1QFY2011 Result Preview - 02-07-10

1QFY2011 Results PPreview
review | July 2, 2010
Table of Contents
Strategy 2
Angel Research Model Portfolio 12
1QFY2011 Sectoral Outlook 19
Automobile 28
Banking 31
Capital Goods 34
Cement 37
FMCG 40
Infrastructure 43
Logistics 46
Metals 49
Oil & Gas 52
Pharmaceutical 55
Power 58
Real Estate 61
Retail 64
Software 67
Telecom 70
Note: Stock Prices as on July 2, 2010.
Refer to important Disclosures at the end of the report 1

Strategy
Indian markets resilient euro zone. With this, overall on a yoy basis, the Indian markets
were up 22.1% though was outpaced by Russia and Indonesia,
1QFY2011 listless…
which gained 50.2% and 43.7% yoy, respectively.
The Indian bourses continued to record a listless performance
for the third consecutive quarter, with the Sensex ending Fund inflows remain healthy despite global headwinds
1QFY2011 on a flat note. The markets have been confined to
Despite the global headwinds, fund inflows towards the Indian
a tight range in the last couple of quarters, which is evident
markets remained robust during the quarter. India, which is
from the fact that the Sensex has recorded gains of a mere
well on the path of reverting back on high growth orbit driven
1.4% since 3QFY2010. However, the performance should be
by its resilient domestic economy unlike its peers, in the current
viewed against the backdrop of the global headwinds emanating
uncertain global environment continues to attract fund inflows.
from the crisis in the euro zone, which has increased the risk
Notably, during the quarter, the FIIs invested Rs10,893cr
aversion of the investors during the period.
(US $2.4bn), while the domestic institutional investors (DIIs)
Exhibit 1: Quaterly performance of Sensex poured in Rs7,520cr (US $1.6bn) into the Indian markets. In
60 fact, the DIIs have become an equal force in the markets as
50
they account for almost 53% of the cumulative net inflows into
40
the markets since FY2008. As far as the domestic mutual funds
30
industry is concerned, they were once again in the profit-booking
% (qoq)
20
10
mode throughout the quarter with net sales of Rs1,753cr.
0
4QFY2006
1QFY2007
2QFY2007
3QFY2007
4QFY2007
1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
1QFY2011
(10) Exhibit 3: Net fund flows

(20) 40,000
(30)
30,000
Source: C-line, Angel Research
20,000
…but outperforms most peers
(Rs cr)
10,000
During the quarter, like few of the other countries such as 0
Indonesia and Korea, the Indian markets also remained flat

1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
1QFY2011
(10,000)
and did not witness any significant declines as compared to
(20,000)
some other global markets, which, on an average, posted FII DII
declines of 8% on a qoq basis. The fall was more severe in the Source: Bloomberg, Angel Research
developed markets, which fell by 12.7% qoq, while the emerging
markets witnessed a downtrend of 5.7% qoq basis. Among the EU crisis behind us
emerging markets, China witnessed a significant fall of 23%
PIGS countries at the centre of the crisis; Other EU
qoq on the back of the concerns of softening of the growth
countries in better frame
momentum in the region and its high exposure to the global
economy, which got accentuated after the rumblings from the The economic slowdown post the credit crisis in 2008 saw its
ramifications in 2010 in the form of sovereign credit crisis that
Exhibit 2: Performance of key indices hit the countries of Portugal, Italy, Greece and Spain (PIGS) in
(%)
60 the European Union (EU), with Greece being at the core of the
50
problem. The country's fiscal deficit, which had risen to almost
40
30
14% in 2009, public debt stood as high as 115% (US $400bn,
20 with around 80% of it being external debt) and domestic savings
10
were abysmal at about 5.5% necessitated a bailout. Post this,
the EU and IMF have now agreed to set up an almost
0
US Dow
US Nasdaq
UK FTSE
Singapore
Indonesia
Korea
Japan
China
Brazil
Malaysia
Russia
India
HongKong
Taiwan
(10)
(20)
US $1trillion line of credit for troubled EU nations, which should
(30)
yoy qoq
have a similar effect as the US Federal Reserve's TARP package
Source: Bloomberg, Angel Research in restoring confidence in the financial markets. This significant

Strategy
step follows the US $147bn bailout package for Greece on Given the country's small size (less than 3% of EU GDP and
May 2, 2010 to prevent it from defaulting on its public debt. In 0.6% of global GDP), the burden on EU to support its fiscal
return, Greece had to agree to reduce its fiscal deficit drastically. imbalances appears manageable. Portugal faces a similar
situation, with a GDP less than 2% of EU GDP and 0.4% of
Exhibit 4: Fiscal deficit of Greece (as a % of GDP) global GDP. As far as Spain and Italy are concerned, they have
12
10.7 better fundamentals (savings rate of 22% and 16% and current
10
8.7
Severe Fiscal Reduction
Targeted
account deficit of 5% and 3% respectively), and with confidence
restoring in the financial markets, they are unlikely to utilise the
(% of GDP)
8 7.5
6 5.6 bailout funds.
4
2.8
Moreover, the US $1trillion bailout package that was announced
2
2
for troubled EU nations - like the US Fed's bailout packages - is
expected to resolve the crisis and restore confidence in the
0
2008 2009 2010E 2011E 2012E 2013E financial markets. To draw a parallel, the US bailout was an
Source: Growth and Stability programme estimated US $1.5trillion for a US $14trillion economy, which
tantamounts to 11% of the GDP. In comparison, the US $1trillion
Greece's problems are symptomatic of its high median age of European package (for PIGS economies) works out to around
42 and the resulting low savings rate of 5.5%. In our view, a 24% of GDP (with the combined GDP of the PIGS countries
country with a high median age has two options to improve being around US $4.2trillion).
growth - if it is a net exporter of capital then on the back of its
Notably, the PIGS countries apart, the other prominent
strong currency it can run a higher fiscal deficit to support growth.
economies in the EU like Germany and Netherlands have better
The other option is to devalue its currency to increase exports
fundamentals, with current account surpluses and high savings
as a driver for GDP growth. In case of Greece, till it is a part of
rates of 24%.
the EU, currency devaluation is not an option. In such a situation,
even though it does not have its own strong currency, having a Global economy on the mend
higher fiscal deficit on the strength of the euro would have been
The global activity is recovering at varying speed - tepidly in
a viable option, had it been acceptable to other EU nations. But many of the advanced economies but more strongly in most
in its current form and unlike the US bailout packages last year, emerging and developing economies. Further, the stimulus
this bailout comes with substantial strings attached, requiring packages offered has put the economies back on growth path.
stringent belt-tightening like public sector wage cuts, sharp Policy intervention on an unprecedented scale has helped
increase in tax rates, cut in pension payments and raising of improve financial conditions and real activity, aiding the global
retirement ages, which we believe would have a detrimental recovery process. Thus, the global economy is all set for a
impact on the demand in the country. stronger rebound in 2010, with both the advanced as well as
developing markets moving onto a strong wicket as compared
Exhibit 5: Key economic data for 2009 (as a % of GDP) to 2009 when the global GDP posted its first dip of 0.6% in the
Current A/c Fiscal Deficit Savings Public Debt last many decades. Overall, as per an IMF estimate the real
Greece (10.1) 10.7 5.5 113.4 global GDP is set to rise by 4.2% during 2010.
Ireland (2.3) 13.0 13.1 63.7
Italy (2.6) 5.1 16.6 115.2 Exhibit 6: Global GDP growth trend
Portugal (8.4) 6.7 11.3 75.2 10.0 6.0
Spain (4.7) 7.9 21.9 50.0 8.0 5.0
France (2.0) 8.1 13.6 79.7 6.0 4.0

(% yoy growth)
(% yoy growth)
Germany 3.9 4.3 24.1 77.2 4.0 3.0
Netherland 5.1 4.6 24.2 62.2 2.0 2.0

UK (1.5) 14.0 13.5 68.5
0.0 1.0
Source: CIA World Factbook, Angel Research 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
(2.0) 0.0
(4.0) (1.0)
Advanced Economies (LHS) Developing Economies (LHS) World (RHS)
Source:IMF

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Advanced economies to grow after the trough remain at the forefront of the global economic growth. The IMF
estimates the developing economies to post real GDP growth
After hitting a trough in 2009, where real output of the advanced
of 6.3% in 2010, accounting for ~ 50% of the global growth.
economies declined by 3.2%, they are set for a rebound in
2010. Ironically, amongst the advanced economies the recovery Indian economy on strong footing
would be more pronounced in the US, the epicenter of the credit FY2010 - Growth returns back to averages, but for
crisis in 2008. Initiatives taken by the US government both fiscal agriculture
and monetary, have aided the recovery which has been on an
The Indian economy, which has been resilient amidst the global
uptrend since 3QCY2009 onwards. This recovery is broad based
meltdown, ended FY2010 with 7.4% GDP growth. The growth
with consumption, investments and trades all posting good
would have been higher but for the flat agriculture output, which
growth. For 1QCY2010, the US posted economic output of 3%
was impacted by bad monsoons, as indicated by the
qoq. With the trend expected to continue, the US economy would
ex-agriculture GDP growth. The ex-agriculture GDP growth for
be back to the pre-crisis levels. The EU, in spite of the concerns
FY2010 came in at 8.8%, in line with the the 5-year average
on the sovereign debt crisis is unlikely to witness a contraction
GDP growth of 8.5%. The recovery has been aided by the fiscal
in the economic activity, as most of the PIGS countries, barring
and monetary stimuli provided by the government. However,
Greece, are not in very bad shape. Howover, Greece with 2%
unlike FY2009, where the dependence on the government to
contribution to the EU GDP is too small to make a significant
prop the overall GDP growth was higher, as reflected in the
impact on the EU recovery. Moreover, any incremental weakness
ex-government GDP growth, which came down to 3.8% ( overall
would result in a lower euro, providing further boost to exports
GDP growth during the period was 6.7%), after averaging
from the region and boost growth. Overall, IMF pegs the 2010
around 9.7% during the last three years, FY2010 witnessed a
growth in the advanced economies at 2.3%.
rebound with ex-government GDP posting 6.6% growth.
Developing economies to remain at the forefront
Exhibit 8: Ex-agriculture GDP growth trend
The developing economies have posted sharp recovery, post 12.0 11.0
the downtrend in 2008. Moreover, the recovery has also been 10.5 10.2
10.0
more balanced in these economies than elsewhere, with output 7.7
8.8
8.0
growth supported by both external and domestic demand. And
(% yoy)
even though macroeconomic stimulus was substantial, private

6.0
demand also gained traction and is expected to drive growth in 4.0
the developing countries going forward. Further, the public 2.0
finances in these countries are strong, which provides a leg for 0.0
these governments to provide further stimulus if required. While FY2006 FY2007 FY2008 FY2009 FY2010
5-Year Average
the dependence of these economies on external funding is lower Source: Bloomberg, Angel Research
on the back of high savings rate (~30% of GDP), they would
continue to attract liquidity, which would provide further fillip to FY2011- Set for high growth
the growth in those countries. Hence, the developing economies
are structurally well placed to grow at a higher pace and would After the drought in FY2010, the monsoons are expected to be
normal in FY2011. Hence, agriculture which was a drag on
Exhibit 7: Contribution of economies to global GDP growth FY2010 GDP growth is expected to bounce back and post
100.0%
growth higher than its 5-year average of 3.1%, albeit on a low
80.0% base.
52.1%
63.0%
60.0% The manufacturing sector is already on an uptrend as witnessed
40.0%
by the strong IIP numbers, which came in at 17.6% for April
37.0%
47.9%
2010. Even after adjusting the IIP numbers for the base impact
20.0%
and taking a CAGR over a 2-year period, the IIP growth was
0.0% around 9.0%, well above the 15-year average of 7.0%. This is
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E
Developing Economies Advanced Economies

also reflected in the manufacturing sector GDP growth, which
Source: IMF at 9.3% was at the higher end of the last 5-year average growth

Strategy
of 8.9%. Though growth of the capital goods, consumer durables Thus, as we enter FY2011, agriculture, services and
and intermediaries sectors, which contribute around 40% of manufacturing are likely to fire the growth of the economy.
the IIP, might moderate on a high base, the rest 60%-i.e basic Further, the current European crisis would not have any impact
goods and consumer non-durables sectors, the laggards in as far India is concerned, as a large part of the country's growth
FY2010, would witness acceleration as growth becomes more hinges on domestic consumption and investments. Further, with
broad-based and exports pick up. Further, moderation in these a high savings rate of 32.5% of GDP (FY2009), India can grow
segments would not be reflective of the demand destruction, at 8-9% with little dependence on external funding. The same
but indicate of the supply constrains. Thus, the recovery in the was reflected in the way the economy grew in FY2009 (India's
manufacturing sector is well entrenched. GDP grew by around 6.7%) amidst the challenging
macro-economic environment. Thus, as we enter FY2011E, with
Exhibit 9: IIP growth trend (2 Year Rolling CAGR) normal monsoons expected, the Indian economy is expected to
14.00
12.00
revert to delivering 8-9% GDP growth on the back of domestic
10.00 consumption and investments.
8.00
(%)
6.00
Exhibit 11: India's GDP trend
60,00,000 12
4.00
2.00 50,00,000 9.5 9.7 10

9.2 9.0
8.5
-
40,00,000 8
(Rs cr)
7.4
1-Aug-96
1-Aug-97
1-Aug-98
1-Aug-99
1-Aug-00
1-Aug-01
1-Aug-02
1-Aug-03
1-Aug-04
1-Aug-05
1-Aug-06
1-Aug-07
1-Aug-08
1-Aug-09
1-Feb-97
1-Feb-98
1-Feb-99
1-Feb-00
1-Feb-01
1-Feb-02
1-Feb-03
1-Feb-04
1-Feb-05
1-Feb-06
1-Feb-07
1-Feb-08
1-Feb-09
1-Feb-10
30,00,000 6.7 6
15- Year Average 20,00,000 4
Source: Bloomberg, Angel Research

10,00,000 2
On the services front, which contributed around 57% of FY2010

0 0
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
GDP, growth is expected to remain robust in spite of the Services (LHS) Manufacturing (LHS) Agriculture (LHS) YoY Growth (RHS)
moderation in the government-linked community and social Source: Bloomberg, Angel Research
services. This would mainly be driven by the improvement in
the hotels, transport and communication sectors as well as
Inflation to moderate in FY2011
finance and real estate, which contributes ~70% of the services, Food inflation continued to be the main cause for the runaway
would expand at a faster pace as compared to 2009-10 on the increase in overall WPI inflation to 10.16% yoy in May 2010,
back of revival in household demand and global economy. As apart from the base effect price increase in primary food articles
an illustration, the Indian software industry, which accounts for at elevated levels of 16.6% yoy. The manufactured product
~6% of the GDP, will witness a strong uptrend in manpower inflation, another key contributor to the inflationary number,
addition after two years. The rise in manpower addition, which registered 6.4% yoy growth in May 2010. Thus, food inflation
was around 10% during FY2008-10, is expected to increase to continued to influence overall inflation.
20% during FY2010-12E, indicating strong traction in the IT
Going forward, food inflation which was exacerbated by the
sector going forward.
bad monsoons last year is likely to moderate. At the same time,
Exhibit 10: Recruitments in IT sector set for a rise due to the base effect, over the next 6-9 months overall inflation
4.0
3.5
30 is likely to once again come down to the manageable 4-5%
3.5
2.9
25 range. Even after assuming the recent hikes in the petroleum
3.0
2.4 20 products - the direct and indirect impact of which on inflation is
(in mn)
2.5 2.2
2.0
expected to be an increase of around 1.0% - inflation can be
(%)
2.0 1.6 15
1.5
1.1
1.3
10
expected to range between 5-6% during FY2011. Moreover,
1.0
5
while crude is up 2.4x from the bottom, it is 50% away from its
0.5
pre-crisis peak and from a fundamental perspective, we do not
0.0 0
FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E expect crude to increase materially from these levels.
Manpower Growth (yoy)
Source: Nasscom

Strategy
Exhibit 12: Inflationary pressures to decline Exhibit 14: Rainfall trend (as a % of LPA) in India
15 110
105 102
12 11 100
95
(% yoy)
9 90 86.2
85 80.8
6 6
80 77
75
3
70
65
0
60
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
(3)
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Source: Bloomberg, Angel Research Source: IMD
Food inflation set to soften Oil to remain range bound
A significant portion of the overall inflationary pressure during Crude prices remained volatile in the range of US $66-87/bbl
FY2010 was on account of food, which directly and indirectly during the quarter. Volatility stemmed from concerns about
contributed to the overall rise in inflationary pressures. The year global recovery following the euro zone crisis. However, on an
saw food inflation touching multi-year highs in December 2009 average, crude prices fell by 0.7% qoq during 1QFY2011.Going
at 20.0%. This was primarily driven by supply-side factors as forward, we expect crude to consolidate at current levels
agriculture was severely affected by the monsoon failure in especially on account of the inventory overhang in the OECD
several parts of the country that led to a drought situation (severe countries and increasing NGL output by the OPEC. The factors,
in the last couple of years) in more than half the country. which are likely to impact the direction of crude will be the
macro environment in the OECD countries particularly in the
At the advent of FY2011, food inflation has already started to western European region. Thus, we expect crude prices to hover
moderate from its highs. In May 2010, food inflation moderated at around US $75-85/bbl in the visible future.
to 16.5% levels. Going forward, monsoons are expected to be
normal with the Indian Meteorological Department (IMD) Exhibit 15: Crude price trend
forecasting FY2011 rainfall for the country as whole to be near 160
140
normal at around 102% of the long period average (LPA). The While crude is up 2.4x from the bottom, it is almost
50% away from its pre-crisis peak. From a
120 fundamental perspective, we do not expect crude to
LPA for the last year was 77%, 23% below normal. While 100
rise up materially from these levels
($/barrel)
according to IMD, on an all-India area-weighted basis, 80
cumulative rainfall was 11% below normal up to June 23, 2010. 60
However, as a major part of the rainfall happens in July (around 40
20
40%), which is also the sowing season, this deviation would not
0
impact the overall outlook. Moreover, history suggests that India
Jan-00
Apr-08
Jul-08
Apr-09
Jun-09
Apr-10
Jun-10
Feb-08
Mar-08
May-08
Aug-08
Sep-08
Nov-08
Dec-08
Feb-09
Mar-09
May-09
Aug-09
Sep-09
Nov-09
Dec-09
Feb-10
Mar-10
May-10
Oct-08
Oct-09
never had back-to-back drought seasons. Thus, as we go into

Source: IMD
FY2011, food inflation should inch downwards, with the
moderation in food prices and high base effect. Metal prices to remain stable
Exhibit 13: Food inflation softening from its highs Internationally, during the quarter both ferrous and non-ferrous
metals remained softer. However, relatively the steel prices
25.0
Food Inflation Moderating after touching exhibited strength on the back of firm iron ore prices.
20.0
21.9 Year highs 20.0
Domestically, during the quarter, the average domestic HRC
15.0 price increased by ~24% yoy and 6.6% qoq to
( % yoy)
10.0
~Rs37,700/tonne as steel prices last year were at their lows.On
the non-ferrous front, base metal prices on the LME declined
5.0
during the quarter due to concerns over sustainability of Chinese
0.0
consumption and fears that the euro zone's debt problems could
May-95
Nov-95
May-96
Nov-96
May-97
Nov-97
May-98
Nov-98
May-99
Nov-99
May-00
Nov-00
May-01
Nov-01
May-02
Nov-02
May-03
Nov-03
May-04
Nov-04
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
(5.0)
lower demand for the metals. Average LME prices for base
Source: Bloomberg, Angel Research 15 - Year Average metals declined on a sequential basis, but remained high on a

Strategy
yearly comparison as prices had bottomed out in the Further, while the exact nature of sharing of the residual
corresponding period last year. petroleum subsidies after the recent price hike has not been
announced, the recent de-regulation of petroleum product prices
Going forward, we expect steel prices for the next one year to
would reduce the strain on the government's financials.
remain stable primarily on account of the raw material cost
According to our estimates, the overall subsidy burden in the
push, removal of export rebate by the Chinese Government
sector would come down by 29% to Rs54,516cr (Rs77,213cr)
and possible revaluation of the yuan, which would to provide a
for FY2011. With the exact subsidy sharing mechanism not
floor to steel prices. On base metals, we expect prices to remain
evolved during FY2010, the government bore around
range bound, but significant upsides would be limited due to
Rs26,000cr by way of the subsidy burden out of the total
high inventory levels at the LME warehouse. However, the
Rs46,051cr for the industry, ie around 56% of the overall burden.
downside for some metals like aluminum and zinc seems limited
as prices are near their marginal cost of production. Thus, as we go forward, we expect overall improvement in the
fiscal position, with the total fiscal deficit (state and centre)
Exhibit 16: Global metal price performance
expected to improve from 9.9% of GDP in FY2010 to 8.0% by
Spot June 30, March 31, June 30, % chg %chg
FY2012E.
US$/tonne 2009 2010 2010 qoq yoy
Tin 14,232 18,379 17,380 (5.4) 22.1 Exhibit 17: Fiscal deficit to decline
12.0
Lead 1,671 2,119 1,726 (18.6) 3.3
9.9
Iron Ore 81 150 147 (2.3) 82.0 10.0
8.5
8.2 8.0
Copper 4,949 7,759 6,484 (16.4) 31.0 7.2
(as % to GDP)
8.0 6.5
Alumina 220 335 335 0.0 52.3 5.1
6.0
Zinc 1,523 2,344 1,760 (24.9) 15.6
4.0
4.0
Aluminium 1,597 2,294 1,951 (14.9) 22.2
Steel HR 483 665 685 3.0 41.8 2.0
Source: Bloomberg 0.0

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Fiscal deficit on path of moderation Source: RBI, Angel Research; Note: Excludes disinvestment proceeds, does
not include off-balance sheet items
FY2010 was a difficult year for the Indian economy, which was
reflected in terms of the fiscal deficit which ballooned to 9.9% Interest rates on uptrend, but unlikely to hurt
of GDP on the back of increased government spending to growth momentum
counter the negative repercussions of the global slowdown and
During FY2010, the RBI had a moderate stance on interest rates
a drought. With the economy now back on growth path, the
with inflation primarily being driven by supply-side pressures,
government in its Union Budget FY2011 has laid a roadmap to
and to facilitate broad-based recovery in the economy. However,
gradually reduce the central fiscal deficit from the estimated
with rising inflation (10.2%) and strong traction in the growth
5.5% of GDP in FY2011 to 4.1% of GDP in FY2013E. The
momentum (as indicated by the strength in the IIP numbers,
reduction in fiscal deficit is based on the introduction of reforms
which stood at 17.6% yoy in April 2010), the increasing pressure
like disinvestment, goods and services tax (GST) and direct tax
for an upward bias in the interest rates are mounting. Further,
code (DTC), which are expected to improve the government's
in line with the upward trajectory in the GDP and IIP numbers,
revenue collection.
the credit demand has also picked up. By June 18, 2010, the
For FY2011 YTD the government has succeeded in garnering yoy growth rate in credit increased to 19.2% yoy compared to
around Rs 1,06,543cr, much higher than the estimated 10% levels in October 2009. Banks have incrementally lent
Rs35,000cr from the 3G and WBA auctions. From the 3G Rs70,000cr YTD in FY2011 (compared to a meagre Rs8,280cr
auctions, the government raked in Rs68,000cr (Rs50,968cr during the same period last year). At the same time, deposit
excluding the proceeds received from the PSU's), while the growth has come down to 13.4% yoy compared to 22.1% yoy
wireless broadband access (WBA) garnered Rs38,543cr.This in 1QFY2010. Going forward, credit demand is expected to
would improve the overall fiscal deficit position by around 1.0% sustain at least above 19% levels in FY2011, necessitating banks
of GDP, thereby reducing overall government borrowings. Thus, to raise their lending and deposit rates.
overall for FY2011, the government is all set to beat its own
estimates of fiscal deficit of 5.5% of GDP in FY2011.

Strategy
Exhibit 18: Rising credit growth, declining deposit growth opportunity, buoyed by cheap foreign capital and strong
35.0
domestic savings. Secondly, interest rates are also well below
30.0
peak levels, leaving ample scope for gradual monetary
25.0
20.0
tightening, without adversely affecting the growth outlook.
(%)
15.0
Current account deficit set for improvement; BoP
to remain healthy
10.0
5.0
-
During FY2010, the current account deficit (CAD) at 2.9% of
Aug-08
Aug-09
Jan-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
GDP (2.4% of GDP in FY2009) deteriorated mainly on the back
Deposit Growth (yoy) Advances Growth ( yoy )
of lower software exports and reduction in other invisibles.
Source: RBI
During the year, software exports at US $48bn registered yoy
Moreover, during FY2010 around 40% of the government growth of 10.9% vis-à-vis a CAGR of almost 25% during
borrowing of Rs4lakh crore was facilitated through the FY2006-09. Trade deficit at US $117bn (at 7.6% of GDP) was
unwinding of MSS securities and OMO purchases. However, in almost similar to the previous year. Both exports and imports
FY2011, almost the entire estimated market borrowing of registered a yoy decline of 3.6% and 2.7% respectively during
Rs3.4 lakh crore by the central government will be funded via the period. However, the decline in imports was less severe than
fresh issuance of securities. The large government borrowing exports, in spite of lower crude prices, mainly on the back of
in FY2010 was also facilitated by sluggish private credit demand strong improvement in domestic demand as compared to the
and comfortable liquidity conditions, which is set to change in global recovery.
FY2011, putting upward pressure on interest rates. Thus, the However, going forward, the pace of exports growth should
G-sec yields could see further upward pressures in 1HFY2011E accelerate. Further, software exports which posted muted growth
from current 8% levels to about 8.25-8.5% levels. The RBI has in FY2010, should register improved performance in FY2011
already announced a 25bp increase each in repo and reverse (estimated to be around US $55bn in FY2011 by Nasscom). In
repo rates on July 2, 2010, taking it to 5.5% and 4.0%, fact, software exports registered an improvement in 2HFY2010,
respectively. registering a yoy growth of 27% after posting a flat qoq growth
during the last four quarters till 2QFY2010. On a qoq basis,
Exhibit 19: Bond yields volatile, could inch up
9.5
4QFY2010 witnessed significant improvement, registering a
9.0 growth of 8.7%. Thus, with global recovery underway, the
8.5
invisibles should witness an improvement in FY2011. This
8.0
7.5 coupled with crude prices expected to remain around these
(%)
7.0 levels should set an improvement in the CAD from FY2011

6.5
6.0
onwards. Moreover, the recent move of China to allow its
5.5 currency to appreciate would negate the impact of an
5.0
appreciating rupee and thus impact India’s exports growth.
Jan-09
Apr-09
Jun-09
Jul-09
Jan-10
Apr-10
Jun-10
Aug-08
Sep-08
Nov-08
Dec-08
Feb-09
Mar-09
May-09
Aug-09
Sep-09
Nov-09
Dec-09
Feb-10
Mar-10
May-10
Oct-08
Oct-09
Exhibit 20: Trade and current account deficit trend

Source: RBI
350,000 0.0
300,000
Going forward, in line with our view that capital inflows could 250,000
(0.5)
further accelerate, monetary tightening may again be required 200,000 (1.0)
to modulate liquidity and anchor inflationary expectations. While

($ mn)
150,000
(1.5)
100,000
this will exert upward pressure on domestic interest rates, it will 50,000 (2.0)
still be a favourable outcome given that capital inflows are 0 (2.5)

FY2007 FY2008 FY2009 FY2010
largely in the form of risk capital, which the private sector will (50,000)
(3.0)
(100,000)
increasingly require to fund capital requirements including (150,000) (3.5)
Exports (LHS) Imports (LHS) Trade Deficit (LHS) CAD as % of GDP (RHS)
working capital and capacity addition across sectors.
Source: RBI
In fact, in the previous cycle, the strength of credit demand
suggested low elasticity to a 300-400bp increase in interest
rates amidst an environment of robust economic activity and

Strategy
Exports growth well placed for strong rebound Exhibit 22: Exports trend (as a % of GDP)
60
54
Improvement in world economy to support trade 50
38.6
In sync with the improvement in the global recovery, Indian 40
32.1 32 32.3
(%)
exports have been posting an improvement on a qoq basis 30 26.9
23.3
19.5
since 2QCY2009. Going forward, with enhancement in the 20
13.6 13.2
10.6 9.9
global recovery the rate of improvement in exports is expected 10
2.6 3.6
4.6 5.7 6.2 5.3
to continue, which should on a quarterly basis soon surpass the 0

1970 1975 1980 1985 2000 2008
pre-crisis levels. With global economies expected to rebound Korea Rep. China India
in 2010, the global trade which has already witnessed signs of
Source: World Bank
improvement, would accelerate in 2010. Thus, Indian exports,
which had been languishing in FY2010, would witness an In perspective, for an economy like India (among the top-15
improvement in FY2011. largest economies), which is well below its major exporting peers
in terms of per capita income, has a lot of potential to increase
Exhibit 21: World trade (yoy annualised growth)
its exports. Though India's trade has accelerated post
60
liberalisation leading to increased market share (gain of 0.7%
40
during 1990-2009), India's share in total global exports
20
continues to be a minuscule 1.2% (2009). Thus, Indian exporters
0
and export-oriented industries have the potential to increase
(%)
Q12005
Q22005
Q32005
Q42005
Q12006
Q22006
Q32006
Q42006
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
(20) market share and scale up operations and post higher growth
(40) than the domestic economy. Historically too, during FY2004-
(60) 10 Indian exports (excluding software exports) posted CAGR of
(80) 19.1% vis-à-vis 12.2% GDP growth during the period.
Source: IMF
Exhibit 23: India v/s other key economies
Structurally India has headroom to increase exports (in $)
50,000 12.0%
45,000
10.0%
Over the last decade, increased globalisation has led to 40,000
35,000
8.0%
widening export opportunities. However, India's dependence 30,000
25,000 6.0%
on exports (contributed around 23% of GDP in 2008) is relatively 20,000

4.0%
lesser than its peers in the emerging markets like China and
15,000
10,000
2.0%
South Korea whose exports contributed almost 37% and 53% 5,000
0 0.0%
of GDP in 2008, respectively. Given the disparity between the

Mexico
Russia
Italy
United States
Germany
South Korea
Brazil
Canada
Kingdom
India
France
Japan
China
United
per capita income of the developed markets vis-à-vis developing PPP (Per Capita income, 2009) (LHS) Exports( Market Share) (RHS)
countries, exports would continue to increase. A case in point is Source: Angel Research
Germany, a developed country which has witnessed a significant
Capital flows expected to remain strong
jump in its per capita income on the back of exports, which
improved from 25% of GDP in 1990 to 47% of GDP in 2008. A significant part of the overall current account deficit gets
Similarly, among the emerging markets like China, a part of its financed through foreign inflows in the form of FII inflows and
overall growth has been on the back of increased exports. As a FDI. During FY2006-10, the foreign inflows to India increased
matter of fact, in the 1970's India and China were enjoying by a CAGR of 35.4%. In fact, even during the crisis-ridden year
equal market share in exports. Thereon, China's thrust on exports of FY2010, the country ended up receiving around US $19.7bn
aided the country's high growth and emerge a main player in and US $32.3bn vis-à-vis US $17.5bn and outflows of US $14bn
the exports market. in FDI and FII respectively, during the last corresponding period.
Going forward, given that the emerging markets, especially
India, would be at the forefront of global growth, we expect
India to continue to attract strong foreign inflows.

