Market Outlook

India Research
December 15, 2011

Dealers Diary
Indian markets are expected to open in red taking cues from gap down opening in most of the Asian markets and negative closing in most of the global markets yesterday. The Indian markets fell yesterday as November inflation numbers came in at 9.1%, indicating that RBI may not cut rates at its upcoming policy meeting on Friday. Globally, US and European markets closed lower yesterday for a third straight day as concerns prevailed regarding the financial situation in Europe. Disappointing results from an Italian bond auction also generated broad based selling pressure as Italys borrowing costs rose to a euro-era record at 6.47% in the auction, reflecting concerns that last week's European Union summit failed to produce a lasting solution to the region's sovereign debt crisis. Meanwhile, industrial production data of Eurozone for October 2011, which was expected to be flat mom, came in at -0.1%. The markets today would be closely watching out for data on corporate advance tax payments which will be out today, giving investors clues to corporate earnings for the third quarter. Also, industrial production data for November 2011 (estimate 0.2%) and jobless claims of US economy will be on radar.

Domestic Indices BSE Sensex Nifty MID CAP SMALL CAP BSE HC BSE PSU BANKEX AUTO METAL OIL & GAS BSE IT Global Indices Dow Jones NASDAQ FTSE Nikkei Hang Seng Straits Times Shanghai Com

Chg (%) (0.8) (0.8) (1.0) (0.8) (0.6) (1.6) (0.4) (1.4) (2.2) (0.9) (0.2) Chg (%) (1.1) (1.6) (2.3) (0.4) (0.5) (0.5) (0.9)

(Pts) (121.4) (37.4) (52.2) (48.2) (38.1) (108.7) (39.1) (120.4) (219.6) (72.2) (13.0) (Pts) (131.5) (40.0) (123.4) (33.7) (92.7) (13.4) (20.1)

(Close) 15,881 4,763 5,430 5,870 5,891 6,575 9,824 8,270 9,969 7,818 5,803 (Close) 11,824 2,539 5,367 8,519 18,354 2,672 2,229

Markets Today
The trend deciding level for the day is 15,957/4,784 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 16,05816,235/4,818 4,874 levels. However, if NIFTY trades below 15,957/4,784 levels for the first half-an-hour of trade then it may correct up to 15,78015,678/4,7294,695 levels.
Indices SENSEX NIFTY S2
15,678 4,695

Indian ADRs Infosys Wipro ICICI Bank HDFC Bank

Chg (%) (3.5) (3.9) (2.6) (3.1)

(Pts) (1.8) (0.4) (0.7) (0.8)

(Close) $49.8 $9.9 $25.5 $26.3

S1
15,780 4,729

R1
16,058 4,818

R2
16,235 4,874

News Analysis
WPI inflation eases to 9.1% but comes in above estimates Rupee depreciation impact Deposit growth surpasses credit growth for the first time since March 2010
Refer detailed news analysis on the following page

Advances / Declines Advances Declines Unchanged

BSE 1,013 1,731 130

NSE 445 1,000 56

Net Inflows (December 13, 2011)

` cr FII MFs ` cr Index Futures Stock Futures Purch
1,598 459

Sales
2,088 635

Net
(490) (176)

MTD
1,003 (523)

YTD
(3,021) 5,423

Volumes (` cr) BSE NSE 1,930 9,775

FII Derivatives (December 14, 2011)

Purch
1,583 1,500

Sales
1,894 1,523

Net
(311) (23)

Open Interest
12,118 24,784

Gainers / Losers
Gainers Company
Sun TV Network Glenmark Pharma Dish TV India Adani Power Tata Comm

Losers Company
Pantaloon Retl Sintex Inds Jain Irrigation Chambal Fert Punj Lloyd

Price (`)
276 304 62 74 196

chg (%)
5.0 3.5 3.1 2.6 2.5

Price (`)
142 75 98 79 43

chg (%)
(9.9) (7.8) (7.0) (6.6) (6.3)

