Angel Broking Market Strategy-July2011

Preview 1QFY2012 Results Preview | July 2011
Table of Contents
Strategy Portfolio Angel Research Model Portfolio 1QFY2012 Sectoral Outlook Automobile Banking Capital Goods Cement FMCG Infrastructure Metals Oil & Gas Pharmaceutical Power Real Estate Software Telecom Watch Stock Watch 15 18 22 25 28 31 34 37 40 43 46 49 52 56
Note: Stock prices as on June 30, 2011 Refer to important Disclosures at the end of the report
2-12 13
Strategy
On the cusp of a turn
Indian markets have underperformed almost all major global markets in the current calendar year ostensibly due to the twin macro-concerns of high inflation and interest rates; and now the key question on the minds of investors is when the rate cycle will reverse. While the trajectory was a little less certain even a couple of months back, in our view, various indicators are signaling that inflation and interest rates are close to peak levels, with respite likely from the second half. In our view, external issues such as the Greek crisis can contribute to near-term uncertainty and volatility, but they are unlikely to materially impact the overall upward trajectory of the Indian economy and markets, which are underpinned by strong structural growth drivers, and even in the near-term are likely to register GDP growth of 7.5-8%. Hence, we maintain our positive stance on Indian equities as we believe that valuations remain fairly attractive, especially in light of the reasonable earnings visibility over the next two years. etc., but nonetheless, food inflation cooling off significantly in recent weeks should reduce policymakers' need to tighten the policy even symbolically. Respite also on global commodities, sustainable crude range US$95-105: Global demand weakness is already leading to cooling commodity prices. Also, affirming the risk to global GDP from higher crude, the IEA has decided to release reserves (third such instance since 1974). Our analysis also indicates that whenever the global oil bill exceeds 5% of GDP crude prices , tend to cool off as demand weakens. For CY2011, this gives a range of US$95-105 for crude. Fed US Fed still perceives deflationary pressures: Wholesale (PPI) inflation in the US is as high as 7.3%, largely similar to Indian WPI levels. The US Fed, on the contrary, is worried about deflation due to weak unemployment and housing data. It is dismissive about the current inflation readings, pointing that they are driven by global commodity price pressures that are expected to dissipate.
Why broader interest rates are close to peak in our view

Insignificant forex inflows: In this cycle, forex reserves have been relatively anaemic (up 12% since March 2010 vs. 60% growth during January 2007 - October 2008), suggesting a peaking of rates at lower levels in this cycle. In cognizance, the RBI too has not used the harsher CRR tool much, mainly sticking to repo hikes. Cooling domestic demand: Broader interest rates have risen by 200-225bp and signs of weakening domestic demand are emerging in interest-sensitive sectors. 1) Real estate and infrastructure sectors are getting adversely impacted, 2) evidencing this slowing construction activity, cement volumes are flat on a yoy basis, 3) auto sales are decelerating, with passenger vehicles growing by just 6.2% yoy and 4) gross capital formation has been stagnant in 4QFY2011. Deposit mobilisations up, credit offtake down: There are broader signs of slowdown in credit offtake, while deposit mobilisation has picked up significantly only to be largely deployed at a negative spread into government bonds. Accordingly, we expect deposit and lending rates to not go up further even if the RBI hikes the repo rate. Respite on domestic food prices: With food forming 45-60% of Indian consumer inflation indices, rising food prices are a practical concern for policymakers. No doubt rather than hiking rates we need to improve supply, logistics, subsidy disbursement,
Overweight on sectors with good earnings visibility

Presently, we have a positive outlook on index BFSI stocks, aided by moderate credit growth, better margin performance and lower provisioning burden than small banks. Moreover, cooling of inflation and interest rates from 2HFY2012 is likely to improve credit growth and asset quality outlook for the overall banking sector. The infrastructure sector is also likely to benefit from an imminent cooling of the rate cycle and, in any case, valuations have become very cheap, offering a margin of safety. Large-cap metals also offer strong earnings visibility, in our view, on account of capacity expansion, low-cost integrated operations and healthy export potential. Incidentally, on the export front, in the past few quarters, growth in India's exports has been phenomenal, in our view, aided by the fact that the rupee has depreciated against the euro and has become more competitive vis--vis the yuan as far as the US and Middle East are concerned. In the export sector, in case of the IT sector, we believe valuations factor in the positives; while in case of the pharma sector, we are overweight on account of a healthy growth outlook at reasonable valuations. Overall, in view of the easing headwinds to growth from 2HFY2012, we estimate Sensex earnings to post an 18.4% CAGR over FY2011-13E. A fair multiple of 15x FY2013E EPS yields a Sensex target of 21,320, giving a reasonable ~14% upside from current levels. Hence, we remain positive on the Indian markets.
Refer to important Disclosures at the end of the report
Strategy
Markets decline for second consecutive quarter
Indian markets continued to be under pressure for most of 1QFY2012 primarily due to concerns of higher inflation and the consequent policy rate hikes by the RBI. Despite the bounce-back at the very end of the quarter, overall the Sensex registered losses of 3.1% qoq, continuing the declining trend witnessed in 4QFY2011.
Inflation and interest rates expected to peak soon

In our view, various indicators are increasingly signaling that inflation and interest rates are close to peak levels, with respite likely from the second half. With the RBI hiking rates 10 times since March 2010 and, more importantly, with demand-supply factors pushing up the broader interest rates by ~200bp, the demand momentum in the economy has slowed, as can be observed from the recent incremental credit offtake, monthly cement and auto sales numbers and almost stagnant capital formation during 4QFY2011. Hence, we believe the RBI has largely achieved its objective, stated in its Monetary Policy Review of May 3, 2011, of reducing demand-side pressures to contain inflation, and this should lead to peaking out of inflation from the second half of FY2012.
Exhibit 1: Sensex continued to be under pressure

60.0 45.0 30.0
(%)
15.0 (15.0) (30.0)

1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Lower forex reserve accretion and RBI not hiking CRR

During the last interest rate cycle, our forex reserves had increased by over US$100bn between January 2007 and October 2008 alone (representing a 60%+ increase), keeping the GDP growth momentum high even at higher levels of interest rates. The demand momentum had remained reasonably strong even though the RBI had resorted to substantial CRR hikes, which were far more potent in pushing up domestic interest rates (at peak levels just before the Lehman crisis, interest rates were almost 150-200bp higher than those at present). This time around, forex reserves have been relatively anaemic (up only 12% since March 2010), suggesting a peaking of interest rates at lower levels in this interest rate cycle as compared to the previous one. In cognizance of this, the RBI too has not really used the harsher CRR tool, sticking to relatively symbolic repo hikes. In the current scenario, with the CRR prevailing at 6.5% and unlikely to be hiked due to naturally tight liquidity conditions, broader interest rates are likely to peak at current levels in spite of repo hikes. This is rightly so, as in the absence of strong forex inflows, demand too is accordingly decelerating sooner.
Source: Bloomberg, Angel Research
Exhibit 2: India has underperformed most major peers YTD

115 110 105 100 95 90 85 80 Dec-10 Jan-11
India Hong Kong
Feb-11
Mar-11
Japan Brazil
Apr-11
May-11
US Dow FTSE
May-11
Jun-11
China South Korea
Source: Bloomberg, Angel Research; Note: Dec 31, 2010=100
Exhibit 3: FII flows turn positive

(` cr)
75,000 60,000 45,000 30,000 15,000 (15,000)
1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Exhibit 4: Forex reserves trend interest rate cycle wise

300 250 200 150 100 50 3.00
%+ 60 v in e for x re ser
v
350
(30,000)
ves
ll now 2% ti Just 1
9.00 7.50 6.00 4.50
May-08
May-09
May-07
Forex reserves (US$ bn)
Repo Rate (%, RHS)
Source: RBI, Angel Research
May-10
May-11
Jan-09
Sep-07
Sep-08
Sep-09
Jan-07
Jan-08
Sep-10
Jan-10
Jan-11
Strategy
Exhibit 5: CRR hikes - very few in this interest rate cycle
10.00 9.00 8.00
Even the 1-year and 10-year G-sec yield spread has recently turned into the negative territory i.e., bond markets are also signalling that interest rates are closer to peak (as witnessed in the last interest rate cycle).
(%)
7.00 6.00 5.00
Exhibit 7: Yield spread indicating near-peak interest rates

4.0 3.0 9.5 8.5 7.5 6.5 5.5 4.5
Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
4.00
May-07 Sep-07 May-08 Sep-08 May-09 Sep-09 May-10 Sep-10 May-11 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
2.0 1.0 (1.0)
Credit offtake has fallen while deposit accretion has gained momentum
Prior to December 2010, broader deposit mobilisation was inevitably lower in light of high inflation and deposit rates even below NSS rates. Due to the resulting drying up of liquidity, broader interest rates have already gone up by about 200-225bp. With the sharp spike in lending rates, credit offtake has declined, as evident from the incremental CD ratio in FY2012 YTD (up to June 17) at just 44.9% compared to 247.1% during the same period in FY2011. A like-to-like comparison between Marchend and mid-June of FY2011 vs. FY2012 indicates 11% lower credit mobilisation vs. almost 5x higher deposit mobilisation. Peak retail FD rates currently hovering at 9-9.5% for major banks are well above the 8% that NSS offers and well above the 10-year G-Sec yield (8.3%) i.e., deposit mobilisation has picked up significantly only to be largely deployed at a negative spread into government bonds. Accordingly, we expect deposit rates as well as private sector lending rates to not go up further even if the RBI hikes the repo rate a couple of more times, as demand-supply dynamics for the banking sector dictate otherwise. In fact, we expect broader deposit and lending rates to decline from 2HFY2012, once WPI inflation also starts heading lower (the near-term uptick due to hike in fuel prices is in our view already factored in by the RBI and markets).
G-Sec 1Yr and 10Yr Spread (%)
Repo Rate (%, RHS)
RBI's actions for containing demand-side inflationary pressures are bearing fruits
The RBI in its Annual Review of Monetary Policy for FY2012 had indicated its intention to contain demand-side pressures on inflation through continuance of tight monetary policy and to carry out further rate hikes if needed. Broader interest rates have risen by 200-225bp and signs of weakening demand are emerging in interest-sensitive sectors. 1) Real estate and infrastructure sectors are getting adversely impacted, 2) evidencing this slowing construction activity, cement volumes are flat on a yoy basis, 3) auto sales are decelerating, with passenger vehicles growing by just 6.2% yoy in May 2011 and 4) gross capital formation has been stagnant in 4QFY2011. The interest-sensitive mortgage demand, which has a substantial negative correlation with interest rates, is also expected to trend down going forward, as home loan rates have also hardened by 150-200bp and SBI's teaser rate scheme has been discontinued. Although sales of 19 large listed real estate companies have recovered from post-Lehman lows, they are still barely at the levels before the Lehman crisis even after a passage of three years and, in our view, higher interest rates could dampen real estate activity further. Cement dispatches for April and May 2011 have been almost stagnant on a yoy basis, providing further evidence of slowing construction activity. Passenger vehicles yoy growth decelerated to a more than two-year low of 6.2% yoy in May 2011. Another acknowledged lead indicator of the broader economy commercial vehicle sales, which were growing at a healthy rate of 30%+ at the start of FY2011, have slowed down to below 20% growth rate. Hence, with the RBI's actions for containment of demand-side inflationary pressures bearing fruits, we expect the monetary tightening stance to end sooner than expected by the markets.
4
Exhibit 6: Deposits up while credit off-take slows

160,000 139,998 120,000
80,000
70,503
62,862
40,000
28,527
Credit offtake (` cr)

FY2011#
Deposit mobilisation (` cr)

FY2012*
Source: RBI, Angel Research; Note: #Between March 26, 2010 and June 18, 2010, * Between March 25, 2011 and June 17, 2011 Refer to important Disclosures at the end of the report
Strategy
Exhibit 8: Interest rates vs. housing loan growth
14.0 12.0 9.7 10.0 8.0 6.0 4.0 2.0 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 8.1 24.1 15.5 9.2 10.2 10.0
10.0 -
Exhibit 12: CV sales momentum has slowed considerably

40.0
50.0 40.0 30.0 46.8 40.2
35.3 11.4
12.3 10.5 8.9 17.8
30.0
32.2
31.7 25.9 19.5
31.2 19.6 10.2
20.0
20.0
16.3
17.8 13.1
Jun-10
Dec-10
Feb-11
Jul-10
Sep-10
Avg Floating Home Loan Rate (%)
Housing loan yoy growth (%, RHS)
Commercial vehicles (YoY % growth)
Source: Company, Angel Research
Exhibit 9: Slow growth in real estate revenue

9,000 150 120 90 6,000 60 30 3,000 (30) (60) 0 (90)
Growth in capital formation decelerating sharply

The gross fixed capital formation (GFCF) during 4QFY2011 dipped sharply to almost the same level as in 4QFY2010. Though the decline in the growth rate in 4QFY2011 has to be seen in the context of the high base during 4QFY2010, yet broader trends suggest that capital formation is slowing down, even if not as drastically as maybe suggested by the latest quarterly numbers. On a yoy basis, real gross capital formation in FY2011 registered an 8.6% increase compared to 7.4% in FY2010. However, yoy growth levels are almost half of what they used to be in the pre-crisis period; and on a quarterly basis, yoy growth in capital formation has been falling sharply for the last five consecutive quarters.
1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
1QFY2011
2QFY2011
3QFY2011
Quarterly Revenue (` cr)
YoY growth (%, RHS)
Source: C-line, Angel Research
Exhibit 10: Growth in cement dispatches muted

20.0 15.0 10.0 5.0 (5.0)
Mar-11 Apr-11 May-10 Nov-10 Aug-10
4QFY2011
Exhibit 13: Steady growth in real GFCF on a yoy basis...

1,700,000 1,500,000 1,300,000 15.3 14.3 15.2 18.0 15.0 12.0 8.6 7.4 1,100,000 6.0 900,000 700,000 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 2.6 3.0 9.0
(10.0)
Cement dispatches (YoY % change)
Exhibit 11: Passenger vehicles growth halves

35.0 28.0 21.4 21.0 21.9 14.0 7.0 Jul-10 Sep-10 Feb-11 Jun-10 Aug-10 Oct-10 Nov-10 Dec-10 Jan-11 Mar-11 Apr-11
Dec-10
May-11
Jan-11
Sep-10
Oct-10
Apr-10
Jun-10
Feb-11
Jul-10
Annual Real GFCF (` cr)
YoY % growth (RHS)
29.9
30.0 25.0
Source: CSO, Angel Research
Exhibit 14: ...but almost stagnant on a quarterly basis

500,000 400,000 25.0 20.0 15.0 300,000
23.0
20.9 17.8
22.0 13.0 10.7 6.2
200,000
May-11
100,000 -
Passenger vehicles (YoY % growth)
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Sep-10
Quarterly Real GFCF (` cr)
Chg YoY (%, RHS)
Source: CSO, Angel Research
Mar-11
May-11
10.0 5.0 (5.0)
Aug-10
Oct-10
Nov-10
Jan-11
Mar-11
Apr-11
Strategy
Oil burden closer to the peak of historical averages; other commodities also expected to soften further on moderating global demand
Global oil prices had risen sharply over the past few months (from a steady range of US$85-95/barrel at the start of CY2011. Brent crude rose to the peak of US$125/barrel in April 2011 and has averaged over US$111/barrel in CY2011YTD, thereby impacting emerging economies like India in particular. However, looking at the trend in crude oil burden (crude oil consumption as a percentage of global GDP) over the past decade, we believe crude prices are closer to their peak levels. Since CY1999, crude oil burden has averaged 3.1% with a peak of 5.0% in CY2008. However, with the increase in oil prices, global forecasted crude oil bill for CY2011 has risen to 5.2%, indicating that CY2011 YTD average oil prices are closer to their peak levels based on historical trends. Hence, we expect Brent crude to continue its recent moderating trend further before stabilising in the US$95-105/barrel band. 28 member countries, recently decided to release 60mn barrels of oil from its emergency stocks. IEA member countries currently hold 4.1bn barrels of oil, of which 1.6bn barrels are held exclusively for emergency use (equivalent to 146 days of net oil imports as against the legal obligation of 90 days). Significantly, this is only the third time since 1974 that the IEA has tapped into its emergency stockpiles, indicating the willingness to reduce the burden of oil prices on the already moderating economic growth and carry out further releases if the situation does not improve. Though the quantum of the recent release was small at 60mn barrels (2mn barrels/day for 30 days) as compared to global forecasted demand for 2011 at ~88mn barrels/day, the quantum of excess reserves with IEA is large enough to continue a similar 'stimulus' for ~300 days. The announcement resulted in a sharp fall in oil prices and is expected to keep them on a downward bias at least in the short term. The government recently decided to hike the prices of several regulated fuels due to the rising under recoveries of OMCs. However, the recent decline in crude prices is expected to contain inflationary pressures within comfortable levels going forward.
Exhibit 15: Scenario analysis of crude oil burden

Price Brent Crude Oil Price (US$/barrel) 90 Crude oil consumption 2011E (US$ bn) 2,894 - as a % of global GDP 4.2 100 3,216 4.7 110 3,537 5.2 120 3,859 5.6 130 4,180 6.1
Exhibit 17: Brent crude oil prices have cooled off

135 120
(US$/barrel)
Global GDP 2011E (US$ bn) 68,652 68,652 68,652 68,652 68,652 Source: IMF, OPEC, Angel Research
Exhibit 16: Historical trend in crude oil burden

4,000 3,000 2,000 2.2 1,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
105 90 75
5.5 4.4 3.3
60 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11
1.1 0.0
Oil consumption (US$ bn)
As a % of global GDP (RHS)
Source: IMF, OPEC, Angel Research; Note: 2011 data as per YTD average prices
Further, with the signs of recovery in advanced economies like the US moderating, consumption is likely to be lower than forecasted, thereby causing a decline in prices. Even the Federal Reserve in its recent review has revised its estimates downwards for US' GDP growth for the current as well as next year, suggesting moderating economic growth. In order to reduce the impact of disruption in Libyan oil supplies, the International Energy Agency (IEA), which consists of
In case of other commodities, with the recent signs of moderation in advanced economies and the re-emergence of sovereign debt crisis in the eurozone, we expect commodities to remain under pressure at least in the short term, which is expected to wane inflationary pressures on the Indian economy. The US Fed also expects pressures from global commodity and energy prices to dissipate going forward, as it modulates its accommodative monetary policy. Also, with the second round of Quantitative Easing (QE-II) ending on June 30, the speculative money which, to an extent, was fueling the commodity prices will shrink, thereby putting downward pressure on prices.
Strategy
The S&P GSCI index, which consists of 24 commodities from all commodity sectors energy products, industrial metals, agricultural products, livestock products and precious metals has cooled off ~12% from its recent peaks (trading near five-month lows), indicating the downward pressure on demand due to moderating global growth. inflation is generally assessed in terms of consumer price inflation (CPI). The Indian CPI is highly skewed towards food items (with a weightage of ~50% in the recently launched new CPI series), which are more relevant in a populous and developing country like India, compared to ~15% weightage in the CPI for US. If we compare the two countries' wholesale price indices, the difference between inflation levels is much smaller. The US PPI is mainly driven by higher global energy and commodity prices, which is a similar situation as with the Indian WPI; in fact, the US PPI is currently prevailing at as high a level as 7.3%. However, the US Central Bank is not worried about the same and expects pressures from these factors to dissipate as it modulates its accommodative monetary policy and the base effect kicks in. In fact, it is still more worried about deflation due to weak unemployment and housing data, which are key demand indicators relevant for monetary policy decision-making. We believe the Indian Central Bank should also take cognizance of this fact and use the monetary tightening tool sparingly in case of energy and commodity prices-related inflation.
Exhibit 18: S&P GSCI index 12% off recent peaks

780 750 720 690 660 630 600 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11
Exhibit 19: Chinese PMI cooling off

59.0 56.0 53.0 50.0 47.0
Sep-09 Dec-09 Mar-10 Sep-10 Jun-09 Jun-10 Dec-10 Mar-11 Jun-11
Exhibit 21: Trend in PPI for US and Indian WPI

15.0 12.0 9.0 6.0 3.0 (3.0) (6.0) (9.0)
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11
Manufacturing PMI SA
New Export Orders PMI SA
India WPI
US PPI
Exhibit 20: US and UK PMI drifting sharply

65.0 60.0 55.0 50.0 45.0 40.0
Feb-10 May-09 May-10 Aug-09 Nov-09 Feb-11 May-11 Aug-10 Nov-10
That said, with food forming a substantial 45-60% of the common man's consumption basket depending on the various domestic consumer inflation indices, rising food prices are bound to be a serious concern for policymakers (not debating the Indian CPI composition which, unlike the US CPI, does not properly cover several items like housing and healthcare). In our view, there is broad acknowledgement that increasing rates is not the way to tackle this, rather we need to improve factors such as supply, logistics, procurement and subsidy disbursement. That said, the significant cooling of food inflation in the recent weeks will provide a respite to policymakers as regards headline inflation numbers, thus reducing the need to resort to even symbolic monetary policy tightening.
UK Mfg PMI
US Mfg PMI
US wholesale inflation (PPI) at almost same levels as WPI for India

In the Indian context, more emphasis is generally put on wholesale price inflation data. However, in the global context,
Strategy
In fact, food inflation is hovering around its two-year low. Primary articles inflation has also come down sharply from its recent peak of 18.4% in January 2011 to 11.3% in May 2011. Even the spread between the primary articles and manufactured products inflation in the WPI has narrowed considerably from the recent peaks, indicating a greater proportion of pass-through of raw-material cost pressures this would ease off cost-push inflationary pressures going forward. However, over the past 2-3 quarters, there has been a wide divergence between them. The quarterly average primary articles inflation has eased considerably from the peak levels of 21.4% in the quarter ended March 2010 to 15.9% during 4QFY2011. On the other hand, raw-material costs as a percentage of sales has gone up to 44.6% during 4QFY2011. Primary articles inflation has softened further to 11.8% during 1QFY2012 (up to June 18, 2011); hence, we expect raw-material cost pressures to decelerate over the next couple of quarters and aid in improving overall EBITDA margins.
Exhibit 22: Food inflation near two-year lows

(%) 25.0 20.0 15.0 10.0 5.0 Feb-09 Feb-10 Feb-11 Jun-09 Jun-08 Jun-10 Oct-08 Oct-09 Oct-10 Jun-11
Exhibit 24: Primary articles inflation vs. RM cost as a % of sales

RM as % of sales 50.0 45.0 40.0 35.0 30.0 25.0 20.0
Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
Avg. Primary Articles Inflation (%, RHS) 25.0 20.0 15.0 10.0 5.0 0.0
Source: MOSPI, Angel Research
Exhibit 23: Even primary articles inflation has cooled off

(%)
Source: MOSPI, C-line, Angel Research
25.0 20.0 15.0 10.0 5.0 Nov-07 Nov-08 Nov-09 May-08 May-09 May-10 Nov-10 May-11
Currency depreciation aiding exports

Export growth has been fairly robust since November 2009; even on a rolling one-year basis, exports have grown by healthy 34.7% yoy. This healthy growth in exports has been partly aided by favourable currency movements for Indian exporters. Over the past one year, the INR has depreciated considerably (3-11%) against the major target export countries such as eurozone. Even though the INR has appreciated against the dollar and the dollar-pegged Middle East countries, which are amongst our major export destinations, it has, however, depreciated by 1.3% against the Chinese yuan, which to an extent has improved the competitiveness of Indian exporters' vis--vis their Chinese counterparts in respect of these major export destinations. The trend in INR depreciation is expected to continue given the overall current account deficit and further yuan appreciation also cannot be ruled out, given China's trade surplus and decreasing need to create employment through the export sector. This, in turn, is expected to maintain a healthy outlook for Indian exports in our view.
Source: MOSPI, Angel Research
Raw-material and interest cost pressures likely to decelerate going forward

Taking into account the above-mentioned factors, viz. slowdown in demand growth, lower credit offtake, considerably lower forex inflows, almost stagnant gross fixed capital formation and the waning inflationary pressures from global energy and commodity prices, we believe that we are very close to the peak of the current interest rate cycle. On the domestic prices front, we expect cost pressures to subside over the next couple of quarters. Based on an analysis of Sensex companies (ex. financials) over the last 20 quarters, we have observed that there is a 70% positive correlation between primary articles inflation and raw-material costs as a percentage of sales.
Strategy
Exhibit 25: Healthy traction in exports
30 46.0 41.1 37.3 20 30.6 26.9 19.3 10 21.6 25.8 41.2 42.2 42.5 44.7 50.0 40.0 30.0 20.0 10.0 Aug-10 Feb-11 Jul-10 May-11 Sep-10 Oct-10 Nov-10 Dec-10 Jun-10 Jan-11 Mar-11 Apr-11
a minor 0.5% of global GDP for CY2011 (as per IMF estimates), creating enough scope (and incentive) for larger countries to bailout Greece and prevent wider global financial repercussions.
Exhibit 27: PIIGS - GDP as % of global GDP (CY2011E)

5.0 4.0 3.2 3.0 2.2 2.0 1.0
Monthly Exports (US$ bn)
3 month rolling chg yoy (%, RHS)
Source: Ministry of Commerce, Angel Research
Exhibit 26: INR vs. Currencies of major target export markets

Currency Euro (EUR) Singapore Dollar (SGD) Japanese Yen (JPY) British Pound (GBP) Chinese Yuan (CNY) Saudi Riyal (SAR) US Dollar (USD) UAE Dirham (UAE) Hong Kong Dollar (HKD) One-year chg. One -year chg. (%) 11.4 8.7 4.5 2.3 1.3 (3.3) (3.3) (3.3) (3.4)
0.3 Portugal Italy
0.3
0.5
Ireland
Greece
Spain
Source: IMF, Angel Research
In our view, external issues such as the Greek crisis can contribute to near-term uncertainty and volatility from an Indian market perspective, but they are unlikely to materially impact the overall upward trajectory of the Indian economy and markets, which are underpinned by strong structural growth drivers and even in the near-term are likely to register GDP growth of 7.5-8%.
Source: Bloomberg, Angel Research; Note: Numbers in brackets denote appreciation of INR
Modest US economic recovery signals continued accommodative monetary policy

Monetary policy in developed economies such as the US has continued to be accommodative with the Fed's policy rate the Federal Funds Target Rate is at its multi-year low level of 0-0.25%. Even in the recent monetary policy review meeting on June 22, 2011, the Federal Reserve reiterated its intention to keep the rates at exceptionally low levels for an 'extended period', thereby encouraging the continuance of 'carry trades' into the emerging market economies. The US Federal Reserve's Chairman himself, in a recent speech, had admitted that, "the current pace of US' economic recovery was frustratingly slow and uneven", thereby hinting at a possibility of further stimulatory measures going ahead as well. Even post QE-II, the Fed has indicated its intention to continue the buyback of treasury securities from its maturing debt (the quantum of which could be ~US$300bn). Unemployment levels in the US continue to be well in excess of historical levels. Unemployment rate in the US has never averaged in excess of 9.0% for three consecutive years in the last 60 years, but during CY2009-CY2011 YTD it has averaged over 9.0%, indicating the gravity of the problem. Even the Federal Reserve, which had pegged the unemployment rate for CY2011 at 8.6% in its April 2011 projections, has revised it upwards to 8.8% in its June 2011 estimates.
Euro sovereign debt concerns unlikely to impact Indian markets materially

Sovereign debt crisis concerns have re-emerged in the PIIGS (Portugal, Italy, Ireland, Greece and Spain) eurozone. Recently, Standard & Poor's had cut Greece's credit rating by three notches from B to CCC and had indicated the likelihood of the country defaulting on its debts at least once by 2013. However, on a positive note, the recent (June 21, 2011) victory of the Greek Prime Minister in a confidence vote has bolstered his government's chances of pushing through austerity measures to secure further international financial aid for the country, thereby buying more time to set the house in order. Also, on June 29, 2011, the Greek Parliament has passed the financial austerity bill, which was a pre-condition for further financial aid. The euro crisis has structural underpinnings arising out of conflict between individual national fiscal policies and common monetary and exchange rate policies of member nations. However, in our view, it is likely to be managed in an orderly fashion, as worst affected countries such as Greece account for
Strategy
Exhibit 28: US unemployment well above average levels
12.0 10.0 8.0 6.0 4.0 2.0 Jan-48 Sep-54 Jan-58 Sep-64 Jan-68 Sep-74 Jan-78 Sep-84 Jan-88 Sep-94 Jan-98 Sep-04 May-51 May-61 May-71 May-81 May-91 May-01 Jan-08 May-11
Sensex EPS: 18.4% CAGR in FY2011-13E

We expect Sensex EPS to grow by 17.6% to `1,193 in FY2012 and by 19.2% in FY2013 to `1,421, implying an 18.4% CAGR over FY2011-13E. A fair multiple of 15x FY2013E EPS yields a Sensex target of 21,320, giving a reasonable ~14% upside from current levels.
Cooled off sharply within a year of hitting peak
Averaging 9.5% over past 2 years
Exhibit 31: Sensex EPS

(`)
1,600 1,400
US Unemployment Rate - Seasonally Adjusted
Average
19. 6 17. 22.