Strategy
Exhibit 24: FII inflows to India which has bottomed out should gather pace in CY2010.
Phenomenal FII inflows
even in a low global
Consequently, valuation of majority global equity markets has
90,000
growth year become attractive on most of the preferred valuation
60,000
parameters such as P/E, P/BV and market cap/GDP. Thus, we
believe that the downsides are limited from hereon and the
(Rs cr)
30,000
0 equity markets, which have witnessed a downtrend owing to

increased risk aversion, should rebound.
(30,000)
(60,000) Emerging markets would continue to outshine - India

CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10
(YTD)
to remain a favoured destination
Source: RBI
While the global recovery is underway the emerging markets
Exhibit 25: Global FDI trend as an asset class would continue to outperform as these
FDI Inflows (% of World)
World) economies would be at the forefront of the global growth in the
Country 1980 1990 2000 2006 2007 2008 years to come. Further, after the correction, valuations of the
World
World 100 100 100 100 100 100 emerging markets have again become attractive, given their
- Developed Economies 86.2 82.9 81.4 70.3 73.2 63.4 growth prospects. Moreover, global liquidity is expected to
- US 31.3 23.3 22.7 16.2 13.7 18.6 remain robust on the back of the low interest regime in the
- UK 18.7 14.7 8.6 10.7 9.3 5.7 developed world, which would chase high growth destinations.
- Developing Economies 13.8 17.1 18.6 29.7 26.8 36.6
In perspective, as per the Emerging Portfolio Fund Research
- Brazil 3.5 0.5 2.4 1.3 1.7 2.7
(EPFR) Global, emerging equity fund inflows were at over
- Russian Federation 0.0 0.0 0.2 2.0 2.8 4.1
US $80bn in 2009 (a tough year for global economies), which
- China 1.8 4.2 8.4 9.0 7.6 11.0
is the highest since EPFR started tracking the data in 1997.
- India 0.1 0.1 0.3 1.4 1.3 2.4
Notably, the world's four biggest emerging market economies,
Source: UNCTAD, Angel Research Brazil, Russia, India and China (collectively known as BRIC)
Global equities in value zone accounted for a bulk of around US $60bn of the investments,
with India accounting for almost US $18bn of the same.
After the rumblings in the euro zone, the global equity markets
have been in correction mode on the back of concerns of Thus, going forward, we expect the funds to continue to flow
unsustainable global economic recovery. Given that the EU towards the high growth emerging markets of China and India.
bailout package should be effective in curtailing the problem, Meanwhile India, the second fastest growing economy in the
we believe that the EU crisis is behind us and economic recovery, region and which has not corrected significantly as compared
to its peers, will continue to exhibit strength on the back of its
Exhibit 26: Global equity valuation low linkages to the global economy and high RoE's.
Country P/E P/B RoE (%) Mcap/
2010 2011 2010 2011 2010 2011 GDP (x) Sensex Earnings Outlook
Developing Markets
1QFY2011 earnings to be impacted by margin pressures
India* 16.7 14.3 3.3 2.8 19.7 19.9 1.0
South Africa 10.9 8.6 1.9 1.7 17.8 19.7 1.3 For 1QFY2011, performance of India Inc. is expected to be
Russia 3.8 5.4 0.7 0.7 19.6 12.2 0.4 robust on the sales front. However, net profit growth during the
China 13.2 11.2 1.7 1.5 12.7 13.7 0.5 quarter would be under pressure on account of higher input
Mexico 14.7 12.8 2.4 2.2 16.1 17.0 0.4 costs on a yoy basis. For 1QFY2011, while we have estimated
Brazil 10.7 9.0 1.5 1.4 14.3 15.7 0.9 net sales of the Sensex companies to increase by around 19.7%
Developed Markets yoy, net profit is expected to remain flat. This is primarily because
USA 11.4 10.5 2.2 2.0 19.7 19.2 0.9 of the pressure on the operating front on account of higher
UK 9.8 8.3 1.5 1.4 15.3 16.2 1.2 input costs resulting in operating profit registering a growth of
Germany 10.9 10.0 1.4 1.3 12.6 12.9 0.3 8.8% during the period. Thus, OPMs would decline by 285bp
France 10.4 8.9 1.1 1.1 11.0 12.1 0.6 to end the period at 28.4%.
Japan 15.4 15.4 1.2 1.1 7.6 7.2 0.7
Source: Bloomberg, Note- Prices as on June 30, 2010, *FY2011, FY2012

Strategy
Sector-wise key features of 1QFY2011 earnings season which has been battered down due to the intense competition,
is expected to bounce back in FY2012 and post yoy growth of
Sectorally, metals, financials and IT are expected to deliver
9.3%. Thus, with the expected robust growth in EPS in FY2012E,
robust numbers for 1QFY2011. The metal pack is expected to
the Sensex earnings are expected to register CAGR of 18.0%
significantly contribute to the overall earnings growth of the
over FY2010-12E.
Sensex. In fact, ex-metals net profit of the Sensex companies is
expected to decline by 6.6%. Higher realisations during the Exhibit 27: Sensex EPS estimates
quarter would aid significant improvement in OPM's and 1,300
ow
th 1,246
gr
consequently higher rise in net profit for the metal sector. The 1,200 19
%
financial sector, on the other hand, is expected to post 11% yoy 1,100
gro
wth 1,052
%
1,000 17
growth in net profit during the period. IT is expected to post a
(Rs)
wth 896
900 gro
2.7% qoq growth on the sales front, while margins are expected 13%
790
800
to remain flat.
700
Amongst others, FMCG is also expected to deliver good set of 600
numbers. The FMCG heavyweights will deliver 14% yoy growth 500
FY2009 FY2010 FY2011E FY2012E
mainly led by ITC.
Source: Angel Research
Oil & Gas, telecom, power and engineering, on the other
hand, are expected to be key underperformers during Exhibit 28: Sectoral v/s Sensex net profit growth
70 65
1QFY2011, which will keep a check on the Sensex earnings' 64
60 53
growth. Oil & Gas, one of largest components of the Sensex, is 50
expected to register de-growth of 35% during the quarter. OPM 40
of the sector would be impacted by the high subsidy burden 30

(%)
22
19 12
20 14 12
expected for ONGC, which will suppress net realisations and
13 12
10
10
(8) (3)
impact margins. The other heavyweight in the pack, Reliance 0
Real Est.
FMCG
IT
Auto
Cement
Engg.
Metals
Power
Construction
Oil & Gas
Pharma
Finance
Telecom
Industries, is expected to post robust performance and register (10)
(20)
34% yoy growth in net profit.
Sectoral net profit growth (FY2010-12E CAGR) Sensex net profit growth (FY2010 -12E CAGR)
Telecom, which has been reeling under competitive pressures, Source: Angel Research
would continue to post subdued performance mainly on the
back of pressures on the operating front. However, on a Exhibit 29: Sectoral contribution to net profit growth of Sensex
sequential basis, the telcos are expected to post flat performance. 6.0
Among the engineering players, L&T is expected to report a yoy

5.2
5.0 4.7
18.5% decline in net profit.

(% CAGR FY2010-12E)
4.0
India Inc. earnings momentum to accelerate

3.0
2.4
2.0
1.2 1.3
1.1
The earnings momentum, which gathered pace in FY2010 1.0
(0.1)
0.7
0.1
0.7
(0.2) 0.4 0.5
(registering a growth of 13% after a dip in FY2009) is expected 0.0

Real Est.
IT
Auto
Cement
Metals
Power
Construction
Oil & Gas
Pharma
FMCG
Finance
Telecom
Engg.
to accelerate as we move into FY2011E. For FY2011E, we expect

(1.0)
Sensex EPS of Rs1,052, up 17.4% yoy mainly on account of

robust earnings in the metals pack, which is expected to post a Source: Angel Research
154% yoy growth, contributing 15% of the overall Sensex

earnings.
For FY2012E, we expect Sensex EPS of Rs1,246, up 18.5% yoy.

Further, these estimates build in ex-commodities to post net profit
yoy growth of 20.8%. The key driver for the FY2012E earnings
would be financials and oil & gas, which are expected to post
28.6% and 20.5% yoy growth, respectively. The cap goods sector
is expected to post 22.1% yoy growth during the period. Telecom,

Strategy
Exhibit 30: Sensex - 1QFY2011 Earnings Estimate
Net Sales (Rs cr) Net PProfit
rofit (Rs cr) Weightage % Contribution
Company 1QFY2011E 1QFY2010 % chg 1QFY2011E 1QFY2010 % chg (%) to Sensex growth
RIL 60,126 32,055 87.6 4,872 3,636 34.0 14.1 43.8
Tata Steel 6,906 5,554 24.3 1,866 790 136.3 2.2 48.6
Sterlite 6,987 4,537 54.0 1,259 673 87.2 1.8 17.0
Tata Motors 11,092 6,350 74.7 382 514 (25.7) 1.9 (5.6)
ONGC 11,145 14,879 (25.1) 2,255 4,848 (53.5) 4.1 (33.4)
ICICIBK 3,798 4,075 (6.8) 1,035 878 17.9 6.9 10.1
BHEL 6,816 5,596 21.8 645 471 37.2 3.0 3.9
ITC 4,840 4,083 18.5 1,042 879 18.6 5.9 7.4
JP Associates 2,722 2,067 31.7 229 249 (8.1) 1.1 (0.7)
HDFCBK 3,230 2,899 11.4 803 606 32.5 5.2 10.2
Maruti Suzuki 8,274 6,340 30.5 642 584 10.0 1.5 1.9
TCS 7,890 7,207 9.5 1,809 1,520 19.0 3.2 5.6
Hindalco 4,986 3,871 28.8 556 481 15.7 1.4 3.4
DLF 2,030 1,650 23.1 445 396 12.4 0.9 0.8
M&M 5,127 4,229 21.2 475 401 18.4 1.9 3.6
ACC 2,068 2,081 (0.7) 375 467 (19.7) 0.7 (3.3)
Hero Honda 4,287 3,811 12.5 596 500 19.2 1.5 3.1
Wipro 7,134 6,415 11.2 1,213 1,016 19.4 1.4 2.5
Cipla 1,412 1,325 6.6 225 242 (7.0) 1.3 (0.7)
Reliance Infra 2,262 2,407 (6.0) 273 317 (13.8) 1.3 (1.7)
L&T 8,437 7,431 13.5 592 727 (18.6) 7.1 (7.8)
Infosys 6,129 5,472 12.0 1,550 1,527 1.5 9.8 1.3
Bharti Airtel 10,450 9,942 5.1 1,962 2,517 (22.0) 2.6 (12.5)
HUL 4,733 4,476 5.7 563 537 4.9 2.2 0.8
HDFC 1,180 900 31.1 716 569 25.8 5.6 8.5
Jindal Steel 3,125 2,748 13.7 1,025 963 6.4 1.9 1.8
SBI 10,344 8,594 20.4 2,372 2,330 1.8 4.8 1.2
NTPC 13,110 12,003 9.2 2,279 2,194 3.9 2.5 1.1
Tata Power 2,179 2,016 8.1 318 377 (15.7) 1.6 (2.7)
RCOM 5,289 5,843 (9.5) 1,192 1,637 (27.1) 1.0 (10.0)
Total 228,109 180,854 26.1 33,607 32,842 2.3 100 100
Sensex # 19.7 0.6
Source: Company, Angel Research; Note # Sensex Sales and Earnings growth based on free-float weightages
Valuations - Trading near fair zone; Earnings Exhibit 31: 1-year forward Sensex P/E
growth to drive upsides 30
25
At current levels of 17,461, the Sensex is trading at 16.6x and
14.0x our FY2011E and FY2012E EPS v/s the 5-year average 20
of 16.2x 1-year forward earnings. With India set for an 8%+ 15
GDP growth, India Inc. is entering a strong earnings growth

10
momentum over FY2011-12E, which would drive the upsides
in the markets. We expect the Sensex to touch 21,000 levels 5
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10
(an upside of 20%) by March 2011, based on a target P/E of 1-yr forward rolling PE (x) 5-yr Avg. P/E (x)
17x FY2012E EPS. Source: Angel Research

Angel Research Model Portfolio

Sectoral weightage Upgrade metals to overweight
Sector BSE -100
BSE-100 Angel Model Stance We have upgraded metals to overweight, increasing the
Weightage (%) Portfolio weightage to 9.0% vis-à-vis the 7.8% weightage in the
Weightage (%) BSE-100, mainly on the back of attractive valuations. In the
Auto & Ancilliaries 6.1 7.0 Overweight pack, we find attractive investment opportunities in mid-cap
Cement 1.4 - Underweight steel companies, such as Electrosteel Casting and Godawari
Finance 22.8 28.0 Overweight Power & Ispat that are expected to benefit significantly over the
FMCG 7.1 3.0 Underweight next two years due to their captive mining assets. We also like
Hotels 0.3 3.0 Overweight Bhushan Steel as it is expected to benefit from substantial volume
Infra & Cap goods 11.5 16.0 Overweight growth and increase in EBITDA/tonne due to technological
IT 10.8 11.0 Overweight advantage. Overall, we expect these companies to significantly
Media 0.4 2.0 Overweight improve their profitability, aiding re-rating of their stocks. Among
Metals 7.8 9.0 Overweight the large caps, we are positive on Hindalco as it is set to benefit
Oil & Gas 16.6 10.0 Underweight from enhanced capacity by 2-3x over the next 4 years, and
Pharma 4.0 4.0 Equalweight ~ 60% of its earnings would be derived from Novelis, which is
Power 5.5 - Underweight neutral to aluminum price movement.
Real Estate 1.1 3.0 Overweight
Rich valuations necessitate stock-specific approach in
Telecom 2.9 4.0 Overweight
capital goods space
Source: Angel Research
Although we are optimistic about the demand for capital goods
Banking, infrastructure, metals key theme calls going forward, we believe that there are few investment options.
At current valuations and given the demand-supply and We have a Neutral view on BHEL due to concerns regarding
competitive dynamics coupled with company-specific market share loss and expensive valuations in the context of
developments, we have a conviction overweight stance on the medium term business opportunity for the company.
banking, infrastructure and metals. Accordingly, we prefer a stock-specific approach, with Crompton
Maintain overweight on banking… Greaves and Jyoti Structures being among our preferred picks.
Interesting midcap ideas and bottom-up calls in
In line with the improving GDP and IIP performance, credit
several sectors
demand is on an upward trajectory and is likely to further
accelerate to 20%+ levels in FY2011E. Accordingly, we expect Pharma: We have given a higher weightage to non-Sensex
the banking sector to outperform, with increasing core earnings pharma companies in our model portfolio due to
growth from credit and fee income, while NPA losses decline. company-specific positive business prospects:
Moreover, relatively in a rising interest rate environment, large Lupin - One of the best plays in the generic space
banks with strong CASA are better placed. We prefer SBI, ICICI Dishman - Stands to benefit from the uptick in the CRAMS
Bank, Axis Bank and HDFC Bank due to expected market share segment.
gains in credit on the back of strong capital adequacy and in Auto: In our view, the auto sector is one of the strongest
CASA deposits and fee income on the back of stronger customer long-term growth stories in India. However, from a near-term
proposition and faster branch expansion. perspective, the large-caps have already run up significantly
…followed by infrastructure due to the huge surge in top-line and bottom-line in FY2010.
In the mid-cap space, there are some interesting stories to play
We have given a strong weightage of 16% to the infra sector in
particularly in the auto ancillary sector such as FAG Bearings
our model portfolio (above the BSE-100 weightage of 11.5%),
and JK Tyre.
given our positive outlook on the sector combined with attractive
valuations. With execution expected to accelerate to 17%+ yoy, IT: In IT, we have introduced two smaller tier 1 players in our
aided by increasing availability of risk capital, evident political model portfolio, viz. Mphasis and Tech Mahindra. Tier-I stocks
will and strong pipeline reflected in increasing order-book- are trading at 20x-22x 1-year forward earnings that factors in
to-sales, the sector is well set to outperform the markets. the expected 15% CAGR over FY2010E-12E leaving little room
for upside in our view. Stocks like Tech Mahindra and Mphasis
offer strong upsides from current levels and remain our top
picks in the IT space.

Top Buys Recommended

Sector Comments
Weightage (%)
Automobile Maruti Suzuki 3% Given India's low car penetration (12 per 1,000 v/s 21 per 1,000 in
China) and with the PPP-based per capita estimated to approach the
empirically observed inflection point for car demand of US $5,000
over the next 4-5 years, we expect 13% CAGR in the company’s
domestic volumes over FY2010-12E. Moreover, with Suzuki Japan
making Maruti a manufacturing hub for small cars to cater to
increasing global demand caused by rising fuel prices and stricter
emission standards, we estimate a 15% CAGR in export volumes
over FY2010-12E. Maruti has a sizeable competitive advantage over
foreign entrants due to its widespread distribution network (2,767
service and 681 sales outlets). We believe attractive valuations provide
an entry point for investors looking to play the India consumer story.
FAG Bearings 2% Due to the greater focus on mechanisation of the manufacturing
process, the demand for bearings is expected to outperform industrial
growth in India. Hence, the industrial segment (accounts for 50% of
the Indian bearings market) offers high growth opportunity for the
industry. This is also supported by the fact that the bearings industry
has a direct correlation with the auto sector’s growth, which is expected
to post around 10% growth per annum over the next 2-3 years. Further,
an increase in utilisation levels would result in higher OPM going
forward and it could act as a trigger for the stock.
JK Tyres 2% Given the shortage of radial tyres in the trucks & buses segment, JK
Tyres is set to fully utilise its enhanced capacity, and that too at higher
realisations (70% of India's total truck/bus radial tyre production),
driving strong earnings growth and improving RoEs. Further, the Tornel
acquisition has already turned profitable in FY2010, aided by the
restructuring exercise implemented by the company. The stock is
available at attractive valuations.
Banking Axis Bank 8% We believe that rising interest rates consistent with the imminent
revival in GDP growth are not a negative for the banking sector as
ICICI Bank 9% it would be outweighed by acceleration in core earnings growth, as
credit growth and fee income picks up, while NPA losses trend
HDFC Bank 4%
downwards. That said, in a rising interest rate environment, large
SBI 7% banks such as HDFC Bank and SBI, with a strong CASA ratio and
lower duration investment book, are relatively better placed followed
by Axis Bank and ICICI Bank that have strong CASA deposits. We
prefer the large private banks as well as SBI in the PSU space in
light of stronger core competitiveness and likelihood of market
share gains (including CASA and fee income market share) on the
back of strong capital adequacy and branch expansion.
Continued...


Sector Comments
Weightage (%)
FMCG ITC 3% ITC's cigarette volumes have consistently exhibited impressive

resilience towards price hikes instilling confidence that cigarette
business is well poised to post double-digit revenue and EBIT growth
in FY2011E. Moreover, outlook for other SBUs is highly
promising – non-cigarette FMCG business is exhibiting strong
revenue traction and reduction in losses, hotels is set to recover
driven by stronger economy and paperboards and agri-business
are expected to post steady growth in revenue.
Hotels TAJGVK 3% Factors like growth in foreign tourist arrivals and increased tourist
activity on the domestic front following the improving economic
outlook have enabled hoteliers in overcoming the tough phase
witnessed in the recent past. Signs of improving demand are visible
with occupancy rates staying above ~70% since 3QFY2010 and
average room rates rising in 1QFY2011. Considering TAJGVK's
dominant position in business destinations like Hyderabad and
Chennai, its diversification strategy and its on-track expansion plans,
we believe that it is poised to benefit from the uptrend in the industry.
Infrastructure L&T 6% Investment in the infrastructure sector is expected to pick up

and momentum going ahead particularly with improving procedural
Cap Goods issues and the government’s relentless stress on infrastructure
development. Moreover L&T because of its diversified presence
across major segments (power, roads, railways and irrigation) of
the infrastructure sector would be a key beneficiary of the same.
Reliance 3% We believe that Reliance Infra would be a force to reckon with in

the infra space owing to its strong parentage and huge net worth.
Infrastructure
Also, given its growth prospects and inexpensive valuations, we
expect the stock to be an outperformer. It should be noted that we
have a long-term view on the company as we believe that the
earnings momentum would pick post FY2012E as invesments start
yielding returns.
Madhucon Projects 2% We expect Madhucon Projects to outperform its mid-cap peers over
the next one year owing to attractive valuations and diversified
portfolio of assets. We also believe that as its assets start reaching
important milestones, it would enhance visibility and markets would
start valuing these assets, which are currently not factored in.
IVRCL 2% IVRCL Infra boasts of a robust order book (order book/sales ratio
at 4.3x FY2010 revenues) with reduced dependence on the state of
Andhra Pradesh (mere 16% of total order book) through
diversification into other geographies. Strong revenue visibility,
receding concerns, attractive valuations and positive outlook on
the sector provides an opportune entry point for long-term investors.
Continued...


Sector Comments
Weightage (%)
Infrastructure Joyti Structures 3% The government has envisaged investments of Rs1.4lakh crore in
and the transmission sector in the eleventh plan (an increase of over
Cap Goods two times from the investments made in the tenth plan) and
Rs2.4lakh crore for the twelfth plan. We believe that Jyoti Structures
being among the top-three players in the space will continue to be
a key beneficiary of the same. Besides, the company has a healthy
order book of Rs4,030cr (2.0x FY2010E revenues), which provides
good revenue visibility and cushions it from short-term order
fluctuations.
Metal Hindalco 3% We remain positive on Hindalco as it is well placed to benefit from

aluminium expansion plans that will increase its capacity by nearly
two-three folds over the next 2-4 years coupled with low cost of
production. Moreover, Novelis is expected to benefit from the
expected price increase following expiry of the metal price ceiling
contracts and cost saving measures. Nearly 60% of Hindalco’s
earnings are derived from Novelis, which is neutral to aluminium
price movement.
Electrosteel Castings 2% Electrosteel Castings (ECL) is setting up a 2.2mn tonne steel plant
by FY2012E through its subsidiary Electrosteel Integrated (EIL). ECL's
backward integration initiatives (allocation of coking coal mines)
are expected to expand OPM by 330bp over FY2010-12E. ECL is
also awaiting environmental clearance for its iron ore mine to further
lower costs (not been factored in our estimates). Further, listing of
EIL (ECL has 40% stake) could unlock value for ECL.
Godawari Power 2% We believe the stock is at inflection point on account of: a) expected
increase in mining capacity at Ari Dongri mine, b) grant of Boria
Tibu iron ore mine, and c) commercial production of pellet to start
at Ardent Steel by August 2010E, which is likely to contribute EBITDA
of nearly Rs18cr and Rs52cr in FY2011E and FY2012E, respectively.
Moreover, the pellet plant at Raipur is expected to result in savings
of ~Rs125 in FY2011E.
Bhushan Steel 2% Bhushan Steel (BSL), India's leading value-added steel producer,
has extended its presence in the steel value chain with the
commissioning of its 1.9mn tonne HR steel capacity. We expect BSL
to register 26.2% CAGR in volumes over FY2010-15E, on completion
of phase-III expansion by October 2012. This would be sweetened
by EBITDA/tonne increasing to US $331 in FY2011E. Being one of
the first entrants in auto grade steel in India, BSL with its strategic
relationships with OEMs and growing investments by foreign OEMs
would witness lower demand risks and uncertainties.
Continued...


Sector Comments
Weightage (%)
Media Jagran Prakashan 2% Jagran will continue to derive steady advertisement revenues owing
to its strong presence in Hindi market, rising colour ad-inventory
and ad-rate hikes. Jagran's recent acquisition of Mid-Day is likely
to be earnings accretive. Moreover, with Blackstone's recent
investment of Rs225cr and a wider portfolio, we believe that Jagran
is well poised to benefit from steady growth in print media.
Oil & Gas Reliance Industries 10% RIL will benefit from expected improvement in fundamentals of extant
businesses coupled with increasing gas production. Recent acquisition
of the shale gas assets in the US opens up new growth vistas and
provides technological know-how to replicate the same elsewhere. The
entry in the broadband wireless segment is also likely to augur well.
Thus, these business initiatives along with the proposed foray in the
power segment are likely to address the issues associated with
redeployment of the cash-flows going ahead. Moreover, the company’s
huge unexplored E&P acreage could result in significant valuation
upsides from current levels.
Pharma Dishman Pharma 2% Dishman has incurred organic capex of Rs300cr in the last three years
towards expansion of existing facilities at its Bavla unit and building the
China and HPAPI facilities. Post all these facilities coming onstream
FY2011E onwards, Dishman would strengthen its ties with the global
innovators leading to stable revenue flow over the long run. Dishman
has also indicated receiving contract manufacturing enquires from the
global innovators of Euro200-250mn. Further, revenues from the Abbott-
Solvay contract, which constituted 13% of FY2010 sales, have also
started normalising with uptick in Eprosartan volumes.
Lupin 2% Lupin is one of the best plays in the generic space given its strong
execution capabilities, improving financial performance and diversifying
business model. The high-margin branded generic business has been
the key differentiator for Lupin in the Indian pharma space. The company
has also cemented its position in this segment by acquiring rights for
two products, viz. Allernaze and Antara. Further, the company has been
among the few Indian players to have built a formidable presence in
the second largest pharmaceutical market in the world, Japan, with
Kyowa's acquisition.
Continued...


Sector Comments
Weightage (%)
Real Estate Anant Raj 3% Anant Raj Industries (ARIL) is a prominent and well-diversified real
estate player in the NCR region. Almost all of ARIL's land bank (872
acres) is exclusively located in the NCR within 50km of Delhi, with
approximately 525 acres in Delhi. This land bank has been acquired
at an historical average cost of Rs300/sq ft. ARIL recently launched
couple of mid-income residential projects in NCR, which will drive
near-term operational visibility. It also intends to launch its premium
residential project at Hauz Khas, Delhi, as it gets its environmental
clearance. Management has guided for Rs500cr of revenue in
FY2011E from the residential segment. Further, ARIL has 70%
pre-lease commitments at its Manesar IT Park (1.2mn sq. ft.) coupled
with five hotels getting operational by FY2011E, which will improve
rental visibility.
Software Infosys 3% We believe that tough times for the Indian IT sector are over with
major clients/outsourcers (BFSI players in developed economies)
TCS 3% clocking better earnings growth, in turn boosting the overall deal
scenario through revived IT budgets. Improving operating metrics
Tech Mahindra 3%
such as sustained client addition, high utilisation and strong hiring
Mphasis 2% are signaling the comeback of robust revenue growth in coming
quarters. Amidst the recent slowdown, the companies displayed
strong margin resilience by employing various margin levers such
as higher offshore effort mix, cut in SGA spends, no wage hikes
and hiring deferment. We expect the companies to continue to
display their high level of efficiency/productivity going ahead as
well and maintain high profitability margins.
The high valuation discount of mid-tier companies of 30-50% over
tier-I players would narrow down in the ensuing quarters. Thus, we
expect mid-tier IT stocks such as Mphasis and Tech Mahindra to
outperform their larger peers on the back of robust business growth
and economical valuations.
Telecom Bharti Airtel 4% We believe that the competitive intensity in the telecom sector is
likely to decrease as the current tariffs are not sustainable for any
new player. In case of Bharti, we believe that the risks associated
with the Zain acquisition are already priced in the stock valuation.
Hence, any positive news flow in terms of improved financial results
of the combined entity going ahead would act as a strong trigger
for the stock. Thus, owing to its market leadership position, strong
opportunities in the African market and improved business dynamics
for the tower segment, Bharti continues to be our top pick in the
Telecom Sector.

1QFY2011 Sectoral Outlook

Sector Trend Outlook
Automobile z The macro-economic scenario appeared optimistic in z On the back of a positive economic scenario
FY2010 with most of the companies reporting sequential and improving consumer sentiment, we retain
spurt in volumes during the period. In 1QFY2011, most our positive outlook on the auto sector. We
auto companies continued healthy traction in volume expect the ongoing economic recovery to help
growth albeit on a low base. Fears of price increase due the auto sector (passenger vehicles (PVs),
to the increase in raw material costs and change in the commercial vehicles (CVs) and two-wheelers)
emission norms resulted in advanced buying and perked register good growth in the domestic market,
up volumes in 1QFY2011. Thus, most companies are and a decent growth in the export markets
expected to post good growth in 1QFY2011. However, over FY2010-12E.
uptick in the commodity prices over the last six months
could exert pressure on margins in 1QFY2011 z We estimate overall auto volumes to register
sequentially. a CAGR of around 11% over FY2010-12E

aided by the improved economic environment
z The substantial volume growth is expected to boost sales for the sector. Over the longer term,
growth of our auto universe for 1QFY2011 to a high of comparatively low penetration levels, a healthy
47% yoy. However, margins are expected to contract economic environment and favourable
sequentially by 44bp reflecting the higher input costs. All demographics supported by higher per capita
these factors combined would result in about 23.5% yoy income levels are likely to help the auto
growth in earnings. companies in sustaining their top-line growth.
z Tata Motors, Ashok Leyland and Bajaj Auto are expected z Among the heavyweights, we prefer Maruti
to report strong earnings growth for 1QFY2011. Relative Suzuki, TTata
ata Motors and M&M.
change in product mix and low base would support the
higher earnings growth of these companies.
Auto Ancillaries z Auto ancillaries are expected to report healthy top-line z The auto component industry is expected
growth in 1QFY2011 on the back of better domestic to be on the path of recovery. Outlook for the
volume growth. industry is good on the domestic front, but
slightly cautious on the export front.
z Margin pressure is expected to reduce marginally owing
to improving operating leverage. However, higher raw z On the domestic front, the industry is back
material cost is expected to exert pressure on few ancillary on track aided by a better-than-expected
companies (tyres) and would result in higher margin revival in domestic auto demand.
contraction.
z Companies with high exposure to exports
z Broadly, the sector is expected to deliver positive are expected to show marginal recovery owing
earnings growth. Losses posted by few ancillaries (with to volume recovery in some of the developed
exposure in overseas market) during FY2010 are expected markets. However, rupee appreciation would
to register profit aided by the cost restructuring exercise impact export realisation to a certain extent.
implemented by them in their overseas operations during
z Among the ancillary stocks, we maintain a
1QFY2011.
Buy on Automotive Axles and FFag ag Bearings
Bearings,
which are available at attractive valuations and
Accumulate on Motherson Sumi and Exide
Industries. In tyres, we recommend a Buy on
Apollo TTyres yre, owing to the
yres and JK TTyre,
apparent structural shift the industry is going
through.
Continued...

Banking z Strong improvement in credit growth and falling deposits z We expect growth of 19% each in advances
growth was witnessed in 1QFY2011. This led to a short- (with an upward bias) and deposits during
term liquidity squeeze, primarily driven by demand for FY2011E. We do not expect base rate to have
funds from the telecom sector and advance tax payments any impact on NIMs. Asset quality, however,
by corporates. could be a concern in case of PSUs with high
z G-sec yields remained volatile during 1QFY2011,
proportion of restructured assets for couple
dropping by 29bp to 7.55%. Hence, we expect most of of quarters. Slippages from restructured assets
the banks under our coverage to have moderate MTM is a key parameter to watch closely in
gains in 1QFY2011E. 1QFY2011 results.
z We expect NIMs to decline on a sequential basis by z We continue to prefer banks with a high
10-30bp in 1QFY2011E because of interest payment on CASA ratio and lower-duration investment
savings deposits on a daily basis. Banks that have a higher book, given the rising interest rate scenario.
proportion of savings deposits, such as SBI, PNB, HDFC z Among the large banks, our top picks
Bank, Axis Bank and Dena Bank, are expected to witness include HDFC Bank, ICICI Bank, Axis Bank
a deeper fall in NIMs sequentially. and SBI due to expectations of credit and
CASA market share gains. We like Dena Bank
because of its structurally strong CASA ratio
relative to its peers. We have an Accumulate
rating on FFederal
ederal Bank and South Indian
Bank as we believe they are the most efficient
and attractively valued old private banks. We
upgrade IOB to Accumulate,
Accumulate as we expect
asset quality to improve due to higher
recoveries.
Capital Goods z Visibility seems to be improving gradually, with foreign z Macro indicators are increasingly exhibiting
investments in India continuing momentum, with relatively strength.
smooth financial closure of several projects, and with quite
z However, we believe that several Capital
a few companies across sectors having successfully tapped
Goods stocks are already trading at premium
the financial markets
valuations, leaving little scope for
z Cumulative IIP growth for the period of April-March outperformance.
2009-10 stands at 10.4% (2.8%), while the cumulative
growth for Capital Goods components in the mentioned z With the backdrop of the rich valuations,
period registered a growth of 19.2% (7.3%). we prefer a stock- specific approach.
Crompton Greaves and Jyoti Structures figure
z The top-line of the companies under our coverage
among our preferred picks.
universe is expected to post around 19.8% yoy growth.
On the operating front, we expect our universe to register
an 84bp expansion in margins. Consequently, pet profit
would also increase at a higher pace of around 26.3%
yoy for our universe.
Continued...

Cement z Cement prices witnessed correction across the country z In ensuing quarters, we expect cement
during the quarter on account of excess supply and tepid demand to be hit by monsoons and register
demand. While supply increased due to new capacity low volumes. We expect total capacity addition
additions, growth in demand was poor due to slowdown of 10.5mn tonnes during 2QFY2011E and
in offtake from the irrigation and housing segments. The 3QFY2011E by players such as ACC, Ambuja
and JP Associates. Capacity utilisation is
southern region, which witnessed the highest capacity
expected to remain the lowest in the southern
addition over the last one year, witnessed the highest price
region as bulk of the capacity addition in
correction with the new plants stabilising. We expect our FY2010 was carried out in this region. Prices
universe of cement stocks to report marginal top-line are also expected to remain weak. We expect
growth of 3.7% yoy during the quarter, purely on the back the south-based players to turn in a poor
of volume growth. However, operating profit is set to performance in terms of profitability, while
decline by 18.2% yoy due to margin pressures. northern players would perform relatively
better due to better demand-supply dynamics.
z Global coal prices were up by 50% yoy during the
quarter and stood at US $100/tonne. The increase in the z We are positive on India Cements, Madras
prices of coal and other raw materials is expected to result Cements and JK Lakshmi Cement due to their
in margin contraction during the quarter. attractive valuations (based on EV/tonne and
EV/EBITDA multiples). We maintain a Buy on
India Cements, Madras Cements, Grasim,
Ultratech and JK LLakshmi.
akshmi. However, we are
Neutral on ACC and Ambuja.
FMCG z For 1QFY2011, we expect our FMCG universe's revenue z We remain bullish on the FMCG sector due
growth to moderate to 14% (largely volume led) and to low penetration in most categories.
earnings growth to slip to 16% as we expect margins to However, top-line is expected to moderate due
remain flat or dip except for Marico, GCPL and Dabur. to lower value growth (price hikes to take
backseat, focus back on volume growth).
z GCPL, Marico and Dabur are expected to report
Higher input costs and intensifying competition
strongest earnings growth during the quarter. HUL is
are likely to check margin expansion.
expected to report a muted 5.7% top-line growth, largely
volume driven, as price cuts in the S&D segment will z Most FMCG stocks are currently trading at
continue to drag overall growth and margins. Hence, peak valuations. The long-term consumption
earnings is also expected to grow a muted 3.6%, largely story for the FMCG industry remains intact,
aided by higher other income (low base). ITC is expected but further re-rating from current levels seems
to witness a 1% volume decline during the quarter in unlikely given near-term concerns over
cigarettes impacted due to recent price hikes. We expect 1) strong competition, 2) possible rise in
ITC to register a robust 18.5% yoy growth in top line and inflation post fuel price hike and 3) spike in
earnings, aided by recent price hikes in cigarettes, strong input costs (low base in FY2010). Hence, we
performance of non-cigarette FMCG and rebound in its change our stance from equal-weight to
hotels business. underweight on the FMCG sector
sector.. GCPL and
Asian PPaints
aints are our top picks in the sector
sector..
Continued...

