India

Snapshot

LITTLE BLACK BOOK

January 2012

Contents

Equity Overview Conviction ideas from the Sales Desk Valuation Matrix Valuation Charts Earnings Momentum FII flows Price Momentum IPO Snapshot Economic Indicators Recent Publications

3 8 9 10 11 13 14 17 18 26

Authors of the report Nick Paulson-Ellis Aditya Jhawar Nitesh Sharma Deepali Bhargava

Published 11th January 2012

January 2012

Equity Overview
INTRODUCTION Welcome to the January 2012 edition of Espirito Santo Investment Banks Little Black Book. In this monthly publication we offer a quick snapshot view of Indian equities, with our summary view on key markets issues, as well as valuation, momentum, investor flows, IPOs and key economic statistics and some key ideas from the sales desk. Nick Paulson-Ellis India Country Head nick.paulson-ellis@execution-noble.com BETTER TO BE SAFE THAN SORRY New Year, new hope? 2011 was Indias annus horribilis, topping the charts of the worlds worst performers, losing over a third in dollar terms and delivering the countrys second worst equity market performance in history. I think most of us recognize the reasons why, though too many government officials still blame Europe, when most of Indias current problems are in fact self-inflicted (you dont get the prize for the worst performing major market and currency simply due to external factors). That means they are technically within Indias control to resolve: indeed, the steps taken to resolve the multitude of issues will be the key to the outcome for markets in 2012. Come January and the truck load of year ahead predictions lands on your desk. Rather ironically, however bearish the tone, they all seem to plump for a year end Sensex target of around 18,000. Tempting though it is at this time of year to make bold predictions for the year ahead, we think it is too early. Forecasting is inherently difficult as it is, but with ceteris paribus seemingly a dead concept it is particularly futile right now. The fact is that the outlook remains extremely foggy and the biggest single factor will be political decisions that have not yet been taken, and are hard to predict. 2011 was an extraordinary year in many ways, but particularly in the influence of politics on financial markets whether the Euroquake, Arab Spring, divisive US party politics impairing its credit rating, or indeed Indias political cacophony. Systemic concerns, politics and policy announcements drove financial markets more than corporate fundamentals last year. In large part this explains why the majority of active funds across the world underperformed in 2011: it is easier and we are better at predicting corporate earnings than political outcomes. Unfortunately it looks unlikely that early 2012 will be a return to normal, with any shift back to focus on economic and corporate fundamentals. Certainly that looks unlikely in India ahead of important state elections and the budget in March. Until there is greater clarity on the political environment and policy initiatives in the Union budget, we think investors are better off taking a wait and see stance, and remaining relatively cautious and defensively positioned. But what about the new rate cycle? The big plus this year is likely to be the turn in the monetary policy cycle, with the RBIs policy priority gradually shifting from controlling inflation to ensuring a stabilization and then recovery in growth. There has been growing certainty over the last fortnight on where we are in the monetary policy cycle. Inflation is starting to fall, given the high base effect and falls in food inflation. Recent rhetoric from the RBI reflects that rate hikes are over and assigns almost a 100% probability on its next move being an interest rate cut. We think that the uncertainty on core inflation in the face of worsening deficit indicators and INR depreciation, as well as the RBIs desire to be very careful about inflationary expectations, means uncertainty in the exact timing of a rate cut, though we expect the first Repo rate cut in Q1 FY13, with the April meeting being our best guess. We expect a CRR cut in January 2012 as increased government borrowing, election related spending and RBI intervention (USD selling) negatively impact domestic INR liquidity. We also

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January 2012

Equity Overview
expect the RBI to lower its GDP growth target for FY12 from 7.6% YoY currently to about 7.2% YoY in the third quarter review meeting in January 2012. Its inflation projection of 7% YoY in March 2012 is likely to remain unchanged. The rate cut cycle this time is unlikely to be as aggressive as in 2008. Back then, the entire rate cut cycle was short in duration merely six months and heavy on quantum - with an initial 100 bps cut in the Repo rate and cumulative cuts of 425 bps. That was in response to a sudden and highly uncertain global crisis. The backdrop this time is serious, but very different; a structurally challenged though better understood developed world scenario, but combined with a more difficult domestic scenario. In the absence of a systemic crisis caused by a tail event in Europe, we think a better parallel for assessing the impact might be the rate cut cycle of 2001-2004, which was far more gradual extended over three years - and less aggressive with cumulative cuts of 400 bps in the Repo rate. In that cycle, from an average of 7% in the one year before the rate cuts began, WPI inflation slipped to an average of 3.7% in the two years following the first rate cut, with manufacturing inflation slipping from 3% YoY to 2.2% in the corresponding periods. To the extent that it is driven by structural factors in the current highinflation scenario, it is unlikely that inflation will moderate in a hurry in FY13 as it did in the 2001-2004 rate cut cycle. We expect WPI inflation to average 7.2% in FY13. So with this combination of persistent domestic structural inflationary factors, a stubbornly high oil price and twin deficit concerns meaning a weak Rupee, it is hard to see the RBI doing a sudden volte face and aggressively easing. In terms of the impact on investment, our analysis suggests that real investment growth started picking up only after the rate cut cycle was over i.e. around March 2004, and moved above trend only in 2004-05. The investment growth slowdown is expected to be prolonged this time as well. Though the trends in fixed investment
Source: Bloomberg, ESIB research

growth so far are not necessarily more worrisome than in 2001-2004, itll likely be more difficult for corporates to finance investment both externally and domestically, even after the RBI embarks on the rate cut cycle, given: 1) high government market borrowings (up by INR 930bn over and above the budget for FY12), which will likely crowd out already shallow bank credit growth; 2) risk aversion limiting availability of global liquidity and 3) policy and political uncertainty negatively impacting foreign investment into India. Also, the critical investment led growth can only recover when domestic and foreign investors not only see reforms and investment-friendly policies and initiatives, but also regain confidence in the governments ability to implement them. That wont happen overnight. Lastly, in terms of the impact of rate cuts on the markets, theres no historical evidence, from the 2001-2004 or 20082009 rate cut cycles, to suggest that the markets will be in a hurry to recover ahead of, or early in the rate cut cycle. In the 2001-2004 cycle, the Nifty remained rangebound for most of the period of rate cuts, recovered marginally in the last phase, to then recover significantly only once the rate cuts were over and the RBI went into a pause mode. The RBI paused after March 2004 and the Nifty returned 15% in the year that followed and 92% by March 2006. Things were entirely different in the 20082009 cut cycle, when the equity market continued to collapse for the entire duration of aggressive rate cuts and recovered only after the RBI had paused. The huge rebound of 65% over the following year was to a great extent about a recovery in confidence following a period of unprecedented global uncertainty.

