontracted by
same or different parties at much higher rates. This is a big positive for the company. Rig fleet addition globally

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has been very tardy in last couple of years due to tight schedule on the part of manufacturers. Thus established
companies like Aban Offshore enjoy tremendous entry barrier.

The long term prospects of crude are strong than historic trend despite near term probable weakness. The stock has
high correlation with rising crude prices though same is not the case in downward revision in crude prices.

We recommend the stock with a “BUY” rating with a possible target price of Rs1000-1100 in next 6 months
implying more than 20% upside.

Commodities Outlook
Steel

Flat Products

The flat market was quiet this week on the back of scepticism regarding the price movement. Most markets either
remained slow or saw marginal rise. Prices dropped marginally in the Middle East countries and the US.
Transaction levels were scanty as the demand failed to recover. Some cheap imports from CIS region have started
to arrive, but the volume was not very large.

Meanwhile, raw material prices continued to be a concern area for steel mills as the market is still trying to adjust
to the quarterly contracting of iron. Flat product prices remained soft this week in absence of firm buying support.
In the interim, some upward price revisions were seen by some steel majors while others kept it unchanged. Essar
Steel hypermart hiked CR sheet prices by Rs 250 per ton and cut prices of GP sheets by Rs 500 per ton over their
mid-April price. Another prime steelmaker raised domestic prices of hot rolled and cold rolled coils by about Rs
500 per ton ($11 per ton) effective May 1 to offset rising raw material costs that it was unable to fully recover with
previous hikes.

This marginal increase contrasted with state -owned SAIL which kept its list prices unchanged for May bookings.
Official rebate announcements are expected next week. However, SAIL increased its galvanized corrugated sheet
price by Rs 500 to 600 per ton only in South India compared to the last month’s price. The prices in other parts of
India remained the same. Buyers had already purchased a lot of material in March. Now stockists were trying to
push out as much old stock as they can, while end-users are only sourcing for their immediate requirements. The
lowering prices in May would have weakened already dampened market sentiment. But if this bad demand
situation continues, the steel majors may have to cut prices next month.

The Chinese market adopted a wait-and-watch attitude this week owing to the price volatility in the past few
weeks. Given the fact that major Chinese mills will gradually start using high-priced iron ore purchased on long-
term contracts in July, some market sources believe mills will start pushing their prices even higher in a bid to
cover rising costs. Spot market prices would also be driven higher if they can be accepted by downstream buyers.

Long products

The long products market remained mostly slow this week as demand failed to see any recovery coupled by a drop
in scrap prices. The transactions were at a low level. There was widespread skepticism in the market and buyers
preferred to say out as they expected the prices to move further down.

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The Indian long products market plunged last week as the buyers did not accept the increased prices to offset high
raw materials cost. However, it is interesting to note that the real demand level continues to be at the same level as
it was in March end. The prices saw a dip of Rs 5000 per ton compared to the April level, despite the fact that the
end users demand has not seen any change since March. The buying was entirely speculative in March end as the
market was sceptical that prices may move up further once the prime steel producers hike their prices. As the pick-
up in the market was not as expected, the traders are lowering their prices to push the stocked-up material in the
market. However, as the real demand is at an average level, the stocks are liquidating but slowly.

Meanwhile, the traders are buying as per the immedia te requirement owing to the volatility in the market.
Although the funds for the construction activities have been slowly unlocked, the construction companies are
holding back their purchases on expectation that the prices will move down further.

Meanwhile, in tandem with the sluggish market sentiments, the Steel Authority of India Ltd (SAIL) may cut its
long
product prices in the Bhilai region after the buyers did not accept the hike in the prices made in April beginning.
The price reduction will be announced in select products by increasing the discounts as the base price will be kept
the same, as per industry sources. However, no confirmation was received from the company officials. Ingot prices
shot up to Rs 31,000 per ton in March end from RS 23,000 per ton in February, inclusive of excise duty. This was
on the back of a high cost push and huge speculative buying, primarily in the secondary market. Thus, to keep the
prices in tandem with the market, SAIL announced a marginal hike in prices. However, as per expectation, to
offset the high raw materials cost, SAIL announced a hike of Rs 2000 per ton in April beginning which failed to
get acceptance from the buyers.