Sector 4th Quarter

TrendTrend Outlook
Outlook
Infrastructure z We expect the infrastructure sector to post good numbers z In light of the pivotal role that the
for 1QFY2011 on the back of robust order booking over infrastructure sector plays in enabling future
the last couple of quarters and receding impediments like growth, we believe that the government will
delays in financial closures, client side issues apart from have to continue focusing on infrastructure
low base effect. Therefore, we expect the sector to be back development in the country as was evident in
the recent Union Budget. Over the next few
on the growth trajectory, aided by strong pick up in
quarters, we expect healthy order backlogs
execution and margin expansion owing to benign
of the companies in our universe to translate
commodity prices and low interest rate regime.
into earnings growth.
We are bullish on the infra sector, owing to

the recent underperformance and expectation
of strong numbers going ahead. Our top pick
is IVRCL Infra due to its good long -term
long-term
prospects and relatively cheap valuations.
Logistics z For 1QFY2011, we expect our universe of stocks to z The container traffic data released for
report moderate revenue growth on a yoy basis, driven FY2011 YTD (April-May 2010) by the Indian
by a low base and improving economy. We expect the Port Association (IPA) registered robust growth
domestic segment to continue to do well in 1QFY2011 of 20.6% yoy on account of a low base and
on the back of strong consumption. We expect our higher imports. Going ahead, we expect trade
coverage universe to register moderate 11.6% yoy revenue to remain stable on the back of improving
growth, while reporting a 2.8% yoy decline in PAT for economy. We expect the country's overall
1QFY2011E. container volumes to register 12-15% yoy
growth at 12 Indian major ports in FY2011E.
z We expect OPMs of Container Corporation of India
(Concor) and Allcargo Global Logistics (AGL) to decline z We prefer companies that provide a decent
on account of higher empties and inability to pass on the blend of growth opportunities, quoting
entire hike in rail freight rates to customers, respectively. attractive valuations. We continue to remain
However, we expect Gateway Distriparks (GDL) to report Neutral on the logistics sector. We rate GDL
16% yoy improvement in profits on account of strong as our top pick in the sector on account of its
volumes across segments and sustainable OPM at the presence in strategic locations, ongoing
current level. expansion plans and breakeven in the rail
business at PAT level.
Metals z Despite the price cuts undertaken by the steel players z While the raw material cost push is certain,
in June 2010 (first time this year) due to the surge in we believe it is unlikely that steel producers
cheaper steel imports from China, we believe sales volume would undertake any further price cuts from
for the quarter would be lower sequentially as the steel here on. However, steel prices may remain
companies responded late to the surge in imports. subdued in the near term due to the slowdown
However, higher realisation is likely to boost the top-line in demand in the construction industry ahead
of the steel companies under our coverage. We expect of the monsoon. We maintain a Buy on TTata ata
top-line to grow by nearly 5-46% and margins to expand Steel and JSW Steel.
by around 380-1,460bp yoy.
z We believe China's decision to allow its
z On the non-ferrous front, LME prices declined on a currency to appreciate may provide some
sequential basis due to the debt crisis in the euro zone respite for the metal prices. Moreover,
and monetary tightening measures in China. However, downside for some metals like aluminium and
on a yoy basis, prices were up by ~28–61%, with copper zinc is limited as prices are near the marginal
leading the pack. We expect non-ferrous companies to cost of production. We maintain a Buy on
register positive growth in top line on a yoy basis. Further, Sterlite, Hindalco and Hindustan Zinc.
margins of Nalco, Sterlite and Hindustan Zinc are likely
to expand by nearly 850–1,121bp yoy, whereas margins
of Hindalco are likely to decline by 227bp yoy. Continued...

Oil & Gas z RIL is likely to report GRMs of US $8.0/bbl for the z We expect RIL to deliver strong performance
quarter. In petrochem, while the cracker margins have in its extant businesses. Recent acquisition of
weakened, PP and polyester margins have improved on the shale gas assets opens up new growth
a qoq basis. Production of gas from the KG basin is likely vistas and provides technological know-how
to average at around 60mmscmd during the quarter. to replicate the same elsewhere. Entry in the
z We expect ONGC to register net realisation of US
broadband wireless segment also augurs well.
$47.1/bbl (decline of US $11.1/bbl yoy). The decline could We believe RIL has addressed the issues
be attributed to the increase in the product prices of petrol associated with redeployment of cash-flows,
and diesel in the international markets. We have assumed which is positive. The huge unexplored E&P
ONGC to bear the subsidy sharing only on auto fuels as acreage with RIL could result in significant
no announcement of the subsidy-sharing mechanism has valuation upsides from current levels.
been put in place for the year. z In the upstream space, performance of the
z We expect IGL to maintain its strong growth in volumes,

PSU companies, viz. ONGC and OIL, is likely
driven by higher conversion of CNG vehicles during the to be dependent on the subsidy-sharing
trailing one year. On account of the recent CNG price formula. We expect ONGC to report net
hike, we expect OPMs to expand on a qoq basis. realisation of US $60/bbl. Till clarity emerges
over the subsidy-sharing mechanism, we
z GSPL is likely to report 36.4% yoy growth in
maintain our Neutral view on ONGC. In the
bottom line, largely on account of the increase in volumes
private upstream space, Cairn's performance
during the trailing one year.
is likely to be driven by the crude oil movement.
z We expect auto fuel and cooking fuel under-recoveries Given our outlook of subdued crude oil prices,
to stand at Rs7,897cr and Rs10,880cr respectively, during we expect mute stock performances.
the quarter. The increase in under-recoveries is largely
z We remain bullish on the gas companies,
due to the rise in product cracks of subsidised products
viz. GSPL
GSPL,, GAIL
GAIL,, IGL and PPetronet
etronet LNG
LNG.. These
during the quarter. Thus, the fate of OMCs for the quarter
companies are the key beneficiaries of the
is likely to be dependent on policy action regarding the
increasing gas demand in the country.
subsidy-sharing mechanism.
Pharmaceutical z The Indian pharmaceutical sector is expected to post z During the past one year, the BSE HC index
strong growth on the sales front. We expect our coverage has been one of the best performing indices,
universe to register 7.5% yoy growth in top line, despite rallying 61.9% and outperforming the market
the 6% yoy rupee (INR) appreciation, on an average, by 39.8%. On back of rich valuations, we
against the US dollar (USD) for 1QFY2011E. Sun Pharma continue to recommend a bottom-up
and Lupin are expected to post strong top-line growth, approach. In the generic segment, we now
mainly driven by product launches in the US and strong prefer LLupin,
upin, Cadila Healthcare, Cipla and
domestic formulation traction. Cadila Healthcare will post Indoco Remedies.
healthy growth owing to its robust performance in the US
z We continue to favour CRAMS, though the
and the domestic market. PHL is expected to post strong
segment is witnessing near-term hiccups
numbers on the back of its robust domestic business.
because of inventory rationalisation and
z We expect most companies in our coverage to witness multiple mega global pharma mergers in
an expansion in OPM, resulting in strong growth in net CY2009. However, most of the CRAMS
profit. We expect 1QFY2011 to be one of the good companies are now witnessing an uptick in
quarters for pharma companies on both the top-line and order enquiries from global innovators,
bottom-line fronts, given the product launches in the US indicating an improvement in the global
and OPM expansions. scenario. In this segment, we recommend
Dishman Pharma.
Continued...

Sector 4th Quarter

TrendTrend Outlook
Outlook
Power z The power generation companies under our coverage z Going ahead, we expect capacity addition,
(NTPC, GIPCL and CESC) are expected to report decent which has been beset by a number of
9.4% yoy top-line growth during 1QFY2011, primarily execution issues currently, to gather some
on account of increased sales volume because of capacity steam over the last two years of the eleventh
addition. Growth in top line is also expected to be aided plan period, as has been the trend historically.
However, the power-deficit scenario is likely
by higher tariffs and improved plant load factor (PLF) in
to persist, as supply is not likely to keep up
gas-based plants. Operating profit of the universe is
with demand. Our overall outlook continues
expected to grow by 10.0%. However, net profit is expected to remain positive for the sector, driven by its
to grow at a lower 5.2% yoy during 1QFY2011 on account huge growth potential.
of higher depreciation and interest costs.
z We expect higher growth in thermal
z Global prices of coal rose substantially during the generation on the back of increased power
quarter. Average prices of the New Castle Mckloksey generation from gas-based projects, due to
6,700kc coal stood at around US $100/tonne in higher gas availability from the KG-D6 basin,
1QFY2011 as against US $65/tonne recorded in better performance of thermal plants and
1QFY2010. higher coal imports.
z We recommend an Accumulate rating on
NTPC and maintain a Buy rating on GIPCL
GIPCL,,
PTC and CESC.
PTC
Retail z We expect retail stocks under our coverage to report z With economic growth now firmly on track,
strong top-line growth of 42.1% yoy in 1QFY2011E on coupled with the revived consumer sentiment
the back of a rebound in consumer confidence. The key and expectations of good monsoons in the
change is expected to come from a revival in lifestyle coming months, we foresee good times ahead
retailing segment as consumers are opening their wallets for the retail industry. Sensing the changing
for discretionary spends, thereby providing indications of dynamics, several retailers have started
a stout recovery. We expect Pantaloon Retail (PRIL) to lead chalking out expansion plans, which further
our universe with 50.7% yoy top-line growth, followed by bolsters our belief. Moreover, the improving
31.8% growth by Shoppers Stop (SSL) and 29.5% growth dynamics are even enticing foreign players to
by Titan. set up their operations in India. Any positive
news related to FDI in the retail industry will
z We estimate the OPM of our retail universe to increase
act as a big booster for the industry.
by 20bp to 8.9% in 1QFY2011E from 8.7% in 1QFY2010,
driven by cost-rationalisation measures taken earlier and z We expect the growth trend to continue to
increased footfalls during the quarter. strengthen going ahead, thereby keeping the
long-term growth prospects for the organised
z We estimate the net profit of our retail universe to witness
retail segment in India intact.
growth of 92.1% yoy in 1QFY2011E and margin to
improve by 80bp to 3% in 1QFY2011E from 2.2% in z We favour companies having presence
1QFY2010. across price points and categories to be in a
better position to drive growth. Among the
retail stocks under our coverage, we expect
PRIL to outperform the pack.
Continued...

Real Estate z For 1QFY2011, we expect volumes to drop on a qoq z The BSE realty index has undergone
basis because of high property prices, which adversely correction in the past six months, whereas
affected affordability. The drop in residential volumes will asset prices have moved up by 5-15% since
be offset by increased property prices. We believe the October 2009. We believe stock performances
residential segment will continue to drive revenue of real are related to macro factors interspersed with
estate companies. Volumes for commercial and retail company-specific issues, such as the DLF-DAL
segments will continue to remain subdued. Banks are merger and group-related issues at HDIL. We
currently offering competitive mortgage rates, but we are positive on the long-term outlook of the
expect interest rates to inch up on RBI's concerns over realty sector, with growing disposable income,
real estate inflation. shortage of 25mn houses in India and
reasonable affordability. In the current
z Among our universe of stocks, we expect DLF's revenue
scenario, we expect stability in residential
to be driven by the Capital Greens project at Shivaji Marg,
prices, with an exception of certain micro
Delhi. We expect HDIL to report flat to 10% qoq decline
markets where prices have overheated, and
in transfer of development rights (TDR) volumes, with
an uptick in the commercial segment towards
average realisations to be higher by 5-6%. This is on
end-FY2011.
account of the recent decision by the Bombay High Court
to quash the Maharashtra Government's proposal to z Among our universe of stocks, we prefer
increase the floor space index (FSI) to 1.33, which has companies with visibility on cash flow, low
benefited HDIL and, thus, boosted TDR prices. We expect leverage and a strong project pipeline with
Anant Raj's (ARIL) revenue to be driven by the Kapashera attractive valuations. Our top picks are HDIL
project and rental income. and ARIL
ARIL, which are trading at 44% and 39%
discount to our one-year forward NAVs,
respectively. We maintain a Neutral rating on
DLF with concerns of a weak operating cash
flow, increasing gearing levels and the stock
trading at 4% discount to our one-year forward
NAV.
Software z During 1QFY2011, the INR witnessed a sequential z With recovery in the global economy, the IT
appreciation of 0.6% against the USD, 8.6% against the sector has started experiencing renewed
euro and 5.1% against the British pound (GBP). demand as global outsourcers started drawing
their IT spend plans. The current improvement
z In 1QFY2011, we expect the top four IT companies to
in demand has largely been from the US and
report 3-5% qoq revenue growth in USD terms, mainly
emerging markets. We continue to remain
driven by volume growth. However, revenue in reported
positive on the Indian IT sector and maintain
currency would range from 1-3% on account of adverse
TCS
CS,, Wipro and HCL TTech ech as our top picks
cross-currency movement.
amongst tier -1 IT players.
tier-1
z The hiring spree is likely to remain robust 1QFY2011
onwards as guided by IT companies in their 4QFY2010
earnings. This will result in higher employee costs in
1QFY2011E on account of increased headcount and
wage hikes announced, which should impact the
operating margins of companies by 20-190bp.
z Profit after tax is likely to remain down by 2-6% for
Infosys, TCS, Wipro and HCL Tech, considering the lower
growth in operational profits and expected rise in the
effective tax rate during 1QFY2011E.
Continued...

Telecom z We expect Bharti Airtel, Reliance Communication z We continue to maintain our cautious view
(RCOM) and Idea Cellular to report top-line growth of on the telecom sector on account of high capex
3.9% qoq (up 5.1% yoy), 3.9% qoq (down 9.5% yoy) and spend on 3G and BWA auctions, heightened
4.5% qoq (up 17.5% yoy), respectively. This is on account pricing intensity, likely introduction of MNP and
of strong subscriber additions of 8.4mn, 9.2mn and uncertain regulatory policies. However, we
4.4mn expected to be done by Bharti Airtel, RCOM and believe Bharti Airtel, with its low-cost integrated
Idea Cellular, respectively, in the mobile business segment model, potential opportunity from Africa, high
and broad-based growth in other business segments subscriber/revenue market share and
during 1QFY2011. relatively better key performance indicators
(KPIs), will emerge as the winner in the long
z However, we expect EBITDA margins of Bharti Airtel,
term. Thus, we continue to remain positive
RCOM and Idea Cellular to fall by 100bp, 190bp and
on Bharti Airtel.
77bp, respectively, on a qoq basis in 1QFY2011E. This is
on account of continued investments in network expansion
costs, subscriber acquisition costs and a decline in tariffs.
On the back of lower operational profitability and higher
interest outgo due to the recent 3G and Broadband
Wireless Access (BWA) auctions, we expect bottom lines
of Bharti Airtel, RCOM and Idea Cellular to decline by
4.5% qoq (down 22% yoy), 2.2% qoq (down 27.1% yoy)
and 6.8% qoq (down 16.4% yoy), respectively, in
1QFY2011E.
z Growth in subscriber base continues to move at its
strong run rate. We expect the total wireless subscriber
base to increase by 50mn qoq to 634mn by June 30,
2010.

Automobile
Sustained volume growth… For 1QFY2011, commodity prices in general registered an
upturn. Prices of steel and aluminum increased between 2-8%
For 1QFY2011, we expect our auto universe to post steady
and rubber prices increased by around 20%. Although average
revenue growth of 47% yoy, aided by strong 31% yoy growth in
international crude oil prices remained more or less stable
volumes. Revenue growth is expected to be led by CV makers,
throughout the quarter, hike in the domestic petrol and diesel
Tata Motors and Ashok Leyland (strong recovery in volumes on
prices increased the cost of other key materials and
a low base) and Bajaj Auto (BAL, new product launches and
transportation costs for all the companies in our auto universe.
low base effect). We expect Hero Honda (HH) to emerge as a
key laggard in terms of revenue growth, as we model lower Auto index - Strong 7.5% outperformance in 1QFY2011
growth on a high base and intensifying competition.
The auto index registered 8.5% jump during 1QFY2011 versus
After the Union Budget and new emission norms, companies marginal 1% rise in the Sensex, outperforming it by 7.5%.
have been forced to pass on the excise duty hike and cost Sentiment for auto stocks had turned positive in FY2010 on
pressure to end-customers. However, for most companies the easing concerns over lower volume growth following the various
focus continues to be on volume growth. Going ahead, success stimuli announced by the government and the RBI to arrest the
of new launches, rising income levels and easy availability of declining volumes of the industry. The positive upturn in volume
finance both in the two and four-wheeler segments will determine continued in 4QFY2010 and 1QFY2011 on the back of positive
sales fortunes of auto players. consumer sentiment and partially due to advancement of buying
at dealers' desk in anticipation of roll back of excise duty in the
…OPM pressures to increase sequentially
Union Budget. Further, the expected increase in price owing to
Input costs have spiraled in the last six months following the change in emission norms from April 1, 2010, and higher input
spurt in steel, rubber and aluminum prices. The cycle has cost also boosted volume growth during 1H2010. Stocks like
reversed in the recent past, following an upturn in commodity M&M and BAL outperformed the auto index by 6.2% and 15%,
prices. Thus, margin of our auto universe is expected to contract respectively, in 1QFY2011 post a substantial outperformance
sequentially by 44bp to reflect higher input costs. All these factors in FY2010.However, leaders such as Maruti, Tata Motors and
combined would result in 23.5% yoy earnings growth. Players HH underperformed due to intensifying competition and
are expected to register yoy increase in net profit in 1QY2011 uncertainty related to overseas operations.
on better operating leverage and higher volume growth.
Exhibit 1: Auto index v/s the Sensex
However, on a qoq basis, net profit is estimated to decline by 200
around 11% qoq, owing to a sequential drop in overall volume. 180
160
Interest rate, fuel price and commodity price trend 140
120
Industry trend suggests that there is a negative correlation 100
between auto finance rates and auto volume growth. Auto 80
60
finance rates had moved down by 200-250bp in FY2010, which 40
also supported the robust growth during the period. The auto 20
finance industry witnessed good recovery in FY2010 after

Apr-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
BSE Auto BSE_SENSEX
recouping almost the 25% decline in disbursements in FY2009. Source: Company; Angel Research
Swift revival in underlying vehicle sales volume, a benign finance
environment, increase in finance penetration and loan-to-value Commercial vehicles - Low base supports high growth
(LTV) ratio are the key factors responsible for the industry’s CV sales have a direct correlation with the country's GDP and
growth. However, the recent change in the trend of monetary IIP growth, which were caught in a cyclical downturn over
measures is expected to increase the cost of borrowing for FY2008-09. With GDP estimated to register CAGR of 8.0% over
consumers over the next six months. Further, the government FY2010-12E, we expect demand for CVs to remain buoyant.
has hiked petrol and diesel prices substantially by Rs7.12/litre CV volumes witnessed good recovery in FY2010 and have
and Rs5.28/litre YTD in 2010. This has a direct impact on the registered 64.7% yoy growth YTD in FY2011. We believe that
ownership cost and freight operators' profitability; and could further pickup in domestic industrial activities would support
moderately impact auto volume growth in the medium term. positive growth in CV demand going forward. Thus, CV sales

Automobile
are estimated to record around 14% CAGR over the next two Two-wheelers - Momentum continues
years. As most of the catalysts were in favour of the CV industry
This segment also registered robust 30% yoy growth YTD in
in 1QFY2011, Tata Motors recorded a substantial 40.1% yoy
FY2011, aided by 27% growth in the dominant motorcycle
growth in CV volumes, aided by 56.4% yoy and 30.2% yoy
segment. HH reported 10.3% yoy growth in the domestic market
growth in M&HCV and LCV, respectively, in 1QFY2011. in 1QFY2011, indicating strength of its market reach and better
Exhibit 2: TML, ALL - Quarterly volumes performance by the rural market. At the same time, backed by
Segment 1QFY11 1QFY10 % chg FY10
FY10 FY09 % chg
a series of new launches and low base, BAL reported 69.5%
yoy jump in two-wheeler volumes in 1QFY2011. We believe
Tata Motors 181,711 123,113 47.6 642,407 498,147 29.0
M&HCV 45,298 28,965 56.4 167,598 123,011 36.2
that though the substantial ownership base of two-wheelers
LCV 61,639 47,358 30.2 233,652 168,495 38.7 results in reduced headroom for higher growth and increases
Total CV 106,937 76,323 40.1 401,250 291,506 37.6 dependence on replacement demand to sustain volumes, rural
Utility Vehicles 9,795 8,117 20.7 34,124 39,981 (14.6) markets will register better growth on demand arising from the
Cars 64,979 38,673 68.0 207,033 166,660 24.2 relevant rural population. This is expected to help
Total PV 74,774 46,790 59.8 241,157 206,641 16.7
two-wheeler companies maintain their growth momentum and
Exports (Inc Above ) 12,243 5,220 134.5 33,862 33,410 1.4
register around 10% CAGR in volumes over the next few years.
Ashok LLeyland
eyland 21,402 7,693 178.2 64,075 54,444 17.7
MDV Passenger 5,088 2,485 104.7 18,480 19,745 (6.4)
Exhibit 4: BAL, HH, TVS - Quarterly volumes
MDV Goods 16,039 4,977 222.3 44,348 33,349 33.0
FY10 FY09 % chg
LCV 275 231 19.0 1,247 1,350 (7.6)
Export (Inc Above ) 1,940 903 114.8 5,934 6,812 (12.9) Bajaj Auto 928,336 547,664 69.5 2,852,634 2,194,108 30.0
Source: Company; Angel Research Motorcycles 828,391 482,729 71.6 2,506,847 1,907,810 31.4
Scooters 27 1,693 (98.4) 4,851 11,772 (58.8)
Passenger vehicles - Maruti beats competition Total Two-Wheelers 828,418 484,422 71.0 2,511,698 1,919,582 30.8
Three Wheelers 99,918 63,242 58.0 340,936 274,526 24.2

YTD in FY2011, PV sales volume grew by a substantial 31.9%
Exports (Inc Above ) 323,899 178,295 81.7 891,098 772,519 15.3
yoy aided by an increase in exports and recovery in domestic
Hero Honda 1,234,039 1,118,987 10.3 4,600,130 3,722,000 23.6
demand. This was supported by a rebound in consumer
TVS Motors 463,834 349,311 32.8 1,536,704 1,334,601 15.1
sentiment, which was reflected in the improving volumes of the Motorcycles 200,358 152,778 31.1 640,960 635,905 0.8
domestic PV market. An impressive volume growth, low Scooters 95,486 67,250 42.0 309,501 255,364 21.2
penetration and low-cost manufacturing base have been Mopeds 160,191 127,153 26.0 571,563 438,438 30.4
attracting attention of global auto majors towards India, who Three Wheelers 7,799 2,130 266.2 14,680 4,894 200.0
have started launching products for the Indian market. During Exports (Inc Above ) 54,044 31,356 72.4 167,651 193,398 (13.3)
1HCY2010, Volkswagen and Ford launched the Polo and Figo, Source:Company, Angel Research
respectively, in the dominant A2 segment, thereby escalating
competition for market leader Maruti Suzuki. However, the latter Auto Ancillaries: To track the auto sector
recorded a robust 25% yoy increase in volumes during This sector, which depends on OEMs for growth, was stuck in
1QFY2011, supported by strong volume traction in the A2 and the midst of sluggish growth in the domestic market in FY2009
C segments. and a recession-hit global export market. However, revival of
Exhibit 3: Maruti, M&M - Quarterly volumes domestic auto volumes in FY2010 supported recovery of the
players during the period. Growth of the Indian auto component
FY10 FY09 % chg
industry is directly linked to growth of the auto sector and has
Maruti Suzuki 283,324 226,729 25.0 1,018,347 792,167 28.6
more than 65% of its domestic sales to OEMs. Thus, recovery
Total Passenger Cars 239,898 196,032 22.4 866,858 714,655 21.3
MUV Gypsy, Vitara 2,989 1,383 116.1 3,932 7,489 (47.5)
of auto sales volume in FY2010 would help the OEM segment
Domestic 242,887 197,415 23.0 870,790 722,144 20.6 to register a 12.6% CAGR over FY2010-12E. Further, an overall
Exports 40,437 29,314 37.9 147,557 70,023 110.7 increase in vehicle population (recorded 10% CAGR over
M&M 132,093 106,252 24.3 511,128 472,071 8.3 FY2000-10E) is expected to support consistent growth in
Domestic Auto 78,436 61,723 27.1 308,071 286,676 7.5 replacement demand of auto parts and register a 7% CAGR
Exports 3,507 1,145 206.3 12,507 10,815 15.6
over FY2010-12E. The shift in focus of the Indian auto
Domestic Tractor 47,718 41,963 13.7 182,718 165,581 10.3
component industry to exports has been apparent from the rise
Exports 2,432 1,421 71.1 7,832 8,999 (13.0)
Source: Company; Angel Research
in its share in the overall turnover to 20% in FY2009 (11% in

Automobile
FY1999). Europe and USA contribute around 66% of export by the improved economic environment for the sector.
revenue of the sector. Economic slowdown has been adversely
Over the longer term, comparatively low penetration levels, a
impacting vehicle sales in these markets in the last two years.
healthy economic environment and favourable demographics
However, with these markets now showing signs of revival, export
supported by higher per capita income levels are likely to help
volumes are expected to recover in FY2011-12E. At the end of
the auto companies in sustaining their top-line growth. Core
FY2009, auto component players were finding it difficult to make
business performance of auto companies improved in FY2010
future projections, as two of their key markets, the OEM and
and visibility restored, with a substantial 25% yoy and 32%
replacement segments, had been hit by poor demand and
growth seen in volumes in FY2010 and YTD FY2011,
instability in final product prices, which were trending
respectively. Thus, while this quarter's performance is likely to
downwards. However, the industry is now recovering on
be robust on a yoy basis, we also expect the auto companies to
better-than-expected revival in the domestic market and
report a sequential spurt in revenue on better volumes. Most
marginal improvement in exports. Companies in the sub-
stocks have been positive in the last one year due to better
segment of the auto components sector (tyres, bearings and
visibility for the sector. We remain positive on the long-term
batteries), with larger share of revenue from the replacement
prospects of the Indian auto sector. We prefer stocks where
and domestic markets, have been less affected than those that
strong and improving fundamentals could deliver positive
supply exclusively to the overseas market. Broadly, the sector is
earnings surprises.
expected to deliver good yoy earnings performance in
1QFY2011 on improved volumes and better operating leverage. Among the auto heavyweights, we prefer Maruti Suzuki, TTata ata
Motors and M&M. Among the ancillary stocks, we maintain a
Outlook
Buy on Automotive Axles and FFagag Bearings, which are available
Going ahead, we expect economic recovery to help the auto at attractive valuations and Accumulate on Motherson Sumi
sector, which includes PV, CVs and two-wheelers, in registering and Exide Industries. In TTyres,
yres, we recommend Buy on Apollo
good growth in the domestic market and decent growth in the Tyres and JK TTyre
yre owing to the apparent structural shift the
export markets over FY2010-12E. We estimate overall auto industry is going through.
volumes to register a CAGR of 11% over FY2010-12E, aided
Exhibit 5: Quarterly estimates - Automobile Rs cr

Company CMP Net Sales OPM (%) Net PProfit
rofit EPS (Rs) EPS (Rs) P/E (x) Target Reco.
rge
(Rs) 1QFY11E % chg 1QFY11E chg bp 1QFY11E % chg 1QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (Rs)
Ashok Leyland 62 2,661 191.6 11.0 803 155.4 1,903 1.17 1,903 3.2 4.0 4.7 19.5 15.6 13.2 66 Accumulate
Bajaj Auto@ 2,454 3,760 66.4 20.6 110 526.7 79.5 36.4 79.5 128.9 142.4 157.1 19.0 17.2 15.6 - Neutral
Hero Honda 2,020 4,287 12.5 16.3 (76) 596.1 19.2 29.8 19.2 111.8 120.3 131.4 18.1 16.8 15.4 - Neutral
Maruti 1,408 8,274 30.5 12.5 28 641.9 10.0 22.2 10.0 86.4 92.5 105.3 16.3 15.2 13.4 1,685 Buy
M&M @ 602 5,127 21.2 15.0 63 474.7 18.4 8.2 18.4 36.9 37.3 39.7 16.3 16.1 15.2 704 Buy
Tata Motors @* 767 11,092 74.7 9.1 (19) 381.7 (25.7) 6.7 (33.1) 45.1 58.4 72.1 17.0 13.1 10.6 907 Buy
TVS Motors 117 1,399 43.4 7.2 80 45.3 150.3 1.9 150.3 3.6 7.2 9.4 32.2 16.3 12.4 - Neutral
Source: Company, Angel Research; Note: Price as on July 2, 2010, Note: @Adjusted for extraordinary items;* FY2010-12E EPS on consolidated basis
Exhibit 6: Quarterly estimates - Auto Ancillary Rs cr

rofit EPS (Rs) EPS (Rs) P/E (x) Target
rge Reco.
Auto Axle^ 418 175 166.9 13.9 240 12.8 378.9 8.5 378.9 6.4 29.5 35.2 65.3 14.1 11.9 528 Buy
Bharat Forge@ 294 559 59.0 24.4 355 53.6 239.0 2.4 5,486.1 0.7 11.4 16.4 419.3 25.8 17.9 - Neutral
Bosch India# 5,377 1,628 33.3 18.7 119 209.3 9.6 66.1 9.7 168 238 269 32.1 22.6 20.0 - Neutral
Exide Ind. 128 1,059 17.2 21.1 (210) 136.1 11.2 1.6 4.6 6.3 7.0 8.8 20.3 18.3 14.5 144 Accumulate
FAG Bearing# 567 241 23.5 15.1 284 22.1 18.5 13.3 18.5 39.4 51.3 59.4 14.4 11.0 9.6 712 Buy
Motherson * 146 1,960 39.6 13.1 712 116.0 950.2 3.1 896.7 6.5 9.0 11.1 22.6 16.2 13.1 167 Accumulate
Subros 47 259 23.4 10.0 139 8.6 163.6 1.4 163.6 4.6 5.2 6.0 10.2 9.0 7.8 60 Buy
Apollo Tyres@ 64 1,228 4.1 11.4 (505) 64.4 (31.9) 1.3 (31.9) 11.2 8.9 10.9 5.7 7.2 5.9 87 Buy
JK Tyres@ 158 1,095 22.0 5.5 (604) 16.0 (60.8) 3.9 (60.8) 50.7 39.0 47.5 3.1 4.1 3.3 237 Buy
Ceat 133 814 20.8 3.5 (1,190) 10.6 (82.4) 3.1 (82.4) 47.0 26.9 41.3 2.8 4.9 3.2 165 Buy
Source: Company, Angel Research, Price as on July 2, 2010, Note: * Consolidated Results; # December year ending; ^ September year ending; @ FY2010-12E EPS on consolidated
basis and adjusted for FCCB interest after tax
Analyst - Vaishali Jajoo

Vaishali

Banking
1QFY2011 - Delays in tightening due to short-term Due to rising concerns of monetary tightening by the RBI and
liquidity squeeze the liquidity crunch in the system due to borrowings of the
Strong improvement in credit growth and falling deposits growth telecom sector, banking stocks were largely subdued during
was witnessed in 1QFY2011. This led to a short-term liquidity the quarter. BSE Bankex as well as Sensex gained marginally by
squeeze, primarily driven by demand for funds from the telecom 1%, sequentially. Apart from ICICI Bank, which sequentially went
sector and advance tax payments by corporates. down by 10%, and SBI, which went up by 11%, all other large
caps in our coverage universe, from the private as well as the
G-sec yields remained volatile during 1QFY2011, dropping PSU bank space, gave moderate returns between -1 to 6%.
by 29bp to 7.55%. Hence, we expect most of the banks under Within our coverage universe, Indian Bank gave highest returns
our coverage to have moderate MTM gains in 1QFY2011E. of 28% sequentially, followed by Federal Bank and Dena Bank,
which increased by 19% each.
We expect NIMs to decline on a sequential basis by 10-30bp in
1QFY2011E because of interest payment on savings deposits Key Developments
on a daily basis. Banks that have a higher proportion of savings Sharp pick up seen in credit demand
deposits, such as SBI, PNB, HDFC Bank, Axis Bank and Dena As per data available for the week ended June 18, 2010, total
Bank, are expected to witness a deeper fall in NIMs sequentially. credit increased 19.2% yoy compared to 17.6% yoy in May
However, as interest rates on wholesale deposits in the system 2010. Banks have incrementally lent Rs70,000cr YTD in FY2011
start rising in 2QFY2011E, these banks will be better placed to (compared to a meager Rs8,280cr during the same period last
sustain or improve their NIMs. year). Deposit growth stood at 13.4% yoy during the quarter
Most banks have announced their base rates in the range of compared to 22.1% yoy in 1QFY2010. Consequently, credit
7-8%, in line with expectations. We do not expect the base rate deposit ratio, which bottomed out during 2QFY2010 at 68.9%,
regime to have any material impact on actual lending rates or improved to 73.3% in 1QFY2011and the investment to deposit
on any business segment of banks. ratio fell to 31.3% from the high of 33.6% in 2QFY2010.
Some banks (including Union Bank, Indian Bank and
Market Returns
Corporation Bank) increased their retail fixed deposit rates (in
Exhibit 1: 1QFY2011 stock performance most cases by 25bp) in 1QFY2011. However, they continue to
Returns - Returns - Returns Since 4QFY2010 be unattractive for depositors, leading to a gap between savings
qoq yoy Prev
rev.. Update Reco. and investments, which is being plugged by the high current
account deficit at present.
INDBK 28 54 5 Neutral
FEDBK 19 27 14 Buy Exhibit 2: Credit and deposit growth trend
35.0
DENABK 19 67 12 Buy
30.0
IOB 13 20 8 Neutral 25.0
SBI 11 32 8 Buy 20.0