825
2%
w gro
th
1,421
Exhibit 29: Fed Funds rate remains at record low levels

(%) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Oct-04 Oct-06 Oct-08 Feb-10 Oct-00 Oct-02 Oct-10 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11
1,200 1,000 800 600 FY2010
row %g
th
1,193
9%
w gro
th
1,014
FY2011
FY2012E
FY2013E
Source: Angel Research
Exhibit 32: Sensex One-year forward P/E

35.0 30.0 25.0
The US Federal Reserve in its June 2011 policy review meeting, for the second time, revised GDP growth forecasts downwards. Real GDP growth for 2011 has now been pegged at 2.8% compared to January 2011 estimate of 3.7%; similarly for 2012, it stands at 3.5% against the estimate of 4.0% in January 2011. Also, unemployment levels have been pegged higher than April 2011 forecasts, suggesting an overall moderating trend in the economic growth.
(x)
20.0 15.0 10.0 5.0 0.0 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Average P/E Mar-10 Mar-11
Sensex 1-yr fwd P/E
Exhibit 33: Sensex earnings yield vs. bond yield

12.0 10.0 8.0
(%)
Exhibit 30: US Fed revises growth forecasts downwards again

Avg of central tendency (%) 2011 Real GDP growth - Jun 2011 projection - Apr 2011 projection - Jan 2011 projection Unemployment rate - Jun 2011 projection - Apr 2011 projection - Jan 2011 projection Personal Cons. Exp (PCE) inflation - Jun 2011 projection - Apr 2011 projection - Jan 2011 projection 2.4 2.5 1.5 1.8 2.0 1.5 1.8 1.7 1.6 1.9 1.9 1.8 8.8 8.6 8.9 8.0 7.8 7.9 7.3 7.0 7.0 5.4 5.4 5.5 2.8 3.2 3.7 3.5 3.9 4.0 3.9 3.9 4.2 2.7 2.7 2.7 2012 2013 Longer run
6.0 4.0 2.0 0.0 Apr-04 Apr-05 Apr-06 Apr-07 Bond Yield Apr-08 Apr-09 Apr-10 Apr-11
Earnings Yield
The primary growth drivers of Sensex EPS over FY2011-13E are expected to be BFSI, oil and gas and metal stocks, with the BFSI sector expected to contribute 31.6% to overall growth in Sensex EPS during the period, while contribution from the oil and gas and metal sectors is estimated to be at 16.8% and
Source: US Federal Reserve, Angel Research
10
Strategy
11.9%, respectively. Strong performance by the BFSI sector highlights the underpenetration of financial services in India, which would drive credit growth in the years to come. IT companies are expected to contribute healthy 10.7% to Sensex EPS growth over FY2011-13E, primarily backed by higher volumes. On the other hand, sectors such as telecom, power and FMCG are expected to underperform the others. The combined contribution of all these sectors to Sensex EPS growth is expected to be 12.6% over FY2011-13E. We expect FMCG companies to post decent 16.4% yoy growth in sales on the back of higher volumes as well as price hikes; the increase in profits is expected to be healthy 20.7% yoy due to an 87bp yoy expansion in operating margins. Power companies are expected to post a 15.5% increase in sales, while PAT is expected to grow by healthy 22.8% on the back of OPM expansion of 262bp yoy. The auto, capital goods, metals and telecom sectors are expected to be the major underperformers during this quarter. Auto stocks are expected to report 12.1% yoy growth in profit, despite a healthy 22.2% increase in sales, mainly because of sub-15% growth in earnings for Hero Honda, Tata Motors and M&M due to stiff pressure on margins on account of high input costs. Maruti Suzuki is expected to report a 3.7% yoy decline in profits due to lower volumes as well as margin compression. Telecom companies are expected to report a decline in profits, despite substantial top-line growth. The telecom sector is expected to report a healthy 29.1% yoy increase in the top line, partially because of the inclusion of Zain's numbers in Bharti Airtel's accounts. However, due to increased competition and higher interest and other costs on account of the 3G network rollout, profits are expected to decline by 2.5% yoy. RCom's earnings are expected to fall substantially by 72.2% yoy due to operating margin compression as well as higher interest costs. Ex. telecom, profit growth in the Sensex is estimated at 14.7% yoy. Metal companies are expected to witness healthy growth of 27.3% in the top line on the back of stronger commodity prices as well as volume growth on account of capacity expansions. However, profits are expected to grow by relatively lower 11.2% yoy, primarily due to high input costs denting margins by 207bp yoy. Though the capital goods sector is expected to witness strong sales growth of 25.8%, margins are estimated to fall by 92bp yoy, resulting in bottom-line growth of just 5.8%. In the construction sector, we expect JP Associates to report moderate performance on the top-line front with strong growth in adjusted net profit. Sales and adjusted profits are estimated to grow by 11.6% and 88.4% yoy, respectively, with margins increasing by 275bp. We expect Cipla to perform moderately, with 15.5% top-line growth and 9.4% growth in the bottom line.
Exhibit 34: Sectoral contribution to Sensex EPS growth in FY11-13E

100.0 80.0 10.7 60.0 40.0 20.0 6.2 7.2 1.3 31.6 5.2 11.9 16.8 1.1 3.1 0.5 4.3 100.0
Auto
IT
Oil & Gas
Metals
Power
Real Estate
FMCG
Pharma
Engg.
Finance
1QFY2012 Sensex earnings outlook

We expect Sensex companies to maintain strong top-line growth momentum, with projected growth of 21.8% yoy in sales. However, profit growth is expected to be lower at 14.0% yoy, mainly on the back of lower operating margins, which are expected to contract by 124bp yoy during the quarter. Overall, we expect OPM to come in at 20.9% vis--vis 22.1% in the corresponding period last year. Net profit margin is also expected to decline to 11.0% from 11.7%, down by 75bp yoy. We expect strong numbers to be posted by the oil and gas, BFSI and FMCG sectors in 1QFY2012. The oil and gas sector is expected to drive growth in Sensex sales and profit, with 18.7% contribution in Sensex sales growth and 18.4% contribution in Sensex profit growth, despite operating margin contraction of 116bp yoy. Ex. oil and gas, growth in Sensex sales and earnings is expected to be at 22.9% and 14.1%, respectively. IT companies are expected to report 21.2% growth in sales, driven primarily by volumes, while profit growth is expected to come in at a relatively lower 13.2% yoy due to a 199bp yoy margin compression on account of wage hikes. BFSI companies are expected to report an 18.9% jump in net profit on the back of similar growth in the top line. Performance of private banks is expected to remain consistent with ~30% yoy growth in profits. The regulatory provisioning burden will decline for SBI over the next couple of quarters, thereby aiding growth in profits. Ex. BFSI, growth in Sensex profit is expected to be 12.8% yoy.
Telecom
Constr.
Total
11
Strategy
Exhibit 35: Quarterly earnings trend for Sensex companies
(` Net Sales (` cr) Company Bajaj Auto Bharti Airtel BHEL Cipla DLF HDFC HDFCBK Hero Honda Hindalco HUL ICICIBK Infosys ITC 1QFY2012E 4,763 17,212 8,251 1,649 2,334 1,326 4,180 5,704 19,476 5,462 4,385 7,435 5,692 1QFY2011 3,737 12,231 6,601 1,427 2,029 1,081 3,341 4,265 16,544 4,794 3,672 6,198 4,817 2,998 3,214 7,885 5,124 8,051 12,944 13,823 5,069 3,706 58,228 10,994 5,925 26,876 5,152 27,195 8,216 7,236 283,372 % chg 27.4 40.7 25.0 15.5 15.0 22.6 25.1 33.7 17.7 13.9 19.4 20.0 18.2 19.5 11.6 26.0 27.5 2.5 16.6 17.1 1.1 28.2 18.2 13.9 72.2 23.4 7.6 27.5 28.4 15.2 21.7 21.8 Profit (` Net Profit (` cr) 1QFY2012E 734 1,874 785 282 408 884 1,073 550 819 609 1,493 1,689 1,301 864 199 674 637 448 2,091 3,904 70 391 5,615 2,550 1,700 2,226 494 1,858 2,182 1,363 39,766 1QFY2011 590 1,743 668 257 411 695 812 492 759 515 1,026 1,488 1,070 957 106 666 562 465 1,842 3,661 251 375 4,851 2,914 1,008 1,989 318 1,865 1,843 1,318 35,518 % chg 24.3 7.5 17.6 9.3 (0.8) 27.3 32.2 11.9 7.8 18.3 45.5 13.5 21.6 (9.7) 88.4 1.2 13.3 (3.7) 13.5 6.6 (72.2) 4.2 15.7 (12.5) 68.6 11.9 55.5 (0.4) 18.4 3.4 12.0 14.0 Weightage % Contribution (%) to Sensex growth# 1.4 3.5 2.3 1.1 0.6 6.2 6.2 1.2 2.5 1.6 8.4 9.4 7.3 1.8 0.6 6.6 2.3 1.1 2.0 3.1 0.5 0.5 10.7 4.6 1.7 2.5 1.4 2.7 4.6 1.7 100 2.8 1.8 1.6 0.6 (0.0) 6.7 8.2 1.1 1.2 2.6 18.3 6.7 6.3 (1.6) 2.0 0.3 2.3 (0.3) 2.0 1.9 (2.5) 0.3 16.4 (6.4) 12.2 6.5 4.8 (0.2) 4.0 0.4 100
Jindal Steel & Power 3,582 JP Associates L&T M&M Maruti Suzuki NTPC ONGC RCOM Reliance Infra RIL SBI Sterlite Tata Motors Tata Power Tata Steel TCS Wipro Total Sensex# 3,588 9,938 6,536 8,250 15,094 16,191 5,123 4,751 68,849 12,519 10,200 33,166 5,543 34,668 10,547 8,335 344,749
Source: Angel Research; Note: # based on free-float weightages
12
Angel Research Model Portfolio

Sector
Auto & Ancillaries JK Tyres MRF BFSI SBI Axis Bank ICICI Bank HDFC Bank Capital Goods & Infrastructure IVRCL Infra L&T LMW Cement FMCG ITC Hotels Taj GVK Media Jagran Prakashan Metals Hindalco Inds Tata Sponge Tata Steel Oil & Gas Reliance Industries Pharma Cipla Lupin Power Real Estate Software Infosys HCL Tech TCS Telecom Others Surya Roshni Greenply 84 192 137 270 2,907 493 1,180 3,424 591 1,337 330 449 377 593 898 1,189 181 340 609 242 415 799 127 161 105 140 202 203 70 1,823 2,090 100 2,030 2,780 2,406 1,289 1,093 2,503 2,832 1,650 1,355 2,594 96 6,723 133 8,627
Company
CMP (`)
Target Price (`)
BSE-100 Weightage (%)

6.3 0.0 0.0 26.2 3.2 1.6 5.9 4.4 10.0 0.1 4.6 0.0 2.1 8.9 5.1 0.2 0.0 0.4 0.0 9.0 1.2 0.0 1.9 12.4 7.2 4.5 0.8 0.5 4.0 0.7 11.9 6.7 0.6 3.3 3.1 0.6 0.0 0.0
Angel Weightage (%)

6.0 3.0 3.0 29.0 5.0 9.0 12.0 3.0 11.0 3.0 5.0 3.0 0.0 3.0 3.0 3.0 3.0 3.0 3.0 12.0 4.0 3.0 5.0 12.0 12.0 6.0 3.0 3.0 0.0 0.0 9.0 3.0 3.0 3.0 0.0 6.0 3.0 3.0
Stance
Underweight Overweight Overweight Overweight Overweight Overweight Overweight Equalweight Overweight Overweight Overweight Overweight Underweight Underweight Underweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight Underweight Overweight Overweight Overweight Overweight Underweight Underweigh Underweight Underweight Underweight Overweight Equalweight Underweight Overweight Overweight Overweight
13
1QFY2012 Sectoral Outlook
14
Automobile
Strong demand growth witnessed in the Indian auto sector in FY2010 and FY2011 showed signs of slowing down during 1QFY2012. Although the overall auto sector reported healthy growth of ~18% YTD in FY2012, it was primarily driven by the two-wheeler and three-wheeler segments. We expect our auto universe to report ~18% yoy growth in revenue during 1QFY2012 on the back of ~17% yoy jump in volumes. However, on a sequential basis, revenue is expected to decline by ~10%, led by a qoq decline in passenger vehicle (PV) and commercial vehicle (CV) volumes. While the strong growth momentum in two-wheelers and light commercial vehicles (LCV) continued in 1QFY2012, cumulative effects of rising interest rates and a sharp increase in fuel prices resulted in slowing PV and medium and heavy commercial vehicles (M&HCV) demand. We expect the near-term demand environment to remain challenging for the auto sector due to increased ownership cost for consumers. The long-term demand momentum is expected to remain healthy, aided by positive consumer sentiment, rising income levels, easy availability of finance and new launches. 6-18% yoy. Rubber and lead prices also rose by ~38% and ~30% yoy, respectively, during the quarter.
Auto index underperforms the Sensex

The auto index underperformed the Sensex during 1QFY2012, registering a decline of 5.3% versus losses of 3.1% posted by the Sensex. The underperformance can be attributed to growing concerns regarding volume growth in the sector due to headwinds in the form of rising interest rates and higher vehicle and fuel prices. Index heavyweights, Tata Motors and Maruti performed poorly as compared to the auto index, down 15% and 3%, respectively. During the quarter, Tata Motors share price declined by 20% on account of lower-than-expected 4QFY2011 performance. Maruti Suzuki fell by 8% on concerns that the strike at the Manesar plant will hurt the companys volume and profitability. On the other hand, Hero Honda, Exide Industries and Apollo Tyres outperformed the auto index by 24%, 19% and 18%, respectively.
Under pressure EBITDA margin to restrict profitability

We expect operating margin of companies in our auto universe to remain under pressure in 1QFY2012 on account of a yoy increase in raw-material costs. On a sequential basis though, commodity prices have remained more or less stable. Key raw materials such as steel, aluminum, plastic and rubber witnessed average increases of ~6%, ~18%, ~1% and ~38% yoy, respectively, during 1QFY2012. However, we believe average price increases of ~2% by auto makers during the quarter and ongoing cost-reduction initiatives will dilute the impact of input cost inflation to a certain extent. As a result, we expect a marginal ~50bp yoy contraction in EBITDA margin to ~12%. On the net profit front, our auto universe is expected to report a ~9% yoy increase in profitability, while it is expected to decline by ~13% on a qoq basis.
Exhibit 1: Auto index vs. the Sensex

250 200 150 100 50 0 Jul-07 Feb-08 Oct-08
BSE Auto
Jul-09
Mar-10
BSE_SENSEX
Oct-10
Jun-11
CV sector to ride on LCV demand

In FY2011, the CV industry grew by robust 30.4% yoy, driven by significant recovery in economic and industrial activity, healthy freight availability and improvement in agricultural production. Despite higher vehicle prices and interest rates, the CV industry has grown at a healthy rate of ~15% YTD in FY2012. During the quarter, the LCV segment grew by robust 22.8% YTD in FY2012, while the M&HCV segment witnessed moderate growth of 5.6%. However, multiple headwinds in the form of higher interest rates, diesel prices and moderation in near-term economic growth are expected to negatively affect transporter profitability, leading to a slowdown in growth momentum. As such, we expect the CV sector to register a CAGR of 10-12% over the next two years, with the LCV segment expected to drive growth as it is estimated to grow at a relatively high rate of 16-18% during the same period. During 1QFY2012, Tata Motors recorded 18% yoy growth on account of 25% yoy growth in the LCV segment. Going ahead, new product launches (Magic, Iris and Ace) are expected to drive volume growth.
Interest rate, fuel price and commodity price trend

Financing plays an important role for the auto industry and interest rates exhibit a negative correlation with auto volume growth. Monetary tightening by the RBI to rein inflation has been pushing interest rates up, leading to increased cost of ownership for consumers. Further, the government's policy of deregulating petrol prices to control the fiscal deficit has led to a sharp increase in petrol prices since the beginning of CY2011. Petrol and diesel prices have been hiked by `7.5/litre and `3.4/litre YTD in CY2011. This has negatively affected ownership cost and freight operators' profitability and has moderated auto volume growth. Further, commodity prices in general have witnessed a slight uptick during the quarter on a yoy basis, with prices of key raw materials, steel and aluminum, increasing by
15
Automobile
Ashok Leyland, on the other hand, witnessed a 9.9% yoy dip in volumes, led by a 14.2% yoy fall in the M&HCV goods segment.
Two-wheeler growth relatively insulated

The two-wheeler segment maintained its growth momentum and posted strong 19.8% yoy growth YTD in FY2012. Sales volume continues to defy the slowdown witnessed in PV and CV sales as the increase in interest rates and fuel prices is believed to have a negligible impact on overall two-wheeler volumes. Further, improving supplies across the domestic motorcycle segment coupled with high growth in the exports market aided the two-wheeler segment's growth. The dominant motorcycle segment posted robust 21% yoy growth, while the scooters and mopeds segments reported 15% and 20% yoy growth in volumes, respectively. Hero Honda led the two-wheeler pack, registering impressive growth of 24% yoy, backed by the strength of its market reach and strong performance in the rural market. Bajaj Auto reported a healthy 18% yoy increase in motorcycle volumes on the back of strong traction in Pulsar and Discover. Led by superior sales growth, Hero Honda regained a market share of 282bp at the expense of Bajaj Auto and TVS in the domestic two-wheeler segment, and its YTD FY2012 market share stands at 46.8% as against 19.6% and 14.2% for Bajaj Auto and TVS, respectively. Going ahead, we expect the two-wheeler segment to report strong volume performance and register a 14-15% CAGR in volumes over the next couple of years. Exhibit 4: Bajaj Auto, Hero Honda, TVS Quarterly volumes
Segment
Bajaj Auto Motorcycles Three Wheelers
Exhibit 2: TML and Ashok Leyland Quarterly volumes

Segment
Tata Motors M&HCV LCV Total CV Utility Vehicles Cars Total PV Exports (Inc Above )
1QFY12
193,038 49,115 77,033 126,148 10,627 56,263 66,890 14,886
1QFY11 % chg
181,711 45,298 61,639 106,937 9,795 64,979 12,243 21,400 6.2 8.4 25.0 18.0 8.5 (13.4) 21.6 (9.9)
FY2011 FY2011
803,265 212,278 284,647 496,925 43,076 263,264 306,340 58,044 94,106
FY2010 % chg
642,685 167,828 233,697 401,525 34,124 207,036 241,160 34,140 63,926 25.0 26.5 21.8 23.8 26.2 27.2 27.0 70.0 47.2
74,774 (10.5)
Leyland Ashok Leyland CV sales 19,277
Source: Company; Angel Research
PV segment Sluggish demand; Competition to intensify with new launches

PVs witnessed a slowdown in volume growth during 1QFY2012, plagued by macroeconomic concerns such as rising interest rates, fuel price hikes and declining consumer confidence. As a result, the industry registered sluggish yoy volume growth of 10.6% YTD in FY2012. Going ahead, we expect the slowdown in demand to continue for the next couple of months with revival likely in 2HFY2012, led by festival demand. However, we estimate the PV segment to register a CAGR of 10-12% over the next two years on account of buoyant long-term expected economic growth, low penetration levels and increasing disposable income. During 1QFY2012, market leader, Maruti witnessed sluggish volume growth in domestic markets due to which it reported a 0.6% yoy decline in sales. The primary reason for sluggish growth can be attributed to the slowdown in the dominant A2 segment, which increased marginally by 0.3% yoy. In terms of market share, Maruti conceded ~200bp of market share to competition in domestic markets YTD in FY2012 and its share now stands at 43.7%. We expect Maruti's market share to remain under pressure, ahead of several new small car launches that are lined up in FY2012.
1QFY12
1,092,815 963,051 129,764
1QFY11 % chg
928,336 828,418 99,918 323,899 1,234,039 463,840 200,358 95,486 160,197 7,799 54,483
FY2011 FY2011
FY2010 % chg
34.0 34.9 28.1 35.2 17.4 33.2 30.6 50.7 23.1
17.7 3,823,929 2,852,632 16.3 3,387,045 2,511,696 29.9 436,884 340,936 890,006
Exports (Inc above ) 427,364 Hero Honda TVS Motors Motorcycles Scooters Mopeds Three Wheelers Exports (Inc above ) 1,529,577 536,130 215,051 117,523 192,133 11,423 77,802
31.9 1,203,718
23.9 5,402,444 4,600,130 15.6 2,046,731 1,536,868 7.3 23.1 19.9 46.5 42.8 836,821 466,264 703,717 39,929 234,411 640,965 309,501 571,536
14,866 168.6 165,414 41.7
Exhibit 3: Maruti and M&M Quarterly volumes

Segment
Maruti Suzuki Passenger Cars MUV, Gypsy, Vitara Domestic Exports M&M Automotive-Exports Tractor-Domestic Tractor-Exports
Source:Company, Angel Research
1QFY12
281,526 249,181 1,502 250,683 30,843 162,149 5,717 57,244 2,908
1QFY11 % chg
283,324 239,898 2,989 242,887 40,437 132,241 78,318 3,775 47,716 2,432
FY2011 FY2011
FY2010 % chg
24.8 30.0 44.1 30.1 (6.3) 24.9 24.9 64.6 21.8 31.9
(0.6) 1,271,015 1,018,365 3.9 1,127,083 (49.7) (23.7) 22.6 22.9 51.4 20.0 19.6 5,666 138,266 590,719 358,023 19,042 201,786 11,868 3.2 1,132,749 866,858 3,932 870,790 147,575 472,914 286,713 11,567 165,633 9,001
Auto ancillaries to track the auto sector

The auto ancillaries sector, which derives 70-75% of its revenue from OEMs, has benefitted from strong growth in domestic automobile production in the last two years and is estimated to have grown at a robust rate of 20-25% during the period. The sector's growth has been driven by the domestic OEM segment, which has witnessed a CAGR of ~25% in FY2009-11. Further, exports, which account for ~17% of the auto component industry, are estimated to have grown at a rate of ~15% during the period on the back of recovery in the cars and light trucks segment in the US in CY2010, after a
16
Automotive-Domestic 96,280
Automobile
21% yoy decline in CY2009. The US and European Union are the major export destinations for Indian auto component manufacturers, contributing 60-65% to the sector's export revenue. Going ahead, we expect the auto component industry to register moderate growth as domestic OEM demand is expected to ease after witnessing strong volume growth over the last two years. However, exports are likely to grow at a healthy rate on revival in the automobile industry across the globe and increased penetration of domestic auto component players in key export markets over the next couple of years. Further, with India emerging as a global automotive manufacturing hub, foreign players are setting up their facilities in the country, and this is expected to aid sourcing of components from the country over the long term. Replacement demand in the industry is expected to grow at a steady rate of 8-10%, although the threat of cheaper Chinese imports will remain a major concern for domestic manufacturers. Companies in the subsegments of the auto components sector (tyres, bearings and batteries), with a larger share of revenue from the replacement and domestic markets, are likely to register strong growth in the next couple of years.
Outlook
Considering the near-term macroeconomic challenges, we expect the auto industry to register moderate volume growth of 12-13% for FY2012. However, we believe low penetration levels coupled with a healthy and sustainable economic environment and favourable demographics supported by increasing per capita income levels will drive long-term growth of the Indian auto industry. As such, we prefer stocks that have strong fundamentals, ability to deliver strong top-line performance and are available at attractive valuations. We continue to prefer companies in the auto sector with a strong pricing power and high exposure to rural and exports markets. We prefer M&M among auto heavyweights. In the ancillary space, we maintain our positive stance on Exide Industries, Tyres Tyres. Apollo Tyres and JK Tyres.
Exhibit 5: Quarterly estimates Automobile

Company Ashok Leyland Bajaj Auto@ Hero Honda Maruti M&M @ Tata Motors@* TVS Motors CMP (`) 49 1,406 1,878 1,158 701 994 54 Net Sales 1QFY12E 2,505 4,763 5,704 8,250 6,536 33,166 1,644 6.7 27.4 33.7 2.5 27.5 23.4 20.0 OPM (%) chg bp (53) (20) 112 (13) (127) (175) (92) 9.5 19.8 15.1 9.5 13.8 12.5 5.5 Profit Net Profit 1QFY12E 102 734 550 448 637 2,226 46 (17.1) 24.3 11.9 (3.7) 13.3 11.9 14.0 (` EPS (`) % chg (17.1) 24.3 11.9 (3.7) 9.2 0.1 14.0 0.8 25.4 27.6 15.5 10.8 34.9 1.0 (` EPS (`) FY11 4.7 90.4 100.6 79.2 43.3 145.3 4.1 FY12E 4.5 100.3 103.9 89.1 46.7 159.4 4.4 FY13E 5.0 107.3 116.9 101.0 51.6 172.6 5.2 FY11 10.3 15.6 18.7 14.6 16.2 6.8 13.2 P/E (x) FY12E 10.8 14.0 18.1 13.0 15.0 6.2 12.2 FY13E 9.7 13.1 16.1 11.5 13.6 5.8 10.3 % chg 1QFY12E % chg 1QFY12E (` (`) 60 1,610 1,314 804 1,100 62 Buy
(` cr)
rge Target Reco.
Accumulate Neutral Accumulate Buy Accumulate Buy
Source: Company, Angel Research; Note: Price as on June 30, 2011, @Adjusted for extraordinary items; * Consolidated numbers
Exhibit 6: Quarterly estimates Auto Ancillary

Company Bharat Forge* Bosch India# CMP (`) 310 6,851 Net Sales 1QFY12E 1,300 1,930 1,336 322 2,200 2,426 28.4 16.5 16.0 18.9 18.4 33.2 OPM (%) chg bp (194) (19) (354) 37 137 (90) 16.3 18.6 19.3 19.5 11.1 10.0 Profit Net Profit 1QFY12E 75 249 187 42 106 91 21.4 18.7 13.2 23.9 78.8 22.4 (` EPS (`) % chg 21.5 18.7 13.2 23.9 78.8 22.4 3.2 79.3 2.2 25.2 2.7 1.8 (` EPS (`) FY11 12.8 273.4 7.8 73.1 10.1 8.7 FY12E 18.8 307.9 8.7 86.7 11.6 9.8 FY13E 23.4 340.6 10.0 97.3 13.7 11.6 FY11 24.2 25.1 20.6 16.3 22.4 9.0 P/E (x) FY12E 16.5 22.3 18.5 13.8 19.5 8.0 FY13E 13.2 20.1 16.1 12.3 16.5 6.7 rge Target (`) 351 172 247 93 % chg 1QFY12E % chg 1QFY12E
(` cr)
Reco. Accumulate Neutral Accumulate Neutral Accumulate Buy
Exide Industries 162 FAG Bearing# 1,194 Motherson Sumi* 226 Apollo Tyres* 78
Source: Company, Angel Research; Note: Price as on June 30, 2011, * Consolidated numbers; # December year ending
Yaresh Kothari Analyst - Yaresh Kothari

17
Banking
During 1QFY2012, banking stocks suffered on account of uncertain domestic macro conditions, which have been plagued by high inflation for over a year now. With margin compressions and provisioning for pension expenses for retired employees in case of PSU banks in 4QFY2011 results already having created doubtful sentiments, the possibility of further aggressive rate hikes by the RBI as inflation numbers continued to be much outside the comfort zone led to a sharp correction in the Bankex in the last week of April. An aggressive 50bp hike in key policy rates in the May 3rd monetary policy was accompanied by the increase in savings rate and shift to relatively stricter provisioning norms, which further slid the Bankex down. Eventually, the Bankex rallied along with the Sensex in the last week of June, with increasing visibility that inflation may cool down from 2HFY2012. By the end of the quarter, the Bankex was down by 3.6% sequentially, underperforming the Sensex marginally by 0.5%. Within our coverage universe, Federal Bank gave the highest returns of 7.9% sequentially, followed by HDFC Bank and South Indian Bank, with gains of 6.8% and 4.8%, respectively.
Credit demand sustains above 20%, deposit growth crosses 18%

Prior to December 2010, broader deposit mobilisation was inevitably lower in light of high inflation and deposit rates even below NSS rates. Due to the resulting drying up of liquidity, broader interest rates have already gone up by 200-225bp. In 1QFY2012 alone, a cumulative repo rate hike of 75bp and the more impactful 50bp hike in savings rate have led most banks to pass on most of the burden to borrowers. Further, the rise in interest rates during the quarter led to a decline in credit demand from the highs of 23-24% witnessed in 4QFY2011 to a more sustainable 20.7% (as of June 17, 2011). However, on the positive side, it resulted in higher and much-required deposit mobilisation. With the sharp spike in lending rates, credit offtake has declined, as evident from the incremental CD ratio in FY2012 YTD (up to June 17) at just 44.9% compared to 247.1% during the same period in FY2011. A like-to-like comparison between March-end and mid-June of FY2011 vs. FY2012 indicates 11% lower credit mobilisation vs. almost 5x higher deposit mobilisation. The deposit growth rate for the first time since December 2009 crossed 18% (18.2% as of June 17, 2011), as the continual increase in deposit rates by banks over the last six months led to higher supply of funds. Consequently, the overall credit-to-deposit ratio marginally fell to 74.9% from 75.7% at the start of 1QFY2012. The peak retail FD rates, currently hovering at 9-9.5% for major banks, are well above the 8% rate that NSS offers and well above the 10-year G-Sec yield (8.3%), reflecting that deposit mobilisation has picked up significantly but only to be deployed at a negative spread into government bonds. Accordingly, we expect deposit rates as well as private sector lending rates to not go up further even if the RBI hikes the repo rate a couple of more times, as the demand-supply dynamics for the banking sector dictate otherwise.
Exhibit 1: 1QFY2012 stock performance

(%) Federal Bank (FEDBK) HDFC Bank (HDFCBK) South Indian Bank (SIB) Indian Overseas Bank (IOB) Yes Bank (YESBK) ICICI Bank (ICICIBK) Sensex Bankex Syndicate Bank (SYNDBK) Jammu and Kashmir Bank (J&KBK) IDBI Bank (IDBIBK) Axis Bank (AXSB) Indian Bank (INDBK) United Bank of India (UTDBK) Bank of Baroda (BOB) UCO Bank (UCO) Punjab National Bank (PNB) Andhara Bank (ANDHBK) Central Bank of India (CNTBK) Vijaya Bank (VIJBK) State Bank of India (SBI) Dena Bank (DENABK) Bank of India (BOI) Allahabad Bank (ALBK) Oriental Bank of Commerce (OBC) Union Bank of India (UNBK) Canara Bank (CANBK) Corporation Bank (CRPBK) Source: Bloomberg, Angel Research Returns (qoq) 7.9 6.8 4.8 2.3 0.6 (1.8) (3.1) (3.6) (3.7) (3.9) (4.5) (8.2) (8.5) (9.4) (9.5) (10.6) (10.7) (11.1) (11.9) (12.4) (13.1) (13.1) (13.3) (14.7) (14.8) (15.7) (16.3) (17.6) Returns (yoy) 42.1 30.7 44.4 41.1 15.9 26.8 6.5 19.1 27.6 1.7 14.2 3.7 (5.9) 18.9 24.2 23.6 4.1 3.2 3.6 7.7 4.5 (2.6) 18.8 21.3 1.1 (5.9) 16.8 0.3
Exhibit 2: Deposits up while credit off-take slows

160,000 139,998 120,000
80,000
70,503
62,862
40,000
28,527
Credit offtake (` cr)

FY2011#
Deposit mobilisation (` cr)

FY2012*
Source: RBI, Angel Research; Note: #Between March 26, 2010 and June 18, 2010, * Between March 25, 2011 and June 17, 2011
18
Banking
Exhibit 3: 4QFY2011 and 1QFY2012 Lending and deposit rates
Avg. Avg. Base rates Bank AXSB HDFCBK SBI ICICIBK IDBI CRPBK CANBK BOB J&KBK UNBK BOI SYNBK OBC ANDHBK CENTBK DENABK IOB INDBK PNB UCOBK SIB ALLBK UTDBK 4QFY11 8.52 8.03 8.12 8.44 9.29 9.14 9.31 9.31 9.01 9.31 9.32 9.32 9.32 9.31 9.31 9.27 9.32 9.33 9.33 9.33 8.92 9.33 9.45 1QFY12 9.64 9.00 8.85 9.05 9.81 9.65 9.81 9.81 9.50 9.80 9.81 9.81 9.81 9.79 9.79 9.76 9.81 9.81 9.81 9.81 9.40 9.81 9.79 9.81 BP change 112 97 73 61 52 51 50 50 49 49 49 49 49 49 49 49 49 49 49 49 48 48 34 31 4QFY11 16.50 17.25 13.00 17.50 14.00 13.25 13.75 13.75 13.25 13.75 13.75 13.75 13.75 13.75 13.75 14.50 13.75 13.75 13.00 13.75 17.50 13.75 13.50 13.75 BPLR rates 1QFY12 17.25 17.75 14.00 18.00 14.50 13.85 14.25 14.25 14.00 14.25 14.25 14.25 14.25 14.25 14.25 15.00 14.25 14.25 13.50 14.25 18.50 14.25 14.25 14.25 BP change 75 50 100 50 50 60 50 50 75 50 50 50 50 50 50 50 50 50 50 50 100 50 75 50 4QFY11 9.25 9.25 9.25 9.25 9.25 9.25 9.10 9.35 9.50 8.75 9.25 9.25 9.25 9.25 9.60 9.00 9.25 9.50 9.15 9.00 9.75 8.75 8.75 9.35 FD rates 1QFY12 9.25 9.25 9.25 9.25 9.50 9.30 9.25 9.00 9.00 9.25 9.25 9.35 9.25 9.25 9.25 9.25 9.25 9.25 9.15 9.00 9.75 9.00 8.75 9.35 BP change 25 5 15 (35) (50) 50 10 (35) 25 (25) 25 -
VIJAYA 9.50 Source: Company, Angel Research
On the back of pick-up in deposit growth rates in 1QFY2012, some of the banks reduced their term deposit rates. However, on the advances side, banks raised their lending rates by ~50bp on an average during the quarter. Amongst banks under our coverage, Axis Bank had the highest average base rate change (112bp), followed by HDFC Bank (97bp). We expect most banks, especially the smaller banks with low CASA ratios, to face NIM pressures during the quarter, as 1) further deposits reprice upwards, 2) CASA ratios decline as rising interest rates are likely to have resulted in a shift from savings to term deposits and 3) in most cases, CD ratios deteriorate in line with sectoral trends. Overall, we expect large private banks to post 25% yoy growth in net interest income, while PSU banks are expected to register 20.6% yoy growth.
The easing of liquidity pressures in 1QFY2012 post two quarters of heavy liquidity crunch in the system (average LAF borrowings for 3QFY2011 and 4QFY2011 at `92,300 and `83,800cr, respectively) further suggests that banks may not increase deposit rates any further even if there are further rate hikes by the RBI.
Exhibit 4: Lower average LAF borrowings in 1QFY2012