Tata Tiscon also lowered its Fe 500 and Fe 500 D series TMT bar prices by 4% over their April price. The
company raised TMT price by 6% over their March 23 prices. Market participants feel that slowdown in
consumption has forced the company to cut rates. Interestingly, the market is yet to see such cuts from other
leading players.

In the steel segment however we are very bullish on the JSW Steel and advise investors to add position if the
prices correct to the level of Rs. 900 -950 levels. The recent acquisition of a coking coal mine in the US is
going to bring down its dependence on external supply of the raw material to the extent of 30% and the
company expects that even after importing coking coal from US the landed cost is going to be significantly
less compared to the ruling price of the raw material. Keeping in view its expansion plans and the higher
gorwth in output we maintain our “Buy” rating on the stock with a rtarget price of Rs. 2000.

Iron Ore

Two consecutive drops in iron ore prices in the week gone by is not good enough reason for iron ore buyers in the
global market to heave a sigh of relief. Though prices are near acceptable limits now, the fact that Chinese buyers
considerably reduced their purchases during the month of March and carried it through April, there is little doubt
over the inventory levels at the Chinese mills.
Falling steel prices in the Chinese market triggered a second fall in prices within a span of seven days. The low
steel prices have prompted many buyers to wait and watch rather than start making bookings just as yet. Chinese
traders have indicated that steel mills in China have no intention of stocking up the ore and prefer to keep their
stocks as low as two weeks under the given circumstances.

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Earlier when the prices were moving up rapidly, there were some steel mills which continued to buy the ore. This
they managed to do by blending the high cost iron ore with the low cost ore which had been procured earlier.
However, this was not a sustainable option and the transactions have slipped drastically ever since the steel mills
ran out of the low cost ore.

There have been some iron ore supplies coming in from Chinese domestic mills as well, which is being used by
mills there to control the cost of production since the domestic iron ore is cheaper than the imported material. The
dull state of the steel market in China has raised a number of questions over the country’s economic growth over
the second half of the year. There is a mixed sentiment however, which looms over the fate of the iron ore market
in the coming days. The steps taken by the Chinese government to maintain balance in the economy may,
according to some market participants, affect the steel demand in the coming months from the real estate sector.
Moreover, the growing focus on domestic iron ore would further affect the demand for imported ore. However,
there is another section which feels that steel mills would soon return to the market. As far as importing Indian iron
ore is concerned, the Chinese may not waste much time owing to the approaching monsoons which would render
the ports located in western India inaccessible starting end of May and extending right up till September.

Meanwhile, Vale, which finally won the battle in favour of quarterly pricing, has put its foot down while signing
contracts with Chinese buyers. Keeping in mind the market volatility, Vale has devised a formula and would set
aside one month between each quarterly period to settle prices with buyers. For instance, prices for the July-
September quarter will be settled in June using the average published price of the ore during the period March-
May.

In instances when prices witness an acute drop in comparison to the retrospective price which is used as base, the
buyers may be tempted to default on the contracts and instead buy at a cheaper rate from the spot market. To avoid
such occurrences as far as possible, Vale has indicated that those customers who default on the contract would
have their names removed from Vale’s customer list and the mining company would not be obliged to supply iron
ore to the defaulters. Freight rate on the Brazil-China route has dropped marginally during the week gone by and
was recorded at $29.408 per ton on May 4, against $31 per ton recorded during the previous week. On the same
day, the freight rate on the India-China route was recorded at $22.7 per ton. Prices of Indian iron ore fines
characterised by 63.5% Fe content dropped twice last week. Prices for the grade in the Chinese spot market were
recorded between $182 and $185 per ton down from the previous week’s prices which ranged between $185 and
$187 per ton cfr.

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DISCLAIMER:
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Analyst Team

Analyst Name Sectors E-mail Contact Number

Samudrajit Gohain Oil & Gas, Engineering samudrajit@eurekasecurities.com +91- 9748860335
Kinshuk Acharya Steel, Agriculture kinshuk@eurekasecurities.com +91- 9681478735
Md. Riazuddin, FRM Banking, Economy, Power riazuddin@eurekasecurities.com +91- 9903062346
Rajiv Agarwal Auto, Tea, Sugar rajiv.ag@eurekasecurities.com +91- 9903076345
Ankit Kanodia Infrastructure ankit_kanodia@eurekasecurities.com +91- 9163278562

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