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January 2012

Equity Overview
What implications does this have for market behaviour this time? History doesnt give any real precedent to assume that the market will be in any hurry to lift itself with a turnaround in the rate cycle. History is only ever a guide and clearly the backdrop of rate cuts is different this time, but we suspect the turn in the rate cycle alone is not in itself enough of an inflection point, and it is still too early to switch to an aggressive recovery stance. There are three things to look for clarity on first: 1) a bottoming out of the earnings downgrade cycle; 2) the Eurozone crisis and, most importantly, 3) Indias state elections, budget and ensuing policy initiatives. 1) The earnings cycle: when will it bottom out? Macro predictions for India are now mostly fairly pessimistic and this has gradually filtered down to bottom-up earnings estimates, though we dont think it has gone far enough and the divergence in consensus expectations is now very wide. The consensus expectation for FY13 earnings growth is ~15%, but this masks a range from 0% to high teens. We expect the Q3 FY12 results season, which kicks off this week, to be a difficult one, resulting in FY13 earnings being pared back several percentage points. The driver of downgrades over the past two quarters has been raw material input and interest cost inflation both squeezing margins, and whilst these have peaked, there is now weakness in previously robust revenue growth. So we expect the earnings downgrade cycle to continue throughout calendar Q1. 2) Eurozone: no silver bullet, but at least a wave of liquidity A Eurozone recession in 2012 seems a near certainty given the fiscal drag, collapse in business and consumer confidence and lending slowdown in the face of banking system de-leveraging. No doubt were in for a few surprises, but at least some progress has been made, notably in the ECBs extraordinary liquidity measures (490bn), easing pressure on Europes banking system and buying time for politicians to deliver longer-term solutions. But Q1 is likely to remain a dicey period in Europe, given 14.4bn of Greek debt matures on 20th March, a busy schedule of sovereign debt auctions, the need for Eurozone governments to ratify the December agreements on greater fiscal unity and, critically, visibility on progress towards European banks meeting the European Banking Associations core tier 1 capital requirement of 9% by June 2012. Europe wont be the primary driver for India, but given its potential impact on sentiment, and the importance of the European banks to Indian corporate borrowing, all these events in Q1 strengthen our belief that caution is the right approach for now. 3) Indias state elections, budget and ensuing policy initiatives But the biggest driver of our caution in calendar Q1 is the uncertainty caused by a busy state election calendar, especially in Uttar Pradesh (UP), and then the announcement of the budget just after the election results in March. Policy paralysis is likely to persist in the run up to elections, and there is also risk of populist election friendly measures, whilst the ensuing budget will be a critical one in terms of signaling a return to a reform agenda, but also steps towards fiscal consolidation, some of which could be negative for corporate earnings, such as a hike in corporate tax rates to raise revenues. 2012 begins elections in five states in Q1, then there is a gap before ending with Gujarats polls in Nov-Dec 2012. The UP election is the key one and may materially impact the composition of central government and therefore ensuing policy trends and reforms over the remaining two years of UPA rule. Given volatile and unreliable allies like DMK and TMC, a more stable partner like SP with its 23 MPs could boost confidence and help pave the way for reforms. We see three possible scenarios: a) SP + Congress: This is the best result for the central government as SP can support and form part of the government, potentially helping it get rid of TMC.

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January 2012

Equity Overview
b) BSP + Congress or BSP alone: Not too bad for the central government since they have been supporting the government in the past. They also helped the government in the Lok Sabha during current winter session c) BJP: This would be the most destabilizing result and could also lead to complete policy paralysis or even early general elections. Results for all the states will be announced by the first week of March, and with the Union budget delayed until after the elections, if the election results are favourable it gives the UPA room to present a less populist budget and more reformist budget. Recent opinion polls by Neilsen-Star showed SP gaining 132 seats, BSP winning 117 and Congress delivering a strong performance to win 68 seats compared to the 22 seats at the 2007 general election. In aggregate 403 seats will be contested in UP elections. It looks like a close race but SP and Congress seem to be making inroads as Mayawati fights the antiincumbency factor and disappointment with actual progress. 2007 UP poll results Assembly Elections timeline
% of national electorate 24% Year 2012 Assembly Elections in states Goa, Manipur, Punjab, Uttar Pradesh, Uttarakhand and Gujarat. Himachal Pradesh, Madhya Pradesh, Meghalaya, Mizoram, Nagaland, Delhi, Rajasthan and Tripura.

2013

13%

Source: Election commission of India, ESIB research

Others 27 Congress 22 BJP 51

We think major portfolio decisions are best delayed until after the outcome of elections in March. The UPA governments problem is now not so much a lack of recognition of the issues and required policies (the Sensex collapsing and Rupee hitting an all time low has surely woken up Delhis politicians), it is a lack of political constituency to deliver reforms, with unreliable allies it depends upon for survival. The upcoming elections can have a material impact on this, either good or bad. Sustainable recovery in GDP growth, and in particular non-inflationary GDP growth, depends upon a recovery in the investment cycle, and in the face of government fiscal challenges, particularly private sector investment. This isnt going to recover in a hurry, but the keys will be progress on fast-tracking project clearances, pro-investment policies and rebuilding confidence. Investors need to watch not only the high level policy announcements and initiatives, but given the likely ongoing constraints for high profile reforms like FDI in retail, also watch out for lower level progress and evidence of execution picking up see page 25 for our newly introduced Policy Watch to track developments on the policy front. But what about valuations, dont they discount all our caution? After a c.26% fall in 2011 India has at least moved from the most overvalued club at the start of the year, to being sensibly valued now. A headline valuation of ~13x forward earnings it is below historic averages, yet still at a premium to the emerging market average. And frankly most markets are now trading below historic averages, and given the foggy outlook and trauma that investors have suffered over the past three years, such a situation may well persist. India is not at the

BSP 206

SP 97

Total seats - 403

Source: Election commission of India, ESIB research

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January 2012

Equity Overview
c.10x levels seen in previous troughs, and given the uncertainties weve raised above, sensible valuations arent compelling enough. The valuation argument does become more compelling when one looks beyond market level multiples to different sectors, as well as mid/small cap vs. large cap. One of the features of 2011 was a flight to 1) defensives, particularly Consumer Staples; 2) to quality and away from any governance risk and 3) a big move up the liquidity curve away from mid and small caps. This caused a massive divergence of performance between sectors, and between large vs. mid/small caps. So whilst Consumer Staples is trading at a 14% premium to its historic average, Industrials and Financials are at an >40% discount (see below). This suggests that in the months ahead there may well be compelling opportunities to become more aggressive in some of the mid caps and in beaten down sectors, such as Industrials and Capital Goods, so investors should keep a close eye on project approvals. But whilst we watch and wait, in the meantime our stock focus is: 1) Defensive scare market portfolio (click here) 2) Silver Bullets analyst top picks (click here)
MSCI Indices Consumer Staples Telecom Healthcare IT Utilities Materials Energy Consumer Discretionary Industrials P/E (x) 24 15.3 18.4 17.3 11.2 7.7 9.3 9.5 10.1 P/B (x) Financials
Source: Bloomberg, ESIB Research

Avg 21 15.6 20 19.5 14.1 9.9 12.5 14.2 17.8 Avg 2.7

% Disc / Pre to Avg 14 -2 -8 -11 -21 -22 -25 -33 -44 % Disc / Pre to Avg -42

1.6

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January 2012

Conviction ideas from the sales desk

Manappuram - Poorva Upadhyaya LIC Housing Finance - Sunny Shah (MGFL IN, BUY, CMP: Rs 51, FV: Rs 80, 57% upside) The stock struggled in 2011 because of the RBIs removal of priority sector status on gold loans and more recently due to the falling gold prices. However, over the last two quarters the company has shown that most of these concerns are unfounded, achieving 15% and 25% QoQ loan and profit growth in Q2 FY12. For all the non-believers in the gold story, the fact remains that funds investing in gold have outperformed equities in the past one year with a gain of 27-31% compared with losses in equity funds. The company is well on its way to its guided quarterly loan book of Rs 135bn by the end of March. Following the removal of priority sector status for gold loan companies, it was expected that the ROE would reduce as a result of no assignments and an increased cost of funding. However, Manappuram has been able to pass on the increased cost of funding to its customers. We expect the ROE to improve further towards 30% with economies of scale kicking in and the cost of funds going down in FY13. We recently increased our profit forecasts by 27% for FY12 and 66% for FY13, mainly due to the ability to pass on most of the increased cost of funding to borrowers and the increase in AUM forecasts. We would expect the company to report more than 60% YoY growth in earnings and its loan book for this quarter. We expect to the stock to catch up and be in line with the trading multiples of the broader sector. Currently the stock is trading at 1.2x FY13E, our fair multiple for the stock is 2x FY13E. (LICHF IN, BUY, CMP: Rs 231, FV Rs 260, 13% upside) LICHF outperformed the Bankex by 46% last year, emerging largely unscathed from the bribe for loan scandal. It was able to grow its loan book at 32% CAGR and profit at 26% over the last three years with less than 0.7% gross NPLs. We think that going forward on a structural basis, strong drivers in terms of low mortgage penetration, a rising middle class, increasing affordability and taxation benefits will keep the housing finance market growing at 15-20% over the next 3-5 years. We rate LICHF as a good quality franchise given its strong distribution and mainly retail base with a small ticket size (Rs 1.6m) and low LTVs. In FY13 we expect a growth rate of 15% and NPLs to remain low owing to the smaller LTVs and loan size. Given the lag in transmission of the increased cost of funds to borrowers and with the majority of teaser loans getting converted to fixed from July 2012, we expect NIMs to start increasing. Also, reversal of extra provisioning (C.100 crores) and expected recoveries can further boost the bottomline in coming quarters. On the negative front, LICHF has amongst the highest leverage of HFCs and NBFCs, with Tier I capital at 8.6% compared to 12% for HDFC and an average of c.16% for NBFCs. Hence we can expect the company to raise capital in the near term if it intends to grow its loan book. Lastly on valuation, we think the stock is relatively cheap, trading at 1.7x FY13E P/B, which is a 40% discount to HDFC. Reiterate BUY.