(` bn) 1,200
800 400 0 (400) (800) (1,200) (1,600) (2,000)
Aug-10 Dec-10 Feb-11 Jul-10 May-11 Sep-10 Oct-10 Nov-10 Jan-11 Mar-11 Apr-11 Jun-11
Liquidity relatively comfortable during 1QFY2012

Increasing deposit mobilisation and slowing credit offtake, apart from seasonal factors, reflected in lower average LAF borrowings for 1QFY2012 at ~`46,000cr, comfortably within the RBI's comfort zone of +-1% of total NDTL.
Provisioning for employee benefits

PSU banks had to provide fully for pension liabilities related to retired employees in 4QFY2011, which led to a few disappointments in 4QFY2011 results, particularly in case of
19
Banking
Central Bank of India, Vijaya Bank, Bank of India and Dena Bank. However, with one-time costs related to pension expenses for retired employees having been provided in 4QFY2011, we expect most PSU banks under our coverage to report a decline or negligible increase in staff costs in FY2012.
Rate hikes by the RBI push up bond yields

The 10-year G-sec bond yields remained above 8% for most of April as inflationary expectations continued to dominate sentiments in the bond markets. The markets were expecting a 25bp hike in key policy rates in the annual monetary policy meet on May 3, 2011; however, the RBI surprised mostly everyone by announcing an aggressive 50bp hike. The RBI also increased the savings deposit rate by 50bp to 4% and tightened the provisioning norms for banks, which further dampened sentiments in the bond markets, leading to a single-day increase in bond yields by nearly 10bp to 8.24%. Evidence of a slowdown in the economy coupled with high reported inflation figures further hardened yields to as high as 8.41% during the quarter. The hardening of bond yields despite higher deposit mobilisation (leading to higher SLR investments) witnessed during the quarter (18.2% as of June 17, 2011) also indicates higher demand of funds from the government's side. With yields having hardened by ~22bp on an average in 1QFY2012 over the last quarter, we expect banks carrying a high modified duration investment book to report some MTM losses in 1QFY2012 results.
Exhibit 5: Expected qoq reduction in staff costs

(%) 60.0 50.0 40.0 30.0 20.0 10.0 BOI CRPBK ALLBK J&KBK DENABK SYNBK PNB ANDHBK UNBK BOB CANBK CENTBK VIJAYA OBC
52.5 48.3 43.3 42.0 39.2 34.2 29.8 26.5 19.3 13.5 11.2 10.3 7.2 5.8
Barring a few banks, asset quality remains strong

Although a few banks surprised negatively on the asset-quality front by reporting high slippages for 4QFY2011, the asset quality of the sector on a whole especially for private banks continued to improve in 4QFY2011, which is evident from the fact that net NPA ratio for the entire sector has been on a declining trend since 3QFY2010. We expect moderation in asset-quality pressures for public sector banks from the high base in the last few quarters; however, further switchover to CBS-based recognition of NPAs during this quarter as well as in 2QFY2012 is expected to lead to an upsurge in gross NPAs for some PSU banks, especially including those with larger proportion of rural branches. We expect asset quality to remain healthy for private banks going forward, although it is unlikely to improve materially from the already low levels witnessed in the past couple of quarters. Overall, incremental asset-quality pressures that could arise due to the recent increase in interest rates pose risks to our asset quality estimates for the sector.
Exhibit 7: Corp. & G-Sec bond yields rise in 1QFY2012

(%) 10.00 9.50 9.00
9.63
9.45 9.62
9.35 9.59
9.20 9.59
9.55
9.23 9.57
8.00 7.50 7.00 1Yr AAA
9.15
9.62
8.50
2Yr AAA
3Yr AAA
5Yr AAA
31-Mar-11
7Yr AAA
10Yr AAA
1Yr Gsec
7.55 8.30
10Yr Gsec
30-Jun-11
Exhibit 8: AFS modified duration as of FY2011

Bank OBC ANDHBK SBI VIJBK AXSB BOB PNB AFS (`cr) 11,642 3,423 71,900 6,676 24,988 18,496 21,067 7,406 17,168 21,830 30,153 14,110 14,057 7,468 1,759 AFS (%) 27.7 14.1 24.9 25.2 34.7 26.0 22.1 28.0 36.0 26.1 36.6 24.2 32.4 37.9 21.1 AFS Mod. Dur. Dur. (yrs) 4.4 3.9 3.6 3.2 3.1 2.8 2.7 2.7 2.6 2.2 2.0 1.8 1.5 1.5 0.4
Exhibit 6: Net NPA ratio on a declining trend

1.20 1.15 1.08 1.05 1.02 1.00 0.97 0.99 0.97 1.06 1.07
1.10
1.06
UTDBK IOB CANBK BOI UNBK CPRBK
0.90
3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11
J&KBK SIB Source: Company, Angel Research
Source: Company, Angel Research Refer to important Disclosures at the end of the report
7.99 8.33
20
Banking
Hike in savings deposit rate; Provisioning norms become stricter
The RBI hiked the savings bank rate by 50bp to 4.0% on May 3, 2011, the first hike in the past 19 years, to reduce the spread between saving deposit and term deposit rates, which had widened significantly in the recent period; this move by the RBI is possibly a precursor to the deregulation. The impact of the hike is expected to be more on banks with a higher proportion of saving account deposits to total liabilities. Assuming no interest burden had been passed on, the overall negative impact would have been 0.4-9.3% on the net profit level (FY2012E) and 1-8bp on the return on assets (FY2012E) level. However, as expected, most banks have passed on the increased burden of cost of deposits through lending rate hikes. The RBI relaxed the 70% provisioning coverage norm for banks; however, it increased the provisioning requirements across the NPL bucket by 5-10%. Even in case of restructured advances, provisioning requirements were hiked to 2.0% from the existing 0.25-1.0% (depending on the category of advances), which is expected to add to the provisioning burden mainly for PSU banks in 1QFY2012. With inflation not budging, the RBI was forced into further rate hikes, which we feel was justified considering the generalisation of inflationary pressures and the underlying strength in credit demand remaining firm. Meanwhile, growth has suffered, as pointed out by few of the growth indicators; however, with the policy action in shape, we expect inflation to moderate in the second half of FY2012. Also, we expect deposit rates as well as private sector lending rates to not go up further even if the RBI hikes the repo rate a couple of more times, as the demand-supply dynamics for the banking sector dictate otherwise. In fact, we expect broader deposit and lending rates to decline from 2HFY2012, once WPI inflation starts treading downwards (the near-term uptick due to fuel prices is in our view already factored in by the RBI and markets). Accordingly, while we continue to like large banks with strong deposit franchises, ICICI Bank and Axis Bank are our top picks in this space as in our view they will also be bigger beneficiaries of the eventual turn in the interest rate cycle. In the mid-cap space, we prefer banks that have either already seen bulk of the asset-quality pressures or have been relatively conservative in the past couple of years. In this space, we like Corporation Bank, Indian Bank, United Bank and Syndicate Bank. (` ( ` cr)
Net Profit Profit 1QFY12E 943 174 1,073 1,493 86 212 358 329 1,001 773 1,018 235 337 141 336 417 294 162 348 1,100 2,550 344 198 631 127 109 % chg 27.1 32.3 32.2 45.5 46.4 35.8 3.0 2.5 16.5 6.7 0.5 (30.3) 0.8 1.8 33.9 13.2 46.6 11.3 (4.1) 3.0 (12.5) 29.6 (23.9) 5.0 17.6 (37.4) FY11 82.5 34.3 84.4 44.7 2.6 20.9 29.9 22.6 108.0 45.5 90.9 27.7 95.4 18.3 16.7 38.8 18.7 126.9 51.5 139.9 130.1 18.3 12.6 32.7 13.2 8.7 EPS (`) (` FY12E 98.2 43.1 110.3 57.1 3.1 26.0 33.4 23.9 117.1 56.9 91.6 17.6 100.2 19.5 18.5 43.3 22.5 141.2 57.4 151.9 202.5 21.1 14.8 43.8 14.8 9.1 FY13E 120.8 49.6 143.5 69.3 3.2 29.8 35.6 24.0 131.9 67.2 92.6 22.0 107.5 20.3 21.9 47.4 26.4 150.2 66.6 174.6 270.6 24.0 17.8 47.8 17.1 10.3 Adj BVPS (`) BVPS (` FY11 462.5 298.3 545.5 478.3 14.8 109.3 152.7 116.0 534.4 266.6 381.8 126.6 466.4 102.9 128.0 179.5 128.7 717.4 334.3 602.7 108.3 65.5 162.0 101.6 65.0 FY12E 529.8 332.7 630.3 510.0 17.2 131.8 185.3 134.1 624.8 331.5 469.8 131.7 554.8 119.7 142.7 217.9 145.1 825.5 395.2 743.3 131.9 82.2 237.8 111.3 71.5 FY13E 622.7 371.8 741.2 549.0 19.2 156.9 211.1 152.4 726.5 383.3 534.9 149.7 640.1 137.1 159.5 254.8 165.9 940.2 447.9 882.0 150.1 92.4 274.4 122.3 78.7 FY11 15.6 13.2 29.7 24.4 9.3 14.9 6.6 5.9 8.1 9.1 5.8 4.5 5.5 4.9 8.1 5.5 7.9 6.6 6.4 7.8 18.5 6.4 7.6 9.0 7.3 8.0 P/E (x) FY12E 13.1 10.5 22.7 19.2 7.7 12.0 5.9 5.6 7.4 7.3 5.7 7.0 5.2 4.7 7.4 4.9 6.5 5.9 5.7 7.2 11.9 5.6 6.5 6.7 6.5 7.7 FY13E 10.7 9.1 17.4 15.8 7.4 10.5 5.5 5.6 6.6 6.2 5.7 5.6 4.9 4.5 6.2 4.5 5.6 5.6 4.9 6.2 8.9 4.9 5.4 6.1 5.6 6.8 P/ABV (x) P/ABV FY11 FY12E FY13E 2.8 1.5 4.6 2.3 1.6 2.9 1.3 1.2 1.6 1.6 1.4 1.0 1.1 0.9 1.1 1.2 1.1 1.2 1.0 1.8 2.6 1.1 1.5 1.8 0.9 1.1 2.4 1.4 4.0 2.1 1.4 2.4 1.1 1.0 1.4 1.2 1.1 0.9 0.9 0.8 1.0 1.0 1.0 1.0 0.8 1.5 2.1 0.9 1.2 1.2 0.9 1.0 1.2 3.4 1.3 2.0 0.9 0.9 1.1 1.0 0.8 0.8 0.7 0.9 0.8 0.9 0.9 0.7 Target (`) Buy 483 Accum. - Neutral Buy 26 Accum. 337 Accum. 222 Accum. 145 Accum. Buy Buy Reduce Buy Buy Buy 498 112 640 106 255 Reco.
Outlook and valuation

The trade-off between growth and inflation once again was the key predicament faced by the RBI during the quarter. Exhibit 9: Quarterly estimates
Company CMP (`) AXSB FEDBK HDFCBK ICICIBK SIB YESBK ALLBK ANDHBK BOB BOI CANBK CENTBK CRPBK DENABK IDBI INDBK IOB J&KBK OBC PNB SBI SYNBK UCOBK UNBK UTDBK VIJAYA 1,289 452 2,503 1,093 24 312 197 134 872 414 524 124 526 91 136 213 147 840 330 1,090 2,406 117 96 293 96 70 Operating Income 1QFY12E 3,092 596 4,180 4,385 275 553 1,484 1,110 3,088 2,811 2,756 1,632 1,105 621 1,635 1,385 1,605 505 1,301 4,009 12,519 1,417 1,149 2,161 723 606 % chg 23.0 13.8 25.1 19.4 31.4 36.3 29.2 17.5 24.8 20.8 10.1 19.5 14.7 32.8 24.1 8.0 43.2 9.8 2.3 14.9 13.9 20.2 2.0 21.2 14.9 (1.5)
2.1 1,650
2.0 1,355
1.2 1,017
- Neutral
- Neutral 166 Accum. 893 Accum. 392 Buy Buy Buy Buy
1.2 1,235 Accum. 1.8 2,832 0.8 1.0 1.1 0.8 0.9 139 357
928.7 1,141.0 1,337.7
- Neutral 110 Accum. - Neutral
Source: Company, Angel Research; Note: Price as on June 30, 2011
Vaibhav Agrawal/ l/Shrinivas Bhutda Varm arma Analyst - Vaibhav Agrawal/ Shrinivas Bhutda / Varun Varma
21
Capital Goods
Capital Goods (CG) Index Still in doldrums
During 1QFY2012, the CG index outperformed the broader indices and ended with a gain of 5.1% in absolute terms, outperforming the Sensex by 8.2%. After reporting negative returns in the first two months of the quarter, the CG index bounced back in June with ~6% returns in absolute terms. This was largely aided by the recent rally in the broader markets. In addition, the spike in CG production reported through IIP numbers released in June had a positive impact on the CG index. However, we believe the surge in CG stocks is a temporary event, given the deteriorating macro enviroment lower-thanexpected industrial capex and higher working capital requirements.
Concerns over the sector loom large

Interest rate heads northward: Elevated interest rates remain a cause of concern, given the cascading impact on industrial capex (lower capacity additions) and, thereby, demand for capital goods. Muted demand in terms of lower inflows will have a direct impact on companies in our coverage universe. Additionally, high commodity prices are likely to continue impacting the profitability of CG companies. However, in our view, both inflation and interest rates are close to peak levels and are likely to see some respite from 2HFY2012.
Exhibit 3: Higher interest rates impacting GFCF

25.0 8.0
Exhibit 1: 1QFY2012 Sensex vs. CG stocks

Abs. Returns (%) BSE Sensex BSE CG ABB Areva T&D BHEL BGR Energy Crompton Greaves Jyoti Structures KEC International Thermax Source: C-line, Angel Research (3.1) 5.1 9.9 3.8 (0.7) (5.9) (5.0) 4.8 (3.9) (1.4) Relative to Sensex (%) 8.2 13.0 6.9 2.4 (2.8) (2.0) 7.8 (0.8) 1.7
15.0
6.0
5.0
4.0
Mar-10 (5.0)
Jun-10
Sep-10
Dec-10
Mar-11
Repo Rate (%, RHS)
Jun-11 2.0
% change in GFCF (YoY)
Source: RBI, CSO, Angel Research
Exhibit 2: CG index Relative returns to the Sensex

60.0 48.6 50.0 40.0 30.0
(%)
23.5 17.2 9.4 1.3 0.6 (0.6) (6.2) (14.1)

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09
20.0 10.0 0.0 (10.0) (20.0)
Coal deficit A key concern: With the Indian coal sector struggling to meet the demands of the power sector, the perceived shortage in coal supply casts a grim outlook on the power sector. Further, the coal sector is facing problems over coals blocks (No-Go regions declared by the Environment Ministry), thereby pressuring coal supply. However, the environment ministry has agreed to relax the 'No-Go region' norms in certain cases in order to cope with the massive capacity expansion planned in the country. Power sector hurdled with delays in capacity addition: Most of the companies in our CG universe have their fortunes directly linked to the pace of the power sector's growth in the country. India has a poor track record in this regard, with only 50-60% of the total planned capacity added during several of the previous five-year plans. For the Eleventh Plan, the capacity addition target was revised to 62,374MW (78,000MW), of which only 57% has been achived till May 2011. As per the planning commission, around 17,600MW of capacity addition is planned in FY2012, which also seems challenging. As per our analysis, we estimate a total capacity addition of 42,000MW at the end of the Eleventh Plan.
8.2 3.5
(9.7) (7.1)
3Q09 4Q09 1Q10
(4.6) (5.8)
1Q11 2Q11 3Q11
(10.7)
2Q10 3Q10 4Q10
(9.0)
4Q11 1Q12
Companies in our CG universe reported a mixed performance during the quarter. ABB and Jyoti Structures emerged as the major gainers, up 9.9% and 4.8%, in absolute terms and outperformed the Sensex by 13% and 7.8%, respectively. BGR Energy tumbled the most, declining by 5.9%, in absolute terms and underperformed the Sensex by 2.8%; slackening order inflows and poor earnings visibility remain as an overhang on the stock. BHEL faced downward pressure partially due to the proposed FPO, before recovering in the recent market rally. We believe the challenges outlined in the power sector such as coal linkages, delays in land acquisition and environmental clearances will remain a near-term drag for companies in our CG universe.
22
Capital Goods
Exhibit 4: IIP growth
(%) 20.0 15.0 10.0 5.0 0.0 (5.0)
Apr-08 Jan-09 Apr-09 Jan-10 Apr-10 Jan-11 Oct-08 Oct-09 Oct-10 Apr-11 Jul-08 Jul-09 Jul-10
Key developments during the quarter

(CMP/TP: 876/ 876/`637) ABB (CMP/TP:`876/ 637) (Rating: Sell) ABB plans to invest ~US$24mn in India to manufacture a new range of miniature circuit breakers (MCB), residual current circuit breakers (RCCB) and surge protection devices (SPD). The new manufacturing facility will be set up in Nelamangala campus in Bangalore. The plant will manufacture a new range of protection devices used in residential and commercial buildings, industrial and renewable energy applications, data centres and telecommunications industries to protect installations against over-current, short circuits and leakage current. (CMP/TP: 257/) Areva T&D (CMP/TP: `257/) (Rating: Neutral): Areva T&D bagged orders of Electric BoP from Essar Projects and L&T Power. The combined value of the orders is `410cr. The scope of work includes supply and installation of electrical BoP solutions for which Areva T&D India will manufacture and install gas-insulated substations, air-insulated substations, distribution and power transformers, and low-voltage switchboards. (CMP/TP: 2,047/) BHEL (CMP/TP:`2,047/) (Rating: Neutral): BHEL secured an order for steam turbine generators for a new rating of 700MWe nuclear sets from Nuclear Power Corporation of India for its 2x700MWe Kakrapar Nuclear Power Station (Units 3 and 4) in Gujarat. The order is in consortium with Alstom. BHEL's share in the contract is worth `880cr. (CMP/TP: 259/ 259/`300) Crompton Greaves (CMP/TP: `259/ 300) (Rating: Buy) Continuing with its strategy of pursuing inorganic growth, Crompton Greaves concluded two overseas acquisitions, viz. Sweden-based Emotron Group and US-based QEI, Inc. We believe the acquisition will enable the company to become a stronger and more comprehensive player in the industrial and power systems business and build capabilities by leveraging its existing product portfolio. Further, the overseas buyouts will help the company offset the sluggishness in the local transmission and distribution markets. (CMP/TP: 79/ 79/`115) KEC International (CMP/TP:`79/ 115) (Rating: Buy): KEC International witnessed impressive order inflow during the quarter. In the domestic T&D segment, the company secured orders worth `600cr. KEC International also fared well in the Middle East and African markets by securing orders totaling `548cr. SAE Towers contributed `273cr to the order book. New segments of water and railway also booked orders worth `92cr. (CMP/TP: 85/ 85/`104) Jyoti Structures (CMP/TP: `85/ 104) (Rating: Buy): Jyoti Structures secured orders totaling `524cr for substation and transmission projects in India and Bhutan. The company's subsidiary, Jyoti Structures Africa Pty. Ltd., won another contract from ESKOM (South African Power Utility) worth `225cr for the execution of 765kV and 400kV lines.
Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
(10.0)
Exhibit 5: CG component growth

(%) 65.0 50.0 35.0 20.0 5.0 (10.0) (25.0)
Oct-09 Apr-08 Oct-08 Jan-09 Apr-09 Jan-10 Jul-08 Jul-09
Exhibit 6: Basic goods component growth

(%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 (2.0)
Jan-09 Apr-08 Oct-08 Apr-09 Jul-08 Oct-09 Jan-10 Apr-10 Oct-10 Jan-11 Apr-11 Jul-10 Jul-09
Exhibit 7: Intermediate goods component growth

(%) 20.0 15.0 10.0 5.0 0.0 (5.0) (10.0)
Jul-08 Jul-09 Jul-10 Oct-10 Jan-11 Oct-09 Jan-10 Oct-08 Jan-09 Apr-08 Apr-09 Apr-10 Apr-11
23
Capital Goods
(CMP/TP: 594/) Thermax (CMP/TP:`594/) (Rating: Neutral): Thermax bagged an order worth `366cr for a 120MW captive power plant for supplying two blast furnace gas-fired boilers and one steam turbine generator. The company also received an order valued at `403cr to supply circulating fluidised bed combustion (CFBC) boilers for a co-generation plant. Management is scouting overseas to buy a company with a technological edge in water waste management to strengthen its presence in the water treatment segment. The size of such an acquisition is expected to be around US$100mn. 1QFY2012 expectations: We expect companies in our CG universe to post cumulative top-line growth of 17% yoy. This would primarily be driven by BHEL and Jyoti Structures, which are expected to post strong revenue growth of 25% and 24% yoy, respectively. KEC International and Thermax are also likely to maintain steady top-line growth of 18% and 14.1% yoy, respectively. BGRs top line is expected to drop by 15% yoy on a high base. In the T&D equipment segment, we expect ABB and Areva to report top-line growth of 15% and 14% yoy, respectively, while Crompton Greaves is likely to post muted growth of 8% yoy. On the operating front, we expect our universe companies to report flat margins at ~12.3%. ABB is likely post a margin improvement of 345bp yoy due to fewer expected cost provisions. KEC International is likely to post a slight improvement of 52bp yoy because of increased contribution from SAE Towers. On the other hand, we expect Thermax to report a 115bp yoy dip in OPM to 11%. Similarly, BGR and Crompton Greaves are expected to report a margin dip of 44bp and 42bp yoy, respectively. The expected top-line growth of 17% yoy along with flat margins would result in ~13% yoy PAT growth for companies in our CG universe. ABB is likely to report robust profitability growth on a low base. KEC International is also expected to report strong PAT growth because of normalised tax rates compared to high tax incidence in 1QFY2011. BHEL and Jyoti Structures are likely to maintain steady growth.

Transmission and distribution (T&D): The T&D equipment space is circled with diverse set of challenges. First, generation delays are likely to adversely affect growth prospects of T&D equipment suppliers as the sector has a high degree of correlation with power capacity addition. Second, the T&D equipment space is turning competitive on the recent new PGCIL mandate of separate tendering of sub-stations and circuit breakers. We believe this would lead to lower order inflows for companies like ABB, Areva and Siemens, who enjoy a dominant market share in the high-voltage T&D space. In the transmission EPC space, KEC International is well placed in terms of growth prospects. In the last couple of quarters, KEC International has gained increased traction from Africa and Americas (SAE Towers), which outlines a huge potential for the company in these regions. With geographical diversity, we believe KEC International is insulated against domestic competition. Jyoti Structures also provides improved revenue visibility on the back of better-than-expected order inflows during the previous quarter as well as optimistic management guidance on future order intakes. Power equipment: BHEL continues to ride high on the strong order book (3.2x FY2012E revenue); however, its long-term concerns over competitive pressures in the BTG space and the proposed FPO are putting pressure on the stock. NTPC bulk tendering will be a key for BHEL, Thermax and BGR. In June 2011, five companies including Thermax and BGR placed bids for the bulk tender. Valuations: On the valuation front, we believe most companies in our CG universe are presently trading at premium valuations, offering a meager upside from current levels. In such a scenario, we prefer a stock-specific approach. Crompton Greaves, KEC International and Jyoti Structures are among our preferred picks.
( ` cr)
Exhibit 8: Quarterly estimates

Company ABB* Areva* BHEL BGR Energy CMP 876 257 2,047 449 Net Sales 1,683 1,009 8,251 771 2,486 998 700 901 15.0 14.0 25.0 (15.0) 8.0 18.0 24.0 14.1 OPM (%) 8.0 9.0 14.5 11.0 12.5 10.5 11.2 11.0 345 (20) (12) (44) (42) 52 (13) (115) Profit Net Profit 80 33 785 40 183 38 32 67 109.6 2.6 17.6 (33.4) (4.3) 43.5 21.6 1.6 (` EPS (`) % chg 109.6 2.6 17.6 (33.4) (4.3) 43.5 21.6 1.6 FY11 3.0 7.8 114.6 44.8 13.9 8.3 10.8 32.0 3.8 1.4 16.0 5.6 2.8 1.5 3.9 5.6 (` EPS (`) FY12E 20.3 8.9 133.6 44.5 15.3 9.5 12.6 37.5 FY13E 23.6 11.9 156.5 48.1 18.7 12.8 15.3 43.4 FY11 293.6 32.9 17.9 10.0 18.7 9.5 7.8 18.5 P/E (x) FY12E 43.2 28.8 15.3 10.1 17.0 8.3 6.7 15.9 FY13E 37.2 21.6 13.1 9.3 13.9 6.2 5.6 13.7 arg Target (` (`) 637 520 300 115 104 (`) 1QFY12E % chg 1QFY12E chg bp 1QFY12E % chg 1QFY12E
Reco. Sell Neutral Neutral Buy Buy Buy Buy Neutral
Crompt. Greav. 259 KEC Intl. Jyoti Stryctures Thermax 79 85 594
Source: Company; Angel Research; Note: Price as on June 30, 2011; * December year ending
Analyst - Hemang Thaker

24
Cement
Demand slowdown continues in 1QFY2012
After registering low dispatch growth of 4.9% in FY2011 (vs. FY2004-10 CAGR of ~9.3%), cement demand continued to remain muted in the first two months of FY2012. During April-May 2011, all-India cement dispatches remained flat at 35.86mt (35.92mt in April-May 2010). There was no pick-up in demand in the southern region post the elections in Tamil Nadu and Kerala. The political situation continued to remain uncertain in Andhra Pradesh, resulting in low government expenditure on housing and infra projects. Some parts of the southern region were also affected due to non-availability of sand. Demand was muted in the northern region as well on account of moderate demand from the real estate segment. Major reasons for low demand in this region were labour shortage due to the harvest season and extremely hot weather conditions. In the eastern region, demand failed to pick-up post the elections in West Bengal. Demand pick-up was slow in the western and central regions as well because of low offtake from the real estate segment and labour shortage.
All-India capacity utilisation down to 70%

Poor demand scenario coupled with excess supply pulled down capacity utilisation for the quarter to 70%. Capacity utilisation has been the lowest in the southern region at ~60%, as the region has been facing double whammy of poor demand as well as huge capacity addition. Amongst all the regions, the eastern region is operating at the highest capacity utilisation (~92%) level. The central region is also operating at a healthy capacity utilisation level in excess of 85%. Capacity utilisation in the western region is at 80%, while the northern region has capacity utilisation of 75%.
Price situation
All-India cement prices rose substantially since mid-February due to the production discipline adopted by cement manufacturers across the country, reaching their all-time highs in March 2011. However, cement prices across the country have begun to correct from the peaks of March 2011. Price corrections have been in the range of `10-30/ bag. Southern region: Price correction has been the lowest in the southern region at `5-10/ bag from March 2011 levels. Cement manufacturers have adopted a strong production discipline despite low capacity utilisation, thereby capping the price fall to a large extent. Currently, cement prices are at `280/bag. On an average, cement prices have remained flat when compared on a sequential basis. Northern region: In the northern region, prices are currently hovering at ~`275/bag, down by `15/bag from March 2011 levels. However, for 1QFY2012, on a sequential basis, prices were higher by `10/bag. Western region: The western region managed to hold on to the peak-level prices till May-end. However, prices have corrected since then. On an average, prices have corrected by `10-25 from March 2011 peak levels. The correction has been severe in Gujarat, which has seen a price decline of ~`100/bag. Currently, prices are at `255/bag in the western region. For 1QFY2012, on a sequential basis, prices in the region were higher by `5/bag. Eastern region: In the eastern region, prices are at `235/bag, down by `25/bag from March 2011 levels. For 1QFY2012 as a whole as well, prices were down on a sequential basis. Central region: Prices have declined the highest in the central region since March 2011. Prices in this region fell by ~`30/bag from March 2011 levels and are currently at `245/bag. On an average, prices during the quarter declined on a sequential basis.
Exhibit 1: Monthly dispatch trend

(%) 20.0 15.0 10.0 5.0 0.0
Jan-11 Mar-11 Apr-11 Aug-10 Nov-10 May-10
(5.0) (10.0)
Source: Industry, Angel Research
Performance of companies
During April-May 2011, among large players, ACC was the top performer with 14.1% yoy dispatch growth, aided by capacity additions at Bargarh and Chanda. JP Associates also reported 7.7% yoy growth in dispatches. However, dispatches of UltraTech Cement and Ambuja Cements declined by 3.9% yoy and 3.7% yoy, respectively.
Exhibit 2: April-May 2011 Cement dispatches (mt)

Company ACC Ambuja UltraTech JP Associates Source: Company, Industry Apr-May Apr-May 2011 4.0 3.6 6.4 2.8 Apr-May Apr-May 2010 3.5 3.8 6.7 2.6 yoy chg(%) chg(%) 14.1 (3.7) (3.9) 7.7
Dec-10
May-11
Jun-10
Sep-10
Apr-10
Oct-10
Feb-11
Jul-10
25
Cement
All-India capacity to increase by 18mt in FY2012
In FY2011, all-India cement capacity stood at ~304mtpa. In FY2012, the country's cement capacity is expected to increase by ~18mt. Capacity addition for FY2012 could go up to 24mtpa, if JP Associates fully meets its capacity addition targets for the year. Capacity addition could be higher by another 3.3mtpa if ABG Group commissions its proposed plant during the year.
Exhibit 4: New Mckloksey coal prices

250 200
(US$/tonne)
150 100 50 0
Dec -10 May-06 May-01 Mar-07 Aug-07 Nov-08 Mar-02 Aug-02 Nov-03 May-11 Dec -05 Dec -00 Feb -05 Jul-05 Feb -10 Jan-08 Jun-08 Sep-09 Jan-03 Feb -00 Jun-03 Sep-04 Jul-00 Oct-06 Oct-01 Apr-04 Apr-09 Jul-10
Exhibit 3: All-India capacity addition (mt)

