ValueGuide Oct2011

Sharekhan ValueGuide
October 2011
October 2011
CONTENTS
From Sharekhans Desk

Darkest before dawn
The headwinds from the West grew stronger last month as the crisis in Greece escalated threatening to engulf the entire euro region. The economic data coming from the USA also pointed to more weakness and the dim outlook for growth globally led to risk aversiondriven sell-off in equities and commodities whereas the flight-to-safetydriven rally pushed up the US Dollar and bonds.
EQUITY FUNDAMENTALS Sharekhan Top Picks Stock Update Mutual Funds Sector Report Sector Update TECHNICALS Sensex COMMODITY FUNDAMENTALS Crude Oil Gold Silver 26 Copper 27 Lead 27 Zinc 27 27 28 07 11 23 20 21 Viewpoint REGULAR FEATURES Report Card Earnings Guide DERIVATIVES 24 View 25 4 I 22
06
ADVISORY DESK Smart Trades Derivative Trades MID Trades PMS DESK ProPrimeTop Equity ProPrimeDiversified Equity ProTechDiversified ProTech Nifty Thrifty ProTech Trailing Stops 33 34 35 36 37 38 38 38
TECHNICALS Gold Silver Crude Oil CURRENCY FUNDAMENTALS USD-INR EUR-INR TECHNICALS USD-INR EUR-INR
29 Zinc 29 Lead 29 Pepper
30 30 30
31 GBP-INR 31 JPY-INR
31 31
32 GBP-INR 32 JPY-INR
32 32
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disclaimer
October 2011
REPORT CARD
STOCK IDEAS STANDING (AS ON SEPTEMBER 30, 2011)
COMPANY RECO PRICE 540.0 71.6 689.0 1768.0 283.5 426.3 714.0 37.0 293.1 545.0 741.9 239.0 358.0 1108.0 602.0 313.0 218.0 50.4 767.0 476.0 599.0 145.0 1119.0 103.0 324.0 284.0 76.6 34.8 80.7 116.0 7.7 1092.0 417.0 79.0 69.0 476.0 143.0 78.9 356.0 229.4 198.3 186.0 53.2 362.0 234.0
W NE
EQUITY
FUNDAMENTALS
PRICE TARGET 730.0 518.0 2591.0 1911.0 1040.0 1201.0 1050.0 71.0 1447.0 600.0 1009.0 850.0 305.0 2100.0 2077.0 468.0 550.0 218.0 1047.0 567.0 426.0 487.0 2630.0 523.0 ** 1210.0 106.0 227.0 520.0 865.0 153.0 1316.0 345.0 115.0 ** 2308.0 233.0 109.0 ** 1300.0 1045.0 247.0 117.0 330.0 228.0
RECO DATE 19-Nov-07 23-Dec-03 30-Dec-03 18-Feb-08 5-Feb-04 6-Mar-06 6-Dec-05 27-Jul-09 15-Nov-05 26-May-08 26-May-08 25-Aug-06 22-Sep-11 25-Sep-06 11-Nov-05 8-Jan-07 19-Dec-03 19-Aug-05 31-May-11 1-0ct-10 17-Jul-08 7-May-09 30-Aug-04 30-Dec-03 29-Jul-11 23-Dec-03 17-Nov-05 12-Aug-04 6-Jan-06 1-Apr-04 22-Aug-02 30-Aug-11 9-May-11 22-Mar-11 9-Feb-11 19-Dec-03 26-Sep-08 12-Aug-05 21-Sep-11 24-Feb-05 21-Mar-06 15-Nov-10 24-Dec-09 14-Sep-10 29-Nov-10
CURRENT RECO Hold Hold Hold Buy Buy Buy Hold Hold Hold Buy Buy Buy Reduce Buy BUY Buy Buy Hold Buy Buy Buy Buy Buy Buy Hold Buy Buy Buy Buy Buy Hold Buy Reduce Buy Reduce Hold Buy Hold Reduce Buy Buy Buy Buy Buy Buy
PRICE AS ON 30-SEP-11 640.9 467.7 2533.1 1357.6 808.4 1037.3 913.3 55.3 1536.0 524.4 719.4 762.3 315.3 1534.1 1639.7 378.0 421.8 152.5 735.5 410.6 323.0 400.5 2341.8 409.2 340.6 875.4 71.4 198.0 474.4 804.8 143.9 1083.0 357.6 68.2 54.1 1911.1 127.2 85.8 340.8 1018.9 759.0 241.4 88.8 199.5 163.0
GAINLOSS (%) 18.7 553.1 267.6 -23.2 185.1 143.4 27.9 49.3 424.0 -3.8 -3.0 219.0 2.0 38.5 172.4 20.8 93.5 202.6 -4.1 -13.8 -46.1 176.2 109.3 297.2 5.1 208.2 -6.9 469.8 487.8 593.8 1768.2 -0.8 16.6 -13.7 27.5 301.5 -11.0 8.7 4.5 344.3 282.8 29.8 66.8 -44.9 -30.4
ABSOLUTE PERFORMANCE 1M 3M 6M 12M -3.3 -0.9 8.1 -15.6 3.3 -0.5 0.2 -6.6 -2.4 -2.3 -4.1 3.5 2.0 0.5 -7.3 -6.6 -4.0 1.4 1.4 0.0 -1.0 -6.3 8.2 -0.4 6.3 0.2 -1.0 -1.0 5.7 9.0 -3.0 -0.8 -1.1 -1.3 -7.3 -3.2 -12.0 -8.3 1.7 -5.0 -10.2 12.4 -2.0 9.0 11.0 -9.3 -7.0 -13 -24.9 -10.0 -12.2 1.7 -28.9 9.2 2.0 -0.8 -12.7 -22.5 -3.6 -19.2 -4.0 -19.8 -41.1 -6.6 -5.8 1.9 -7.0 12.8 -17.3 0.2 -20.0 -6.7 -2.4 6.3 16.5 -7.5 -6.0 -7.2 -12.4 -28.6 -20.5 -29.6 -9.5 -18.4 -21.0 -16.8 34.4 2.6 -2.9 -4.4 -7.3 0.4 -21.3 -17.1 -22.3 -11.6 12.8 -20.0 8.0 0.3 -5.3 -19.5 -32.6 -8.0 -19.7 6.0 -31.1 -44.1 10.4 -10.4 14.0 10.2 -3.8 -14.1 19.9 -20.5 -14.0 11.3 14.6 16.8 3.4 -13.6 -11.5 -16.5 -16.1 -30.0 -15.9 -10.6 -28.4 -26.6 -3.3 76.9 -6.3 -13.4 -22.4 -11.4 -5.4 -15.3 -33.3 -17.4 13.4 7.1 -31.4 7.5 -1.6 -9.2 -10.9 -38.0 -10.6 -32.7 3.5 -36.8 -50.9 8.0 -12.6 7.9 -0.2 6.5 -1.4 12.5 -20.3 -26.8 13.6 23.0 18.2 13.4 -24.3 -26.2 -39.6 -57.2 -40.3 -33.5 -27.3 -23.1 -32.9 16.5 7.4 -36.3 -36.8
1M -2.0 0.4 9.5 -14.5 4.6 0.8 1.5 -5.4 -1.1 -1.1 -2.8 4.9 3.3 1.8 -6.1 -5.4 -2.7 2.7 2.7 1.3 0.3 -5.0 9.6 0.9 7.7 1.6 0.3 0.3 7.1 10.5 -1.7 0.5 0.1 -0.1 -6.1 -1.9 -10.8 -7.1 3.0 -3.8 -9.0 13.8 -0.7 10.4 12.5
RELATIVE TO SENSEX 3M 6M 12M 3.5 6.0 -0.7 -14.3 2.6 0.2 16.1 -18.9 24.5 16.3 13.2 -0.4 -11.6 10.0 -7.9 9.5 -8.5 -32.8 6.6 7.5 16.3 6.1 28.7 -5.7 14.3 -8.8 6.4 11.3 21.2 32.9 5.5 7.2 5.9 -0.1 -18.5 -9.3 -19.6 3.3 -6.9 -9.9 -5.1 53.4 17.0 10.8 9.1 8.3 17.3 -8 -3.1 -9.2 3.3 31.8 -6.6 26.1 17.1 10.7 -5.9 -21.2 7.5 -6.2 23.9 -19.5 -34.7 28.9 4.7 33.2 28.8 12.4 0.4 40.1 -7.2 0.5 30.0 33.8 36.4 20.9 0.9 3.4 -2.5 -2.0 -18.2 -1.7 4.5 -16.3 -14.2 13.0 106.6 9.5 1.2 -9.3 6.5 13.7 1.9 -19.8 -0.7 36.3 28.8 -17.6 29.2 18.3 9.1 7.1 -25.5 7.4 -19.1 24.4 -24.0 -40.9 29.8 5.1 29.7 19.9 28.0 18.5 35.2 -4.2 -12.0 36.6 47.8 42.1 36.4 -9.0 -11.2 -27.4 -48.5 -28.2 -20.1 -12.6 -7.6 -19.4 40.1 29.2 -23.5 -24.0
EVERGREEN
HDFC HDFC Bank Infosys Technologies Larsen & Toubro Reliance Ind Tata Consultancy Services
APPLE GREEN
Aditya Birla Nuvo Apollo Tyres Bajaj Auto Bajaj Finserv Bajaj Holdings Bank of Baroda Bank of India Bharat Electronics Bharat Heavy Electricals Bharti Airtel Corp Bank Crompton Greaves Divi's Labs GAIL Glenmark Pharmaceuticals GCPL Grasim HCL Technologies Hindustan Unilever ICICI Bank Indian Hotel Company ITC# Lupin M&M Marico Maruti Suzuki Piramal Healthcare PTC India Punj Lloyd SBI Sintex Industries^ TGBL (Tata Tea)^ Wipro
W NE
EMERGING STAR
Axis (UTI) Bank Cadila Healthcare# Eros International Media Greaves Cotton^ ITNL IRB Infra
October 2011
EQUITY
FUNDAMENTALS
REPORT CARD
CURRENT RECO Buy Buy Buy Hold Buy Hold Buy Buy Buy Buy Buy Buy Buy Hold Buy Buy Buy Hold Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Hold Hold Buy Buy Buy Buy Buy Buy Buy Buy Reduce Hold Hold Buy Hold PRICE AS ON 30-SEP-11 188.9 221.0 56.0 442.4 272.6 540.4 26.1 106.1 277.6 165.6 368.2 139.4 13.7 72.6 257.2 33.9 72.8 819.3 196.5 32.3 132.6 43.2 31.5 953.0 102.5 298.1 195.7 28.5 462.5 539.1 1141.6 244.7 137.7 210.0 298.0 60.9 316.2 44.0 157.7 123.8 102.6 100.3 140.4 1847.8 GAINLOSS (%) -10.9 11.1 -36.5 256.2 -17.9 193.7 -27.5 -2.7 -1.6 227.3 42.7 -64.5 -34.1 0.8 94.8 -21.3 336.4 91.9 -6.4 -77.3 -19.2 -33.7 -48.4 429.4 89.8 414.0 -47.1 -30.9 665.7 191.4 197.3 432.0 -15.5 29.6 -62.7 184.3 -23.1 -68.2 116.0 -3.0 -3.3 13.9 4.0 315.2 ABSOLUTE PERFORMANCE 1M 3M 6M 12M -2.8 -15.7 3.2 -9.6 -1.8 -7.9 5.0 -11.0 -8.1 0.5 -0.8 -9.2 -5.9 8.3 -17.2 3.0 19.3 7.5 1.6 -11.4 2.4 -4.2 12.2 2.5 -0.3 5.5 19.0 -6.2 -5.3 -10.1 6.7 0.9 -5.4 1.6 -4.7 4.3 -5.6 -14.8 -12.0 -5.0 -4.1 14.4 -4.5 11.4 3.0 -24.6 -17.2 -24.6 -12.7 -13.0 7.4 -7.2 -5.9 2.5 -16.7 -33.5 -19.2 4.5 -25.0 -14.2 -9.6 18.0 9.3 -21.5 -24.5 -19.2 -9.0 -12.5 6.2 6.1 -10.8 -5.7 -6.5 -15.7 23.5 -16.5 -8.6 -4.6 -16.2 10.5 -12.9 -29.9 -20.0 -7.8 -22.3 24.6 4.4 5.1 18.2 -18.2 -21.2 -25.5 -11.2 -5.2 -4.4 8.1 -9.5 7.4 -9.9 -38.3 -26.5 -22.4 -14.1 -30.1 -21.2 51.4 11.1 -38.9 -28.1 -35.8 -24.4 -19.8 -17.4 -10.6 -32.6 -8.7 5.2 -5.9 1.5 -27.7 -6.7 26.8 -21.7 12.3 -5.1 -29.9 -29.3 -14.6 -25.6 -0.3 -0.7 -10.3 11.3 -24.1 -42.6 -43.9 -21.5 -6.3 -24.6 -22.8 -27.0 -2.1 -3.8 -62.7 -35.9 -36.0 -16.2 -28.8 -39.1 116.3 1.1 -72.4 -16.6 -46.9 -50.0 -24.8 -22.0 -1.1 -57.0 -41.0 15.2 -3.5 8.0 -35.4 -22.2 8.7 -36.8 4.5 -18.8 -59.8 -30.0 -19.4 -30.5 -12.1 -33.7 -12.1 RELATIVE TO SENSEX 3M 6M 12M 17.5 -14.0 -5.5 -14.0 -0.4 -0.8 22.5 5.9 7.3 16.9 -4.9 -24.2 -7.8 19.2 -14.5 -2.1 3.1 34.6 24.7 -10.5 -13.9 -7.8 3.8 -0.2 21.1 21.0 1.8 7.6 6.7 -3.8 40.8 -4.7 4.2 8.8 -4.4 26.1 -0.7 -20.0 -8.8 5.2 -11.4 42.2 19.1 19.9 38.1 -4.5 -7.9 -13.0 3.8 10.8 11.7 26.3 5.7 25.5 5.3 -27.9 -14.1 -9.4 0.3 -18.3 -7.9 76.9 29.8 -28.7 -16.0 -25.0 -11.7 -6.3 -3.4 4.5 -21.2 6.7 23.0 10.0 18.5 -15.5 9.0 48.2 -8.5 31.2 10.9 -18.1 -17.4 -0.2 -13.1 16.5 16.0 4.8 33.8 -8.8 -31.0 -32.6 -5.6 12.7 -9.4 -7.2 -12.3 17.7 15.6 -55.2 -23.0 -23.1 0.7 -14.4 -26.8 160.0 21.5 -66.8 0.2 -36.1 -39.9 -9.6 -6.3 18.8 -48.3 -29.1 38.5 16.0 29.9 -22.4 -6.5 30.6 -24.1 25.6 -2.4 -51.6 -15.9 -3.2 -16.4 5.7 -20.3 5.6
STOCK IDEAS STANDING (AS ON SEPTEMBER 30, 2011)

COMPANY Max India Opto Circuits India Patels Airtemp Thermax Yes Bank Zydus Wellness RECO PRICE 212.0 199.0 88.2 124.2 332.0 184.0 36.0 109.0 282.0 50.6 258.0 393.0 20.7 72.0 132.0 43.0 16.7 427.0
W NE
PRICE TARGET 234.0 355.0 84.0 550.0 360.0 646.0 32.0 142.0 413.0 194.0 500.0 355.0 23.0 80.0 381.0 67.0 107.0 810.0 256.0 84.0 179.0 61.0 78.0 1150.0 148.0 500.0 340.0 39.0 575.0 640.0 1150.0 295.0 222.0 249.0 450.0 70.0 400.0 103.0 230.0 118.0 140.0 ** 205.0 1875.0
RECO DATE 24-Nov-09 13-May-08 7-Dec-07 14-Jun-05 2-Dec-10 15-Oct-09 13-Sep-10 30-Aug-11 29-Jun-11 17-Mar-05 16-Mar-10 5-Apr-10 21-Jun-10 12-Aug-11 5-Nov-07 8-Oct-09 30-Dec-03 7-Oct-10 19-Jan-11 23-Dec-09 3-Nov-10 18-Jan-10 6-Jul-10 19-Dec-03 8-Dec-05 20-Mar-06 4-Oct-07 26-Apr-06 24-Dec-03 4-Oct-07 10-Aug-05 19-Dec-03 27-Aug-09 6-Sep-10 9-Jan-08 30-Aug-05 31-Dec-07 26-Feb-08 25-Aug-06 22-Sep-11 19-Jun-09 10-Feb-11 21-Aug-09 17-Nov-05
1M -1.5 -14.6 4.5 -8.4 -0.5 -6.7 6.4 -9.9 -6.9 1.8 0.5 -8.0 -4.6 9.7 -16.1 4.3 20.8 9.0 2.9 -10.2 3.7 -3.0 13.7 3.9 1.0 6.9 20.5 -4.9 -4.0 -9.0 8.1 2.2 -4.1 2.9 -3.5 5.7 -4.3 -13.7 -10.8 -3.7 -2.9 15.9 -3.2 12.9
UGLY DUCKLING
Ashok Leyland # Bajaj Corp CESC
W NE W NE
Deepak Fert Federal Bank Gayatri Projects Genus Power Infrastructure India Cements Ipca Laboratories ISMT Jaiprakash Associates Kewal Kiran Clothing NIIT Technologies Orbit Corporation Polaris Software Lab Pratibha Industries Provogue India Punjab National Bank Ratnamani Metals Selan Exploration Shiv-Vani Oil & Gas Subros Sun Pharma Torrent Pharma UltraTech Cement Union Bank of India United Phosphorus V-Guard Industries
210.0 142.0 164.0 65.2 61.0 180.0 54.0 58.0 370.0 41.2 60.4 185.0 384.0 46.0 163.0 162.0 799.0 21.4 411.0 138.4 73.0 120.1 106.0 88.0 135.0 445.0
VULTURE'S PICK
Mahindra Lifespace Orient Paper and Industries Tata Chemicals Unity Infraprojects
CANNONBALL
Allahabad Bank Andhra Bank IDBI Bank Madras Cement Phillips Carbon Black Shree Cement
**Price target under review ^ Reco price adjusted for stock split
#Reco price adjusted for bonus
October 2011
FROM SHAREKHANS DESK
from sharekhans desk

October 2011
Darkest before dawn

The headwinds from the West grew stronger last month as the crisis in Greece escalated threatening to engulf the entire euro region. The economic data coming from the USA also pointed to more weakness and the dim outlook for growth globally led to risk aversiondriven sell-off in equities and commodities whereas the flight-to-safety-driven rally pushed up the US Dollar and bonds. Meanwhile the news flow at home is also concerning as skeletons of the 2G scam continue to tumble out and threaten to engulf very senior members in the cabinet this time around. On the macro front, the Reserve Bank of India continues with its hawkish stance and further raised policy rates by 25 basis points in its policy review meet last month. However, the greater threat at this moment is from Europe, where the Greece debt crisis has come to a head and is threatening to turn into a contagion. Debt-laden Greece has cash to operate until October. In order to qualify for more bail-out funds and avert a debt default, it has cut pensions and hiked taxes amid mass protests, pushing the nation closer to recession; but more austerity measures are demanded by its international lenders. If Greece does default on its sovereign debt, it could trigger a major global banking crisis as several global banks have exposure to its sovereign debt. The market got a taste of the things to come when last month due to their heavy exposure to Greece French banks crashed, creating panic on the bourses. Meanwhile, Italys credit rating has been downgraded by a notch by Standard and Poors because of its weak growth prospects and political instability. Following the downgrade of Italy, the third largest economy of the euro zone, international pressure has mounted on the European policy makers to solve the debt crisis. UK Chancellor of the Exchequer has warned that Europe has to find a solution by the time the Group of 20 leaders meet in Cannes in November this year. The Greece debt crisis requires some real hard decisions but the euro zone leaders may not possess the political will to do so as each is answerable to his own countrymen, who are not in favour of bailing out Greece. Though the global situation remains uncertain, it is much different than it was in 2008. Unlike the euphoria of 2008, the market mood is quite sombre and there is no element of shock. The credit swaps already indicate that the financial markets are already discounting a default by Greece (as high as 98%) if not by the other fringe countries in Europe. Moreover, a record level of funds has flown out of the equity markets. A recent release shows that there has been a withdrawal of over $72 billion from equity funds in the USA; that is slightly higher than what was witnessed during October 2008-February 2009, five months after the Lehman crash. The Indian market is trading at around 13.0-13.5x one-year forward earnings as against the lofty valuations of over 20x it enjoyed in early 2008. Besides, this is not the first time the world is facing a financial crisis and we have seen that panic situations do not last forever. But in the hindsight, such a panic-driven sell-off is always an opportunity to buy quality stocks at ridiculously low valuations. Thus, investors should look at buying in a gradual or staggered manner as it is not possible to absolutely time the markets.
EQUITY
FUNDAMENTALS
SHAREKHAN TOP PICKS
SHAREKHAN TOP PICKS
Sharekhan Top Picks

The stock markets have been very volatile in recent times mainly due to the uncertainty regarding the euro zone sovereign debt crisis, the mixed data emanating from the USA and the headwinds faced by the domestic economy. This has led to the benchmark indices returning a loss of 2.3% in the Sensex and that of 2.0% in the Nifty since our Top Picks basket was last revised on September 2, 2011. The CNX Midcap Index declined by 3.3% during the same period. Our basket of Top Picks performed in line with the benchmark indices in the above period. Over the past seven months, the Top Picks basket has outperformed the benchmark indices with a marginal decline of 2.2% as against the negative returns of 10.8% in the Sensex and a 10.9% drop in the Nifty over the same period.
ABSOLUTE OUTPERFORMANCE (RETURNS IN %)
140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% Y TDFY 2012 Y TD CY 2011 CY 2010 Sens ex CY 2009 Sinc e Jan 2009
Given the spike in volatility and the fact that we have an eventful month ahead, we believe it would be prudent to reduce some exposure in the mid-cap space. Incidentally, the mid-cap stocks have been more resilient in the past six months, as is evident from the strong outperformance of the CNX Mid-cap Index compared to the benchmark indices, the Sensex and the Nifty. Hence, we are pulling out PTC India and United Phosphorous from the basket and bringing in only one stock in their place, ie Grasim Industries, this month. Another change is related to the churn within the technology sector where we are bringing in Tata Consultancy Services (TCS) in place of HCL Technologies (HCL Tech). We expect TCS to announce strong quarterly results whereas HCL Techs performance could get dented by wage hikes and the adverse impact of the sharp fluctuation in the exchange rate.
CONSTANTLY BEATING NIFTY AND SENSEX (RETURNS IN %)
1 8 0% 1 6 0% 1 4 0% 1 2 0% 1 0 0% 8 0% 6 0% 4 0% 2 0% 0% Oct-09 Dec-09 Feb-10 Oct-10 Jun-09 Dec-10 Feb-11 Jun-10 Apr-09 Aug-09 Apr-10 Aug-10 Apr-11 Jun-11 Aug-11
Sharekhan
Nif ty
S h a r e kh a n
S en s e x
Nif ty
NAME Bharti Airtel CESC Divis Laboratories GAIL Godrej Consumer Grasim ITC Mahindra & Mahindra Orient Paper TCS
* CMP as on September 30, 2011
CMP* (RS) 378 277 728 411 401 2344 198 803 60 1038
FY11 24.6 7.1 22.5 14.6 27.3 9.9 30.9 19.1 8.2 23.4
PER FY12E 18.9 5.9 19.1 13.3 23.7 8.2 25.4 17.1 5.8 19.8
FY13E 13.3 5.4 15.3 11.7 19.5 7.3 21.0 14.7 5.4 17.3
FY11 18.5 9.1 23.9 19.8 35.6 14.8 33.2 22.8 16.0 42.0
ROE (%) FY12E 17.9 10.1 24.2 19.0 27.8 15.1 34.4 23.3 19.4 38.9
FY13E 17.0 10.2 25.9 18.8 27.0 14.4 33.6 22.8 17.4 35.3
TARGET TARGET 468 413 1047 567 487 2630 227 865 70 1201
UPSIDE (%) 23.8 49.3 43.8 38.0 21.5 12.2 14.7 7.8 15.8 15.8
October 2011
SHAREKHAN TOP PICKS