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January 2012

India Valuation Matrix

Indices
Sensex BSE 100 BSE Mid-Cap Sector Indices Auto Bankex Consumer Durables Capital Goods FMCG Healthcare IT Metal Oil & Gas Power Realty Teck*
Source:

PE (x) FY12E
13.9 13.1 9.6

PB (x) FY 12E
2.2 2.0 1.1

EV/EBITDA (x) FY 12E

9.4 9.5 8.2

ROE (%) FY 12E

24.1 23.2 18.6

Div Yield (%) FY 12E

1.7 1.8 1.9

FY13E
12.1 11.1 7.7

FY 13E
1.9 1.7 1.0

FY 13E
8.3 8.2 6.5

FY 13E
23.6 22.9 20.0

FY 13E
2.0 2.0 2.2

11.0 11.1 23.8 12.7 26.8 18.9 19.2 8.0 9.6 12.0 9.3 21.9

9.5 8.8 17.8 11.2 22.6 16.0 16.7 7.0 8.8 10.4 7.2 17.6

2.8 1.4 8.0 2.2 8.2 3.0 4.8 1.1 1.4 1.5 0.7 3.5

2.3 1.2 6.3 2.0 7.3 2.6 4.0 1.0 1.2 1.3 0.6 3.0

6.8 19.7 8.5 17.9 13.1 13.5 5.8 6.3 8.9 9.7 11.4

5.9 15.2 7.4 15.2 11.7 11.7 5.0 5.9 7.3 7.5 9.6

36.1 15.8 44.9 20.6 49.4 22.0 28.7 20.2 15.6 16.3 8.3 24.8

33.0 17.2 42.5 19.9 49.5 21.6 27.3 18.7 15.1 16.0 10.5 24.9

2.2 1.8 1.6 2.0 1.0 1.5 1.8 2.2 2.0 1.4 1.3

2.5 2.1 1.7 2.4 1.2 1.7 1.9 2.3 2.2 1.6 1.5

Bloomberg, Espirito Santo Investment Bank Research, * Teck IT, Media and Telecom, All sector indices are published by BSE.

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January 2012

Valuations
Figure 1: Sensex 12M forward P/E, falls below long term average
25.0 23.0 21.0 19.0 17.0 (x) 15.0 Avg 14.3 13.0 11.0 9.0 7.0 5.0 Oct-02 Mar-05 May-03 Feb-08 Apr-09 May-06 Nov-09 Dec-06 Aug-01 Sep-08 Jan-01 Mar-02 Dec-03 Oct-05 Jun-10 Aug-11 Jul-07 Jul-04 Jan-11 -1Sd 11.3 Min 9.1 +1Sd 17.2 Max 22.4

Source:

FactSet , Espirito Santo Investment Bank Research

Figure 2: FY1 P/E of leading MSCI Emerging market indices.

20 18 16 14 12 10 8 6 4 2 0 Indonesia Malaysia Mexico Poland Taiwan Russia India South Africa Korea Brazil China FY1 P/E 5 yr Average

Source:

Bloomberg , Espirito Santo Investment Bank Research

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January 2012

Earnings Momentum
Figure 3: Earnings sentiment
Net upgrades 60%
Net Upgrades

Sensex (RHS) 22,000

40%

20,000

20%

18,000

0%

16,000

-20%

14,000

-40%
Net Downgrades

12,000

-60%

10,000

-80%

8,000

Source:

FactSet , Espirito Santo Investment Bank Research

In the earnings sentiment chart above we look at the cycle of three months rolling net earnings upgrades/downgrades of the 30 stocks in Sensex and the index price movements.

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January 2012

Earnings Momentum
Figure 4: Earnings revision for FY12
Company BSE 100 - Top 15 by EM
Tata Chemicals Ltd. Infosys Ltd. NMDC Ltd. Tata Communications Ltd. NHPC Ltd. Infrastructure Development Finance Hindustan Unilever Ltd. Reliance Infrastructure Ltd. Bajaj Auto Ltd. Hero MotoCorp Ltd. Tata Motors Ltd. Sun Pharmaceutical Industries Ltd. Tata Consultancy Services Ltd. Grasim Industries Ltd. Wipro Ltd. Materials Information Technology Materials Telecommunication Services Utilities Financials Consumer Staples Utilities Consumer Discretionary Consumer Discretionary Consumer Discretionary Health Care Information Technology Materials Information Technology 0.6 1.2 (0.8) (0.3) 1.9 0.8 0.2 1.1 0.2 (0.0) 1.8 0.2 1.3 1.6 0.6 6.8 2.0 (0.8) 3.0 1.4 5.8 1.4 2.3 0.3 0.3 4.1 3.4 1.4 1.8 1.1 8.4 8.2 8.1 6.7 6.0 5.5 5.4 5.2 4.7 4.4 3.2 2.9 2.6 2.5 2.5 18 8 57 12 7 12 24 34 17 41 45 28 33 43 24

Sector

% Change in EPS 1m 2m 3m

No of EPS est.

BSE 100 - Bottom 15 by EM

Union Bank of India Bharti Airtel Ltd. Cummins India Ltd. Steel Authority of India Ltd. Bharat Petroleum Corp. Ltd. National Aluminium Co. Ltd. Ranbaxy Laboratories Ltd. Adani Power Ltd. Sesa Goa Ltd. Maruti Suzuki India Ltd. JSW Steel Ltd. Reliance Capital Ltd. Suzlon Energy Ltd. Tata Steel Ltd. Exide Industries Ltd. Financials Telecommunication Services Industrials Materials Energy Materials Health Care Utilities Materials Consumer Discretionary Materials Financials Industrials Materials Consumer Discretionary (0.4) (5.3) (0.3) (8.9) (2.0) (3.4) (9.0) (2.6) (8.0) (2.4) (2.8) (3.6) (3.5) (5.4) (0.0) (1.7) (15.5) (16.2) (16.4) (5.6) (17.9) (20.4) (18.4) (9.9) (4.0) (10.0) (15.0) (11.8) (22.1) (2.7) (16.2) (16.2) (16.9) (18.1) (18.5) (19.2) (21.1) (21.3) (21.7) (21.8) (22.2) (22.2) (22.7) (24.7) (29.1) 35 37 12 31 27 19 29 27 27 41 41 10 19 38 23

Source:

FactSet , Espirito Santo Investment Bank Research

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January 2012

FII Flows
Figure 5: Net FII and DII inflows in the Indian equity market
2,500 FII (US$ m) 2,000 1,500 1,000 500 0 (500) (1,000) (1,500) (2,000) (2,500) Feb-11 Mar-11 Apr-11 Oct-11 Jun-11 Jul-11 May-11 Aug-11 Nov-11 Dec-11 29,321 30,000 25,000 20,000 15,000 18,518 17,639 (512) (5,000) (10,000) (15,000) (20,000) (12,918) Sep-11 8,338 Jan-11 DII (US$ m)

Source:

Bloomberg, Espirito Santo Investment Bank Research

Figure 6: FII & DII flows

Month Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 FII (US$ m) 5,579 4,159 329 (1,387) (826) 1,556 1,574 (1,156) 734 1,667 (2,107) (204) 508 (859) (12) DII Sensex Perf (US$ m) (%) (2,660) 542 (109) 1,150 1,270 7 (127) 915 (21) (44) 1,831 342 (469) 918 168 (0.2) (2.6) 5.1 (10.6) (2.8) 9.1 (1.6) (3.3) 1.9 (3.4) (8.4) (1.3) 7.6 (8.9) (4.1)