FY2012E FY2011 FY2010 FY2009 FY2008 FY2007 FY2006 FY2005 FY2004 0 50
216 198 167 158 154 146 322 304 276

18 28
Cement stocks Performance on the bourses

During 1QFY2012, the large-cap cement stocks in our coverage universe underperformed the Sensex, which lost 3.1% during the quarter. India Cements was the biggest loser and fell by 25.7% during the quarter. Madras Cements also fell steeply by 20.2%. UltraTech too corrected substantially by 17.7%.
60 18 31 9 4 8 7
100
150
200
250
300
350
400
Year -end Capacity
Additions during the year
Exhibit 5: Sensex vs. cement stocks (1QFY2012)

Abs. Returns (%) ACC (11.7) (8.9) (25.7) (13.8) (20.2) (17.7) Relative to Sensex (%) (8.6) (5.8) (22.7) (10.7) (17.1) (14.6)
Higher coal prices to exert margin pressures

Indian cement manufacturers are highly dependent on imported coal due to the relatively low coal linkages within India. The cement industry gets ~45% of its requirement from domestic linkage coal, while the remaining is procured from global markets and domestic open markets/e-auction routes. Global spot coal prices were substantially higher on a yoy basis during the quarter. Average prices of the New Castle Mckloksey 6,700kc coal stood at ~US$120/tonne in 1QFY2012, as against US$100/tonne in 4QFY2011. However, on a sequential basis, prices declined by US$8/tonne. In February 2011, Coal India (CIL) selectively raised coal prices by significant 30% for sectors whose products command market-driven prices. The price hike included the cement sector, as cement prices are market driven. The impact of price hikes by CIL is expected to be felt by cement companies from this quarter. ACC has a substantial exposure to domestic coal linkages as it sources 60% of its requirement under this route. Ambuja Cements also has a high exposure of 40% to domestic coal linkages.
Ambuja India Cements JK Lakshmi Madras Cements UltraTech Source: BSE, Angel Research
Key developments
Industry: During the quarter, the Government of India ordered the Security Frauds Investigation Office (SFIO), Department of Corporate Affairs, to investigate the allegations of cartelisation amongst some of the cement manufacturers leading to unsubstantiated rise in prices. The investigation would cover the operations of the cement companies over the last 10 years. The allegations if proved would result in the imposition of severe penalties on cement manufacturers.The Competition Commission of India (CCI), formerly known as Monopolies and Restrictive Trade Practices Commission (MRTPC), which is yet another government agency, is also investigating the allegations of cartelisation. Cement manufacturers had come under the radar of government agencies even in the past. The MRTPC had carried similar investigations in 2007 as well into the activities of cement companies. Although there have been instances of cement manufacturers being penalised abroad, there are no such precedences in India.
26
Cement
1QFY2012 expectations
Top line to increase by 5.2%
We expect our cement universe to report 5.2% yoy growth in its top line, primarily on account of better realisations. However, dispatches are expected to decline by 3.3%. We expect India Cements to post the highest top-line growth of 16.5%. Operating margins to decline Operating margins of cement players are expected to decline on a yoy basis due to increased power and fuel costs. However, India Cements is expected to record a 579bp increase in margins due to substantially higher realisations. Exhibit 8: Margins to decline in 1QFY2012
Company (%)
3,856
Exhibit 6: Realisation per tonne

4,000 3,564
1QFY12E 21.4 23.9 16.1 18.0 23.2 22.5
1QFY11 29.5 31.5 10.3 17.4 28.1 27.4
chg bp (yoy) (804) (761) 579 59 (489) (490)
4QFY11 chg bp (qoq) 24.2 28.4 18.4 18.8 27.1 24.2 (276) (455) (227) (78) (396) (171)
ACC*
3,600
(`/ton)
Ambuja* India Cements
3,200
JK Lakshmi Madras Cements UltraTech^
2,800
2,400 1QFY11 1QFY12E
Source: Company, Angel Research; Note: *Year ending December; ^Performance is computed on a like-to-like basis
Exhibit 7: 1QFY2012E top-line performance

18.0 16.0 14.0 12.0 10.0
(%)

Going ahead, we expect cement demand to decelerate in 2QFY2012 due to the onset of monsoons. Also, we expect cement prices to witness further correction of `20-30/bag in July due to further drop in utilisation levels. However, we expect dispatches to pick up in a healthy way post the monsoons due to acceleration in construction activities with FY2012 being the last year of the Eleventh Plan period. We are Neutral on the sector as a whole as we believe the stocks are fairly priced. We maintain Buy on JK Lakshmi Cement due to its attractive valuations.
8.0 6.0 4.0 2.0 0.0 (2.0) ACC Ambuja Cem. India Cements JK Lakshmi Cem. Madras Cement Ultra Tech
Source: Angel Research; Note: UltraTechs perforamance is computed on a like-to-like basis

Company ACC^ Ambuja^ India Cem. J K Lakshmi Madras Cem. UltraTech# CMP (`) 949 134 71 44 81 934 Net Sales 1QFY12E 2,276 2,036 1,026 323 711 4,079 12.7 (0.6) 16.5 (0.2) 2.0 127.9 OPM (%) chg bp (804) (761) 579 59 (489) (128) 21.4 23.9 16.1 18.0 23.2 22.5 Profit Net Profit 1QFY12E 282 293 42 17 48 464 (21.5) (25.1) 68.6 2.7 (34.7) 91.2 (` EPS (`) % chg (21.5) (25.4) 68.6 2.7 (34.7) (13.1) FY11 59.6 8.2 2.2 4.8 8.9 51.2 15.0 1.9 1.4 1.4 2.0 16.9 (` EPS (`) FY12E 54.9 7.6 4.8 6.1 7.9 69.7 FY13E 62.2 8.4 8.8 7.2 10.5 80.4 FY11 15.9 16.3 32.0 9.1 9.2 18.2 P/E (x) FY12E 17.3 17.6 14.8 7.2 10.3 13.4 FY13E 15.3 16.0 8.1 6.1 7.7 11.6 arg Target (`) 122 57 % chg 1QFY12E % chg 1QFY12E
(` cr)
Reco. Neutral Reduce Neutral Buy Neutral Neutral
Source: Company, Angel Research; Note: Price as on June 30, 2011; ^December year ending; # Estimates for merged entity
Analyst - V Srinivasan
27
FMCG
For 1QFY2012, we expect our FMCG universe's revenue growth to be at ~19% due to 1) price hikes in most product categories by all companies, 2) higher consumer spending on non-food items and 3) no hike in central excise duty in Union Budget 20112012. We expect top-line growth to be a mix of value and volume, driven by better distribution reach, new product launches and significant uptick in advertising activities. However, we highlight that increasing competitive pressure in most categories (particularly home and personal care, noodles, energy drinks and juices) and high levels of food inflation are likely to keep operating margin under pressure. Prices of key raw materials are currently witnessing a downturn, and we expect the full effect of falling input prices to start to play by 2HFY2012.
Exhibit 2: Monsoon trend for June

40 35 3
(No of Subdivisions)
40 30 8 11 10 23 11 17 4 4 25-Jun-08 24-Jun-09 23-Jun-10 22-Jun-11 9 9 20 9 10 0 (10) (20) 11 17 6 21-Jun-06

Excess Rainfall
30 25 20 15 10 5 20-Jun-07 11 8 17
(%)
(30) (40) (50) (60) (70)
Normal Rainfall
Defecient/ Scanty
Deviation from Normal rainfall (RHS)
Source: IMD; Angel Research
Input cost pressure still hovers

While crude is considerably high for CY2011 (YTD), during the quarter it witnessed a steep fall of ~11%. Also, crude-based derivatives are witnessing a dip in prices qoq, though they are still high on a yoy basis. Agri commodities have reflected a mixed trend during the quarter prices of sugar and wheat corrected by 2-4% qoq, while barley prices increased by ~21%. Milk liquid prices witnessed a sharp surge, up ~15% qoq, while coffee prices declined considerably; tea prices have also taken a u-turn during the quarter, though they are still very high on a yoy basis. Except palm, copra and rice bran, all other edible oils witnessed a surge in prices qoq as well as yoy.
Exhibit 1: 1QFY2012E revenue growth (yoy, %)

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 Dabur GCPL Nestle GSKCHL Marico Asian Paints Colgate HUL ITC
33.7 23.7 18.2 17.6 16.5 16.2 15.1 13.9 13.9
Source: Company, Angel Research; Note: Nestle, GSKCHL figures - 2QCY2011
Exhibit 3: Key input prices in 1QFY2012

(` CMP (`) Wheat (`/quintal) Barley (`/quintal) Sugar (`/ quintal) Tea (`/kg) Coffee (`/100kg) Cocoa (US$/MT) Milk Liquid (`/ltr) Palm Oil (MYR/tonne) Copra (`/quintal) Safflower (`/ quintal) Soyabean Oil (`/10kg) Groundnut Oil (`/MT) Coconut Oil (`/quintal) Rice Bran Oil (`/MT) Caustic Soda (`/kg) Soda Ash (`/kg) 1,177 1,300 2,736 205 4,625 3,364 31 3,100 6,400 2,700 622 93,500 10,192 5,100 1,242 988 yoy (%) (3) 19 5 46 70 (4) 24 26 80 23 46 22 85 (20) 44 15 qoq (%) (2) 21 (4) (1) (6) (10) 15 (7) (1) 14 5 23 5 2 0 2
Monsoons to play a decisive role towards growth

The Indian Meteorological Department (IMD) has forecast just below-normal monsoons for this year (last year India witnessed 102% of LPA against the forecasted 98%). Data for June 2011 for the country as a whole shows 11% plus departure from the normal. Apart from the normal monsoon forecast, rise in minimum support prices (MSPs) for kharif crops of 2011-12 season (6-20%) across the board will bring cheer to the FMCG sector as a whole, as it will help cool down food inflation (currently <8%), moderate input costs and increase rural income. Good monsoons will positively affect agri-dependent input cost companies such as Marico (copra is the major raw material), Nestle (milk and wheat) and GSK Consumer (milk), as monsoons will lead to a decline in raw-material costs. Companies such as HUL, Colgate, GCPL and ITC will benefit from increased demand, as good monsoons are likely to cool food inflation, thereby boosting buying power, especially among low/middle income groups, which spend ~60% of their earnings on groceries.
Source: Bloomberg, Angel Research; Note: Prices as on June 28, 2011
However, agri commodities are expected to show a benign trend in case of normal monsoons. Prices of crude-based inputs tend to follow the decrease in crude oil prices with a lag. Hence, despite the currently prevailing benign input cost scenario, prices of crude-linked inputs are expected to decrease going ahead.
28
FMCG
Acquisitions continue in this quarter too
During 1QFY2012, Godrej Consumer (GCPL) continued its global shopping spree and entered into an agreement for the right to acquire 51% stake in Darling Group Holdings (DGH), a company that operates in 14 countries in the sub-Saharan African region. Darling Group is one of the largest players in the hair care category in Africa with brands such as Darling and Amigos, both market leaders in countries in which they are present. Darling Group manufactures and distributes full range of hair extension products in Africa. The acquisition will take place in three phases. In Phase I, GCPL will acquire operations of countries that contribute ~45% to Darling Group's revenue. The phase will be concluded in the next two months. In Phase II, which will be concluded in nearly 12 months from then, GCPL will be acquiring ~70% of the group's business. In Phase III, which will be after another 12 months, GCPL will have the rights to own 100% of the business through a combination of call and put options. Going forward, GCPL may acquire the remaining 49% equity stake in DGH in a period of 3-5 years, through a combination of put and call options. All the acquisitions are in line with the company's core strategy of 3x3 (focus on the three markets of Asia, Africa and Latin America on companies having a presence in the three categories of personal wash, hair care and home care). Similar to most of its past acquisitions, the current acquisition is also likely to add value to GCPL's shareholders. Dabur India acquired 30 Plus, an OTC energizer brand from Ajanta Pharma during the quarter. The acquisition of 30-Plus is part of the company's aggressive strategy to build capability in the OTC healthcare business. The quarter also witnessed a deal in which Jyothy Laboratories snapped a majority stake in Henkel India. The deal includes Henkel's entire portfolio, including Henko and Chek detergents, Pril dish cleaners and Fa deodorant, and rights to the multinational's future launches. Amongst the above-mentioned deals, rumours regarding P&G, Unilever and Colgate also surfaced. India; and Britannia launched Tiger Krunch Chocochips. Dabur India launched Hajmola Mint Masti and a hand sanitizer. Marico's Saffola Arise launched premium basmati rice under the brand Basmati Gold. According to the company, the rice is 100% natural and its pure goodness would nurture the health of consumers. Kurkure launched three new products under the Ingredients of India range. The variants include Mumbai Chatpata Usal, Bengali Jhaal and South Spice Mix. ITC's Fiama Di Wills forayed into the men's grooming segment. Cadbury-Kraft Foods introduced refreshing Tang for children. Perfetti Van Melle India, market leader in the Indian confectionery industry with brands such as Alpenliebe, Center Fresh, Mentos and Happydent, announced its entry into the salty snacks business with the launch of STOP NOT range of snacks. Del Monte launched Four Seasons Fusion drink. Mother Dairy introduced Paan and Rose flavoured kulfis. GRB Dairy Foods launched ice cream, ready-to-cook food, spice blends and sweets mix.
Outperformance across the sector

1QFY2012 witnessed a strong rally by all FMCG companies (all stocks in our universe outperformed the Sensex) with the BSE FMCG index outperforming the Sensex by 15.6% during the quarter. The quarter under review witnessed lot of instability and volatility both at the global and national level. The sector being defensive in nature usually does well in conditions like these. Apart from not so favouring macroeconomic scenario, which led to the rally in FMCG stocks, rumours regarding deals between global and local FMCG giants further fuelled the rally in some stocks. Amongst heavyweights, HUL delivered strong returns on the brink of strong earnings growth and cooling off in palm oil prices, leading to better margins. In mid caps, while Colgate registered significant outperformance, Britannia gained on the back of impressive set of results and margin expansion.
Exhibit 4: Relative outperformance to the Sensex (%)

Sensex BSE FMCG Nestle Marico ITC HUL GSKCH GCPL Dabur Colgate Britannia Asian Paints
(5.0)
(3.1) 12.5 11.6 12.3 11.6 20.4 9.6 17.9 18.7 20.4 28.9 25.9
10.0 15.0 20.0 25.0 30.0 35.0 5.0
Lacklustre quarter in terms of new product launches

During the quarter, companies under our coverage reported fewer product launches as compared to the previous quarters. Colgate launched Colgate Sensitive Pro-Relief Toothpaste in
29
FMCG
Growth across the board
For 1QFY2012, we expect our FMCG universe's revenue growth to be at ~19% (mix of value and volume) and earnings growth at ~18%. We expect margin expansion for HUL, ITC, Britannia, Nestle, Dabur and GCPL; whereas for Asian Paints, Colgate, GSK Consumer and Marico, we expect margin contraction. Sector leader, HUL is expected to report 14% top-line growth, despite high competitive intensity in the S&D segment. Earnings are expected to grow by robust 18% yoy, primarily due to operating margin expansion. ITC is expected to witness strong volume growth, as there was no hike in excise duty on cigarettes during Union Budget 2011-12. We expect ITC to register robust 18.2% yoy top-line growth and 22% yoy earnings growth, aided by recent price hikes in cigarettes, strong performance of non-cigarette FMCG and rebound in its hotels business. Britannia, Colgate, Dabur, GCPL, GSK Consumer, Marico and Nestle are expected to post impressive top-line growth.
Valuations at peak, Recommend Neutral

Most FMCG companies have witnessed a sharp rally during 1QFY2012 and are currently trading at peak valuations. Moreover, we highlight that FMCG companies have significantly outperformed the Sensex, widening the premium valuation gap. While the long-term consumption story for the FMCG industry remains intact due to rising consumer base and expanding rural consumption, any further re-rating from current valuations seems less likely given the near-term concerns over 1) strong competitive intensity and 2) any spike in key raw-material prices. sector, Hence, we maintain our Neutral stance on the FMCG sector, re-ratings as we believe earnings upgrades and P/E re-ratings are likely to take a breather from current levels. ITC Amongst heavyweights, post the significant rally in ITC and HUL, HUL, we maintain our Neutral view on the stocks and wait for better entry opportunities. In mid caps, we recommend Reduce Consumer, on GSK Consumer, Marico, Colgate and Nestle (reported a significant rally during the quarter and are trading at a 14-43% premium to historical valuations) and recommend GCPL, Paints Neutral on GCPL, Britannia and Asian Paints and wait for better entry opportunities.
OPM to be a mixed bag

In 4QFY2011, FMCG companies saw robust top-line growth despite the inflationary environment, but gross margins took a hit due to very high raw-material costs. On the operating front, companies clipped the slide in OPM by reduction in ad spends and other expenditure. In 1QFY2012, though we witnessed a downtrend in key raw-material prices, we expect mixed performance on the operating front. We expect Asian Paints, Colgate, GSK Consumer and Marico to witness operating margin contraction. While Britannia, Dabur, GCPL, HUL, ITC and Nestle are expected to post operating margin expansion.

Company CMP (`) Asian Paints^ 3,181 Britannia Colgate GCPL^ GSKCH* HUL ITC Marico^ Nestle* 478 981 431 2,452 343 202 156 4,095 Net Sales 1QFY12E 2,127 1,092 603 1,185 860 664 5,462 5,692 909 1,725 16.2 19.6 13.9 16.5 33.7 23.7 13.9 18.2 15.1 17.6 OPM (%) chg bp (67) 89 (152) 154 203 (14) 49 82 (15) 91 18.3 5.3 24.8 16.8 20.6 16.5 13.0 34.2 13.2 21.0 Net Profit Profit 1QFY12E 252.6 45.2 128.0 109.7 127.9 85.3 609.0 1,301.1 78.4 242.7 13.7 37.7 4.9 26.3 9.9 18.8 18.3 21.6 6.4 22.9 EPS (`) (` % chg 13.7 37.7 4.9 26.3 9.9 18.8 18.3 21.6 6.4 22.9 FY11 87.9 12.2 29.6 3.3 14.6 71.2 9.7 6.4 3.9 84.9 26.3 3.8 9.4 1.3 4.0 20.3 2.8 3.4 1.3 25.2 EPS (`) (` FY12E 102.5 15.4 33.7 4.2 17.8 82.7 11.7 7.5 4.9 101.0 FY13E 126.3 22.5 38.8 5.0 20.3 98.3 13.3 8.9 6.1 120.1 FY11 36.2 39.3 33.1 34.9 29.4 34.4 35.3 31.4 39.6 48.2 P/E (x) FY12E 31.0 31.0 29.1 26.9 24.2 29.7 29.4 27.0 31.5 40.6 FY13E 25.2 21.2 25.3 22.9 21.2 24.9 25.7 22.8 25.5 34.1 Target arg (`) 874 2,163 147 3,483 % chg 1QFY12E % chg 1QFY12E
(` cr) `
Reco. Neutral Neutral Reduce Neutral Neutral Reduce Neutral Neutral Reduce Reduce
Dabur India^ 114
Source: Company, Angel Research; Note: Price as on June 30, 2011; * December year ending; ^Consolidated
.V.S Analyst: Sreekanth P .S .V

30
Infrastructure Eyeing a sea of red

For 1QFY2012, we expect our coverage universe to post top-line growth on account of a gradual pick-up in execution. (` `7.4cr (`28.3cr) due to its escalating interest cost and subdued top-line top-line growth.
Exhibit 1: Revenue trend (1QFY2012E)

12,000 10,000 8,000 6,000 4,000 2,000 10.0 11.5 10.0 11.6 26.0 18.0 20.0 7.6 6.3 10.0 49.7 54.0 60.0 50.0 40.0 30.0
IRB Infra (CMP/TP: `173/`191) (Rating: Accumulate)

IRB is expected to continue its robust performance on a quarterly basis. We expect 61.6% and 14.5% yoy growth in C&EPC (`533.5cr) and BOT (`233.1cr) revenue, respectively, leading to an overall top-line (`766.5cr) growth of 49.7% for the quarter. The C&EPC segment is expected to get a boost from Surat-Dahisar and Kolhapur road projects, which are nearing completion. On the BOT front, Mumbai-Pune expressway has witnessed a toll hike of 18% effective from April 2011, which will drive growth for the quarter. We expect EBITDA margin at 42.3%, registering a yoy decline of 250bp, mainly on account of change in revenue mix and contraction of C&EPC margins as compared to last year's blockbuster C&EPC margin of 28.8%. We project net profit before tax and after tax (and minority 117.8cr, respectively, interest) at `168.1cr and `117.8cr, respectively, factoring a quarter. tax rate of 27.9% for the quarter.
IRB Infra
MPL
JAL
NCC
SEL
Top -line (` cr, LHS)
yoy change (%, RHS)
However, on the earnings front, we expect a decline for most companies under our coverage universe, primarily on account of higher interest costs. For 1QFY2012, outperformers from the earnings point of view are JAL and SEL.
Exhibit 2: Earnings trend (1QFY2012E)

800 600 0.2 400 (43.3) (57.1) 200 0
L&T IRB Infra MPL JAL NCC SEL Simplex In. CCCL HCC IVRCL
Simplex In.
CCCL
HCC
IVRCL
L&T
88.4 18.7 1.2 (12.7) (38.9) (10.1)
(73.8)
100.0 80.0 60.0 40.0 20.0 (20.0) (40.0) (60.0) (80.0) (100.0)
IVRCL (CMP/TP: `70/`100) (Rating: Buy)

We expect IVRCL to post moderate revenue growth of 10.0% yoy for 1QFY2012 to `1,217cr. On the EBITDA margin front, we expect a marginal dip of 20bp at 8.9% (9.1%). On the earnings front, we expect a decline of whopping 43.3% for the 15.9cr, quarter to `15.9cr, primarily on account of higher interest cost, quarter. which is expected to rise by ~50% yoy for the quarter.
Earning (` cr, LHS)
yoy change (%, RHS)
JAL (CMP/TP: `81/`108) (Rating: Buy)

We expect Jaiprakash Associates (JAL) to post modest top-line growth of 11.6% yoy to `3,588cr (`3,215cr) for the quarter. We expect marginal growth of 2.0% in C&EPC revenue to `1,466cr. For the cement segment, we expect JAL to post revenue of `1,487cr volume of 4.2mt with realisations of `3,622/tonne for the quarter. The real estate sector is expected to continue its robust performance and post healthy top-line growth of 60% yoy to `585.8cr. Overall, we expect JAL to post EBITDA margin of 24.0%, a jump of 274bp yoy, owing to increased contribution from the high-margin real estate segment. The bottom line is expected to come in at `199.3cr, 199.3cr, registering a yoy jump of 88.4% (adjusting for extraordinary quarter. post tax gain of `410cr in 1QFY2011) for the quarter.
CCCL (CMP/TP: `31/) (Rating: Neutral)
Consolidated Construction Consortium (CCCL) is expected to post poor numbers for 1QFY2012. We expect mere 10.0% yoy top-line growth, given the slow-moving infra and commercial orders (41% of the order book). On the EBITDA front, we expect the company to register a dip of 237bp to 5.9% (8.3%), owing to low-margin orders (`1,150cr) in the final stages of completion and fixed price contracts in which rise in material prices is above the companys estimates, leading to margin pressure. Against this backdrop, the bottom line for the quarter is expected to (`17.9cr). decline by 57.1% yoy to `7.7cr (`17.9cr)
HCC (CMP/TP: `32/) (Rating: Neutral)

For Hindustan Construction Company (HCC), we project modest 11.5% yoy growth in revenue for 1QFY2012 to `1,110cr (`995.4cr), which would be led by execution of road projects. We project flat EBITDA margin at 12.7%. However, on the However, bottom-line front, we expect a steep decline of 73.8% to mere
L&T (CMP/TP: `1,823/`2,030) (Rating: Accumulate)

We expect Larsen and Toubro (L&T) to record revenue of `9,938cr, a robust jump of 26.0% yoy, for 1QFY2012. This growth is on account of its large order book (~`1.4trillion) and low base. On the EBITDA front, we expect margin to be lower at 11.6% as against 12.8% in 1QFY2011, in line with management's commentary, to factor in higher commodity prices
31
Infrastructure
during the quarter. We project net profit at `674cr, an increase 674cr, yoy, of mere 1.2% yoy, mainly on account of the expected margin compression. We believe the company would end the quarter with a total order inflow of `16,000cr (`15,626cr) for the quarter, which is good, even though it is lower than its yearly guidance of 15-20%, considering the overall gloomy macro environment on the order inflow front for the sector.
Key developments on the road front

Awarding activity picks up and is expected to continue: NHAI has begun FY2012 on an aggressive note by awarding projects of ~481kms (~10% of the total orders awarded in FY2011) in April 2011. This is in line with the aggressive targets set for the year 1) BOT toll basis: Projects worth ~7,994kms; and BOT basis 2) Annuity/EPC basis: Projects worth ~1,000kms. Further, there has been an increase in the targets for NHAI with the intervention of PMO. Against this background, NHAI has further added 20 NH projects connecting 2,071kms. These additional projects will require investments worth `16,000cr. We believe these targets are aggressive considering NHAI's past performance and its capacity constraints. Policy changes come to the fore: NHAI has recently introduced an important change by which there would be annual pre-qualification for bidders, as against each project basis, which we believe is not only logical and economical but would also lead to shortening of the time cycle (by 2-3 months) in awarding projects. Further, it plans to introduce e-tendering and e-toll collection in the near future. We believe these changes are taking the sector forward in the right direction and would lead to enhanced participation and transparency.
MPL (CMP/TP: `88/`117) (Rating: Buy)

Madhucon projects (MPL) is expected to post decent yoy top-line growth of 18.0% to `480.7cr for 1QFY2012, which would be on the back of its strong order book. We expect EBITDA margin to be under slight pressure and register a yoy dip of 55bp to 10.1%. Earnings are expected to be under pressure on account of higher interest cost for the quarter and are 11.7cr. expected to post a decline of 12.7% yoy to `11.7cr.
NCC (CMP/TP: `81/`109) (Rating: Buy)

We expect Nagarjuna Construction (NCC) to post poor numbers for 1QFY2012. On the top-line front, NCC is expected to post modest growth of 7.6% yoy to `1,169.5cr. EBITDA margin is expected to be flat at ~9.7%. However, a shocker should come However, on the earnings front, as we expect the company to post a quarter. decline of 38.9% yoy/29.0% qoq to `25.3cr for the quarter. This would be primarily on account of burgeoning interest cost (jump of ~96.3% yoy), led by elongated working capital cycle. The financial closure status for the 1,320MW power plant, which was guided by the company to be achieved in March, would be another important development for the quarter.
Outlook remains bleak

Era of scorching debt levels: There has been an increase in debt levels of most companies (except L&T and SEL) over the last three years. This increase in debt levels above comfortable limits is mainly on account of increased working capital requirement and equity infusion in subsidiaries to support revenue growth for the parent construction arm. The standout performers among these companies are L&T and SEL, with net D/E levels at comfortable levels in spite of building an impressive asset portfolio.
SEL (CMP/TP: `134/`161) (Rating: Buy)

We expect Sadbhav Engineering (SEL) to post robust 54.0% yoy growth on the top-line front, owing to pick-up in the execution of captive road BOT projects. EBITDA margin is expected to witness a fall of 220bp yoy to 9.7% (11.9%) on account of higher sub-contracting charges for the quarter. On the earnings front, despite lower margins, the company is expected to post (` decent growth of 18.7% yoy to `30.3cr (`25.5cr).
Exhibit 3: Debt levels have surged over the last 3 years

2.5
Net Debt/Equity (x)
Simplex (CMP/TP: `268/`404) (Rating: Buy)

For Simplex, we project flat top-line growth of 6.3% yoy to `1,251cr for 1QFY2012. This subdued performance would be mainly on account of slowdown faced by the company on the international front. It should be noted that during the last quarter order awarding activity had picked up on the international front, but we believe it would take time for the same to get converted into revenue. We expect EBITDA margin to remain stable at 10.2%, in line with management's guidance. However, the However, bottom line is expected to be under pressure due to increased interest cost (yoy expected jump of ~41%), resulting in a yoy decline of around 10.1% to `32.5cr for the quarter quarter.
2.0 1.5 1.0 0.5 L&T Sadbhav IRB Infra MPL JAL NCC Simplex In. CCCL HCC IVRCL
FY08
FY09
FY10
FY11
Source: Company, Angel Research; Note: Consolidated numbers for CCCL, IRB and Simplex Infra
32
Infrastructure
With high interest rates: The RBI, on June 16, 2011, had increased the repo rate by 25bp (as expected) from 7.25% to 7.50%, with a similar increase in the reverse repo rate from 6.25% to 6.50%. The RBI has raised policy rates for the tenth time in the last 15 months. This move, aiming to kill inflation, would come at the cost of growth and is very well acknowledged by the RBI. We believe this was not the last round of hikes, given that inflation is expected to remain high (with high global commodity prices and food prices). However, we believe that interest rates are nearing peak levels and 2HFY2012 is expected to better off on the interest and inflation fronts. Order awarding takes a backseat: There has been a considerable slowdown in order awarding activity across sectors on account of various factors (such as environment clearance, lack of stable leadership in various PSUs, state elections and land issues). The only silver lining has been pick-up of awarding activity in the last couple of months from NHAI's end, although it is leading to intense competition and creating doubts over the profitability of these projects. Earnings to remain under pressure: For FY2012, we expect a moderate show on the top-line front, while margins will continue to remain under pressure due to high commodity prices and inflationary pressures. Against this background, spiraling interest cost will lead to flat/lower performance on the earnings front for FY2012 despite the benefit of low base effect of FY2011.
Exhibit 4: HCC, MPL, Simplex and JAL most vulnerable to increased interest rates
Company CCCL HCC IRB Infra IVRCL JAL L&T MPL NCC SEL Simplex Infra
Chg. Chg. in earnings for FY12 (%) int. inc. further100bp if int. rate inc. by further100bp (8.0) (76.8) (10.5) (7.9) (13.7) (2.1) (21.1) (13.6) (3.2) (14.1)
Valuations attractive post deep correction

On account of cheaper valuations post the correction in construction stocks and taking into account FY2013E earnings growth outlook, we remain positive on companies having 1) less dependence on capital markets for raising equity for funding projects (L&T and SEL); 2) strong order book position (IVRCL and SEL); 3) superior return rations (L&T and SEL); 4) comfortable leverage position (L&T, NCC and SEL); and 5) inexpensive valuations (IVRCL and NCC). We maintain L&T, L&T, SEL sector. IVRCL and SEL as our top picks in the sector. We have valued construction companies on an SOTP basis. For the core construction business, we have assigned earnings multiple in the range of 8-11x (excluding L&T), based on certain quantitative and qualitative factors. The listed/unlisted subsidiaries of construction companies are valued at 20% discount to their CMP/1-1.5x book value.
(` cr) `