(%)
15.0
CRPBK 9 59 (0) Neutral
10.0
AXSB 6 49 0 Buy 5.0
UNBK 6 29 5 Accum. -
Aug-08
Aug-09
Jan-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
YESBK 6 81 (8) Neutral

PNB 3 54 6 Reduce Deposit Growth (yoy) Advances Growth ( yoy )
Source: RBI, Bloomberg, Angel Research

BOI 2 (1) 10 Accum.
OBC 2 82 (8) Neutral Going forward, as credit demand is expected to sustain at least
Bankex 1 31 above the 19% level, banks are expected to raise their lending
Sensex 1 22 and deposit rates. The RBI has also announced a 25bp increase
HDFCBK (1) 28 (2) Buy
each in repo and reverse repo rates on July 2, 2010, given its
focus on controlling inflation (10.2%), in the backdrop of strong
SIB (7) 83 10 Buy
IIP numbers (17.6% yoy), adding to upward pressure on interest
ICICIBK (10) 19 (12) Buy
rates.
Source: BSE, Angel Research

Banking
Exhibit 3: PPeak
eak retail fixed deposit rates the most efficient formula, to minimise any negative impact on
1QFY11 4QFY10 qoq chg
chg.. 1QFY10 yoy chg
chg.. their business.
AXSB 7.00 7.00 - 7.60 (0.60)
NIMs to decline sequentially
HDFCBK 7.50 7.50 - 7.25 0.25
ICICIBK 7.75 7.75 - 8.25 (0.50) We expect NIMs to decline on a sequential basis by 10-30bp
YESBK 7.65 7.50 0.15 8.25 (0.60) because of savings interest payment on a daily basis. Banks
BOI 7.00 7.00 - 6.75 0.25 that have a higher proportion of savings deposits, such as SBI,
CRPBK 7.25 7.00 0.25 8.00 (0.75)

PNB, HDFC Bank, Axis Bank and Dena Bank, are expected to
witness a deeper fall in NIMs sequentially. However, as interest
INDBK 7.25 7.00 0.25 7.75 (0.50)
rates on wholesale deposits in the system start rising
IOB 7.00 7.25 (0.25) 7.75 (0.75)
2QFY2011E onwards, these banks will be able to sustain or
OBC 7.00 7.00 - 7.75 (0.75)
improve their NIMs due to fixed low costs of CASA deposits.
PNB 7.00 7.00 - 7.50 (0.50)
UNBK 7.50 7.25 0.25 8.00 (0.50) On the positive side, NIMs of banks will likely improve from
Source: Company, Angel Research 2QFY2011E as lending rates are expected to increase earlier
than deposit rates from the beginning of 2QFY2011E.
Most banks announce base rates in the 7-8% range
Tight liquidity and volatile G-sec yields
Exhibit 4: Base rates (%)
In June 2010, system liquidity declined sharply, primarily on
AXSB 7.50
account of outflows related to 3G (Rs70,000cr) and BWA
FEDBK 7.75
auctions (Rs38,000cr) and advance tax payments (Rs25,000cr)
HDFCBK 7.25
by corporates. The short-term pressure on liquidity was visible
ICICIBK 7.50 as banks borrowed Rs40,000cr on an average in June 2010
SIB 8.10 as compared to an average of Rs32,500cr parked with the
YESBK 7.00 RBI's LAF window in May 2010. On June 24, 2010, banks
BOI 8.00 borrowed Rs82,490cr, which was the highest amount borrowed
CRPBK 7.75 since October 10, 2008.
DENABK 8.25
Considering the expected pressure on liquidity, the RBI
INDBK 8.00
announced pre-emptive measures of reduction in SLR by 0.5%
IOB 8.25
to provide additional liquidity of Rs23,000cr. We expect liquidity
OBC 8.00
tightness to reduce in the coming months as government
PNB 8.00
expenditure returns to the system.
SBI 7.50
UNBK 8.00 Exhibit 5: Sharp changes in liquidity
Source: Company, Angel Research
Most banks announced their base rates in the 7-8% range,

in line with expectations. There is some apprehension that the
base rate system may impact the corporate business of banks.
We believe this is unlikely because banks have enough flexibility
to arrive at their base rates and lend to the highest-rated
corporates throught the CP route. Accordingly, we do not expect
the base rate regime to have any material impact on any
business segment of banks or on actual lending rates. Source: RBI, Bloomberg, Angel Research
Also, the RBI has allowed banks to change the methodology for G-sec yields remained volatile during 1QFY2011, eventually
setting their base rate upto December 31, 2010. This provides falling to 7.55% by quarter end, after touching a high of 8.12%
enough leeway to banks to tweak methodologies to determine on April 27, 2010, and a low of 7.37% on May 25, 2010.

Banking
Looking at the yield curve, the spread between 10-year G-sec Exhibit 6: High CASA
CASA,, low investment duration in a rising rate scenario
yield and 3-year G-sec yield declined from 109bp to 79bp 60.0 7.0
50.0 6.0
during 1QFY2011, as liquidity at the short-end dried up. We 5.0
40.0
expect most of the banks under our coverage to have moderate
(Years)
4.0
(%)
30.0
MTM gains in 1QFY2011E as G-sec yields were down by 29bp 20.0
3.0
2.0
from the level at end-4QFY2010. 10.0 1.0
0.0 0.0
Outlook
OBC
FedBk
UBI
ICICIBk
IndBk
IOB
BOI
CorpBk
AxisBk
PNB
DenaBk
SBI
SIB
HDFCBk
YesBk
The expected increase in interest rates will not affect the sector CASA (LHS) Investment/Deposits (LHS) Investment Duration (RHS)
negatively and will be outweighed by acceleration in core Source: Company, Angel Research
earnings growth on the back of improvement in credit growth
and fee income coupled with a sharp reduction in NPA losses. Exhibit 7: Restructuring to net worth (%) - FY2010
120
We continue to prefer banks with a high CASA ratio and lower- 103
100
duration investment book, given the rising interest rate scenario. 78 75
80
We expect growth of 19% each in advances (with an upward 57 57 55
(%)
60 52
48
bias) and deposits during FY2011E. We do not expect base 45
40
rate to have any impact on NIMs. Asset quality, however, could
26 23
20 14 14
be a concern in case of PSUs with high proportion of restructured 0
2 2
assets for couple of quarters. Slippages from restructured assets

UBI
IOB
BOI
PNB
AxisBk
DenaBk
SBI
SIB
OBC
HDFCBk
FedBk
ICICIBk
IndBk
CorpBk
YesBk
is a key parameter to watch closely in 1QFY2011 results.
Among the large banks, our top picks include HDFC Bank,
ICICI Bank, Axis Bank and SBI on account of their stronger
and attractively valued old private banks that were re-rated
core competitiveness and likelihood of credit market share gains
during the quarter on the back of the ICICI Bank-BOR deal. We
because of strong capital adequacy as well as CASA market
expect banks, especially those with large NPA accretion during
share gains due to strong branch expansion. Among mid- cap
mid-cap
FY2010, to start reporting strong jump in recoveries from
PSUs, we like Dena Bank because of its structurally strong CASA
1QFY2011E, reducing incremental NPA provisioning
ratio relative to its peers. Thus, we have increased our target
requirements. In this context, we upgrade IOB to Accumulate
Accumulate,
multiple on the same to 0.95x FY2012E ABV.
as we expect asset quality to improve on account of improvement
We have an Accumulate rating on FFederal
ederal Bank and South in the external operating environment as well as focused internal
Indian Bank as, in our view, they represent the most efficient efforts to ramp-up recoveries and control slippages.
Exhibit 8: Quarterly estimates

Company CMP Operating Income Net PProfit
rofit EPS (Rs) Adj BVPS (Rs)
BVPS P/E (x) P/ABV (x)
P/ABV Target Reco.
(Rs) 1QFY11E % chg 1QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E (Rs)
AXSB 1,237 2,402 19.9 709 26.2 62.1 72.5 97.2 395.1 449.7 523.6 19.9 17.1 12.7 3.1 2.8 2.4 1,466 Buy
FEDBK 330 529 21.0 152 11.3 27.2 36.6 46.8 274.5 302.1 337.5 12.1 9.0 7.0 1.2 1.1 1.0 371 Accum.
HDFCBK 1,913 3,230 11.4 803 32.5 65.3 86.5 117.7 473.4 539.4 629.6 29.3 22.1 16.3 4.0 3.5 3.0 2,204 Accum.
ICICIBK 840 3,798 (6.8) 1,035 17.9 36.2 44.4 60.2 441.5 473.6 507.7 23.2 18.9 14.0 1.9 1.8 1.7 1,145 Buy
SIB 172 196 (6.2) 57 (5.9) 20.7 21.5 26.5 128.9 146.7 169.9 8.3 8.0 6.5 1.3 1.2 1.0 - Neutral
YESBK 269 405 31.0 139 39.1 14.6 17.0 19.2 96.4 113.4 132.6 18.5 15.8 14.0 2.8 2.4 2.0 - Neutral
BOI 357 2,088 7.2 491 (15.9) 32.6 33.0 40.8 227.6 268.6 302.1 11.0 10.8 8.8 1.6 1.3 1.2 378 Accum.
CRPBK 516 880 6.5 264 1.0 81.6 81.6 92.8 401.2 463.6 534.8 6.3 6.3 5.6 1.3 1.1 1.0 561 Accum.
DENABK 92 423 4.2 120 4.0 17.8 19.4 21.9 84.9 102.1 120.6 5.8 5.3 4.7 1.2 1.0 0.9 115 Buy
INDBK 221 1,165 7.1 342 3.0 35.3 36.1 41.1 154.6 182.5 214.2 6.3 6.1 5.4 1.4 1.2 1.0 236 Accum.
IOB 103 1,043 4.4 125 (58.6) 13.0 12.2 19.2 99.5 125.4 142.0 7.9 8.5 5.4 1.0 0.8 0.7 118 Accum.
OBC 320 1,197 36.7 325 26.2 45.3 57.0 59.9 283.8 338.8 386.4 7.1 5.6 5.3 1.1 0.9 0.8 367 Accum.
PNB 1,046 3,186 12.5 908 9.1 123.9 127.1 145.2 514.9 615.1 729.3 8.4 8.2 7.2 2.0 1.7 1.4 948 Reduce
SBI 2,265 10,344 20.4 2,372 1.8 144.4 162.0 228.2 980.4 1,133.3 1,307.6 2.5 2.2 1.6 0.4 0.3 0.3 2,596 Accum.
UNBK 312 1,740 30.8 542 22.7 41.1 48.2 56.3 160.0 201.5 244.7 7.6 6.5 5.5 1.9 1.5 1.3 - Neutral
Source: Company, Angel Research; Note: Price as on July 2 , 2010
Analyst - Vaibhav Agrawal / Amit Rane

Vaibhav

Capital Goods
Capital goods index - An outperformer Among the major losers was the stock of KEC International,
which was down 18.3% in absolute terms and underperformed
During 1QFY2011, the BSE capital goods index outperformed
the broader benchmark indices by 19.3%. Notably, despite a
the broader indices and ended with a gain of 4.5% in absolute
very good operational performance, Crompton Greaves also
terms, outperforming the benchmark BSE Sensex by 3.5%.
ended among the under-performers, owing to rising concerns
Notably, during 1QFY2010, the capital goods index had a
of deteriorating health of the euro zone.
phenomenal run-up after the election results, primarily driven
by the high expectations emanating from the political stability Macro indicators showing strength
emerging in the country. However, as most of the stocks had
run way ahead of their fundamentals and were commanding After registering strong GDP growth of more than 9% for three
premium valuations, the under-performance during 2QFY2010 consecutive years, the Indian economy shifted to a relatively
and muted performance during the last several quarters were lower growth trajectory for FY2009 (owing to the global
along expected lines. meltdown), recording modest 6.7% growth. Nonetheless, the
GDP growth for the current year came in better than expected
Exhibit 1: Sensex v/s capital goods stocks (1QFY2011) at 7.4% (as against 7.2% estimated earlier) on the back of strong
Abs. Returns Relative to Sensex growth in the manufacturing sector. Moreover, the economy is
(%) (%)
expected to pick up steam in ensuing years, with economic
BSE Sensex 1.0 0.0
growth expected to rebound to the 9.0% level by FY2012E. We
BSE Capital Goods Index 4.5 3.5
believe that the government's focus on infrastructure spending,
ABB 3.8 2.9
increase in investment demand by corporate India and improved
Areva T&D (4.8) (5.8)
BHEL 3.2 2.2 consumption would provide a fillip to industrial production.
Crompton Greaves (1.1) (2.1)
Exhibit 3: GDP growth to bounce back
Jyoti Structures (5.7) (6.7)
12.0
KEC International (18.3) (19.3)
Thermax 11.3 10.3 10.0
Source: C-line, Angel Research 8.0
Exhibit 2: Capital goods index: Relative returns to the Sensex

(%)
6.0
60.0
4.0
48.6
50.0
2.0
40.0
30.0 0.0
23.5
17.2 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
(%)
20.0
10.0
9.4 Source: CMIE, Angel Research
1.3 3.5
0.6
0.0
(0.6) The index of industrial production (IIP) is also showing strength,
(10.0) (6.2)
(9.7)
(7.1)
(10.7) partly on the actual economic recovery and due to the low base
(20.0) (14.1)
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 effect. IIP growth (latest) for April 2010 came in at 17.6% (1.1%).
Source: C-line, Angel Research For the full year, the cumulative IIP growth for the period of
April to March 2009-10 stood at 10.4% (2.8%). The capital
On a stock-specific basis, most of the capital goods stocks had goods component for April 2010 also witnessed a sharp spike
a mixed trend during the quarter. Thermax and ABB India were in growth at 72.8% (-5.9%). For the current fiscal, cumulative
the major gainers, up 11.3% and 3.8% in absolute terms and growth for capital goods components from
outperforming the Sensex by 10.3% and 2.9%, respectively. April to March 2009-10 registered growth of 19.2% (7.3%).
Despite the weak set of recent quarterly results, the news of an
open offer (at a substantial premium to the prevailing
price then) for ABB India came as a boon driving its
outperformance. Areva T&D also aroused a lot of buzz during
the quarter for similar reasons as the consortium of
Alstom-Schneider made an open offer to buy 20% in
Areva T&D India at Rs295/share.

Capital Goods
Exhibit 4: IIP growth India has a poor track record in this regard, with only 50-60%
20.0
of the total planned capacity added during several of the
18.0
16.0
previous five-year plans. As per the Central Electricity Authority
14.0 (CEA) data, we are faring no better even in the current plan
12.0
period, with the execution rate being quite slow and around
10.0
48% of the projects already running behind schedule.
(%)
8.0
6.0
4.0
Exhibit 7: Capacity addition (MW)-11th plan (till May 2010)
2.0 50,000
44,241
0.0 45,000
(2.0)Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 40,000 37,248
35,000
30,000
25,000 23,102
Exhibit 5: CG component growth 20,000

18,961
15,000
80.0
10,000
70.0 4,793 3,481
5,000 2,200
660
60.0
0
50.0 Thermal Hydro Nuclear Total
40.0 Planned Actual
Source: CEA, Angel Research

(%)
30.0
20.0
10.0 Key Developments
0.0
(10.0)
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
ABB: During the quarter, the ABB group announced an open
(20.0)
offer for the shareholders of ABB India at Rs900/share to
Source: Bloomberg, Angel Research increase its stake in its Indian arm from approximately 52% to
75%. The parent company cited the investment would facilitate
Liquidity continues
long-term development of ABB's business in India. Subject to
The visibility also seems to be strengthening gradually, with the regulatory clearance, the offer is expected to begin on July
foreign investments in India continuing their momentum, with 8, 2010, and end on July 27, 2010. Payment for the shares is
relatively smooth financial closure of several projects and quite expected to take place on August 10, 2010.
a few companies across sectors having successfully tapped the
Areva T&D: During the quarter, a consortium of Alstom Holdings
financial markets.
and Schneider Electric also made an open offer to buy 20% in
Exhibit 6: FForeign
oreign investments into India (US $bn) Areva T&D India at Rs295/share. The offer will open on July
25
22, 2010, and end on August 10, 2010. Notably, the offer
20 comes after the French nuclear major, Areva SA, agreed to sell
15
its entire equity in Areva T&D Holding SA, its global electric
transmission and distribution business, to a consortium of Alstom
Holdings and Schneider group of companies in January 2010.
10
5 By virtue of the global takeover, the new consortium will

0
automatically get a 72.2% stake currently being held by the
Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Areva group in its Indian subsidiary.
(5)
Source: CMIE, Angel Research BGR Energy: During the quarter, BGR Energy Systems, through
Power sector hurdled with capacity addition delays its majority-owned subsidiary, BGR Boilers, entered into technical
collaboration agreements with Hitachi Power Europe GmbH,
Most of the companies under our coverage in the capital goods Germany for 660MW, 800MW, 1,000MW and 1,100MW
space have their fortunes directly linked to the pace of the power supercritical steam generators (boilers). Additionally, through
sector growth in the country. Although the power sector capex another majority-owned subsidiary, BGR Turbines, it has entered
is relatively resilient (with a majority of the projects being planned into technical collaboration agreements with Hitachi Ltd., Japan,
by the central and state sector utilities), a major cause of concern for 660MW, 700MW, 800MW and 1,000MW supercritical steam
for the companies is delay in capacity addition. Historically, turbines and generators.

Capital Goods
BHEL
BHEL:: During 1QFY2011, BHEL secured a single largest 21.8%, on the back of strong execution of its healthy order
Rs6,300cr mega contract for 1,600MW (2x800MW) supercritical book. Thermax is also expected to post strong revenue growth,
thermal power project in Karnataka from Raichur Power aided by better execution in the current quarter as compared to
Corporation (RPCL). RPCL is a joint venture (JV) company of the low base in the same period last year.
Karnataka Power Corp (KPCL) and BHEL, which has been set
On the operating front, we expect our universe to register 84bp
up to build, own and operate thermal power plants with
margin expansion to 11.0%. Again, BHEL would be the key
supercritical parameters in Karnataka. Significantly, this is the
driver, as the company is expected to witness a 253bp margin
first order for a power project, bagged by BHEL through a JV.
expansion to 11.8%, owing majorly to lower raw material costs
Crompton Greaves: In continuation with its strategy of inorganic and benefits on employee costs. ABB and Areva T&D would,
growth, during the quarter, Crompton Greaves concluded an however, continue to witness pressure on the margins front,
arrangement for the acquisition of three businesses - Traction majorly owing to increased competitive pressures in the market.
Electronics, SCADA and Industrial Drives - of an Indian company
Consequently, net profit would also increase at a higher pace
Nelco on a slump sale basis. The approximate acquisition value
of around 26.3% yoy for our entire universe. BHEL is expected
of the above-mentioned three businesses is Rs92cr. We believe
to witness a strong increase in net profit of 37.2% yoy. Crompton
the acquisition will enable Crompton to become a stronger and
Greaves and Thermax are also expected to continue with their
more comprehensive player in the railways business segment
good performance, while Areva T&D is expected to post sharp
and build capabilities in drives by better leveraging on its existing
erosion in profit in the current quarter as well.
product portfolio.
Outlook
Thermax: During 1QFY2011, Thermax entered into a
The scenario for the Indian Economy in general and that for
technology transfer license agreement with Lambion Energy
the capital goods industry in particular has undoubtedly
Solutions, a German engineering company with expertise in
improved to a big extent, after the political stability in the country
converting waste to energy. The technology transfer will provide
along with the easing liquidity situation and the offshoots of
Thermax with high-efficiency combustion systems for using
recovery in the global economy. However, we believe that several
biomass, high in moisture content, for energy generation.
capital goods stocks are already trading at premium valuations,
Besides, during the quarter, the company also received a major
leaving little scope for outperformance. Besides, although the
turnkey order valued at Rs580cr for a gas-based combined
capital goods companies catering to the power sector will
cycle power project from a petrochemical major in India for its
continue to enjoy a degree of comfort owing to the government's
aromatic complex in a SEZ.
thrust on this core sector, the sector has its own set of issues,
1QFY2011 expectations with around 48% of the planned power projects for the eleventh
plan already running behind schedule. In the backdrop of rich
Companies under our coverage universe are expected to post
valuations, we prefer a stock
stock--specific approach. Crompton
top-line growth of 19.8% yoy. This would primarily be driven by
Greaves and Jyoti Structures figure among our preferred picks.
BHEL, which is expected to witness strong revenue growth of
Exhibit 8: Quarterly estimates Rs cr

rofit EPS (Rs) EPS (Rs) P/E (x) Tar
argget Reco.
(Rs.) 1QFY11E % chg 1QFY11E chg bp 1QFY11E % chg 1QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (Rs)
ABB* 862 1,810 20.3 7.6 (90) 93 11.4 4.4 11.4 16.7 23.1 30.6 51.5 37.3 28.1 - Neutral
Areva T&D* 289 918 16.5 8.1 (552) 22 (55.5) 0.9 (55.5) 8.0 5.6 9.9 36.2 51.2 29.2 - Neutral
BHEL 2,390 6,816 21.8 11.8 253 645 37.2 13.2 37.2 88.1 109.5 130.0 27.1 21.8 18.4 - Neutral
Crompton Greaves 252 2,416 10.0 12.6 135 193 20.6 3.0 20.6 13.4 13.7 15.4 18.8 18.4 16.4 307 Buy
Jyoti Structures 151 587 21.2 11.4 46 29 29.6 3.5 29.6 11.2 13.5 16.5 13.5 11.2 9.1 215 Buy
KEC International473 844 16.2 10.1 (170) 35 41.0 6.9 41.0 33.3 41.9 49.8 14.2 11.3 9.5 648 Buy
Thermax 744 791 47.2 12.0 (78) 66 41.0 5.5 41.0 21.8 29.7 37.4 34.2 25.1 19.9 - Neutral
Source: Company; Angel Research; Note: Price as on July 2, 2010; * December year ending
Analyst - Sarabjit Kour Nangra

Kour

Cement
Despatches slow down Cement prices decline
Despatches of cement companies started to decelerate during Cement prices fell across the country during 1QFY2011, with
1QFY2011 due to lower off-take from the real estate and the southern region recording the highest correction in the range
infrastructure sectors. During April-May 2010, all-India cement of Rs15-45. The fall was steep in Andhra Pradesh, where prices
despatches grew by 8.4% yoy to 36mn tonnes. The northern collapsed by Rs45 per bag over the past two months and stood
region was the top performer with an impressive 13.6% yoy at Rs160 per bag. Further, the southern region witnessed the
growth in despatches during the mentioned period. Demand highest regional capacity addition of 18mtpa over the last one
in this region was driven by the final leg of construction activity year, which resulted in excess supply and softening of prices.
related to the Common Wealth Games and other infrastructure- The western region registered around Rs5-15per bag decline
related activities. Although the southern region was affected by in prices as there was inter-region stock movement from the
poor demand, it managed to report 9.1% yoy growth in south. However, prices remained stable in the northern region.
despatches, aided by inter-regional stock movement. Poor Overall, we expect cement prices to remain under pressure over
demand in the southern region was largely attributed to the the next few quarters due to the monsoons, commissioning of
slowdown in the expenditure in irrigation and housing segments. new capacities and stabilisation of new plants, which have
The western and eastern regions registered 7.5% and 9.5% yoy already been commissioned.
growth in despatches, respectively, while the central region
Exhibit 2: Average cement prices (Rs/bag)
reported a marginal decline. The cement off-take in the eastern
Market 1QFY11E 1QFY10 % chg 4QFY10 %
region fell due to a slowdown in industrial capex. (yoy) qoq
Mumbai 255 265 (3.8) 255 -
Exhibit 1: Region-wise cement despatches Delhi 225 234 (3.8) 242 (7.6)
Region 2MFY2011 2MFY2010 yoy growth (%)
Chennai 230 276 (16.7) 243 (5.7)
South 11.55 10.59 9.1 Kolkata 270 271 (0.4) 282 (4.4)
North 8.62 7.59 13.6 Average PPrice
rice 245 262 (6.5) 256 (4.5)
Source: CMA, Angel Research
West 5.76 5.36 7.5
East 5.19 4.74 9.5 All-India capacity utilisation at 83%
Central 4.82 4.86 (0.8)
All-India capacity utilisation during April-May 2010 remained
All-India 35.94 33.14 8.4 at 83%. The central region reported the highest utilisation rate
of 102% during the mentioned period. The northern and western
Top Performers regions also registered healthy utilisation rates of 88% and 87%,
respectively. However, utlisation rates remained low in the
Jaiprakash Associates: Among the majors, Jaiprakash southern region at 73% due to overcapacity and modest
Associates (JAL) emerged the top performer in terms of demand.
despatches during the quarter. The company posted a 53% yoy
jump in sales volumes in April-May 2010 to 2.44mn tonnes Exhibit 3: Quarterly all-India capacity utilisation trend
(1.60mn tonnes) on the back of substantial capacity addition 105.0
and healthy demand in the northern region, the company's 100.0
primary market. 95.0

(%)
90.0
Ambuja Cements: The company delivered healthy 14.7% yoy
85.0
growth in despatches during April-May 2010 with its new clinker
80.0
and grinding units, set up in the previous quarters, stabilising.
75.0
The company increased its clinker and grinding capacity by
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
4.4mtpa and 3mtpa, respectively, during 1QCY2010.


Cement
Exhibit 4: All-India capacity addition Key Developments
FY2012E 295 17
Grasim Industries
FY2011E 278 21
FY2010 257 38
FY2009 219 21
The Grasim-Samruddhi demerger became effective from May
(mtpa)
FY2008 198 31 18, 2010. Post the demerger, Grasim’s shareholders now directly
FY2007 167 9
hold 35% in Samruddhi, while Grasim's stake in the company
FY2006 158 5
FY2005 154 7
stands diluted at 65%. Samruddhi got listed on the bourses on
FY2004 146 7 June 29, 2010, to provide an exit opportunity to investors.
0 50 100 150 200 250 300 350 Eventually, Samruddhi would be merged with Ultratech, wherein
Year-end Capacity Addition during the year
its shareholders will get four shares of Ultratech (face value of
Rs10) for every seven shares (face value of Rs5) of Samruddhi.
Performance on the bourses The merger is expected to be completed in July 2010.
During 1QFY2011, all the cement stocks under our coverage Grasim Industries has temporarily suspended production at its
delivered negative returns and underperformed the Sensex. staple fibre plant at Nagda due to water shortage till the onset
Ultratech was the biggest loser with negative returns of 24.1%. of the monsoons.
India Cements and Madras Cements too delivered negative
returns of 18.1% and 18.0%, respectively. Shree Cement
Exhibit 5: Sensex v/s cement stocks (1QFY2011) Shree Cement entered into a Memorandum of Understanding
Abs. Returns Relative to Sensex (MoU) with the Karnataka government to set up a cement
(%) (%) manufacturing unit and a power plant in the state entailing an
Sensex 1.0 - investment of Rs2,000cr. The company will invest Rs1,500cr in
Ambuja (4.3) (5.3) a 3mtpa capacity cement facility, while another Rs500cr will be
ACC (8.0) (9.0) incurred towards operationalising a 100MW power plant.
JK Lakshmi (12.7) (13.7) Cement universe to register decline in OPM
Madras Cements (18.0) (19.0)
We expect the cement universe to report a muted 3.7% yoy
India Cements (18.1) (19.1)
growth in top-line primarily on account of a drop in prices. We
Ultratech (24.1) (25.0)
expect Ambuja Cements, which is concentrated in the western
and northern region, to report the highest growth in top line of
Coal prices surge 11.3% yoy. However, south-based players who are expected to
Global prices of coal, a major input in cement manufacturing, be affected the most by the price decline are expected to report
were up substantially on a yoy basis during the quarter under a drop in top line, with Madras Cements registering the highest
review. Spot prices of the New Castle Mclokey 6,700kc coal decline of 23.1% yoy. On the operating front, the margin of
stood at around US $100/tonne, up by more than 50% on a our cement universe is expected to decline by 691bp during
yoy basis. Prices of other raw materials like fly-ash and limestone the quarter.
also increased significantly on a yoy basis.
Exhibit 7: Margins to decline
Exhibit 6: Global thermal coal price trend 1QFY11E (%) 1QFY10 (%) yoy (bp) 4QFY10 (%) qoq (bp)
250
ACC ^ 30.5 36.4 (596) 31.2 (77)
200 Ambuja ^ 29.3 26.0 332 29.7 (38)
Grasim 25.6 31.7 (613) 26.2 (62)
(US$/tonne)
150
Ultratech 23.4 36.7 (1,331) 21.6 177

100
India Cements 14.4 30.5 (1,615) 15.2 (85)
50
Madras Cements 26.4 37.7 (1,129) 21.4 493
0
JK Lakshmi 25.8 34.0 (816) 23.2 264
Jul-00
Dec-00
May-01
Aug -02
Jan-03
Jun -03
Apr-04
Jul-05
Dec-05
May-06
Aug -07
Jan-08
Jun -08
Apr-09
Feb-00
Oct-01
Mar-02
Nov-03
Sep-04
Feb-05
Oct-06
Mar-07
Nov-08
Sep-09
Feb-10
Source: Companies, Angel Research; Note: ^December year ending

Cement
Outlook and Valuation expect south-based players to turn in a poor performance in
terms of profitability, while northern players would perform
India's cement consumption grew at an impressive 9.3% CAGR
relatively better than players in other regions due to better
over FY2004-10, driven by robust demand from the housing
demand-supply dynamics.
and infrastructure sectors. Cement prices too showed a
continuous upward trend during the period, thereby
On an EV/tonne basis, India Cements and Madras Cements
encouraging cement makers to set up new capacities. Over
are trading at US $62/tonne on FY2012E, which is at significant
FY2011-12E, we estimate total capacity addition of 38mn
discount to their replacement value. Going ahead, we believe
tonnes. Further, the new plants commissioned over the past few
these stocks are poised to bounce back from these levels. Hence,
months are expected to stabilise and increase supply. We believe we maintain a Buy on India Cements and Madras Cements.
the new capacity additions would result in an oversupply situation
We maintain a Buy on Grasim due to strong recovery in its VSF
with growth in demand not sufficient to absorb the increase in business and attractive valuations. We maintain a Buy on JK
supply. Overall, we expect all-India demand to post a 10.2% Lakshmi and Ultratech due to attractive valuations. We maintain
We
CAGR over FY2010-12E. Excess supply is expected to result in
our Neutral view on A CC and Ambuja, with these stocks fairly
ACC
prices softening and capacity utilisation levels declining. We priced at current levels.
expect capacity utilisation to remain at low 84% levels during
FY2011E and to bottom out at these levels. Exhibit 8: EV/tonne analysis
Company Installed Capacity EV/Tonne (US $)
EV/Tonne
During the next few quarters, we expect cement demand to be (mtpa) FY10 FY10 FY11E FY12E
hit by monsoons and register low volumes. We expect total ACC^ 26.0 116.6 100.8 96.1
capacity addition of 10.5mn tonnes during 2QFY2011E and Ambuja^ 23.5 134.2 126.2 111.4
3QFY2011E by players such as ACC, Ambuja and JP Associates. Grasim 25.7 118.4 102.4 90.4
Capacity utilisation is expected to remain the lowest in the Ultratech 23.1 105.4 93.3 82.9
India Cements 14.0 61.2 56.5 62.4
southern region as bulk of the capacity addition in FY2010 was
Madras Cements 11.0 76.8 69.2 62.2
carried out in this region. Prices are also expected to remain
JK Lakshmi Cement 5.4 38.9 37.2 37.6
under pressure due to excess supply and poor demand. We
Source: Companies, Angel Research; Note: ^December year ending

arg Reco.
(Rs.) 1QFY11E % chg 1QFY11E chg bp 1QFY11E % chg 1QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (Rs)
ACC ^ 860 2,051 (3.2) 30.5 (596) 378.7 (22.0) 20.1 (22.1) 85.5 66.0 72.2 10.1 13.0 11.9 - Neutral
Ambuja ^ 113 2,055 11.3 29.3 332 392.4 21.0 2.6 20.9 8.0 6.8 7.4 14.1 16.6 15.1 - Neutral
Grasim* 1,825 5,529 7.9 25.6 (613) 594.9 (20.0) 64.9 (44.9) 337.6 207.9 260.5 5.4 8.8 7.0 2,216 Buy
India Cem. 107 936 (2.5) 14.4 (1,615) 53.3 (59.1) 1.7 (66.0) 11.5 10.1 11.6 9.2 10.6 9.2 138 Buy
JK Lakshmi 67 402 14.7 25.8 (816) 52.7 (32.8) 4.3 (32.8) 19.7 12.5 15.7 3.4 5.3 4.3 88 Buy
Madras Cem. 99 591 (23.1) 26.4 (1,129) 47.6 (65.6) 2.0 (65.6) 14.9 6.6 10.7 6.7 15.0 9.3 141 Buy
Ultratech 867 2,041 4.5 23.4 (1,331) 276.6 (33.7) 22.2 (33.7) 87.8 77.5 98.9 9.9 11.2 8.8 1,084 Buy
Source: Company, Angel Research; Note: Price as on July 2, 2010; Note: ^December year ending; *Consolidated numbers
Analyst - Rupesh Sankhe / V Srinivasan