Figure 7: Yearly FII flows (US$ m)

35,000

10,901 10,000 5,000 0

2005 2006 2007 2008 2009 2010 2011

Source:

Bloomberg, ESIB Research

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January 2012

Price Momentum
Figure 8: Performance of major MSCI indices in December-11
China Europe Hong Kong UK USA DM EM Brazil India Poland Russia -10.6% -12%
Source:

2.4% 2.0% 1.6% 1.2% 0.8% -0.2% -1.3% -2.4% -4.4% -5.8%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Bloomberg , Espirito Santo Investment Bank Research

Figure 9: Performance of major MSCI indices in 2011

USA UK DM Europe Hong Kong China EM Russia Poland Brazil India -24.7% -25.9% -25% -20% -15% -10% -5% 0% -19.0% -19.9% -20.0% -20.8% -22.1% -11.3% -6.6% -7.4% -0.1%

-30%
Source:

Bloomberg , Espirito Santo Investment Bank Research

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January 2012

Price Momentum
Figure 10: Performance of key indices in December-11 Figure 11: 2011 performance of key indices

BSE Sensex

-4.1%

BSE Sensex

-24.2%

NSE Nifty

-4.3%

NSE Nifty

-24.2%

BSE 100

-4.8%

BSE 100

-25.2%

BSE Mid Cap -8.8%

BSE Mid Cap

-33.4%

-9.0% BSE Small Cap

BSE Small Cap -41.9%

-50% -10% -8% -6% -4% -2% 0%

Source: Bloomberg , Espirito Santo Investment Bank Research

-40%

-30%

-20%

-10%

0%

Source: Bloomberg , Espirito Santo Investment Bank Research

Figure 12: Performance of sector indices in December-11

Teck FMCG Healthcare Auto Consumer Dur Bank Power Oil & Gas Metal Realty Capital Goods -0.1% -3.1% -3.4% -6.4% -7.1% -7.3% -7.6% -9.1% -12.4% -16.6% -25% -15% -5% 5% 0.8%

Figure 13: 2011 performance of sector indices

FMCG Healthcare Teck Consumer Dur Auto Oil & Gas Bank Power -12.4% -16.2% -16.3% -19.7% -28.7% -30.6% -39.5% 9.9%

Metal -46.9% Capital Goods -47.4% Realty -50.7% -70% -20% 30%

Source: Bloomberg, Espirito Santo Investment Bank Research

Source: Bloomberg , Espirito Santo Investment Bank Research

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January 2012

Price Momentum
Figure 14: BSE 200 best and worst performing stocks in December-11
Gvk Power & Infr Pipavav Defence Tata Communicati Bombay Rayon Fas Tata Global Beve Grasim Inds Infosys Wipro Oil India Ambuja Cements Oriental Bank Of Com -26.5% India Infoline -26.8% Central Bk India -26.9% Essar Oil -27.5% Jai Corp -28.5% United Spirits -29.8% Syndicate Bank -31.3% Sintex Indus -33.0% Jet Airways -33.7% Pantaloon Retail -34.3% -40% Source: -30% -20% -10% 0% 11.3% 11.1% 11.1% 9.7% 7.6% 7.3% 6.0% 5.5% 5.2% 4.7%

10%

20%

Bloomberg , Espirito Santo Investment Bank Research

Figure 15: BSE 200 best and worst performing stocks in 2011
Bata India Ltd Gitanjali Gems L Bombay Rayon Fas Hindustan Unilev Petronet Lng Ltd Marico Ltd Jubilant Foodwor Idea Cellular Divi Labs Ltd Apollo Hospitals Unitech Ltd Gvk Power & Infr Housing Developm Shree Renuka Sug Gujarat Nre Coke Ncc Ltd Jai Corp Ltd Jet Airways Ind Ivrcl Ltd -70.1% -71.1% -71.7% -74.8% -74.8% -75.8% -76.5% -76.7% 25.5% 21.1% 20.5% 20.3% 20.0% 19.4% 46.2% 42.4% 38.4% 31.9%

-77.6% Lanco Infratech -84.8% -100% Source: -80% -60% -40% -20% 0% 20% 40% 60%

Bloomberg , Espirito Santo Investment Bank Research

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January 2012

IPO Snapshot
Figure 16: Performance of IPO index vs. Sensex (Rebased to 100 as of Jan 2006)
BSE IPO Index 300 BSE Sensex

250

200

150

100

50

0 Jan-06
Source:

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Bloomberg , Espirito Santo Investment Bank Research

Figure 17: Table showing performance on recent IPO listings.

Company Name
Gravita India Aanjaneya Lifecare Prakash Constrowell Lovable Lingerie Tree House Education Inventure Growth & Securities Coal India C Mahendra Exports Midvalley Entertainment Future Ventures India Muthoot Finance Fineotex Chemical TD Power Systems L&T Finance Holdings Innoventive Industries Shekhawati Poly-Yarn RPP Infra Projects Sudar Garments PG Electroplast MOIL Birla Pacific Med Spa SRS Ltd Omkar Speciality Chemicals Punjab & Sind Bank Claris Lifesciences PTC India Financial Services M and B Switchgears Sanghvi Forging & Engineering Ravi Kumar Distilleries A2Z Maintenance Taksheel Solutions Shilpi Cable Technologies Acropetal Technologies Tijaria Polypipes

Offer Amount Price Raised (Rs) (Rs mn)

125 234 138 205 135 117 245 110 70 10 175 70 256 52 117 30 75 77 210 375 11 58 98 120 228 28 186 85 64 400 150 69 90 60 450 1,170 600 933 1,138 819 154,751 1,650 600 7,500 9,010 295 2,270 12,450 2,170 360 488 700 1,210 12,600 652 2,030 794 4,708 3,000 4,332 930 369 736 7,762 825 559 1,700 600

Date of Listing
11/16/2010 5/26/2011 10/4/2011 3/24/2011 8/26/2011 8/4/2011 11/4/2010 1/20/2011 1/27/2011 5/10/2011 5/6/2011 3/11/2011 9/8/2011 8/12/2011 5/13/2011 1/12/2011 12/6/2010 3/11/2011 9/26/2011 12/15/2010 7/7/2011 9/16/2011 2/10/2011 12/30/2010 12/20/2010 3/30/2011 10/20/2011 5/23/2011 12/27/2010 12/23/2010 10/19/2011 4/8/2011 3/9/2011 10/14/2011

Latest Price
410 492 239 326 178 148 326 134 72 9 156 58 228 44 89 23 53 52 130 243 6 35 56 60 106 11 59 23 16 90 13 10 12 8

Offer price till date

195% 111% 72% 59% 29% 27% 24% 23% 0% -11% -12% -13% -13% -17% -22% -22% -30% -35% -36% -38% -39% -40% -43% -49% -53% -62% -68% -73% -76% -78% -84% -86% -86% -86%

Performance (%) 1st day Relative to Sensex return post listing

68% 0% 67% 22% -13% 77% 40% 1% -20% -18% 1% 86% 8% -4% -20% 58% -8% 47% 98% 24% 81% -43% -53% 6% -10% -11% 71% 32% 25% -18% -61% -30% 0% -69% 107% 122% 62% 40% 34% 36% 36% 33% 9% 13% -2% -12% -7% -8% -7% -16% -5% -29% -39% -38% -43% -42% -36% -38% -29% -41% -61% -62% -59% -57% -85% -69% -73% -80%

Source:

Bloomberg, Espirito Santo Investment Bank Research

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January 2012

Economic Indicators
The current account deficit widened to USD 16.9bn (3.7% of GDP) in Q2 FY12 from USD 15.8bn (3.4% of GDP) in Q1 FY12. The widening of the current account deficit was driven by an increase in the merchandise trade deficit from USD 41.7bn in Q1 FY12 to USD 43.9bn in Q2 FY12 WPI inflation moderated to 9.11% in November, 2011 from 9.73% in October, led by a collapse in food price inflation. RBI left the Repo rate and cash reserve ratio unchanged at 8.5% and 6.0% respectively with a clear shift in policy stance in favour of rate cuts, the timing of which continues to be uncertain. Though RBI notes that growth is clearly decelerating, we think that absence of sustained signs of moderation in core inflation will prevent a rate cut as soon as January 2012. We expect RBI to embark on the rate cut cycle in Q1FY13.