Company CCCL HCC IRB Infra^ IVRCL JAL# L&T MPL NCC SEL Simplex In. CMP (`) 31 32 173 70 81 1,823 88 81 134 268 Net Sales 1QFY12E 559 1,110 767 1,217 3,588 9,938 481 1,170 655.0 1,251 10.0 11.5 49.7 10.0 11.6 26.0 18.0 7.6 54.0 6.3 OPM (%) chg bp (237) 7 (250) (20) 274 (117) (55) (5) (221) 5 5.9 12.7 42.3 8.9 24.0 11.6 10.1 9.7 9.7 10.2 Profit Net Profit 1QFY12E 7.7 7.4 117.8 15.9 199.3 674.0 11.7 25.3 30.3 32.5 (57.1) (73.8) 0.2 (43.3) 88.4 1.2 (12.7) (38.9) 18.7 (10.1) (` EPS (`) % chg (57.1) (73.8) 0.2 (43.3) 88.4 1.0 (12.7) (38.9) 18.7 (10.2) 0.4 0.1 3.5 0.6 0.9 11.0 1.6 1.0 2.0 6.6 (` EPS (`) FY11 2.5 1.2 13.6 5.9 3.1 58.2 6.9 6.2 8.0 25.1 FY12E 2.6 0.8 11.0 6.2 5.1 68.3 7.5 5.8 8.4 24.1 FY13E 4.2 1.3 14.5 8.2 6.8 82.5 8.7 7.6 9.7 36.7 FY11 12.2 1.8 6.7 7.3 26.3 23.3 5.9 7.7 7.6 10.7 *Adj. P/E (x) FY12E 12.1 2.5 8.3 6.9 15.8 19.8 5.5 8.3 7.2 11.1 FY13E 7.3 1.5 6.3 5.3 11.9 16.4 4.7 6.3 6.3 7.3 arg Target (`) 191 100 108 2,030 117 109 161 404 % chg 1QFY12E % chg 1QFY12E
Reco. Neutral Neutral Accum. Buy Buy Accum. Buy Buy Buy Buy
Source: Company, Angel Research; Note: Price as on June 30, 2011, Target prices are based on SOTP methodology; ^Consolidated numbers; #1QFY2011 numbers for JAL have been adjusted for the etraordinary gain of `410cr (net of tax) *(1) For CCCL, there are no major investments in subsidiary;(2) For HCC, value of Lavasa and Road BOT totals to `29.9/share; (3) For IRB, investments in BOT and real estate total to `81.1/share; (4) For IVRCL, value of IVRCL Assets and BOT projects totals to`26.7/share; (5) For JAL, no investments have been adjusted;(6) For L&T, investments in subsidiaries amount to `464/share. (7) For Madhucon Projects, Road BOT and other investments total to `47.0/share; (8) For Nagarjuna, value of land bank, BOT projects and investments totals to `33.1/share;(9) For SEL, its investments in BOT projects total to `73.5/share; (10) For Simplex Infra, there are no major investments in subsidiaries
Kanani Analyst: Shailesh Kanani / Nitin Arora

33
Metals
In our view, the steel space will continue to face challenges amid near-term negatives like seasonal fall in demand and high raw-material costs. Globally, steel prices are expected to remain under pressure. For 2QFY2012, coking coal and iron ore contracts are expected to settle close to their peak levels of 1QFY2012 levels. Base metal prices are also likely to remain under pressure in the near term on demand concerns due to slowdown in growth, led by monetary tightening in China and escalating debt crisis in Europe. In 1QFY2012, the BSE Metal index underperformed the Sensex by 3.7% and fell by 6.8% in absolute terms. SAIL underperformed by 15.9% on reports of the FPO being delayed, while JSW Steel remained flat relative to the Sensex. However, Tata Steel outperformed by 1.2%. Relative to the Sensex, Nalco fell by 10.4%, led by concerns on coal supplies. Hindalco underperformed by 10.2% due to delay in expansion projects. However, Sterlite remained flat, while HZL outperformed by 2.1%. Coal India continued to outperform, gaining 16.1%, while Sesa Goa was flat. However, NMDC and MOIL underperformed by 7.0% and 12.2%, respectively. Tata Steel sells its stake in Riversdale Mining: During the quarter, Tata Steel sold its 26.3% stake in Riversdale Mining to Rio Tinto for A$1,060mn. However, the company will retain its current holding of 35.0% in Mozambique coking coal project, which will partially integrate its European operations. We believe the sale should aid in part-funding the company's ongoing expansion plans. Vedanta MoEF clears allegation on Vedanta Aluminium: After putting a ban on expansion plans at Vedanta Aluminium at Lanjigarh, Orissa, in 2010, the Ministry of Environment and Forests (MoEF) has cleared anti-pollution measures taken by the company following allegations of a crack in red mud pond, which resulted in leakage of red mud. Posco starts land acquisition process: After a long delay of five years, MoEF finally gave environment and forest clearance to Posco in May 2011 to build the US$12bn steel plant in Orissa with a series of conditions. Posco has started the land acquisition process but is facing stiff resistance from villagers. Power cuts in China: China is facing severe power crisis since 2004 due to low hydropower production, poor coal transportation and inadequate power transmission systems. While the government has raised power tariffs in a bid to improve the situation, we believe the situation could worsen if coal prices continue to rise. In the near term, the increase in power cost has supported aluminium prices at higher levels.
Exhibit 1: Sensex vs. metal stocks

Metal Majors Sensex BSE Metal SAIL Tata Steel JSW Steel Hindalco Nalco Sterlite Ind Hindustan Zinc NMDC Sesa Goa Coal India MOIL Source: Bloomberg, Angel Research Abs. Returns (%) (3.1) (6.8) (19.0) (1.9) (3.7) (13.3) (13.4) (3.1) (0.9) (10.1) (2.8) 13.1 (15.3) (3.7) (15.9) 1.2 (0.6) (10.2) (10.4) (0.0) 2.1 (7.0) 0.2 16.1 (12.2) Relative to Sensex (%)
Ferrous sector
During the quarter, steel prices in India remained flat sequentially with a negative bias due to moderating growth, led by interest rate hikes. In 1QFY2012, average HRC prices in India were flat qoq at ~`39,000/tonne, though up by 6.1% yoy. World average HRC prices increased by 1.9% qoq to US$809/tonne (up 11.7% yoy), while average Chinese export prices were flat qoq at US$714/tonne, though up by 11.5% yoy. JSW Steel and Essar Steel hiked flat product prices by `600-1000/tonne in June (first time in FY2012), citing higher raw-material prices, whereas SAIL kept its prices unchanged at May levels.
Key events
Tata Steel closes Scunthrope plant in Europe: During the quarter, Tata Steel announced to close its Scunthrope plant (long products business) in Europe as the unit has been incurring losses for the last two years due to weak demand from the construction segment. As per Tata Steel, demand for structural steel in UK is only two-third of 2007 level and is not expected to fully recover within the next few years. The proposal is expected to cut 1,200 jobs at Scunthrope and 300 jobs at Teesside sites. We believe the closure will help the company in reducing its operating costs.
Exhibit 2: Chinese HRC prices flat qoq

1,200 1,000
(US $/tonne)
800 600 400 200 0 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 3QFY11 1QFY12
World HRC prices
China export HRC prices (FOB)
Source: Bloomberg, Angel Research Refer to important Disclosures at the end of the report
34
Metals
Exhibit 3: Domestic HRC prices flat qoq
45,000 40,000 35,000
(mn tonnes)
Exhibit 5: Indian iron ore exports to China down

16 14 12 10 8 6 4 2 0
30,000
(`/tonne)
25,000 20,000 15,000 10,000 5,000 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Source: Crisil Research, Angel Research
Raw-material Raw-material prices trading near peak levels: Following the floods in Australia in January 2011, which led to significant supply shortages resulting in substantially higher coking coal prices, 2QFY2012 benchmark coking coal contracts are also settled at higher levels of US$315/tonne (US$330/tonne for 1QFY2012). Additionally, if the workers' strike at BHP Billiton continues, significant supply pressures in the near term may be witnessed. However, coking coal prices are expected to moderate in 2HFY2012, but the pace would depend on how operations in Australia normalise and normalcy in supply is restored. In case of iron ore negotiations, media reports suggest that 2QFY2012 contracts are likely to settle at 1QFY2012 levels. During the quarter, average spot iron ore prices for 63% Fe grade (CFR, China) were flat qoq at US$181/tonne (up 9.2% yoy).
Outlook
Raw-material Raw-material cost pressure to persist: We expect raw-material prices to remain volatile as a result of floods in Australia and low supplies of iron ore from India. However, softer demand from China is expected to keep further increases in iron ore price muted. Moreover, coking coal prices may decline as the flood situation in Australia normalises and normalcy in supply is restored. According to World Steel, global crude steel production for April and May was higher by 5.0% and 4.2% yoy to 127mn tonnes and 130mn tonnes, respectively. Global capacity utilisation levels are estimated to have remained flat at 81% in 1QFY2012. Given that steel production and raw-material prices are at elevated levels, we expect steel prices to remain under pressure, thereby leading to margin pressure in the near term. 1QFY2012 expectations: For 1QFY2012, on a yoy basis, we expect sales volume to increase, aided by higher realisations. Thus, we expect the top line of all the companies under our coverage to grow by 4-35% yoy. However, due to relatively higher raw-material costs, margins of steel companies are likely to contract by 300-370bp yoy. For Sesa Goa, iron ore sales volume is likely to be negatively affected and, thus, we expect flat top-line growth on a yoy basis. We remain positive on Tata Steel and JSW Steel.
Exhibit 4: Iron ore prices and inventory in China

210 180 150
(US $/tonne)
105 90 75 60 45 30 15 0
(mn tonnes)
120 90 60 30 0 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Iron ore inventory (RHS) Indian Iron ore 63% Fe, CFR China (LHS)
Karnataka Iron ore exports from Karnataka yet to resume: Following an order of the Supreme Court on April 5, 2011, to lift the export ban on iron ore, the Karnataka government is likely to resume iron ore exports by July 2011, as the government is working on a mechanism (infrastructure such as checkpoints and satellite tracking systems) to check illegal mining. As per Federation of Indian Mineral Industries, iron ore exports from India have declined by ~18% to 85.4mn tonnes during April 2010-February 2011 on account of export ban in Karnataka and increased export duty. In May 2011, Indian iron ore exports to China fell by 35% yoy to 6.8mn tonnes. Total iron ore exports to China for April-May 2011 fell by 32.4% yoy to 15.8mn tonnes.
Non-ferrous sector
During the quarter, base metal prices witnessed a mixed trend sequentially as concerns over the slowdown in economic growth and Greek default intensified. The sector also suffered due to hike in interest rates and bank reserve requirements by China. On a sequential basis, average aluminium and alumina prices on LME increased by 4-5%, while copper, zinc and lead prices declined by 2-6%. On a yoy basis, copper, aluminium, alumina, zinc and lead increased by 11-31% with copper and lead gaining 30.5% and 31.0%, respectively.
35
Metals
Exhibit 6: Average base metal prices (US$/tonne)
1QFY12 Copper Aluminium Alumina Zinc Lead 9,147 2,600 408 2,251 2,548 1QFY11 7,011 2,092 335 2,020 1,945 yoy % 30.5 24.3 21.8 11.4 31.0 4QFY11 9,633 2,506 388 2,394 2,602 qoq % (5.0) 3.8 5.1 (6.0) (2.1)
Outlook
Though base metal prices are likely to remain under pressure in the near term due to concerns on growth, long-term demand-supply fundamentals remain intact for some metals. The copper market is struggling with supply constraints, while the downside for aluminium prices is capped due to high energy cost. However, zinc and lead prices are unlikely to see any major upside as the market remains in surplus. For 1QFY2012, we expect non-ferrous companies to register positive top-line growth of 18-72%, owing to a surge in LME prices. HZL and Sterlite are expected to report yoy margin expansion of 599bp and 350bp, respectively. However, Nalco and Hindalco are expected to witness a yoy margin contraction of 488bp and 136bp, respectively, on account of higher operating cost. We remain positive on Sterlite and Hindalco.
On a yoy basis, inventory levels at LME warehouse for copper and aluminium increased by 3.1% and 1.6%, respectively. Inventory levels for zinc and lead were higher by 40.7% and 69.8%, respectively. However, on YTD basis, copper, aluminium, zinc and lead inventory increased by 23.2%, 5.2%, 23.1% and 53.8%, respectively.
Exhibit 7: Inventory chart

300 250 200 150 100 50 0 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Zinc
Mar-11
Lead
Jun-11
Copper
Aluminium

Company Coal India Hindalco* Hind. Zinc JSW Steel* MOIL Nalco NMDC SAIL Sesa Goa* Sterlite Inds* Tata Steel* CMP (`) 392 181 136 882 334 83 255 138 282 168 609 Net Sales 1QFY12E 15,078 19,476 2,941 6,448 227 1,698 3,397 9,405 2,378 10,200 34,668 26.3 17.7 50.8 34.9 (35.4) 31.5 34.9 4.2 (1.5) 72.2 27.5 OPM (%) chg bp 887 (136) 599 (315) (1,333) (488) (1,820) (333) (249) 350 (367) 34.3 9.9 58.4 20.6 57.7 25.6 63.3 17.1 58.0 28.0 12.6 Profit Net Profit 1QFY12E 3,943 819 1,532 489 104 268 1,717 1,029 1,075 1,700 1,858 56.1 7.8 71.9 47.3 (43.0) (5.6) 14.2 (12.5) (17.4) 68.6 (0.4) (` EPS (`) % chg 56.1 7.8 71.9 47.3 (43.0) (5.6) 14.2 (12.5) (17.4) 68.6 (0.4) 6.2 4.3 3.6 24.2 6.2 1.0 4.3 2.5 12.1 5.1 19.4 (` EPS (`) FY11 17.2 12.8 11.6 78.6 35.0 4.1 16.4 11.8 47.5 14.3 92.9 FY12E 21.5 16.0 14.2 92.1 32.8 5.1 18.5 12.9 43.4 17.3 73.2 FY13E 22.4 25.5 15.3 115.6 34.9 5.8 21.3 16.5 47.4 21.7 91.5 FY11 22.8 14.1 11.7 11.2 9.5 20.0 15.6 11.6 5.9 11.7 6.6 P/E (x) FY12E 18.3 11.3 9.6 9.6 10.2 16.3 13.8 10.7 6.5 9.7 8.3 FY13E 17.5 7.1 8.9 7.6 9.6 14.4 12.0 8.3 5.9 7.7 6.7 arg Target (`) 242 158 1,024 77 241 191 385 216 799 % chg 1QFY12E % chg 1QFY12E
cr ( ` cr )
Reco. Neutral Buy Buy Buy Reduce Reduce Buy Buy Buy Buy
358 Accumulate
Source: Company, Angel Research; Note: Price as on June 30, 2011; EPS calculation based on fully diluted equity; * Denotes consolidated numbers
Chauhan/Pooja Analyst : Bhavesh Chauhan/Pooja Jain

36
Oil & Gas

We expect robust performance from companies in the oil and gas sector in 1QFY2012. In April 2011, crude oil price increased sharply on the back of political unrest in MENA region; however, it came off in May-June 2011, as concerns over weak European economies and anticipated slowing growth in the US muted the sentiment. On the domestic front, the government raised fuel prices and (surprisingly) cut duties to reduce the gross under recoveries for oil marketing companies (OMCs).
IEA raises its forecast for oil demand

During June 2011, the International Energy Agency (IEA) raised its forecast for global oil demand growth to 1.3% annually over the coming five years on the back of anticipated economic expansion in China. However, it cautioned that increased crude oil prices threaten the recovery in developed nations. As per IEA, consumption is expected to rise to 95.3mnbpd in 2016 compared to 88.0mnbpd in 2010 (China accounting for about 41% of the increase in demand). IEA expects oil production capacity to increase by 1.1mnbpd to 100.6mnbpd by 2016 (compared to 93.8mnbpd in 2010). OPEC capacity is expected to expand to 37.9mnbpd in 2016 (compared to 35.7mnbpd in 2010), driven by increased output from Iraq, Angola and the UAE. Production in Libya is expected to recover gradually in CY2012; current production is hovering around 200,000bpd from pre-conflict levels of about 1.6mnbpd. However, as per IEA, Libya will not reach its full production capacity until 2015. Iraq will increase its oil output capacity by 1.5mnbpd to 4.1mnbpd by 2016. Non-OPEC supply is expected to grow on the back of sustained investment with increased output anticipated from Canadian oil sands, Brazil deepwater and Colombia.
Crude rises in April but cools in May-June 2011

Crude oil price increased to US$127/bbl in April 2011 on the back of political unrest in MENA region. Further, temporary disruptions in crude oil production coupled with depreciation in dollar index aided the crude oil price rise in April 2011. However, crude oil price declined in May 2011 primarily on account of weak macro-economic data. Crude oil continued to slide in June 2011, as there were worries that European effort to resolve Greek debt crisis will not succeed. Further, IEAs decision to release 60mn barrels of oil from its emergency stocks to reduce the impact of disruption in Libyan oil supplies led to the crude price cooling off.
Exhibit 1: Crude oil price slids after rising in April 2011

140 130 120
(US $ /barrel)
OPEC meeting inconclusive

In OPEC's recent meeting to review output targets, only Saudi Arabia, UAE, Qatar and Kuwait were willing to raise output. Saudi Arabia is expected to increase the output to cool down crude oil prices as most economies are reeling under inflationary pressure. We believe easing of MENA crisis would lead to a gradual decline in crude oil price.
110 100 90 80 70 60 50
Aug-10 Aug-10 Aug-10 Sep-10 Sep-10 Feb-11 Nov-10 Nov-10 Dec-10 Dec-10 Feb-11 Jun-10 Jul-10 Mar-11 Jul-10 Mar-11 Oct-10 Jun-11 Oct-10 Jan-11 Jan-11 Jan-11 Apr-11 Apr-11 May-11 May-11 Jun-11
European Brent crude oil spot price
Gas prices rise due to higher demand from Japan

Natural gas prices increased in 1QFY2012 to average US$4.37/mmbtu compared to US$4.18/mmbtu in 4QFY2011. The qoq price increase was mainly due to increased demand from Japan. US Henry Hub prices increased by 7.1% mom in April 2011 due to increased demand from North America.
OPEC oil supply started improving in April-May 2011 after a gradual fall in February-March 2011 as supply concerns in MENA countries eased.
Exhibit 2: OPEC oil supply improved in April-May2011

31 31
(mn barrels/day)
Exhibit 3: Natural gas Henry Hub prices

6 5
30 30 29 29 28 28 27
Aug-10 Nov-10 Dec-10 Feb-11 Sep-10 Oct-10 Jun-10 Jan-11 Jul-10 Mar-11 Apr-11
(US $/mmbtu)
4 3
2
Jul-10 Jul-10 Sep-10 Sep-10 Feb-11 Aug-10 Aug-10 Nov-10 Nov-10 Dec-10 Dec-10 Dec-10 Feb-11 Jun-10 Mar-11 Mar-11 May-11 May-11 Oct-10 Oct-10 Jan-11 Jan-11 Apr-11 Apr-11 Jun-11 Jun-11 Jun-11
OPEC crude oil supply - Monthly
Henry Hub Natural Gas Spot Price
37
Oil & Gas

Exhibit 4: Crude inventory increased in 1QFY2012
400,000
375,000
(000s barels)
350,000
325,000
300,000
Jul-10 Sep-10 Dec-10 Feb-11 May-11 Aug-10 Oct-10 Nov-10 Jan-11 Mar-11 Apr-11 Jun-11
from 5%; whereas on the petrol and diesel front, the revised customs duty will stand at 2.5% from 7.5% earlier. This will result in a loss of `26,000cr to the exchequer. Excise duty on diesel has also been reduced by `2.6/litre to `2/litre, resulting in a loss of `23,000cr to the exchequer. Thus, the duty cuts will cost the exchequer a whopping `49,000cr. We believe the steps taken by the government are per se in the right direction as they provide more clarity on the way ballooning under recoveries will be financed.
RIL hits a 52-week low on CAG report

RIL stock price declined in June 2011 due to a broad decline in the overall stock market and an adverse report from the Comptroller and Auditor General (CAG) of India. The CAG accused the Oil Ministry for favouring RIL by allowing it to double the development cost of its KG-D6 gas field. A draft report of the CAG has reportedly questioned the decision of the oil ministry and its technical arm, the Director General of Hydrocarbons (DGH), to allow RIL to raise the development cost of its KG-D6 field. Meanwhile, the Home Ministry has reportedly given an unconditional nod for UK's British Petroleum to buy a 30% stake in RIL's oil and gas blocks for US$7.2bn.
Exhibit 5: Motor gasoline inventory down in 1QFY2012

250,000
(000s barrels)
225,000
200,000
175,000
Aug-10 Sep-10 Nov-10 Dec -10 Feb -11 Mar-11 Oct-10 Jan-11 Apr-11 May-11 Jun-11 Jul-10
Refining margins improve further

For 1QFY2012, gross refining margins are expected to improve due to increased middle distillate cracks in Asia. After the earthquake in Japan, diesel and SKO cracks spiked, thus improving refining margins. The Singapore refining margin for the quarter is expected to be at ~US$8.7/bbl.
Cairn India gets a conditional clearance for sale of stake to Vedanta

The Cabinet Committee on Economic Affairs has endorsed the group of ministers' recommendation and granted conditional nod to the sale of stake in Cairn India to Vedanta Resources. The two main conditions are that Cairn will have to allow cost recovery of royalty on Barmer crude from the revenue it earns from the field, and it will have to withdraw the arbitration case against the government. The total royalty burden over the project life is estimated to be `18,000cr. In addition, the cess of `2,650/tonne on crude oil will have to be borne by Cairn. However, this deal is subject to acceptance by the board of Cairn. In case Cairn accepts the conditions, it will have a negative impact on Cairn's valuations, as it will lead to higher outflow of royalty. Nevertheless, this development will be positive for ONGC as it will save on royalty costs (approximately `13,600cr).
Key developments
Goverment hikes fuel prices, cuts duties to tame mounting under recoveries
In a meeting held on June 24, 2011, the Empowered Group of Ministers (EGoM) took bold steps on the country's retail fuel pricing after a long wait of one year. As expected, the government not only hiked prices but also re-jigged the duty structure. Hence, it was an all-round effort to help the cash-starved bleeding OMCs. On the price hike front, the government hiked diesel price by `3/litre; whereas the price of cooking fuels, LPG and kerosene, was increased by `50/cylinder and `2/litre, respectively. The resultant price hikes will help reduce under recoveries of OMCs by around `21,000cr. Further, to reduce the burden of under recoveries on OMCs, the government lowered the customs duty on crude oil to nil
Oil stocks decline, while gas stocks inch up

The oil and gas index, similar to the previous quarter, underperformed the Sensex by 7% during 1QFY2012 due to huge underperformance by index heavyweight RIL (falling by 14.3% vs. the Sensex fall of 3.1%). RIL stock declined in June 2011 due to a broad decline in the overall stock market and an
38
Oil & Gas

adverse report from CAG claiming that RIL had benefitted at the cost of the government by hiking the cost of development of its prolific KG-D6 field. In fact, losses in RIL stock would have been higher had some smart recovery not taken place towards the end of the quarter, after the stock hit a 52-week low of `829 towards mid-June. OMCs were the major beneficiaries of the government's decision to hike fuel price and reduction in customs duty and excise duty, with HPCL, BPCL and IOC registering gains of 11.4%, 6.2% and 1%, respectively. However, ONGC lost 5.6% as it fell during the middle of the quarter following the government's decision for the upstream sector to share higher subsidy burden of 38.7% in FY2011. Nevertheless, gas stocks performed well during the quarter, with IGL and Petronet LNG gaining whopping 27.7% and 11.8%, respectively.
ONGC is expected to report higher net realisations for the quarter on account of increased crude price and the government's decision to cap the upstream companies' subsidy burden for 1QFY2012 at 33% of under recoveries compared to 38.7% in FY2011. Consequently, we expect a sequential increase of 40% in ONGC's bottom line during the quarter. On a yoy basis as well, we expect an increase of 6.6% in ONGC's bottom line. RIL is expected to report higher GRM qoq at around US$11/bbl (US$9.2/bbl in 4QFY2011). Higher demand for diesel and SKO consequent to the earthquake in Japan resulted in a spurt in petro cracks in Asian benchmark indices. It could also be attributed to a wider heavy-light crude oil spread. Consequent to the same, we expect RIL's profitability for the quarter to increase by 4.4% sequentially, despite lower gas production. On a yoy basis as well, we expect RIL's profit to increase by 15.7%. Cairn, Cairn being highly leveraged to crude oil, is expected to benefit the most from the ~13% spurt in crude price sequentially. Production from MBA fields is expected to be higher qoq as there was production shutdown in the previous quarter. GAIL is expected to report flat transmission volumes qoq. Higher transmission tariff and lower subsidy burden on a sequential basis is expected to result in GAIL registering a robust 20% qoq increase in profit during the quarter. On a yoy basis, GAIL is expected to report modest growth of 6% yoy.
Exhibit 6: 1QFY2012 stock performance

30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0) (10.0) (15.0) (20.0)
(%)
PLNG
GGAS
BSE O&G index
ONGC

Company Cairn India GAIL ONGC^ RIL^ CMP (`) 311 441 274 898 Net Sales 1QFY12E 4,393 8,500 16,191 68,849 422.4 19.8 17.1 18.2 OPM (%) chg bp 1,452 (233) (585) (73) 91.5 17.9 53.4 15.3 Profit Net Profit 1QFY12E 2,670 940 3,904 5,615 850.0 6.0 6.6 15.7 (` EPS (`) % chg 850.0 6.0 6.6 15.7 13.6 7.4 4.6 17.2 (` EPS (`) FY11 32.4 28.1 26.2 58.0 FY12E 48.7 29.6 32.6 71.9 FY13E 54.7 31.3 39.1 77.2 FY11 9.6 15.7 10.4 15.5 P/E (x) FY12E 6.4 14.9 8.4 12.5 FY13E 5.7 14.1 7.0 11.6 arg Target (`) 539 336 1,189 % chg 1QFY12E % chg 1QFY12E
GUJS
Cairn
IGL
GAIL
RIL
(` cr) `
Reco. Neutral Buy Buy Buy
Source: Company, Angel Research; Note: Price as on June 30, 2011; ^Standalone numbers for the quarter and consolidated numbers for full year
Vora Analyst: Amit Vora

39
Pharmaceutical
Pharma sector bounces back strongly
The BSE healthcare (HC) index outperformed the BSE Sensex during 1QFY2012, after having underperformed in 4QFY2011. The HC index rose by 6.2% as against the drop in Sensex in the same period. The performance of the pharmaceutical sector was impacted by lacklustre performance of the broader indices, which reeled under the slowdown in economic growth and hardening of interest rates. In such a scenario, the pharmaceutical sector, which is never affected by the economic slowdown, emerged as a resilient sector and outperformed the broader indices. However, the regulator issued the warning letter dated June 3, 2011, citing 'lack of corrective actions' by the firm. With 4% contribution to the consolidated sales of FY2011 and ANDA filed with reference to DMF from the plant, we believe the warning letter would have a minor impact on the company's financial performance. We maintain our Buy recommendation on DRL with a target price of `1,920. APL has indicated that it has received the warning letter from the USFDA, detailing its observations for its Unit VI, for which the company has already received the warning letter. Also, based on a field alert report for packaging and labeling compliance for Unit III, the USFDA has asked APL to submit a detailed action plan for improvement in this letter, which is required to be submitted within 15 working days, and has given the opportunity to APL for a regulatory meeting. Unit III contributes approximately US$140mn to APL's total sales. We believe, even in the worst-case scenario, the stock would be fairly valued at these levels. APL is requesting the USFDA for the meeting date and is in the process of submitting a detailed action plan. Although this is a move towards the much-awaited clarity needed on the USFDA's ban, there is still nothing concrete that can be inferred from the same. In terms of the developments for Unit III, we believe there are packaging compliance issues, which have a high probability of getting resolved. Hence, we currently maintain our estimates and recommend Buy on APL with a target price of `278.
Exhibit 1: BSE HC index vs. the Sensex

50.0 40.0 30.0 20.0
(%)
10.0 0.0 (10.0) 1QFY2011 (20.0) 2QFY2011 3QFY2011

BSE HC Sensex
4QFY2011
1QFY2012
The upward rally during the quarter was mainly driven by large caps. Ranbaxy rose by 22%, led by positive news flow on Lipitor. With regards to other major players, Cadila, Sun Pharma and Lupin were the big gainers, rising by 16%, 12% and 8%, respectively. In mid caps, Ipca was up by 13%. In the MNC pack, Glaxo was up by 12%. Amongst losers, Dr. Reddy's Laboratories (DRL) and Aurobindo Pharma (APL) dropped by 6% and 12%, respectively, which declined because of USFDAs import alert. Despite good quarterly numbers in 4QFY2011, Dishman was hammered, down 12%. Among small caps, Indoco Remedies lost 4% during 1QFY2012.
Developments in the Lipitor case positive for Ranbaxy

In a recent update on Ranbaxy's Lipitor case, the FDA responded to Mylan's suit, asking the court to deny Mylan's request for a preliminary injunction and stating that no immediate decision will be made on Ranbaxy's ANDA for Lipitor. It stated that no drug manufacturer can state USFDA's priorities and that the administration has not made any unreasonable delay in taking the decision. It further emphasised that there is no generic company that has received any approval so far and there is no certainty of an approval until the technical or scientific issues are resolved. The FDA and Ranbaxy are engaged in discussions to resolve the issues, and the clarity on the positioning of the ANDA is unlikely to come soon. Moreover, the US court has dismissed Mylan's petition challenging Ranbaxy's exclusive marketing rights over the generic version of Pfizer's Lipitor. Mylan had sued the USFDA for providing the exclusive right to Ranbaxy, alleging that the permission was given on the basis of 'falsified data'. In response to Mylan's plea, the FDA said that the company's complaint
Key developments
Indian companies remain on USFDA's warning list
After Ranbaxy, Lupin and Sun Pharma, DRL and APL have now received the USFDA's warning letters. DRL's Mexican arm has received a warning letter from the US health regulator for violation of the current good manufacturing practice regulations. The company's Mexico facility produces intermediates and active pharmaceutical ingredients. The USFDA had inspected DRL's Mexico facility in November 2010 and later sought certain explanations from the company.
40
Pharmaceutical
was premature and the agency's enforcement discretion was not reviewable by a court. It also indicated that drug makers cannot sue over pending applications filed by their competitors. The news is positive for Ranbaxy, and since the company is awaiting clarity on the ongoing litigation, we retain our numbers. The stock is currently trading at 18.7x and 12.0x its CY2011E respectively. We and CY2012E earnings, respectively. We recommend Accumulate with a target price of `588. 588.
Exhibit 2: ANDA approvals for select companies