NAME CMP (RS) 378 PER FY12E 18.9 ROE (%) FY12E 17.9
EQUITY
FUNDAMENTALS
TARGET TARGET 468 UPSIDE (%) 23.8
FY11 24.6
FY13E 13.3
FY11 18.5
FY13E 17.0
BHARTI AIRTEL
Remarks:
Bharti Airtel continues to lead the domestic telecom market in terms of both the subscriber base (21%) and the revenue market share (32.3%). In the last two quarters the subscriber addition for the industry has moderated with the return of rationality and players shifting focus to revenue earning customers. Thus despite a fall in the subscriber net additions, the overall revenue of the industry grew by 6% sequentially in June 2011 quarter with Bharti Airtel gaining 50-basis-point market share. On the back of its improving market share, Bharti Airtel has hiked its on-net tariff by 20%, reflecting the return of pricing power. This was followed by tariff hikes by the other GSM players. We view this development as a positive for the industry specially for the incumbent players like Bharti Airtel. The benefits of the same are likely to be reflected in the companys financials by the end of H2FY12. An improving domestic 2G environment, visible volume and margin progress on the acquired African operations, and a strong data opportunity in the form of 3G adoption awaiting in the wings coupled with the stocks attractive valuation keep us bullish. Factoring in the tariff hike, we have upgraded our FY13 earnings estimate for the company. Following the earnings upgrade, the stock now trades at a trailing EV/EBITDA of 10.0x, which appears attractive in view of the 21.7% EBITDA CAGR over FY2011-13E. The implied EV/EBITDA-to-growth is ~0.52x which compares favourably with the average of 0.64x for the leading emerging market telecom companies (including China Mobile, Telecom, Indosat, Idea Cellular and Bharti Airtel). Thus we maintain a Buy on Bharti Airtel valuing it at an EV/EBITDA of 8x. This leads to a price target of Rs468.
CESC
277
7.1
5.9
5.4
9.1
10.1
10.2
413
49.3
Remarks:
CESC is engaged in generation and distribution of power across Kolkata city. The power distribution business in Kolkata is growing at a healthy rate and generates substantial free cash to fund CESCs expansion plans. Moreover, the integrated status (having generation and distribution businesses) is a clear advantage for utility business considering the concerns over the deteriorating financial position of the State Electricity Boards (SEBs). CESC is doubling its generation capacity by FY15 through an addition of 600MW of capacity in Chandrapur and 600MW of capacity in Haldia over its existing capacity of 1225MW. While 75% of the output would be sent on regulated price, the remaining would be kept for the merchant route. Fuel supply assurance for a significant portion of requirement (80%) acts as a long term strength for the firm. This would emerge as a competitive advantage in a scenario where most of the domestic peers are not having assured supply of fuel and with fuel shortage likely to go up only in the coming days. Loss making retail arm of the company, Spencers had been a drag for CESC for a couple of years; however in FY11, the company has reported a profit at store level and the management intends to turn around the retail business in the next two years. The initial signs are visible. CESC is one of the cheapest utility stocks available in the Indian market, trading at 0.6x FY12 BV, and significantly lower to the average multiple of the comparable companies, primarily due to the loss making retail arm. However, improving financial health of the retail business and the growing scale of the power utility business has reduced significantly the share of retail losses on the overall balance sheet. The current market price ignores the turnaround possibility, with substantial discounting. Hence, we have a Buy recommendation on CESC with a target price of Rs413 (SoTP based), which also factors negative value of Rs123 per share for the losses of the retail arm.
DIVIS LABORATORIES
728
22.5
19.1
15.3
23.9
24.2
25.9
1047
43.8
Remarks:
Coupled with an IPR-respecting and non-compete with customer policy, Divis has an unstinted focus on the contract manufacturing (CM) space, thereby edging over its Indian peers. Its India-centric business model develops and produces all APIs/intermediates with a substantial cost advantage. Divis enjoys EBITDA margin of >40% each, possibly the highest amongst its peers globally. After a full year of inventory downsizing, the outstanding results in H2FY11 have re-affirmed our confidence in the companys growth potential. The biggest thrust is likely to come in FY12 as the new facility at Vishakhapatnam is fully operational. The nutraceutical business could become a big opportunity with limited competition. A near debt-free balance sheet and strong cash flow (FCF likely to reach Rs306 crore by FY13E) are likely to help build a war chest for pursuing strategic investments (biosimilars). The appreciation of the rupee and slowdown in R&D allocation of the MNC clientele remain the key challenges for the company. With the order inflow picking up from H2FY11 and its new plant getting operational, Divis has a strong revenue growth visibility and the operating leverage in the business will boost its margins. Consequently, we estimate the companys revenue and earnings to grow at a CAGR of 23% and 21% respectively over FY11-13. At the current market price the stock trades at PE of 19.1x and 15.3x discounting its FY12E and FY13E earnings respectively. We maintain our Buy recommendation.
October 2011
EQUITY
NAME
FUNDAMENTALS
CMP (RS) 411 PER FY12E 13.3 ROE (%) FY12E 19.0
SHAREKHAN TOP PICKS

FY11 14.6
FY13E 11.7
FY11 19.8
FY13E 18.8
GAIL
Remarks:
GAIL India, a leading gas transmission company, is aggressively expanding its pipeline network and plans to invest more than Rs30,000 crore over FY10-14 in a phased manner to double its gas pipeline network to over 14,000km and its transmission capacity to around 300mmscmd. This provides strong revenue visibility in its core gas utilities business. We also see value accretion from doubling of the petrochemical capacity by FY14, and from the exploration and production (E&P) and city gas distribution (CGD) businesses going forward. A higher than expected fuel subsidy burden and regulatory risk in its core transmission business are the key risks for the company. Despite the subsidy burden, the strong growth visibility in its core gas transmission business would drive its earnings growth of 11.9% CAGR during FY11-13. At the current market price, the stock trades at a PE of 11.7x and EV/EBITDA of 7.8x based on our FY13 estimates. We have a Buy recommendation on the stock with a price target of Rs567.
GODREJ CONSUMER
401
27.3
23.7
19.5
35.6
27.8
27.0
487
21.5
Remarks:
Godrej Consumer Products Ltd (GCPL) is a major player in the Indian FMCG market with a strong presence in the personal care, hair care and home care segments in India. The recent acquisitions (in line with the 3x3 strategy) have immensely improved the long-term growth prospects of the company. On the back of strong distribution and advertising & promotional support, we expect GCPL to sustain the market share in its core categories of soap and hair colour in the domestic market. On the other hand, continuing its strong growth momentum the household insecticide business is expected to grow by 19% YoY. In the international markets, the Indonesian and Argentine businesses are expected to achieve a CAGR of around 25% and 15% respectively over FY11-13. Overall, we expect GCPLs consolidated revenues to grow at a CAGR of about 19% over FY11-13. Due to the recent domestic and international acquisitions, the companys business has transformed from a commodities soap business into the business of value-added personal care and home care products. Hence, we expect its OPM to be in the range of 16-18% in the coming years. Overall, we expect GCPLs bottom line to grow at a CAGR of about 18% over FY11-13. We believe increased competitive activity in the personal care and hair care segments and the impact of high food inflation on the demand for its products are the key risks to the companys profitability. At the current market price the stock trades at 23.7x its FY12E EPS of Rs16.9 and at 19.5x its FY13E EPS of Rs20.5. We have a Buy recommendation on the stock.
GRASIM
2344
9.9
8.2
7.3
14.8
15.1
14.4
2630
12.2
Remarks:
Grasim Industries is well placed to capture the growing opportunity in its core business of VSF in terms of both volume and healthy realisation. In addition, the performance of its cement business (ie its key subsidiary UltraTech Cement) has shown signs of improvement with an increase in the average cement price. Due to the improved demand environment, the performance of the VSF division continues to shine. The VSF realisation has increased by Rs10-12 per kg after Q1FY2012 on account of a pick-up in the global demand. Hence in Q2FY2012 the realisation is expected to remain healthy. The cement capacity of the company at the consolidated level is the highest among the other domestic players at 52.75MTPA. Hence the company will be the key beneficiary of a likely pick-up in the demand through government infrastructure projects in the coming couple of months. On the other hand, the company is planning to expand its VSF capacity by another 120,000 tonne by FY2013 and its cement capacity by 9.2MTPA by FY2014. We believe the capacity addition will provide volume growth in the longer run. We believe the company will benefit due to its strong balance sheet as most of its capex will be met through internal accruals. However, in light of the upcoming capacity and stabilisation of the newly-added capacity, the cement prices are expected to come under pressure. Moreover, cost pressure in terms of coal prices and higher freight cost remains a key concern. At the CMP of Rs2,344 the stock trades at PE of 8.2x and 7.3x its FY2012 and FY2013 earnings estimates on a consolidated basis.
October 2011
SHAREKHAN TOP PICKS

NAME CMP (RS) 198 PER FY12E 25.4 ROE (%) FY12E 34.4
EQUITY
FUNDAMENTALS
FY11 30.9
FY13E 21.0
FY11 33.2
FY13E 33.6
ITC
Remarks:
ITCs cigarette business, which contributes around 60%, continues to be a cash cow for the company. The company endeavours to make a mark in the Indian FMCG market and with successful brands such as Bingo, Sunfeast and Aashirwaad, ITC is already in the reckoning among the best in the industry. With the new portfolio of personal care products gaining market share, its FMCG business promises to compete with the likes of Hindustan Unilever and Procter & Gamble. After a sharp increase of 16% in Union Budget FY10-11, the government has spared cigarettes from an excise duty hike in the FY2012 budget. Also key states including Kerala, Karnataka, Andhra Pradesh and Maharashtra have kept VAT on cigarette unchanged in their respective state budgets. We expect ITCs cigarette sales volume to grow at mid single digits in FY12. ITCs other businesses, such as hotel, agri, non-cigarette FMCG business and paper, paperboard and packaging, are showing a strong up-move and will provide a cushion to the overall profit in FY12. An increase in taxation and the governments intention to curb the consumption of tobacco products remain the key risks to ITCs cigarette business over the longer term. We expect ITCs bottom line to grow at a CAGR of about 21.2% over FY11-13. At the current market price, the stock trades at 25.4x its FY12E earnings and 21.0x its FY13E earnings. We maintain our Buy recommendation on the stock.
ORIENT PAPER
60
8.2
5.8
5.4
16.0
19.4
17.4
70
15.8
Remarks:
Orient Paper & Industries Ltd (OPIL), a part of the CK Birla group, is a diversified conglomerate operating in three segments: cement, paper and fans. The cement division contributes over 53% of the total revenue. The company benefits due to its diversified business model. Due to the recent increase in cement prices, the present realisation of the company is higher by over 26% over FY11. The surge in the realisation will be able to offset the cost inflation and the profitability of the division is likely to improve (marginally). In the electrical division, due to the new product launches and market share gains we expect the company to deliver over 12% revenue growth in FY12. Going forward, the division can grow on the back of lighting products (CFL) and household appliances. Further, the proposed restructuring plan to demerge the cement division augurs well for the company as the uncertainty in the profitability of the paper division was one of the major overhangs on the stock. Hence the stock could get re-rated going ahead. However, the key concern remains the poor volume offtake in its key market area, ie Andhra Pradesh (which accounts for 37% of its total dispatches). Further, with the likely increase in supply the cement prices may again come under pressure. At the current market price of Rs60, the stock trades at PE of 5.4x and EV/EBIDTA of 3.6x discounting its FY13E earnings.
TCS
1038
23.4
19.8
17.3
42.0
38.9
35.3
1201
15.8
Remarks:
TCS pioneered the IT services outsourcing business from India and is the largest IT service firm in the country. It is a leader in most service offerings and is in the process of further consolidating its leadership position through the organic and inorganic route as well by winning large deals. TCS has consistently increased its market share amongst the top 5 Indian outsourcers with market share in terms of revenues increasing from 29.2% in the March 2009 quarter to 30.4% in the June 2011 quarter. We continue to like TCS amongst the offshore IT vendors on account of its mammoth scale of operations and resilient cost model that allows it to withstand headwinds in the sector. On the other hand, at the current juncture TCS is well placed to garner incremental deals in the sector with the organisational structure in place, unlike Wipro and Infosys that are going through a phase of organisational restructuring. At the current market price the stock trades at 19.8 and 17.3x its FY2012E and FY2013E earnings respectively. We have a Buy recommendation on the stock with a price target of Rs1,201.
October 2011
10
EQUITY
FUNDAMENTALS
STOCK UPDATE
UGLY DUCKLING
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs142 Rs1,563 cr Rs146/73 42,263 533229 BAJAJCORP BAJAJCORP 2.2 cr
Others 5%
BUY; CMP: RS104
BAJAJ CORP
SEPTEMBER 30, 2011
Price target revised to Rs142

Event: acquisition of property for Rs75 crore for its corporate office
BCL has acquired Uptown Properties and Leasing Pvt Ltd for Rs75 crore. Uptown owns a building in Worli with a built-up area of 33,600 square feet. The sole reason behind the acquisition is to develop a corporate office on the acquired plot to bring in all the scattered divisions at various locations under one roof to improve the operational efficiencies.
Expensive acquisition compared to recent deals

The move to spend a substantial chunk of this cash on non-yielding assets such as property, that too at a premium, would dilute its earnings and is seen as a de-rating factor by us. More so, since the company would have to spend additional Rs15-20 crore on either refurbishing the existing property or rebuilding a new structure.
SHAREHOLDING PATTERN
FIIs 5% Domestic institutions 4% Promoters 86%
Valuation corrects in response to move

To factor in the deal, we have downgraded our earnings estimates by 1.6% and 2.4% for FY2012 and FY2013 respectively. The BCL stock has already reacted negatively to the announcement of the property deal and factors in the negative implication of the same at the current market price. Going forward, any initiative on the companys part to expand its limited product portfolio or strengthen its core business would be the key upside trigger for the stock. At the current market price the stock trades at 13.4x its FY2012E EPS of Rs7.8 and 11.1x its FY2013E EPS of Rs9.5. We maintain our Buy recommendation on the stock with the price target of Rs142.
For further details, please visit the Research section of our website, sharekhan.com.
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 4.1 2.3 3m 4.1 16.1 6m 31.7 49.0 12m -14.3 0.9
The author doesnt hold any investment in any of the companies mentioned in the article.
APPLE GREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float: (No of shares) SHAREHOLDING PATTERN
Public & Foreign Others 6% 2% Institutions 15% Nonpromoter corporate 2%
BHARAT ELECTRONICS
Revenues marginally below target
Rs2,100 Rs12,872 cr Rs1927/1547 28,966 500049 BEL BEL 1.9 cr
BUY; CMP: RS1,609 SEPTEMBER 5, 2011 Annual report review
Bharat Electronics Ltd (BEL) reported gross revenues of Rs5,529.7 crore for FY2011 as against a revenue target of Rs5,620 crore. This was mainly on account of a slow order offtake in the initial part of the year. The net sales were up 5.6% to Rs5,471.7 crore. The margins were up 20 basis points to 16%. The reported net profit was up 19.5% to Rs861.5 crore.
Working capital turns negative

For FY2011, the working capital turned negative to Rs2,330 crore (150 days) on the back of close to doubling of advances received from customers. BEL closed the year with advances from customers to the tune of Rs6,441.1 crore, up 84% over FY2010. This led to a negative working capital of 150 days. Debtor days increased to 194 days from 153 days mainly due to a higher execution in the latter part of the year (66% revenues in H2FY2011), budgetary constraints of customers and milestone based payments on some deals. However, the inventory days were lower at 164 days compared to 173 days in FY2010.
Promoters 75%
Valuation and view

BEL is one of the strongest plays on the Indian defense sector. FY2011 saw a slow revenue growth marred by delays in execution of orders. However, FY2012 looks promising with the large order book of Rs23,830 crore as of June 2011, giving strong revenue visibility for the next few years The company is sitting on a huge cash reserve of Rs6,519 crore translating into a cash of Rs815 per share which would cushion the downside. We remain positive on BEL on a 12 month perspective with a Buy rating and target price of Rs2,100. At the current market price, the stock trades at 14x FY2012E and 12.4x FY2013E earnings.
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m -6.6 0.4 3m -5.0 3.7 6m -6.1 1.8 12m -6.7 -0.3
11
October 2011
STOCK UPDATE
EQUITY
FUNDAMENTALS
APPLE GREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs2,077 Rs81,110 cr Rs2695/1651 4.0 lakh 500103 BHEL BHEL 13.6 cr
BHARAT HEAVY ELECTRICALS
BUY; CMP: RS1,657 SEPTEMBER 19, 2011 Competition pressure intensifies, PT revised to Rs2,077
BHEL gets a fair share in NTPC bulk tendering

Bharat Heavy Electricals Ltd (BHEL) is likely to get Rs6,520 crore worth of orders due to favourable specifications in the tender for 7,200MW (9x 800MW) National Thermal Power Corporation (NTPC) power projects, provided it matches the L1 quotations.
However, concerns for BHEL intensify

Pricing pressure and risk of aggressive bidding: The new players like BGR are aggressively bidding to get a break-through in the supercritical equipment market. Overcapacity situation by 2014 and aggressive bidding from the new entrants could further trigger a price war in the coming years. Margin pressure: While BHEL has maintained 16%+ EBITDA margins over the past few years the sustenance of such margins looks difficult in the BTG industry, which is getting highly competitive. Outlook: We have fine-tuned our estimates in view of its annual report details. We have lowered our order inflow expectation for FY2012 and FY2013 in view of the slow order awarding activities in the infrastructure sector and the unfavorable changes in the competition landscape. We are expecting a compounded annual growth rate (CAGR) of 9.9% in the bottom line over FY2011-13. This slowdown is also reflected in its price performance. BHELS one-year forward price/earnings (P/E) multiple has fallen from over 20x (enjoyed till FY2010) to 11.2x now. We are revising our target multiple to 14x on FY2013 earnings estimate. Hence, our revised price target stands at Rs2,077. In view of the 25% upside potential, we maintain our Buy call on the stock.
Institutions 13% Others 6%
Foreign 13% Promoters 68%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m -4.8 -6.1 3m -12.4 -7.4 6m -11.1 -4.7 12m -30.4 -21.4
UGLY DUCKLING
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs413 Rs3,567 cr Rs423/257 1.9 lakh 500084 CESC CESC 6.6 cr
BUY; CMP: RS284 SEPTEMBER 16, 2011 Annual report review

Kolkata utility business performance
Positive cash generation continued but higher working capital squeezed cash: The utility business of CESC generated cash to the tune of Rs436 crore from operations, 26% lower than previous year, while PAT grew by 13% in same period. This indicates a significant proportion of its funds was blocked in working capital, as evident from the substantial rise in its loans and advances (up Rs165 crore). CESCs debtors days, inventory days remained in line with last year. Current liabilities turn over days fell to 194 days from 225 days in FY2010.The net debt of the company now stands at Rs3,017 crore, factoring the cash of Rs838 crore. Returns ratio improved; still low: At the company level (stand-alone), the RoE hovered around 9% in FY2011, reflecting an expansion of 48 basis points over FY2010. Even the return on capital employed (RoCE) of the company expanded by 146 basis points YoY to 7.6%. A strong growth at the EBIT level could be attributed to the 25% growth registered in the EBITDA.
CESC
Others 12% Institutions 18% Promoters 52%
Improved performance of Spencers

Healthy same store sales growth, store level profit maintained: Spencers maintained a healthy same store sales growth of around 14-15% (YoY). Further, the gross margin remained at 19% and managed to have a store level breakeven with a 2% margin. Hence, losses at EBITDA level have come down from Rs225 crore in FY2010 to Rs169 crore in FY2011. The management expects it could achieve EBITDA level break even in the next six-seven quarters. Working capital efficiency reflected: Spencers witnessed significant improvement in inventory days which came down from 57 days in FY2010 to 42 days in FY2011. The receivable days have fallen from 9 days in FY2010 to 7 days in FY2011.
Foreign 18%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m -13.8 -14.1 3m -3.1 3.6 6m -7.7 -1.8 12m -32.4 -23.0
October 2011
12
EQUITY
FUNDAMENTALS
STOCK UPDATE
EMERGING STAR
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs247 Rs2,093 cr Rs251/124 2.4 lakh 533261 EROSMEDIA EROSMEDIA 2.0 cr
EROS INTERNATIONAL MEDIA

Performance for FY2011
Public & Foreign 9% Others 15% Institutions 3% Non-promoter corporate 2%
For the year ended March 2011, Eros International Media Ltd (EIML) reported a 10.3% growth in operating revenues to Rs707 crore. The company released 77 films, down from 115 in FY2010. The company had five films in the list of Top 10 box office grossers for 2010 including Housefull (own production), Golmaal 3 (co-production), Dabangg and Endhiran (overseas distribution). The EBITDA margin improved 460 basis points to 22.2% mainly on the back of strong box-office collection, improving mix of revenues towards television syndication and monetisation of content library. The net profit surged 43.1% to Rs117.8 crore for the year ended March 2011.
Free cash flow turns negative with increase in content investments

For FY2011, the free cash flow turned negative to Rs55.1 crore, down from a positive cash flow of Rs73.1 crore in FY2010, mainly on the back of an higher content investment. The content investment in FY2011 doubled to Rs536.5 crore, up from Rs262 crore in FY2010. The working capital increased by Rs140.2 crore against a decrease of Rs21 crore in FY2010, mainly due to an increase in advances against production/purchase of film rights.
Promoters 78%
Valuation
3m 52.1 64.7 6m 68.3 82.2 12m -
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 19.5 19.2
Over the years EIML has consistently been increasing and improving its scale and quality of earnings. Going ahead, we remain positive on EIMLs earning trajectory with a strong films slate for the upcoming years. Further, an increasing share of new media initiatives would yield better margins in the coming years. At the current market price of Rs229, the stock is trading at 13.7x and 11.1x FY2012 and FY2013 earnings estimates respectively. We maintain our Buy recommendation on EIML with a price target of Rs247. We will take a fresh review on our target price post Q2FY2012 earnings.
APPLE GREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs2,630 Rs21,543 cr Rs2625/1981 79,536 500300 GRASIM GRASIM 6.9 cr

KEY POINTS
The VSF & chemical division propelled FY2011s revenue growth. However on account of a muted revenue growth in cement division and margin contraction by over 700 basis points (bps), the net profit declined by 21.6% year on year (YoY) to Rs2,163.9 crore. UltraTech (subsidiary of Grasim) completed the acquisition of ETA Star Cement Company with its assets comprising of 2.3 million TPA clinker facility. Consequent to this acquisition, the cement capacity stands augmented at 52MTPA. Further, on the VSF front, the company has acquired a 33% stake in Aditya Holding AB, Sweden, which acquired Domsjo Fabriker AB (Domsjo), Sweden and hence Grasim has secured its captive pulp requirement for VSF production. In order to maintain its market share UltraTech is setting up an additional cement capacity of 9.2MTPA which is expected to come on stream by Q1FY2014. In the VSF division the company is setting up a greenfield project of 120,000TPA at Vilayat, Gujarat and is carrying out a brownfield expansion at Harihar with a capacity of 36,500TPA. The project is likely to commence production by FY2013. The current debt equity ratio stands at 0.4x which ensures comfortable debt raising to part fund its expansion plan. On the other hand the company has made an additional investment of Rs1,257 crore in a liquid mutual fund scheme. We continue to prefer Grasim as our top pick among the other large players due to its strong balance sheet, comfortable debt - equity ratio, attractive valuation and diversified business. We maintain our Buy recommendation on the stock with price target of Rs.2630. At the current market price the stock discounts its FY2013 estimated earning per share (EPS) by 7.3x.
GRASIM INDUSTRIES
Institutions 18% Promoters 26%
Foreign 24% Public & others 32%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 10.7 10.5 3m 13.4 21.1 6m -4.8 3.5 12m 6.0 27.3
13
October 2011
STOCK UPDATE
EQUITY
FUNDAMENTALS
APPLE GREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Under review Rs73,032 cr Rs354/265 23.3 lakh 500696 HINDUNILVR HINDUNILVR 102.6 cr
HINDUSTAN UNILEVER
KEY POINTS
HOLD; CMP: RS338 SEPTEMBER 19, 2011 Annual report review