FMCG
For 1QFY2011, we expect our FMCG universe's revenue growth Exhibit 2: Monsoon trend for June
40 50%
to moderate to 14% from an average of 15-20% in FY2010 45%
40%
35
due to 1) impact of excise roll-back, 2) lower consumer spending 30
28%
4 30%
15 20%
due to high food inflation and 3) absence of any significant
(No of Subdivisions)
19 11
25 10%
24
value growth due to price hikes (negative for HUL and Marico
28 0%
20 31 -5%
-10%
due to price cuts). We expect top-line growth to be largely volume

10
15 -20%
-24% -24%
21 -30%
driven, aided by a low base, better distribution reach, new
10 11
7
-40%
4 -46% 11
5
product launches and significant uptick in advertising spends.
2 -50%
6 5
3 4
0 -60%
However, we highlight that rising competitive pressures in most 1-15 Jun 05 1-14 Jun 06 1-13 Jun 07 1-18 Jun 08 1-17 Jun 09 1-16 Jun 10
Excess Rainfall Normal Rainfall

categories (particularly home and personal care) and the recent Defecient/ Scanty Deviation from Normal rainfall (RHS)
Source: IMD, Angel Research

price hike in petrol/diesel prices (near-term impact on consumer
spends) are likely to keep top-line growth under check. Near-term input cost pressures to subside
Exhibit 1: Revenue growth (1QFY2011E) For CY2010 (YTD), while crude derivatives are down 3-5%
40.0 36.7
(except for hDPE), agri-commodities have reflected a mix
35.0
30.0 trend – sugar and tea have corrected 12-15% due to significant
25.0 21.5 rally while coffee and barley are still up 13-22%. However, over
(yoy %)
19.3 18.5
the past three months, there has been a surge in the prices of
20.0 16.9 16.5 15.8
15.0
10.0 7.1
certain agri commodities, such as tea, barley and copra (risen
5.7
5.0 by 4-17%), and crude and crude oil derivatives, including caustic
-
soda, LAB and hDPE (risen by 4-12%).
Nestle
Marico
GCPL
GSKCHL
ITC
Colgate
Asian Paints
Dabur
HUL
Exhibit 3: Input cost trend

Source: Company, Angel Research; Note: Nestle, GSKCHL figures - CMP 3M (%) YTD (%) High (%)
2QCY2010, GCPL numbers do not include figures from recent acquisitions Tea (Rs/Kg) 96 6.5 (12.7) (17.7)
Coffee (Rs/50kg) 8,975 0.8 21.3 (23.9)
Good monsoon spell critical for growth
Barley (Rs/Quintal) 1,071 17.2 12.9 -
Low rainfall last year did not have a significant impact on stocks Sugar (Rs/ Quintal) 2,998 (20.3) (14.4) (25.4)
under our universe due to the various measures undertaken by Palm Oil (MYR/Tonne) 2,535 (2.5) (2.1) (2.8)
the government to counter the same, including better irrigation, Copra (Rs/Quintal) 3,500 4.3 1.4 -
higher MSPs, NREGS, farm loan waiver schemes and Soyabean Oil (Rs/10Kg) 420 (4.5) (10.6) (10.6)
implementation of the Sixth Pay Commission. This year the Indian Groundnt Oil (Rs/10Kg) 685 2.1 0.9 (1.1)
Meteorological Department (IMD) has forecast normal Coconut Oil (Rs/Quintal) 5,040 (1.7) 1.1 (1.7)
monsoons, which in our opinion will bring cheer to the FMCG Caustic Soda (Rs/Kg) 22 4.5 (3.6) (21.4)
sector as a whole, as it will help cool down food inflation Soda Ash (Rs/Kg) 18 (0.2) - (14.3)
(currently 16-18%), moderate input costs and increase LAB (Rs/Kg) 89 1.1 (5.3) (5.3)
disposable rural income. hDPE (Rs/Kg) 88 11.3 21.5 -
Source: Bloomberg, CMIE, Angel Research
Good monsoons will positively impact agri-dependent input
cost companies like Marico (copra is the major raw material), However, agri-commodities are expected to show a benign trend
Nestle (milk and wheat) and GSKCHL (milk), as it will help stem in case of normal monsoons. Prices of crude-based inputs tend
an increase in raw material costs. Companies like HUL, Colgate, to follow the increase in crude oil prices with a lag. Hence,
Godrej Consumer (GCPL) and ITC will benefit from the increase despite the currently prevailing benign input cost scenario (YTD
in demand, as good monsoons are likely to cool food inflation, drop in caustic soda, soda ash and LAB), the prices of crude-
thereby increasing buying power, especially among the linked inputs are expected to rise going ahead.
low/middle income groups, which spend ~60% of their earnings Quarter marked by acquisitions…
on groceries.
In the quarter under review, GCPL was on a global shopping
spree. After acquiring Megasari of Indonesia, it bought over
the Issue Group and Argencos of Latin America in quick

FMCG
succession, followed by taking over the balance 51% stake in from its global portfolio, while ITC launched a new variant of
Godrej Sara Lee (GSL), owned by its joint venture partner, Sara Vivel soap- Deo spirit and Vivel UltraPro shampoo in Andhra
Lee Corp. All the acquisitions are in line with the company's Pradesh and West Bengal.
core strategy of 3x3 (focus on the three markets of Asia, Africa
The energy drink market is heating up with GSKCHL introducing
and Latin America on companies having a presence in the three
Lucozade Sport from its global OTC portfolio, Coco Cola
categories of personal wash, hair care and home care). Similar
launching its premium niche energy drink Burn, Pepsico foraying
to most of its recent acquisitions, the current acquisitions are
into the ready-to-mix powder segment with the launch of
also likely to add value to GCPL's shareholders. GCPL now has
Gatorade sports mix and Rasna likely to foray into the market
a presence in the UK (Keyline), Africa (Rapidol, Kinky and Tura),
armed with a host of variants in the powdered drink category.
Middle East (Godrej Global Middle East) and Indonesia
Marico launched the new edible oil brand, Saffola Gold in
(Megasari).
Bangladesh and is fending off competition in the hair oil category
Marico and Dabur India are the other two companies from Dabur, which has re-branded its beauty hair oil, Dabur
aggressively scouting for acquisitions overseas. While Marico Amla as Dabur Amla Nelli hair oil.
is eyeing companies in Africa and Asia, Dabur India is looking
at entering new geographies and is eying the viable markets of Agro Tech Foods, an affiliate of ConAgra Foods, US, introduced
Nepal and Bangladesh. Dabur India completed the acquisition Sundrop Freshlite. In the snack segment, Parle Agro launched
of Fem Care Pharma with itself during the quarter after receiving two new variants of Hippo (chatpatta and salt) and GSKCHL
the necessary approvals from Delhi and Bombay High Courts extended its Horlicks brand to the premium cookies segment.
and as per the record date (June 30, 2010) has alloted Dabur
Outperformance galore
shares to Fem Care Pharma shareholders in the ratio of 5:1.
1QFY2010 witnessed a strong rally by FMCG companies (all
…shareholder rewards (buybacks, bonus)
stocks in our universe outperformed the Sensex). The BSE FMCG
ITC and HUL decided to reward their shareholders during the Index outperformed the Sensex by 13% during the quarter.
quarter. HUL announced buyback of its shares at a price not Amongst heavyweights, ITC delivered robust returns buoyed by
exceeding Rs280/share and up to an aggregate of Rs630cr, strong results, special dividend and bonus issue, while HUL
resulting in purchase of up to ~22.5mn equity shares from the posted modest gains aided by the buyback announcement. In
outstanding 2,179.9mn shares or roughly ~1% of the equity at midcaps, while GCPL registered significant outperformance due
the higher end of the capped buyback price and outlay. While to its acquisition spree, Marico and Dabur also gained on
we are enthused with the buyback price (likely to limit downside expectations of potential acquisitions in the near term.
risks), it would be EPS neutral owing to reduction in other income
due to the usage of cash. ITC, on the other hand, announced Exhibit 4: Relative outperformance to the Sensex (1QFY2011)
1:1 bonus in its centenary year. Sensex 1.0
BSE FMCG 14.1
New launches driving competitive intensity higher Dabur 32.3
GCPL 31.7
In line with our expectations, most FMCG companies continued Colgate 24.2
their momentum in launching new products. Category-wise, GSKCHL 20.9
we expect the skin care, homecare and processed foods

Marico 18.8
ITC 15.8
segments to drive growth for the FMCG sector. Asian Paints 12.9
HUL 11.8
ITC led the pack in new product launches. The company forayed 8.1
Nestle
into skincare through fairness creams with the launch of Vivel

-
10.0
15.0
20.0
25.0
30.0
35.0
5.0
Active Fair in Kerala. ITC also introduced Lucky Strike, the global
premium branded cigarette from its major shareholder British
American Tobacco's portfolio. HUL came in a close second,
with the launch of Pureit Compact to compete against Tata's
Swach (pricing it at Re1 premium to its competitor) and Pureit
Marvel to compete against Eureka Forbe's Aquaguard. In the
toiletry segment, HUL introduced the Sure antiperspirant brand

FMCG
Midcaps to record better performance v/s heavyweights While the long-term consumption story for the FMCG industry
remains intact, any further re-rating from current levels seems
For 1QFY2011, we expect our FMCG universe's revenue growth
less likely given near-term concerns over: 1) strong competitive
to moderate to 14% (largely volume led) and earnings growth
intensity, 2) possible rise in inflation post the fuel price hike and
to slip to 16% as we expect margins to remain flat or dip, except
3) spike in input costs (low base in FY2010). Hence, we change
for Marico, GCPL and Dabur. Major HUL is expected to report
our stance from equal-weight to underweight on the FMCG
muted 5.7% growth in top line, largely driven by volumes
sector
sector,, as we believe that both earnings upgrades and P/E
(modeled 10% volume growth), as price cuts in the S&D segment
re -ratings are likely to take a breather from current levels.
re-ratings
will continue to drag overall growth and margins. Hence,
earnings are also expected to remain muted at 3.6% due to Amongst the heavyweights, post the rally in IT C, we recommend
ITC,
margin contraction, largely aided by higher other income on a a Neutral view on the stock (await clarity on volume growth in
low base. ITC is expected to witness 1% volume decline during cigarettes in 1QFY2011E before re re-rating)
-rating) and recommend
the quarter, impacted by the recent price hikes. We expect ITC Reduce on HUL (rally post buyback offers excellent opportunity
to register robust 18.5% yoy growth in top line and earnings, to exit the stock, weak earnings growth in FY2011E). In midcaps,
following the recent price hikes in cigarettes, strong performance we recommend Reduce on GSK CHL and Marico (significant
GSKCHL
of non-cigarette FMCG and rebound in its hotels business. rally this quarter
quarter,, trading 15-20% premium to historical
(clarity/news--
valuations), and maintain Accumulate on GCPL (clarity/news
Valuations at peak, recommend Underweight
flow on consolidation of acquisitions to drive stock) and Asian
Most FMCG companies witnessed a sharp rally during Paints (steady volume growth and strong pricing power).
1QFY2011 and are currently trading at peak valuations.
Moreover, we highlight that FMCG companies have significantly
outperformed the Sensex (remained flat in 1QFY2011E),
widening the premium valuation gap.

arg Reco.
Asian Paints^ 2,321 1,706 16.9 19.2 26 210.4 19.1 21.9 19.1 80.5 89.3 107.0 28.8 26.0 21.7 2,461 Accumulate
Colgate Palmolive 841 542 15.8 22.5 3 115.3 12.1 8.5 12.1 31.1 31.8 36.1 27.0 26.5 23.3 - Neutral
Dabur India^ 202 865 16.5 16.8 83 115.4 26.3 1.3 26.3 5.8 6.7 7.8 34.7 30.0 25.7 - Neutral
GCPL^ 345 600 36.7 21.0 131 98.3 41.0 3.2 17.6 11.0 12.7 14.2 31.3 27.1 24.3 357 Accumulate
GSK Consumer* 1,803 570 21.5 15.8 (16) 66.4 20.4 15.8 20.4 55.3 65.1 77.2 32.6 27.7 23.3 1,622 Reduce
HUL 269 4,733 5.7 14.3 (112) 562.7 3.6 2.6 3.6 9.6 9.9 11.3 28.1 27.2 23.8 237 Reduce
ITC 303 4,840 18.5 33.0 25 1,042.5 18.6 2.7 18.6 10.6 12.5 13.9 28.5 24.2 21.8 - Neutral
Marico^ 126 746 7.1 15.6 175 77.6 29.2 1.3 29.2 4.0 4.6 5.4 31.9 27.2 23.6 113 Reduce
Nestle* 2,967 1,444 19.3 20.5 (119) 188.7 16.5 19.6 16.5 67.9 81.5 98.5 43.7 36.4 30.1 - Neutral
Source: Company, Angel Research; Note: Price as on July 2, 2010; Note: * December year ending; ^ Consolidated
Analyst: Anand Shah / Chitrangda Kapur

Kapur

Infrastructure
Quarterly Outlook
We expect the infrastructure sector to post good numbers for Investment of Rs7.8trillion (~38% of the original targeted
1QFY2011 on the back of robust order booking over the last investments) was made in the sector in the initial three years of
couple of quarters and receding impediments like delays in the plan, which was much below the planned target amount.
financial closures and client side issues, apart from the low Therefore, to meet the estimated plan outlay of Rs20.6trillion,
base effect. Therefore, we expect the sector to be back on the during the remaining two years of the plan period, investments
growth trajectory, aided by strong pickup in execution and of Rs12.7trillion would be required, which we believe is quite
margin expansion owing to benign commodity prices and a far fetched.
low interest rate regime.
Execution to be back on track
Exhibit 1: Revenue trend (1QFY2011E)
80.0 72.5 In our 4QFY2010 preview, we had anticipated execution woes
70.0
60.0 to wane and bottom out, which was evident in the quarterly
50.0
40.0 31.7
27.5
results. Going ahead, on the back of firm order books along
30.0 23.9 23.7
20.0 10.3 13.5 15.9 12.8 with the government’s sound financial position, we expect
10.0
0.0
execution to further pick up.
(10.0)
(9.9)
(20.0)
Exhibit 3: Execution to gather pace
HCC
IRB Infra
Punj Lloyd
Sadbhav
IVRCL Infra
JP Assoc.
NCC
MPL
L&T
Simplex Infra.
100.0 70.0
80.0 60.0
50.0
Source: Companies, Angel Research 60.0
40.0
40.0
Key Developments 30.0
20.0
20.0
Eleventh plan investment outlay revised downwards -
10.0
200706
200709
200712
200803
200806
200809
200812
200903
200906
200909
200912
201003
During the quarter, the infra sector witnessed marginal (20.0) -
downward revision in targeted investments during the eleventh (40.0) Simplex Infra IVRCL LNT NCC Average (10.0)
plan. Sectors like power, roads, railways, water supply and Source: Company; Angel Research
sanitation have seen a downward revision, whereas airports
To reaffirm our stance that execution will pick up going ahead,
have seen an upgrade. This downward revision was primarily
we reviewed the order book growth (yoy), execution growth
on account of land acquisition problems (operational issues),
(yoy) and order book-to-sales of the companies under our
delays in ordering activity (on account of general election) and
coverage (excluding L&T). Our analysis revealed that high order
lack of liquidity. While these factors played out, simultaneously
book-to-sales ratio is normally followed by high execution rates
the overall award activity and execution were also impacted.
(refer Exhibit 4). Therefore, FY2010 order book-to-sales ratio
Exhibit 2: Revision in eleventh plan investment outlay of 3.5x indicates that execution is expected to pick up going
20.0 16.5 ahead. Pertinently, our estimated growth rate of 15-20% for
10.0 FY2011-12E for our coverage universe could exceed and pose
-
(0.1)
upside risk to our estimates.
(1.2) (2.8)
(10.0)
(11.3)
(20.0)
(23.3) (22.3)
(30.0)
(40.0)
(50.0)
(60.0) (53.9)
Power Roads Railways Irrigation W. Supply & Ports Airports Total
Sant.
Source: Planning Commission, Angel Research

Infrastructure
Exhibit 4: OB/sales - Lead indicator of execution Improving IIP - A barometer of improving times
OB growth (%) Exe. growth (%) OB/sales
FY02 31.6 24.6 4.2 In FY2011E, even as the government may gradually withdraw
FY03 24.2 32.5 3.7 the monetary and fiscal policy support, we expect the recovery
FY04 21.5 51.4 2.9 trend to be sustained owing to a strong rise in domestic demand,
FY05 64.8 27.3 3.6 which has pushed IIP growth close to its 20-year high. IIP growth
FY06 55.7 44.3 3.9 accelerated to 17.6% yoy in April 2010 compared to the trough
FY07 18.4 35.1 3.3 of (0.2%) in December 2008. IIP growth has largely been driven
FY08 45.5 38.1 3.5 by the sharp acceleration in domestic demand.
FY09 19.5 41.0 3.0
Exhibit 6: Improving IIP data
FY10 29.1 13.1 3.5
20.0
Source: Company, Angel Research 18.0
16.0
14.0
Orders bagged during the quarter 12.0
10.0
IVRCL 8.0
6.0
4.0
z Bagged orders worth Rs5,323cr during the quarter, including 2.0
-
India's largest toll road project from NHAI amounting to
Apr-06
Jul-06
Oct-06
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
(2.0)
Rs3,100cr
IIP 3MMA
z IVRCL's order book stands at Rs23,375cr or 4.3x FY2010 Source: Company, Angel Research
revenue.
Sensex v/s infrastructure stocks
Nagarjuna Construction
On the bourses, infrastructure stocks over 1QFY2011 posted a
z Bagged five orders during the quarter totaling Rs791cr.
mixed set of returns. Most of the stocks from our Buy list,
z NCC's order book stands at around Rs15,000cr or 3.2x FY2010 especially our top picks L&T and IVRCL, outperformed the Sensex
revenue. barring three stocks namely Punj Lloyd (huge losses at subsidiary
Larsen and Toubro levels), Madhucon Projects (dismal set of quarterly numbers)
and JP Associates (poor listing of its subsidiary Jaypee Infratech).
z Bagged orders during the quarter totaling Rs7,800cr. Going ahead, we believe these stock-specific performances
z L&T's order book stands at around Rs1,00,000cr or 2.8x FY2010
would continue.
revenue. Exhibit 7: Relative outperformance to the Sensex
Exhibit 5: OB, OB/sales ratio Simplex Infra
Sadbhav Engg 0.8
9.0
120,000 5.4 6.0 Punj Lloyd (23.3)

4.6 Pratibha Ind. 3.6
100,000 5.0
4.3 Nagarjuna Const. 16.0
3.7
80,000 3.3 4.0 Madhucon (10.7)
60,000 3.0 L&T 11.0
2.7 JP Assoc. (14.2)
2.8
40,000 2.5 2.0 IVRCL Infra
1.2 13.1
20,000 1.0 IRB Infrastructure 3.9
Hindustan Const. (10.6)
- -
CCCL 7.3
IVRCL infra
Punj Lloyd
Simplex Infra
Sadbhav
CCCL
L&T
NCC
HCC
MPL
BSE Sensex 1.0
(30.0) (25.0) (20.0) (15.0) (10.0) (5.0) - 5.0 10.0 15.0 20.0
Order Book (Rs cr,LHS) Order book / Sales (FY2010E) (x,RHS)


Infrastructure
Outlook At current levels, most infrastructure stocks (except L&T) are

trading at 12-14x FY2012E earnings, which we believe are in
In light of the pivotal role that the infrastructure sector plays in
line with their long-term averages. Therefore, we recommend
enabling future growth, we believe that the government will
stock-specific investments. We believe that the next leg of rally
have to continue focusing on infrastructure development in the
would be mainly on account of execution surprises as current
country. Moreover, in the long run, with the economy on a roll
expectations from construction stocks are low in spite of a strong
(India averaged 8-9% growth in the last 4-5 years) and expected
order book-to-sales position. Besides, the infra sector still offers
to maintain the momentum, we expect the sector to attract more
tremendous 'Infusion-Dilution Opportunity', which will lead to
funds not only from domestic players, but also from overseas.
companies trading at 2.0-2.5x P/BV over the longer run owing
Other factors, including political intent, liquidity, commodity and
to higher growth opportunities.
crude prices, structural and procedural reforms by various
government bodies (like NHAI) are also in place to facilitate the We prefer companies that provide a decent blend of growth
roll out of the Indian infrastructure growth story going ahead. opportunities, strong management and relatively attractive
Further, progress made on fiscal deficit, which was a surprise valuations. At the current juncture, we prefer mid-caps to
and pick up in credit growth would ensure investors’ interest in large-caps as there still exist some headroom for factoring in
this domestic theme. We believe the infrastructure sector still subsidiary valuations. We remain bullish on the infrastructure
remains one of the best sectors to play out the India investment sector with our top pick being IVRCL Infra.
story. Hence, we maintain our positive stance on the sectorsector..
Valuation
Majority of the infrastructure stocks are trading at reasonable

valuations post the quarterly outperformance. This substantiates
the effect of improved liquidity and enhanced political will on
stock valuations. We believe that improved execution (which
the market has been looking forward to for quite some time)
and fund raising at the subsidiary level would act as a potential
trigger for the next level of re-rating.

arg Reco.
(Rs) 1QFY11E % chg 1QFY11E chg bp 1QFY11E % chg 1QFY10 % chg FY10 FY11E FY12E FY10 FY11E FY12E (Rs)
HCC 118 962 10.3 11.1 (168) 26.3 44.7 0.9 22.2 2.7 3.2 3.8 43.8 37.2 31.0 - Neutral
IRB Infra 262 714 72.5 39.7 (44) 94.1 15.6 2.8 15.6 11.6 13.8 15.3 22.6 19.0 17.2 289 Accu.
IVRCL Infra 186 1,368 23.9 8.6 2 35.6 1.3 1.3 (51.3) 7.8 9.6 12.0 23.6 19.3 15.4 216 Buy
Jaiprakash Asso. 127 2,722 31.7 27.4 610 229.1 (8.1) 1.1 (53.8) 7.8 9.7 10.2 16.3 13.1 12.5 178 Buy
MPL 146 352 23.7 7.3 (519) 5.5 (58.0) 0.7 (58.0) 5.8 6.4 9.8 25.1 22.7 14.9 190 Buy
NCC 187 1,275 27.5 9.4 (91) 48.8 27.7 1.9 13.9 7.8 10.0 10.7 24.0 18.7 17.4 - Neutral
Punj Lloyd 133 2,661 (9.9) 8.5 (130) 57.7 (54.6) 1.7 (58.3) - 8.3 12.2 - 16.2 11.0 170 Buy
Sadbhav Engg . 1,275 347.0 15.9 11.2 (15) 16.5 (7.9) 13.2 (7.9) 43.0 57.5 69.5 29.6 22.2 18.3 - Neutral
Simplex Infra 469 1,250 12.8 9.6 (35) 41.5 61.9 8.4 61.9 25.7 31.9 40.7 18.2 14.7 11.5 570 Buy
L&T 1,786 8,437 13.5 10.7 (65) 592.0 (18.6) 9.7 (28.8) 51.3 57.5 71.3 34.8 31.1 25.1 - Neutral
Source: Company, Angel Research; Note: Price as on July 2, 2010, Note: Target prices are based on SOTP
Analyst: Shailesh Kanani / Aniruddha Mate

Kanani

Logistics
For 1QFY2011E, we expect our universe of stocks to report Exhibit 2: Container traffic - Signs of improvement
revenue growth of 11.6% on a yoy basis, while reporting a 700
607 604 608
654
630 649
40
600 559 553 553 569 554 555 30

2.8% yoy decline in PAT, on account of a low base and improving 543
518 538
500 464 442 20
economy. Further, we expect the domestic segment to continue
('000 TEUs)
400 10
(%)
to do well on the back of strong consumption. 300 -
200 (10)
Concor and AGL are expected to report yoy declines in operating
100 (20)
margins on account of higher empties and inability to pass on 0 (30)
the entire hike in rail freight rates to customers, respectively.
Jan-09
Feb-09
Mar-09
Apr-09
Jun-09
Jul-09
Aug-09
Sep-09
Jan-10
Feb-10
Mar-10
Apr-10
May-09
Oct-09
Nov-09
Dec-09
May-10
However, we expect GDL to report 16% yoy improvement in Container Volumes (LHS) YoY change (RHS)
profits on account of strong volumes across segments and Source: IPA, Angel Research
sustainable OPM at the current level.
Key Developments
Exhibit1: Revenue & PAT estimates for 1QFY2011E
20 Margin pressure to persist for Concor
14.7 15.6
15 12.4
10 7.7 Concor's FY2010 OPM fell by 80bp yoy to 26.4% on lower

5 ground rent revenue, rebates to customers and the company's
inability to pass on the entire hike in haulage charges, which
0
(%)
Revenue (1.9) PAT

(5)
(10)
pulled down Exim performance. Management has indicated
(15) OPMs to remain range bound in FY2011E. However, we
(20) estimate a 50bp decline in OPM in FY2011E on account of
(25) (22.1)
Concor Gateway Distriparks Allcargo Logistics
increased contribution from the low-margin domestic business
and higher empties in 1HFY2011E. Further, management has
Source: Company, Angel Research; Note* AGL had booked other income of
Rs18cr in 2QCY2009 through GDL's stake sale stated that talks about Indian Railways increasing its haulage
charges on certain routes could come through in the near term.
Improving Exim visibility
The recent hike in petroleum products has also led to an increase
The container traffic data released for FY2011 YTD (April-May in road freight rates. Management believes it should be able to
2010) by the IPA registered robust growth of 20.6% yoy on pass on any further increase in haulage charges, in absolute
account of a low base and higher imports. The Jawaharlal Nehru terms. However, we believe any increase in haulage charges
Port Trust (JNPT) port, which handles around 60% of the country's will be detrimental for Concor's volumes. In our view, the
container volumes, registered volume growth of 16.8% yoy for company’s margins would be affected if haulage rates are
April-May 2010. The Chennai port, which handles around 17% increased in absolute terms.
of the country's container volume, recorded strong volume
Exhibit 3: EBITDA margins under pressure
growth of 40.5% yoy in April-May 2010. 35
Going ahead, we expect trade to remain stable on the back of 32 31.5
improving economy. For the first two months of FY2011, Concor 29.1
28.7
recorded 147,000TEU of exports as against 181,000TEU of
29
27.2
(%)
26.6 26.4
imports, leading to 18.5% empty running. We estimate Concor 26
25.8
25.1
to post around 10.0% yoy increase in Exim volumes and GDL

to register 15.0% yoy growth in CFS volumes for 1QFY2011E. 23
We expect the country's overall container volumes to register 20
12-15% yoy growth at 12 Indian major ports in FY2011E. FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
Falling market share at JNPT CFS a concern for GDL
GDL reported a 13.0% decline in JNPT CFS volumes in FY2010

in spite of the 2.7% yoy growth registered in container volumes
at JNPT. The company witnessed a 100bp erosion in market
share to 5.3% at JNPT CFS in FY2010 on the back of increasing

Logistics
competition and oversupply of CFS at JNPT. We believe GDL website, the additional capacity is now expected to come up by
will continue to face near-term pressures at JNPT CFS as no 2HFY2011. We believe this would marginally impact container
additional capacity is coming up in FY2011E. We expect volume growth in FY2011E as JNPT accounts for 60% of the
additional capacity of 0.8mn TEU to come up at JNPT's third total container traffic in India.
container terminal only by end-FY2011E, which will improve
Container traffic outperforming overall cargo traffic
capacity utilisation of CFS players.
Container traffic increased from 3.4mn TEU in FY2003 to 6.9mn
Exhibit 4: Declining market share of GDL
6,000 7.0 TEU in FY2010, registering an 11% CAGR during the period.
6.5
5,000 6.2
6.3
5.8 6.0 Meanwhile, cargo at major ports posted a 9% CAGR during
5.2 5.3 5.3 5.0 the same period. The share of container traffic in the current
4,000
decade increased from 11.5% to 18.0% in FY2010, following
('000 TEUs)
4.0
(%)
3,000
3.0 increased private participation in handling container terminals
2,000
2.0 and customer preference in transporting cargo in containerised
1,000 1.0 form as it reduces handling costs.
0 0.0
FY06 FY07 FY08 FY09 FY10 FY11E FY12E While the slowdown in global trade in FY2009 had a greater
Container Volumes at JNPT (LHS) GDL's Market Share (RHS)
impact on containerisation than the overall cargo traffic, the
Source: IPA, Company, Angel Research
trend reversed in 2HFY2010 and container traffic is expected
Weakening euro to hurt AGL’s profitability to outperform overall cargo traffic going ahead.
Major European economies witnessed a revival in economic Exhibit 6: Container traffic to outperform cargo traffic
activity post the stimulus package of • 200bn. However, fears 30
3rd container terminal at JNPT came into

of sovereign debt default by countries such as Portugal, Ireland, 25
existence boosting volumes
Italy, Greece and Spain (PIIGS nations) led to massive weakening 20
of euro vis-à-vis global currencies. The rupee has appreciated

(%)
15
by more than 15% against the euro in CY2010 until date. This 10
might affect AGL's profitability as around 70% and 20% of its 5

Slowdown in global trade has impacted container
volumes more than overall cargo
consolidated revenue and profits, respectively, are derived from
0
the company's European subsidiary ECU Line. FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010
EXIM growth yoy Container growth yoy
Exhibit 5: Sustained rupee appreciation to hurt AGL Source: IPA, Angel Research
70
68
66
Bullish on the container industry on low penetration
64 and customer preference
62
60
58 Non-bulk cargo, which constitutes around 35% of the total cargo
56
54
at major ports, has the potential to be transported in
52 containerised form. Earlier, only basic goods were suitable for
50
shipment in containers, but now most items can be shipped in
Jan-10
Jan-10
Jan-10
Jan-10
Jan-10
Feb-10
Feb-10
Feb-10
Feb-10
Mar-10
Mar-10
Mar-10
Mar-10
Apr-10
Apr-10
Apr-10
Apr-10
Apr-10
Jun-10
Jun-10
Jun-10
Jun-10
May-10
May-10
May-10
May-10
a container. It is estimated that 75-80% of the total non-bulk

cargo can be containerised. Currently, containerisation level in
Euro/INR

India is at around 51%, compared to 80% globally, which
Delay in capacity expansion at JNPT indicates the scope of growth on account of improved
infrastructure. The share of containerisation traffic increased
To tackle the expected growth in container traffic and faster by around 700bp during FY2007-09 despite the slowdown in
turnaround time, JNPT had planned to extend its third container trade in FY2009; however, it has tapered down in FY2010. We
berth by 330 meters, thereby expanding its capacity by around expect the share of containerisation to increase to 62-65% over
9.6mn tonnes (i.e. 0.8mn TEUs) per year. This was expected to the next five years as it helps to reduce handling costs.
come up by end-FY2010, but it has been delayed on account
of pending clearance from the relevant authority. As per JNPT's