Company APL Generic products Approvals Divalproex Sodium, Venlafaxine Hydrocholride, Piperacilin Sodium;Tazobactum Sodium,Alprazolam, Ramipril,Levofloxacin 5 Risperidone,Donepezil Hydrochloride Venlafaxine Hydrocholride, Donepezil Hydrochloride, Desloratadine Psedoephedrine Sulfate, Venlafaxine Hydrocholride, Donepezil Hydrochloride, Letrozole,Levofloxacin Naproxen Sodium Docetaxel, Donepezil Hydrochloride, 4 2 2
Cipla Cadila DRL
Sun and MSD enter strategic partnership to co-market MSD's diabetes drugs
During the quarter, Sun Pharma and MSD in India announced the formation of a strategic partnership agreement for the Indian market. Under the agreement, Sun Pharma would have the right to market, promote and distribute MSD's diabetes products, sitagliptin and sitagliptin plus metformin, under different brand names in India. MSD would provide the scientific excellence and market success of the product to the partnership, while Sun Pharma would bring in its proven success and expertise in the marketing of drugs in the relevant therapeutic areas across India. The stock is currently trading at 27.7x and 21.1x its FY2012E and FY2013E earnings, respectively. After the recent run-up we are Neutral on the stock.
5 1
Ranbaxy Sun Pharma
Letrozole,Sumatriptan Succinate Source: USFDA, Angel Research
1QFY2012 result expectations

The Indian pharmaceutical sector is expected to report muted numbers for 1QFY2012. We expect our coverage universe (excluding Orchid, where the corresponding consolidated numbers are unavailable) to register 19% yoy top-line growth. However, on the operating front, margins are expected to decline by 110bp, which along with increased tax outgo would lead to flat growth in net profit. Amongst large caps, Sun Pharma is expected to post 35.3% yoy sales growth mainly on the back of integration of Taro. Cipla is expected to post net sales growth of 15.5% yoy. DRL, Lupin and Cadila are expected to report 10.0%, 17.0% and 20.5% yoy growth in net sales, respectively. Amongst small caps, Indoco Remedies is expected to post 21.1% yoy growth. In the MNC pack, Aventis is likely to post 25.1% yoy growth in net profit, led by 10.3% yoy sales growth.
APL redeems FCCBs

In May 2006, APL had issued FCCBs in two tranches: Tranche-A of US$150mn and Tranche-B of US$50mn. After the repurchase and cancellation of FCCBs from time to time, the outstanding nominal value of FCCBs has been paid in full at the respective redemption prices of the principal amount on the maturity date i.e., May 17, 2011, as per the terms and conditions of the offering circular dated May 12, 2006. The company has paid an aggregate amount of US$203.86mn for both the aforesaid tranches. For the repayment, US$70mn was through internal accruals and the remaining was through debt. Pursuant to this, there are no outstanding bonds as on date. We maintain our Buy rating on the stock with a target price of `278.
Exhibit 3: Sales growth and OPM for 1QFY2012

40.0 35.3 30.7 30.0 20.8 20.0 17.0 18.1 15.5 17.4 10.0 10.0 2.1 0.0 Sun Pharma Lupin Cipla
Sales growth OPM
15.2
ANDA approvals in 1QFY2012

During the quarter, DRL and APL received five approvals each. Amongst others, Sun Pharma received higher ANDA approvals, with four approvals in place. Among the other companies in our coverage, Cipla, Cadila and Ranbaxy received two, two and one approval, respectively.
Ranbaxy
DRL
Among large caps, DRL and Cadila to outperform

Among the large caps in our coverage universe, for 1QFY2012, Sun Pharma is likely to report 35.3% yoy growth in sales mainly on the back of integration of Taro, which will drive export
41
Pharmaceutical
formulation sales during the period. On the domestic front, Indian formulation sales are expected to report a muted performance. Despite strong top-line growth on account of the integration, the company's operating profit margin would decline by 13.4% yoy, with margin likely to be around 30.7%. Net profit is expected to drop by 23.6% yoy for the quarter. Lupin, on the other hand, is expected to register sales growth of 17.0% yoy. The company's OPM is expected to contract by 188bp during the period. Net profit is expected to increase by 3.8% yoy. DRL is expected to post strong results with top-line growth of 10.0% to `1,851cr, majorly driven by the US market. The company is expected to witness strong traction in its Indian and Russian formulation businesses as well. In the PSAI segment, lacklustre performance is expected for 1QFY2012. The company is expected to post OPM of 15.2%, up 71bp yoy. On the net profit front, we expect the company to post net profit of `245cr, registering growth of 16.9% yoy. Cipla is expected to post net sales growth of 15.5% yoy to `1,649cr, driven by domestic as well as exports performance. OPM (excluding technical know-how fees) is expected to come in flat at 20.8% due to lower other expenses. Further, net profit is expected to increase by 9.3% yoy to `281.5cr. Ranbaxy's net sales are expected to remain flat at `2,143cr during 2QCY2011. The company's gross profit margin is expected to remain flat, leading to margin of 17.4%. Cadila is expected to post yet another strong quarter with 20.5% yoy growth in net sales to `1,280cr on the back of robust growth on the domestic formulation and exports fronts. The company's OPM is expected to expand by 128bp yoy to 20.7% due to a favourable product mix. Net profit of the company is expected to increase by 35.6% yoy to `179.0cr, driven by top-line growth and OPM expansion.
Among mid caps, Ipca Labs to take the lead

We estimate Ipca Labs' top line to grow by 17.2% to `603cr for 1QFY2012. OPM is expected to decline by 137bp yoy to 20.8%, led by higher other expenses. Overall, adjusted net profit is expected to increase by 27.1% yoy. APL is expected to post net sales growth of 9.5% yoy, led by formulation exports. With improved gross margin for the period, strong growth of 253bp is expected in the company's OPM at 17.6% for the quarter. Overall, net profit is expected to rise by 26.2% yoy on the back of improvement in operating profit. Indoco Remedies is expected to report top-line growth of 21.1% yoy to `135cr. OPM is expected to expand by 60bp yoy to 16.4%, driven by growth in domestic formulation sales. Net profit is expected to increase by 8.8% yoy to `16.1cr because of higher depreciation cost and tax outgo.

With the expected earnings CAGR of 21% over FY2011-13E for our coverage universe, we remain overweight on the sector and maintain our positive outlook. In the generic segment, we prefer Cipla, Lupin, Cadila Healthcare, APL and Indoco Remedies. In CRAMS, though the segment is currently witnessing some pressure, there have been indications of gradual recovery and ramp-up from most CRAMS players. Thus, with valuations rendering attractive, we recommend Dishman Pharma in this segment.

Company APL Aventis Cadila Cipla Dishman Dr. Reddys Glaxo# Indoco Ipca Labs Lupin Orchid * Sun Pharma
#
(` cr) `
OPM (%) chg bp 253 (0) 128 (13) (452) 71 (180) 60 (137) (188) 0 (1,336) Profit Net Profit 1QFY12E 117.9 53.0 179.0 281.5 14.7 245.0 154.4 16.1 82.8 203.8 50.3 258.9 431.2 26.3 25.1 35.6 9.3 (46.0) 16.9 10.6 8.8 27.1 3.8 (24.2) (23.6) (` EPS (`) % chg 22.5 25.1 35.6 9.3 (46.0) 16.9 10.6 8.8 27.1 3.8 (24.2) (23.6) FY11 20.2 67.3 33.8 12.0 9.9 63.8 66.2 41.5 20.9 19.3 22.2 35.5 17.5 4.1 23.1 8.8 3.5 1.8 14.6 18.2 13.2 6.6 4.6 7.2 6.2 4.2 (` EPS (`) FY12E 20.2 85.5 38.6 15.2 9.3 87.9 72.0 53.3 20.0 22.4 28.4 29.1 18.0 FY13E 21.9 89.7 52.6 18.9 11.1 96.0 86.9 66.5 27.5 29.7 37.3 44.8 23.5 FY11 8.6 30.5 27.2 27.4 9.1 24.0 35.6 10.4 16.4 23.3 12.2 15.2 28.3 P/E (x) FY12E 8.6 24.0 23.8 21.6 9.7 17.4 32.7 8.1 17.1 20.1 9.6 18.6 27.7 FY13E 7.9 22.9 17.5 17.5 8.1 16.0 27.1 6.5 12.4 15.1 7.3 12.1 21.1 arg Target (`) 278 1,053 377 133 1,920 665 593 373 588 Buy Neutral Buy Buy Buy Buy Neutral Buy Neutral Buy Buy Accum. Neutral Reco. % chg 1QFY12E 17.6 16.0 20.7 20.8 17.5 15.2 34.7 16.4 20.8 18.1 22.1 17.4 30.7
CMP (`) 173 2,052 919 330 90 1,533 2,354 430 342 449 271 497
Net Sales 1QFY12E 967 299 1,280 1,649 227 1,851 563 135 603 1,543 500 2,143 1,894 9.5 10.3 20.5 15.5 12.5 10.0 13.0 21.1 17.2 17.0 2.1 35.3
% chg 1QFY12E
Ranbaxy Lab# 541
Source: Company, Angel Research; Note: Our numbers do not include MTM on foreign debt. #2QCY2011 ,* Non-availability of 1QFY2011 consolidated numbers
Kour Analyst: Sarabjit Kour Nangra

42
Power
For 1QFY2012, we expect power-generating companies in our universe to report top-line growth of 16.4% yoy, driven by capacity additions and higher tariffs. The operating profit of companies in our universe is expected to increase by 15.2% yoy. Net profit is expected to increase by 12.7% yoy.
Operational highlights
During 2MFY2012, power generation in India rose by 8.5% yoy to 146BU (135BU). Overall, the country's thermal power generation rose by 6.5% yoy to 120.5BU. The plant load factor (PLF) of thermal plants for 2MFY2012 stood at 78.4%, higher by 646bp than the targeted 71.94%. Hydro power generation increased by 12.7% yoy to 20.2BU, while nuclear power generated grew substantially by 54.7% yoy to 5.4BU during the mentioned period.
Capacity addition: Status check

Generation
As of May 2011, only 57% of the revised Eleventh Plan capacity addition target of 62,374MW has been completed. During FY2011, 12,160MW of capacity was added as against the targeted 21,441MW. Capacity addition is expected to pick up in FY2012, being the last year of the plan period. Capacity addition has generally been delayed due to execution issues relating to acquisition of land and obtaining environment and other statutory clearances. In all, we expect capacity addition of 42,000MW during the plan period, which will be ~20,000MW short of the targeted addition. Despite this shortfall in capacity addition, the quantum of the actual addition will be well ahead of 27,283MW added in the Tenth Plan. Exhibit 1: Generation capacity addition
25,000 20,000 15,000 40 10,000 5,000 0 FY07 FY08 FY09 FY10 FY11 2MFY12 20 80
Exhibit 2: Power generation (BU)

May-11 May-10 May-11 May-10 chg (%) Thermal Hydro Nuclear Total 60.7 11.4 2.7 74.8 56.5 9.5 1.7 67.7 7.4 20.2 58.5 10.5% 2MFY12 120.5 20.2 5.4 146 2MFY11 chg (%) 113.2 18.0 3.5 135 6.5 12.7 54.7 8.5%
Source: CEA, Angel Research
Power-deficit situation
The country continues to face power deficit due to the delay in commissioning of new capacities, fuel shortage and deficiencies in the T&D system. India's overall and peak power-deficit levels during 2MFY2012 stood at 7.2% and 9.3%, respectively, lower than 13.0% and 13.8% reported in 2MFY2011. Exhibit 3: India Power-deficit scenario
18.0 16.0 14.0 12.0 12.2 8.8 7.1 7.3 11.2 11.7 12.3 9.6 8.4 9.9 13.8 12.0 11.0 12.7 10.1 9.8 8.5 9.3 7.2 16.6
60
(MW)
(%)
10.0 8.0 6.0 4.0 2.0 -
Target (T) LHS
Achievement (A) LHS
A as a % of T (RHS)
Transmission lines
During 2MFY2012, 706 circuit kilometers (ckm) were added to the 400kV transmission lines, as against the targeted 813ckm. Total addition to the 220kV transmission line categories stood at 309ckm, as against the targeted 197ckm.
Overall
Peak
Power deficit highest in the western region

The western region continues to record the highest power deficit in the country. During 2MFY2012, the region's power deficit stood at 11.1%. Maharashtra, the highest power consuming state in the country, had overall power deficit of 16.1% and peak deficit of 18.6%. The eastern region had the lowest power deficit of 4.5%, while the peak deficit was 6.3%.
Transmission sub-stations
During 2MFY2012, total addition to the 220kV sub-station category stood at 980MW, as against the targeted 640MW.
2MFY12
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
43
Power
Exhibit 4: Region-wise power deficit (2MFY2012)
Region (%) Northern Western Southern Eastern Northeastern All India Source: CEA, Angel Research Overall (4.9) (11.1) (5.8) (4.5) (10.4) (7.2) Peak (7.9) (14.8) (7.2) (6.3) (10.3) (9.3)
Coal scenario Availability

As of May 31, 2011, 24 critical thermal power stations out of the 82 monitored by the CEA had critical coal stocks for less than seven days. Currently, coal shortage has been due to multiple reasons such as lower production by Coal India, logistical issues and lower imports.
Recently, the Indonesian government has set a September 2011 deadline, by which coal export contracts should be re-negotiated if contract prices are below the market price. If this rule comes into effect, then the cost of imported coal would be based on a reference price, which would be published by the Indonesian government every month. The reference price would be the basis for computation of royalty and taxes. This rule, when it takes effect, will substantially increase the cost of imported coal and would significantly affect the profitability of power players if they could not modify their PPAs to pass on the price hikes using the force majeure clause. The Association of Power Producers, a body of private power generators, has already moved the Ministry of Power for a change in the PPA clause.
Key developments
NTPC
NTPC commissioned the 660MW Unit 1 of Sipat Super Thermal Power Project on June 28, 2011. With this, the total capacity of NTPC Group now stands at 34,854MW. This is the first supercritical 660MW unit of NTPC. With the commissioning of this unit, the total installed capacity of Sipat Super Thermal Power Project has become 1,660MW. During the quarter, the Ministry of Coal de-allocated five coal blocks, which were previously allotted due to lack of the progress in development work. All these coal blocks were allocated on June 25, 2006. Coal blocks that have been de-allocated are Chhati-bariatu, Kerandari, Chhati-bariatu (south), Brahmini and Chichro Pastimal.
Global coal prices on the rise

Spot global coal prices were substantially higher on a yoy basis during the quarter. Average prices of the New Castle Mckloksey 6,700kc coal stood at ~US$120/tonne in 1QFY2012 vs. US$100/tonne in 1QFY2011. However, on a qoq basis, coal prices were down by 6%.
Exhibit 5: New Castle Mckloskey coal prices

250 200
(US$/tonne)
150 100 50 0
Dec-10 May-06 May-01 Mar-07 Aug-07 Nov-08 Mar-02 Aug-02 Nov-03 May-11 Dec-05 Dec-00 Feb -05 Jul-05 Feb -10 Jan-08 Jun-08 Sep-09 Jan-03 Feb -00 Jun-03 Sep-04 Jul-00 Oct-06 Oct-01 Apr-04 Apr-09 Jul-10
CESC
CESC has entered into a deal with Australia's Resource Generation (R-Gen) to buy a 4.8% stake in the latter for A$10mn. The acquisition has been done through CESC's subsidiary, Bantal Singapore Pte. Ltd., which has agreed to buy 12,195,122 shares of R-Gen at A$0.82 per share. Post this acquisition, RPG Group's (promoter of CESC) stake in R-Gen has increased to 11.2%. This deal also entails Integrated Coal Mining (another affiliate of RPG) to get 139mn tonnes of coal over 38 years from R-Gen's Boikarabelo mines in South Africa from late CY2013 when mining starts in these mines. CESC is exploring a possibility to set up a 2x660MW coal-fired plant adjacent to Boikarabelo mines to utilise a portion of the coal. CESC proposes to supply this power to the South African grid.
Indonesian coal regulation

Currently, India's power sector imports a major portion of its coal requirements from Indonesia. Further, various Indian companies such as Tata Power and Adani Power intend to operate their plants with Indonesian coal. Tata Power has acquired a stake in Bumi Resources and has entered into an agreement with Bumi for procuring ~12mtpa for its Mundra plant. Similarly, Adani Power has entered into an agreement with Adani Enterprises, its promoter group company, to procure Indonesian coal for its plants in Mundra complex.
44
Power
Adani Power
During the quarter, Adani Power became the largest private sector thermal power generator in the country. The company synchronised the second supercritical unit of 660MW at Mundra, taking its overall capacity to 2,640MW. The company expects to have 6,000MW operational by the end of FY2012, out of the 16,500MW under development. CESC is expected to register 8.6% yoy growth in its standalone top line to `1,191cr, aided by higher sales volume and better realisation. OPM is expected to decline by 36bp yoy to 23.0%, while net profit would increase by 14.1% yoy to `125cr during 1QFY2012. We expect GIPCL to register a 41.3% yoy increase in revenue in 1QFY2012, primarily on the back of higher volumes. Commissioning of Unit 3 and 4 in Surat is expected to aid volume growth. OPM is set to expand by 194bp to 27.3%. However, the bottom line is expected to decline by 29.4% yoy to `29.6cr in 1QFY2012 on account of higher depreciation and interest costs. We expect PTC to record a 2.9% yoy jump in its standalone top line to `2,839cr, aided by higher volumes. We expect the company's operating margin to expand by 16bp yoy to 1.2% on account of better trading margins. Net profit for the quarter is expected to increase by 17.2% yoy to `32.6cr.
JSW Energy
JSW Energy has terminated its plans to acquire CIC Energy Indonesia, as the required due diligence cannot be completed before the deadline of May 31.
Performance on the bourses

Most of the power stocks under our coverage underperformed the Sensex, which lost 3.1% during the quarter. GIPCL was the biggest loser as the stock fell by 17.8% during the quarter. NTPC and CESC also fell by 3.2% and 4.1%, respectively.
Outlook
We expect capacity addition to gather pace by the end of the Eleventh Plan in FY2012. However, the country's power-deficit scenario is likely to persist, as supply is unlikely to keep pace with demand. The poor financial position of State Electricity Boards (SEB) remains a major cause of concern for the industry. Although there have been no reported instances of non-repayment of dues by state utilities to generating companies, there have been instances of delayed payments. Poor financials have also resulted in increasing cases of backing down by state utilities. State utilities are averse to buying merchant power, which has resulted in merchant power tariffs plummeting by ~50% from FY2009 levels. In this scenario, players with fuel security and assured power offtake through PPAs are safer bets as compared to merchant power players. We maintain our Accumulate recommendation on NTPC and Buy view on CESC and GIPCL .
Exhibit 6: Performance on the bourses (%)

Sensex BSE Power CESC GIPCL NTPC PTC (20.0) (18.0) (16.0) (14.0) (12.0) (10.0) (8.0) (4.7) (6.0) (4.0) (2.0) 0.0 (17.8) (3.2) (3.1) (3.7) (4.1)
Source: BSE, Angel Research
For 1QFY2012, we expect NTPC to record a 16.6% yoy increase in its top line to `15,094cr, aided by volume growth due to the commencement of new capacities. Operating profit is expected to increase by 15.1% yoy to `3,849cr. Net profit is expected to increase by 13.5% yoy to `2,091cr.

Company CESC GIPCL NTPC PTC CMP (`) 298 76 187 79 Net Sales 1QFY12E 1,191 357 15,094 2,839 8.6 41.3 16.6 2.9 OPM (%) chg bp (36) 194 (34) 16 23.0 27.3 25.5 1.2 Profit Net Profit 1QFY12E 125 30 2,091 33 14.1 (29.4) 13.5 17.2 (` EPS (`) % chg 14.1 (29.4) 13.5 17.6 FY11 38.8 10.8 11.3 4.7 10.0 2.0 2.5 1.1 (` EPS (`) FY12E 42.9 9.2 12.3 6.2 FY13E 44.5 11.1 13.4 6.9 FY11 7.7 7.1 16.5 16.8 P/E (x) FY12E 7.0 8.2 15.2 12.8 FY13E 6.7 6.8 13.9 11.6 arg Target (`) 380 94 202 % chg 1QFY12E % chg 1QFY12E
(` cr) `
Reco. Buy Buy Accumulate Neutral
V. Analyst - V. Srinivasan
45
Real Estate
For 1QFY2012, we expect residential volumes to report flat to moderate growth on a sequential basis on account of weak demand due to high interest rates and elevated property prices. Revenue of real estate companies is expected to be largely driven by execution of existing projects and new launches, though execution delays remain a cause of concern. Companies such as DLF and Unitech (through UCP) are expected to continue to see sustainability in office-leasing volumes on a sequential basis. Accordingly, we believe commercial rentals have bottomed out, and we do not foresee any material uptick until inventory levels come down. In our universe of stocks, we expect HDIL to report flat growth in Transfer of Development Rights (TDR) volumes and prices, given low inventory of TDRs left on account of earlier stoppage of the MIAL project, which has re-started and, thus, we expect TDR sales volume to increase in the coming quarters. HDIL is also expected to continue to book partial revenue from the 2mn sq. ft. (msf) FSI sale (worth ~`1,400cr) in 1QFY2012. DLF's revenue is expected to be largely driven by the sale of plotted properties in Gurgaon. For ARIL, we expect revenue to be driven by the residential segment and rental income. interest rates may compel buyers to postpone their purchases or investments in new houses. With increasing input cost and demand failing to pick up, we expect execution delays for many new as well as old properties. We also believe that cost escalation will impact margins over the coming quarters; however, margins will improve once revenue from new projects increases.
Exhibit 2: Rising input cost A cause of concern

(`) 280 260 240 220 200 180 160 140 30,000 25,000 20,000 15,000 (`) 45,000 40,000 35,000
1QFY11
2QFY11
3QFY11
4QFY11
Cement prices Per 50kg bag (LHS)
Steel prices Per Tonne (RHS)
Source: CRISIL, Angel Research
RBI tightens liquidity further to curb speculative demand

In its bid to curb excess liquidity and speculative demand in the real estate sector, the RBI had initiated measures in 4QFY2011, including: 1) capping the LTV ratio to 80% (previously 85%), 2) increasing risk weight on residential housing loan of above `75lakh and 3) raising standard asset provisioning for teaser loans from 0.4% to 2.0%. We believe these measures will marginally affect demand and may lead to postponement of buying in the short term. Also, the debt refinancing requirement is expected to come under pressure during 1QFY2012, which could lead to prices cooling off in regions such as Central Mumbai and Gurgaon, where prices have overheated since the last six months.
Exhibit 1: 1QFY2012E Revenue and PAT yoy growth

60 50 40 30
(%)
48.3
33.9
20 10 0 (10)
15.0 10.8 6.3
Revenue
ARIL DLF HDIL
(0.8) PAT
HDIL MIAL gets the green signal

HDIL, which had stopped work on the MIAL project, recently got the green signal from the government to start the MIAL project. The MMRDA has also started shifting eligible slum dwellers to the Kurla Premier Compound. This is a positive sign for the company, as it can quickly ramp up its Phase-I project and start work on Phase-II of the project. The company, which had already generated 11mn sq. ft. from the MIAL project so far, despite a delay of over a year in shifting the families in Phase 1, will benefit with the continuation of work and increased TDR generation. In the current quarter, we expect flat growth in the sale of TDR; however, going ahead, we expect TDR sales to improve to 1-1.2msf vs. our earlier expectation of 0.7-0.8msf. The Maharashtra government is expected to hike FSI from 1.0x to 1.33x in the suburbs, which will have a negative impact on TDR prices. Thus, we have factored in lower TDR price of
Escalating input cost and interest rates causing concern

Cost overruns continue to be a big cause of concern for real estate developers. Around 70% of the construction cost is contributed by material and labour costs. The major components of these costs are steel, cement and labour. Currently, on a two-year basis, cement price has increased by ~27% from `202/bag to `275/bag, steel price has increased by ~13% from `30,750/tonne to `38600/tonne and labour cost has increased by ~50% from `250/day to `325/day. DLF reported a one-time expense of `475cr in the previous quarter on account of higher costs, which resulted in a sharp margin decline. Apart from increased costs, rise in interest rates has also resulted in a slump in demand. In May 2011, on a yoy basis, Mumbai witnessed a decline in residential registration by 1%. Higher
1QFY12
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
46
Real Estate
`2,400/sq. ft. (i.e. 20% discount to current levels of `3,000/sq. ft.) for arriving at our target price and do not expect any negative impact incrementally. We have assumed 4.5msf of TDR sale for FY2012 to factor in the hike in FSI. It should be noted that a 10% decline in TDR prices would impact our NAV by mere 3% and target price by 2.3%. Given the delay in shifting of families, we have excluded 10msf (potential 65 acres), which HDIL is expected to get at the airport vicinity as it rehabilitates 85,000 families. Overall, we expect the share of TDR sales in HDIL's revenue mix to fall from 60% in FY2011 to 30% in FY2012. appreciation across most micro markets. Industry participants have indicated that the surge in leasing enquiries has come on the back of renewed interest shown by corporates. In 1QFY2012, commercial area in Mumbai witnessed a 12-month high with 1.84msf of area leased out. Of this, the financial sector was the major contributor with a share of 40%. We expect demand for office space to start picking up from 2HCY2011 as we expect 20% net employee addition in the IT/ITES sector over FY2011-13. Cushman and Wakefield estimates cumulative pan-India demand for office space during CY2009-13 to be 196msf. Exhibit 3: Pan-India commercial demand
60 50
(mn sq. ft.)
DLF Working towards reducing debt

In FY2011, DLF's net debt increased by ~`2,314cr yoy to ~`23,990cr from ~`21,677cr. Thus, DLF's net debt-to-equity now stands increased from 0.88x to 0.98x yoy, which continues to remain a key overhang on the stock price as debt repayment of ~`2,910cr is required to be made over the next 15 months. Further, clarity on whether DLF will buy out the promoter's stake in DAL remains another key concern since it could potentially further dilute the equity of minority shareholders. However, the company has increased its overall target on divestments to about `10,000cr mainly to reduce debt, which would be about `4,500cr if the wind segment is excluded. Further, the company has added `6,000cr-7,000cr to its disinvestment target over the next two to three years.
40 30 20 10 0 2009 2010 2011 2012E 2013E
Source: Cushman & Wakefield, Angel Research
Retail segment Still some pain left

Vacant space in shopping centres had increased during 2008-09, primarily on account of high real estate costs and lower consumption, owing to which many retailers shifted gears from the rapid expansion mode to the consolidation mode. Therefore, in the short term, vacant spaces are likely to increase, given the considerable rationalisation in the supply pipeline. On the other hand, we believe demand is yet to pick up, especially in tier-II and III cities, which is not the case with metros, where catchment areas are witnessing high demand. We expect prices to remain under pressure, as the segment has fragmented supply dynamics. Initial recovery volumes are likely to be cornered by experienced players such as Phoenix Mills, and not necessarily large ones.
Sluggish residential volumes adding to margin pressure

In Mumbai and Delhi, residential prices are currently ruling 15-30% above the peak levels of 2008, whereas prices in most other markets are still 10-15% lower than their last peak levels. This has resulted in tapering of volumes in regions like Mumbai and NCR. India's top two real estate players DLF and Unitech have recently stated that slower sales are leading to a build-up of inventory and, thus, they may see some price correction, leading to margin pressures. On the back of sluggish demand, HDFC and SBI have also seen a drop in their mortgage loan transactions. For instance, HDFC has seen a drop of 15-20% in its mortgage loans in Mumbai (although disbursements have been good otherwise), while SBI expects a downward revision in its growth target. We believe CY2011 will see consolidation with residential prices remaining soft in Mumbai and Gurgaon (could see a correction of 15-20% in some overheated micro markets), with a modest to flat 5% increase expected in other markets.
Exhibit 4: Pan-India retail demand

14 12 10
(mn sq.ft.)
8 6 4 2 0 2009 2010 2011 2012E 2013E
Commercial demand to pick up over the next 12 months

After registering a sharp decline in the past few quarters, capital values have started to strengthen, registering a marginal
Source: Cushman & Wakefield, Angel Research
47
Real Estate
Sensex vs. realty stocks
During 1QFY2012, the BSE realty index widely underperformed the Sensex by 1,049bp on the back of 1) corporate governance, 2) restricted credit flow to the sector and 3) the expected increase in cost of funding for future projects. Moreover, the RBI's measures to tighten liquidity and curb speculative demand by increasing LTV and risk weight on teaser loans have further dampened stocks performance. However, we believe the recent correction gives a good entry opportunity on account of 1) companies trading at a significant discount to our one-year forward NAV, 2) stability in volumes and 3) comfortable balance sheet position unlike that in 2008. We believe HDIL, Oberoi Realty and ARIL are best placed in the sector.