Operating cash flows declined YoY: The net cash generated from the operating activities stood at Rs1,910.2 crore in FY2011 as against Rs3,479.6 crore in FY2010. The decline in the cash generated from operations can largely be attributed to the increase in the commodity prices during the year. Hence, the free cash flows reduced to Rs1,795.8 crore in FY2011 from Rs3,077.6 crore in FY2010. Return ratios remained strong: The return ratios remained strong with the RoE and RoCE standing at 79.4% and 101.1% respectively in FY2011 as against 87.7% and 103.5% respectively in FY2010. Dividend pay-out maintained above 75%: Despite a flat growth in the adjusted PAT and a single-digit growth in the reported PAT, the company maintained the strong dividend pay-out. Its dividend pay-out ratio stood at 76.9% in FY2011 as against 78.7% in FY2010. Outlook and valuation: We shall review our estimates for HUL after the declaration of its Q2FY2012 results. We maintain our Hold recommendation on the stock but due to the stocks rich valuations we keep our price target under review. At the current market price the stock trades at 29.9x its FY2012E EPS of Rs11.3 and 26.0x its FY2013E EPS of Rs13.0.
Others 17% FIIs 19% Domestic Institutions 12% Promoters 52%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 9.3 7.8 3m 6.9 12.9 6m 26.4 35.4 12m 24.6 40.8
CANNONBALL
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs140 Rs10,491 cr Rs202/101 20.5 lakh 500116 IDBI IDBI 34.3 cr
HOLD; CMP: RS106 SEPTEMBER 27, 2011 Asset quality woes continue
We recently interacted with the management of IDBI Bank to have an update on the growth prospects in emerging environment. IDBI Banks asset quality woes are unlikely to end soon as the bank is expected to report higher slippages over the next couple of quarters. The bank continues to consolidate its business and has guided for a 13-15% growth in advances over the next two years. The incremental credit growth would be mainly in the priority sector, mortgage and corporate segment (working capital loan). Despite the initative taken the CASA mobilisation remains below the targeted levels due to a sharp increase in the term deposit rates. However, the retail term deposits are growing which would add comfort on the asset liability management (ALM) front. The asset quality pressures are expected to continue for the next couple of quarters. Apart from that the bank has significant exposure to sensitive sectors like power, infrastructure (27%) and SME (8%). Its exposure to the power sector is about 11%, though the exposure to the state electricity boards (SEBs) is nominal. The management expects the accounts in the infrastructure and aviation sectors to get restructured which would lead to a significant increase in the proportion of the restructured loans.
12m -29.9 -13.8
IDBI BANK
Public & others 16% Foreign 3% MF & FI 16%
Promoter 65%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 3.2 1.8 3m -17.7 -6.8 6m -23.3 -11.1
Going ahead, in line with the subdued growth in the advances, the bank is expected to grow its fee income by 10-12% in FY2012-13. We have recently downgraded the stock from Buy to Hold (refer to report dated 22 Sept titled Asset quality concerns intensify) and revised its price target to Rs140.
October 2011
14
EQUITY
FUNDAMENTALS
STOCK UPDATE
EMERGING STAR
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs228
IRB INFRASTRUCTURE DEVELOPERS

KEY POINTS
BUY; CMP: RS173 SEPTEMBER 21, 2011 Annual report review; price target revised to Rs228
Significant order wins over FY2009-10 led to buoyant FY2011 results: IRBs portfolio currently consists of 17 projects worth Rs17,600 crore (~6,822 lane km). Over FY200910, IRB won six projects worth Rs8,165 crore, recently it won the Tumkur-Chitradurg project and a mega highway Ahmedabad-Vadodara project. The recent build-up in the portfolio led to a 43% sales growth in FY2011. However, due to a MTM loss of Rs47 crore on a derivative contract, the PAT grew by only 17% in FY2011. Adjusting for the same, the PAT growth stood at 30%. Debt level rises, working capital & operating cash flows improve: The D/E ratio currently stands at 1.4x, further with Tumkur and Ahmedabad projects to start construction work in FY2012 and FY2013 the D/E could reach 2.5x. The net working capital days improved further to 62 days in FY2011 vs 102 days in FY2010 due to better inventory management, and lower loans and advances. The operating cash flow for FY2011 improved by 19% YoY to Rs1,078 crore on the back of a strong BOT portfolio and limited working capital requirement. Marginally lowering estimates, maintain Buy (PT 228): We have kept revenue and EBITDA estimates unchanged, but reduced PAT estimates by 5% and 3% for FY2012 and FY2013 respectively by factoring in the slightly higher depreciation charge and interest cost. The project awarding activity by NHAI has gained momentum & considering IRBs rich experience & strong financials, we expect it to make the most of the huge opportunity. We lower our target PE multiple to factor in the current macro environment which revises our price target to Rs228. The stock still provides a good upside from the current levels and is a long-term bet. Currently, the stock trades at 11.4x its FY2012E earnings and 2x FY2012E BV.
Rs5,733 cr Rs290/132 14.4 lakh 532947 IRB IRB 8.4 cr
Institutions Corporate 4% Bodies 3% Foreign 13% Public & others 5%
Promoters 75%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 17.1 10.4 3m 8.2 10.2 6m -3.2 0.1 12m -36.8 -27.5
APPLE GREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs227 Rs148,571 cr Rs211/150 73.5 lakh 500875 ITC ITC 773.8 cr
BUY; CMP: RS192 SEPTEMBER 23, 2011 Price hike in cigarettes

KEY POINTS
WNC prices increased by 10%: ITC has increased the prices of the Wills Navy Cut (WNC) brand of cigarettes by 10% to Rs44 from Rs40 earlier. Year-to-date price increase in the cigarette portfolio currently stands at 5.1%. Price hikes to lessen the impact of VAT increase in key states: The recent price hikes in the cigarette portfolio have been undertaken largely to mitigate the impact of the recent hike in the value-added tax (VAT) in the key states of Tamil Nadu, West Bengal and Andhra Pradesh (which together contribute close to 32% to the cigarette revenues). Price increases unlikely to affect the cigarette sales volume: The cigarette sales volumes are price inelastic and hence we dont expect the recent price hikes to have any material impact on the sales volumes of ITCs cigarette business. We maintain our volume growth expectation of about 7% for FY2012. Outlook and valuations: Since our last update the stock has corrected by ~5%. This provides an opportunity for the investors to invest in the stock with the expectation of a decent upside of 19% from the current levels. Hence, in view of the decent upside and the better earnings visibility over the next two years, we maintain our Buy recommendation on the stock with the price target of Rs227. At the current market price the stock trades at 24.5x its FY2012E earnings per share (EPS) of Rs7.8 and 20.5x its FY2013E EPS of Rs9.4.
ITC
Others 17% Domestic Institutions 36%
FIIs 47%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m -5.5 -5.7 3m 3.1 10.1 6m 14.9 24.9 12m 11.8 34.3
15
October 2011
STOCK UPDATE
EQUITY
FUNDAMENTALS
APPLE GREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs865 Rs49,916 cr Rs826/585 19.1 lakh 500520 M&M M&M 46 cr
MAHINDRA AND MAHINDRA
BUY; CMP: RS813 SEPTEMBER 29, 2011 Price target revised to Rs865
XUV 5OO: PRICING IS A GAME CHANGER

XUV 5OO pricing disruptive; to dramatically alter perception for M&M
Mahindra and Mahindra (M&M)s XUV 5OO, perceived to be an entry segment luxury sports utility vehicle (SUV), has surprised with its disruptive pricing. The basic twowheel drive model starts from Rs10.8 lakh and extends to Rs11.95 lakh ex showroom Delhi. The four-wheel drive starts from Rs12.88 lakh. M&Ms XUV 5OO will compete with Tata Motors Aria and Toyota Innova. It incorporates new hi-tech features incorporated in the new vehicle are GPS, DVD, micro hybrid technology, voice command system, cruise control, parking sensors, six airbags, hill control system and antilock braking system (ABS) with electronic brakeforce distribution (EBD). The company spent Rs650 crore in developing XUV 5OO besides the investment in Chakan plant. We expect the new XUV 5OO to sustain 1000 units/ month in domestic market with exports may double this demand M&M to become the most entrenched player in Indian UV space: In August 2011, the company had launched the entry-level Scorpio at Rs7.59 lakh ex Delhi. This offering has increased the affordability of its SUV range. The XUV 5OO is positioned to migrate the entry-level SUV customers to the premium end beyond XUV 5OO to SsangYong products like Korando and Rexton. Valuation: For M&M our FY2012 and FY2013 EPS estimates are pegged at Rs46.8 and Rs54.8 respectively. We are upgrading our sum-of-the-parts (SOTP) price target to Rs865 per share based on a higher price/earnings multiple (from 12x to 13x on FY2013E EPS) to the core business. We maintain our Buy recommendation on the stock.
Non Corp Holdings 10% Public & Others 8% Promoters 25%
Foreign 34%
Institutions 23%
PRICE PERFORMANCE
APPLE GREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs153 Rs8,789 cr 173/112 2.4 lakh 531642 MARICO MARICO 22.8 cr
HOLD; CMP: RS143 SEPTEMBER 15, 2011 Price target revised to Rs153
Volume growth momentum: Marico registered a strong volume growth of 21% year on year in Q1FY2012. However, going ahead the company expects factors like the slowdown in the global economy and the high food inflation and rising interest rates in the domestic economy to have some impact on consumer sentiments which, in turn, is likely to affect the demand for the companys products. Situation in international market: The business environment in the Middle East and North Africa region remains bleak due to continued political uncertainty in most of the constituent countries. Inflation is another key factor which is hurting consumer sentiment in most of the countries in which Marico operates. Gross margins to remain under pressure in the coming quarters: Though the company has taken price increases in its portfolio but the gap persists between the increase in the raw material prices and the price hikes implemented by the company. Hence the gross profit margin would remain under pressure in Q2FY2012 as well. We expect the gross profit margin to be lower by over 500 basis points on a Y-o-Y basis in Q2FY2012. Outlook and valuation: The higher raw material cost would continue to put pressure on the margin for the next one to two quarters. However, considering the product portfolio of strong brands and the companys ability to launch innovative products in domestic as well as international markets, we believe the long-term growth story of Marico is intact. Hence, we maintain our Hold recommendation on the stock with a revised price target of Rs153. At the current market price the stock trades at 28.3x its FY2012E EPS of Rs5.0 and 21.5x its FY2013E EPS of Rs6.7.
MARICO
Others 7% Foreign & Institutions 31%
Promoters 62%
PRICE PERFORMANCE
October 2011
16
EQUITY
FUNDAMENTALS
STOCK UPDATE
APPLE GREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs1,316 Rs33,351 cr Rs1600/1045 4.3 lakh 532500 MARUTI MARUTI 13.2 cr

The pace of FY2011 growth surprised; however future outlook cautious
The confluence of negative macro cycles such as interest rates, fuel prices and inflationary pressures is expected to hurt passenger car demand in FY2012. The earlier growth expectation of 10-15% has been downgraded to single digit growth. A significant stress is being witnessed in the petrol segment due to a dramatic shift in demand for alternative fuels. Almost the entire FY2012 and medium term growth would come from diesel, CNG and hybrid cars
MARUTI SUZUKI INDIA
Foreign 19% Public & Others 3%
Maruti leads competition on capacity expansion curve

The Manesar II line has been commissioned at a time when the demand for the Swift diesel has hit a euphoric high. An additional 2.5 lakh unit capacity with the cost of Rs1800crore has placed the company much ahead of the competition on the expansion curve. The management indicated the total Manesar capacity having touched 7.5 lakh units per annum following the commissioning of Manesar III in FY2013.
Promoters 54% Institutions 24%
Macro headwinds pose formidable challenges

Higher interest rates and commodity prices pose challenges for the entire industry. In FY2011, Marutis contribution per vehicle declined by 9%, reflecting a significant stress on the contribution margins. An additional challenge specific to the company is linked with the Yen
12m -17.3 -4.6
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m -0.9 -4.6 3m -1.4 4.6 6m -0.7 4.8
Valuation
We see a dramatic improvement in realisation and contribution margins from Q4FY2012 onwards as the full effect of the Manesar II line would be felt by then. Our estimates for FY2012 and FY2013 remain unchanged at Rs93.5 and Rs109.7 respectively. We are valuing the company at Rs1,316, discounting FY2013E earnings by 12x and have a Buy rating on the stock. The key risk is the ongoing tiff with the workers at Manesar.
VULTURES PICK
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs70 Rs1,196 cr Rs69/44 1.5 lakh 502420 ORIENTPPR ORIENTPPR 12.8 cr
ORIENT PAPER AND INDUSTRIES

KEY POINTS
Institutions 36% Promoters 34%
Foreign 2%
Public & others 28%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 4.4 5.1 3m 4.6 14.1 6m 34.5 46.7 12m -3.2 10.5
Orient Paper & Industries (OPIL) posted an impressive 20.9% revenue growth on account of stabilisation of its new cement capacity, expansion of its market mix and an impressive performance by its electrical division. However, on account of continued losses in its paper division coupled with overall margin contraction, the companys net profit declined by 10.2% to Rs143.1 crore. During the year OPIL has finalised an expansion of the cement capacity by 3 milliontonne-per-annum (mtpa) at Karnataka. The plant is expected to commence production after FY2014 and the overall cement capacity will enhance to 8mtpa. In the electrical division the company has planned to add household appliances to its products portfolio. In the paper division, to overcome the water shortage issue, the company has set up two water reservoirs. In order to unlock value for the shareholders and provide better focus to each of the businesses, the management has recently announced to carry out a de-merger of its cement business. The appointed date for the said de-merger is April 2012. We believe the development could be value unlocking for the shareholders. The current debt equity ratio of the company stands at 0.6x which will ensure comfortable debt raising to part fund the Karnataka plant. Due to increase in debtor days and decrease in creditor days the working capital cycle has increased as compared to FY2010. In addition to a strong balance sheet and attractive valuation, the demerger of the cement division will act as a re-rating factor for the stock. Hence we maintain our Buy recommendation on the stock with a price target of Rs70. At the CMP, the stock trades at a PE multiple of 5.6x discounting its FY2013 estimated earnings.
17
October 2011
STOCK UPDATE
EQUITY
FUNDAMENTALS
EVERGREEN
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs1,040 Rs245,934 cr Rs1187/713 6.3 lakh 500325 RELIANCE RELIANCE 164.8 cr
RELIANCE INDUSTRIES
BUY; CMP: RS825 SEPTEMBER 9, 2011 Price target revised to Rs1,040
Others 22% Corporate bodies 5% Institutions 28% Promoters 45%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 9.2 7.9 3m -10.2 -4.4 6m -12.7 -7.3 12m -10.4 -4.0
The comptroller and auditor general (CAG) tabled in parliament yesterday its final report on the functioning of hydrocarbon production-sharing contract (PSC) in KG-D6 block. Major points of CAG report Reliance Industries Ltd (RIL) did not relinquish 25% of the total contract area at the end of Phase-I and Phase-II in June 2004 and 2005 respectively. Hence RIL violated the PSC in KG D6 block. The Directorate General of Hydrocarbons (DGH) should have forced the contractor to relinquish the stipulated area and the authority failed to pursue technical aspects. The DGH and the petroleum ministry were unequipped to oversee the PSC. Front ending of capital expenditure (capex) by RIL would result in lower profit petroleum for the Government of India (GoI). Our view: While the report recommended revisiting the profit-sharing formula,the CAG remained silent on the notional loss that an increased capex in D6 may cause to the government. Moreover, the charges on RIL about front ending of capex and cost estimation are too difficult aspects to prove reasonably. Hence, there is hardly any material impact of the report on RIL, though some negative sentiment to remain. Valuation: We believe lingering concerns on the global macro environment is likely to impact on RILs petrochem and refinery business. So we have revised down our net profit by 9% for FY2012 and by 8% for FY2013. While we roll over our valuation multiple base to FY2013, we cut down our multiple on petrochem and refinery business from 7x to 6.5x (on EV to EBITDA). Consequently, we revise our target price by 13% to Rs1,040 but retain Buy rating.
UGLY DUCKLING
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs500 Rs483 cr Rs411/264 66,383 530075 SELAN SELAN 1.0 cr
SELAN EXPLORATION TECHNOLOGY
BUY; CMP: RS284 SEPTEMBER 26, 2011 Gearing up for a strong production ramp-up
Firm realisation and healthy OPM reflected in strong net profit growth: In Q1FY2012, the net revenues (adjusted for the petroleum profit) of Selan Exploration Technology (Selan) grew by 42% backed by a stupendous growth (of 46%) in the realization. Sequentially, the sales grew by 24%, which is a reflection of the growth in both volume (up 10%) and realisation (up 13%). OPM expanded by 118 basis points YoY and 1823 bps QoQ to 73.6%. Net profit grew by 49% YoY and 68% QoQ to Rs 12.9 crore in Q1 FY12. Initial signs of a ramp-up; aggressive production ramp-up likely from FY2013: Selan has commercialised two new wells in the Lohar oil field, which could bring incremental output of 50,000 barrels a year. Another recently drilled well is likely to get commercialised in this fiscal. It aims to drill 15-20 wells in the Bakrol and Indrora oil fields where the seismic survey data is quite encouraging. Hence, management expects 500,000 to 700,000 barrels of annual production over the next two years. Experienced new management would support aggressive growth plan: The company has roped in highly experienced team to manage the operations under the leadership of Andrew Wenk as the president and CEO. Mr Wenk has two decades of experience in the oil exploration industry with stints in companies like Cairn India (the Rajasthan block) and Reliance Industries (the Krishna-Godavari basin). Retain Buy: We expect the production to scale up to around 240,000 barrels in FY2012 and to 440,000 barrels in FY2013. Consequently, we expect Selans net sales and earnings to grow at a compounded annual growth rate (CAGR) of 47% and 49% respectively over FY2011-13. We remain positive on the stock and retain our Buy call with a price target of Rs500 (based on EV/EBITDA FY2013E multiple of 5.5x).
Promoters 42% Others 56%
Foreign 2%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 0.6 2.6 3m -0.6 8.5 6m -13.6 -3.7 12m -5.5 14.4
October 2011
18
EQUITY
FUNDAMENTALS
STOCK UPDATE
VULTURES PICK
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs400 Rs8,374 cr Rs446/302 3.1 lakh 500770 TATACHEM TATACHEM 13.9 cr

KEY POINTS
Tata Chemicals Ltd (TCL) posted a dreary financial performance in FY2011 with adjusted net profit declining by ~8% year on year (YoY) during the year. The sales for FY2011 grew by 15.9% to Rs11,060.2 crore on the back of an increase in the realisation of soda ash and sodium bicarbonate in India and Africa and a rise in the trading volume of traded fertiliser (DAP and MOP). The net operating cash flow during FY2011 stood at Rs427 crore as compared to Rs843 crore in FY2010. The operating cash flow declined mainly due to an increase in debtors as well as inventories during the year. The companys return ratios decreased from the levels of FY2010 and remained southward during FY2011. The return on equity (RoE) stood at 12.0% while the return on capital employed (RoCE) stood at 13.3% during the year. The dividend pay-out ratio for the company improved from 29.1% in FY2010 to 36.9% during FY2011. Going forward, TCLs revenue would grow at a compounded annual growth rate (CAGR) of 13% and adjusted profit after tax (PAT) will grow at a 20% CAGR. With its liberal dividend pay-out policy we expect TCL to maintain a 31% dividend pay-out over the next two years. Consequently, we maintain our Buy recommendation on the stock with a price target of Rs400. We value TCL at 9x FY2013E earnings per share (EPS) and investment value of Rs41 per share. At the current market price the stock is trading at 9.9x and 8.7x its FY2012E and FY2013E respective earnings.
TATA CHEMICALS
Others 26% Promoters 31%
Institutions 29%
Foreign 14%
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m -8.1 -6.2 3m -8.7 0.7 6m 2.2 11.5 12m -21.8 -10.1
EMERGING STAR
COMPANY DETAILS
Price target: Market cap: 52 week high/low: NSE volume (No of shares): BSE code: NSE code: Sharekhan code: Free float (No of shares): Rs550 Rs5,839 cr Rs927/477 67,302 500411 THERMAX THERMAX 4.0 cr
HOLD; CMP: RS490 SEPTEMBER 22, 2011 Price target revised to Rs550
Loses out in NTPC 800MW boilers tendering
Thermax returned empty handed from the bulk tendering for boilers of NTPCs 7x 800MW power project as it emerged as the third lowest bidder. Sluggish order awarding by the power utilities along with a rising number of domestic players could put additional pricing and thereby margin pressure. Moreover, the revenue flow from the supercritical space would only start from FY2014 provided it bags some supercritical order in FY2012-13.
THERMAX
Downgrade estimates
Thermax growth outlook is clouded by the significant slowdown in the industrial capex cycle. Moreover, given the lack of order inflow, the competitive environment has also intensified. In view of these concerns, we have lowered our order inflow and earnings estimates. We are now estimating a compounded annual growth rate of 12.7% in revenues over FY2011-13, lower than the 26.7% CAGR posted over FY2006-11. We also sense a margin pressure for FY2012-13 (margin expected at ~11% versus 13% posted for the last five years.
Public & others 14.7% Foreign 10.3% Promoters 38.9%
MF & FI 13.0%
Price target revised to Rs550

6m -9.4 -6.4 12m -35.7 -25.7
PRICE PERFORMANCE
(%) Absolute Relative to Sensex 1m 3.0 -2.7 3m -13.1 -11.1
In view of the tough business environment, we have also downgraded valuation multiples (14x as compared to 16x earlier) and revised the target price to Rs550 (at 14x FY2013E earnings). We maintain our Hold rating on the stock. The positive trigger for our target price would be in the form of the company winning big orders in the supercritical or captive power categories. Conversely, downward risk would emerge from a slow industry capex cycle in the form of sluggish order inflow and margin pressure.
19
October 2011
SECTOR REPORT
EQUITY
FUNDAMENTALS
INFORMATION
TECHNOLOGY
SEPTEMBER 21, 2011
Sky is not falling...hope persists