Figure 18: India real GDP growth (YoY)

11 10 9 8 7 6 5 6.9

Average = 8.4

Source:

Bloomberg , Espirito Santo Investment Bank Research

Figure 19: Industrial Production (IIP, YoY%)

20 18 16 14 12 10 8 6 4 2 0 Nov-09 Feb-11 Apr-11 Mar-11 Aug-09 Sep-09 Oct-09 Feb-10 Jan-10 Mar-10 Apr-10 May-11 Jul-11 Aug-11 May-10 Aug-10 Dec-09 Nov-10 Sep-10 Oct-10 Jun-10 Dec-10 Sep-11 Jan-11 Jun-11 Jul-10 10.5 8.2 11.3 10.1 8.8 7.2 7.3 4.9 3.6 2.5 3.7 3.6 7.3 6.3 5.6 3.3 4.1 1.9 18 16.8 15.1 15.5 12.2 16.6 15.1 12.1

Source:

Bloomberg , Espirito Santo Investment Bank Research

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January 2012

Economic Indicators
Figure 20:YoY % change in WPI inflation
12 10 8 6 4 2 0 -2 Average = 6.8 WPI YoY Average WPI 9.11

Source:

Bloomberg , Espirito Santo Investment Bank Research

Figure 21: Breakdown of WPI inflation (YoY %)

24

20

16

12

Dec-10

Dec-10

May-11

May-11

Nov-11

Mar-11

Apr-11

Mar-11

Aug-11

Nov-10

Nov-10

Aug-11

Nov-11

Sep-11

Feb-11

Apr-11

Feb-11

Sep-11

Jan-11

Jun-11

Jan-11

Dec-10

Oct-11

Jun-11

Oct-11

Nov-10

May-11

Aug-11

Primary aticles

Fuel & Power

Manufactured products

Source:

Bloomberg , Espirito Santo Investment Bank Research

Figure 22: Key policy rates (%)

10 9 8 7 6 5 4 3 2 1 0 6% Cash Reserve Ratio Reverse Repo Rt Repo Rate 8.5% 7.5%

Source:

Bloomberg , Espirito Santo Investment Bank Research

FIT FOR Page 19 of 34 A NEW ERA_________________________________________________________________________________________

Nov-11

Jul-11

Jul-11

Mar-11

Apr-11

Feb-11

Sep-11

Jan-11

Jun-11

Oct-11

Jul-11

January 2012

Economic Indicators
Figure 23: Forthcoming Economic Data releases
Major release for India Major release for US

Date Event
8-10 Jan India Local Car Sales 12-Jan Industrial Production 12-Jan Weekly Inflation Data 16-Jan DEC WPI 19-Jan Weekly Inflation Data 24-Jan RBI policy meet 26-Jan Weekly Inflation Data 31-Jan 3QFY11 GDP Data 1-Feb Export/Import Data 2-Feb Weekly Inflation Data

Date

Event

10-Jan Wholesale Inventories Data 12-Jan Retail Sales 12-Jan Initial Jobless Claims 13-Jan Trade Balance 18-Jan Industrial Production 19-Jan Consumer Price Index 19-Jan Housing Starts 19-Jan Initial Jobless Claims 20-Jan Existing Home Sales 25-Jan FOMC rate decision 26-Jan New Home sales 27-Jan 4Q11 GDP Data 31-Jan S&P Case Shiller Index 2-Feb Domestic Vehicle Sales

Source:

Bloomberg , Espirito Santo Investment Bank Research

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January 2012

Economic Indicators
Figure 24: India Summary of key economic indicators
Apr-10 Sectoral growth (%YoY) Industrial production Mining Manufacturing Electricity 13.0 9.2 14.5 6.5 8.5 7.8 8.9 6.2 7.5 7.0 7.9 3.6 10.0 8.7 10.8 3.7 4.5 5.9 4.6 1.0 6.2 4.3 6.8 1.8 11.4 6.1 12.4 8.8 6.4 6.9 6.5 4.6 8.1 5.9 8.7 5.9 7.5 1.7 8.1 10.5 6.7 1.1 7.5 6.8 9.4 0.3 11.0 7.2 5.3 1.6 5.7 6.5 6.2 1.8 6.3 10.3 9.5 (1.4) 11.2 7.9 3.7 0.6 3.1 13.1 3.6 (4.1) 4.1 9.5 2.0 (7.1) 2.4 9.0 (5.1) (7.2) (6.0) 5.6 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11

Domestic passanger car sales Cement Despatches Monetory aggregates (%YoY) M3 Money supply Bank deposit Credit Growth External sector Exports (%YoY) Imports (%YoY) Trade defecit (USD bn) FX Reserve (USD bn) Inflation WPI Inflation Primary articles Food Fuel and Power Manufacturing Interest rates Reverse repo rate Repo rate Cash reserve ratio

39.8 8.9

30.4 8.6

30.7 3.7

38.0 4.5

33.2 3.4

30.3 8.0

37.0 19.9

19.6 (5.8)

28.9 (4.9)

26.3 0.1

22.6 7.0

24.4 4.5

13.2 (1.8)

7.0 (1.1)

1.6 1.2

(15.8) 7.7

(10.1) 4.8

(1.8) 0.2

(23.8) (1.8)

7.0 19.8

15.3 15.0 8.6

15.3 14.1 9.7

16.0 13.2 18.6

15.7 12.9 21.5

15.6 13.7 20.4

15.2 14.1 16.7

16.1 14.6 21.1

15.7 14.6 21.6

16.5 13.5 20.2

16.2 15.6 21.1

16.5 14.1 21.8

16.0 13.2 20.9

17.3 16.9 22.3

17.3 16.9 22.6

17.1 15.7 19.9

16.4 17.2 18.5

16.7 17.9 20.6

16.2 19.1 21.4

16.1 13.5 17.9

16.3 17.9 17.7

42.2 47.6 (14.0) 280

35.1 36.9 (13.1) 272

46.6 12.3 (8.8) 277

13.2 25.9 (13.6) 284

24.1 20.5 (10.2) 283

24.5 37.1 (11.3) 292

21.1 25.2 (11.2) 298

43.9 15.4 (4.8) 294

36.4 -0.3 (2.6) 297

32.4 13.1 (6.7) 299

49.7 21.2 (6.7) 301

43.9 17.3 (3.8) 303

34.4 15.0 (7.5) 314

56.9 49.2 (15.6) 310

46.5 42.5 (11.9) 309

81.8 47.9 (11.7) 319

44.3 41.8 (14.0) 319

36.4 17.2 (9.8) 311

10.8 21.7 (19.6) 320

3.9 24.6 (13.6) 304

10.9 21.5 20.9 13.6 6.4

10.5 20.5 20.6 14.4 5.9

10.3 20.1 19.9 13.9 5.6

10.0 19.1 16.5 13.3 5.8

8.9 16.0 14.8 12.6 5.2

9.0 18.2 16.9 11.1 5.0

9.1 18.1 12.7 11.0 5.1

8.2 14.7 8.9 10.3 5.0

9.5 18.4 20.8 11.3 5.4

9.5 18.4 13.0 11.4 5.3

9.5 15.9 10.7 12.4 6.3

9.7 13.4 8.9 12.5 7.5

9.7 15.1 8.1 13.0 6.8

9.6 12.9 8.5 12.3 7.4

9.5 11.3 7.1 12.9 7.9

9.4 11.5 9.7 12.0 7.7

9.8 12.5 9.6 12.9 7.9

10.0 12.2 9.5 14.0 8.0

9.7 11.4 10.8 14.8 7.7

9.1 8.5 6.6 15.5 7.7

3.75 5.25 6.00

3.75 5.25 6.00

3.75 5.25 6.00

4.50 5.75 6.00

4.50 5.75 6.00

5.00 6.00 6.00

5.00 6.00 6.00

5.25 6.25 6.00

5.25 6.25 6.00

5.50 6.50 6.00

5.50 6.50 6.00

5.75 6.75 6.00

5.75 6.75 6.00

6.25 7.25 6.00

6.50 7.50 6.00

7.00 8.00 6.00

7.00 8.00 6.00

7.25 8.25 6.00

7.50 8.50 6.00

7.50 8.50 6.00

Source: Bloomberg, Espirito Santo Investment Bank Research

FIT FOR FIT FORERA_________________________________________________________________________________________________________________________________________________________ Page 21 of 34 A NEW Page 21 of 34 A NEW ERA_________________________________________________________________________________________