India's realty index is currently ruling near its life-time low seen in 2008. However, things are much better than 2008 with respect to project visibility, cash flow, net debt-equity and growing disposable income. Further, refinancing of loans from the banking sector will give some respite to developers in the falling volume scenario. Having said that, we believe absorption and not price appreciation will drive residential growth over the next six quarters. Amidst this scenario, new launches have been more rewarding for developers who have launched projects at a 10-15% discount to the prevailing market rates. Further, high inventory is still hampering commercial recovery, though there has been an uptick in absorption levels. We expect rentals to remain firm at current levels with an uptick likely over the next 12 months. We believe that stock performances are related to macro factors interspersed with company-specific issues such as the DLF-DAL merger translating into higher debt and 2G-related scam for Unitech. We are positive on the long-term outlook of the realty sector, taking into account growing disposable income, shortage of 25mn houses in India and reasonable affordability. Given the current scenario, we expect stability in residential prices with the exception of certain micro markets, where prices have overheated, and expect an uptick in the commercial segment over the next 12 months. We prefer companies with visibility in cash flow, low leverage and strong project pipeline with attractive valuations. Our top picks are HDIL and ARIL, which are trading at ~38% and ARIL, NAVs, respectively. We ~56% discount to their NAVs, respectively. We maintain our Neutral view on DLF owing to concerns of weak operating , DLF, flow, cash flow, increasing gearing and just ~12% discount to our one-year forward NAV. one-year NAV
Jan-11 May-11 Sep-10
Exhibit 5: 1QFY2012 Coverage vs. Sensex performance

0.0 (5.0) (10.0)
(%)
(3.0)
(15.0) (20.0) (25.0) (30.0) BSE Sensex
(12.3)
(22.6) (25.8) HDIL DLF ARIL
Exhibit 6: BSE Realty index vs. Sensex

80 60 40 20
(%)
0 (20) (40) (60) (80)

Mar-09 Aug-09 Nov-08 Dec-09 Jan-08 May-10
BSEREAL Index
SENSEX Index

Company CMP (`) DLF Anant Raj Ind. HDIL 210 64 160 Net Sales 1QFY12E 2,334 153 604 OPM (%) chg bp (600) 508 (502) Profit Net Profit 1QFY12E 407.8 48.8 259.6 (` EPS (`) % chg (0.8) 6.3 10.8 FY11 9.7 5.7 21.0 (` EPS (`) FY12E 11.6 7.5 26.0 FY13E 13.7 11.5 30.0 FY11 21.7 11.2 7.6 P/E (x) FY12E 18.0 8.5 6.1 FY13E 15.3 5.5 5.3 arg Target ) (`) 105 200 % chg 1QFY12E 15.0 48.3 33.9 42.3 60.1 54.3 % chg 1QFY12E (0.8) 6.3 10.8 2.4 0.2 0.7
(` cr) `
Reco.
Neutral Buy Buy
Analyst - Sharan Lillaney

48
Software
Demand landscape remains unscathed
The demand environment cited by most tier-I IT companies in terms of 1) positive client budgets for CY2011 across industries (expect telecom, which is expected to be flat) and with a higher component of offshoring; 2) like-to-like pricing increase in some of the deals as well as clients willing to compensate for cost of living adjustment (COLA); 3) upbeat gross hiring guidance for FY2012 by Infosys and TCS of 45,000 and 60,000, respectively; 4) robust revenue growth guidance by Infosys (18-20% yoy) and Cognizant (at least 29% yoy); 5) global major Accenture (August year ending) raising revenue growth guidance from 8-11% yoy in 1QFY2011 to 11-14% yoy in 2QFY2011 and then to 14-15% yoy in 3QFY2011; and 6) uptick in new license sales by Oracle envisage a strong demand environment for IT spending.
Spending continues to be broad-based (ex. telecom)

For 1QFY2012, we expect demand drivers for growth to continue to span across various dimensions industry wise (except telecom, which will continue to be sluggish), service wise and geography wise. As per NASSCOM's strategic review in February 2011, worldwide IT spend is expected to grow by ~4% in CY2011. Industry-wise Industry-wise trends: The BFSI segment (the major contributor with a 45-50% share in exports) will continue to lead in terms of volume due to persistent work related to 1) regulatory compliance, 2) data analytics, 3) operational efficiency and 4) risk and fraud prevention.
Exhibit 2: BFSI Revenue growth trend

15 10
Budgets persist but looming macro concerns cause delay

The aggregate US macro data for May 2011 highlights looming concerns about the macro picture, with data points like 1) manufacturing index declining to 53.5 vs. 60.4 for April 2011, 2) retail sales growth dropping to -0.2% vs. 0.3% for April 2011, 3) consumer confidence decreasing to 60.8 from 66.0 for April 2011 and 4) US GDP at 1.8% for 1QCY2012 as against 3.1% for 4QFY2011. For Europe, the PMI index declined to 54.6 for May 2011 from 58.0 for April 2011. Client budgets are positive on a yoy basis. However, due to unstable macros, the pent-up in budget flush is not happening as planned because clients are turning marginally cautious towards economic recovery. However, there are no indications of any budget cuts from clients and IT companies continue to see robust demand for discretionary services going ahead. In fact, Gartner has recently increased its estimate of IT spending for CY2011 to 7.1% yoy from 5.6% yoy earlier. IT index has underperformed over the past three months, as 4QFY2011 panned out to be a soft quarter because of clients freezing their budgeting cycles. However, the demand outlook for IT spending remains positive as clients look forward to spend on discretionary services such as enterprise solutions and engineering services to drive cost efficiency, prepare for growth and capture market share.
(% qoq)
5 0 (5) (10)
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
Infosys
TCS
Wipro
HCL Tech
For the retail and CPG segment, IT spend continues to grow on multi-channel integration to encash on the digital consumer behaviour. Also, retail clients are spending on digital marketing and mobile and social technology to provide multi-channel experience, retail commerce and mobile marketing to increase digital consumer engagements. The manufacturing segment is also back with higher spend on IT, especially with industries such as hi-tech and semiconductor looking at immediate go-to-market strategies and, thus, spending on product engineering, supply-chain management and consulting to drive cost efficiencies. In the manufacturing segment, automotive and aerospace have also started spending on dealer management network, CRM applications, rationalising internal processes, setting up shared services, global launch and product engineering.
Exhibit 1: IT index vs. the Sensex

6800 6400 6000 18000 5600 5200 4800 16500 15000 21000 19500
Exhibit 3: Manufacturing Revenue growth trend

15 10 5
(% qoq)
0 (5) (10)
1-May-11
1-Apr-11
16-Apr-11
15-Jun-11
16-May-11
31-May-11
30-Jun-11
(15)
4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11
BSE IT
Sensex (RHS)
Infosys
TCS
Wipro
HCL Tech
Source: Bloomberg, Angel Research Refer to important Disclosures at the end of the report
4QFY11
49
Software
The energy and utilities vertical is gaining strong traction, especially for businesses relating to oil and gas, smart grid and safety, among others, mostly for cost-cutting measures. The telecom vertical is still a very soft spender and client budgets remain weak. This vertical was heavily impacted for Infosys and TCS due to one of their top clients, British Telecom, cutting back heavily on capex and downsizing operations. Managements of both the companies maintain that the client-specific issue is behind, and they foresee a slow recovery in the sector. We believe TSPs of matured markets will start spending to migrate to next-generation networks such as 4G to support the heavy voice and burgeoning data traffic. Service-wise Service -wise trends: Changed business needs of various industries have led to a surge in demand for discretionary services such as enterprise application services (EAS) and engineering and R&D (ERD) services. Investments in EAS mostly focus on simplifying internal processes and harmonising business processes across the enterprise to make organisations smarter and leaner primarily focusing on increasing efficiencies and reducing throughput. Even ERD services are witnessing a spurt in demand, with product companies getting aggressive and trying to launch a series of new products by shortening the go-to-market cycle. In addition, demand for ERD services is driven by increasing use of electronics, fuel efficiency norms, convergence of local markets and localised products.
Utilisation to be a mixed bag

In 1QFY2012, we expect the utilisation level (including trainees) of Infosys to marginally increase by 50bp qoq to 68.9%. In case of TCS, we expect the company to hold up (qoq) its utilisation level (including trainees) at 75.1%. Wipro and HCL Tech, on the other hand, are expected to see a marginal dip of 30bp and 40bp qoq to 75.8% and 76.9% in their utilisation level, respectively, on the back of freshers joining in.
Cross-currency movement to favour dollar revenue growth

The cross-currency movement, which had proved to be a bane over 4QFY2010-1QFY2011 impacting USD revenue by 0.8-1.5% (qoq), has turned into a boon since 2QFY2011. The USD has depreciated by 5.2%, 1.8% and 5.7% qoq against the Euro, GBP and AUD, respectively, in 1QFY2012. This will aid USD revenue for Infosys, TCS, Wipro and HCL Tech by 1.3%, 0.8%, 1.1% and 1.4%, respectively. In the entire IT pack, Tech Mahindra is expected to be the highest beneficiary of favourable cross-currency movement of 2% qoq. However, INR has appreciated by 1.2% qoq against USD in 1QFY2012, which will result in lower rupee revenue growth vs. dollar revenue growth and impact operating margins by 35-40bp.
Exhibit 4: Cross-currency impact on USD revenue

2.0 1.5 1.0
(%)
1.3
1.4 1.1
Hiring spree to continue

IT players got into the hiring mode from 2HFY2010, with high lateral hiring to tap the sudden increase in demand. With a strengthening demand landscape, Infosys and TCS have indicated robust gross hiring targets yet again for FY2012 of 45,000 and 60,000, even on the total employee base of 1,30,820 and 1, 99,365, respectively. These initial hiring numbers are much higher than the initial hiring numbers of 30,000 each indicated a year ago by Infosys and TCS. Also, due to the unanticipated pent-up demand as well as higher attrition rates of 20-25% annualised, gross hiring numbers for FY2011 stood much higher at 43,120 and 69,685 for Infosys and TCS, respectively. Companies are now looking at planned hiring to address the strengthening demand pipeline as well as to flatten their employee pyramids. Infosys and TCS have planned to give campus offers to 27,500 and 37,000 people (most of which have already been given), respectively, indicating that majority of the hiring in FY2012 will be of freshers. Also, with cooling attrition rates, we do not expect attrition to be a spoilsport anymore as companies resort back to planned hiring. We expect the hiring trend to remain upbeat, with Infosys expected to have hired ~6,921 employees and TCS hiring ~8,901 employees in 1QFY2012.
0.8
0.5 (0.5) (1.0) (1.5)

Infosys TCS HCL Tech Wipro
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12E
Modest volume growth

Traditionally, 1Q is a strong quarter for IT companies as client budgets on the kind of discretionary, operational and capital spending freeze by 4Q and budget flush start happening in the next quarter. However, we expect 1QFY2012 to be modest in terms of volume growth due to unstable macros because of which clients are delaying the incremental budget flush from their end. For 1QFY2012, we expect volume growth to remain modest at 0-4.8% qoq for tier-I IT companies.
Revenue continues to surge

For 1QFY2012, we expect USD revenue to surge by 1.1-6.2% qoq for tier-I IT companies on the back of modest volume growth, stable pricing and favourable cross-currency movement. In INR terms, revenue growth is expected to be lower at 0.4-4.7% qoq due to appreciation of INR against USD on a qoq basis.
50
Software
Exhibit 5: Trend in volume growth (qoq)
12 10 8
(%)
Exhibit 7: Change in EBIT margins (qoq)

200 100
4.9
10.5 8.1 7.6 4.7
11.2
189 127 86 37 7 (0) (85) (121) (178) (237) (242) (270) 3QFY11
TCS Wipro*
120
7.2
7.4 6.6 5.7 3.1
6.8 4.4 1.9 2.7 (1.4)
23 3 (7) (14) (49)
4 2 0 (2) 1QFY11 2QFY11

Infosys
2.9 1.5
BP(qoq)
4.8
(100) (200) (300) (35)
(228) 4QFY11
HCL Tech
3QFY11
TCS HCL Tech
4QFY11
Wipro
1QFY12E
1QFY11
2QFY11
Infosys
1QFY12E
Source: Company, Angel Research; *Note: For IT services segment
Exhibit 6: Trend in USD revenue growth (qoq)

14 11.7 12 10 10.2 7.6 6.4 6 4 2 0 1QFY11 2QFY11
Infosys TCS
Earnings to slip (ex. HCL Tech)

On the back of wage hikes undertaken in 1QFY2012, profitability of tier-I companies like TCS and Infosys is expected to slip by 7% and 9% qoq, respectively. For Wipro, the impact will be limited to a 1% qoq decline due to partial impact of the wage hike. However, for HCL Tech profitability is expected to scorch up on the back of margin expansion and nil forex loss. Amongst mid-tier IT companies, profitability is expected to slide steeply on the back of wage hike as well as shooting up of tax rates because of the expiry of STPI w.e.f. April 1, 2011. However, this was already priced in our estimates.
9.0 7.5 7.0 5.8 5.9 5.6 4.7 5.8 4.2 3.9 1.1 6.2 5.2
(%)
8 4.3
3.2 1.1
3QFY11
HCL Tech
4QFY11
Wipro
1QFY12E
Margins to decline due to annual wage hikes

We expect EBIT margin for Infosys, TCS and Wipro to decline on the back of wage hikes given in 1QFY2012. Also, appreciating rupee remains a challenge. Infosys and TCS are expected to record a margin decline of 270bp and 228bp qoq to 26.3% and 25.7%, respectively. Impact on the EBIT margin of Wipro's IT services segment due to wage hike will be less at 49bp to 21.6% as the increment is effective from June 1, 2011, so the major impact will flow in 2QFY2012. On a consolidated level, Wipro's EBIT margin is expected to be flat qoq at 17.8%. For HCL Tech, we expect the company's EBIT margin to improve by 120bp qoq to 15.6% due to operating leverage on the back of higher volume growth. In case of TechMahindra, we expect the margin to expand by 213bp qoq due to SGA efficiency, growth in non-BT and absence of wage hikes.

The global macro data is pointing towards a bleak outlook for global corporate profits, though currently S&P 500 quarterly profits are about to tick in a lifetime high. Clients have allocated 2-3% higher budgets related to IT spending in CY2011, but some delay in spending is surfacing as they are turning a bit cautious on the back of tepid macro indicators. Therefore, 1QFY2012 is expected to be modest at 1.1-6.2% qoq growth in USD revenue for tier-I IT companies, aided by moderate demand driving volumes, favourable cross-currency movement and stable pricing environment. However, due to looming macro concerns, coutiousness prevails for CY2012 client budgets. We remain cautiously optimistic on the IT sector with TCS, Infosys and HCL Tech as our preferred picks.

Company Infosys TCS Wipro HCL Tech* Mphasis^ Infotech 3i Infotech CMP (`) 2,907 1,180 418 493 435 144 46 Net Sales 1QFY12E 7,435 10,547 8,335 4,340 1,288 1,303 337 307 638 2.6 3.8 0.4 4.9 2.1 3.7 3.5 (0.4) (2.1) OPM (%) chg bp (270) (228) 1 120 213 (392) (241) (194) (43) 26.3 25.7 17.8 15.6 19.6 12.5 8.2 6.9 15.5 Profit Net Profit 1QFY12E 1,689 2,182 1,363 516 209 156 11 17 48 (7.1) (9.1) (0.9) 10.3 1.2 (28.2) (69.3) (37.2) (24.4) (` EPS (`) % chg (7.1) (9.1) (0.9) 10.3 1.2 (28.2) (69.3) (37.2) (24.4) FY11 119.5 44.4 21.7 24.7 57.0 37.2 12.6 11.4 12.8 29.6 11.1 5.6 7.4 16.0 7.4 1.0 2.1 2.4 (` EPS (`) FY12E 139.3 50.8 23.9 33.4 55.3 39.0 12.7 12.4 10.5 FY13E 163.0 60.8 28.4 42.2 56.4 44.4 16.1 16.9 11.8 FY11 24.3 26.6 19.3 20.0 12.7 11.7 11.4 15.2 3.6 P/E (x) FY12E 20.9 23.2 17.5 14.8 13.0 11.2 11.3 13.9 4.4 FY13E 17.8 19.4 14.7 11.7 12.8 9.8 8.9 10.2 3.9 arg Target (`) 3,424 483 591 % chg 1QFY12E % chg 1QFY12E
( ` cr ) cr
Reco. Buy Buy Buy
1,337 Accumulate
Tech Mahindra 721
790 Accumulate 499 Accumulate 208 Neutal Buy Neutral
KPIT Cummins 173
Source: Company, Angel Research; Note: Price as on June 30, 2011; *June ending so 4QFY2011 estimates; ^October ending so 3QFY2011 estimates; Change is on a qoq basis
Analyst - Srishti Anand/Ankita Somani

51
Telecom
During 1QFY2012, all telecom stocks (ex. RCom) gained, with Bharti Airtel (Bharti) and Idea pacing up by 10.0% and 21.0%, respectively. This was primarily due to strong subscriber net additions, positive MNP outcome and fading knee-jerk reaction towards the possible outcomes of National Telecom Policy 2011 due to recommendation regarding the re-pricing and re-framing of the spectrum and its charges.
Exhibit 3: Net subscriber gainers/losers due to MNP

12 10 8
(mn)
1.20 1.04 10.0 0.80 8.5
1.4 1.2 1.0 0.8

(%)
6 4
0.49 3.8
6.4
0.6 0.4 0.2 0.0
2 0 Feb-11 Mar-11 Apr-11 May-11
Exhibit 1: Stock return analysis of leading Indian TSPs

60 40 21.0 20
(%)
49.0 34.7 10.0
Total subscribers opting for MNP (mn)
Share in total subscriber base (%)
Source: Bloomberg, Angel Research; Note: data till May 2011
0 (20) (40) (60) Bharti

Chg. (3 months)
VLR data points favourable for tier-I companies

(12.9)
(51.7) Rcom
Chg. (1 year)
Idea
As per the recent VLR data released for April 2011, out of the total 826.93mn subscribers, 583.22mn subscribers (70.5%) were active subscribers on the date of Peak VLR. Service provider wise, Idea leads the tally with a share of 92.92%, followed by Bharti with 89.51%, Vodafone with 80.78% and RCom with 63.64%, whereas Etisalat is at the bottom with 31.47%.
However, RCom underperformed significantly during the quarter, slipping by 12.9% because of the arrest of few of its senior officers along with the promoters of DB-Etisalat on account of their possible links in the 2G scam.
Exhibit 4: VLR data of incumbents

100 92.6 90 80
(%)
92.9 89.5 80.8 77.7 90.3
MNP recording a secular trend

Since the launch of MNP in January 2011, a secular trend is emerging in which incumbents such as Vodafone, Idea and Bharti are proving to be net gainers in the mentioned pecking order; whereas, the highest net looser has been RCom, both for its GSM and CDMA subscriber base. BSNL has also been losing out subscribers to other incumbents. Till date, the Indian mobile market has seen ~11mn users opting for MNP which , although is insignificant at ~1.3% of subscriber base, but the trend emerging from the applications clearly suggests that the above-mentioned players are proving to be the front-runners in gaining market share.
70 60 50 Bharti Vodafone
Jan-11
66.3 63.6 53.8 54.6 59.9 54.1
Idea
Feb-11
Rcom
Mar-11
BSNL
Apr-11
Aircel
Exhibit 5: Active subscribers (April 2011)

Active subscribers (mn) Bharti Vodafone Idea RCom BSNL Aircel MTNL 147.3 110.7 85.4 89.0 47.6 30.3 1.8 Active subscribers' market share (%) 25.38 19.06 14.72 15.34 8.20 5.21 0.32 Active subscribers' Reported subscribers' market share (%) market share (%) -March 2011 25.78 18.73 14.59 15.39 8.07 5.34 0.32 20.00 16.64 11.17 17.00 10.59 6.80 0.63
Exhibit 2: Net subscriber gainers/losers due to MNP

Tata Indicom BSNL Rcom (1,086,669) Aircel Tata Docomo Bharti Idea Vodafone (1,200,000) (800,000) (400,000) 400,000 70,553 135,592 563,460 590,343 591,600 800,000 (318,125) (477,164)
Source: TRAI, Angel Research
RMS vs. SMS

As per the revenue market share (RMS) data for 4QFY2011, Bharti leads at 31% with subscriber market share (SMS) of 20%, whereas Ideas RMS and SMS stand at 13.9% and 11.1%, respectively. RMS for Bharti and Idea is higher than SMS, which indicates that the quality of subscribers added by these companies is good. On the contrary, in case of RCom, SMS is at 17%, which is much ahead of RMS that is only at 8.2%. This is evident from the ARPU profile of these companies.
52
Source: Bloomberg, Angel Research; Note: data till May 2011
Telecom
Thus, though the pace of subscriber addition sported by each of the companies remains at 2mn-2.5mn per month, additions made by Bharti and Idea are value additions, whereas for RCom it is more of a volume addition. Amongst unlisted companies, Vodafone is also part of the Bharti-Idea clan with higher RMS at 21.2% and SMS at 16.7%, whereas incumbents such as BSNL and Aircel are part of RCom's clan with SMS higher than RMS. New entrants, including Etisalat, Uninor, S Tel and Loop Mobile, grew at average rates of 15.9%, 5.5%, 5.9% and 0.6%, respectively, while Videocon declined at an average rate of 0.4% mom. Although subscriber base of all telecom players reported growth, net addition run rate slided steeply for every player in April-May 2011. Thus, a trend was spotted with most incumbents (Bharti, Vodafone, Idea and Aircel) maintaining their subscriber market share over March-May 2011, whereas RCom and BSNL lost their market shares slightly to 16.9% and 10.5% in May 2011 from 17.0% and 10.7% in March 2011, respectively.
Exhibit 6: RMS vs. SMS of incumbents (as of 4QFY2011)

35 30 25 20.1
(%)
31.1
21.2 16.7 13.9 11.1 10.7 8.2 8.3 4.8 6.8 17.0
MOUs to remain flat

In 4QFY2011, Idea and RCom experienced a decline in minutes of usage (MOU), while Bharti (excluding Africa) reported flat MOU on the back of robust subscriber growth. For 1QFY2012, we expect MOU of Bharti (excluding Africa), Idea and RCom to remain flat at 449min, 397min and 241min, respectively.
20 15 10 5 0 Bharti
Vodafone
Idea
RMS
Rcom
SMS
BSNL
Aircel
Source: TRAI, Angel Research
Exhibit 8: Trend in MOU per month per subscriber

500 468 446 480 454 449 449 449
Incumbents continue to post strong subscriber addition

400
Over March-May 2011, the Indian subscriber base grew at an average rate of 1.7% mom, led by incumbents such as Bharti, Vodafone and Idea. However, net subscriber addition numbers were the lowest in the last one year. Amongst incumbents, subscriber growth was led by Idea at 2.3% mom, followed by Aircel, Vodafone, Bharti, RCom and BSNL, which grew at an average rate of 2.0%, 1.8%, 1.5%, 1.5% and 0.7% mom, respectively.
(min)
389 300 330
398
415
394
401
397
397
318 295 276 251

2QFY11 3QFY11
241
241
200
3QFY10 4QFY10 1QFY11
4QFY11
Bharti (ex-Africa)
Idea
Rcom
Exhibit 7: Total subscriber base

Company (mn) Dec-10 Bharti RCom Vodafone BSNL Idea TTSL Aircel MTNL Loop Mobile HFCL Shyam Telelink S Tel Uninor Videocon DB Etisalat 152.5 125.7 124.3 81.4 81.8 83.7 50.2 5.1 3.0 1.6 8.4 2.3 18.5 7.3 0.3 Jan-11 155.8 130.1 127.4 83.6 84.3 86.1 51.8 5.2 3.1 1.3 9.1 2.5 20.3 6.0 0.5 eb-11 Feb-11 159.0 133.4 130.9 85.1 86.8 87.7 53.5 5.2 3.1 1.4 9.6 2.7 21.6 6.6 0.7 Mar-11 Mar-11 162.2 137.0 134.6 86.5 89.5 89.1 54.8 5.2 3.1 1.5 10.1 2.8 22.8 7.1 1.0 807.2 Apr-11 May-11 Apr-11 May-11 164.6 139.9 137.0 87.1 92.0 90.4 56.0 5.2 3.1 1.5 10.6 3.0 24.2 7.2 1.2 823.0 167.1 141.2 139.4 87.6 93.8 90.8 57.1 5.2 3.1 1.4 11.2 3.2 25.4 7.1 1.3 834.8
VAS share to grow

We expect VAS share in the mobility revenue of Bharti and Idea to increase in 1QFY2012, which would arrest the downside in average revenue per minute (ARPM) due to lower voice ARPM resulting in from higher growth in B and C circles. We expect VAS share as a percentage of mobility revenue to grow by 50bp and 10bp qoq to 15.5% and 12.2% for Bharti (excluding Africa) and Idea, respectively.
Exhibit 9: Trend in VAS share as a % to mobility revenue

17
(% of mobility revenue)
15 13 11.2 11 11.0 9
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
13.8 12.4 12.6 12.9 15.0 15.5
12.7 11.8 11.6
13.0 12.1 12.2
4QFY11
Total 746.1 766.9 787.1 Source: COAI, AUSPI, Angel Research
Bharti (ex-Africa)
Idea
1QFY12E
1QFY12E
53
Telecom
ARPM to remain flat
ARPM has been following a declining trend over the past nine quarters due to entry of new players and the price war. However, the price war logged by these new entrants has turned into a curse for their own sustainability. The confidence in no further possibility of a price war was instilled by the rational pricing move made by various telecom players for 3G, i.e. no case of undercutting. Therefore, for 1QFY2012, we expect ARPM for Bharti (excluding Africa) to increase by 4.6% qoq to `0.45/min; however, for Idea and RCom, ARPM is expected to be stable on a qoq basis.
EPMs to inch up (ex. RCom)

For 1QFY2012, we expect EBITDA per minute (EPM) to remain almost flat for Idea, while a slight uptick is expected for Bharti and RCom on account of stable MOU and APRM and increased share of VAS in mobility revenue.
Exhibit 12: EPM trend

0.21 0.18
(`/min) (`/min)
0.20 0.17 0.20 0.17 0.17 0.17 0.17 0.16 0.16 0.10 0.11 0.11
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12E
0.17 0.17 0.15 0.16 0.16 0.10 0.11 0.10 0.13 0.13 0.11 0.16 0.14
0.15 0.12 0.09
0.16 0.13 0.13
0.17 0.17
Exhibit 10: Trend in ARPM

0.55
0.13
0.10
0.10
(`/min)
0.50
Bharti (ex-Africa) Bharti (ex-Africa)
Idea
Rcom
0.45
0.40
1QFY12E 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11

For 1QFY2012, we expect revenue growth to be driven by decent growth in subscriber base, flat voice ARPM and higher share of VAS in mobility revenue. Amongst the top three operators, we expect Bharti to post revenue growth of 5.8% qoq. Idea and RCom are expected to post revenue growth of 4.8% and 3.9% qoq, respectively. On the EBITDA margin front, we expect margins of Bharti, Idea and RCom to expand by 172bp, 63bp and 407bp (higher growth due to low base effect) qoq to 35.2%, 26.0% and 28.2%, respectively. Players in the sector (especially RCom and Etisalat) continue to be haunted by issues related to the 2G scam. We believe industry dynamics point toward a possible consolidation in the long run and expect only select few operators, including Bharti, Vodafone, RCom, Idea, BSNL, Aircel and Uninor, to be the survivors out of the current 15 operators. Amongst the listed players, Bharti is a better bet due to its low-cost integrated model (owned tower infrastructure), potential opportunity to scale up in Africa, established leadership in revenue and subscriber market share, and relatively better KPIs. However, overall we remain Neutral on the telecom sector.
Bharti (ex-Africa)
Idea
Rcom
ARPUs to decline marginally

For 1QFY2012, we expect the combination of flat MOU, flat ARPM and soft subscriber addition to pull down the average revenue per user (ARPU) of Bharti (excluding Africa), Idea and RCom by 0.8%, 1.9% and 1.0% qoq to `192/month, `164/month and `106/month, respectively.
Exhibit 11: Trend in ARPU per month

250 230 220 215 202 200
(`/month)
198 167 168
194 168
192 164
185 200
182
150 149 100 50

3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12E
139
130
122
111
107
106
Bharti (ex-Africa)
Idea
Rcom

Company Bharti Rcom Idea CMP (`) 395 96 80 Net Sales 1QFY12E 17,212 5,123 4,438 5.8 3.9 4.8 OPM (%) chg bp 172 407 63 35.2 28.2 26.0 Net Profit Profit 1QFY12E 1,874 70 195 33.8 (58.7) (29.0) EPS (`) (` % chg 33.8 (58.7) (29.0) 4.9 0.3 0.6 EPS (`) (` FY11 15.9 6.5 2.7 FY12E 21.1 3.1 2.6 FY13E 26.2 7.1 3.4 FY11 24.8 14.8 29.3 P/E (x) FY12E 18.8 31.2 30.7 FY13E 15.1 13.6 23.5 Target rge (`) % chg 1QFY12E % chg 1QFY12E
(` cr) `
Reco. Neutral Neutral Neutral
Source: Company, Angel Research; Note: Price as on June 30, 2011; Change is on a qoq basis
Analyst - Srishti Anand/Ankita Somani