Logistics
Exhibit 7: Improving levels of containerisation Outlook
600 56
54.2
500
54 We believe sustained growth of the Indian economy, with GDP
400 52.2
51.5 52 growth expected at 6-8% over the next few years, as well as
('000 TEUs)
50 emergence of India as a global outsourcing hub will facilitate
(%)
300
47.4
46.2
47.2 47.5 48 the country's container trade. In the current decade, container
200
46 traffic registered a 12% CAGR compared to the 9% CAGR posted
by the total traffic at major ports. We expect this trend to continue
100 44
0 42
and container traffic to register an 11% CAGR over the next
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010
EXIM traffic at major ports-LHS Non-bulk cargo-LHS Container share in non bulk cargo-RHS five years, driven by addition of new container terminals and
Source: IPA, Angel Research increased containerisation.
Sensex v/s logistics stocks The improving trade visibility has seen a re-rating of the sector
and resulted in a rally in the stocks. We prefer companies that
During 1QFY2011, the Sensex was marginally up by 1.1%. provide a decent blend of growth opportunities, quoting
During the quarter, GDL and AGL underperformed the Sensex attractive valuations. Accordingly
Accordingly,, we maintain a Reduce rating
by 9.0% and 9.2%, respectively; whereas Concor outperformed on Concor as the company is losing its pricing power in the
it by 1.4%. Going forward, we believe Concor's ability to sustain high-margin Exim segment coupled with expensive valuations.
operating margins along with its market share in rail freight We maintain a Neutral rating on A GL as it factors near
AGL -term
near-term
will determine its stock performance. The performance of GDL growth opportunities. However
However,, we expect GDL to register an
is likely to be determined by volume growth at JNPT and 18.0% EPS CA GR over FY2010-12E on account of its presence
CAGR
breakeven in the rail business at PAT level. AGL has in strategic locations, ongoing expansion plans and breakeven
underperformed the market by a wide margin owing to in the rail business at PPA
AT level. Hence, we recommend a Buy
uncertainty in Europe as it derives ~70% of its revenue from its on GDL with a target price of Rs150.
European subsidiary ECU Line. Improvement of margins at ECU
Line and euro appreciation could be key triggers for the stock
to outperform.
Exhibit 8: Underperforming the Sensex in 1QFY2011

Sensex GDL Concor AGL
4.0
2.4
2.0 1.0
0.0
(2.0)
(%)
(4.0)
(6.0)
(8.0)
(8.0) (8.2)
(10.0)

arg Reco.
Rs) 1QFY11E % chg 1QFY11E chg bp 1QFY11E % chg 1QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (Rs)
Allcargo* 171 587.9 12.4 10.5 (142.8) 36.3 (22.1) 2.8 (22.1) 9.9 11.6 14.3 17.2 14.7 12.0 - Neutral
Concor 1,383 977.0 7.7 25.5 (181.6) 197.0 (1.9) 15.2 (1.9) 59.9 64.8 72.6 23.1 21.3 19.0 1,194 Reduce
Gateway Dist. 114 143.2 14.7 26.5 (20.1) 19.2 15.6 1.8 15.6 7.3 9.1 12.1 15.5 12.5 9.5 150 Buy
Source: Company, Angel Research; Note: Price as on July 2, 2010; Note* AGL had booked other income of Rs18cr in 2QCY2009 through GDL's stake sale. Calendar year closing
Analyst: PParam
aram Desai / Mihir Salot

Metals
A melting feel Ferrous sector
Despite the price cuts undertaken by steel companies in June Lately, steel prices in India have declined primarily due to the
2010 (first time this year) due to the surge in cheaper steel surge in cheaper steel imports from China as Chinese export
imports from China, we believe sales volume for the quarter HRC prices decreased by ~US $50-100/tonne in May 2010.
would be lower sequentially as steel companies responded late Thus, increased imports forced the domestic steel players to
to the surge in imports. On the non-ferrous front, LME prices undertake price cuts. In June 2010, SAIL cut HRC prices by
declined due to the debt crisis in the euro zone and monetary ~Rs3,000/tonne in two tranches. Other steel companies have
tightening measures in China. also cut prices by ~5-7%. Despite price cuts, we believe sales
volume for the quarter would be lower sequentially as steel
The weakness in the market was clearly reflected in stock
companies responded late to the surge in imports.
performances as the BSE metals index underperformed the
Sensex by 19.2% and posted negative return of 18.2% in The average world export HRC prices increased by 56.6% yoy
absolute terms. On the Indian bourses, SAIL, Tata Steel, JSW to US $724/tonne (US $463/tonne) and 17.6% qoq
Steel, Hindalco, Sterlite, Hindustan Zinc, NMDC and Sesa Goa (US $616/tonne). Although Chinese export prices have fallen
underperformed the broader markets, with losses of 10-25% in May and June 2010, the average China export FOB HRC
in absolute terms, while Nalco outperformed the broader indices prices were higher by 31.0% yoy and 15.2% qoq to
with gains of 4.5% in absolute terms. US $640/tonne.
Exhibit 1: Sensex v/s metal stocks (1QFY2011) Exhibit 3: Average world export HRC prices
Metal Majors Abs. Relative to 1,200
Returns (%) Sensex (%) 1,000
Sesa Goa (25.0) (26.0)

(US $/tonne)
800
SAIL (23.7) (24.7) 600
Tata Steel (23.2) (24.2) 400
Hindalco (20.3) (21.3) 200
Sterlite Ind (20.0) (21.0) 0

1QFY08 3QFY08 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
Hindustan Zinc (19.5) (20.5)
BSE Metal index (18.2) (19.2)
JSW Steel (14.0) (15.0) Exhibit 4: Chinese export HRC prices (FOB)
NMDC (9.8) (10.8) 1200
Nalco 4.5 3.5 1000
Sensex 1.0 800

(US $/tonne)
Source: Bloomberg, Angel Research 600
Exhibit 2: Metal Index - Relative returns to Sensex 400
40 37.6 200
30 26.7 0
20.8 1QFY08 3QFY08 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
20
12.9 13.5
10.5
12.7 Source: Bloomberg, Angel Research
10 8.1
(%)
1.7
0 The average domestic HRC price increased by 24.2% yoy and
(10)
1QFY08 3QFY08
(7.1)
1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
6.6% qoq to Rs37,700/tonne as the prices last year were at
(20)
their lows. For the first time in May 2010 since September 2009,
(17.0)
(19.2)
the domestic prices traded at a discount of 4.6% to the landed
(30) (27.5)
prices.

Metals
Exhibit 5: Domestic HRC prices Exhibit 6: Iron ore prices and inventory in China
70,000 200 90
180 80
60,000
160 70
50,000 140
(US $/tonne)
60
(Rs/tonne)
(mn tonnes)
40,000 120
50
100
30,000 40
80
30
20,000 60
40 20
10,000
20 10
0 0 0
Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10
Domestic HRC Prices Landed cost Indian Iron ore 63% Fe, CFR China (LHS) Iron ore inventory (RHS)
Source: Crisil Research, Angel Research Source: Bloomberg, Angel Research
Domestic demand outpaces production: According to the World During the quarter, NMDC hiked its domestic prices by ~50%,
Steel Association, global crude steel production in April 2010 doubled its export price for Japanese and Korean players and
stood at 122mn tonnes, up 35.7% yoy. Meanwhile, Indian steel switched to quarterly contracts. We feel the company's volumes
consumption in April 2010 rose by 9.6% yoy to 4.14mn tonnes, would be impacted due to the ongoing Naxal activities at its
higher than the domestic steel production. Steel production mining area.
during the period rose by 5.3% to 4.9mn tonnes (4.6mn tonnes).
Outlook - Steel prices to remain subdued in near term
Crucial Chinese development in 1QFY2011
Steel producers across the globe have cut prices for June and
z Ban on low -grade iron ore imports: In April 2010, as per
low-grade July deliveries. While the raw material cost push is certain, we
media reports, China's iron ore trading association had put a believe it is unlikely that steel producers would undertake any
ban on import of iron ore with less than 60% Fe content. further price cut from here on. However, steel prices may remain
However, the ban does not apply to steel mills and their licensed subdued in the near term due to the slowdown in demand in
agents. In our view, if the ban exists it could potentially hit Sesa the construction industry ahead of the monsoon.
Goa's volumes as it exports low-grade ore, mainly to China
Higher realisation is likely to boost the top line of the companies
(~85%).
under our coverage. We expect top line to grow by nearly
z De -incentivising steel exports and CNY revaluation: The
De-incentivising 5-46%. Margins of steel companies are likely to expand by
Chinese Government has withdrawn the 9% rebate on HRC around 380-1,460bp yoy. We maintain a Buy on TTata ata Steel
and 13% rebate on CRC with effect from July 15, 2010. and JSW Steel.
Moreover, another important development that is likely to affect
Non-ferrous sector
the industry going forward is CNY revaluation. We believe it
would benefit Indian steel companies as dollar-denominated Metal prices on the LME were on a downward trend since the
steel prices would increase in the international market. beginning of the quarter due to concerns over sustainability of
strong Chinese consumption and fears about euro zone's debt
z Cost push exists: In our view, cost increase for the steel
problems that could lower demand for metals. Average LME
companies is certain due to the recently negotiated coking coal
prices of copper, aluminium, zinc and lead fell by 2.7%, 3.1%,
prices. The settlement of benchmark coking coal contracts for
11.7% and 12.7% respectively, while alumina prices were up
July-September 2010 quarter was higher by 12.5% at
2.9% on a qoq basis. During the quarter, LME inventory levels
US $225/tonne (US $200/tonne for April-June 2010). Given
of copper and aluminium fell by 12.3% and 3.7%, respectively,
the continued production growth in China, the settlement of
but zinc and lead inventory was up by 13.8% and 8.0%,
benchmark iron ore contracts for July-September 2010 as per
respectively. However, base metal prices showed a strong yearly
media reports is expected higher at US $147/tonne
performance, primarily due to the low base effect. Average LME
(~US $100-110/tonne for Apr-June 2010). During the quarter,
prices of copper, aluminium, alumina, zinc and lead increased
average spot iron ore prices for 63% Fe grade (CFR, China)
by 49.4%, 39.8%, 60.5%, 36.3%, 28.9%, respectively, on a
increased substantially by 141.5% yoy to US $166/tonne
yearly basis.
(US $69/tonne) and 24.2% sequentially (US $134/tonne).

Metals
Exhibit 7: Average base metal prices (US $/tonne) Non-ferrous sector outlook - Downside limited
1QFY11 1QFY10 yoy % 4QFY10 qoq %
Copper 7,011 4,694 49.4 7,202 (2.7)
In the near term, China's decision to allow its currency to
appreciate may provide some respite for metal prices. Moreover,
Aluminium 2,092 1,496 39.8 2,158 (3.1)
downside from current levels of ~US $2,000/tonne for
Alumina 335 209 60.5 325 2.9
aluminium and ~US $1,800/tonne for zinc is limited as prices
Zinc 2,020 1,481 36.3 2,288 (11.7) are near the marginal cost of production. However, we believe
Lead 1,945 1,509 28.9 2,229 (12.7) if the Chinese economy slows down from its frenetic pace, we
Source: Bloomberg, Angel Research may not see any uptick in international metal prices despite the
recent CNY appreciation.
Exhibit 8: Quarterly price trend
10,000
We expect the non-ferrous companies to register positive
8,000 top-line growth on a yoy basis. Further, margins of Nalco, Sterlite
and Hindustan Zinc are likely to expand by nearly
(US $/tonne)
6,000
~850-1,121bp yoy, whereas margins of Hindalco are likely to
4,000
decline by 227bp yoy. Hindustan Zinc, Hindalco and Sterlite
2,000 remain our top picks in the sector
sector..
0
1QFY05 4QFY05 3QFY06 2QFY07 1QFY08 4QFY08 3QFY09 2QFY10 1QFY11
Copper Zinc Aluminium Lead
Exhibit 9: Base metal inventory levels (Indexed to 100)

350
300
250
200
150
100
50
0
Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10
Copper Aluminium Zinc Lead

arg Reco.
Hindalco* 144 4,986 28.8 17.3 (227) 556 15.7 2.9 2.9 20.5 19.1 20.3 7.0 7.5 7.1 208 Buy
Hind. Zinc 941 2,392 56.7 60.1 886 1,158 61.0 27.4 61.0 95.6 119.8 162.4 9.8 7.9 5.8 1,399 Buy
JSW Steel 1,028 5,817 45.8 22.8 553 565 141.2 30.2 141.2 39.4 103.8 127.4 26.1 9.9 8.1 1,360 Buy
Nalco 430 1,459 58.3 29.4 1,121 279 120.7 4.3 120.7 12.9 15.8 18.7 33.3 27.2 23.0 316 Sell
NMDC 263 1,643 28.6 69.3 (485) 908 17.3 2.3 17.3 8.7 18.1 21.7 30.2 14.5 12.1 247 Reduce
SAIL 190 9,391 4.9 24.8 381 1,462 10.2 3.5 10.2 16.4 15.5 16.7 11.6 12.3 11.4 - Neutral
Sesa Goa 347 2,445 141.7 60.0 1,521 1,197 183.4 13.3 147.8 30.4 48.3 52.3 11.4 7.2 6.6 - Neutral
Sterlite Inds 161 6,987 54.0 30.1 852 1,259 87.2 3.7 87.1 11.5 22.9 25.0 14.0 7.0 6.4 245 Buy
Tata Steel* 475 6,906 24.3 44.8 1,457 1,866 136.3 21.1 103.8 (25.0) 61.0 57.2 - 7.8 8.3 697 Buy
Source: Company, Angel Research; Note: Price as on July 2 , 2010; Full year EPS calculations based on fully diluted equity; * FY2010, FY2011 and FY2012 numbers are
consolidated and quarterly estimates are standalone numbers
Analyst : PParesh
aresh Jain/Pooja Jain
Jain/Pooja

Oil & Gas

Trend is up On the supply side, as per the IEA's June outlook the OECD
stocks increased by 48mnbbl in April 2010 to 2,726mnbbl.
During 1QFY2011, crude prices were volatile in the range of
Thus, end-June demand cover rose to 60.5 days, up by more
US $66-87/bbl. Natural gas prices, which witnessed weakness
than a day from the downward revised end-March readings.
(ruling around US $4/mmbtu) in the latter part of the previous
The global oil supply fell by 0.6mnbpd to 86.3mnbpd in May
quarter, showed strength (ruling around US $4.5-5/mmbtu)
due to lower non-OPEC output resulting from seasonal
towards end of 1QFY2011. Petrochemical margins weakened
maintenance. However, 2010 non-OPEC output has been
during the quarter on account of reduction in cracker margins;
revised upwards by 0.1mnbpd to 52.3mnbpd amidst
however, PP margins and polyester margins improved during
slower-than-expected decline in North Sea. This year's growth
the quarter. Refining margins were subdued on a qoq basis.
of 0.8mnbpd from non-OPEC countries comes over and above
Crude volatile in a narrow range the 0.8mnbpd growth in OPEC's natural gas liquid (NGLs).
Crude prices were volatile in the range of US $66-87/bbl during OPEC crude oil supply in May was down slightly versus April,
the quarter. However, on an average, crude prices fell by 0.8% with higher Iraqi production offset by supply outages in Nigeria
during 1QFY2011. On a month-on-month (mom) basis, crude and Angola. In all, May crude oil output fell by 30kbpd to
prices were at the higher end of the range during April, whereas 29.0mnbpd leaving spare capacity of around 5.4mnbpd. The
it hovered at the lower end of the range during May. Thereafter, underlying 2010 'call on OPEC crude and stock change' remains
in June, crude prices hovered around US $75/bbl levels. Crude at 28.7mnbpd, peaking at 29.1mnbpd in 3QCY2010.
had fallen to around US $ 66/bbl in May on demand concerns On the demand side, IEA has revised global oil demand
from Europe due to the sovereign debt crisis and strengthening upwards by 60kbpd to 86.4mnbpd for 2010 on stronger-than-
US dollar. However, the recovery seen thereafter (four-week rally expected preliminary OECD data. However, downside risks
post May 24) came on the back of the decline in the US Dollar remain. Global demand growth in 2010 is now seen at
Index and optimism that Europe's debt crisis would not stymie +1.7mnbpd (+2.0%), deriving almost entirely from the
the global economic recovery. OPEC is comfortable with the non-OECD.
current crude price and thus does not intend to hold a meeting
Natural gas strengthens
to discuss oil production before its scheduled conference in
October 2010. According to Kuwait's Oil Minister, Natural gas, after witnessing weakness (ruling around
Sheikh Ahmad al-Abdullah al-Sabah, the favoured crude price US $4/mmbtu) in the latter part of the previous quarter, exhibited
for the group (OPEC) is between US $75-85/bbl. strength (ruling around US $4.5-5/mmbtu) at the end of the
quarter under review. From lows of US $3.72/mmbtu at the
The Indian basket of crude averaged at US $78.4/bbl during beginning of the quarter, Henry Hub natural gas prices touched
1QFY2011 as against the 4QFY2010 average of a high of US $5.17/mmbtu in the second fortnight of June.
US $76.3/bbl. We maintain our stance of subdued oil prices in Average natural gas prices were, however, lower on a sequential
the near term and expect crude to consolidate at current levels, basis (on account of firm prices in the first half of the previous
especially owing to the inventory overhang in the OECD quarter) at US $4.3/mmbtu as against the 4QFY2010 average
countries and increasing NGL output by OPEC. Thus, we expect of US $5.1/mmbtu, thereby registering an average fall of 15.8%.
crude prices to hover at US $75-85/bbl in the visible future. Thus, prices were on a recovery path throughout 1QFY2011
Exhibit 1: WTI crude, Indian basket of crude oil after the fall in the latter half of the previous quarter, though still
150 way below the FY2010 high of US $7.5/mmbtu hit in January 2010.
125
Exhibit 2: Natural gas - Henry Hub prices
100
14.00
US$/ bbl
75 12.00
50 10.00
US$/mmbtu
25 8.00
6.00
0
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Mar-07
May-07
Sep-07
Nov-07
Mar-08
May-08
Sep-08
Nov-08
Mar-09
May-09
Sep-09
Nov-09
Mar-10
May-10
4.00
2.00
WTI Crude Avg. WTI price
Indian Crude oil basket Avg. Indian Crude oil basket
0.00
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Mar-07
May-07
Sep-07
Nov-07
Mar-08
May-08
Sep-08
Nov-08
Mar-09
May-09
Sep-09
Nov-09
Mar-10
May-10
Henry Hub Price Average Henry Hub NG Price

Oil & Gas
Spot LNG prices were subdued on a qoq basis with cargoes gas prices were last revised in 2005. Current prices will be
being sold at US$5-5.5/mmbtu. Notably, in spite of the uptick effective till FY2014. In a related development, the Cabinet also
in demand, the market is expected to remain amply supplied in approved the marketing margins of US $0.112/mmbtu
2010-11 as new production in Russia, Yemen, Indonesia and (Rs200/scm) for GAIL on APM gas marketing volumes.
Qatar comes on stream. Thus, we expect spot LNG prices to be On June 25, 2010, the EGoM in a major policy decision freed
subdued going ahead. the petrol price from the government's control. On an immediate
Petchem margins weakened, refining margins subdued basis, petrol prices were increased by Rs3.7/litre. Diesel prices
were hiked by Rs2/litre and are to be deregulated in a phased
Petrochemical margins weakened during the quarter following
manner. However, no timeline for the decontrol was mentioned.
the weakening in the cracker margins and integrated PE In the cooking fuel segment, domestic LPG prices were increased
margins. Non-integrated margins were largely stable during by Rs35/cylinder, and kerosene prices by Rs3/litre. We believe
the quarter, while the polyproplene (PP) margins improved these steps are in the right direction as they reduce uncertainty
during the quarter. in terms of earnings and encourage investments in the sector.
In the refining segment, diesel cracks increased in May in the RIL-RNRL enter new gas supply deal
US and Europe, while differentials in Singapore remained
In the much-awaited decision on the RIL-RNRL legal wrangle,
relatively flat mom. In the US, stronger demand for diesel
the Supreme Court (SC) delivered its final verdict on May 7,
evidenced by increased trucking and rail activity, boosted crack
2010 in favour of RIL. The SC ruled that the family MoU under
spreads to their highest level in 16 months. Diesel cracks for
which RNRL claimed cheap gas was not binding and that the
WTI at the US Gulf Coast were up by US $3.15/bbl in May to
government regulation overrides the MoU. The SC gave RIL
US $12.15/bbl, and in NY Harbor by a stronger US $3.50/bbl
and RNRL six weeks to renegotiate the gas supply agreement in
to just shy of US $14/bbl. After weakening during the first week
line with the government’s regulations. The verdict squashed
of May, upgrading margins thereafter remained mostly
the Bombay High Court judgment of June 15, 2009, which
unchanged. However, on a monthly basis, upgrading margins
had directed RIL to supply RNRL 28mmscmd of gas at
deteriorated by US $0.94/bbl in Europe, US $0.61/bbl in US $2.34/mmbtu for 17 years starting commissioning of
Singapore and US $0.17/bbl in the USGC. Reliance Power's gas-based power plant.
On a monthly basis, May refining margins increased across Post the SC verdict, RIL and RNRL entered into a new gas supply
regions. Spot prices for refined products declined in all major agreement. While details of the agreement have not been
regions in May, but crack spreads largely improved due to the disclosed, speculation is rife that RIL will supply 28mmscmd to
relatively sharper downturn in the crude markets. Gasoline crack RNRL for 17 years at the government fixed price of
spreads were mostly firmer in the US, but largely unchanged in US $4.2/mmbtu. The quantity and terms of the supply are likely
Europe and weaker in Singapore on ample supplies. In the US, to be determined by the EGoM.
onset of the peak summer driving season boosted spreads
With the gas supply agreement in place, the ADAG Group will
though preliminary data indicates flat demand in May compared
now speed up its power generation projects. It may take 3-4
to a year ago.
years for creating a gas-based generating capacity of 8,400MW,
Overall, refining margins were subdued for the quarter. including its existing projects and the upcoming one in Dadri
However, on account of improvement in the spread between and Uttar Pradesh. The move improves the project visibility for
light and heavy crude oil, conversion margins for the complex ADAG Group's upcoming power projects.
refineries are likely to improve. Oil & gas index - Outperformance to Sensex after 4
Key Developments quarters of underperformance
Major deregulation moves - APM gas price hiked, auto On the bourses, the Oil & Gas index outperformed the Sensex
fuels deregulated by 6.1% during 1QFY2011. The OMCs' under-recoveries have
been mounting owing to the firm crude prices. Hence, the
The government hiked the APM gas price sold by ONGC and EGoM's decision to de-regulate the auto fuel prices (diesel to
OIL from nomination blocks from Rs3.20/scm to Rs6.82/scm. be done later) and increasing kerosene and domestic LPG prices
Prices now rule at US $4.2/mmbtu (pre-royalty adjusted) from has come as a positive surprise for the market and relief for the
US $1.9/mmbtu earlier. After the hike, APM prices are now in OMC stocks. It led to outperformance by the entire set of PSU
line with the EGoM-determined gas prices for the KG-D6. APM stocks as post this decision under-recoveries and uncertainties

Oil & Gas
have reduced. HPCL, BPCL and IOC gained whopping 47.5%, We expect RIL to report average refining margins of
28.2% and 35.7% respectively, whereas ONGC moved up US $8.0/bbl for the quarter. On the petrochemical front,
20.2% during 1QFY2011. Gains in ONGC was also led by the performance is likely to be flat on qoq basis while the cracker
increase in APM gas price. GAIL was up 14% after being allowed margins have weakened; PP margins and polyester margins
to charge marketing margin on APM gas, but gains were capped have improved on qoq basis. Production of gas from the KG
as no clarity emerged on it being exempted from sharing any basin is likely to average at around 60mmscmd during the
subsidy. On the other hand, bellwether RIL (has weightage of quarter.
60% in the oil & gas index) gained 1.1% in line with the Sensex GAIL
GAIL's performance during the quarter is likely to be driven by
performance. Cairn India ruled flat on account of average crude increased transmission of KG gas volumes on the yoy basis
price losing 0.8% during the quarter. coupled with improved performance in the petrochemical
Exhibit 3: Relative performance to Sensex segment and benefits of marketing margins on the APM gas
60 sales. However, performance of the LPG & liquid hydrocarbon
50
segment is likely to be weak on account of higher subsidy
40
30
burden. Overall, GAIL's performance is likely to be strong for
20 the quarter.
(%)
Petronet LNG is likely to witness growth in volumes on a yoy

10
0
(10) Q3'FY09 Q4'FY09 Q1'FY10 Q2'FY10 Q3'FY10 Q4'FY10 Q1'FY11 basis following expansion at the Dahej terminal. We expect
(20) volumes during the quarter to stand at 92TBTUs.
(30)
GSPL is likely to report 36.4% yoy growth in bottom-line largely
(40) BSE Sensex BSE Oil & Gas
on account of the increase in volumes in the last one year.
IGL is likely to continue to post strong volume growth driven by
Outlook higher conversion of CNG vehicles witnessed during the trailing
ONGC
ONGC's performance for the quarter is likely to be dependent one year. CNG volumes during the quarter are estimated to
on the subsidy sharing mechanism. During FY2010, upstream have increased 13.7% yoy. We also expect operating margins
companies paid subsidy only on auto fuels. However, there is to improve on a qoq basis during the quarter on account of the
no announcement of the subsidy sharing formula for the current CNG price hike.
fiscal despite the initial steps towards fuel price reforms. Pending Gujarat Gas volumes will continue to be supported by LNG on
clarity, we have assumed upstream companies bearing subsidy account of subdued LNG prices. We expect the company to
only on auto fuels. For 1QFY2011E, ONGC is likely to report report volume of 3.24mmscmd for the quarter, registering a
average crude realisation of US $80.6/bbl at the gross level; growth of 10% yoy and 1.5% qoq. Gross spread is expected to
we expect the company to bear subsidy of US $33.5/bbl leading be flat sequentially at Rs4.2/scm on 0.7% appreciation in the
to net realisation of US $47.1/bbl. Rupee.
RIL is likely to report subdued performance during the quarter Overall, 1QFY2011E is likely to be mixed for our universe of
primarily on account of the subdued margins in refining and stocks.
petrochemical business coupled with stagnant gas production.

arg Reco.
Cairn India 296 795 287.8 54.7 (972) 317 51.6 1.7 51.6 5.5 23.2 46.1 53.4 12.8 6.4 315 Accumulate
GAIL 461 6,451 7.1 22.1 445 881 34.2 6.9 34.2 24.8 30.3 35.2 18.6 15.2 13.1 580 Buy
GSPL 101 266 26.3 93.4 (50) 110 36.4 2.0 36.3 7.4 7.7 8.4 13.7 13.1 11.9 120 Buy
Gujarat Gas * 306 417 23.0 24.8 247 62 32.6 4.9 32.6 13.6 17.0 20.4 22.6 18.1 15.0 - Neutral
IGL 281 318 35.9 34.3 (257) 60 24.9 4.3 24.9 15.4 18.1 22.1 18.3 15.5 12.7 317 Accumulate
Petronet LNG 79 2,486 (4.8) 10.0 305 114 10.4 1.5 10.4 5.4 6.3 6.7 14.6 12.4 11.7 87 Accumulate
ONGC ^ 1,305 11,145 (25.1) 53.4 (1,050) 2,255 (53.5) 10.5 (53.5) 90.7 114.6 123.3 14.4 11.4 10.6 - Neutral
RIL ^ 1,068 60,126 87.6 16.1 (239) 4,872 34.0 14.9 34.0 48.6 69.5 87.3 22.0 15.4 12.2 1,260 Buy
Source: Company, Angel Research; Note: Price as on July 2, 2010; Note: * Calender year, ^ standalone numbers for quarter and consolidated numbers for full year;
RILs EPS does not include gain from Treasury stock sale.
Analyst: Deepak PPareek

areek / Amit Vora
Vora

Pharmaceutical
Pharma sector continues to shine Pharma will be launching generic versions of other strengths of
Stalevo on October 2, 2012, and generic versions of Comtan
During 1QFY2011, the BSE healthcare (HC) index surged 7.9%,
on April 1, 2013. Stalevo and Comtan reported sales worth
outperforming the Sensex by 6.9% and marking the fourth
US $113mn and US $87mn, respectively, in the US in 2008.
consecutive quarter of outperformance. Growth during the
We expect Sun Pharma to enjoy 180-day exclusivity for Stalevo
quarter was mainly on account of a strong outlook for the
100 and Stalevo 150.
pharma sector for FY2011.
Exhibit 1: BSE HC index outperforms the Sensex Cipla buys stake in biotech companies: Cipla's management
50
has announced that it will be investing US $65mn over the next
three years in two biotech companies, one in India and the
40
other in Hong Kong, targeting off-patent products in the
30 oncology, rheumatism and asthma therapeutic segments. Cipla
20
will acquire a 40% stake in the Indian biotech company
Mabpharm for US $40mn (setting up a biosimilar facility in
( %)
10
Goa). Cipla will also acquire a 25% stake in a Hong
0 Kong-based biotech company Biomab (setting up a biosimilar
facility in China). Through both the investments, Cipla will get
(10) 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
the rights to market all the biosimilar products of the companies
(20) in India and globally. Cipla expects the first biotech product to
(30)
BSE HC Sensex hit the Indian domestic market by end of CY2011.
DRL Allegra-D24 launch delayed: The US District Court of New
In our coverage universe, among the large caps, Jersey has upheld Sanofi-Aventis and Albany Molecular
GlaxoSmithKline Pharmaceuticals gained 23.2% during the Research's motion for a preliminary injunction against DRL
quarter, as MNC pharma scout for acquisitions in the domestic application to market generic Allegra-D24. DRL, the sole
formulation market, which is one of the fastest growing first-to-file (FTF) holder of Allegra-D24, planned to launch 'at
markets. Lupin Pharmaceuticals continued to be an outperformer risk'. However, this verdict blocks DRL's launch until the final
gaining 21.0%, as the company built a formidable presence in legal resolution of the issue. Management has stated that it
the largest generic US market. DRL gained 13.7% during the disagrees with the verdict and would appeal against the same.
quarter, as media reports suggest that the company is The outcome of the appeal may take six months. This interim
contemplating the demerger of its domestic formulation business injunction is a temporary setback for DRL as the company will
to unlock value for its shareholders. On the other hand, Ranbaxy not be able to go ahead with the planned launch for now.
fell by 3.0% and Sun Pharma was flat during the quarter. Nevertheless, we continue to remain positive on the product
launch (likely in 4QFY2011), subsequent to the court's approval.
Among mid caps, Cadila Healthcare was an outperformer,
Given that DRL is the sole known FTF holder of
gaining 19.6% on the back of strong FY2011 guidance and
Allegra-D24 until now, it will have exclusivity on the drug for a
the supply agreement with Abbott. Piramal Healthcare (PHL)
significant period. DRL is also seeking to persuade the court to
gained 13.1% post the sale of its domestic formulation
retain the provisions of temporarily restraining the order relating
business for US $3.72bn to Abbott. Ipca Labs was up 8.2%
to the recovery of lost profits due to the delayed launch.
during the quarter. Indoco Remedies gained 23.1% on the back
of strong guidance on the top line and OPM fronts for FY2011. Piramal Healthcare sells domestic formulation business: In the
PHL-Abbott deal, PHL has sold its domestic formulation business
Key Developments
(52% of FY2010 sales) for US $3.72bn. PHL is the fourth largest
Sun Pharma settles with Orion: Sun Pharma has settled the US player, with a market share of 4.2%, as per MAT ORG IMS
patent litigations pertaining to the generic version of Stalevo March 2010. Post the acquisition, Abbott would emerge as the
and Comtan with Orion. Under the terms of the agreement, number one player in the Indian formulation market with a
Sun Pharma will be able to launch generic versions of Stalevo market share of nearly 7%. With this deal, PHL's domestic
100 (25/100/200 mg) and Stalevo 150 (37.5/150/200 mg) formulation business, having sales of around Rs1,876cr in
tablets in the US on April 1, 2012. In addition to these, Sun FY2010, will fetch good valuations of around 9x FY2010

Pharmaceutical
EV/sales and nearly 6.1x FY2012E EV/sales. This landmark deal top-line growth, mainly driven by product launches in the US
signifies the growing interest of global MNCs in the Indian and strong domestic formulation traction. Cadila Healthcare
domestic formulation business and signals increasing likelihood will likely post healthy growth owing to its robust performance
of further consolidation in the industry, justifying premium in the US and the domestic market. PHL is expected to post
valuations that the sector enjoys. strong numbers on the back of its robust domestic business.
We expect most companies in our coverage to witness an
Exhibit 2: M&A deals in the pharma industry
expansion in OPM, resulting in strong growth in net profit. We
Acquirer Target Deal Size EV/Sales (x)
expect 1QFY2011 to be one of the good quarters for pharma
Mylan Matrix labs 736 4.1
companies on both the top-line and bottom-line fronts, given
Daiichi Ranbaxy 4,600 4.0
the product launches in the US and OPM expansions.
Fresenius Kabi Dabur Pharma 273 3.7
Sanofi Aventis Shantha Biotech 784 8.7 Exhibit 3: Sales growth and OPM for 1QFY2011E
Hospira Orchid Chemicals (Injectable division) 400 4.0 40.0
34
Abbott Piramal Healthcare (Domestic division) 3,720 9.0 30.0