January 2012

Economic Indicators
Figure 25: India Summary of key economic indicators
Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 GDP Real GDP growth (%) Real GDP by production (%YoY) Agriculture Mining Manufacturing Electricity Constrution Balance of Payments, $ bn Exports Imports Trade balance Current account 34.4 56.3 (22.0) (6.7) 38.3 59.5 (21.2) (4.3) 41.0 67.0 (26.1) (4.5) 52.5 74.9 (22.3) (1.5) 57.5 82.7 (25.3) (3.3) 5.5 53.6 92.8 (39.1) (12.6) 7.8 39.4 73.5 (34.0) (11.7) (6.1) 39.8 54.4 (14.6) 4.7 (5.3) 39.2 64.8 (25.6) (4.5) 4.0 43.4 73.0 (29.6) (9.2) 19.3 47.2 78.1 (30.9) (12.2) 14.6 52.4 83.9 (31.5) (13.0) 16.1 55.3 87.2 (31.9) (12.1) 16.8 52.0 89.0 (37.0) (16.9) 21.6 65.9 97.4 (31.5) (10.0) 13.4 77.2 107.1 (29.9) (5.4) 8.2 74.3 116.1 (41.8) (15.8) 22.6 76.6 120.5 (43.9) (16.9) 18.4 3.1 1.1 12.1 10.2 10.7 3.9 4.6 10.3 9.1 13.1 8.7 4.5 10.7 7.1 9.6 2.1 5.1 8.3 7.8 7.1 3.2 2.6 5.9 3.3 9.8 2.4 1.6 5.5 4.3 7.2 (1.4) 2.7 1.3 4.0 1.1 3.3 (0.3) 0.6 4.1 5.7 1.8 6.9 2.0 6.2 5.4 1.2 6.6 6.1 7.5 5.1 (1.6) 5.2 11.4 4.5 8.3 1.1 8.9 15.2 7.3 9.2 2.4 7.4 10.6 5.5 7.7 5.4 8.0 7.8 2.8 6.7 9.9 6.9 6.0 6.4 9.7 7.5 1.7 5.5 7.8 8.2 3.9 1.8 7.2 7.9 1.2 3.2 (2.9) 2.7 9.8 4.3 9.3 9.4 9.7 8.5 7.8 7.5 6.1 5.8 6.3 8.6 7.3 9.4 8.8 8.4 8.3 7.8 7.7 6.9

Capital account 17.9 33.5 31.0 26.5 Source: Bloomberg, Espirito Santo Investment Bank Research

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January 2012

Economic Indicators
Figure 26: WTI Spot crude oil (US$/bl)
160

Figure 27: Gold spot (US$/per ounce)

2000 1800 1600 1400 1200 1000 800 600

140

120

100

80

60

40

20 400 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11
Source: Bloomberg, Espirito Santo Investment Bank Research

Source: Bloomberg , Espirito Santo Investment Bank Research

Figure 28: LME Steel (in US$/MT)

700 650 600 550 500 450 400 350 300 250 200 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 May-09 Nov-11

Figure 29: S&P GSCI Agri commodity Index

700 650 600 550 500 450 400 350 300 250 200 Oct-09 Mar-10 Aug-10 Jan-11 May-09 Jun-11 Nov-11

Source: Bloomberg , Espirito Santo Investment Bank Research

Source: Bloomberg , Espirito Santo Investment Bank Research

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January 2012

Economic Indicators
Figure 30: GDP growth (YoY %) of key EM
15 China Russia 10 Brazil India
3

Figure 31: GDP growth (YoY %) of DM

5 Eurozone UK US

-1

-5

-3

-10

-5

-15 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11

-7

Source: Bloomberg , Espirito Santo Investment Bank Research

Source: Bloomberg , Espirito Santo Investment Bank Research

Figure 32: CPI (YoY %) for major EM*

China 16 14 12 10 8 6 4 Brazil Russia

Figure 33: CPI (YoY %) for major DM

6 5 4 3 2 1 0 Euro Zone UK US

2 -1 0 -2 -4 Feb-07 Feb-11 Oct-06 Jun-08 Feb-09 Oct-09 Feb-10 Jun-11 Feb-08 Oct-08 Oct-07 Jun-09 Jun-07 Oct-10 Jun-10 Oct-11 -2 -3 Oct-06 Feb-08 Oct-09 Oct-07 Feb-09 Jun-09 Jun-08 Jun-07 Feb-10 Oct-10 Jun-10 Feb-11 Feb-07 Oct-08 Oct-11 Jun-11

Source: Bloomberg, Espirito Santo Investment Bank Research * Refer to fig 20 for Indias WPI.

Source: Bloomberg , Espirito Santo Investment Bank Research

FIT FOR Page 24 of 34 A NEW ERA_________________________________________________________________________________________

Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11

January 2012

Policy watch
Winter session - Bills that mattered
The Winter session of parliament that lasted for 38 days was overall subdued with almost half of the session being washed out with the logjam over foreign direct investment and anti-graft bill.
TitleofBills Description Status To enact the legislation relating to establishment of the institution of the Lokpal to enquireintoallegationsofcorruptionagainstpublicfunctionaries TheLokpalBill,2011 PassedonlyinLoksabha The Cable Television Networks Aims at regulating cable operators and digitalising the analog TV network across the (Regulation)AmendmentBill,2011 countryinaphasedmannerby2014 Clearedbytheparliament Food security bill seeks to provide rice at Rs 3, wheat at Rs 2 and coarse grains at Rs 1 TheNationalFoodSecurityBill,2011 perkgtooverhalfofIndia's1.2billionpopulation IntroducedinLokSabha AimstoreplacethefivedecadeoldCompaniesActof1956bytheCompaniesAct,2011 WithdrawninLokSabha Regulatingthequalityofseedsforsale,importandexportandtofacilitateitsproduction andsupply NotTabled Effectively manage and regulate the sale, management import, export, distribution and ThePesticidesManagementBill,2008. useofpesticides NotTabled Proposes coal miners to share 26% of the profit and noncoal miners' 100% of the The Mines and Minerals (Development royalty annually to projectaffected people. The bill also envisages introduction of competitivebiddingprocessforcoalminingblocks andRegulation)Bill,2011. IntroducedinLokSabha To establish a statutory Pension Fund Regulatory and Development Authority (PFRDA) to The Pension Fund Regulatory and promote old age income security by establishing, developing and regulating pension funds. DevelopmentAuthorityBill,2011 NotTabled TheCompaniesBill,2011.

TheSeedsBill,2004

Source: PIB, PRS, ESIB Research

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January 2012

Recent Publications
N.B. all prices, valuations and recommendations within this section as per date of research note Healthcare - Analyst : Chirag Talati
Date 1.12 Company\Title Ranbaxy RBXY IN On time delivery NEUTRAL 6% upside Price 435 : FV 460 9 pages Headline comment In-line with our expectations, the US FDA approved Ranbaxys Lipitor ANDA paving the way for a launch over the coming days from its Ohm Labs facility in the US. This was the most keenly awaited approval for Ranbaxy, and the company has maintained its track-record of monetizing all key Para-IV opportunities despite the substantial uncertainty involved with the ongoing FDA/DoJ issues. While this is very positive for Ranbaxy, we await further clarity on the comprehensive settlement that would entail a clearance of the Dewas and Paonta Sahib facility and is key to driving the operating leverage that is central to Ranbaxys investment case. We also expect the market to now focus on its post launch execution of Lipitor and keenly await early market share trends. Re-iterate Neutral.