54
Stock Watch
55
Watch Stock Watch | July 2011

Sales (` cr) FY12E FY13E 2,451 1,342 6,495 2,097 10,520 12,384 834 19,654 6,052 7,697 4,188 1,068 5,459 1,242 21,914 6,636 27,025 41,706 9,651 1,225 145,042 7,360 6,046 4,456 13,517 12,803 11,470 11,522 6,742 4,631 2,561 2,498 18,444 19,161 7,244 5,678 6,598 4,802 16,632 14,605 12,871 12,981 7,586 5,199 2,750 2,805 22,893 23,361 8,474 6,196 2.9 3.0 3.0 2.6 2.4 2.4 2.6 2.2 2.6 3.5 4.4 2.7 1.9 3.5 2.7 2.7 2.9 2.5 2.2 2.2 2.5 2.1 2.4 3.2 4.3 2.7 2.0 3.3 33.4 23.9 98.2 117.1 56.9 91.6 17.6 100.2 19.5 43.1 110.3 57.1 18.5 43.3 35.6 24.0 120.8 131.9 67.2 92.6 22.0 107.5 20.3 49.6 143.5 69.3 21.9 47.4 5.9 5.6 13.1 7.4 7.3 5.7 7.0 5.2 4.7 10.5 22.7 19.2 7.4 4.9 5.5 5.6 10.7 6.6 6.2 5.7 5.6 4.9 4.5 9.1 17.4 15.8 6.2 4.5 1.1 1.0 2.4 1.4 1.2 1.1 0.9 0.9 0.8 1.4 4.0 2.1 1.0 1.0 0.9 0.9 2.1 1.2 1.1 1.0 0.8 0.8 0.7 1.2 3.4 2.0 0.9 0.8 2,396 11,724 13,621 933 22,380 7,141 8,638 4,817 1,196 6,294 1,413 24,368 7,300 30,583 47,242 11,126 1,336 161,960 8,253 14.3 11.0 10.1 12.0 19.2 15.0 18.3 3.3 3.9 18.3 18.0 14.1 5.0 12.7 8.5 11.0 7.6 12.7 5.8 14.2 11.4 10.2 11.6 18.7 15.0 18.1 4.3 5.4 18.4 17.8 14.1 5.8 12.6 8.7 11.1 7.6 12.5 5.8 20.7 9.8 4.5 32.0 100.3 18.8 307.9 14.3 6.9 8.7 86.7 103.9 19.0 46.7 89.1 11.6 3.9 159.4 4.4 23.4 11.6 5.0 34.8 107.3 23.4 340.6 29.9 14.0 10.0 97.3 116.9 29.5 51.6 101.0 13.7 4.4 172.6 5.2 10.9 8.0 10.8 13.2 14.0 16.5 22.3 7.5 9.5 18.5 13.8 18.1 5.1 15.0 13.0 19.5 8.0 6.2 12.2 9.6 6.7 9.7 12.1 13.1 13.2 20.1 3.6 4.7 16.1 12.3 16.1 3.3 13.6 11.5 16.5 7.0 5.8 10.3 2.3 1.4 2.2 2.7 6.8 3.1 4.2 0.5 0.8 4.2 2.8 10.2 0.4 3.6 2.0 5.5 0.7 2.2 2.4 1.9 1.2 2.0 2.2 5.4 2.6 3.6 0.5 0.7 3.5 2.3 9.0 0.4 3.0 1.7 4.4 0.7 1.6 2.0 23.3 15.7 14.5 22.0 53.5 20.4 18.9 7.4 8.9 24.6 22.5 62.4 8.3 25.1 16.7 30.0 9.5 41.9 20.7 19.2 19.1 20.1 20.2 18.1 20.8 16.2 19.3 17.5 13.7 18.8 14.0 13.6 22.0 21.5 17.2 14.9 19.9 46.1 21.3 17.7 15.2 16.4 23.5 20.7 59.5 11.9 23.9 16.0 29.8 10.3 32.1 21.0 17.8 16.8 21.0 19.5 18.5 18.1 15.1 17.9 15.8 14.1 20.9 15.6 14.5 20.4 2,752 1,570 6,940 12.3 18.4 19.7 12.3 17.9 19.8 45.7 83.4 15.4 50.2 97.7 17.2 20.1 18.4 9.9 18.3 15.7 8.9 4.0 4.5 1.6 3.3 3.7 1.4 23.5 27.3 17.6 21.3 25.9 17.1 1.4 2.1 1.2 0.9 0.6 0.6 0.8 1.8 1.3 2.4 0.3 0.2 2.2 1.3 1.4 0.3 1.2 0.6 1.0 0.3 0.5 0.4 OPM (%) FY12E FY13E EPS (`) FY12E FY13E PER (x) FY12E FY13E P/BV (x) FY12E FY13E RoE (%) FY12E FY13E EV/Sales (x) FY12E FY13E 1.2 1.8 1.1 0.7 0.5 0.6 0.7 1.5 1.0 2.0 0.3 0.1 1.8 1.1 1.2 0.3 1.0 0.5 0.8 0.3 0.4 0.3 -
Company Name
Reco
CMP (`) 3,367 2,985 7,076 1,922 3,945 6,472 638 40,681 7,211 21,512 364 183 13,740 1,984 37,499 394 41,183 33,479 8,751 186 63,356 2,548 9,372 7,507 53,068 34,139 22,641 23,226 8,024 7,785 3,021 7,724 116,718 125,937 13,396 9,139
Target Price (`)
Mkt Cap (` cr)
Agri / Agri Chemical Bayer Cropscience Rallis India United Phosphorus Auto & Auto Ancillary
Neutral Neutral Buy
919 1531 153
198
Amara Raja Batteries Apollo Tyres Ashok Leyland Automotive Axle^ Bajaj Auto Bharat Forge Bosch India* CEAT Denso Exide Industries FAG Bearings* Hero Honda JK Tyre Mahindra & Mahindra Maruti Motherson Sumi Subros Tata Motors TVS Motor Banking
Accumulate Buy Buy Neutral Accumulate Accumulate Neutral Buy Buy Accumulate Neutral Neutral Buy Buy Accumulate Accumulate Accumulate Accumulate Buy
225 78 49 422 1,406 310 6,851 106 66 162 1,194 1,878 96 701 1,158 226 31 994 54
257 93 60 1,610 351 135 98 172 133 804 1,314 247 35 1,100 62
Allahabad Bank Andhra Bank Axis Bank Bank of Baroda Bank of India Canara Bank Central Bank Corporation Bank Dena Bank Federal Bank HDFC Bank ICICI Bank IDBI Bank Indian Bank
Accumulate 197 Accumulate 134 Buy 1,289 Buy 872 Buy 414 Neutral 524 Reduce 124 Buy 526 Buy 91 Accumulate 452 Neutral 2,503 Buy 1,093 Neutral 136 Buy 213
222 145 1,650 1,017 498 112 640 106 483 1,355 255
Please refer to important disclosures at the end of this report.
56
Company Name
Reco
Accumulate Accumulate Buy Accumulate Accumulate Buy Buy Neutral Buy Accumulate Neutral Accumulate 18,565 6,141 3,240 100,183 16,628 1,772 697 2,075 2,356 7,076 17,841 20,590 2,181 538 1,932 25,582 573 1,938 5,740 4,046 1,864 17,192 112,069 651 2,086 1,036 2,433 4,722 2,901 5,103 6,275 15,860 53,705 2,069 5,856 3,272 2,946 5,485 3,995 7,100 7,494 18,708 66,161 2,632 6,939 3,587 6.4 12.6 42.9 24.5 9.2 24.5 12.0 10.2 9.3 12.7 7.3 12.6 38.3 21.6 9.4 24.4 12.0 9.9 9.7 13.1 2.6 0.8 11.0 24.0 6.2 5.1 68.3 7.5 5.8 15.5 8,913 8,463 3,896 1,529 3,033 18,351 10,160 9,617 4,394 1,717 3,467 20,704 20.6 23.2 13.4 15.9 21.8 20.9 21.0 23.3 16.5 15.8 21.4 21.1 54.9 7.6 4.8 6.1 7.9 69.7 62.2 8.4 8.8 7.2 10.5 80.4 4.2 1.3 14.5 29.7 8.2 6.8 82.5 8.7 7.6 23.0 17.3 17.6 14.8 7.2 10.3 13.4 12.2 39.7 15.7 8.7 11.2 15.8 26.7 11.7 14.0 9.5 15.3 16.0 8.1 6.1 7.7 11.6 7.4 24.1 11.9 7.0 8.5 11.9 22.1 10.1 10.6 6.4 7,443 4,564 5,252 50,647 11,029 1,721 2,830 5,398 2,350 6,197 8,675 5,320 5,719 59,389 12,867 2,053 3,259 6,418 2,883 7,173 9.4 10.2 11.0 19.8 13.4 22.9 11.0 11.0 14.2 10.7 9.5 10.7 11.0 19.8 13.9 25.6 11.0 11.3 14.3 10.7 20.3 8.9 44.5 133.6 15.3 11.9 12.6 9.5 179.3 37.5 23.6 11.9 48.1 156.5 18.7 15.4 15.3 12.8 231.7 43.4 43.2 28.8 10.1 15.3 17.0 7.6 6.7 8.3 11.7 15.9 37.2 21.6 9.3 13.1 13.9 5.9 5.6 6.2 9.0 13.7 6.7 5.3 2.7 4.1 4.1 1.1 0.9 1.8 2.4 4.2 2.5 2.5 0.6 0.5 1.0 2.1 0.9 1.3 2.1 1.6 0.9 1.7 4.3 1.0 0.8 0.7 5.8 4.4 2.3 3.4 3.3 0.9 0.8 1.4 2.0 3.4 2.3 2.3 0.6 0.5 0.9 1.8 0.8 1.3 1.8 1.4 0.8 1.5 3.7 0.9 0.8 0.6 16.6 19.7 30.0 28.9 26.8 14.6 16.8 24.2 22.9 29.6 15.2 15.2 4.3 7.0 10.3 16.7 7.3 3.2 14.2 20.6 8.1 11.0 17.5 8.5 6.1 7.2 16.8 22.1 26.8 27.2 26.3 17.2 15.3 26.0 24.7 27.3 15.5 15.2 7.8 7.7 12.4 16.7 11.2 5.3 16.5 21.2 9.8 13.1 18.1 9.2 7.6 9.9
CMP (`) 147 840 330 1,090 24 2,406 117 96 293 96 70 312 2.4 1.5 0.7 1.6 1.4 1.3 0.4 0.6 0.6 0.9 1.7 2.1 1.0 0.5 1.6 1.5 0.4 1.3 3.6 2.2 0.6 2.3 2.2 0.8 0.8 1.0
Target Price (`) 166 893 392 1,235 26 2,832 139 357 110 337
Mkt Cap (` cr) 9,086 4,073 9,614 34,520 2,706 152,778 6,733 6,005 15,352 3,317 3,285 10,859
Sales (` cr) FY12E FY13E 6,496 7,031 2,040 2,169 5,346 5,859 17,044 19,313 1,099 1,203 54,719 63,505 5,632 5,939 4,849 5,596 8,962 9,848 2,968 3,299 2,541 2,798 2,412 2,956
OPM (%) FY12E FY13E 2.7 2.4 3.2 3.0 2.6 2.5 3.3 3.1 2.6 2.5 2.9 2.9 2.8 2.4 2.2 2.2 2.8 2.6 2.6 2.5 2.3 2.2 2.4 2.4
EPS (`) FY12E FY13E 22.5 26.4 141.2 150.2 57.4 66.6 151.9 174.6 3.1 3.2 202.5 270.6 21.1 24.0 14.8 17.8 43.8 47.8 14.8 17.1 9.1 10.3 26.0 29.8
PER (x) FY12E FY13E 6.5 5.6 5.9 5.6 5.7 4.9 7.2 6.2 7.7 7.4 11.9 8.9 5.6 4.9 6.5 5.4 6.7 6.1 6.5 5.6 7.7 6.8 12.0 10.5
P/BV (x) FY12E FY13E 1.0 0.9 1.0 0.9 0.8 0.7 1.5 1.2 1.4 1.3 2.1 1.8 0.9 0.8 1.2 1.0 1.2 1.1 0.9 0.8 1.0 0.9 2.4 2.0
RoE (%) FY12E FY13E 16.0 16.6 18.3 17.0 15.4 15.8 21.9 21.3 19.2 17.3 19.7 22.6 17.0 17.0 16.8 17.6 19.2 18.1 13.5 14.0 12.4 12.8 21.6 20.6
EV/Sales (x) FY12E FY13E 2.1 1.3 0.6 1.4 1.2 0.9 0.3 0.5 0.4 0.8 1.4 1.8 0.8 0.4 1.3 1.2 0.4 1.2 3.0 2.1 0.6 1.9 1.8 0.8 0.8 0.9
Sell Neutral Buy Neutral Buy Buy Buy Buy Buy Neutral
876 257 449 2,047 259 91 85 79 2,090 594
637 520 300 123 104 115 2,780 -
IOB J & K Bank Oriental Bank Punjab Natl.Bank South Ind.Bank St Bk of India Syndicate Bank UCO Bank Union Bank United Bank Vijaya Bank Yes Bank Capital Goods ABB* Areva* BGR Energy BHEL Crompton Greaves Graphite India Jyoti Structures KEC International LMW Thermax Cement ACC Ambuja Cements India Cements J K Lakshmi Cements Madras Cements UltraTech Cement Construction Consolidated Co Hind. Const. IRB Infra ITNL IVRCL Infra Jaiprakash Asso. Larsen & Toubro Madhucon Proj Nagarjuna Const. Patel Engg.
Neutral Reduce Neutral Buy Neutral Neutral
949 134 71 44 81 934
122 57 -
Neutral 31 Neutral 32 Accumulate 173 Buy 208 Buy 70 Buy 81 Accumulate 1,823 Buy 88 Buy 81 Neutral 148
191 308 100 108 2,030 117 109 -
57

Sales (` cr) FY12E FY13E 9,585 2,602 5,373 9,092 5,014 2,564 5,268 2,723 4,196 21,840 24,706 3,431 7,277 310 2,201 1,612 480 19,451 32,999 1,432 1,324 5,771 1,401 45,584 5,178 35,504 2,555 4,246 3,055 1,415 2,000 1,339 540 2,132 1,588 2,241 1,453 627 2,384 3,689 4,812 3,325 23.0 27.5 40.2 29.6 18.1 29.4 19.9 78.4 22.3 27.0 41.5 30.8 18.2 29.5 21.5 78.8 47.7 71.4 42.2 14.1 8.8 7.2 5.0 21.2 76.0 79.5 49.3 16.8 9.7 8.1 8.4 23.9 2,260 1,802 650 23,391 40,203 1,652 1,637 6,560 1,545 54,509 5,715 41,145 20.6 43.1 33.6 18.1 31.1 15.0 14.7 17.4 13.2 29.0 19.2 20.0 21.5 46.7 33.5 18.5 30.1 16.3 16.2 17.2 13.8 28.7 18.3 20.9 10.5 42.1 30.5 33.4 139.3 12.7 12.4 39.0 5.5 50.8 55.3 23.9 11.8 51.8 42.3 42.2 163.0 16.1 16.9 44.4 6.9 60.8 56.4 28.4 4.4 9.3 17.2 14.8 20.9 11.3 13.9 11.2 10.0 23.2 13.0 17.5 7.4 14.6 6.8 16.5 19.4 17.5 20.4 16.4 360 40.4 40.6 9.5 11.7 11.0 9.0 3.9 7.6 12.4 11.7 17.8 8.9 10.2 9.8 8.0 19.4 12.8 14.7 4.6 13.1 5.8 13.9 17.5 15.7 12.0 14.5 1.8 0.7 1.8 2.8 3.8 5.0 1.4 2.0 1.9 1.5 7.5 2.3 3.7 1.6 2.5 0.7 4.2 3.0 5.6 0.9 4.5 1.5 0.6 1.3 2.5 3.1 4.1 1.2 1.7 1.6 1.3 6.1 2.0 3.2 1.2 2.3 0.6 3.4 2.6 5.2 0.8 3.7 17.3 15.3 15.1 17.4 25.8 23.9 12.0 15.7 17.3 14.9 32.5 17.9 21.1 23.9 18.0 10.3 27.9 16.6 33.2 4.2 30.7 10,608 5,858 2,966 6,033 3,174 4,681 24,574 29,294 3,926 8,435 17.0 5.8 20.1 19.1 16.4 19.5 13.4 34.0 13.7 20.1 17.6 7.1 20.8 19.5 16.9 19.9 13.9 34.2 14.1 20.7 102.5 15.4 33.7 4.2 82.7 17.8 11.7 7.5 4.9 101.0 126.3 22.5 38.8 5.0 98.3 20.3 13.3 8.9 6.1 120.1 31.0 31.0 29.1 26.9 29.7 24.2 29.4 27.0 31.5 40.6 25.2 21.2 25.3 22.9 24.9 21.2 25.7 22.8 25.5 34.1 11.0 10.9 31.7 11.2 8.8 6.0 23.7 8.0 8.3 30.8 8.6 8.9 22.8 8.9 7.2 5.2 20.5 6.5 6.6 20.9 39.6 37.8 113.9 46.7 32.6 35.1 74.8 32.7 30.8 91.1 38.3 46.1 105.0 43.3 31.8 26.3 74.6 31.5 29.0 72.9 18.3 15.1 17.0 16.7 26.9 22.9 13.2 17.7 16.8 16.7 31.4 15.6 21.5 29.6 17.7 11.2 27.3 15.8 34.4 6.9 28.2 10,992 2,865 6,721 8.3 9.8 9.7 8.4 10.4 9.8 3.7 8.4 24.1 5.9 9.7 36.7 20.6 15.9 11.1 12.8 13.8 7.3 0.8 2.7 1.1 0.8 2.3 1.0 4.1 18.4 10.5 6.4 17.9 14.3 0.7 1.0 0.5 3.2 1.1 5.0 3.8 3.4 3.4 3.2 6.0 2.7 5.3 2.5 1.1 2.5 1.8 1.7 4.4 0.7 1.0 1.1 0.7 4.8 1.9 2.5 1.6 2.7 2.7 3.0 2.0 3.1 0.5 6.3 OPM (%) FY12E FY13E EPS (`) FY12E FY13E PER (x) FY12E FY13E P/BV (x) FY12E FY13E RoE (%) FY12E FY13E EV/Sales (x) FY12E FY13E 0.6 0.9 0.5 2.7 1.0 4.2 3.3 2.9 3.0 2.8 5.0 2.3 4.5 2.0 1.0 2.3 1.4 1.3 3.4 0.6 0.7 0.9 0.5 3.8 1.6 2.1 1.1 2.3 2.5 2.5 1.8 2.9 0.3 5.6
Company Name 2,519 2,011 1,331 30,508 5,710 13,346 19,849 10,312 13,944 74,017 156,658 9,569 39,484 658 886 3,722 1,000 34,295 166,303 1,595 1,411 9,116 909 231,018 9,408 102,479 1,796 13,506 4,377 4,270 3,995 4,010 276 13,704
Reco
CMP (`)
Target Price (`)
Mkt Cap (` cr)
Punj Lloyd Sadbhav Engg. Simplex Infra FMCG
Neutral Buy Buy
76 134 268
161 404
Asian Paints Britannia Colgate Dabur India GlaxoSmith Con* Godrej Consumer HUL ITC Marico Nestle* Hotel
Neutral Neutral Reduce Neutral Reduce Neutral Neutral Neutral Reduce Reduce
3,181 478 981 114 2,452 431 343 202 156 4,095
874 2,163 147 3,483
Buy
105
140
Taj GVK IT 3i Infotech Educomp Everonn HCL Tech Infosys Infotech Enterprises KPIT Cummins Mphasis NIIT TCS Tech Mahindra Wipro Logistics and Shipping
Neutral 46 Buy 392 Accumulate 526 Buy 493 Buy 2,907 Neutral 144 Buy 173 Accumulate 435 Buy 55 Accumulate 1,180 Accumulate 721 Buy 418
522 602 591 3,424 208 499 68 1,337 790 483
ABG Shipyard Concor GE Shipping Media
Neutral Neutral Buy
353 1,039 287
360
D B Corp HT Media Jagran Prakashan PVR Sun TV Network
Buy Neutral Buy Buy Buy
233 170 127 102 348
335 161 127 454
58

Sales (` cr) FY12E FY13E 7,923 60,311 1,756 1,425 11,748 75,211 35,722 1,177 1,860 7,067 13,075 2,205 47,903 953 11,147 34,722 120,167 15,690 34,001 1,081 2,122 2,186 129,526 15,936 275,171 4519 1,224 5336 7138 1115 8721 2447 591 2,207 6817 2143 10196 5243 1,401 6478 8322 1282 9584 2788 740 2,548 8272 2508 12023 17.8 14.9 19.8 20.0 17.5 25.2 35.5 16.1 20.5 18.3 21.8 19.0 18.3 15.3 20.2 21.2 17.9 25.1 35.5 17.2 21.5 19.7 21.8 23.0 15.5 85.5 38.6 15.2 9.3 87.9 72.0 53.3 20.0 22.4 28.4 29.1 19.1 89.7 52.6 18.9 11.1 96.0 86.9 66.5 27.5 29.7 37.3 44.8 17,900 37,724 1,110 2,438 2,650 151,323 17,402 275,661 81.9 17.9 92.2 20.8 26.1 44.5 9.5 15.4 80.2 17.6 92.5 19.9 24.0 44.6 10.3 16.5 48.7 29.6 9.2 20.9 20.9 32.6 9.8 71.9 54.7 31.3 9.4 23.2 22.7 39.1 11.6 77.2 6.4 14.9 9.7 18.7 18.3 8.4 13.9 12.5 11.2 24.0 23.8 21.6 9.7 17.4 32.7 8.1 17.1 20.1 9.6 18.6 5.7 14.1 9.5 16.8 16.8 7.0 11.7 11.6 9.0 22.9 17.5 17.5 8.1 16.0 27.1 6.5 12.4 15.1 7.3 12.1 1.2 2.5 2.1 5.2 4.4 1.7 3.1 1.5 1.7 3.9 6.3 3.6 0.8 4.7 8.9 1.3 3.3 5.2 2.0 3.5 1.0 2.2 1.8 4.5 3.7 1.5 2.6 1.3 1.4 3.5 4.9 3.1 0.7 3.8 7.8 1.1 2.7 4.1 1.6 2.9 21.2 18.2 23.3 29.7 26.3 21.9 24.7 14.0 20.7 18.3 31.7 17.2 8.1 28.6 21.1 18.1 21.8 28.2 19.3 20.1 19.4 16.9 20.0 28.8 23.8 22.4 24.3 13.3 19.0 17.1 33.4 18.5 8.8 25.2 30.7 19.5 24.9 30.8 23.4 25.9 8,359 64,355 1,818 1,607 12,560 80,961 42,800 1,208 2,673 7,115 15,036 2,193 56,016 1,013 12,453 41,331 125,290 33.2 26.8 17.9 20.0 56.4 11.6 17.5 57.7 27.8 27.1 73.0 21.9 19.2 21.5 46.9 24.4 13.7 34.7 26.8 17.7 21.7 56.8 14.7 18.0 58.6 30.8 28.6 72.9 25.6 22.1 24.1 46.7 28.9 15.4 49.8 21.5 5.0 41.3 14.2 16.0 92.1 32.8 41.5 5.1 18.5 22.8 12.9 27.1 43.4 17.3 73.2 54.9 22.4 5.3 54.8 15.3 25.5 115.6 34.9 56.5 5.8 21.3 28.0 16.5 33.0 47.4 21.7 91.5 8.8 18.3 5.9 3.8 9.6 11.3 9.6 10.2 12.0 16.3 13.8 2.9 10.7 7.9 6.5 9.7 8.3 8.0 17.5 5.6 2.8 8.9 7.1 7.6 9.6 8.8 14.4 12.0 2.4 8.3 6.5 5.9 7.7 6.7 1.5 5.7 0.5 0.6 2.0 1.3 1.0 2.2 1.3 2.2 4.1 0.4 1.4 1.0 1.5 1.2 1.4 1.3 4.6 0.5 0.5 1.7 1.1 0.9 1.9 1.2 2.2 3.2 0.3 1.2 0.9 1.2 1.0 1.2 19.2 35.0 9.4 17.6 23.6 12.2 10.8 23.7 11.8 12.7 33.3 16.9 13.5 13.8 25.2 13.2 18.5 17.7 28.8 9.4 19.4 20.6 16.9 12.2 21.4 15.3 13.6 30.0 17.4 15.2 14.8 22.3 14.3 19.6 3.1 3.2 1.1 0.8 3.1 0.8 1.0 3.0 3.3 2.9 6.3 0.7 1.4 1.4 1.1 1.8 0.5 3.3 1.6 5.8 2.1 2.6 1.6 0.8 1.1 1.5 3.1 3.4 3.8 1.5 3.3 7.3 1.0 2.1 3.0 1.8 2.3 OPM (%) FY12E FY13E EPS (`) FY12E FY13E PER (x) FY12E FY13E P/BV (x) FY12E FY13E RoE (%) FY12E FY13E EV/Sales (x) FY12E FY13E 2.8 2.8 1.0 0.6 2.4 0.8 0.8 2.6 2.6 2.9 5.1 0.7 1.3 1.2 0.8 1.3 0.5 2.4 1.5 5.6 1.8 2.1 1.2 0.8 1.0 1.3 2.6 2.7 3.3 1.4 2.9 6.3 0.8 1.8 2.5 1.5 1.7
Company Name
Reco
CMP (`) 9,311 247,854 921 492 57,569 34,724 19,688 5,612 3,210 21,339 101,100 884 56,793 764 24,521 56,476 58,387 59,111 55,972 5,004 5,008 5,338 234,377 10,174 293,857 5101 4849 18424 26648 739 26271 19987 524 4314 19887 1882 23029
Target Price (`)
Mkt Cap (` cr)
Neutral Neutral Buy Buy Buy Buy Buy Accumulate Accumulate Reduce Reduce Buy Buy Buy Buy Buy Buy
439 392 29 155 136 181 882 334 499 83 255 66 138 213 282 168 609
37 225 158 242 1,024 358 533 77 241 96 191 253 385 216 799
Metal Bhushan Steel Coal India Electrosteel Castings Godawari Power Hind. Zinc Hindalco JSW Steel MOIL Monnet Ispat Nalco NMDC Prakash Ind. SAIL Sarda Energy Sesa Goa Sterlite Inds Tata Steel Oil & Gas Cairn GAIL GSPL Gujarat Gas IGL ONGC Petronet LNG RIL Pharmaceuticals Aurobindo Pharma# Aventis* Cadila Healthcare Cipla Dishman Pharma Dr Reddy's GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy*
Neutral Buy Buy Accumulate Reduce Buy Neutral Buy
311 441 89 391 381 274 136 898
539 105 418 352 336 1,189
Buy Neutral Buy Buy Buy Buy Neutral Buy Neutral Buy Buy Accumulate
173 2052 919 330 90 1533 2354 430 342 449 271 541
278 1,053 377 133 1,920 665 593 373 588
59

Sales (` cr) FY12E FY13E 7576 4,457 1,526 64,696 12,292 697 10,204 2,875 70,990 18,562 21,400 3,301 5,575 2,994 3,692 766 2,431 1,383 658 5,296 982 4,327 2,870 3,969 4,078 2,197 4,382 926 2,770 1,498 822 6,256 1,150 5,647 3,391 9.8 17.0 17.7 9.3 34.8 9.1 12.5 18.6 18.3 12.2 4.9 7.7 9.9 8.5 14.3 9.5 35.0 9.2 13.0 18.6 17.4 11.6 5.3 7.6 19.1 8.1 6.3 24.8 285.7 8.5 31.2 64.0 20.8 65.1 4.8 18.0 24.1 1.9 30.0 346.2 10.7 40.8 79.1 23.6 70.4 6.7 23.0 12.6 8.7 9.9 12.1 24.3 5.4 6.2 29.7 8.7 6.4 6.9 4.6 10.0 32.5 10.0 20.1 4.3 4.7 24.0 7.7 5.9 4.9 3.6 80,428 21,134 23,340 35.0 26.1 29.2 35.6 26.6 31.4 21.1 2.6 3.1 26.2 3.4 7.1 18.8 30.7 31.2 15.1 23.5 13.6 2.7 2.0 0.5 3.2 0.5 1.2 4.1 10.5 0.9 1.1 15.4 1.7 1.5 2.7 0.5 2.3 1.8 0.5 2.6 0.6 1.2 3.5 9.0 0.7 0.9 12.6 1.4 1.2 1.8 0.5 1,110 11,312 3,206 60.1 45.2 53.8 55.9 46.5 55.0 7.5 11.6 26.0 11.5 13.7 30.0 8.5 18.0 6.1 5.5 15.3 5.3 0.5 1.3 0.6 0.4 1.2 0.5 5.7 7.5 11.3 15.2 6.7 1.5 28.1 6.2 13.4 38.1 47.1 16.9 21.0 55.8 19.3 25.1 46.5 12.8 4,821 1,619 72,586 14,292 25.9 26.7 25.4 1.7 26.2 26.2 25.4 1.7 42.9 9.2 12.3 6.2 44.5 11.1 13.4 6.9 7.0 8.2 15.2 12.8 6.7 6.8 13.9 11.6 0.8 0.8 2.0 1.0 0.7 0.7 1.9 0.9 12.0 9.9 13.9 8.0 11.2 11.0 13.9 8.5 8.3 8.3 11.5 16.3 8.2 3.5 28.5 3.8 38.0 48.3 18.2 22.4 56.4 18.1 22.4 41.6 14.0 9516 30.1 31.1 18.0 23.5 27.7 21.1 4.8 4.1 18.4 20.9 6.7 1.6 1.3 2.8 0.2 3.1 6.2 2.9 2.9 2.0 2.2 0.8 0.9 1.2 0.7 6.3 0.3 0.6 3.6 1.3 0.7 0.2 0.4 OPM (%) FY12E FY13E EPS (`) FY12E FY13E PER (x) FY12E FY13E P/BV (x) FY12E FY13E RoE (%) FY12E FY13E EV/Sales (x) FY12E FY13E 5.3 1.5 1.1 2.7 0.2 2.5 5.8 2.8 2.5 1.8 1.9 0.6 1.1 1.2 0.6 5.1 0.2 0.5 2.8 1.1 0.6 0.0 0.3
Company Name 51469 3,747 1,150 154,067 2,342 1,874 35,742 6,628 150,057 26,333 19,752 2,388 1,620 1,612 2,690 4,929 708 464 2,120 4,932 389 1,334 366
Reco
CMP (`)
Target Price (`)
Mkt Cap (` cr)
Neutral
497
Sun Pharmaceuticals Power CESC GIPCL NTPC PTC India Real Estate
Buy Buy Accumulate Neutral
298 76 187 79
380 94 202 -
Anant Raj DLF HDIL Telecom
Buy Neutral Buy
64 210 160
105 200
Bharti Airtel Idea Cellular Rcom Others
Neutral Neutral Neutral
395 80 96
Bajaj Electrical Bajaj Hindusthan ^ Balrampur Chini Blue Star CRISIL Finolex Cables Greenply Page Industries Sintex Siyaram Silk Mills SpiceJet Surya Roshni
Neutral 240 Neutral 71 Neutral 63 Buy 299 Accumulate 6,942 Buy 46 Buy 192 Neutral 1,901 Buy 181 Neutral 415 Neutral 33 Buy 84
420 7,616 75 270 212 137
Source: Company, Angel Research, Note: ^Sept. year end; *December year end; Price as on June 30, 2011; #EPS for Aurobindo Pharma is on recurring basis
60
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Ratings (Returns) :
Buy (> 15%) Reduce (-5% to -15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
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Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Shailesh Kanani Srishti Anand Bhavesh Chauhan Sharan Lillaney Amit Vora V Srinivasan Pooja Jain Yaresh Kothari Shrinivas Bhutda Sreekanth P .V.S Hemang Thaker Nitin Arora Ankita Somani Varun Varma Technicals: Shardul Kulkarni Mileen Vasudeo Derivatives: Siddarth Bhamre Jaya Agarwal Institutional Sales Team: Mayuresh Joshi Abhimanyu Sofat Jay Harsora Meenakshi Chavan Gaurang Tisani Production Team: Simran Kaur Dilip Patel Research Editor Production simran.kaur@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales AVP - Institutional Sales Manager Dealer Dealer mayuresh.joshi@angelbroking.com abhimanyu.sofat@angelbroking.com jayr.harsora@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com Head - Derivatives Derivative Analyst siddarth.bhamre@angelbroking.com jaya.agarwal@angelbroking.com Sr. Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com vasudeo.kamalakant@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Infrastructure IT, Telecom Metals, Mining Mid-cap Research Associate (Oil & Gas) Research Associate (Cement, Power) Research Associate (Metals & Mining) Research Associate (Automobile) Research Associate (Banking) Research Associate (FMCG, Media) Research Associate (Capital Goods) Research Associate (Infra, Real Estate) Research Associate (IT) Research Associate (Banking) sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com shailesh.kanani@angelbroking.com srishti.anand@angelbroking.com bhaveshu.chauhan@angelbroking.com sharanb.lillaney@angelbroking.com amit.vora@angelbroking.com v.srinivasan@angelbroking.com pooja.j@angelbroking.com yareshb.kothari@angelbroking.com shrinivas.bhutda@angelbroking.com sreekanth.s@angelbroking.com hemang.thaker@angelbroking.com nitin.arora@angelbroking.com ankita.somani@angelbroking.com varun.varma@angelbroking.com
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Angel Broking Market Strategy-July2011

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Angel Broking Market Strategy-July2011

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Preview 1QFY2012 Results Preview | July 2011

Preview 1QFY2012 Results Preview | July 2011

Why broader interest rates are close to peak in our view

Overweight on sectors with good earnings visibility

Refer to important Disclosures at the end of the report

Preview 1QFY2012 Results Preview | July 2011

Inflation and interest rates expected to peak soon

Exhibit 1: Sensex continued to be under pressure

15.0 (15.0) (30.0)

Lower forex reserve accretion and RBI not hiking CRR

Source: Bloomberg, Angel Research

Exhibit 2: India has underperformed most major peers YTD

China South Korea

Source: Bloomberg, Angel Research; Note: Dec 31, 2010=100

Exhibit 3: FII flows turn positive

Exhibit 4: Forex reserves trend interest rate cycle wise

9.00 7.50 6.00 4.50

Source: Bloomberg, Angel Research

Forex reserves (US$ bn)

Repo Rate (%, RHS)

Source: RBI, Angel Research

Refer to important Disclosures at the end of the report

Preview 1QFY2012 Results Preview | July 2011

7.00 6.00 5.00

Exhibit 7: Yield spread indicating near-peak interest rates

2.0 1.0 (1.0)

Source: RBI, Angel Research

G-Sec 1Yr and 10Yr Spread (%)

Repo Rate (%, RHS)

Source: RBI, Angel Research

Exhibit 6: Deposits up while credit off-take slows

Credit offtake (` cr)

Deposit mobilisation (` cr)

Preview 1QFY2012 Results Preview | July 2011

Exhibit 12: CV sales momentum has slowed considerably

12.3 10.5 8.9 17.8

31.7 25.9 19.5

31.2 19.6 10.2

Avg Floating Home Loan Rate (%)

Housing loan yoy growth (%, RHS)

Commercial vehicles (YoY % growth)

Source: RBI, Angel Research

Source: Company, Angel Research

Exhibit 9: Slow growth in real estate revenue

Growth in capital formation decelerating sharply

Quarterly Revenue (` cr)

YoY growth (%, RHS)

Source: C-line, Angel Research

Exhibit 10: Growth in cement dispatches muted

Exhibit 13: Steady growth in real GFCF on a yoy basis...

Cement dispatches (YoY % change)

Source: Company, Angel Research

Exhibit 11: Passenger vehicles growth halves

Annual Real GFCF (` cr)

YoY % growth (RHS)

Source: CSO, Angel Research

Exhibit 14: ...but almost stagnant on a quarterly basis

22.0 13.0 10.7 6.2

Passenger vehicles (YoY % growth)

Quarterly Real GFCF (` cr)

Chg YoY (%, RHS)

Source: CSO, Angel Research

Refer to important Disclosures at the end of the report