Escalating uncertainties in the euro zone on account of the sovereign debt crisis coupled with turmoil in the US region post the Standard & Poor (S&P)s downgrade of US credit ratings have sparked fears of a slowdown in demand for the Indian IT sector. Consequently, in the last three months, the BSE IT index has materially underperformed the broader market indices with a fall of 9.3% vis--vis a 2.8% fall in the BSE Sensex. The price damage in some of the frontline counters in the IT space is higher than the fall in the BSE IT index in the last three months. For instance HCL Technologies (12.6%), Infosys (10.8%) and Wipro (11.5%) have all corrected down more than the BSE IT index fall. Though the current environment does indicate towards an uncertain tomorrow, nevertheless the Indian IT companies have evolved much stronger and clients have become more disciplined after the last downturn. Thus we expect that if there is a downturn, the transition will be much smoother than the last time. However, we have revised our earnings estimates for FY2013 and reduced our target multiples for companies in our IT universe to factor in the growing uncertainties and concerns in the sector. Overall, we remain cautiously optimistic on the sector and selectively positive on the companies. Our top picks in the large cap space are TCS and HCL Technologies and in the mid cap space we remain positive on NIIT Technologies. Once bitten twice shy The price erosion in 2008-09 came into effect post the 2008 Lehman crisis. However the current price damage has happened prior to any major event unfolding in the sector apart from the historic S&P downgrade of US credit rating and on account of euro zone uncertainties. But the fear of another potential crisis has lead to a dwindling of investors confidence in the sector. At the current juncture it is very difficult to gauge the magnitude of the impact on the sector and our interaction with companies managements also suggests the same. Most of the companies managements say there yet hasnt been any impact on the business volume apart from some instances of delay in the decision making.
Infosys: Downgraded to Hold

With the company going through a transition phase of organisational restructuring coupled with it facing client specific issues, we expect Infosys growth trajectory to remain relatively weaker than TCS in the medium term. Nevertheless, we continue to remain positive on Infosys organic led growth model and industry leading margin profile.
Hold; CMP: Rs2,433

The companys premium priced offerings and non-linear solutions driven approach would provide long term sustenance to the business model. On the other hand, deployment of cash reserves in opportune inorganic initiatives would provide the much needed push to the revenue trajectory in the medium term.
Tata Consultancy Services: Price target revised to Rs1,201

We continue to like TCS amongst the offshore IT vendors on account of its mammoth scale of operation and resilient cost model to withstand headwinds in the sector. On the other hand, at the current juncture TCS is well placed to garner incremental deals in the sector with organisational structure in place. On the back of current uncertainties in the
Buy; CMP: Rs1,043

global macro environment and potential risk of further downgrade of estimates for FY2013 in the event of further deterioration of the macro environment, we have reduced our target multiple for TCS by 10% to 20x FY2013E earnings. Consequently we have reduced our target price to Rs1,201 based on revised earnings estimates for FY2013. We maintain our Buy rating on the stock.
Wipro: Downgraded to Reduce

In the medium term we expect Wipro to demonstrate a relatively weaker earnings growth vis--vis its peers owing to it undergoing an organisational restructuring phase.
Reduce; CMP: Rs356

We expect Wipros earnings to grow at a CAGR of 5.6% over FY2011-13E. We downgrade our rating from Hold to Reduce with a reduced target price of Rs346. At our target price the stock would be valued at 14.5x FY2013E earnings.
HCL Technologies: Price target revised to Rs523

We continue to remain positive on HCL Technologies with its ability to gain market share during the downturn and strong presence in the infrastructure management services (IMS) space.
Buy; CMP: Rs406

We expect HCL Technologies earnings to grow at a CAGR of 25% over FY2011-13E. We maintain our Buy rating on the stock with a reduced target price of Rs523. At our target price the stock would be valued at 13.6x FY2013E earnings.
October 2011
20
EQUITY
FUNDAMENTALS
SECTOR UPDATE
BANKING
SEPTEMBER 22, 2011
Asset quality concerns intensify

Key points
New stress points emerge: Amid rising concerns over the growth of the domestic economy and the growing asset quality risks, the banking sector continues to underperform the broader indices. Apart from the traditional issues of moderation in credit growth, margin pressure in a rising interest rate cycle and the risk of higher delinquencies from SME, MFI and some other risky segments, the asset quality risks have also emerged from the infrastructure sector especially power generation companies due to execution delays and a sharp deterioration in the financials of the state utilities. Revision in earnings: Due to the long gestation period and high outlay of infrastructure projects, a good part of the loans are likely to get restructured which would increase the stock of restructured loans for banks. Some of the earlier restructured loans as well as the fresh restructured loans could slip into non-performing assets (NPAs), thereby requiring banks to have higher provisions. In order to factor the same we have assumed onethird of the power sector loans would get restructured. Taking cue from the past cycle (2008-2009) we also assume 15% of the restructured loans to slip into NPAs resulting in increase in
VALUATION SUMMARY Banks Price target PSU banks Andhra Bank Allahabad Bank Bank of Baroda Bank of India Corporation Bank IDBI Bank Punjab National bank SBI Union Bank Pvt banks Axis Bank Federal Bank HDFC Bank ICICI Bank Yes Bank 1,300 500 518 1,210 360 BUY BUY HOLD BUY BUY 2.0 1.1 4.0 1.7 1.8 1.7 1.0 3.4 1.5 1.5 19.6 13.0 18.7 10.4 19.9 18.8 14.5 19.5 11.6 18.0 1.5 1.2 1.6 1.4 1.4 1.4 1.2 1.6 1.5 1.2 118 230 850 305 550 140 1,150 2,308 295 Reduce BUY BUY Reduce BUY HOLD BUY HOLD BUY 0.9 0.8 1.3 0.9 0.8 0.7 1.3 1.7 0.9 0.8 0.7 1.1 0.8 0.7 0.7 1.1 1.4 0.8 19.9 19.0 20.3 15.3 17.8 13.9 21.1 16.9 16.9 20.3 20.3 21.6 16.9 18.9 14.4 21.2 18.7 17.6 1.2 1.0 1.1 0.7 0.9 0.7 1.2 0.9 0.9 1.2 1.1 1.2 0.8 0.9 0.8 1.2 0.9 0.9 Reco FY12E P/BV FY13E FY12E RoE (%) FY13E FY12E RoA (%) FY13E
provisions estimates (provision for the restructured loans and loss in the present value terms). That results in downward revision in our earnings estimates for FY2012 and FY2013 by around 5-15% for banks under our coverage. Selectively positive with preference for private sector banks: We have downgraded our price target for most banks under our coverage due to the downward revision in earnings and a reduction in valuation multiples. In our view, the rising credit costs and slower business growth would lead to dip in returns on equity (RoEs) and hence should lead to a downgrade of the valuation multiples. Since these stocks have corrected substantially from recent peaks and partly factor the above stated concerns, we remain selective in the banking space with a preference for private banks due to their steady business growth and lower exposure to the sensitive sectors. HDFC Bank (a defensive bet), ICICI Bank (sturdy core income growth and attractive valuations) and Federal Bank (attractive valuations and expected turnaround over medium term) are our preferred picks in private banks space. Among PSBs we prefer Bank of Baroda (higher return ratios and reasonable valuations).
For further details, please visit the Research section of our website, sharekhan.com
21
October 2011
VIEWPOINT
EQUITY
FUNDAMENTALS
FERTILISERS
Key points
The volume sales data of the leading 13 fertiliser companies in India shows a decline in the offtake of the complex (nonurea) fertiliser products due to a considerable increase in the average selling price of non-urea fertiliser under the NutrientBased Subsidy (NBS) regime. Among the non-urea fertilisers there is a growing preference for complex fertilisers with low nutrient content as compared to DAP/MOP that has high single nutrient content. Higher prices of non-urea fertilisers are resulting in a shift towards higher usage of urea especially by marginal farmers who show an extremely price sensitive behaviour. Thus, the volume growth for urea manufacturers like Chambal Fertilisers and Chemicals (Chambal), Zuari Industries (Zuari) and Nagarjuna Fertilisers and Chemicals (Nagarjuna) is likely to remain healthy at least till the new urea policy becomes effective. During the first two months of the current kharif season, ie July and August, the sales of manufactured complex fertilisers
SEPTEMBER 20, 2011
Urea makers have the advantage

declined by 8.5% and the import of non-urea fertilisers declined by 35.1%. The sales of manufactured non-urea fertilisers decreased by 1.0% while the import of non-urea fertiliser declined by 32.3% during April to August 2011 vis--vis the 6.7% rise in the consumption of urea in the same period. Due to an import holiday in the first three months of this fiscal, the import volume of MOP declined drastically to near 90% levels owing to the higher cost of MOP in the international markets. Coromandel International will be the main beneficiary of the increased usage of low nutrient-based (non-DAP/MOP) complex fertilisers; urea players (Chambal, Zuari and Nagarjuna) would continue to benefit in terms of higher volume offtake of urea.
VIEWPOINT
Key points
LIBERTY PHOSPHATE
CMP: RS53
Key beneficiary of NBS scheme
SEPTEMBER 7, 2011
Liberty Phosphate was incorporated in 1976 to produce essential nutrients like sulphur for crops. It has around 18% share of the domestic SSP market. In India the total consumption of SSP has grown at a compounded annual growth rate (CAGR) of 8% over FY2008-11. The SSP industry was almost dead due to the unfair policy adopted by the Government of India of subsidising SSP and favouring the manufacturers of DAP and complex fertilisers. But the introduction of the nutrient-based subsidy (NBS) scheme and the declaration of sulphur as an important crop nutrient, in line with nitrogen, phosphorus and potassium (NPK), revived the SSP industry. The Government of India included sulphur in the NBS policy from April 1, 2010. thereby providing a level playing field to the manufacturers of SSP with regard to the DAP and complex fertiliser makers. Liberty Phosphate is planning to increase its capacity through de-bottlenecking at different plant locations. It has increased its capacity by 99,000 tonne through de-bottlenecking at Udaipur which has increased its installed capacity to 5.62 lakh tonne. One of the key advantages enjoyed by Liberty Phosphate is the easy availability of raw materials from local suppliers, eg rock
phosphate from Rajasthan Mines and sulphuric acid from Hindustan Zinc. Rock phosphate and sulphuric acid are the basic raw materials required for the production of SSP. Given the aggressive expansion of its manufacturing capacities Liberty Phosphate can potentially grow at a CAGR of around 22% over the next two years. In terms of valuations, the stock trades at around 1.6 x FY2013 rough estimate; this makes it one of the cheapest stocks in the complex fertiliser space. However, in view of the stocks extremely low both market cap and volumes at the counter, we do not have it under our active coverage. Companys profile Liberty Phosphate was incorporated in 1976. It is a Vadodara-based SSP manufacturer. The company is engaged in manufacturing and trading of SSP under the brand name, Double Horse, which is the most popular brand in the SSP market. Liberty Phosphate has four manufacturing units situated at Udaipur (Rajasthan), Kota (Rajasthan), Nandesari (Gujrat) and Pali (Maharashtra). The Liberty group as a whole caters to about 18% of the SSP fertiliser demand in the country making it an important market player.
October 2011
22
MUTUAL FUNDS
DESK
MUTUAL GAINS
SHAREKHANS TOP MUTUAL FUND PICKS (EQUITY)

Scheme Name Large-cap funds ICICI Prudential Focused Bluechip Equity Fund - Ret Franklin India Bluechip Birla Sun Life Frontline Equity Fund - Plan A Principal Large Cap Fund Tata Pure Equity Fund Indices BSE Sensex Mid-cap funds HDFC Mid-Cap Opportunities Fund IDFC Premier Equity Fund - Plan A DSP BlackRock Small and Midcap Fund SBI Magnum Sector Funds Umbrella - Emerg Buss Fund Indices BSE MID CAP Multi-cap funds UTI Opportunities Fund Tata Dividend Yield Fund SBI Magnum Global Fund 94 UTI Equity Fund - Growth AIG India Equity Fund - Reg Indices BSE 500 Tax saving funds Religare Tax Plan Fidelity Tax Advantage Fund Franklin India Taxshield HDFC Long Term Advantage Fund Tata Tax Saving Fund Indices CNX500 Thematic funds DSP BlackRock Natural Resources & New Energy Fund - Ret Birla Sun Life India GenNext Fund UTI India Lifestyle Fund Kotak Lifestyle Fund AIG Infrastructure and Economic Reform Fund - Reg Indices S&P Nifty Balanced funds HDFC Prudence Fund HDFC Balanced Fund Birla Sun Life 95 Tata Balanced Fund ICICI Prudential Balanced Indices Crisil Balanced Fund Index
Note: Returns < 1 year - absolute, > 1 year - CAGR (compunded annualised growth rate)
SEPTEMBER 26, 2011

Data as on August 31, 2011
Stars rating
NAV (Rs) 15.1 199.0 79.4 25.4 90.0 16675.8 15.4 32.3 16.7 43.0 6273.6 26.3 31.6 56.1 51.1 12.2 6487.2 17.0 20.3 199.5 126.7 43.9 4038.4 14.5 24.4 11.7 13.2 9.0 5001.0 204.7 55.1 297.1 79.6 45.8 3287.9
6 mths -1.9 -2.2 -4.2 -5.4 -0.1 -6.4 10.9 9.6 6.2 15.5 -1.6 4.1 2.8 10.4 -0.1 8.5 -5.3 4.1 -2.1 2.2 -1.7 0.9 -4.9 9.3 12.3 8.3 5.7 6.5 -6.2 1.9 5.9 0.7 2.6 4.8 -2.7
Returns (%) 1 yr 3 yrs -1.7 -3.3 -7.7 -9.1 -9.9 -7.2 2.1 -2.9 -8.2 5.2 -17.5 0.3 -1.7 -1.7 -1.7 0.5 -11.0 -3.6 -5.4 0.2 -4.9 -2.5 -11.0 0.8 -1.0 2.0 -4.5 -5.6 -7.5 -1.5 4.5 -3.1 -1.3 5.3 -2.6 15.9 12.8 11.7 11.0 9.5 4.6 19.5 19.4 18.3 16.5 3.0 17.9 16.4 12.8 12.5 12.0 4.8 16.3 13.9 13.2 10.7 8.9 5.0 14.5 14.3 13.4 10.3 9.5 4.7 19.0 17.2 15.6 13.2 10.3 6.8
5yrs -12.4 13.7 11.9 11.4 7.3 -24.7 -12.2 5.5 14.8 14.7 10.6 12.1 -8.0 -14.2 12.4 9.6 8.4 7.5 -13.5 -7.1 -7.9 15.9 13.8 14.4 13.3 8.5 8.3
Since inception 13.5 25.8 25.9 17.5 25.1
10.9 21.9 11.3 23.3
17.1 18.5 13.7 10.9 4.9
12.0 13.8 27.3 26.9 20.8
11.7 15.8 4.0 5.3 -2.8
20.5 16.8 22.7 16.2 13.7
Every individual has a different investment requirement, which depends on his financial goals and risk-taking capacities. We at Sharekhan first understand the individuals investment objectives and risk-taking capacity, and then recommend a suitable portfolio. So, we suggest that you get in touch with our Mutual Fund Advisor before investing in the best funds.
23
October 2011
TREND & VIEW
EQUITY
TECHNICALS
Breakdown
Sensex: Daily view
The Sensex has been forming lower tops and lower bottoms. The momentum indicators have given a negative crossover and are trading around the zero line. The index has taken resistance at the 20-daily moving average (DMA) around 16750 levels. A crucial resistance lies around 17300, which is the area where the index had a negative gap. The support in the short term is at around 15750, which is the previous swings low. In the short term, the Sensex is expected to fall till 15750 or lower.
KST (-1.15742) 5 0 -5 * BSE - SENSEX (16,599.74, 16,745.16, 16,404.78, 16,453.76, -244.311) 21000 20500 20000 19500 19000 18500 18000
17500
17000
16500
16000
The Indian market has been in a downside journey since November 2010 and there are no signs of any recovery in the medium-term outlook. The market consolidates and slips to find the next key supports every time. The Sensex has been consolidating around the 20DMA and the 40-DMA for the last couple of weeks. These levels have been broken on the downside. As per the Elliott wave theory, the fall from 21109 to 15765 is in a W-X-Y-X-Z form but the last leg in wave C of wave Z is still remaining. The target for the same is around 15765 and 14000 below that. The key resistance would be around the 20-weekly moving average (WMA) and the 40-WMA, ie 17704 and 17956 respectively.
15500 MACD (DEMA-smoothed) (76.8125, 106.197) 500 0 -500 ber December 2011 February March April May June July August September October
Sensex: Weekly view

The Sensex has broken down from a bearish head-and-shoulders pattern. A crucial resistance lies around the 20-WMA, ie 17400. The correction has been in the W-X-Y-X-Z form, where wave Z is still pending. The momentum indicators are still on the sell side, trading just below the zero line.
* BSE - SE NSEX (16,209.19, 16,756.08, 15,801.01, 16,453.76, +291.700)
22000 21500 21000
x x
20500 20000 19500 19000
w 18500 18000 17500 y 17000 16500 16000 15500 15000 14500 14000 13500 13000 12500
z?
12000
Jul
Aug
Sep
Oct
Nov
Dec
2010
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2011
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Sensex: Monthly view

The Sensex is now expected to retrace 50%, ie 14400, of the previous rally from 7697 to 21108. A crucial resistance lies around the monthly 20-simple moving average (SMA), ie 17750. The market closed September in the negative zone. The Sensex has closed below the monthly 40-SMA, ie 16578, which is a very bearish sign for the market. Overall, the index has been forming lower tops and lower bottoms for the last ten months and is expected to be in the downtrend in the medium term.
Trend Down Trend reversal Medium term Short term 17300 16800 Supports 15700/ 14000 Resistances 16800/ 17300 Target 15700/ 14000
* BSE - SENSEX (16,963.67, 17,211.80, 15,801.01, 16,453.76, -222.990)
0.0%
23.6%
23000 22500 22000 21500 21000 20500 20000 19500 19000 18500 18000 17500 17000 16500 16000 15500 15000
38.2%
50.0%
14500 14000 13500
61.8%
13000 12500 12000 11500 11000 10500 10000 9500 9000 8500 8000
100.0% 7500
M A
M J
O N
2009
M A
M J
2010
M A
M J
O N
2011
M A
M J
O N
2012
M A
M J
October 2011
24
EQUITY
DERIVATIVES
MONTHLY VIEW
Derivative view: Bears resurge

Taking negative cues from the global equities markets and extending the losses of the August series, the September series commenced the month on a negative note. However, with the passage of the month the tables soon turned after the approval of the European Unions support to Greece which triggered buying across equities. After a rally of 3.63% the Nifty ended the month in positive terrain. The market could not accelerate the positive momentum of the September series in the absence of any triggers. The tussle between bulls and bears will continue until a break-out on either side. The October series has started the month with Rs10,162 crore in Nifty futures, Rs25,398 crore in stock futures, Rs4,750 crore in index options and Rs1,717 crore in stock options compared to Rs10,744 crore, Rs26,040 crore, Rs48,481 crore and Rs1,336 crore respectively in the September series. The October data is marginally lower as compared with the data of the last month (September). At 82.89% the market-wide roll-over was in line with the Streets expectation of 84.74% whereas the Nifty posted a much lower roll-over of 61.19%, well below the 70.88% roll-over seen in the previous month. On the option side, the majority of activity was seen in the 5200 strike option followed by the 5300 and 5100 strike options on the call option (European style; CE) side. On the put option (European style; PE) side, the activity was concentrated in the 4800 strike followed by the 4700 and 4500 strikes that held the highest number of shares in open interest. The higher and lower breakeven points of the straddle stand at 5300 and 4700 respectively. The put-call ratio (PCR) started the month above the mark of 1.35 and sustained above the same for the series. Top five stock futures with the highest open interest in the current series
STOCK FUTURES(SHAREKHAN SCRIP CODE) SBIN LT RELIANCE TATASTEEL ICICIBANK OPEN INTEREST (RS CR) 982.4 916.4 883.2 811.1 758.4
View
The Nifty flirted with its volume weightage average price (VWAP) and finally closed well below it, indicating any rise in the market will attract selling unless the Nifty closes above the 5000 levels. The overall market set-up is negative and the risk-reward ratio is favourable on the sell side. To play out such a scenario with a favourable risk-reward ratio we are forming a ratio put spread strategy that can be used as a strategy as well as a portfolio protection tool.
Ratio bear put spread

A ratio bear put spread is created when the market is expected to move in a downward direction. The ratio put spread is created by buying at-the-money put options and selling out-of-money put options twice the quantity of the put options purchased. This can be constructed as follows:
SCRIP Nifty PE 4800 Nifty PE 4500 ACTION Buy Sell RATE 146.8 61.5 QUANTITY 100 200 OUTFLOW 23.8
This strategy has an initial outflow of 23.8 points in the Nifty, which is Rs2,380 (23.8*100) and the maximum profit potential of 276.2 points in the Nifty, which is Rs27,620 (276.2*100). The strategy is safe up to 4224 levels, which is the lower break-even point (BEP), but below 4224 maximum loss could be incurred and it will be advisable to close the strategy after this level. The higher break-even point is 4776 above which the maximum loss will be just 23.80 points in Nifty. The margin requirement for the strategy will be approximately Rs35,000.
PAYOFF DIAGRAM
400 300 200
PR O FIT / L OS S
100 0 -100 -200 -300 -400 3 9 00 4 0 00 4 1 00 4 2 00 4 3 00 4 4 00 4 5 00 4 6 00 4 7 00 4 8 00 4 9 00 5 0 00 5 1 00 5 2 00 5 3 00 5 4 00
Top five stock options with the highest open interest in the current series
STOCK OPTIONS(SHAREKHAN SCRIP CODE) SBIN INFY LT RELIANCE TATASTEEL OPEN INTEREST (RS CR) 296.3 242.0 203.6 160.8 130.8
25
October 2011
MONTHLY VIEW
COMMODITY
FUNDAMENTALS
Commodities: Bigger quarterly slump since end of 2008 Macro-economy

Key points European sovereign debt crisis deepens. The US Feds Operation Twist fails to calm the markets. Chinas manufacturing contracts fall for the third straight month. New Zealand loses AAA rating. US Fed chief, Ben Bernanke, warns that downside risk has increased. Jean-Claude Trichet, president of European Central Bank (ECB), says downside risks to euro area have intensified. A majority of investors think that Greece default is inevitable. The USA cant sustain spending and tax levels, CBO head says. Brazilian government official: BRICS coordinating plan to aid European Union (EU). Retail sales in the USA unexpectedly stagnate due to lack of jobs. International Monetary Fund (IMF) chief: Without bold action, major economies risk slipping backward. EU cuts quarterly growth forecasts for EU, euro zone. IMF reduces global growth forecast due to debt crisis. European sovereign, bank bond risk rises to record levels, default swaps show. ECB ready to act this month if outlook deteriorates. US economyconsumer spending cooled in August as wages fell.
Change in (000' bbls) 26-Aug-11 Change in (%) COMMODITY PRICES IN SEPTEMBER (IN $) Commodity Copper Zinc Lead Gold Silver Crude oil High 9304.0 2311.0 2589.5 1921.2 43.4 90.7 Low 6800.0 1821.0 1800.0 1535.1 26.1 77.1 Close 7018.5 1860.0 1985.0 1623.8 29.9 79.2 % Mon chg -24.3% -18.9% -23.1% -11.1% -28.0% -11.2%
MONTHLY CHAINGE IN DOE CRUDE STOCKS (AUG-SEP) Crude oil -16088 357051 -4.51 Dist. 1618 156060 1.04 Gasoline 6225 211436 2.94
Refinary utlisation rate was at 87.8% in the last week of September
MONTHLY CHANGE IN SHFE STOCKS (AUG-SEP) Copper Change (in tonne) 26-Aug-11 Change (in %) -4347 102258 -4.25 Lead 3084 61368 5.03 Zinc -16511 417784 -3.95
MONTHLY CHANGE IN LME STOCKS (AUG-SEP) Copper Change (in tonne) 31-Aug-11 Change (in %) 9875 463825 2.13 Lead 56000 317600 17.63 Zinc -34225 855550 -4.00
Note LME: London Metal Exchange , SHFE: Shanghai Futures Exchange, DOE: Department of Energy (US)
Crude oil: Further decline possible