Please refer to important disclosures at the end of this report

Sebi Registration No: INB 010996539

Market Outlook | India Research

WPI inflation eases to 9.1% but comes in above estimates

Wholesale price-based inflation (WPI) for November 2011 eased to 9.11%, falling significantly from the 9.73% level registered in October 2011. The figure of 9.11% was, however, above the Bloomberg estimate of 9.02%. Core (non-food manufacturing) inflation which the RBI tracks closely rose by 27bp to 7.79%. Primary articles inflation came in at 8.5%, ~287bp lower than the 11.4% witnessed in October 2011. Food articles inflation also eased to 8.5% from 11.1% registered in October 2011. Non-food articles inflation more than halved on a month-on-month basis to just 3.2% (7.7% in October 2011 and 14.6% in September 2011) on account of lower prices of logs and timber, mesta, raw rubber, raw silk and raw jute, amongst others. Inflation for minerals continued to be high (at 18.0%), though moderating from 20.4% witnessed in October 2011. Fuel and power inflation continued to rise at a faster pace for the fourth straight month and rose to the highest level in three years at 15.5%. Manufactured products, which have a weightage of ~65% in overall WPI inflation, continued to be high but remained steady on a month-on-month basis at 7.7% (average of 6.1% over the past two years). Manufacturing articles inflation was driven by higher prices of beverages, chemicals, metals and leather products. On the other hand, inflation in food products, textiles and rubber products moderated vis--vis October 2011. The spread between primary articles and manufactured products inflation, which was as high as 13.1% at the start of CY2011, shrank significantly from 3.7% registered in October 2011 to 0.8% (lowest in nearly the last four years). Inflation figures came in moderately above the streets consensus and, thus, had a negative effect on the markets. On the basis of moderation in inflation in November 2011 and further easing expected hereon (on the basis of weaker demand prospects due to slower global growth) and the considerably slower economic growth trends, as highlighted in the IIP contraction of 5.1% in October, we do not expect further hike in policy rates in the current interest rate cycle.

December 15, 2011

Market Outlook | India Research

Rupee depreciation impact

High current account deficit necessitated rupee depreciation: Of late, because of the high domestic inflation as well as high crude prices, Indias trade and current account deficit had been ballooning from the already high 3% levels this was being masked by capital flows earlier. However, with this kind of high current account deficit, we had maintained the view that the rupee was likely to depreciate and this finally was accentuated once capital flows diminished recently.

Exhibit 1: Rupee depreciation (%) vs. other currencies from peak levels
USD INR 19.4 Euro 19.0 Pound 18.9 Yen 30.0 Yuan 23.1

Source: Company, Angel Research

Short-term negative, medium-term positive for the Indian economy: In the near term, there could be an immediate negative impact on the countrys inflation and trade deficit due to higher crude prices (as far as other commodities are concerned, dollar prices of most of these commodities have also corrected by 15-20% from peak levels, offsetting the rupee depreciation). But, in our view, rupee depreciation is positive for the Indian economy as a whole in the medium term because of the boost it is likely to provide to the export sectors. IT, pharma and auto ancillary to benefit the most: Within our coverage universe, the major beneficiaries of rupee depreciation are not surprisingly expected to be the IT, pharma and export-oriented auto ancillary companies. For most of the metal companies with large exports, absolute benefits are neutralized due to the corresponding fall in the dollar prices of their products, albeit because of the improved competitiveness vis--vis other countries. However, even in a slowing global environment, these companies are likely to continue earning relatively better margins and work at high utilization levels compared to global peers. Cairn is also benefitting from the high crude realizations, but we have a neutral view on the stock due to its high valuations. High forex debt to impact handful of companies: In terms of negative impact, a handful of the large corporates that tried to play the interest arbitrage between domestic and foreign loans will suffer on account of rupee depreciation. We were always concerned about such foreign borrowings, especially considering that some of them were used to fund expensive acquisitions, and over a 3-5 year period it is possible that rupee depreciation may eat away a good chunk of the arbitrage these corporates were banking on. Within our coverage, companies impacted most by the high forex debt include Bharti Airtel, RCom, Tata Steel, SAIL and Ranbaxy amongst large-caps; and Bhushan Steel, Godrej Consumer, Dabur and Greenply amongst mid caps. Crude derivatives and component importers negatively impacted: Companies in the capital goods and auto ancillary space that import a significant portion of their raw materials (mainly components) would be some of the marginal losers from the rupee depreciation. In our coverage, this includes few companies such as Subros, and BGR. However, for several companies, especially MNCs such as ABB or Bosch, the products are high-end and pricing power is likely to enable some passthrough of higher import costs. The other set of companies to be negatively impacted are those whose raw materials are crude or crude derivatives, because
December 15, 2011

Market Outlook | India Research

unlike other global commodities, crude prices have remained steady even in dollar terms and their (crude or crude derivatives) rupee prices have therefore increased substantially. This has a direct negative impact on government oil and gas companies (whose under-recoveries increase) as well as airline companies; while its indirect impact is on FMCG companies such as Asian Paints and Godrej Consumer. In case of steel companies importing coking coal, again the impact of rupee depreciation has been neutralized by a corresponding fall in dollar prices of coking coal.