22
Source: Company, Angel Research; Note: Figures in US$ million 20 19 19
20.0 16
13
(%)
Cadila enters into a supply agreement with Abbott: Cadila's 10.0 7
1
management has announced that it has received Rs47.4cr from 0.0
Abbott as a milestone payment under the strategic alliance
(10.0) (5)
entered between the two companies in May 2010 for the supply Sun Pharma Lupin Cipla Ranbaxy DRL
of 24 branded generic products to 15 emerging markets. The Sales growth OPM
agreement also has an option for including 40 more products Source: Angel Research
over the term of the collaboration. The deal is likely to
Sun Pharma and Lupin to outperform
commercialise in FY2012. We expect the deal to be positive, as
it should enable Cadila to leverage its strong product pipeline For 1QFY2011E, among the large caps in our coverage
and manufacturing capabilities. universe, we expect Sun Pharma to post strong top-line growth,
driven by its US and domestic formulation businesses. During
Orchid Chemicals acquires K aralex Pharma: Orchid Chemicals'
Karalex
the quarter, Sun Pharma received seven ANDA approvals from
management has announced entering into an agreement to
US FDA, one of the highest in our pharma coverage universe.
acquire Karalex Pharma, a US-based generic marketing and
We expect the company's revenue to grow by 21.7% to Rs950cr
sales service company, through an all-cash deal. Though the
for the quarter. The company's OPM is expected to expand to
company has not disclosed the purchase consideration, it is
34.2%. However, net profit is expected to rise by 95.9% to
estimated to be in the range of 2-2.5x price/sales. Orchid
Rs308cr on the back of a low base effect.
proposes to fund the deal through internal accruals, as it has
residual cash of Rs300cr from the Hospira deal. On a Lupin is likely to record strong 19.6% growth in top line during
conservative basis, we expect the deal to contribute US $10mn 1QFY2011E to Rs1,298cr on account of traction in its US
in FY2011E and US $15mn in FY2012E to Orchid's top line, business, viz. launch of the generic version of Lotrel in
with EBITDA margins to be in line with the current levels of 4QFY2010, with a market share of more than 20% and strong
17-18%. With this acquisition, Orchid will get front-end presence growth in the domestic formulation business. On the operating
in the US and reach its customers directly, which will increase front, we expect the company's OPM to expand by 100bps to
overall margins of its US generic business, contributing 13% to 18.9%. Net profit will likely grow by 26.0% to Rs176cr on the
FY2011E sales. back of robust top-line growth and OPM expansion.
Strong expectations for 1QFY2011E Ranbaxy is expected to post modest top-line growth of 1.5% to
Rs1,818cr, driven by its US business as the company continues
The Indian pharmaceutical sector is expected to post strong
to benefit from Valtrex in the second quarter also. The company
growth on the sales front. We expect our coverage universe to
is expected to report OPM of 13.4%. However, the company
register 7.5% yoy growth in top line, despite the 6% yoy rupee
will likely report MTM losses on its forex hedges. As a result,
appreciation, on an average, against the US dollar for
Ranbaxy is expected to report net profit of mere Rs80cr.
1QFY2011E. Sun Pharma and Lupin are expected to post strong

Pharmaceutical
DRL is expected to report a 5.4% decline in sales to Rs1,684cr, expected to grow by 53.7% to Rs131cr, mainly driven by lower
as 1QFY2010 witnessed robust growth with the launch of the interest and depreciation costs.
generic version of Imitrex. Excluding the one-off, DRL's recurring
We estimate Ipca Laboratories' top line to grow by 16.4% to
sales are expected to grow by 6.0%, driven by the US and India
Rs417cr for 1QFY2011E. The company is expected to post
formulation segments. During the quarter, DRL received US FDA
strong growth on the export and domestic formulation fronts.
approval for the generic versions of Lotrel, Valtrex, Prograf and
The company's OPM is expected to expand by 63bp to 20.4%
Camptosar. On the OPM front, margins are expected to come
and net profit is expected to come at Rs53cr.
at 16.4%, with net profit of Rs167cr.
Indoco Remedies is expected to report top-line growth of 17.8%
Cipla is expected to post modest sales growth of 6.6% to
to Rs116cr, driven by the domestic formulation segment. While
Rs1,412cr, mainly driven by the domestic formulation segment.
the company’s OPM is expected to contract by 215bp to 16.8%
The company's OPM (excluding technical know-how fees) is
on the back of higher raw material cost. However, net profit is
expected to contract by 336bp to 18.6% on account of lower
expected to increase by 14.4% to Rs19.3cr, driven by other
gross margins and higher employee expenses. Further, net profit
income.
is expected to fell by 7.0% to Rs225cr on account of lower OPM.
Outlook and Valuation
Cadila expected to post strong growth
During the past one year, the BSE HC index has been one of
Cadila is expected to post strong top-line growth of 13.9% in
the best performing indices, rallying 61.9% and outperforming
1QFY2011E, driven by robust growth in the export and domestic
the market by 39.8%. On the back of rich valuations, we continue
formulation fronts. We expect the company's OPM to remain
to recommend a bottom-up approach. In the generic segment,
flat at 20.7%. However, net profit is expected to increase by
we now prefer LLupin,
upin, Cadila Healthcare, Cipla and Indoco
17.2% to Rs146cr, driven by top-line growth and lower
Remedies.
financial cost.
We continue to favour CRAMS, though the segment is witnessing
In case of PHL, we estimate the company to report 13.5% yoy
near-term hiccups because of inventory rationalisation and
top-line growth to Rs933cr because of strong traction in its
multiple mega global pharma mergers in CY2009. However,
domestic formulation business and increasing contribution from
most of the CRAMS companies are now witnessing an uptick in
the inhalation anaesthetic segment. We also expect PHL's CRAMS
order enquiries from global innovators, indicating an
segment to register growth during the quarter after a lull in
improvement in the global scenario. In this segment, we
FY2010. We expect margins to expand to 20.4%. Net profit is
recommend Dishman Pharma.

arg Reco.
Alembic 54 300 3.2 10.8 41 13.5 10.6 1.0 10.6 3.0 5.6 6.5 18.2 9.7 8.3 74 Buy
Aventis# 1,912 276 10.3 18.3 (285) 48.2 2.4 21.0 2.4 68.4 80.8 92.1 28.0 23.7 20.8 1,658 Reduce
Cadila 658 1,002 13.9 20.7 18 146.3 17.2 7.2 17.2 24.7 30.6 39.6 26.6 21.5 16.6 714 Accumulate
Cipla 337 1,412 6.6 18.6 (336) 224.8 (7.0) 2.9 (7.0) 13.5 13.9 17.1 25.0 24.2 19.7 360 Accumulate
Dishman 212 228 0.3 24.0 50 27.6 13.9 3.4 13.9 14.5 17.4 21.4 14.7 12.2 9.9 311 Buy
Dr. Reddy’s 1,435 1,684 (5.4) 16.4 (561) 166.7 (30.2) 9.9 (30.2) 20.9 59.1 78.1 68.8 24.3 18.4 - Neutral
Glaxo# 2,161 527 15.3 35.8 24 145.3 16.9 17.2 16.9 60.0 65.4 73.9 36.0 33.0 29.2 1,700 Sell
Indoco 492 116 17.8 16.8 (215) 19.3 14.4 15.8 14.4 34.3 39.5 54.1 14.4 12.5 9.1 541 Accumulate
Ipca Labs 293 417 16.4 20.4 63 53.0 6.6 4.2 6.6 16.4 19.5 23.7 17.8 15.0 12.4 - Neutral
Lupin 1,930 1,298 19.6 18.9 101 176.4 26.0 20.5 21.7 76.8 93.4 116.6 25.1 20.7 16.6 2,099 Accumulate
Orchid Chem* 170 275 (10.0) 17.6 (265) 10.3 - 1.5 - 48.2 10.0 15.7 3.5 17.1 10.9 - Neutral
Piramal Health 489 933 13.5 20.4 149 130.6 53.7 6.2 53.7 23.1 27.2 33.8 21.2 18.0 14.5 - Neutral
Ranbaxy Lab# 456 1,818 1.5 13.4 1,106 80.0 (88.5) 2.1 (88.5) 7.1 25.8 28.7 64.7 17.7 15.9 480 Accumulate
Sun Pharma 1,755 950 21.7 34.2 1,862 308.4 95.9 14.9 95.9 65.2 71.6 84.8 26.9 24.5 20.7 - Neutral
Source: Company, Angel Research; Price as on July 2, 2010; Note: Our numbers include MTM on Foreign Debt; PHL estimates include the sold domestic formulation business;
Alembic estimates include the demerged pharma business; # 2QCY2010; * The quaterly numbers are standalone financials
Analyst: Sarabjit Kour Nangra / Sushant Dalmia
Kour

Power
During 1QFY2011, the power sector continued to grapple with Operational Highlights
delays in capacity addition. Delays were primarily caused by
During 2MFY2011, the amount of power generated in India
failure on the execution front by developers and others issues,
rose by 7% yoy to 134.7BU (125.9BU). Thermal power
such as delay on the part of the government relating to the
generation rose by 5.8% yoy to 113.1BU, while hydro power
initiation of the bidding process and issues related to land
generated increased by 12.4% yoy to 18.1BU. The amount of
procurement. However, on a positive note, the fuel availability
nuclear power generated grew substantially by 20.7% yoy to
situation improved for gas-based plants, with increased
3.5BU. The PLF for 2MFY2010 stood at 77.7%, which was 113bp
availability of gas from the KG-D6 basin, giving a boost to
higher than the target of 76.6%.
capacity addition. For 1QFY2011, we expect the power
generating companies in our universe to report top-line growth Exhibit 2: Energy generation (bn units)
of 9.4% yoy, driven by capacity additions and increased tariffs. May ’10 May
May’10 ’09 chg (%)
May’09 2MFY11 2MFY10 chg (%)
Operating profits are expected to grow by 10.0% on a yoy basis, Thermal 56.4 53.2 6.0 113.1 106.9 5.8
primarily on account of reduction in fuel costs. Bottom line is
Hydro 9.7 8.5 14.1 18.1 16.1 12.4
also likely to rise by 5.2% on a yoy basis.
Nuclear 1.7 1.4 21.4 3.5 2.9 20.7
Capacity addition below targets
Total 67.8 63.1 7.4 134.7 125.9 7.0
Generation assets Source: CEA, Angel Research
Capacity addition until May 2010 from the beginning of the Fuel Scenario
eleventh plan period stood at 23,102MW, which is just 52% of
Coal
the capacity targeted to be achieved by May 2010. While the
CEA expects the actual capacity addition to be 62,488MW Coal-based plants account for 53% of India's total power
during the eleventh plan, we expect it to be lesser than this. generation capacity. During FY2002-10, the country's coal
Delays are expected to be on account of execution challenges consumption for power generation grew at a 6% CAGR from
relating to land acquisition, obtaining fuel linkage and statutory 240mn tonnes to 366mn tonnes. Thus, the availability of coal
clearances. For instance, request for the Chhattisgarh UMPP plays a critical role in the country’s total power generation.
qualification was postponed in 1QFY2011 due to nonavailability Currently, coal-based plants are facing shortage on account
of environmental clearance for coal block allocation. of various reasons such as delay in procuring coal linkages
and obtaining environment clearances and other regulatory
Exhibit 1: Generation capacity addition below targets
20,000 100
approvals, hurdles in expansions and logistical and
infrastructural issues.
15,000 80
India's coal imports have increased over the years. The country
(MW)
(%)
10,000 60
is expected to procure a major portion of its coal imports from
5,000 40 Indonesia and South Africa due to location advantage. India's
major power generating companies such as Tata Power, Reliance
0 20
FY2003 FY2005 FY2007 FY2009 2MFY2011 Power and JSW Energy have acquired coal mines abroad to
Target (T) Achievement (A) A as a % of T
satisfy their fuel needs.
Transmission lines Exhibit 3: Coal consumption for power generation

400
366
During 2MFY2011, 165circuit kilometer (ckm) were added to 350 330
355
the 500kV-HVDC transmission lines, as against the targeted 300 278 280
302
263
180ckm. Total addition to other categories of transmission lines 250
240
253
(Mn tonnes)
was at 2,110ckm, as against the targeted 2,150ckm. 200
150
Transmission sub-stations
100
During 2MFY2011, total addition to the 400kV sub-station stood 50
at 1,890MW, in line with the target. Further, 610MW of capacity 0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
was added to the 220kV sub-station category, as against the
targeted 1,300MW.

Power
Spot global coal prices have risen substantially on a yoy basis Exhibit 6: India facing a power-deficit scenario
during the quarter. Average prices of the New Castle Mckloksey 18.0 16.6
16.0 13.8 14.3
6,700kc coal stood at around US $100/tonne in 1QFY2011 14.0 12.2 11.2 11.7
12.3 12.0
12.6
as against US $65/tonne recorded in 1QFY2010.

12.0
13.0
10.0 9.9
(%)
11.0
8.0 9.9
9.6
Exhibit 4: Global coal price trend 6.0
8.8
7.1 7.3
8.4
4.0
250
2.0
0.0
200
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
2MFY2011
(US$/tonne)
150
Overall Peak
100
50
Key Developments
0
Jul-00
Dec-00
May-01
Aug-02
Jan-03
Jun-03
Apr-04
Jul-05
Dec-05
May-06
Aug-07
Jan-08
Jun-08
Apr-09
Feb-00
Oct-01
Mar-02
Nov-03
Sep-04
Feb-05
Oct-06
Mar-07
Nov-08
Sep-09
Feb-10
NTPC
Source: CEA, Angel Research In 1QFY2011, NTPC along with Coal India Ltd. (CIL)
Gas incorporated CIL NTPC Urja Pvt. Ltd. The JV has been formed
to carry on the business of acquisition, in part or full, of green
In FY2010, gas-based plants contributed 12.5% to the total field or operational coal/lignite mine blocks in India and abroad
amount of electricity generated in the country. Out of the present and development of all kinds of coal/lignite mining for supply
availability of natural gas (160mmscmd), nearly 40% is being of fuels to NTPC and other buyers. NTPC and CIL shall contribute
supplied to the power sector. equally to the equity share capital of the JV.
In a recent EGoM meeting, which finalised the total allocation CESC

of 91.6mmscmd gas, 43.2mmscmd was allocated to the power
In 1QFY2011, CESC acquired 100% ownership in Dhariwal
sector (31.2mmscmd on firm basis and 12mmscmd on fallback
Infrastructure Projects Ltd. (DIPL). CESC, which had already
basis). Further, 10mmscmd gas has been allocated on fallback
acquired a 50% stake in DIPL in FY2010, acquired the remaining
basis to captive power plants. The total estimated gas
50% stake for Rs100cr as per media reports (Economic Times:
requirement of the power sector by the end of the eleventh plan
June 7, 2010). DIPL is currently executing a 300x2MW thermal
period is 126.5mmscmd.
project at Chandrapur, Maharashtra. The project is expected to
Exhibit 5: Rising gas demand by the power sector be commissioned in two phases in March and June 2013. The
140 project's financial closure and environmental clearance have
120 been obtained.
100
Reliance Power
(mmscmd)
80
60
Reliance Coal Resources, a subsidiary of Reliance Power, entered
into share purchase agreements to acquire the entire share
40
capital of two coal companies in Indonesia. The Indonesian
20
companies own three coal mines in Indonesia. Coal from these
0
FY2008 FY2009 FY2010 FY2011E FY2012E mines will be used in the Krishnapatnam UMPP and other power
Source: Infraline projects of Reliance Power.
Power deficit situation Reliance Power acquired three power plants of Reliance
Infrastructure, having a generation capacity of 433MW. The
Power demand in India is growing on the back of increased
transferred assets have been valued at Rs1,095cr, comprising
domestic, agricultural and industrial consumption. However,
a 220MW plant at Samalkot in Andhra Pradesh, a 165MW
capacity expansion has not been in line with the targets, leading
plant at Kochi in Kerala and a 48MW plant in Goa.
to continued power deficit. The country's overall and peak
power-deficit levels rose during 2MFY2011 and stood at 13.0%
and 14.3%, respectively.

Power
JSW Energy We expect CESC to register 7.5% yoy growth in its standalone
top line to Rs870cr, aided by increased volumes due to the
JSW Energy entered into a Memorandum of Understanding
recent commissioning of the 250MW Budge-Budge plant and
(MoU) with Osho Venture FZCO (Osho), Dubai, and Indian
higher tariff charged during the quarter. In1QFY2011, the
Ocean Mining (Pty) Ltd. (IOM), South Africa, with an intention
company charged a higher tariff of Rs4.57/unit in the regulated
to acquire 70% equity interest in IOM from Osho. IOM has
area as against Rs3.91/unit in 1QFY2010. The company's
certain coal prospecting rights in the northwest region of South
standalone OPM is expected to expand by 421bp yoy to 27.7%.
Africa. The MoU is part of the strategy to enhance fuel security
We expect CESC to record 23.5% yoy growth in its net profit to
through long-term imported coal linkages.
Rs130cr.
Performance of power stocks during 1QFY2011
We expect GIPCL to register a 22.0% yoy increase in revenue in
During the quarter, power stocks under our coverage 1QFY2011, primarily due to a substantial increase in its sales
underperformed the Sensex. PTC was the top loser, shedding volume due to the recent commissioning of the 250MW Surat
10.4% during the quarter. NTPC, CESC and GIPCL fell by 3.8%, Lignite Power Plant. We expect the company to sell 1,312MU of
1.6% and 3.9%, respectively. However, the BSE power index power during the quarter, up 16% on a yoy basis. The company's
gained 2.1% as against 1.0% returns made by the Sensex. OPM is expected to expand by an impressive 315bp to 26.8%,
primarily on account of cheaper gas. We expect GIPCL's bottom
Exhibit 7: Power stocks’ performance in the BSE
line to increase by 40.5% to Rs41.3cr in 1QFY2011E.
Sensex 1.0%
We expect PTC to record a 44.9% yoy decline in its standalone

BSE Power 2.1%
top line to Rs1,307cr. We expect the company to trade 3,350MU
NTPC -3.8%
of power during the quarter, resulting in a decrease of 20.3%
CESC -1.6% yoy. We have assumed an average realisation of Rs3.9/unit.
GIPCL -3.9% We expect the company's net profit to decline by 48.1% yoy to
Rs17.3cr.
PTC -10.4%
-12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% Industry Outlook
Going ahead, we expect capacity addition, which has been
Expected financial performance in 1QFY2011 beset by a number of execution issues currently, to gather some
steam over the last two years of the eleventh plan period, as
We expect NTPC's top line to grow 9.2% yoy to Rs13,110cr,
has been the trend historically. However, the power-deficit
aided by 5.0% volume growth. The company's operating profit
scenario is likely to persist, as supply is not likely to keep up
is expected to increase by 8.5% yoy to Rs3,445cr. We estimate
with demand. Our overall outlook continues to remain positive
NTPC's net profit to grow by a moderate 3.9% to Rs2,279cr, on
for the sector, driven by its huge growth potential. We
account of high depreciation costs.
recommend an Accumulate rating on NTPC and a Buy rating
on GIPCL
GIPCL,, PT
PTCC and CESC.

arg Reco.
CESC 375 870 7.5 27.7 421 130 23.5 10.3 23.5 34.5 43.0 54.8 10.9 8.7 6.8 460 Buy
GIPCL 115 305 22.0 26.8 315 41 40.5 2.2 40.5 7.1 9.6 12.0 16.3 12.0 9.6 135 Buy
NTPC 202 13,110 9.2 26.3 (18) 2279 3.9 2.8 3.9 10.7 11.8 14.1 18.9 17.2 14.4 230 Accumulate
PTC 100 1,307 (44.9) 0.7 9 17 (48.1) 0.6 (48.1) 3.2 5.1 6.5 31.4 19.8 15.3 136 Buy
Source: Company, Angel Research; Note: Price as on July 2, 2010; *Consolidated numbers
Analyst - Rupesh Sankhe / V

V.. Srinivasan

Real Estate
For 1QFY2011, we expect volumes to drop on a qoq basis Mumbai registrations fall 25% MoM in May 2010
because of high property prices, which adversely affected Apartment registrations in Mumbai fell by 25% mom in May
affordability. The drop in residential volumes will be offset by 2010 to 5337, the lowest in the last 11 months. In our view, the
increased property prices. We believe the residential segment decline can largely be attributed to high property prices, which
will continue to drive revenue of real estate companies. Volumes have adversely affected affordability. Further, the High Court's
for commercial and retail segments will continue to remain rule to quash the government's proposal to increase FSI in
subdued. Banks are currently offering competitive mortgage suburbs will further increase land acquisition cost. Prices in
rates, but we expect interest rates to inch up on RBI's concerns Mumbai have gone up 15-20% since the last six months. We
over real estate inflation. expect significant new launches across Mumbai over the next
Among our universe of stocks, we expect DLF's revenue to be 12 months, which should halt the price hike rate.
driven by the Capital Greens project at Shivaji Marg, Delhi. We New launches have been rewarding HDIL
expect HDIL to report flat to 10% qoq decline in TDR volumes,
During 1QFY2011, HDIL launched the first phase of The
with average realisations to be higher by 5-6%. This is on account
Meadows, Goregaon West. The company sold 0.4mn sq. ft. in
of the recent decision by the Bombay High Court to quash the
just two days of the launch. Further, the company has also
Maharashtra Government's proposal to increase FSI to 1.33,
launched the second phase of Premier property, a 0.75mn sq.
which has benefited HDIL and, thus, boosted TDR prices. We
ft. residential project in Kurla.
expect ARIL’s revenue to be driven by Kapashera project and
rental income. HDIL has strategically deleveraged its business model by
launching various projects through the conventional route since
Exhibit 1: Revenue and PAT estimates for 1QFY2011E March 2009, thereby reducing its overdependence on the TDR
70
58.8 market. The company has been able to pre-sell 75% of its
50 42.4 residential projects (5.5mn sq. ft.) launched since FY2009,
30 23.1
thereby providing Rs2,600cr of revenue visibility over
(% yoy growth)
12.4 FY2010-12E. HDIL has even managed to pre-lease 20% of its

10
commercial launches at its Andheri (Metropolis) project for
(10) Anant Raj DLF HDIL
Rs140/sq. ft. The company's recent launches have been
(30)
(27.1)
successful on account of being launched at 10-20% discount to
(50)
(33.9)
prevailing market prices. Management has indicated that it
Revenue PAT
would adopt the same strategy for its forthcoming launches as
well. In FY2011, HDIL plans to launch new projects of 5-6mn
Bombay High Court’s rule to benefit HDIL sq. ft. largely in Mumbai (including Siddharth Nagar, Goregaon;
Ekta Nagar, Kandivali; and Pant Nagar, Ghatkopar).
The Bombay High Court has set aside Maharashtra
Exhibit 2: High pre-sales providing revenue visibility
Government's decision to increase the FSI in suburbs to 1.33
Project Location Saleable area Sale/lease Average sales
from the current level of 1. However, developers will be required (mn sq. ft.) (%) rate (Rs/sq. ft.)
to buy TDRs from the open market to avail the additional FSI Residential
over and above the base FSI of 1. This is likely to result in Galaxy Kurla (E) 0.47 > 90 4,500
higher TDR prices and increased cost of construction, resulting Premier Kurla (W) 1.00 > 95 5,700
in higher property prices in the city. We believe this could impact Metropolis Andheri (W) 0.65 > 95 9,000
Majestic Bhandup 1.30 > 40 6,500
volumes as the hike in TDR prices will adversely affect
Residency Park Virar 1.25 > 75 2,600
affordability. HDIL controls ~70% of TDR supply in Mumbai.
Harmony Goregaon 0.07 > 95 8,451
HDIL's management has indicated that it has sold TDR at an
Meadows - Phase-1 Goregaon 2.00 >20 7,740
average realisation of Rs2,800-2,900 per sq. ft. in 1QFY2011, Commercial
up by 10% qoq. Premier Kurla (W) 2.00
Metropolis Andheri (W) 1.02 20 Rs140/sq. ft.
HDIL Industrial Park Virar 1.50 >90
Harmony Goregaon (W) 0.04 >75
Total 11.30

Real Estate
Residential launches to drive ARIL’s near-term Retail supply is projected to be around 16.4mn sq. ft.
operational visibility during 2010, with an expected absorption of only around
8.9mn sq. ft. Therefore, vacant spaces are likely to increase in
ARIL recently launched two residential projects in NCR-
the short term, given the considerable rationalisation in the
Kapashera (0.28mn sq. ft.) and Manesar (1mn sq. ft.) for
supply pipeline. We believe demand is yet to pick up, especially
Rs5,000/sq. ft. and Rs2,500/sq. ft., respectively. Management
in tier-II and tier-III cities, which is not the case with metros
has indicated that over 50% of the Kapashera property has
where catchment areas are high.
been sold. Construction of the above projects will start by August
2010. The Manesar property was acquired at Rs450/sq. ft. in Exhibit 4: Pan-India retail demand
2009. Going ahead, ARIL intends to launch its premium 14
11.9
residential project at Hauz Khas, Delhi, as it gets environmental 12
clearance. Management has guided for Rs500cr of revenue in 10

9.8
8.4
FY2011E from the residential segment.
(mn sq ft)
8 7.0
5.9
6
Commercial demand to pick up over the next 12 months
4
After witnessing a sharp decline in the past few quarters, capital 2
values have started to strengthen and have registered marginal 0
appreciation across most micro markets. Industry participants 2009 2010E 2011E 2012E 2013E
Source: Cushman & Wakefield, Angel Research

have indicated that the surge in leasing enquiries is because of
a renewed interest from corporates. Recovery in the commercial
Deleveraging holds key for stock performance
and retail segments generally lag the recovery in economy. We
expect net employee addition of 15% in the IT/ITES sector over Real estate companies came out of the woods with new projects
FY2010-12E. Accordingly, we believe demand in office space being successfully launched and liquidity position of developers
will start picking up from 2HFY2011E. Cushman and Wakefield improving on the back of QIPs. Despite the reduction in debt,
estimates pan-India cumulative demand for office space during interest expenses as a percentage of EBITDA remain on the
CY2009-13E to be 196mn sq. ft. higher side. This is on account of change in the product mix in
Exhibit 3: Pan-India commercial demand favor of the low-margin, mid-income segment. Going forward,
60 we believe deleveraging hinges on the timely execution of
55.0
projects, successful new launches and recovery in the
50 45.0
40.0
non-residential segment.
40
(mn sq ft)
30 26.0
30.0
Exhibit 5: High debt still remains a concern
25,000 74.3 80.0
20
66.4 70.0
20,000
10 60.0
15,000 50.0
0
(Rs cr)
(%)
41.3 40.0
2009 2010E 2011E 2012E 2013E
10,000 30.0
Source: Cushman & Wakefield, Angel Research
20.0
5,000
Retail segment - Still some pain left 10.0
0 0.0
DLF Unitech HDIL
Vacant space in shopping centres increased during 2008-09. Debt-LHS Int. as a % of EBITDA-RHS
This was primarily on account of higher real estate costs and Source: Company, Angel Research
lower consumption, because of which many retailers started
shifting from their rapid expansion mode to a consolidation
mode. Consequently, the absorption of retail space fell to
4mn sq. ft. in 2009.

Real Estate
Realty stocks continue to underperform Outlook & Valuation
The BSE realty index has underperformed the Sensex in spite of The BSE realty index has undergone correction in the past six
macros remaining positive. DLF has underperformed the Sensex months, whereas asset prices have moved up by 5-15% since
by 7.6% on account of high gearing levels owing to the October 2009. We believe stock performances are related to
DLF-DAL merger, which we believe will continue in the near macro factors interspersed with company-specific issues, such
term. HDIL's stock has also underperformed over the last three as the DLF-DAL merger and group-related issues at HDIL. We
months due to group-level issues, expectation of increased FSI are positive on the long-term outlook of the realty sector, with
in Mumbai suburbs and delays in the MIAL project. Going increasing disposable income, shortage of 25mn houses in India
forward, we believe the stock should outperform with the and reasonable affordability. In the current scenario, we expect
Bombay High Court's ruling, which came in favor of TDR stability in residential prices with an exception of certain micro
developers; relocation of families for phase-1 of the MIAL project markets where prices have overheated and expect an uptick in
to be sorted out over the next three months; and the commercial segment towards end-FY2011E.
depromoterisation.
Among our universe of stocks, we prefer companies with higher
Exhibit 6: Real estate stocks continue to underperform visibility on cash flow, low leverage and a strong project pipeline
Sensex ARIL DLF HDIL with attractive valuations. Our top picks are HDIL and ARIL ARIL,,
2 1.0
which are trading at 44% and 39% discount to our one -year
one-year
0
forward NA NAVs, respectively.. W
Vs, respectively We
e maintain a Neutral rating on
(2)
DLF with concerns of a weak operating cash flow flow,, increasing
(4)
gearing levels and the stock trading at 4% discount to our
(%)
(6)
(8)
(6.6) one -year forward NA
one-year NAV V.
(10)
(12)
(12.1)
(14) (12.7)

arg Reco.
DLF 282 2,030.3 23.1 45.0 (10.3) 445.2 12.4 2.6 12.4 10.2 13.8 23.9 27.7 20.5 11.8 - Neutral
Anant Raj Ind 119 60.1 (27.1) 80.0 (1,217.1) 45.5 (33.9) 1.5 (33.9) 7.6 8.8 13.1 15.7 13.6 9.1 178 Buy
HDIL 241 420.5 42.4 50.0 1,068.7 170.7 58.8 4.7 58.8 15.2 19.1 34.8 15.8 12.6 6.9 302 Buy
Source: Company, Angel Research; Note: Price as on July 2 , 2010
Analyst - PParam
aram Desai / Mihir Salot

Retail
Consumer confidence rebounds, retailers announce such as Big Bazaar, Food Bazaar, More and D'Mart tried to
expansion plans cushion the impact of inflation on demand by aggressively
offering bargains and discount offers across product categories
During 1QFY2011, consumer confidence in India rebounded
that have been hit hard by spiraling prices. We expect the
to reach its highest level since the third quarter of 2007. The
value-retailing format to register double-digit growth in
Nielsen Global Consumer Confidence survey conducted in
1QFY2011E. Hence, major players in the value retailing
March 2010 ranks India as the number one country in terms of
segment, including PRIL, Reliance Retail, Spencer's and More,
consumer confidence with 127 index points, followed by
are likely to benefit from this ongoing trend.
Indonesia (116) and Norway (115). India also retains its number
one spot (with 91% votes) as the most optimistic country as far On the lifestyle-retailing front, stable economic conditions and
as job prospects are concerned, according to the survey. pickup in consumer confidence have resulted in consumers
spending more on lifestyle goods. We expect lifestyle retailing
Exhibit 1: Nielsen Global Consumer Confidence Index to witness double-digit growth in 1QFY2011E.
127
Government considering proposal to ease FDI rules in
116 115 111 111 108 108 108 107 103
the retail sector
The Commerce and Industry Ministry is currently working on a

(%)
concept note to allow up to 51% FDI in multi-brand retail other

than primary goods (foods, groceries and vegetables), but with
some stiff riders. The government has treaded cautiously on
IN ID NO PH AU SA BR CN SG AE
allowing FDI mainly due to fears that with a liberal FDI regime,
Q1 2010
Source: Nielsen Global Consumer Confidence Survey

big global retailers would go in for predatory pricing, virtually
destroying small retailers. Under the existing rules, FDI is not
Given the improving economic scenario, consumers in India allowed in retail, except for trading of single brand products,
are now loosening their wallets. During 1QFY2011, consumer where up to 51% foreign investment is permitted. Whereas, FDI
sentiment remained buoyant, providing enough confidence to of up to 100% is allowed in wholesale cash-and-carry trade.
retail players to chalk out their future strategic plans. The
The core of the plan is to allow FDI in the retail segment, provided
optimism of retailers is also echoed by FMCG players, who are
expecting a pickup in demand on the back of expectations of a the retail stores are located in cities with a minimum population
good monsoon. All domestic top retailers such as Future Group's of one million. The move aims to protect vendors in small cities.
Pantaloon, SSL, Aditya Birla Group's More Retail and Reliance The ministry is keen to permit FDI in the retail of food grain as
Industries' Reliance Retail have chalked out their expansion plans. well as other essential commodities to create a parallel network
Moreover, the positive sentiment in the domestic retail market to the public distribution system, which has become notorious
is encouraging foreign retailers to increase their focus on Indian for its leakages. The proposal suggests that 50% of the FDI in
shores. After lying low for nearly two years, retailers are firming food retail should be spent towards building infrastructure,
up plans to increase their presence in the sub-continent not just logistics or agro processing.
through retail expansion but also through price cuts to establish
The ministry may also suggest minimum capitalisation norms
their position in the region. Major retailers such as Walmart,
for companies investing in retail, in addition to a minimum
The Body Shop and Artsana are considering expansions. It is
built-up area rule for their retail outlets. Also, the government
estimated that by December 2010, nearly 2.5cr sq. ft. of new
can reserve the right of first procurement or could think of a
retail space will be developed countrywide, mainly in big cities
mechanism to collect a certain amount of levy from private
and lucrative tier-II cities, which is 50% more than that developed
traders in case the buffer stock falls below a specified level to
in FY2010.
ensure that the stock is maintained at a desired level. It is
Value retailing to strengthen further, lifestyle retailing expected that the discussion paper will make it mandatory for
to gain momentum multi-brand retailers to sell products at wholesale prices to small
shopkeepers, giving them the benefit of scale on sourcing.
On the value-retailing front, growth is expected to be robust in
Companies will also have to procure products domestically and
1QFY2011, despite soaring food prices. Value retail formats
help improve returns for farmers.