Key points Organisation of Petroleum Exporting Countries (OPEC): Weaker economy, Libya restart are downside risk to oil. International Energy Agency (IEA) cuts 2011, 2012 oil demand forecasts due to weak economy. Saudi oil output at 30-year high as OPEC pumps more, IEA says. IEA says that developed nations oil stocks below five-year level for the first time since 2008. OPEC may cut output as Libyan crude revives.
WTI NYMEX crude oil
CMP: $79.20
Crude oil fell by over 10% in the month as US Pesident Barack Obamas plans and Mr Bernankes Operation Twist failed to allay the concerns about the US growth. The Fed decided to take out $400 billion from its short-term treasury holdings to buy long-term bonds so as to support the ailing housing market. However, the markets think that the long-term rates are already low; hence the said step wont make much difference. Both IEA and OPEC sent dire warnings for crude oil prices on weaker economy and Libya restart. IMF reducing the global growth is in line with the views of the OPEC and IEA. Presently, the European sovereign debt concerns overshadow any other issue. Crude oil is likely to fall to $68 in the near term. However, the Organisation for Economic Cooperation and Development (OECD) inventories slipping below the five-year average for the first time since 2008 is supportive for the counter. Hence, support is likely to emerge at lower levels. The upside is capped at $90.
October 2011
26
COMMODITY
FUNDAMENTALS
MONTHLY VIEW
Precious metals: Dip buying noted

Gold CMP: $1,623
Physical buying noted as prices fall. The biggest three-day drop since the failure of Lehman Brothers in 2008. Festival buying expected to pick up in India. Gold premium over platinum seen rising to record level. Gold exchange traded fund (ETF) assets set to hit Rs10,000 crore by December 2011. Gold leasing rates plunge amid dollar rush. Gold poised to reach $3,000 in 2013, Oro Minings Brownlie says. Gold witnessed a sharp correction as it fell from its record high of $1,921 to $1,535. The dollar rally, the across-the-board commodity sell-off, the liquidations ahead of the half-yearly closing, the redemptions at mutual funds and hedge funds, and the cash is king mentality led to a huge sell-off in the gold market. Gold looked like a crowded trade as almost everyone has been buying and recommending gold. This added to the downside pressure. However, there has been no material change in the fundamental picture of the yellow metal. The yellow metal can decline to $1,500 in the short term; however Greece sovereign debt issue, high inflation in the emerging markets and huge volatility in currencies are going to support gold. We maintain our long-term target of $2,300. In the near term the metal is likely to trade between $1,500 and $1,800.
Silver
CMP: $29.93
Silver falls most since 1979 as risk-off mentality spurs rout. GFMS: 2011 silver investor demand to hit new record above $10 billion. Silver has been hit hard on demand fears. Silver was the worst affected commodity in September as it tumbled 28%. ETFs are showing interest in the metal as its price has corrected sharply. The metal can decline to $24 level in the near term. Huge volatility is expected in the counter; hence the metal can trade between $24 and $35 in the short term. Overall, we remain friendly towards the counter in the long term and look for a target of $60-75 in the next three years.
Base metals: Buy copper on dips

Key points Base metals decline below 2010 November lows. Copper fares the worst on account of prices being significantly higher than the marginal cost of production. Codelcos chief financial officer says copper fundamentals still look pretty well. Copper demand may gain more by than 40% by 2020, Rio Tinto says. Chinas zinc, lead consumption growth may stall after October 2011. Japans copper cable shipments rise 1.3% to 53,700 tonne in August 2011. Zinc will rise to average $2,800 a tonne in 2014, Antaike says.
Copper
CMP: Rs347
The base metals complex has been hit hard in the current sell-off caused by the European zones sovereign debt concerns, the possibility of Greece defaulting on its debt, the global slowdown, the lack of expected support from the central bankers and the sharp rally in the dollar. The disconcerting fact is that the sell-off is occurring amid extreme volatility as 4-5% intra-day movement has become usual. The complex has slid below the November 2011 low and further decline in the price is on the cards. A decline to the 2010 summer lows is possible as risk aversion increases and demand fears grip the markets. One bright spot in the whole scenario for copper is a pick-up in cancellations with the fall in the prices, which shows physical interest in the metal. Copper can fall to Rs300 level in the near term. However, we would like to initiate a long call if the opportunity arises at lower levels. The upside is capped at Rs395 level for the time being.
Lead
CMP: Rs98.40
Lead is likely to be quite vulnerable as London Metal Exchange (LME) inventories rise to the highest level since 1995. Lead had been hit the hardest in 2008 on account of its extensive usage in automobiles. Chinas zinc and lead consumption growth may stall after October this year and the demand may even decline in the next year, adding pressure to the prices, said Yu Zhongmin, vice president of Shenzhen Zhongjin Lingnan Nonfemet Co. A slowdown in automobile production and public-housing construction, along with environmental checks on lead-acid battery makers, may curb the demand. Lead can fall to as low as Rs80. The upside is capped at Rs105.
27
October 2011
MONTHLY VIEW
COMMODITY
FUNDAMENTALS
Zinc
CMP: Rs92.40
The supply of zinc concentrates will be tighter than the supply of copper concentrates in the medium term, Lennart Evrell, president and chief executive officer of Swedish miner Boliden, told Metal Bulletin. We expect zinc to fare better than lead. The galvanising metal can decline to Rs80 level. The upside is likely to be capped at Rs99. Japans zinc output will climb in 2012 as smelters run at full capacity to meet the recovering demand from the automobile and construction industries after the earthquake and tsunami, amid a forecast for a global deficit. Zinc is likely to give the best returns in the long term as concentrate supply tightens after 2012.
CMP as on October 01, 2011
Major economic events in October 2011

Date 1-Oct-11 3-Oct-11 3-Oct-11 3-Oct-11 3-Oct-11 6-Oct-11 6-Oct-11 7-Oct-11 7-Oct-11 7-Oct-11 10-Oct-11 11-Oct-11 13-Oct-11 14-Oct-11 14-Oct-11 14-Oct-11 17-Oct-11 18-Oct-11 18-Oct-11 18-Oct-11 18-Oct-11 18-Oct-11 19-Oct-11 19-Oct-11 19-Oct-11 20-Oct-11 20-Oct-11 21-Oct-11 24-Oct-11 25-Oct-11 25-Oct-11 25-Oct-11 26-Oct-11 26-Oct-11 26-Oct-11 27-Oct-11 27-Oct-11 27-Oct-11 27-Oct-11 27-Oct-11 28-Oct-11 28-Oct-11 Region China US EC UK Germany EC Germany US US Japan China Event PMI Manufacturing ISM Manufacturing PMI Manufacturing PMI Manufacturing PMI Manufacturing ECB announces interest rates Factory orders MoM (sa) Change in non-farm pay-rolls Unemployment rate BOJ target rate Trade balance (USD) Forecast 51.1 50.3 48.4 48.5 50 1.50% 0.00% 50K 9.10% -$16.4B --0.4% -6.2% ----13.2% --------------------Actual Prior 51.2 50.9 -50.6 48.5 48.4 51.1 49 50.3 50 - - 1.50% - - -2.80% -0K - - 9.10% - - 0.10% - - $17.76B ------0.20% 2.6% 0% -6.20% 0.20% -44.6 4.50% 2.20% 13.50% -43.3 3.80% --17.5 7.70% 107.5 85.10% 45.4 -6 --0.10% -2.30% 5.2 1.30% 0.70% -1.20% -0.06 95 0.20% -Impact Ominous implications for industrial commodities if a sharp contraction occurs. Bullish for industrial commodities; indirectly negative for gold. Important for industrial commodities, euro. Important mainly for industrial commodities, GBP. Data is important as Germany is the growth engine of the EC region. A possibility of a rate cut, hence euro can suffer. Important for the industrial commodities. Important for all the commodities. Important for all the commodities. Important mainly for JPY. Higher than expected surplus could delay easing, which won't bode well for industrial commodities. Important for industrial commodities. Higher than expected inflation would be bearish for the euro if the ECB gets in rate cut mode. Important for industrial commodities. Important for euro & bullions. Higher than expected would be bearish for industrial commodities as it would delay easing. Gold can rise. Important for industrial commodities. Six-month forward looking investors' and analysts' expectations. Important for industrial commodities and the euro. Important for GBP & bullions. Important for industrial commodities Important for industrial commodities. Important for industrial commodities. Important for bullions. Important for industrial commodities. Important for GBP as easing indications would weigh on it. Important for industrial commodities. Important for industrial commodities, particularly copper and aluminium. Business climate indicator important for industrial commodities and the euro. Important for the euro and industrial commodities. Bearish data would be negative for industrial commodities; supportive for gold. Important for industrial commodities. Important for GBP. Important for industrial commodities. Important for industrial commodities, particularly copper and aluminium. Important for industrial commodities. Disappointing data could lead to further sell-off in industrial commodities. Crucial mainly for industrial commodities. Bearish data would be somewhat supportive for gold. Important for industrial commodities, particularly copper and aluminium. Important for euro & industrial commodities. Important for euro & industrial commodities. Important for all the commodities. Important for industrial commodities.
UK Industrial production (MoM) Germany Consumer Price Index (YoY) US EC China US EC UK China China Germany US US UK US US Germany EC US US UK US US Germany US US US EC EC US Japan Advance retail sales Euro-zone CPI (YoY) Consumer Price Index (YoY) Industrial production ZEW Survey (Econ. sentiment) CPI (YoY) Real GDP (QoQ) Industrial production (YoY) ZEW Survey (Econ. sentiment) Consumer Price Index (YoY) Housing starts MoM% Bank of England minutes Philadelphia Fed Existing home sales MoM IFO--business climate Euro-zone govt. debt/GDP ratio Consumer confidence Richmond Fed Manufacturing Index GDP (QoQ) Durables ex transportation New home sales MoM GFK Consumer Confidence Survey GDP QoQ (annualised) Personal consumption Pending home sales MoM Business climate indicator Euro-zone economic confidence Personal spending Industrial production (MoM)
-------------------------
October 2011
28
COMMODITY
TECHNICALS
TREND & VIEW
Gold (London): Monthly outside bar

Gold has formed an outside bar on the monthly charts. That is a reversal pattern in the medium term. The momentum indicators have also come into sell mode on the daily and weekly time frames. Gold is trading below its 20-daily moving average (DMA) and 20-weekly moving average (WMA), which are placed at $1,762 and $1,639 respectively and are the key levels to watch for in the month ahead. All these technical evidences suggest that the prices are set to correct in the medium term and if gold breaks the key support at $1,460 on a monthly closing basis, then it can slide till $1,313 in the medium term. In the short term gold can pull back till $1,700.
Trend Down since 01-10-11 Trend reversal $1,702 Supports $1,534/1,460 Resistances $1,702 /1,793 Target $1,460/ $1,313
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
KST 35 30 25 20 15 10 5 0 -5 -10
GOLD [CASH] 2000
1500
1000
500
Silver: Bears cut loose

Silver broke down the pole flag pattern and sold off sharply, exceeding the conservative target. The momentum cycle is in sell mode in the daily, weekly and monthly time frames which indicates that weakness is likely to persist in the medium term. As the daily momentum is in oversold range, a pull can arise in the short term but in the medium term it remains weak unless it crosses $34.5. The downside can be targeted at $26.10, the recent swings low, and $24.30, the 61.8% retracement of the $8.42-49.51 swing. On the higher side, it can pull back till the $34 area where the previous support zone was placed. The reversal of the bearish view is placed at $37.5 where the 20-DMA is placed.
Trend Down since 04-08-11 Trend reversal $37.5 Supports $24.22/22.13 Resistances $33/34.05 Target $24.22/ $22.13
g Sep Oct Nov Dec 2010 Mar Apr May Jul Aug Sep Oct Nov Dec 2011 Mar Apr May Jul Aug Sep Oct Nov De KST 40 35 30 25 20 15 10 5 0 -5 -10 55 50 45 40 35 30 25 20
SILVER [CASH]
15
Light sweet crude oil: Monthly 20-SMA important in the medium term
Last month crude found resistance around $87.61, where the monthly 20-simple moving average (SMA) was placed, and resumed its downtrend. The momentum cycle is in sell mode in the monthly, weekly and daily time frames, suggesting weakness ahead. Going forward, the key support is placed at $74, which once broken on a weekly closing basis, will take it towards $64.5 in the medium term. The reversal of the view is placed at $ 91.415 where the weekly 20-SMA is placed.
KST 60 50 40 30 20 10 0 -10 -20 -30 -40 LIGHT CRUDE CONTINUOUS 1000 BARRELS [NYMEX] 150
100
50
Trend Down since 04-08-11
Trend reversal $91.415
Supports $74/64.5
Resistances $92.6 /98
Target
2004 2005 2006 2007 2008 2009 2010 2011 2012
$75.71/ $64.5
29
October 2011
TREND & VIEW
COMMODITY
TECHNICALS
Zinc: At MOB
Last month zinc found resistance around Rs105 and started to crack from there forming lower tops and lower bottom on the daily charts. The sell-off found support at a key make-or-break (MOB) level around Rs88 and staged a pull-back rally. The break and close below that will target Rs83/74. Any pull-back should be limited till the Rs98/100 area. The momentum cycle is in sell mode on the daily, weekly and monthly time frames, suggesting bears have an upper hand. Resistance is placed at Rs102.5, which will act as a reversal point.
Trend Down since 04-08-11 Trend reversal Rs102.5 Supports Rs83/74 Resistances Rs98/102.5 Target Rs88/ Rs74
ar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Feb Mar
KST (-4.90453)
15 10 5 0 -5 -10 -15 -20
ZINC - 1KG - 1 MONTH (94.3000, 97.3000, 89.3500, 93.2000, -0.80000) 125 120 115 110 105 100 95 90 85 80 75 70 65 60
Lead: Last leg pending

After breaking the double bottom at Rs99.10 lead has closed above it again. Going forward, it is likely to witness a pull-back till the Rs104108 area before it starts its last leg of downtrend again. The daily, weekly and monthly momentum cycles are in sell mode, indicating bears have an upper hand at the higher levels. As the daily momentum cycle is in an over-sold zone, one can see some pull-back rally but the medium-term view remains down. Hence, in the short term it is likely to make a marginally new low near Rs90 before it bottoms out in the medium term for a significant pull-back.
Trend Sideways 04-08-11 Trend reversal Rs112 Supports Rs90/85 Resistances Rs108/112 Target Rs90
ct Nov Dec 2010 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec KST 20 15 10 5 0 -5 -10 -15 LEAD - 1 KG - 1 MONTH 140 135 130 125 120 115 110 105 100 95 90 85 80 75 70
Pepper NCDEX: Rs31,096 critical for bulls

After witnessing a five-wave advance from the low of Rs26,532 pepper is in short-term correction mode. The momentum cycles remains in buy mode in the monthly and weekly time frames but in sell mode on the daily charts and above the zero line. It is likely to finish its bear cycle. Hence it is likely to correct till Rs33,932 in the short term. In the medium term the momentum cycles are still in buy mode and should stage a new high in the coming months. The support is placed at Rs33,932 and thereafter at Rs31,096 where the 20-WMA is currently placed. These are going to help bulls to remain in the uptrend. Any weekly close below these will signal the reversal of the uptrend The targets on the higher side will be Rs37,130 and Rs39,150, ie the retest of the recent high.
Trend Up since 04-08-11 Trend reversal Rs31,096 Supports Rs33,932/ Rs31,096 Resistances Rs36,745/ Rs37,130 Target Rs37,130
2004 2005 2006 2007
PEPPER QUINTAL - 1 MONTH 75000 70000 65000 60000 55000 50000 45000 40000 35000 30000 25000
20000
15000
10000
5000
2008
2009
2010
2011
2012
October 2011
30
CURRENCY
FUNDAMENTALS
MONTHLY VIEW
Currency market : Indian Rupee tumbles along with Asian currencies

Key points
CURRENCY LEVELS IN SEPTEMBER (IN RS) Low 45.90 63.60 73.65 59.45 Close 49.18 66.65 76.63 64.46 Monthly chg (%) -6.61 0.30 -1.42 -7.20
Germanys parliament passes EFSF Bill. Currency High Worst month for Asian currencies since 1997 on slowdown signs. USD-INR 49.93 British Pound Sterling (GBP), euro tumble against the US Dollar EUR-INR 67.53 (USD). GBP-INR 76.94 SNB official says GBP holdings may get a boost. 65.66 India is committed to meet the 4.6% deficit target, says JPY-INR R Gopalan, secretary of the Department of Economic Affairs in the finance ministry. European Central Bank (ECB) can slash interest rates as the euro zone crisis worsens. Asian currencies fall to 10-month low; central banks intervene. ECB hawk, Jrgen Stark, quits amid fears of a rift.
September contract price movement
50 49.5 49 48.5 48 47.5 47 46.5 46 45.5 45 2-Sep-11 6-Sep-11 29-Aug-11 66 USDINR JPYINR 65 64
September contract price movement

67.1 66.6 (in Rs.) 66.1 65.6 65.1 64.6 64.1 2-Sep-11 6-Sep-11 8-Sep-11 12-Sep-11 14-Sep-11 16-Sep-11 20-Sep-11 22-Sep-11 29-Aug-11 26-Sep-11 EURINR GBPINR 77.1 76.6 76.1 75.6 75.1 74.6 74.1 73.6
(in Rs.)
63 62 61 60 59 8-Sep-11 12-Sep-11 14-Sep-11 16-Sep-11 20-Sep-11 22-Sep-11 26-Sep-11
USD-INR
CMP: Rs49.16
The European sovereign debt crisis, the US Feds Operation Twist, the slowdown in Indias industrial production, and current account deficit issue weighed heavily on the Rupee. The INR fell over 6% as the regional currencies fell to a ten-month low. Among the BRIC currencies, the Yuan fared the best. Indias government is committed to meet its fiscal deficit target of 4.6% for the financial year that began on April 1, said Mr Gopalan. With no immediate signs of a relief on the global macro-economic front, the currency is likely to be under pressure and can fall to as low as Rs51.50. The downside of the USD is seen limited at the Rs48.50 level.
EUR-INR
CMP: Rs66.89
The Indian Rupee (INR) slipped vs. the euro despite the latter tumbling sharply against the USD. This is because the INR fell even more against the USD. The Euro tumbled against the US Dollar on heightened sovereign debt crisis as the Troika of IMF, the ECB and the European Union postponed the decision on the next tranche of the Greece bailout fund. Although EFSF empowerment would be approved, risk aversion and the possibility of the ECB turning dovish could take the euro down to the $1.30. USD-INR movements would affect the performance of the INR against its rest of the peers. The pair is likely to trade between Rs65.50 and Rs67.50.
GBP-INR
CMP: Rs76.88
The INR lost against the GBP last month despite Britain's manufacturers reporting falling order books, talks of further easing by the Bank of England and a decline in retail sales in the UK. The GBP is likely to do reasonably well in the debt crisis scenario as the nations deficit reduction plans are credible. It is interesting that the GBP has appreciated against the USD after the Federal Open Market Committees September 21, 2011 decision whereas the JPY and the euro have fallen. The pair is likely to trade between Rs76.50 and Rs79. We recommend buying at the dips.
JPY-INR
CMP: Rs64.14
The domestic currency fell the most against the JPY as it fell 6.70% during the month. The Feds Operation Twist deters sharp gains in the JPY-USD pair as the possibility of a rise in the short-term yields of the USA makes the dollar more attractive. We look for a range of Rs64 to Rs66 in the short term with a caution that if the sovereign debt crisis deepens, the JPY may shoot up sharply.
CMP as on October 03, 2011
31
October 2011
TREND & VIEW
CURRENCY
TECHNICALS
USD-INR: Time for a breather

USD-INR was trading near a crucial support zone, which is 61.8% retracement of the entire previous rally, where it had taken support multiple times. It formed an ending diagonal and broke out on the upside. Since the breakout it has formed a five wave structure on the upside which forms the first leg of the rise. The move was so sharp that it has stretched the daily momentum indicator to the overbought zone. At that level it has formed a wedge, which is a bearish pattern. Hence a correction of the entire five wave rise is likely. The targets for USD-INR are 48.5-47.6, ie 23.6%-38.2% retracement respectively.
Relative Strength I ndex (71.1756) 80 70 60 50 40 30
GBP-INR: Moving higher

GBP-INR has surpassed the upper end of the medium term rising channel. After the breakout it has taken support at the upper channel line. The Bollinger Bands are expanding along with the price, thus making room for the price to rally. The daily as well as the weekly momentum indicators are also in favour of the bulls. Hence, unless the price falls back into the channel (75.9) on a closing basis, dynamic channel target is 78.3, whereas equality target is 78.9.
KST (3. 06081) 5
-5
USDI NR - INDI AN RUPEE (49. 0300, 49. 2200, 48. 8300, 49. 0100, +0. 04000)
0.0%
49.885
50. 0 49. 5 49. 0
GBPINR (76.3240, 77. 0830, 75. 9970, 76.3670, +0.05800) 82 81 80
23 .6 %
48.5
48. 5 48. 0
78.9 78.3
79 78 77
38 .2 %
47.6
47. 5 47. 0 46. 5
75.9
76 75 74 73 72 71 70 69 68 67
50 .0 %
61 .8 %
46. 0 45. 5 45. 0 44. 5 44. 0 43. 5
66 65 64 63 D 2010 M A M J J A S O N D 2011 M A M J J A S O N D 2012
10 0.0%
2011
February
April
May
June
July
August
Sept em ber
Novem
EUR-INR: Channelised rise

EUR-INR is trading in a medium term upward channel. It has formed an intermediate channel (dotted) within the larger channel. It found support at the lower end of the larger channel. Also it retested and took support at a falling trendline. From there EUR-INR has moved up sharply till the upper end of the intermediate channel. The currency which is now falling towards key daily moving averages and the lower channel line can be bought with reversal below the swing low of 64.45. The targets on the upside are 67.7-67.9.
KST (1. 10543) 4 3 2 1 0 -1 -2 EURI NR (66. 5160, 66. 6910, 65.5800, 65.5950, -0.96500) 69.5 69.0
JPY-INR: Correction unfolding

JPY-INR has recently completed a five wave structure on the upside. On the daily chart, at the top of the move, it formed an inside bar, which suggests a loss of momentum on the upside. The daily as well as the weekly momentum indicators have been stretched to overbought territory. Hence though the overall trend for the price is up, a decent correction is likely. The key retracement targets are 0.61200.6000. On the other hand, the high of 0.6536 will act as a crucial hurdle from the short to medium term perspective.
KST (9. 35793) 5 0 -5 JPYINR (0.64490, 0.65260, 0.63500, 0.63580, -0.00800)
0.0%
0.6536
0.66 0.65 0.64 0.63
67.9 67.7
68.5 68.0 67.5 67.0 66.5 66.0 65.5 65.0
23 .6 % 38 .2 % 50 .0 % 61 .8 %
0.612 0.6
0.62 0.61 0.60 0.59 0.58 0.57 0.56 0.55
64.45
64.5 64.0 63.5 63.0 62.5 62.0 61.5 61.0 60.5 60.0 59.5 59.0 58.5 58.0 57.5 57.0
10 0.0%
0.54 0.53 0.52 0.51 0.50 0.49 0.48 0.47 0.46
Oct
Nov
Dec
2011
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
2010
2011
2012
Currency USD-INR GBP-INR EUR-INR JPY-INR
Trend Down since 27-09-11 Up since 27-09-11 Up since 20-09-11 Down since 27-09-11
Trend Reversal 49.89 75.90 64.45 0.6536
Supports 48.65/48 76/75.9 65.4/65 0.6250/0.6130
Resistances 49.24/49.77 77.08/78 66/67 0.6430-0.6500
Target 48.5-47.6 78.3-78.9 67.7-67.9 0.6120-0.6000
October 2011
32
PMS
DESK
PMS FUNDS
Portfolio Management Service