Exhibit 2: Top exporting companies in India

Company Infosys Satyam Hexaware KPIT Cummins Infotech Persistent MindTree TCS HCL Tech Mphasis TechM Wipro Dr Reddy's Labs Aurobindo Pharma Dishman Pharma Ranbaxy Labs. Bharat Forge Tata Motors Motherson Sumi Systems Lupin Cadila Healthcare Cipla Ipca labs Orchid Chemicals CRISIL Apollo Tyres Aventis Indoco Remedies Sun Pharmaceuticals Sector IT IT IT IT IT IT IT IT IT IT IT IT Pharmaceuticals Pharmaceuticals Pharmaceuticals Pharmaceuticals Auto & Auto Ancillary Auto & Auto Ancillary Auto & Auto Ancillary Pharmaceuticals Pharmaceuticals Pharmaceuticals Pharmaceuticals Pharmaceuticals Others Auto & Auto Ancillary Pharmaceuticals Pharmaceuticals Pharmaceuticals Net Exports 97.7% 95.1% 94.5% 92.5% 92.0% 91.5% 91.5% 90.8% 90.5% 90.0% 85.0% 78.2% 72.2% 71.8% 70.4% 67.7% 67.2% 62.6% 61.8% 60.1% 59.8% 55.7% 51.3% 47.3% 44.2% 38.5% 35.2% 31.0% 28.5%

Bajaj Auto JK Tyre and Industries Ceat

Source: Company, Angel Research

Auto & Auto Ancillary Auto & Auto Ancillary Auto & Auto Ancillary

27.4% 19.1% 17.9%

December 15, 2011

Market Outlook | India Research

Exhibit 3: Companies with high foreign currency debt

Company Bharti Airtel GCPL Ranbaxy Labs. Dabur Bhushan Steel RCom Godawari Ispat Greenply Sector Telecom FMCG Pharmaceuticals FMCG Metals & Mining Telecom Metals & Mining Others Fx debt (`cr) Impact on Net worth 51,998 1,500 4,060 800 4,190 805 27,047 342 165 10.1% 8.7% 7.9% 7.3% 7.1% 7.1% 6.5% 6.1% 5.1%

Exhibit 4: Companies with high imports

Company ONGC SpiceJet Subros FAG Bearings Amara Raja Batteries Sector Oil & Gas Aviation Auto & Auto Ancillary Auto & Auto Ancillary Auto & Auto Ancillary

Orchid Chemicals Pharmaceuticals

Source: Company, Angel Research

Source: Company, Angel Research

Deposit growth surpasses credit growth for the first time since March 2010
Growth in bank credit of Scheduled Commercial Banks (SCBs) remained flat on a fortnightly basis at 17.7% yoy. The pace of deposit accretion picked up considerably, taking the yoy growth closer to the 18% mark (at 17.9%). The spread between credit and deposit growth, which had widened to as much as 9% in December 2010, has turned into the negative territory, albeit marginally. Overall, systemic credit-to-deposit ratio remains elevated at 74.2% levels. FY2012 YTD credit offtake has declined by 15.9% yoy, while deposit mobilization has risen by 43.6% yoy. Deposit accretion during the fortnight was healthy at `62,798cr as compared to a decline of `6,842cr in the previous fortnight. Credit offtake during the fortnight was also healthy at `46,377cr compared to an average of `13,482cr over the past three fortnights. In spite of healthy deposit mobilization, systemic liquidity remains tight. Overnight LAF borrowings have averaged ~`90,300cr over the past fortnight, well above the RBIs indicated comfort zone of +/- 1% of NDTL.

Economic and Political News

US$300bn export target not an easy target for 2011-12, says Govt. of India IEA warns high oil prices threaten global economy Petrol prices may rise by `0.65 from December 16

Corporate News
Bharti Telecom acquires shares of Airtel worth `20cr Indian Oil in talks with Dhamra port for LNG terminal Millennium and Copthorne Hotels choose MindTree as its strategic IT partner NTPC-BHEL JV to start operations next fiscal
Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

December 15, 2011

Market Outlook | India Research

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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December 15, 2011