Healthcare - Analyst : Chirag Talati

1.12 Ranbaxy RBXY IN A twist in the tale NEUTRAL 4% upside Price 443 : FV 460 9 pages In line with our expectations, the US FDA approved Ranbaxys Lipitor ANDA paving the way for a launch over the coming days from its Ohm Labs facility in the US. However, the launch was not without its share of glitches, as Ranbaxy unexpectedly announced a profit share with Teva during the 180 day exclusivity. We are yet to get clarity whether the Teva agreement stands for API or involves co-distribution, but it is a dampener on sentiment and will lead to cuts in consensus expectations on Lipitor. We await clarity on the comprehensive settlement that would entail a clearance of the Dewas and Paonta Sahib facilities and is key to driving the operating leverage that is central our investment case on Ranbaxys. Re-iterate Neutral.

BFSI Analyst : Santosh Singh, CFA, Nidhesh Jain

9.12 Housing Finance Initiate on HDFC as Neutral, DEWH as Buy and retain Buy on LICHF 37 pages HFCs have substantially outperformed the Bankex this year due to their defensive qualities and strong and consistent operating performance. We expect the underlying businesses to continue to perform strongly, but premium valuations cap upside in the stocks. However, in such an uncertain environment they still look attractive as relatively safe havens. We initiate on HDFC with a Neutral stance, but highlight it as the most defensive stock, on Dewan with a Buy stance and highest upside of the three, but also highest risk and we remain buyers of LICHF as our preferred sector pick.

India Economics Chief Economist: Deepali Bhargava

14.12 Inflation moderates, RBI headed for a pause WPI inflation moderated to 9.11% in November, 2011 from 9.73% in October led, by a collapse in food price inflation. RBI may not be able to draw significant comfort from todays inflation numbers as core inflation continued to edge higher. But given the sharp moderation in growth as reflected in the industrial production growth in October, we expect RBI to keep rates on hold in the December 16th policy meeting.

5 pages

Infrastructure Analysts : Krishnakant Thakur & Pawan Parakh

15.12 Mundra Port & SEZ MSEZ IN BUY 50% upside Price 195: FV 130 16 pages We like MSEZ for its strong cash flow generation, assured cargo volumes and strategic location. Since we initiated both the quarterly earnings and the acquisition of the Abbot Point terminal have strengthened our confidence in the business model and its assured cargo based expansion strategy. Yet despite what we think are good fundamentals, the stock has reacted negatively to newsflow around the mining scam and MOEF notice. We think the recent 30% correction presents an attractive entry point for clients who like the business but have baulked at the valuation. It is among the few firms in the infrastructure sector with a combination of defensiveness and growth, and we reiterate BUY and highlight it as our top sector pick.

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January 2012

Recent Publications
N.B. all prices, valuations and recommendations within this section as per date of research note India Strategy Analyst : Aditya Jhawar, Nick Paulson-Ellis & Nitesh Sharma
Date 15.12 Company\Title GSFC Ltd. GSFC IN BUY 39% upside Price 550: FV 395 17 pages Headline comment With 70% of revenues from fertilizers, and at a headline 4.9x FY13E and 2.4x cash & investments adjusted P/E, GSFC stands out as the value play in the fertilizer sector, which due to de-regulation and demand/supply mismatch is a core investment theme for us. Yes, volatility in industrial chemicals and near-term weak volume in the fertilizer sector are issues, but we believe that these are more than baked into the price. We initiate with a Buy and round out our coverage of listed complex fertilizer plays.

India Economics Chief Economist : Deepali Bhargava

16.12 India: Rates unchanged, cuts not on horizon yet 10 pages RBI left the Repo rate and cash reserve ratio unchanged at 8.5% and 6.0% respectively with a clear shift in policy stance in favour of rate cuts, the timing of which continues to be uncertain. Though RBI notes that growth is clearly decelerating, we think that absence of sustained signs of moderation in core inflation will prevent a rate cut as soon as January 2012. We expect RBI to embark on the rate cut cycle in Q1FY13.

Healthcare - Analyst : Chirag Talati

19.12 Cipla-haler CIPLA IN BUY 16% upside Price 329 : FV 380 21 pages After a 2-year hiatus, Ciplas operational performance has shown signs of improvement over the past two quarters, driven by the benefits of operating leverage from the Indore SEZ and an improving product mix. While we are not fans of Ciplas partnership model for the regulated markets, its footprint in EMs including India and Africa is enviable. However, the real gem in Cipla is its respiratory franchise, which we believe offers a sustainable competitive advantage that has not yet been fully appreciated by the market. We set out our framework for respiratory generics in this note, and initiate with a BUY and a fair value of Rs.380, offering 13% upside.

Consumer Analyst : Nitin Mathur

20.12 Consumer Pair Trade: Long volumes (HUL), short margins (ITC) 22 pages While all quoted consumer stocks benefit from Indian demographics and the low penetration of consumer goods in India, relative stock market outperformance will be achieved by companies which continue to drive volumes and increase scale, even if that implies a compromise on margins in the near term. Large cap valuation multiples are at historical peaks, yet despite that Investors interest shows no sign of flagging as they seek safe havens. We propose a sector neutral strategy long HUL (focus on volumes) and short ITC (focus on margins).

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January 2012

Blank for notes

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January 2012

Share price and ratings history

Manappuram
S
90 80 70

MGFL IN

B
60 50 40 30 20 10 0 Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Report Date
08-Nov-11 26-Sep-11 17-Feb-11 24-Nov-10

Recommendation
Buy Buy Buy Sell

Fair Value (INR)

Rs80.0 Rs70.0 Rs140.0 Rs160.0

Source: Bloomberg, Espirito Santo Investment Bank Research

LIC Housing Finance

300

LICHF IN
B

250

B B

200

B B

150

100

50

0 Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Report Date
09-Dec-11 27-Jan-11 01-Oct-10 15-Apr-10 24-Feb-10

Recommendation
Buy Buy Buy Buy Buy

Fair Value (INR)

Rs260.0 Rs255.0 Rs1607.0 Rs943.0 Rs894.0

Source: Bloomberg, Espirito Santo Investment Bank Research

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January 2012

Important Disclosures
This report was prepared by Esprito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Esprito Santo de Investimento, S.A., with headquarter in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A Corretora de Cmbio e Valores Mobilirios, in Brazil, and Execution Noble Limited, in the United Kingdom, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the Financial Group controlled by Esprito Santo Financial Group S.A. (Banco Esprito Santo Group). Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Esprito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter. Explanation of Rating System
12-MONTH RATING BUY NEUTRAL SELL SHORT TERM RATING ST POSITIVE DEFINITION Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months.. Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months DEFINITION Analyst expects the stock price to appreciate in value within 3 months of the rating assignation because of a specifically identified catalyst(s) or event(s) Analyst expects the stock price to decline in value within 3 months of the rating assignation because of a specifically identified catalyst(s) or event(s)

ST NEGATIVE

For further information on Rating System please see Definitions and distribution of ratings on: http://www.espiritosantoibresearch.com Ratings Distribution Espirito Santo Investment Bank Research hereby provides the distribution of the equity research ratings in relation to the total Issuers covered and to the investment banking clients as of 30 September 2011.
As at end September 2011 Recommendation BUY NEUTRAL SELL RESTRICTED TOTAL As at end June 2011 Recommendation SHORT TERM POSITIVE SHORT TERM NEGATIVE TOTAL Total ESIB Research Count 223 125 68 4 % of Total 53.0% 29.8% 16.2% 1.0% Count 33 12 1 1 47 Count 0 0 0 Total Investment Banking Clients (IBC) % of IBC 70.3% 25.5% 2.1% 2.1% 100% Total Investment Banking Clients (IBC) % of IBC 0% 0% 0% % of Total 0% 0% % of Total 7.9% 2.9% 0.2% 0.2%

420 100% Total ESIB Research Count 0 0 0 % of Total 0% 0% 0%

Share Prices Share prices are as at the close of business on 10 January 2012, unless otherwise specified. Coverage Policy Esprito Santo Investment Bank Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. Esprito Santo Investment Bank Research has no specific policy regarding the frequency in which opinions and investment recommendations are released.