We are pleased to introduce you to Sharekhans Portfolio Management Service (PMS) in which we completely manage your investment portfolio so that you stop worrying about the market volatility and focus your energy on things that you like to do! We have a wide range of strategies that you can choose from. Our strategies are based on fundamental research and technical analysis. We have the following strategies on offer:
ProPrime (based on fundamental research)

Top Equity Nifty Thrifty Trailing Stoploss Diversified Equity Diversified
ProTech (based on technical analysis)
PROPRIME - TOP EQUITY

OVERVIEW
The ProPrimeTop Equity PMS strategy is suitable for the long-term investors looking to create an equity portfolio through disciplined investments that will lead to a growth in the portfolios value with low to medium risk.
(In %) 1 month 3 month 6 month 1 year 3 year Since inception* Best month Worst month Best quarter Worst quarter
#18-May-11
Product performance as on September 30, 2011

Scheme -1.0 -4.5 -4.6 1.0 -4.5 -4.5 Sensex -1.3 -12.7 -11.1 1.9 -8.4 -12.7 Nifty -1.2 -12.5 -11.1 1.6 -8.8 -12.5
INVESTMENT STRATEGY
Disciplined investment decisions are taken in specific stocks based on thorough fundamental research. Investments are made primarily in the Nifty Fifty or the BSE 100 scrips. Attempts to have an exposure of minimum of 70% in the Nifty Fifty stocks and that of minimum of 90% in the BSE 100 stocks. Endeavours to create a core portfolio of blue-chip companies with a proven track record and have partial exposure to quality companies in the mid-cap space.
Disclaimer: Returns are based on a clients returns since inception and may be different from those depicted in the risk disclosure document.
PRICING
Minimum investment of Rs10 lakh Charges 2% per annum; AMC fee charged every quarter 0.5% brokerage 20% profit sharing after the 12% hurdle is crossed at the end of every fiscal
Top 10 stocks
ICICI Bank Bank of Baroda Reliance Industries GAIL Godrej Consumer Products Divis Laboratories Bharat Heavy Electricals HCL Technologies ITC Tatamotors-DVR-A-Ordy
Fund Manager: Gaurav Dua

FUND OBJECTIVE
A good return on money through long-term investing in quality companies
33
October 2011
PMS FUNDS
PMS
DESK
PROPRIME - DIVERSIFIED EQUITY

OVERVIEW
The ProPrimeDiversified Equity PMS strategy is suitable for long-term investors looking to create an equity portfolio through disciplined investments that will lead to a growth in the portfolios value with medium to high risk.
INVESTMENT STRATEGY
Disciplined investment decisions are taken in specific stocks based on thorough fundamental research. A balanced mix of value and growth stocks (mid-cap and small-cap) is created that represents investment opportunities across sectors and market capitalisation. Invests in quality value and growth stocks with good earnings visibility and healthy balance sheet. The fund manager, with the help of extensive, in-house, superior research, identifies fundamentally sound companies to invest in. The fund manager strives to capture the short-term trading opportunities to maximise the potential of the swings in specific stocks.
(In %) 1 month 3 month 6 month 1 year 3 year

Scheme -3.6 -17.6 -20.4 -44.1 -12 94 38 -24 65 -29 S&P CNX 500 -1.5 -12.0 -14.0 -19.2 30 169 34 -27 51 -29
PRICING
Minimum investment of Rs5 lakh Charges 2.5% per annum; AMC fee charged every quarter 0.5% brokerage 20% profit sharing after the 15% hurdle is crossed at the end of every fiscal
Since inception* Best month Worst month Best quarter Worst quarter
*24-Sept-04
FUND MANAGERS VIEW

The market continues to face rough weatherthe Sensex is down 30% from its peak levels on persistent global concerns and relentless macro head winds. Due to this, portfolios that got structured in the last 15-18 months are witnessing erosion in their net asset values. But in the pervading gloom what is being missed is the fact that valuations have become cheap yet again and the risk-reward ratio is now favourable. We believe the need of the hour is to review your portfolio again and start accumulating those stocks that are coping well with the present situation, continue to have a bright business outlook and are available cheap. It is a proven fact that the returns from equities multiply manifold over a longer period of time. If we look at a longer time frame and concentrate on the CAGR growth (as against the annualised return), we will find that the existing low valuations provide the perfect opportunity to go long now to reap the rewards at a much larger scale and a much faster pace when the market recovers. We are certain that the defaults, downgrades and the recession will soften crude and the other commodities. This will help the Indian economy, which is currently reeling under inflation, hardening interest rates and widening budget deficit. The economy will do much better once the interest rate cycle peaks out. Besides, corporate earnings are forecast to grow at 15-18 % over the next 2 to 3 years. We also do not expect any liquidity crunch to halt the capex cycle of India Inc. In other words, visibility of growth is very much there. The fall in the local currencies of the emerging markets like India and Brazil is the outcome of the financial mess in the euro zone, which has taken a toll on the currencies, crude and base & precious metals. Once the dust settles, investors will realise that the fall of 20-25% in the aforementioned will have a huge favourable impact on the corporate earnings and interest rate cycle. We suggest investors can now mobilise their idle funds and participate at the lower end of the market.
Top 10 stocks
IL&FS Transport Networks Reliance Industries Gayatri Projects Diamond Power Infrastructure PTC India Southern Petrochemicals Industries Provogue (India) Reliance Infra Sterlite Industries (India) SREI Infrastructure Finance
Fund Manager: Suhas Samant

FUND OBJECTIVE
A good return on money through long-term investing regardless of short-term volatility
October 2011
34
PMS
DESK
PMS FUNDS
PROTECH - DIVERSIFIED
OVERVIEW
The ProTechDiversified PMS strategy is suitable for long-term investors who desire to profit from both bullish and bearish market conditions. The strategy involves going long (buying) or going short (selling without holding) on certain investment classes by predicting the market direction based on a back-tested automated model.
INVESTMENT STRATEGY
This strategy has the potential to generate profits irrespective of the market direction by going long or short on specific indices and stocks. It invests in the Nifty and the Bank Nifty indices (via futures) and 10 stock futures. An automated basic back-testing model is used to predict the market direction for each of the indices and stocks which then decides the strategy to be deployed in terms of going long or short. The portfolio is not leveraged, ie its exposure will never exceed its value.

*16-May-2010
Scheme -5.6 -1.3 0.6 5.3 10 5.1 -3 6 -1
Sensex -1.3 -12.7 -15.4 -18.0 -6 12 -11 13 -13
Nifty -1.2 -12.5 -15.3 -18.0 -6 12 -10 14 -12
PRICING
Minimum investment of Rs5 lakh Charges AMC fees: Brokerage: Profit sharing: 0% 0.05% Flat 20% charged on a quarterly basis
FUND MANAGERS VIEW

The Nifty, which saw large swings in September, finally settled almost flat with a loss of around 1% for the month. The index traded in a broad range between 4800 and 5180 for the entire montha 200-point move in either direction from the August 2011 close. This indicates there is a tussle between bulls and bears with none emerging as a clear winner. The high volatility within this range also suggests indecisiveness at the current levels. Going forward, in the next series we feel that the market will show a clear trend in the latter part of the series. As October is a results month, we might see a lot of volatility especially in the early part of the month. On the derivative side of the market, it is clearly visible that the market is sufficiently hedged, as indicated by the significantly high implied volatility as well as high put-call ratio (PCR) and open interest, which will help to arrest panic selling if any. We have also observed many shorts in the system which have been carried forward from the previous series. These might also provide some support. The level 4800 will be crucial to watch out for in the current series as we have bounced multiple times from around these levels and a lot of put concentration was also seen at that strike price. The break of 4800 on the lower side may take the Nifty to 4650-4550 odd levels. The upside seems to be capped at around 5000 in the short term. September was not a good month for ProTech Diversified whose net asset value (NAV) declined by 5.64%, erasing the gains generated in August. As the Nifty has oscillated around 5000 levels like a pendulum, resulting in a higher number of whipsaws, the current draw-down gives an excellent opportunity to re-enter the product. We should see a better performance in the coming quarters. The product has been consistently delivering returns for the last few quarters and this was the first quarter that it saw marginal erosion in its NAV.
Top 10 stocks*
IDBI Aban DLF Jindal Steel JP Associate Punj Lloyd Ranbaxy Sesa Goa Tata Motors Yes Bank
*Traded stocks
Fund Manager: Abhinay Jain

FUND OBJECTIVE
Absolute returns irrespective of market conditions through a long-short strategy followed in multiple investments
35
October 2011
PMS FUNDS
PMS
DESK
PROTECH NIFTY THRIFTY

OVERVIEW
The ProTechNifty Thrifty PMS strategy is suitable for long-term investors who desire to profit from both bullish and bearish market conditions. The strategy involves going long (buying) or going short (selling without holding) on Nifty futures by predicting the market direction based on a back-tested automated model.

*01-Feb-2006
INVESTMENT STRATEGY
The strategy has the potential to generate profits irrespective of the market direction by going long or short on Nifty futures. An automated basic back-testing model is used to predict the market direction for the Nifty which then decides the strategy to be deployed in terms of going long or short. The portfolio is not leveraged, ie its exposure never exceeds its value.
Scheme -5.2 2.0 3.3 14.0 38 119 29 -17 33 -12
Sensex -1.3 -12.7 -15.4 -18.0 28 59 28 -24 49 -25
Nifty -1.2 -12.5 -15.3 -18.0 26 61 28 -26 42 -25
PRICING
Stocks
FUND MANAGERS VIEW

After a clear return in the previous month the index whipsawed between 5200 and 4720 in September leading to multiple signals that did not follow up with a trend. This caused a negative return of 5.23% for the month. October promises to be much better as it is seasonally a trending month. The NAV of Nifty Thrifty has been gradually making higher tops for the last 12 months and that is an encouraging sign. The NAV is far below its long-term mean growth rate. Therefore, there is room for it to catch up with the long-term mean.
Nify Index
Fund Manager: Rohit Shrivastava

FUND OBJECTIVE
Absolute returns irrespective of market conditions.
October 2011
36
PMS
DESK
PMS FUNDS
PROTECH TRAILING STOPS

OVERVIEW
Our ProTechTrailing Stops PMS strategy is suitable for long-term investors who desire to make profits in both bullish and bearish market conditions. It is also for those investors who are looking for profit pay-outs at regular intervals. This strategy involves going long (buying) or short (selling without holding) on stock/index futures.

(In %) 1 month 3 month 6 month 1 year 3 year Best month Scheme 2.6 8.8 6.4 -2.9 9 Sensex -1.3 -12.7 -14 2 -8 -3 Nifty -1.2 -12.5 -14 2 -9 -3 -
INVESTMENT STRATEGY
This strategy spots the winning trades based on technical analysis vs time framebased portfolios, basically the momentum calls. A risk model has been developed for stock portfolio allocation that reduces the risk and portfolio volatility through staggered building of positions. It is non-leveragedthe exposure will never exceed the value of the portfolio.
Revised strategy date* 6.7
PRICING
Worst month Best quarter Worst quarter
*07th May 2011 (Revised strategy)
Stocks
FUND MANAGERS VIEW

The revised final form of the Trailing Stops product since May of this year has us kicked about the pay-off that we should be able to deliver through this format. The object of delivering monthly returns with low portfolio volatility can be seen in the NAV behaviour of the product since May this year. The quarterly return is 9.85% for the quarter ended September 2011. The monthly return is 2.41%.
Nify Index Stock Futures
Fund Manager: Rohit Shrivastava

FUND OBJECTIVE
Absolute returns irrespective of market conditions.
37
October 2011
MONTHLY PERFORMANCE
ADVISORY
DESK
Advisory Products & Services

Sharekhans Advisory Desk is a central desk consisting of Mumbaibased expert advisory team that runs various sample model portfolios (for illustration purposes only) for clients of all profiles, be they traders or investors. Targeted at all types of clients, it is ideal for those who do not have the time to monitor the market tick by tick or to sift through pages of research for data or to pour over complex charts to catch a trend. Advisory Desk caters to both traders and investors. For traders it has three products, Smart Trades, Derivative Trades and MID Trades. For investors it runs the Sharekhan Portfolio Doctor service under which it reviews an existing portfolio on various parameters and suggests recommendations on a regular basis to improve its performance.
PRODUCTS & SERVICES
Investors
Portfolio Doctor
Traders
Smart Trades
Derivative Trades
MID Trades
FOR INVESTORS PORTFOLIO DOCTOR

Portfolio Doctor evaluates an existing portfolio on various parameters and suggests recommendations on a regular basis to improve its performance. It is targeted at long-term investors with a portfolio value of more than Rs10 lakh. The Portfolio Doctor service involves three simple steps: analysis of an existing portfolio, realignment of the portfolio with Sharekhans recommendations and creation of a Model Portfolio.
FOR TRADERS SMART TRADES

Smart Trades are calls generated based on the market pulse or the flavour of the season (these calls are not based on fundamental research). These calls are targeted at short-term delivery traders with a medium risk profile.
MID TRADES
MID Trades are trading calls on liquid stocks where momentum is expected before or after the announcement of results or where there is some news/event probable. These calls are generated by our Market Intelligence Desk and are rolled out based on the market pulse. The calls under MID Trades are not based on fundamental research but are generated using basic technical indicators and derivatives analysis. MID Trades are for intra-day and short-term swing traders. All these products require perfect discipline and money management for desired results.
DERIVATIVE TRADES
Derivative Trades are generated by the Sharekhan Derivatives Desk based on the analysis of open interest and other indicators. It is a leveraged product and ideal for aggressive futures traders. Product performance Product Ticket size (Rs) Month No of calls Profit and loss (Rs) Returns (%) Strike rate Smart Trades 3000,000 Sep 2011 18 -3327 -1.11 NA YTD FY12 298 -38716 -12.91 NA
Derivative Trades 3000,000 Sep 2011 23 -1,645 -0.55 NA YTD FY12 154 13,332 4.44 NA
MID Trades NA Sep 2011 62 27 NA 55 YTD FY12 69 38 NA 55
For more details on any of the Advisory Desk products write to us at info@sharekhan.com READY FOR ROARING ADVICE
October 2011
38
EARNINGS GUIDE
EQUITY
FUNDAMENTALS
Prices as on September 30, 2011
Sharekhan Earnings Guide