Retail
The ministry is also considering clauses such as a minimum Exhibit 3: Sales and EBITDA likely to rise
4,500 9.0%
threshold level for investment in infrastructure and logistics to 4,000
4,070
8.9%
8.9%
discourage non-serious players and up to 50% reservation in 3,500 8.9%
2,865
jobs for rural youth. 3,000 8.8%
2,500 8.8%
We concur with industry experts that allowing FDI in retail would 2,000
8.7%
8.7%
1,500 8.7%
benefit the sector, as it will result in increased employment and 1,000 8.6%
a higher level of consumerism on account of competitively priced 500 8.6%

0 8.5%
products. The government will also benefit from this, as the 1QFY2010 1QFY2011E
exchequer would receive increased collections, since the large Net Sales (Rs Cr) (LHS) EBITDA % (RHS)
organised trade players are tax-compliant, contribute robust Source: Bloomberg, Angel Research
tax revenue and are unable to avail exemption limits. On the On the operating margin front, we expect Titan and SSL to
supply-chain front, we believe wastage in farm-to-fork will report yoy improvement of 80bp and 250bp, respectively. We
decrease with the introduction of state-of-the-art technology by expect PRIL's margins to dip by ~70bp. In our view, improvement
global players. in the top line and margins will percolate to the bottom line,
Retail stocks outperform the Sensex in 1QFY2011 thereby improving our retail universe's net profit margins by
77bp yoy for the quarter.
Retail sector stocks broadly outperformed the Sensex in
1QFY2011. SSL emerged as a clear winner by outperforming Exhibit 4: PATM on an upward trajectory
the Sensex by a whopping 34%. Titan and PRIL outperformed 140.0 3.5%
120.1
the Sensex by 20% and 6%, respectively, during 1QFY2011. 120.0 3.0% 3.0%
100.0 2.2% 2.5%
Exhibit 2: Retail stocks shine over the Sensex in 1QFY2011 80.0 2.0%
62.5
1.40 60.0 1.5%
1.30 40.0 1.0%
1.20 20.0 0.5%
1.10 0.0 0.0%
1.00
1QFY2010 1QFY2011E
Net Profit (Rs Cr) (LHS) Net Profit Margin (RHS)
0.90
0.80
15-Apr-10
22-Apr-10
29-Apr-10
10-Jun-10
17-Jun-10
24-Jun-10
1-Apr-10
8-Apr-10
6-May-10
13-May-10
20-May-10
27-May-10
3-Jun-10
Outlook and Valuation

Sensex PRIL Titan SSL
With the economic growth on track, coupled with revived
consumer sentiment and expectations of good monsoons, we
1QFY2011 performance preview foresee good times ahead for the retail industry. Sensing the
changing dynamics, several retailers have started chalking out
During 1QFY2011, consumer sentiment was upbeat on account
expansion plans, which further bolsters our belief. Any positive
of improved economic scenario, thereby providing the much
news related to FDI in retail will act as a big booster for the
needed security to consumers. With footfalls rising and
industry. We expect the growth trend to continue to strengthen
consumers opening up their wallets on discretionary spending,
going ahead, thereby keeping the long-term growth prospects
we expect retailers to register healthy growth. We expect value
for the organised retail segment in India intact.
retailing to strengthen further and lifestyle retailing to extend its
growth trajectory as upbeat consumer sentiments should The value retailing segment is likely to lead the growth path
translate into higher demand for lifestyle goods. We expect retail over the next few years, as more and more consumers are
stocks under our coverage to report top-line growth of 42.1% expected to go for value-for-money goods. However, we expect
yoy. We estimate PRIL to lead our universe, reporting 50.7% the lifestyle retailing segment's growth to pick up because of
yoy top-line growth. the revived consumer confidence. We expect players such as
PRIL, who are straddled across price and product points, to
benefit in the short as well as in the long term.

Retail
We believe the Indian retail sector remains one of the fastest Titan has a stable and niche business model in the jewellery
growing sectors in India, and we remain positive on its growth segment. The surge in gold volumes witnessed during the
prospects. previous quarter indicates that consumers may have adjusted
to the high gold prices and do not expect prices to correct
PRIL continues to be our preferred pick
significantly. Continuance of this trend could have a positive
PRIL's presence across price points and categories helps the impact on the company. Titan's watch segment is also performing
company to be in a better position than its peers. Additionally, well. Further, the company has intensified the brand
the company's restructuring initiative would enable it to enhance campaigning for its eyeware division recently. We expect these
its focus on different segments and provide a good opportunity segments to perform well as there has been a revival in demand
of value unlocking. At Rs418, the stock is trading at 20.5x for lifestyle category goods. At Rs2,323, the stock is trading at
FY2012E earnings and 2.4x FY2012E P/BV. Our SOTP-based 25.3x FY2012E earnings and 8.4x FY2012E P/BV. We maintain
target price for PRIL (standalone) is Rs408, wherein we have a Neutral view on Titan due to its rich valuations.
valued its stake in FCH, HSRIL and Future Bazaar at Rs31, Rs12
We expect SSL to continue to perform well in the coming quarters
and Rs18, respectively. PRIL continues to be our top pick in the
on the back of pickup in consumer demand for lifestyle retailing.
retail sector
sector.. We maintain our Accumulate rating on the stock
We
At Rs549, the stock is trading at 26.8x FY2012E earnings and
with a target price of Rs469.
4.3x FY2012E P/BV. Considering the recent run-up in the stock
price, we maintain a Neutral view on SSL
SSL..

arg Reco.
Pantaloon* 418 2,506 50.7 10.3 (72) 62.7 71.7 3.3 71.7 10.8 15.6 20.4 38.7 26.8 20.5 469 Accumulate
Titan 2,323 1,143 29.5 6.4 80 43.4 73.6 9.8 73.6 56.5 72.5 92.0 41.1 32.0 25.3 - Neutral
Shoppers Stop 549 421 31.8 7.3 247 14.0 1,286.1 4.0 1,286.1 10.3 17.4 20.5 53.3 31.6 26.8 - Neutral
Source: Company, Angel Research; Note: Price as on July 2, 2010, Note: * June year ending, Estimates are 4QFY2010 for PRIL, Figures on standalone basis
Analyst - Viraj Nadkarni

Software
During 1QFY2011, the BSE IT index gained 1.6% qoq, Global economy back on track
outperforming the Sensex, which gained by 1% during the same The global economy is set to recover as indicated by better
period. This was despite the 0.6% appreciation in average INR corporate earnings, improved industrial production data and
versus USD over the quarter along with unfavorable certain paybacks of stimulus obligations by banks.
cross-currency movement. The steady performance of the IT
The International Monetary Fund (IMF) has forecast improved
index can be attributed to the positive demand environment
GDP projections for the advanced economies of the world. These
witnessed during the quarter.
advanced economies (which account for close to 90% of Indian
Exhibit 1: IT index outperforms the Sensex IT services exports) on an average are likely to grow by 2.3% in
(Rs)
CY2010E (2.4% in CY2011E). We believe strong recovery in
120
115 the global economy will lead to a rise in discretionary IT spending
110 BSE IT Index: Rs101.6 and an increasing number of transformational deals. However,
105
the high unemployment rate and renewed debt crisis may hinder
100
95 BSE Sensex: Rs100.9
the smooth recovery path for IT outsourcing.
90
Demand has improved since 2QFY2010 as global MNCs are
31-Mar-10
10-Apr-10
20-Apr-10
30-Apr-10
10-May-10
20-May-10
30-May-10
09-Jun-10
19-Jun-10
29-Jun-10
looking out for increased offshoring to cut cost. Large outsourcers

are rationalising their vendor lists and are renegotiating their
BSE IT Index BSE Sensex
IT spends by outsourcing their non-core business segments.
Indian IT players with their wide service offering and pricing
Currency movements edge are likely to improve on their wallet share in this
Euro, GBP weaken further; USD salvages overall impact vendor-rationalisation exercise.
During 1QFY2011, the INR witnessed a sequential appreciation Exhibit 3: GDP growth projections (%)
of 0.6% against USD, 8.6% against the euro and 5.1% against GDP growth projections 2008 2009 2010E 2011E
the British pound (GBP).
US 0.4 (2.4) 3.1 2.6
The INR averaged about 45.6 per USD during the quarter, much
UK 0.5 (4.9) 1.3 2.5
better than the expected realisation rate of Rs44.5 by the
top-tier IT companies at the time of announcement of their Euro zone 0.6 (4.1) 1 1.5
4QFY2010 results. The recovery in USD from the lows of 44.3 Australia 2.4 1.3 3 3.5
is expected to help IT companies post higher revenue growth in
Japan (1.2) (5.2) 1.9 2
INR terms than factored in earlier.
Advanced economies 0.5 (3.2) 2.3 2.4
We believe the overall realisation impact would be about 120bp, Source: Angel Research, IMF-World Economic Outlook
considering the hedging position and cross-currency weights,
resulting in lower realisations in INR terms. The near-term Revenue from US markets has improved significantly over the
revenue of IT companies would not be impacted much due to last couple of quarters, driven by large M&A integration deals
the hedged portfolio. However, overall realisations would come and increased spending by US financial services clients.
down from 2HFY2011. We have already built in a 400bp decline
Combined revenue of the top four Indian IT companies stood
in forex realisations in FY2011E and, thus, the recent slide does
at Rs13,300cr in 4QFY2010, registering a 3.7% CQGR from
not impact our estimates.
1QFY2009 to 4QFY2010. However, European markets continue
Exhibit 2: INR v/s USD, Euro and GBP to remain sluggish despite the incremental expansion in terms
85.0
of new delivery centres and client acquisitions. The slowdown
80.0
75.0 in business from British Telecom, India's largest IT client, has
70.0 affected the overall business from Europe. Revenue from
65.0
Rest-of-the-World (ROW), excluding US and Europe, holds lot
(Rs)
60.0
55.0 of potential as ROW economies are growing and an increasing
50.0
number of companies are realising the benefits of IT offshoring.
45.0
40.0 Indian IT companies registered a 5% CQGR between1QFY2009
2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11E
and 4QFY2010 from ROW economies, contributing about 15%
INR-USD INR-EUR INR-GBP
of total IT revenue.

Software
Exhibit 4: Region-wise revenue trend of top four IT players new business growth in newer verticals, such as healthcare,
140
124 125 122
127 129
133
retail and logistics, and recovery in core verticals such as BFSI
120
103
113
and technology. Indian IT players have been able to regularly
93
100
add new clients throughout the downturn, which would now
80
boost their next stage of growth. Infosys' guidance of 16-18%
(Rs bn)
56 56 55 54 55 55 55
50
growth in consolidated revenue in USD terms for FY2011E is a
60 48
40 28 32 33
25 23 26 26 27 28
strong positive, considering its consistent historical
20
outperformance over its guidance.
0
US Europe Asia/Others Strong hiring is back
Source: Company website, Angel Research; The top four IT companies
include Infosys, TCS, Wipro and HCL Tech. With clients finalising their annual budgets and the deal market
getting active, companies have sped their hiring process in view
IT players to post strong top-line growth in 1QFY2011E
of increased business visibility. Top-tier companies are getting
Business confidence is back as IT companies witnessed strong aggressive about increasing their workforce in view of rising
growth in dollar terms in 4QFY2010, led by strong volume demand and increased attrition rate. TCS, Infosys, Wipro and
traction. Pricing growth has been muted on account of HCL added 10,775 (7.3%), 3,914 (3.6%), 5,955 (5.9%) and
re-negotiations in the recent past and due to increased 2,441 (4.4%) net employees, respectively, in 4QFY2010, which
offshoring, which led to lower blended realisations. We have is the highest headcount addition in the last 10 quarters. (Note:
been projecting strong dollar-term growth for top-tier players The figure in the bracket indicates additional growth over the
(CQGR of 5% over 1QFY2011-4QFY2012E), induced by average base on a TTM basis).
volume traction, with a muted growth assumption for pricing.
The hiring spree is likely to remain robust in 1QFY2011 as
There could be further upside to our estimates as the revival in
guided by IT companies during 4QFY2010 earnings. This will
demand may lead pricing back to the pre-crisis level. Further,
result in higher employee costs in the coming quarter on account
wage hikes announced by all major companies will result in
of increased headcount and wage hikes announced, which
higher operating cost, which would eventually lead to pricing
would impact the operating margins of companies by 20-100bp.
revision for the companies. Broadly, we are building in strong
Increased attrition rates at ~14% in 4QFY2010 as against ~12%
growth for Indian IT players from 1QFY2011E, based on our
in 3QFY2010 could also further fuel up the wage war in the
expectation of an imminent rebound in top-line growth and strong
industry (as the industry has seen lower hikes in the downturn).
optimistic guidance by large IT companies.
Exhibit 5: Quarterly revenue growth trend in USD terms Exhibit 6: Quarterly net employee addition trend
14,000
14
12 12,000
10 10,000
Rebound
8 in 8,000
6 demand
4 6,000
(%)
2 4,000
0 2,000
(2)
0
(4)
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
2QFY10
4QFY10
Oct-Dec'07
1QFY10
3QFY10
(6) (2,000)
(8) (4,000)
4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11E
TCS Infosys Wipro HCL Tech
Infosys TCS Wipro * HCL Tech
Source: Angel Research; Note:* Wipro's US $ revenue growth of combined IT services
The quarterly growth trend subdued between 1QFY2009 and

Utilisations back to their optimum levels
4QFY2009, witnessing an increase from 1QFY2010. This further Top-tier IT companies have displayed a strong margin resilience,
enforces our belief in demand revival. The top four players which was helped by maintaining the utilisation rate (excluding
registered an average quarterly growth rate of 1.4% during trainee) over the 70% level. Utilisation levels improved as
1QFY2009 and 1QFY2010, whereas the average dollar-term companies pressed on for higher productivity and efficiency in
growth in 4QFY2010 was over 4.2% (5.5% in 3QFY2010), which the downturn. Utilisation levels have now reached the pre-crisis
indicates a recovery in demand. The revival was led by sustained highs of over 75% for all players, which is a healthy sign, and

Software
should reach 80% as demand picks up. However, the current Exhibit 8: EBIDTA margin - Quarterly trend
robust hiring spree may dilute utilisation in the first half of the year.
40
35
Exhibit 7: Quarterly trend in utilisation (ex. trainees)
86 30
(%)
84
25
82
80 20
(%)
78
76 15
74
TCS Infosys Wipro* HCL Tech
72
70
Source: Angel Research; Note:* Wipro's EBITDA margins of combined IT services
TCS Infosys Wipro* HCL Tech margin resilience, we believe profitability will go down by
Source: Company, Angel Research; Note: * Wipro's utilisation trend of 150-200bp over FY2011-FY2012 on account of the full effect
combined IT services
of hiring, salary hike, overall increased headcount and renewed
High efficiency and effort-mix levers support strong focus on S&M efforts. For 1QFY2011E, we expect EBITDA
margin resilience margins of top four IT players to contract by 20-190bp qoq on
During the first three quarters of FY2010, tier-1 IT companies account of strong hiring and salary hikes. Also, the expected
witnessed strong EBITDA margin expansion as they deployed rise in the effective tax rate (Infosys has guided a 400bp increase
various margin levers to maintain profitability. Companies in ETR to 25% in FY2011E) will likely lead to dilution in PAT
curtailed unnecessary SG&A spends, stalled wage hikes and margin by 70-200bp.
opted for fixed price contracts to imbibe operational excellence. IT sector poised to maintain strong growth
Apart from these, increased offshore effort mix helped
With recovery in the global economy, the IT sector has started
companies in covering up pricing pressures. In 4QFY2010, IT
experiencing renewed demand as global outsourcers started
companies increased their headcount and announced wage
drawing their IT spend plans. The current improvement in
hikes, which would put pressure on profitability in the coming
demand has largely been from the US and emerging markets.
quarters. Also, the recent volatility in the currency (euro crash)
For 1QFY2011E, we expect the top four IT companies to report
could hamper the profitability on unhedged earnings.
3-5% qoq revenue growth in USD terms, mainly driven by
During FY2010, Infosys' EBITDA margin expanded by 148bp, volume growth. However, revenue growth in reported currency
while that of Wipro and TCS expanded by 253bp and 309bp, should range from 1-3% on account of adverse cross-currency
respectively. Although the top four companies have shown strong movement. We continue to remain positive on the Indian IT
sector and maintain TTCSCS
CS,, Wipro and HCL TTech.
ech. as our top
picks amongst tier -1 IT players.
tier-1

arg Reco.
Infosys 2,729 6,129 3.1 33.5 (0.6) 1,550 (4.1) 27.0 (4.5) 109.7 118.8 140.4 24.9 23.0 19.4 3,089 Accumulate
TCS 744 7,890 2.0 28.0 (1.9) 1,809 (6.3) 9.2 (6.4) 35.1 37.9 41.9 21.2 19.6 17.7 921 Buy
Wipro 386 7,134 2.2 21.2 (0.4) 1,213 (1.9) 5.0 (1.9) 18.9 20.4 23.7 20.4 18.9 16.3 475 Buy
HCL Tech.* 353 3,109 1.1 19.5 (0.2) 348 1.2 5.0 1.2 19.6 22.5 27.2 18.0 15.7 13.0 420 Buy
Source: Company, Angel Research; Note: Price as on July 2 , 2010; * June ending and 4QFY2010 estimates, % chg is qoq
Analyst - Vaibhav Agrawal/Vibha Salvi

Vaibhav

Telecom
During 1QFY2011, Bharti Airtel and Idea Cellular witnessed Exhibit 2: Declining ARPU leading to subscriber growth
declines of 17% and 11%, respectively, on a qoq basis. However, 700 231 228
205
250
600 188
RCOM reported an increase of 18% qoq during the quarter. 500
184 175
162
200
145
133 127 122 150
400
On a yoy basis, Bharti Airtel, Idea Cellular and RCOM fell by
(mn)
(Rs)
300 564 617
100
an average of 28%. The negative performance was on account 200 345
415 457 507
50
of the new 2G recommendations, tariff wars and 3G and BWA 100 166 185 206 226 250
0 0
auctions, which were more in favour of the government than
1QFY11E
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
TSPs, during the quarter.
The quarter also witnessed major corporate events such as RIL’s Total Subscribers Avg. Monthly ARPUs
Source: COAI, AUSPI, Angel Research
entry into the telecom broadband space with the acquisition of
Infotel and the recent demerger of RCOM’s tower business with
The industry's blended ARPU is declining quarter after quarter.
GTL Infra.
This has led to robust subscriber growth. We believe ARPU will
Exhibit 1: Stock return analysis of leading Indian TSPs further decline as operators are offering sub-paise per second
30 billing. In our view, falling ARPU is not a factor of concern, as
20
17.90
part of the fall is because of multiple SIM card ownership, which
10 has diluted per subscriber metrics.
0
(10) Exhibit 3: Quarterly growth trend in total MOU

(10.57)
20
(20) (17.22) (16.97)
18
(30) 16
(31.60) 14
(40) (34.36)
12
Bharti Airtel RCOM Idea Cellular
(%)
% Chg (3 Mths.) % Chg (1 yr.) 10

8
Source: C-line, Angel Research 6
4
Subscriber growth momentum strong as tariff war continues 2

0
1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
Growth in subscriber base continues to move at its strong run Bharti Airtel RCOM Idea Cellular
rate, as new players take the price war to a new level to achieve Source: COAI, AUSPI, Angel Research; Note: Data as on March 31, 2010.
the desired market share. In April 2010, the industry witnessed
Increasing MOU to balance falling ARPU
strong net addition of 16.9mn wireless subscribers in India. We
expect the total wireless subscriber base to increase by 50mn With falling ARPU and declining market share for large
qoq to 634mn subscribers by June 30, 2010. In 1QFY2011, incumbent operators, the only respite comes in the form of
new entrants such as Uninor and Videocon extended their growing minutes of usage (MOU). During 4QFY2010, Idea
network rollouts and intensified the price war by unveiling 0.30 registered 13.5% qoq growth in total MOU, Bharti Airtel reported
paise per minute plan and free bundled minute start-up 12.8% qoq growth and RCOM witnessed 5.1% qoq growth.
connections, further fuelling multiple SIM card ownership and We believe increased MOU will support and subsidise the impact
churn rate concepts. RCOM launched unlimited local and STD of falling ARPU in the coming quarters, resulting in flat growth
call plans. We believe subscriber growth will continue at its strong in the mobile segment's revenue.
pace; however, the large churn in subscriber base on account
of multiple SIM card ownership has now made the subscriber
matrix less effective for measuring the industry's growth.

Telecom
Exhibit 4: Market share analysis of Indian TSPs Government emerges clear winner in 3G, BWA auctions
3%
6%
22%
The long-awaited 3G and BWA auctions concluded during
11% 1QFY2011, with the spectrum sale fetching over Rs1,06,000cr
for the government, 3x of the budgeted estimate of Rs35,000cr.
11% (Out of the Rs1,06,000cr outlay, 3G auction contributed
18%
Rs68,000cr and BWA the remaining.) The bidding went ahead
12% of all early estimates, as service providers bid aggressively in
17% view of scarcity of resources and tricky regulatory moves. The
Bharti Airtel RCOM Vodafone -Essar BSNL Tata Tele. Idea Cellular Aircel Others* 3G auction concluded with Bharti Airtel winning 13 circles (outlay
Source: COAI, AUSPI, Angel Research; (Data as on April 30, 2010) of Rs12,296cr), RCOM getting 13 circles (outlay Rs8,585cr)
* Includes Spice Com., MTNL, BPL Mobile, Sistema-Shyam, HFCL Infotel,
and Idea winning 12 circles (outlay of Rs5,972cr). We believe
Uninor, S-Tel, Videocon and Etisalat
the event to be incrementally negative for the sector in view of
In April 2010, Bharti Airtel, RCOM, Vodafone and BSNL were the large immediate payments to be made, stressing the balance
the top four players in the telecom sector. Bharti Airtel was the sheet of the companies.
leader with a subscriber market share of 21.7% (GSM+CDMA
combined). However, the biggest gainers in the sector were Tata BWA auction outcome was even more surprising because of
Teleservices and Aircel, which reported increases of 230bp yoy subdued response from large telecom operators with only Bharti
and 150bp yoy, respectively, in their market share. New entrants, Airtel managing the successful spectrum win in four circles (outgo
viz. Uninor, MTS and Videocon, have eaten up combined share of Rs3,314cr on BWA). RCOM and Idea opted out of the race
of 1.6% of the subscriber pie, thereby adding to the worries of as the bid went aggressively ahead of all estimates. Infotel
the leaders. Going forward, the leaders are likely to witness a backed by Reliance Industries bagged all 22 circles with an
drop in their market shares, as the number of participants per estimated outlay of Rs12,848cr, marking a clear victory by
circle would nearly double from the average of 7-8 currently to securing an early-mover advantage.
13-14. Thus, the large incumbents would continue to focus on
RCOM demerges tower business with GTL Infra
their revenue market share. Currently, the top seven players
account for over 98% of the revenue and 97% of the subscriber RCOM, along with its subsidiary Reliance Infratel Ltd., and GTL
market share. Infra have approved a deal of Rs50,000cr (US $11bn) to create
one of the world's largest independent telecom infrastructure
Exhibit 5: New entrants eating up the market share
Subscriber Market Share (%)
company, neither owned nor controlled by any telecom operator.
As on As on As on chg bp chg bp The transformational deal is expected to be implemented
Companies 30-Apr ’10 31-Mar'10
30-Apr’10 30-Apr'09 qoq yoy through a demerger of Reliance Infratel's tower assets into GTL
Bharti Airtel 21.7 21.8 24.3 (0.1) (2.6) Infra. Reliance Infratel will demerge its tower assets into GTL
RCOM 17.5 17.5 18.8 (0.0) (1.3) Infra’s fibre optic network. The merged entity will have over
Vodafone-Essar 17.3 17.3 18.0 (0.0) (0.7) 80,000 towers and about 125,000 tenancies from over 10
BSNL 11.8 11.9 12.0 (0.1) (0.2) telecom operators. The entity will also have a firm option of
Tata Tele. 11.3 11.3 9.0 0.0 2.3 additional 75,000 tenancies. With this deal, RCOM will receive
Idea Cellular 10.9 10.9 11.1 (0.1) (0.2) cash infusion, which will be utilised for substantial reduction of
Aircel 6.4 6.3 4.9 0.1 1.5 its debt, as well as GTL Infra’s shares, though details of the
MTNL 0.9 0.9 1.1 (0.0) (0.2) share-swap ratio are not yet available. The proposed transaction
BPL Mobile 0.5 0.5 0.6 (0.0) (0.1) is expected to achieve final closure over the next six months.
Sistema-Shyam (MTS) 0.7 0.6 0.2 0.1 0.5 Further, RCOM is also looking to sell nearly 26% stake, which is
HFCL Infotel 0.1 0.1 0.1 0.0 (0.0) expected to raise another Rs10,000cr-11,000cr, depending on
Uninor 0.8 0.7 - 0.1 0.8 the premium at which the stake would be sold out. RCOM's
S-Tel 0.2 0.2 - 0.0 0.2 debt position as on March 31, 2010, stood at Rs24,747cr, while
Videocon 0.1 0.0 - 0.1 0.1 the debt/equity ratio stood at 0.64x. We believe the demerger
Etisalat 0.0 0.0 - (0.0) 0.0 of Reliance Infratel’s business with cash infusion from GTL Infra
Total 100.0 100.0 100.0
and the expected stake sell would definitely strengthen RCOM's
Source: Company, Angel Research financial position by reducing its debt significantly and improving

Telecom
its leverage ratio, compared to its peers, who would see a Exhibit 7: EPM - Quarterly trend
substantial increase in leverage due to the recent 3G and BWA 0.7
auctions and funds requirement for the new 2G 0.6
recommendations of TRAI, which might aggravate their situation

0.6
(RPM)
further.
0.5
Competition intensity hurting per minute spreads

0.5
Total MOU have been growing at a robust pace, recording a 0.4
48% CAGR from FY2006 to FY2010. MOU growth is likely to 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
continue, led by strong subscription growth (current penetration Bharti Airtel RCOM Idea Cellular

at just 51% in India as against 88% in the US) and an increase
in MOU per subscriber (452 minutes in India as against 772 We continue to maintain our cautious view on the telecom sector
minutes in the US). We expect total MOU to grow by over 20% on account of high capex spend on 3G and BWA auctions,
from FY2010-14E. However, declining revenue realisations per heightened pricing intensity, likely introduction of MNP and
minute (RPM) with a relatively stable cost per minute have uncertain regulatory policies (the recent TRAI recommendation).
resulted in squeezed EBITDA per minute (EPM) for the However, we believe Bharti Airtel will emerge as the winner in
companies. As the decline in operating cost is not linear, the the long term, with its low-cost integrated model (owned tower
incremental pricing pressure may significantly impact profitability infrastructure), potential opportunity from Africa, high
in the coming quarters. subscriber/revenue market share and relatively better KPIs. Thus,
we continue to remain positive on the stock.
Exhibit 6: RPM - Quarterly trend
0.24
0.22
0.20
0.18
(EPM)
0.16
0.14
0.12
0.10
Bharti Airtel RCOM Idea Cellular

rge Reco.
Bharti Airtel 265 10,450 5.1 37.0 (4.8) 1,961.9 (22.0) 5.2 (21.6) 24.0 22.0 24.9 11.0 12.0 10.6 360 Buy
RCOM 191 5,289 (9.5) 29.6 (7.2) 1,192.5 (27.1) 5.3 (30.0) 21.6 17.0 17.1 8.8 11.2 11.1 171 Reduce
Idea Cellular 58 3,497 17.5 26.8 (2.1) 248.4 (16.4) 0.8 (21.6) 2.9 1.7 2.5 20.1 34.8 23.6 50 Reduce
Source: Company, Angel Research; Note: Price as on July 2 , 2010, % chg yoy
Analyst - Vaibhav Agrawal/Vibha Salvi

Vaibhav

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Research Team
Fundamental:
Sarabjit Kour Nangra VP-Research, Pharmaceutical sarabjit@angeltrade.com
Vaibhav Agrawal VP-Research, Banking vaibhav.agrawal@angeltrade.com
Vaishali Jajoo Automobile vaishali.jajoo@angeltrade.com
Shailesh Kanani Infrastructure, Real Estate shailesh.kanani@angeltrade.com
Anand Shah FMCG , Media anand.shah@angeltrade.com
Deepak Pareek Oil & Gas deepak.pareek@angeltrade.com
Sushant Dalmia Pharmaceutical sushant.dalmia@angeltrade.com
Rupesh Sankhe Cement, Power rupeshd.sankhe@angeltrade.com
Param Desai Real Estate, Logistics, Shipping paramv.desai@angeltrade.com
Sageraj Bariya Fertiliser, Mid-cap sageraj.bariya@angeltrade.com
Viraj Nadkarni Retail, Hotels, Mid-cap virajm.nadkarni@angeltrade.com
Paresh Jain Metals & Mining pareshn.jain@angeltrade.com
Amit Rane Banking amitn.rane@angeltrade.com
Jai Sharda Mid-cap jai.sharda@angeltrade.com
Sharan Lillaney Mid-cap sharanb.lillaney@angeltrade.com
Amit Vora Research Associate (Oil & Gas) amit.vora@angeltrade.com

V Srinivasan Research Associate (Cement, Power) v.srinivasan@angeltrade.com
Aniruddha Mate Research Associate (Infra, Real Estate) aniruddha.mate@angeltrade.com
Mihir Salot Research Associate (Logistics, Shipping) mihirr.salot@angeltrade.com
Chitrangda Kapur Research Associate (FMCG, Media) chitrangdar.kapur@angeltrade.com
Vibha Salvi Research Associate (IT, Telecom) vibhas.salvi@angeltrade.com
Pooja Jain Research Associate (Metals & Mining) pooja.j@angeltrade.com
Technicals:
Shardul Kulkarni Sr. Technical Analyst shardul.kulkarni@angeltrade.com
Mileen Vasudeo Technical Analyst vasudeo.kamalakant@angeltrade.com
Derivatives:
Siddarth Bhamre Head - Derivatives siddarth.bhamre@angeltrade.com
Jaya Agarwal Derivative Analyst jaya.agarwal@angeltrade.com
Institutional Sales Team:

Mayuresh Joshi VP - Institutional Sales mayuresh.joshi@angeltrade.com
Abhimanyu Sofat AVP - Institutional Sales abhimanyu.sofat@angeltrade.com
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Pranav Modi Sr. Manager pranavs.modi@angeltrade.com
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1QFY2011 Result Preview - 02-07-10

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1QFY2011 Result Preview - 02-07-10

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1QFY2011 Results PPreview

review | July 2, 2010

Angel Research Model Portfolio 12

1QFY2011 Sectoral Outlook 19

Oil & Gas 52

Note: Stock Prices as on July 2, 2010.

Refer to important Disclosures at the end of the report 1

(10) Exhibit 3: Net fund flows

During the quarter, like few of the other countries such as 0

Indonesia and Korea, the Indian markets also remained flat

Refer to important Disclosures at the end of the report 2

6 5.6 bailout funds.

Spain (4.7) 7.9 21.9 50.0 8.0 5.0

France (2.0) 8.1 13.6 79.7 6.0 4.0

Germany 3.9 4.3 24.1 77.2 4.0 3.0

Netherland 5.1 4.6 24.2 62.2 2.0 2.0

Refer to important Disclosures at the end of the report 3

even though macroeconomic stimulus was substantial, private

demand also gained traction and is expected to drive growth in 4.0

the developing countries going forward. Further, the public 2.0

Developing Economies Advanced Economies

Refer to important Disclosures at the end of the report 4

2.00 50,00,000 9.5 9.7 10

15- Year Average 20,00,000 4

Source: Bloomberg, Angel Research

On the services front, which contributed around 57% of FY2010

Refer to important Disclosures at the end of the report 5

Source: Bloomberg, Angel Research Source: IMD

Food inflation set to soften Oil to remain range bound

according to IMD, on an all-India area-weighted basis, 80

cumulative rainfall was 11% below normal up to June 23, 2010. 60

However, as a major part of the rainfall happens in July (around 40

never had back-to-back drought seasons. Thus, as we go into

Refer to important Disclosures at the end of the report 6

Source: Bloomberg 0.0

Refer to important Disclosures at the end of the report 7

7.0 levels should set an improvement in the CAD from FY2011

Exhibit 20: Trade and current account deficit trend

further accelerate, monetary tightening may again be required 200,000 (1.0)

to modulate liquidity and anchor inflationary expectations. While

still be a favourable outcome given that capital inflows are 0 (2.5)

Refer to important Disclosures at the end of the report 8

to continue, which should on a quarterly basis soon surpass the 0

Over the last decade, increased globalisation has led to 40,000

widening export opportunities. However, India's dependence 30,000

on exports (contributed around 23% of GDP in 2008) is relatively 20,000

of GDP in 2008, respectively. Given the disparity between the

Refer to important Disclosures at the end of the report 9

0 equity markets, which have witnessed a downtrend owing to

(60,000) Emerging markets would continue to outshine - India

Refer to important Disclosures at the end of the report 10

Amongst others, FMCG is also expected to deliver good set of 600

expected to register de-growth of 35% during the quarter. OPM 40

of the sector would be impacted by the high subsidy burden 30

Among the engineering players, L&T is expected to report a yoy

18.5% decline in net profit.

India Inc. earnings momentum to accelerate

(registering a growth of 13% after a dip in FY2009) is expected 0.0

to accelerate as we move into FY2011E. For FY2011E, we expect

Sensex EPS of Rs1,052, up 17.4% yoy mainly on account of

154% yoy growth, contributing 15% of the overall Sensex

For FY2012E, we expect Sensex EPS of Rs1,246, up 18.5% yoy.