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January 2012

Representation to Investors Esprito Santo Investment Bank Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material. Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances.. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the investors currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Esprito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are Esprito Santo Investment Bank Research present opinions only, and are subject to change without prior notice. Esprito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein nor to provide the recipient with access to any additional information. Esprito Santo Investment Bank Research has not entered into any agreement with the issuer relating to production of this report. Esprito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report or its contents. Ownership and Material Conflicts of Interest Banco Esprito Santo de Investimento, S.A. and/or its Affiliates (including all entities within Esprito Santo Investment Bank Research) and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Esprito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. For a complete list of the covered Issuers in which Banco Esprito Santo de Investimento, S.A. or its Affiliates hold stakes in excess of 1% and for information on possible material conflicts of interest arising from investment banking activities please see disclosures on Conflicts of Interest on http://www.espiritosantoib-research.com. Confidentiality This report cannot be reproduced, in whole or in part, in any form or by any means, without Esprito Santo Investment Bank Researchs specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Esprito Santo de Investimento, S.A. Regulatory Authorities For information on the identity of the Regulatory Authorities that supervise the entities included within Esprito Santo Investment Bank Research please see http://www.espiritosantoib-research.com.

IMPORTANT DISCLOSURES FOR U.S. PERSONS This report was prepared by Esprito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Esprito Santo de Investimento, S.A., with headquarter in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A Corretora de Cmbio e Valores Mobilirios, in Brazil, and Execution Noble Limited, in the United Kingdom, all authorized to engage in securities activities according to each domestic legislation. Neither Banco Esprito Santo de Investimento, S.A. nor these affiliates are registered as a broker-dealer in the United States and therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is provided for distribution to U.S. institutional investors in reliance upon the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended. This report is confidential and not intended for distribution to, or use by, persons other than the addressee and its employees, agents and advisors.

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January 2012 E.S. Financial Services, Inc. is the U.S. distributor of this report. E.S. Financial Services, Inc. accepts responsibility for the contents of this report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed in the report should do so only through E.S. Financial Services, Inc. Contact Information: Garreth Hodgson Eva Gendell Joseph Mcglone Joy Bejasa Lisa Gottardo Mike Maione MikeWilliams Pedro Marques Poorva Upadhyaya Senior Managing Director /Head of Sales Vice President Vice President Vice President Executive Director Executive Director Vice President Vice President Assistant Vice President (212) 3516054 (212) 3516058 (212) 3516061 (212) 3516055 (212) 3516060 (212) 3516067 (212) 3516052 (212) 3516051 (212) 3516056 ghodgson@esinvestment.com egendell@esinvestment.com jmcglone@esinvestment.com jbejasa@esinvestment.com lgottardo@esinvestment.com mmaione@esinvestment.com mwilliams@esinvestment.com pmarques@esinvestment.com pupadhyaya@esinvestment.com

E.S. Financial Services, Inc. New York Branch 340 Madison Avenue, 12th Floor New York, N.Y. 10173 Each analyst whose name appears in this report certifies the following, with respect to each security or issuer that the analyst covers in this report: (1) that all of the views expressed in this report accurately reflect the personal views of the analyst about those securities and issuers; and (2) that no part of the compensation of the analyst was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this report. The analysts whose names appear in this report are not registered or qualified as research analysts with the Financial Industry Regulatory Authority ("FINRA") and may not be associated persons of E.S. Financial Services, Inc. and therefore may not be subject to the applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Banco Esprito Santo de Investimento, S.A. and/or its Affiliates and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Esprito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. For a complete list of the covered Issuers in which Banco Esprito Santo de Investimento, S.A. or its Affiliates hold stakes in excess of 1% and for information on possible material conflicts of interest arising from investment banking activities please see Important disclosures for US persons on http://www.espiritosantoib-research.com. Receipt of Compensation For information on Receipt of Compensation from subject Issuers please see Important disclosures for US persons on http://www.espiritosantoib-research.com. Representation to Investors Esprito Santo Investment Bank Research has issued this report for information purposes only. All the information contained therein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Esprito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are our present opinions only, and are subject to change without prior notice. Esprito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Where an investment is denominated in a currency other than the investors currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. Esprito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report. Please note that investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission or subject to regulation in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States.

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Contact Information:
Garreth Hodgson Eva Gendell Joseph Mcglone Joy Bejasa Lisa Gottardo Mike Maione MikeWilliams Pedro Marques Poorva Upadhyaya Senior Managing Director /Head of Sales Vice President Vice President Vice President Executive Director Executive Director Vice President Vice President Assistant Vice President (212) 351-6054 (212) 351-6058 (212) 351-6061 (212) 351-6055 (212) 351-6060 (212) 351-6067 (212) 351-6052 (212) 351-6051 (212) 351-6056

January 2012

ghodgson@esinvestment.com egendell@esinvestment.com jmcglone@esinvestment.com jbejasa@esinvestment.com lgottardo@esinvestment.com mmaione@esinvestment.com mwilliams@esinvestment.com pmarques@esinvestment.com pupadhyaya@esinvestment.com

E.S. Financial Services, Inc. New York Branch 340 Madison Avenue, 12th Floor New York, N.Y. 10173 Each analyst whose name appears in this report certifies the following, with respect to each security or issuer that the analyst covers in this report: (1) that all of the views expressed in this report accurately reflect the personal views of the analyst about those securities and issuers; and (2) that no part of the compensation of the analyst was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this report. The analysts whose names appear in this report are not registered or qualified as research analysts with the Financial Industry Regulatory Authority ("FINRA") and may not be associated persons of E.S. Financial Services, Inc. and therefore may not be subject to the applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.

Ownership and Material Conflicts of Interest

Banco Esprito Santo de Investimento, S.A. and/or its Affiliates and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Esprito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. For a complete list of the covered Issuers in which Banco Esprito Santo de Investimento, S.A. or its Affiliates hold stakes in excess of 1% and for information on possible material conflicts of interest arising from investment banking activities please see Important disclosures for US persons on http://www.espiritosantoib-research.com.

Receipt of Compensation
For information on Receipt of Compensation from subject Issuers please see Important disclosures for US persons on http://www.espiritosantoib-research.com.

Representation to Investors
Esprito Santo Investment Bank Research has issued this report for information purposes only. All the information contained therein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Esprito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are our present opinions only, and are subject to change without prior notice. Esprito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Where an investment is denominated in a currency other than the investors currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. Esprito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report. Please note that investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission or subject to regulation in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States.

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Contact details
Country Head India
Nick Paulson-Ellis +91 22 4315 6814

Sales
Sales
Ashish Goenka Poorva Upadhyaya +44 20 3429 2012 +1 212 351 6056 Arjay Prasad Sunny Shah +91 22 4315 6841 +91 22 4315 6842

Research
Banks / Financial Services Santosh Singh +91 22 4315 6822 Sri Karthik +91 22 4315 6826 Nidhesh Jain +91 22 4315 6823 Saikiran Pulavarthi +91 22 4315 6824 Healthcare Chirag Talati Metals and Mining Ritesh Shah Consumer Nitin Mathur Power and Infrastructure Krishnakant Thakur +91 22 4315 6832 Pawan Parakh +91 22 4315 6833

+91 22 4315 6828 +91 22 4315 6831 +91 22 4315 6821

Strategy Aditya Jhawar Nitesh Sharma

+91 22 4315 6819 +91 22 4315 6820

Technology Soumitra Chatterjee +91 22 4315 6829 Economics Deepali Bhargava +91 22 4315 6827

ASIA 1203A, Floor 12A, Tower 2A One Indiabulls Center Elphinstone Road Mumbai 400 013 India t: +91 22 4315 6800 15/F St Johns Building 33 Garden Road Central Hong Kong China t: +852 3181 4000

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e: research@execution-noble.com

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