Company Price (Rs) FY11 Sales FY12E FY13E FY11 Net Profit FY12E FY13E EPS (%) EPS Growth PE (x) FY11 FY12E FY13E FY13/FY11
ROCE (%)
RONW (%)
DPS
FY11 FY12E FY13E FY12E FY13E FY12E FY13E
Div Yield (Rs) (%)
Evergreen
HDFC HDFC Bank Infosys Tech Larsen & Toubro Reliance Ind TCS 640.9 467.7 2,533.1 1,357.6 808.4 1,037.3 5,319.0 14,898.0 27,501.0 52,089.1 265,810.6 37,324.5 6,278.0 18,041.0 32,893.1 62,166.6 7,420.0 21,584.0 37,466.1 70,841.8 3,536.0 3,926.0 6,835.0 3,920.9 19,293.7 8,682.9 4,143.0 5,107.0 7,865.1 4,903.2 21,559.9 10,282.7 4,908.0 6,187.0 24.0 16.9 28.2 20.8 137.5 80.7 72.3 52.5 32.4 25.2 152.4 95.8 82.1 60.1 16% 22% 13% 22% 13% 16% 26.7 27.7 21.2 21.0 12.5 23.4 22.7 22.5 18.4 16.8 11.2 19.8 19.8 18.6 16.6 14.2 9.8 17.3 37.7 11.9 11.6 50.0 33.8 12.7 13.0 44.9 21.0 18.7 27.3 16.8 12.3 38.9 19.3 19.5 25.1 17.2 12.2 35.3 9.0 3.3 60.0 14.5 9.0 14.0 1.4 0.7 2.4 1.1 1.1 1.3
8,719.5 119.5 5,822.8 24,480.0 11,753.0 64.5 64.7 44.4
269,086.5 292,945.6 46,938.2 54,582.7
Applegreen
Aditya Birla Nuvo @ Apollo Tyres Bajaj Auto Bajaj Finserv Bajaj Holdings Bank of Baroda Bank of India 913.3 55.3 1,536.0 524.4 719.4 762.3 315.3 5,436.0 8,867.8 16,609.0 2,444.0 898.2 11,611.0 10,453.0 5,471.7 41,566.1 59,467.0 4,264.0 10,005.1 1,307.1 32,458.6 2,949.1 3,643.0 21,269.0 16,034.2 19,691.0 15,665.0 2,891.7 21,468.3 5,706.8 23,494.0 3,128.3 36,965.0 2,556.0 9,063.0 7,849.6 48,351.0 4,223.4 6,004.5 31,054.2 6,012.0 11,540.1 20,021.0 12,982.6 11,327.5 6,344.3 48,747.8 75,265.0 4,485.2 11,332.7 1,621.4 36,001.5 3,673.3 4,427.8 23,915.0 19,442.7 22,134.8 17,927.3 3,456.6 25,349.4 6,549.5 28,920.7 3,924.2 42,528.0 2,043.1 10,357.0 9,238.0 54,592.0 5,276.8 6,347.0 35,638.9 6,877.0 13,786.0 22,964.3 15,679.2 13,519.5 7,083.2 55,614.0 80,644.0 5,330.6 12,749.6 1,964.1 42,672.3 4,002.9 5,119.6 25,801.0 22,268.9 24,949.7 20,925.1 4,122.1 29,649.8 7,608.0 33,023.8 4,514.3 49,086.0 302.2 440.9 2,615.0 1,114.8 2,322.8 4,242.0 2,489.0 861.5 6,011.2 5,859.0 1,413.0 926.8 429.3 3,561.1 392.8 476.9 2,164.0 1,709.5 2,134.4 5,151.0 (105.6) 4,987.6 862.5 2,662.0 256.9 2,289.0 367.5 426.2 2,909.3 4,520.9 2,808.6 921.7 6,444.0 7,577.0 1,359.9 840.8 506.4 3,917.5 652.0 547.3 2,624.0 2,219.8 2,442.9 5,982.9 148.6 6,062.3 972.6 2,872.4 310.1 2,701.0 110.0 152.6 4.9 11,771.9 562.0 307.9 5,660.1 473.0 547.0 3,346.8 26.6 8.7 90.4 77.1 32.4 8.5 100.6 114.7 51.3 115.2 131.6 20.0 91.8 13.1 38.2 30.9 24.1 16.9 286.2 31.8 11.3 52.0 2.0 7.8 21.8 46.8 5.0 93.5 6.4 5.2 0.1 185.4 18.2 5.0 23.1 41.7 10.9 115.7 142.1 64.1 130.1 148.4 28.5 112.6 15.6 47.6 35.2 22.6 20.5 322.9 38.4 13.0 62.5 4.1 9.4 26.5 54.7 6.7 109.7 19.3 7.1 5.2 235.1 22.1 6.8 23.9 25% 12% 13% 15% 19% 11% 10% 36% 9% 4% 21% 12% 25% 18% 17% 25% 15% 18% 21% 17% 14% 26% 18% 23% 34% 28% 30% 6% 34.3 6.3 17.0 7.1 6.9 14.6 13.4 24.5 4.4 10.7 22.7 14.6 22.3 27.2 9.9 16.7 34.4 19.6 -51.0 30.9 24.6 19.2 34.3 13.7 -1.7 14.5 28.2 6.5 15.3 6.6 6.1 13.3 12.5 18.9 4.6 11.6 19.3 13.3 13.4 23.7 8.2 12.9 30.1 16.8 35.7 25.4 21.8 17.2 28.8 11.6 55.9 13.1 21.9 5.1 13.3 5.4 4.9 11.8 11.0 13.3 3.7 9.8 15.5 11.7 14.3 19.5 7.3 10.7 8.9 14.5 47.3 21.7 43.1 18.9 29.1 27.5 20.9 17.3 17.5 18.6 27.5 10.0 16.4 39.8 20.4 40.1 20.0 29.3 29.5 19.9 14.9 21.6 18.0 27.8 91.9 11.4 44.5 20.7 25.4 27.6 21.5 1.4 12.4 8.9 13.0 9.8 21.5 7.1 15.0 50.4 20.3 15.3 15.1 26.2 16.1 17.8 21.2 24.2 19.0 19.1 27.8 15.1 26.7 80.2 10.4 5.9 34.4 22.7 23.3 29.7 18.4 0.8 6.7 0.2 16.9 19.2 7.6 21.6 8.3 16.4 43.9 21.6 16.9 14.1 24.5 18.0 18.9 21.0 25.9 18.8 15.3 27.0 14.4 26.4 72.0 11.6 11.8 33.6 21.4 22.8 30.2 18.0 2.3 8.7 5.5 18.7 18.9 9.8 19.5 5.5 0.5 40.0 1.3 35.0 16.5 7.0 21.6 31.2 1.0 20.0 2.2 10.0 7.5 0.4 4.5 20.0 7.5 3.5 14.0 1.0 4.5 3.0 11.5 0.7 7.5 12.0 1.5 0.2 30.0 0.7 2.0 6.0 0.6 0.9 2.6 0.2 4.9 2.2 2.2 1.4 1.9 0.3 4.7 1.4 1.4 1.8 0.1 1.1 0.9 1.8 1.0 1.6 1.4 2.2 0.6 1.4 0.5 0.7 3.4 2.2 0.3 1.6 0.5 2.3 1.8
- 219.0 5,599.2 107.6 3,510.1 45.5
Bharat Electronics 1,534.1 BHEL Bharti Airtel Corp Bank Crompton Greaves Divi's Labs GAIL Glenmark Pharma GCPL Grasim HCL Tech** HUL ICICI Bank Indian Hotel Co ITC Lupin M&M Marico Maruti Suzuki Piramal Healthcare PTC India Punj Lloyd SBI Sintex industries TGBL (Tata Tea) Wipro 1,639.7 378.0 421.8 152.5 735.5 410.6 323.0 400.5 2,341.8 409.2 340.6 875.4 71.4 198.0 474.4 804.8 143.9 1,083.0 357.6 68.2 54.1 1,911.1 127.2 85.8 340.8
1,040.5 105.2 7,263.8 122.8 10,821.0 1,668.3 999.9 631.2 4,462.3 612.1 662.4 15.4 95.3 14.3 32.4 28.1 14.5 14.7
2,960.0 236.0 2,679.9 2,811.7 7,192.8 332.1 7,249.0 1,180.9 3,361.3 408.9 3,170.0 24.5 9.9 44.7 -1.4 6.4 19.3 42.0 4.2 79.2
26.2 102.2 14.0 17.4 21.1 17.9 14.7 21.5 9.9 18.5 9.6 10.4 8.1 5.8 12.6 14.3 8.0 45.0 20.9 25.6 24.3 20.7 -0.3 9.5 6.9 12.5 7.9 22.4
2,411.5 (3,435.8) 14,996.0 11,972.0 63,440.4 6,692.0 6,730.0 39,318.1 139.0 (160.0) 8,265.0 419.1 248.0 5,253.3
334.4 -204.6 208.5 173.9 4.7 -4.8
-11.3 541.0 14.7 9.4 21.5 15.9 10.3 7.0 17.2 14.8
14,928.1 130.2 682.6 421.2 5,854.0 13.5 4.0 21.4
Emerging Star
Axis (UTI) Bank Cadila Health Eros International Greaves Cotton ITNL
@Stand-alone financials
1,018.9 759.0 241.4 88.8 199.5
11,195.0 4,630.3 707.0 1,250.5 4,048.3
13,436.4 5,445.4 891.5 2,004.2 5,353.0
15,614.5 6,272.9 1,090.6 2,348.3 6,456.5
3,389.0 711.1 117.3 127.3 432.3
4,053.1 876.6 152.3 193.0 456.6
4,559.0 1,068.1 188.8 219.5 525.2
82.5 34.7 12.9 5.2 22.3
98.7 42.8 16.7 7.9 23.5
111.0 52.2 20.7 9.0 27.0
16% 23% 27% 32% 10%
12.4 21.9 18.7 17.1 8.9
10.3 17.7 14.5 11.2 8.5
9.2 14.5 11.7 9.9 7.4
28.2 23.3 46.8 14.3
27.9 24.6 42.6 11.6
19.6 31.0 20.5 32.5 16.7
18.8 28.5 21.0 29.5 15.2
14.0 6.3 0.0 1.5 3.5
1.4 0.8 0.0 1.7 1.8
**June ending company
Note: For Grasim and Apollo Tyres we have shifted our estimates to consolidated
39
October 2011
EQUITY
Company Price (Rs)
FUNDAMENTALS
Sales FY11 FY12E 3,277.8 1,931.9 84.8 5,638.3 2,533.3 391.3 FY13E 4,830.7 2,270.9 97.5 6,202.1 3,217.5 468.5 FY11 452.5 32.0 367.2 8.9 383.5 727.1 59.6 Net Profit FY12E 504.2 422.8 7.2 429.2 960.5 77.8 FY13E 606.7 509.4 8.5 468.2 1,144.6 100.9 EPS (%) EPS Growth 18.3 27.3 16.7 39.3 30.0 25.8 16% 18% -2% 10% 20% 30% 12.0 11.2 3.2 13.7 13.0 35.5 PE (x) ROCE (%)
EARNINGS GUIDE
RONW (%) DPS Div Yield (Rs) (%) 1.5 4.5 2.0 9.0 2.5 4.0 0.9 2.0 3.6 2.0 0.9 0.7
FY11 FY12E FY13E FY13/FY11 13.6 19.7 17.5 32.2 20.9 15.2 15.2 22.7 14.2 36.0 25.2 19.9
FY11 FY12E FY13E FY12E FY13E FY12E FY13E 10.7 9.7 3.9 12.3 10.8 27.2 8.9 8.1 3.4 11.3 9.1 20.9 57.7 51.7 14.3 19.7 22.8 43.2 12.6 20.5 23.6 38.7 19.0 26.9 16.4 26.9 19.9 45.3 19.2 25.8 16.5 24.1 18.0 41.6
IRB Infra Max India Opto Circuits India Patels Airtemp Thermax Yes Bank Zydus Wellness
163.0 188.9 221.0 56.0 442.4 272.6 540.4
2,438.2 6,668.0 1,585.6 76.0 4,884.4 1,870.2 336.5
Ugly Duckling
Ashok Leyland # Bajaj Corp CESC Deepak Fert Federal Bank Gayatri Projects Genus Power Infra India Cements Ipca Laboratories ISMT JP Associates KKCL NIIT Technologies Orbit Corporation Polaris Software Pratibha Industries Provogue India PNB Ratnamani Metals Selan Exploration Shiv-Vani Oil & Gas Subros Sun Pharma Torrent Pharma UltraTech Cement Union Bank of India United Phosphorus V-Guard Industries 26.1 106.1 277.6 165.6 368.2 139.4 13.7 72.6 257.2 33.9 72.8 819.3 196.5 32.3 132.6 43.2 31.5 953.0 102.5 298.1 195.7 28.5 462.5 539.1 1,141.6 244.7 137.7 210.0 11,117.6 359.4 3,939.9 1,564.8 2,263.4 1,441.0 711.8 3,501.0 1,898.9 1,611.4 13,320.2 236.6 1,232.2 399.2 1,586.3 1,268.1 565.4 15,420.0 812.2 71.0 1,462.2 1,091.4 5,721.4 2,122.0 13,209.9 8,255.0 5,804.3 726.3 13,229.4 464.2 4,304.8 2,036.7 2,576.4 1,712.2 800.8 4,019.0 2,223.6 1,881.5 14,850.2 306.4 1,407.1 515.1 1,991.2 1,559.1 616.1 17,467.5 1,090.3 105.2 1,534.7 1,194.7 7,297.1 2,502.5 16,715.5 9,002.6 7,197.0 977.0 15,213.9 550.4 4,680.7 2,262.9 3,002.6 2,073.2 923.9 4,199.0 2,624.2 2,209.3 17,719.7 349.0 1,590.8 661.8 2,288.6 1,912.8 662.3 20,370.1 1,269.5 152.7 1,608.2 1,356.4 8,273.2 2,899.9 18,180.4 10,593.5 8,570.2 1,286.2 636.1 103.1 488.4 186.6 587.1 61.0 60.1 66.3 262.8 75.4 653.0 46.2 180.9 78.3 202.5 71.5 33.4 4,434.0 80.5 32.2 228.6 28.8 1,816.1 248.2 1,278.7 2,082.0 585.8 39.0 658.5 115.5 585.9 214.0 700.2 68.3 56.6 219.0 292.1 92.1 680.0 56.4 166.8 74.5 215.5 83.5 39.5 4,956.0 97.3 48.1 241.7 31.0 2,261.4 314.9 1,802.2 2,297.6 771.0 52.3 795.6 139.7 638.1 246.0 863.8 95.9 67.8 267.0 362.1 150.8 954.0 66.6 189.7 109.9 241.3 103.2 46.8 2.4 7.0 38.9 21.2 34.3 50.9 3.8 2.2 20.9 5.1 3.1 37.5 30.5 6.9 20.4 7.2 2.9 2.5 7.8 46.6 24.3 40.9 32.4 3.6 7.1 23.3 6.3 3.2 45.7 28.1 6.5 21.7 8.3 3.5 156.4 21.0 28.3 52.1 5.2 21.8 37.2 65.8 43.8 16.7 17.5 3.0 9.5 50.8 27.9 50.4 45.5 4.3 8.7 28.9 10.3 4.5 54.0 32.0 9.6 24.3 10.2 4.1 185.9 24.8 41.9 56.7 5.6 25.0 44.4 76.1 52.7 20.5 24.9 12% 16% 14% 15% 21% -5% 6% 99% 18% 43% 20% 20% 2% 18% 9% 19% 19% 15% 19% 49% 7% 8% 20% 23% 19% 15% 27% 38% 10.9 15.2 7.1 7.8 10.7 2.7 3.6 33.0 12.3 6.7 23.5 21.8 6.4 4.7 6.5 6.0 10.9 6.8 5.9 15.7 4.0 5.9 26.4 18.4 21.1 6.2 10.8 16.0 10.4 13.6 6.0 6.8 9.0 4.3 3.8 10.2 11.0 5.4 22.7 17.9 7.0 5.0 6.1 5.2 9.0 6.1 4.9 10.5 3.8 5.5 21.2 14.5 17.3 5.6 8.2 12.0 8.7 11.2 5.5 5.9 7.3 3.1 3.2 8.3 8.9 3.3 16.2 15.2 6.1 3.4 5.5 4.2 7.7 5.1 4.1 7.1 3.5 5.1 18.5 12.1 15.0 4.6 6.7 8.4 20.9 29.6 14.8 12.9 21.5 23.1 18.0 15.8 25.9 21.4 35.6 13.9 12.4 20.4 23.2 18.8 16.6 28.4 15.6 13.7 6.0 22.4 11.7 9.4 34.0 28.0 10.0 26.5 19.4 8.6 16.6 14.2 6.0 23.1 15.7 10.6 34.9 27.7 12.9 25.0 19.0 9.6 14.1 33.7 8.6 12.7 15.1 33.5 8.6 13.0 15.9 26.8 10.1 18.7 13.0 14.2 13.1 5.0 24.4 13.3 7.2 26.3 20.5 7.7 19.3 16.0 5.1 21.1 20.3 22.8 13.2 12.1 19.9 27.5 14.7 16.9 17.7 27.2 17.6 26.6 10.2 18.7 14.5 14.6 13.6 6.0 24.4 17.9 9.4 26.9 20.5 10.5 18.8 17.0 5.7 21.2 19.9 25.6 13.1 11.6 18.7 26.3 14.8 17.6 18.4 30.4 1.0 1.9 4.0 5.0 8.5 2.5 0.1 1.5 3.2 1.3 0.9 10.0 7.5 1.5 4.5 0.6 0.3 22.0 2.5 1.8 1.0 0.7 3.5 8.0 6.0 8.0 2.0 3.5 3.8 1.8 1.4 3.0 2.3 1.8 0.7 2.1 1.2 3.7 1.3 1.2 3.8 4.6 3.4 1.4 0.8 2.3 2.4 0.6 0.5 2.5 0.8 1.5 0.5 3.3 1.5 1.7
5,890.3 139.9 115.1 71.1 262.7 33.7 2,591.9 375.5 2,086.0 2,762.4 936.1 74.3 17.4 18.9 49.3 4.8 17.5 29.3 54.0 39.7 12.7 13.1
Vulture's Pick
Mahindra Lifes@ Orient Paper Tata Chemicals Unity Infraprojects 298.0 60.9 316.2 44.0 476.7 1,959.0 11,156.3 1,701.5 508.7 2,254.7 12,774.9 2,014.9 581.8 2,501.6 14,265.1 2,317.1 103.1 143.1 690.4 94.4 106.0 202.2 844.1 101.8 115.1 227.6 962.9 127.0 24.9 7.4 29.3 12.7 25.6 10.5 35.9 13.7 27.8 11.1 39.3 17.1 6% 22% 16% 16% 12.0 8.2 10.8 3.5 11.6 5.8 8.8 3.2 10.7 5.5 8.0 2.6 14.1 22.9 16.1 16.5 14.5 22.5 16.8 17.5 9.9 19.4 14.0 14.6 10.0 17.4 14.4 15.8 5.0 1.2 10.0 1.0 1.7 2.0 3.2 2.3
Cannonball
Allahabad Bank Andhra Bank IDBI Bank Phillips Carbon Madras Cements Shree Cement 157.7 123.8 102.6 140.4 100.3 1,847.8 5,393.0 4,118.0 6,412.5 1,695.7 2,605.0 3,511.9 6,317.0 4,548.8 7,456.5 1,975.2 2,962.0 3,941.0 7,457.0 5,319.3 8,622.8 2,142.4 3,197.0 4,567.0 1,423.0 1,267.0 1,650.0 116.3 211.0 258.2 1,743.1 1,391.0 1,868.9 142.2 254.0 152.0 2,163.2 1,646.4 2,158.4 152.0 288.0 277.6 29.9 22.6 16.8 35.0 8.9 74.1 36.6 24.9 19.0 42.8 10.7 43.6 45.4 29.4 21.9 45.7 12.1 79.7 23% 14% 14% 14% 17% 4% 5.3 5.5 6.1 4.0 11.3 24.9 4.3 5.0 5.4 3.3 9.4 42.4 3.5 4.2 4.7 3.1 8.3 23.2 18.8 7.0 7.0 17.7 8.0 10.3 19.0 19.9 13.9 23.3 14.0 7.3 20.3 20.3 14.4 20.0 14.0 12.0 5.0 5.5 3.5 5.0 1.8 8.0 3.2 4.4 3.0 3.6 1.7 0.4
#UltraTech numbers are post merger of Samruddhi Cement.
40
October 2011
EARNINGS GUIDE
Remarks
EQUITY
FUNDAMENTALS
Evergreen HDFC HDFC is among the top mortgage lender providing housing loans to individuals, corporates and developers. It has interests in banking, asset management and insurance through its key subsidiaries. As these subsidiaries are growing faster than HDFC, the value contributed by them would be significantly higher going forward. HDFC Bank was established in 1994 as a part of liberalisation of the Indian banking industry by the Reserve Bank of India (RBI). It was one of the first banks to receive an 'in principle' approval from the RBI to set up a private sector bank. Its relatively high margins (compared with its peers), strong branch network and better asset quality make HDFC Bank a safe bet. Infosys is India's premier IT and IT-enabled services company. It is one of the key beneficiaries of the strong trend of offshore outsourcing. The company is relatively better positioned to weather the tough business environment and is also among the major beneficiaries of the revival in IT spending. However, the leadership re-organisation, visa litigation and quarterly under-performance have led to a near-term sluggishness in the stocks performance. Larsen & Toubro, being the largest engineering and construction company in India, is a direct beneficiary of the strong domestic infrastructure boom. Strong potential from its international business, its sound execution track record, bulging order book and strong performance of subsidiaries further reinforce our faith in it. There also lies great growth potential in some of its new initiatives. RIL holds a great promise in E&P business with gas production from KG basin starting from April 2009 and crude oil production commencing from September 2008. We expect the companys GRM to pick up with a likely improvement in the light-heavy crude oil price differential. The company is likely to fetch premium over Singapore Complex GRM due to its superior refinery complexity and captive use of KG D-6 gas. We expect the petrochem margins to be maintained in the medium term on uptick in the domestic demand. Currently the decline in gas output from KG D6 basin has weighed high on the stock price, however its recent deal with BP is expected to benefit RIL in terms of the global expertise of BP in deep-water exploration to ramp-up production at KG-D6. TCS pioneered the IT services outsourcing business from India and is the largest IT service firm in the country. It is a leader in most service offerings and is in the process of further consolidating its leadership position through the inorganic route and large deals. At the current juncture TCS is well placed to garner incremental deals in the sector with organisational structure in place, unlike Wipro and Infosys, which are going through a phase of organisational restructuring. Its consistent quarterly performance coupled with the higher predictability of its earnings would keep it the Streets favourite over Infosys. Apple Green Aditya Birla Nuvo We believe the value businesses of the company (insulators, textiles, fertilisers, carbon black and rayon) have started witnessing increased efficiency as reflected in sharp improvement in their operating margins, while the growth businesses (retail, BPO, life insurance and financial services) are showing improved revenue visibility and gaining strong market share. We believe strong internal cash flows from value businesses coupled with promoter funding would aid in meeting the funding requirement of the growth businesses. Apollo Tyres is the market leader in truck and bus tyre segments with a 28% market share. A strong demand in the OEM and replacement tyre segments coupled with the commencement of additional capacity at its new Chennai facility is likely to see a healthy growth in its volume going forward. The European and South African acquisitions have yielded regional and product diversification. The Indian operations contribute about 64%; VBBV contributes around 24%; and Apollo Dunlop, South Africa contributes approximately 12% to the consolidated revenues. Bajaj Auto is a leading two-wheeler automobile company. It is moving up the value chain by concentrating on the executive and premium motorcycle segments. The success of the new launches will drive most of the growth for the company during the year and help the company to regain its lost market share in the 125cc segment. Bajaj Finserv is actively present in businesses such as vehicle finance, consumer finance, distribution etc with insurance being the dominant contributor to revenues. It is one of the top few players in the fast growing life insurance segment and also has a sizable presence in the general insurance segment. Bajaj Holdings is the holding company of the Bajaj group, having a 30% stake each in Bajaj Auto and Bajaj Finserv. The two-wheeler sales are expected to improve going forward with new product launches. The insurance business makes it one of the largest players in the insurance space. BoB is among the top PSU banks having sizeable overseas presence (86 offices in 25 countries) and a strong domestic network of over 3,400 branches across the country. It has a stronghold in the western and eastern parts of India. The bank has laid out aggressive plans to expand its income streams from both domestic and international businesses. Bank of India has a wide network of branches, spread across the country and abroad, along with a diversified product and services portfolio and steadily growing assets. The asset quality had posed concerns and affected the operating performance of the bank.
HDFC Bank
Infosys
L&T
Reliance Ind
TCS
Apollo Tyres
Bajaj Auto
Bajaj Finserv
Bajaj Holdings
Bank of Baroda
Bank of India
41
October 2011
EQUITY
FUNDAMENTALS
Remarks
EARNINGS GUIDE
Bharti Airtel
Bharti Airtel continues to lead the domestic telecom market in terms of both the subscriber base and the revenue market share. Return of pricing power in the domestic market, visible through recent tariff hikes, coupled with improving efficiency and market share in the acquired Zain African operations puts Bharti Airtel in a sweet spot. We have upgraded it to Buy. Bharat Electronics Ltd (BEL), a PSU manufacturing electronic, communication and defence equipment, is benefiting from the enhanced budgetary outlay for strengthening and modernising the countrys security. The growth in revenue is also expected to be aided by the civilian and export orders. The companys current order book of Rs23,830 crore provides revenue visibility for the next two years. BHEL, India's biggest power equipment manufacturer will be the prime beneficiary of the four-fold increase in the investments being made in the domestic power sector. The current order book of Rs1,59,600 crore stands at around 3.8x its FY2011 revenues providing revenue visibility for at least the next three years. However, the key challenge before the company now would be to maintain a robust order inflow amid rising competition in the power equipment space and a profitable execution of the order book. Corporation Bank is a mid-sized PSU bank having strong presence in the corporate segment. The bank is planning to expand its retail and SME book, and expand the CASA ratio which will improve the net interest margin over the medium term. The bank is most aggressive on technology implementation which gives it a competitive edge over its peers. Crompton Greaves' key businessesindustrial and power systemsholds huge potential in view of investment opportunities in infrastructure particularly Transmission and Distribution sector in India. Its consumer products segment, which has done very well in the recent years, also led to diversification in its business exposure. The synergy from the acquisition of Pauwels, GTV, Microsol, Emotron and QEI will drive the companys consolidated earnings. However, disappointing Q1FY2012 results have added to the investors concerns on the companys growth slowdown and competitive margin pressure. After a full year of inventory downsizing, the outstanding results in H1FY2011 have re-affirmed our confidence in Divis Labs growth potential. The biggest thrust is likely to come in FY2012 as the new facility at Vishakhapatnam is fully operational. A near debt-free balance sheet and strong cash flow are likely to help build a war chest for pursuing strategic investments (biosimilars) and exploit growth opportunities in niche segments like high potency for oncology and steroids for contraceptives. With the order inflow picking up from H2FY2011 and its new plant getting operational, Divis has a strong revenue growth visibility and the operating leverage in the business will boost its margins. GAIL India, a leading gas transmission company, is aggressively expanding its pipeline network and plans to invest more than Rs30,000 crore over FY2010-14 in a phased manner to double its gas pipeline network to over 14,000km and its transmission capacity to around 300mmscmd. This provides strong revenue visibility in its core gas utilities business. Despite the subsidy burden, the strong growth visibility in its core gas transmission business would drive its earnings growth at a CAGR of 12% during FY2011-13. Through the successful development and out-licencing of five molecules in a short span of eight years, Glenmark has become India's best play on research-led innovation. It has built a pipeline of 14 molecules (recent addition of GBR500) and has managed to clinch five out-licencing deals worth $1,672mn (received $192mn as initial milestone payment). Its core business has seen stupendous success due to its focus on niche specialties and brand building. Out-licencing deals of its key molecules would provide further impetus to the earnings. Godrej Consumer Products Ltd (GCPL) is a major player in personal wash, hair colour and household insecticide market segments in India. The recent acquisitions of Darling Group, Tura, Megasari and an Argentine company has helped the company to expand its geographic footprint. We believe the decent sales volume growth in the domestic business coupled with a strong growth in Megasari (Indonesian business), African and the Argentine business would help GCPL to achieve an around 18% CAGR top line and bottom line growth over FY2011-13. Due to the de-merger of its cement division, Grasim Industries has become a holding company for the cement business and is left with the VSF and chemical divisions. On the other hand, due to a strong demand for VSF in the global market the companys realisation is healthy. Further, the company is in the process of adding another 120,000 tonne capacity by FY2013 with an investment of Rs1,690 crore. HCL Tech is one of the leading Indian IT service vendors. It has outperformed its peers in terms of better financial performance in the past few quarters on the back of a ramp-up in business from large deals bagged earlier. We expect HCL Tech to show a superior earning CAGR of 25% over FY2011-2013E with a broad based revenue growth and margin improvement. With improved revenue visibility and consistency in financial performance, we now value HCL Tech at a 25% discount to Infosys.
BEL
BHEL
Corp Bank
Crompton Greaves
Divi Labs
GAIL
Glenmark Pharma
GCPL
Grasim
HCL Tech
42
October 2011
EARNINGS GUIDE
Remarks
EQUITY
FUNDAMENTALS
HUL
HUL is India's largest FMCG company. It would achieve above 10% Y-o-Y top line growth driven by a mix of sales volume and a price-led growth. However, the higher input prices will continue to sustain pressure on the profitability in the near term. With commodity prices showing a downward trend, the company could ease out of margin pressure in the second half of FY2012. Thus overall we expect HULs bottom line to growth at a CAGR of 13% over FY201113. In the long term, HUL will be one of the key beneficiaries of the Indian consumerism story. ICICI Bank is India's second largest private sector bank with a network of over 2,500 branches in India and a presence in around 18 countries. The bank has once again entered an expansionary mode after making a conscious effort to contract its advances book due to asset quality concerns. The bank offers substantial value unlocking opportunities with the expected listing of its subsidiaries like ICICI Securities and ICICI Prudential Life Insurance. Indian Hotels is the largest hotelier in India with a vast portfolio of hotel properties around the globe. Over the long term the company would benefit from increase in tourism and corporate travels in India. Also, a turnaround in profitability of its overseas properties would boost its earnings. The occupancies and ARRs in the domestic business have revived on the back of buoyancy in domestic tourism and a strong growth in foreign tourist arrivals. ITC has a strategy of effectively utilising the excess cash generated from its cash cow, the cigarette business, to strengthen and enhance its other non-cigarette businesses. This would nurture the growth of these businesses some of which are at nascent stage. Thus we believe the company will deliver sustained and steady growth in coming years. Lupin is set to take off in the export market by targeting the US market (primarily for branded formulations) while maintaining its dominance in the anti-TB segment globally. Further, with an expanded field force and therapy focused marketing division; its formulation business in the domestic market has been performing better than the industry. Its ongoing R&D activities are also expected to yield sweet fruits going forward. Further, a swift ramp-up in branded products would add further sheen to its growth. M&M is a leading maker of tractors and utility vehicles in India. New product launches are likely to drive its growth going forward in the automobile segment, while the company has consolidated well in the tractor segment with the acquisition of Punjab Tractors. Further, its investments with world majors in passenger cars and commercial vehicles have helped it diversify into various automobile segments, while the value of its subsidiaries adds to its sum-of-theparts valuation. Marico is among India's leading FMCG company. Its core brands, Parachute and Saffola, have a strong footing in the market. It follows a three-pronged strategy that shall ensure its growth in the long term. The strategy hinges on expansion of existing brands, launch of new product categories (especially in beauty and wellness space) and growth through acquisitions. While the domestic product portfolio is likely to achieve a steady growth in volumes, the international business is expected to post a robust growth on the back of an increase in distribution to neighbouring countries and extension of its international product portfolio over the long run. However in the recent past firming copra prices have kept profitability under pressure. Maruti Suzuki is India's largest small carmaker. It is the only pure passenger car play in the domestic market. While the new Swift has seen unprecedented response from the market, there is considerable stress in its petrol portfolio. Suzuki of Japan has also identified India as a manufacturing hub for small cars for its worldwide markets. Even though the pharma business is witnessing strong traction, diversification into unrelated areas allays our fears of losing focus on the core business. With the NCE business becoming an integral part of the parent company, the risk profile of the company has increased. We value the company at a higher discount rate of 50% (from 20% earlier) as it still has a hefty cash balance of Rs8,500 crore (part to be received over a period of 4 years), which could be utilised for high risky ventures. PTC India Ltd is a leading power trading company in India with a market share of around 33% in short term power trading in CY2010. Driven by the strong growth in trading volumes and an uptick in the trading margins, the company is estimated to show a robust growth in its earnings over the next few years. In the last few years, the company has made substantial investments in various areas like power project financing via PFS or taking direct equity stake, coal trading and power tolling which have great growth potential in the future. Given its niche positioning, de-risked business model and strong growth outlook with improving core RoE, the valuations are quite attractive on a sum-of-the-parts basis. Punj Lloyd is the second largest EPC player in the country (first being Larsen & Toubro) with global presence. In FY2007, it acquired SEC and Simon Carves, which helped it plug gaps in the services offered by it. However, since FY09, the profitability has come under severe pressure due to cost overruns/ liquidated damages in some of its subsidiaries projects and rising working capital requirement. Further the political unrest in Libya has aggrevated the situation. Thus going ahead, the successful execution of its projects holds the key as the company enjoys a very robust order book.
ICICI Bank
Indian Hotels Co
ITC
Lupin
M&M
Marico
Maruti Suzuki
Piramal Health
PTC India
Punj Lloyd
43
October 2011
EQUITY
FUNDAMENTALS
Remarks
EARNINGS GUIDE
SBI
State Bank of India is the largest bank of India with loan assets of Rs7.9 lakh crore. The loan growth is likely to remain slightly subdued in FY2012 while the core operating performance will be healthy with stable net interest margin. Successful merger of the associate banks could provide further upside for the parent bank. The asset quality of the bank would remain a key monitorable. A key player in the plastic specialties space, Sintex Industries has a diverse business model with presence in construction, prefabs, custom moulding and textile businesses. Being a pioneer in the monolithic construction technique, it is witnessing a strong traction in the order inflow for this division. Given the need for affordable housing, we expect its order book to remain buoyant in the future. With presence in exciting growth businesses, its revenues and profits are expected to post a CAGR of 22.0% and 27.6% respectively over FY2011-13E. Over the past few years, Tata Global Beverage Ltd (TGBL, formerly Tata Tea) has transformed its focus from being a mere tea and coffee company to a complete beverage maker. The recent addition of Mount Everest mineral water to its product portfolio and its tie-up with Pepsico Inc to make a mark in the non-carbonated beverage space are likely to be the new growth drivers for the company in the long run. Its intention to acquire companies in the US, Europe and Russia also augurs well to enhance its geographical footprint. Wipro is one of the leading Indian IT service companies. The company has lagged the other IT biggies in terms of performance. In the medium term we expect Wipro to demonstrate a relatively weaker earnings growth vis--vis its peers owing to it undergoing an organisational restructuring phase. We expect Wipros earnings to grow at a CAGR of 5.6% over FY2011-13E. Emerging Star
Sintex Industries
TGBL
Wipro
Axis Bank
Over the last few years, Axis Bank has grown its balance sheet aggressively. Notably, the bank has maintained a delicate balance between aggressive balance sheet growth and profitability. Besides the core banking business, the bank has forayed into the asset management business and is acquiring the securities and investment banking business of ENAM. We expect the quality of its earnings to improve as the proportion of fee income goes up. Cadila's improving performance in the US generic vertical and emerging markets along with steady progress in CRAMS space enrich its growth visibility of achieving a $3bn revenue target. With the key subsidiaries turning profitable and its aggressive take on Para IV filings, the company is all set to harvest the fruits of its long-term investments. Eros is one of the largest integrated film studios in India with multi-platform revenue streams and a well-established distribution network across the globe. With its proven track record, de-risked business model and aggressive rampup plans, we believe the company is well poised to gain from the rising discretionary spending on film entertainment driven by the countrys favourable demographics. Thus, EIML is a compelling value play on the Indian media and entertainment industry. Greaves Cotton is a midsize and well-diversified engineering company. The Companys core competencies are in Diesel/ Petrol engines, Power Gensets, Agro engines & pumpsets (Engines segment) and Construction Equipment (Infrastructure equipment segment). The engine business accounts for ~85% of the companys revenue, while the rest comes from infrastructure equipment. With strong growth in sales of automotive engines and expected revival in the construction equipment sales, we expect the company to post a robust CAGR of 16% in profits over FY2011-14. ITNL is Indias largest player in the BOT road segment with a pan-India presence and a diverse project portfolio. The fair mix of annuity and toll projects, and state and NHAI projects along with the geographical diversification across 12 states reduces the risk to a large extent and provides comfort. Further, a strong pedigree along with the outsourcing of civil construction activity helps ITNL to scale up its portfolio faster. Thus, it is well equipped to capitalise on the huge and growing opportunity in the road infrastructure sector. IRB is the largest toll road BOT player in India and the second largest BOT operator in the country with all its projects being toll based. It has an integrated business model with an in-house construction arm which provides a competitive advantage in bidding for the larger projects and captures the entire value from the BOT asset. Further, it has a profitable portfolio as majority of its operational projects have become debt-free and it has presence in high-growth corridors which provides healthy cash flow. Thus, IRB is well poised to benefit from the huge opportunity in the road development projects on the back of its proven execution capability and the scale of its operations. Max India is a unique investment opportunity providing direct exposure to two sunrise industries of insurance and healthcare services. Max New York Life, its life insurance subsidiary, is among the leading private sector players, has gained the critical mass and enjoys some of the best operating parameters in the industry. With insurance penetration picking up in India and with the company entering into a tie up with Axis Bank we expect to see a healthy growth in the companys annual premium equivalent (APE) going ahead.
Cadila
Eros Intl Media
Greaves Cotton
IL&FS Trans
IRB Infra
Max India
44
October 2011
EARNINGS GUIDE
Remarks
EQUITY
FUNDAMENTALS
Opto Circuits
A leading player in manufacturing medical equipment like sensors and patient monitors, Opto Circuits has diversified into invasive space, supplying stents for medical use. A lower cost base and an attractive pricing strategy have enabled the company's stents to gain acceptance globally. A steady growth in the non-invasive segment and increasing acceptance of DIOR, a revolutionary cardiac balloon, in Europe would also drive its growth. The Criticare acquisition has further enabled it to diversify into gas monitoring system and strengthen its position in the USA. The quick turnaround in the recently acquired Cardiac Lifescience is impressive and would drive the future growth. Patels Airtemp, a manufacturer of heat transfer technology products, would benefit immensely from the strong boom in its user industries, particularly oil and gas, refineries and power. It currently has a strong order book of Rs68 crore while the order inflow is expected to remain steady in the next two years as well. The energy and environment businesses of Thermax are set to benefit from a continuing rise in India Inc's capex. Its group order book stands at Rs6,804 crore, which is 1.3x its FY2011 consolidated revenue. While its super-critical boilers foray is yet to see some major order inflow, we remain positive on its diversified sector exposure and opportunities in the infrastructure sector. Yes Bank, a new generation private bank, started its operations in November 2004 and is the only greenfield bank approved by the RBI in the last decade. The bank is promoted by Rana Kapoor and Ashok Kapur. Yes Bank follows a unique business model based on knowledge banking, which offers product depth and a sustainable competitive edge over established banking players. Knowledge led banking also enables the bank to generate strong fee income, which eventually translates into higher return ratios. Zydus Wellness owns three high growth brands, Nutralite, Sugar free and Ever Yuth in the niche health and wellness segment. The company focuses on rampant growth by increasing the distribution of existing products, scaling up the existing product portfolio through variants and new product launches leveraging the three brands. Also, the tax benefit from the new facility would aid in a strong bottom line growth in the coming years. Thus, we expect the companys profit to register a strong CAGR of 30% over FY2011-13E. Ugly Duckling
Patels Airtemp
Thermax
Yes Bank
Zydus Wellness
Ashok Leyland
Ashok Leyland, the second largest commercial vehicle (CV) manufacturer in India, is a pure CV play. The new greenfield facility in Pantnagar in Uttaranchal has provided strategic cost and diversification benefits. The company has ventured into LCV space with the launch of Dost together with Nissan. It is also entering into construction equipment space through JV with John Deere. Bajaj Corp is the third largest player in the hair oil segment and has emerged as the dominant player in the premium light hair oil (LHO) category with its Almond Drops hair oil. With its strong brand positioning, distribution strength and healthy balance sheet, it is well poised to ride on the strong consumer demand emerging due to the rising disposable income and growing aspirations of the Indians. Any initiative on the companys part to expand its limited product portfolio or strengthen its core business would be the key upside trigger for the stock. Hence, we recommend Buy on the stock with a price target of Rs142. CESC is the power distributor in Kolkata and Howrah backed by 1,225MW of power generation capacity, which is a strong cash generating business. Further, it is adding 1,200MW of generation capacity which would be on stream by FY2015. Moreover, having 80% of assured coal supply from invested company and coal linkages, CESC has a high degree of integrated status among peers. Despite that, the stock is currently one of the cheapest stock in the Indian utility space trading at a discount to its book value primarily on account of the concerns related to losses from its retail business, Spencers. However, we believe the concerns are overdone and the company has started exhibiting store level profit in FY2011 which is an initial sign of revival as per the management. Nevertheless, this possible turnaround of retail business is not priced in the current stock price; hence the stock is a rerating candidate. DFPCL manufactures and supplies industrial chemicals and ANP fertilisers. Given the expansion in TAN capacity, introduction of new products in the fertiliser division and ability to manage cost pressures, we expect the company to report good growth in revenue and earning going forward. Federal Bank is the fourth largest private sector bank in India in terms of asset size and has traditionally been a strong player in south India especially Kerala. The bank is expected to witness an improvement in its RoE due to leveraging of its equity and easing of cyclical asset-quality pressures. Gayatri Projects is a Hyderabad-based infrastructure company with a very strong presence in irrigation, road and industrial construction businesses. The order book excluding Andhra Pradesh irrigation projects stands at Rs4,160 crore, which is 2.9x its FY2011 revenues. It is also expanding its power and road BOT portfolio and plans to unlock value by offloading stake to private equity. We feel the company has potential to transform itself into a bigger player and expect its net profit to grow at a CAGR of 25% over FY2011-13.
Bajaj Corp
CESC
Deepak Fert
Federal Bank
Gayatri Proj
45
October 2011
EQUITY
FUNDAMENTALS
Remarks
EARNINGS GUIDE
Genus Power
Genus, India's leading electric meter making company, is all set to reap the benefits of APDRPs initiatives like 100% metering programme and replacement of mechanical meters with electronic meters. However in the recent times its order inflow and execution has been below our expectation and its guidance. On these concerns, in the recent times, the stocks price has seen a steep fall and has come at quite an attractive level. India Cements installed capacity has got enhanced to 16MTPA which will result in volume growth and drive the earnings of the company. The company is also setting up a 100MW captive power plant, which is expected to come on stream by FY2013. However, in spite of cost inflation we expect the profitability of the company to improve in FY2012 due to the increase in the cement realisation on account of supply discipline followed by the manufacturers. A well-known name in the domestic formulation space, Ipca has successfully capitalised on its inherent strength in producing low-cost APIs to tap the export markets. The company's ongoing efforts in the branded promotional business in the emerging economies, revival in the UK operations, pan-European initiatives and a significant scaleup in the US business will drive its formulation exports. The Indore SEZ approval is likely to be the next trigger. A leading maker of seamless tubes, ISMT is likely to benefit from improving demand in its traditional user industries like automobile and mining. It would also gain from efforts taken to expand its product offerings and it increasing the size of its addressable market by penetrating into energy and oil exploration sectors. It is also set to gain from a lower power cost with its captive power plant coming into operation in Q2FY2012. We expect the profit to grow at a CAGR of 43% over FY2011-13E. Jaiprakash Associates, India's leading cement and construction company, is all set to reap the benefits of India's infrastructure spending. The company has also monetised very well on the real estate properties of Yamuna Expressway. Moreover, the marked improvement in macro environment has improved accessibility to capital and thus eased the concerns of liquidity to some extent. However, higher leverage could act as drag on the valuation. KKCL is a branded apparel play with four brands in its kitty. Killer, its flagship denim brand, has created a niche space in the minds of consumers. With a gross market turnover of approximately Rs145 crore, Killer is ahead of its rival-Spykar. We believe that a strong brand profile, a disciplined management and a consistent track record coupled with a robust balance sheet position (cash on books at ~Rs120 a share) puts KKCL in a sweet spot. With its strong domain expertise in a few niche verticals and competitive advantage in terms of significant contribution from its non-linear initiatives, NIIT Technologies is well placed to benefit from the overall improvement in the demand environment. The recent large deal wins give further revenue visibility for the future. Moreover, the company has healthy cash on the books with minimal debt which leaves scope for further acceleration in growth through inorganic initiatives and act as another re-rating trigger for the stock. Given its unique business model, Orbit is expected to cash in the massive re-development opportunities in southern and central Mumbai. Further, given its presence in the luxury segment, which is less price sensitive, it will be able to revive faster once the real estate industry recovers. Punjab National bank (PNB) has one of the best deposit mixes in the banking space with low-cost deposits constituting around 39% of its total deposits that helps it maintain one of the highest margins in the sector . A strong liability franchise and technology focus will help the bank boost its core lending operations and fee income related businesses. Polaris Software Lab (Polaris) is one of the few integrated midcap IT companies having a strong foothold in the BFSI vertical and having offerings in both, the services and solutions segments. We continue to remain positive on the Intellect side of the business and expect a faster and stronger growth momentum in the coming years. Pratibha Industries is a dominant player in water & irrigation and urban infrastructure space. The companys backward integration into making HSAW pipes has enabled it to bid for pipeline related projects at competitive prices. It has also diversified into other high-margin areas like road BOT, power and oil & gas. The current order book stands at Rs4,470 crore, which is 3.5x its FY2011 revenues. Given the governments thrust on developing these segments, we expect the net profit to grow at a CAGR of 20% over FY2011-13. Provogue India is a strong bet to play the up-cycle in the discretionary consumption space. The companys core businessfashion apparels continue to do well. Further, its subsidiary Prozone, which is developing multipurpose infrastructure in tier II cities with a well-funded balance sheet and good portfolio of land bank, has started delivering properties from the current year, with the first mall at Aurangabad becoming operational in October 2010. Ratnamani Metals and Tubes is the largest stainless steel tubes and pipes maker in India. In spite of the challenging business environment due to increasing competition, we believe the stock is attractively valued. We believe with the increasing order backlog of the EPC contractors, the order inflow visibility is set to improve going forward. Earnings are likely to grow at a CAGR of 19% from FY2011-13E.
India Cements
Ipca Lab
ISMT
Jaiprakash Asso
KKCL
NIIT Tech
Orbit Corp
PNB
Polaris
Pratibha Ind
Provogue India
Ratnamani Metals
46
October 2011
EARNINGS GUIDE
Remarks
EQUITY
FUNDAMENTALS
Selan Exploration
Selan Exploration is an oil exploration & production company with five oil fields in the oil rich Cambay Basin of Gujarat. The initiatives taken to monetise the oil reserves in its Bakrol and Lohar oil fields are likely to improve production. Further, in FY2012 it intends to explore its next field, Indrora, which is the most prolific one with significant reserves. Based on this, we expect the company to ramp up its production two times by FY2014 over that of FY2011. It would lead to an earnings growth of 49% (three years CAGR over FY2011-13) as it is expected to take advantage of the ramp-up in production, higher crude price and stable operating cost. Hence, we rate this stock as Buy. The company is the largest on-shore oil exploration service provider in the domestic market. Its strong order book of Rs2,700 crore, which is 1.8x its FY2011 revenues, provides healthy visibility to its revenues for two years. Currently the stock is trading attractively at low valuation. Subros is the largest integrated manufacturer of automobile air conditioning systems in India. It is expected to be the prime beneficiary of the buoyancy in the passenger car segment led by its key clients Maruti Suzuki, Tata Motors and Mahindra & Mahindra. With a stronghold in the domestic formulation market, Sun Pharma has become an aggressive participant in the Para IV patent challenge space. Along with the exclusivities in the USA, the recent consolidation of the Taro acquisition has provided the much-needed boost to the stock. With most of the potential bad news (relating to Caraco) already priced in, we do not expect any significant de-rating ahead. The resumption of Caraco and Cranbury facilities, and Para IV approvals would act as re-rating factors for the stock. A well-known name in the domestic formulation market, Torrent has been investing in expanding its international presence. With the investment phase now over, Torrent should start gaining from its international operations in Russia and Brazil. The impending turnaround of its German acquisition, Heumann, will also drive the profitability of the company. Due to the amalgamation of Samruddhi Cement (the cement business of Grasim Industries) into UltraTech Cement, the latter has emerged as Indias largest cement company with approximately 52 million tonne cement capacity. UltraTech Cement is likely to benefit from the likely improvement in its market mix. Ramping-up of new capacity and savings accruing from new captive power plants will improve the companys cost efficiency. A leading global producer of crop protection products, intermediates, specialty chemicals and other industrial chemicals, United Phosphorus has presence across value-added agricultural inputs ranging from seeds to crop protection products and post-harvest activities. A diversified geography and the recent acquisition of DVA Agro Brazil will help the company to have a strong presence in the Brazilian market and help in growing inorganically. United Phosphorous will grow at 25% to 30% for the next two years. Union Bank has a strong branch network and an all-India presence. With strong return ratios and stable performance in terms of various operating parameters, the bank is a good investment play. V-Guard Industries is an established brand in the electrical and household goods space, particularly in South India. Over the years, it has successfully ramped up its operation and network to become a multi-product company. The company has recently also forayed into non-South India and is particularly focusing on the tier-II and III cities where there is a lot of pent-up demand for its products. We expect VGI to post a CAGR of 38% in its earnings over FY2011-13E. Vulturess Pick
Shiv-vani
Subros
Sun Pharma
Torrent Pharma
UltraTech Cement
United Phos
UBI V Guard Ind
Mahindra Lifespace
The company is the first in India to own two integrated business cities (IBC; which is a combination of SEZ and domestic area)one in Chennai and the other at Jaipur and both have become operational. Further, it has acquired land at Pune and Chennai to come up with two more IBCs. Apart from this, it has 3.11 million sq ft of residential and commercial projects under construction across various cities and an additional land bank of 17 million sq ft for future development. Consequently, we expect the company's stand-alone net profit to grow at a CAGR of 6% over FY2011-13. Orient Paper has increased its cement capacity from 3.4 million tonne to 5 million tonne and installed a 50MW captive power plant to save on power costs. We believe, the company will be able to deliver an impressive volume growth in FY2012 due to the commissioning of its new capacity. Further, a change in its market mix in favour of the western region compared to southern region augurs well for the company. The company is also in the process to de-merge its cement division which could act as a value unlocking. With a combined capacity of 5.5MMTPA Tata Chemicals is the second largest soda ash producer in the world. Tata Chemicals has purchased 25% stake in urea-ammonia green field project at Goban with investment at $290mn. Further changes in urea policy are likely to benefit the company further. We expect IMACID to show a strong performance on the back of a steep increase in the price of phosphoric acid, the main raw material for the production of DAP. TCL is expected to show a strong performance on the back of a relatively healthy demand for soda ash and sodium bicarbonate in India compared to the rest of the world.
Orient Paper
Tata Chemicals
47
October 2011
EQUITY
FUNDAMENTALS
Remarks
EARNINGS GUIDE
Unity Infra
With a well-diversified order book, Unity Infrastructure is expected to be the key beneficiary of the government's thrust on infrastructure spending. The order book remains strong at Rs3,478 crore, which is 2x its FY2011 revenues. We expect its net profit to post a CAGR of 16% on the back of a strong order book during FY2011-13. Further, it has recently forayed into road BOT segment and plans to enter power segment also. Cannonball
Allahabad Bank
With a wide network of over 2,200 branches spread across India, Allahabad Bank enjoys a strong hold in north and east India. With an average RoE of ~20% during FY2010-12E, coupled with improving asset quality trends the bank is one of the stronger players in the public sector banks. Andhra Bank, with a wide network of over 1,200 branches across the country, has a strong presence in south India especially in Andhra Pradesh. Though the bank is available at attractive valuation, concerns on asset quality front and political situation within the state would affect its operations. IDBI Bank is one of leading public sector banks of India. The bank is expected to improve its core performance significantly, which is likely to reflect in the form of better margins and return ratios. Due to rising asset quality risks and slower business growth the stock is likely to underperform in the near term. Madras Cement, one of the most cost-efficient cement producers in India, will benefit from the capacity addition carried out ahead of its peers in the southern region. The 3-million-tonne expansion will provide the much-needed volume growth in the future. However, regional demand remains lacklustre but on account of the improvement in the realisation due to supply discipline and a likely change in the market mix, we believe, the profitability of the company would improve in FY2012. Phillips Carbon Black, a leading carbon black manufacturer in India, is one of the key beneficiaries of the revival seen in the domestic tyre industry. To tap this opportunity it is constantly adding capacity in India and is now entering the Vietnam market. The company also generates substantial revenue from the sale of surplus power in the open market which helps to protect margins even during down turns. Consequently, we expect the company to generate a healthy earnings growth and returns ratio over the next two years. Currently, the stock is undervalued (below its BV) and we believe it should trade at par with its BV of Rs205. The companys cement grinding capacity has enhanced to 13.5MTPA which will support the volume growth of the company in the coming years. Additionally, the company is also setting up a 300MW power plant entirely for merchant sale, which is expected to come on-stream by FY2012. Thus, a volume growth of the cement division and the additional revenue accruing from the sale of surplus power will drive the earnings of the company.
Andhra Bank
IDBI Bank
Madras Cement
Phillips Carbon
Shree Cement
48
October 2011
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Sharekhan ValueGuide

From Sharekhans Desk

29 Zinc 29 Lead 29 Pepper

STOCK IDEAS STANDING (AS ON SEPTEMBER 30, 2011)

#Reco price adjusted for bonus

FROM SHAREKHANS DESK

from sharekhans desk

Darkest before dawn

SHAREKHAN TOP PICKS

SHAREKHAN TOP PICKS

Sharekhan Top Picks

SHAREKHAN TOP PICKS

SHAREKHAN TOP PICKS

SHAREKHAN TOP PICKS

BUY; CMP: RS104

SEPTEMBER 30, 2011

Price target revised to Rs142

Expensive acquisition compared to recent deals

Valuation corrects in response to move

Rs2,100 Rs12,872 cr Rs1927/1547 28,966 500049 BEL BEL 1.9 cr

BUY; CMP: RS1,609 SEPTEMBER 5, 2011 Annual report review

Working capital turns negative

Valuation and view

BHARAT HEAVY ELECTRICALS

BHEL gets a fair share in NTPC bulk tendering

However, concerns for BHEL intensify

Foreign 13% Promoters 68%

BUY; CMP: RS284 SEPTEMBER 16, 2011 Annual report review

Improved performance of Spencers

EROS INTERNATIONAL MEDIA

BUY; CMP: RS229 SEPTEMBER 12, 2011 Annual report review

Free cash flow turns negative with increase in content investments

BUY; CMP: RS2,350 SEPTEMBER 23, 2011 Annual report review

Foreign 24% Public & others 32%

HOLD; CMP: RS338 SEPTEMBER 19, 2011 Annual report review

IRB INFRASTRUCTURE DEVELOPERS

Rs5,733 cr Rs290/132 14.4 lakh 532947 IRB IRB 8.4 cr

BUY; CMP: RS192 SEPTEMBER 23, 2011 Price hike in cigarettes

MAHINDRA AND MAHINDRA

XUV 5OO: PRICING IS A GAME CHANGER

BUY; CMP: RS1,155 SEPTEMBER 20, 2011 Annual report review

MARUTI SUZUKI INDIA

Maruti leads competition on capacity expansion curve

Promoters 54% Institutions 24%

Macro headwinds pose formidable challenges

ORIENT PAPER AND INDUSTRIES

BUY; CMP: RS62 SEPTEMBER 15, 2011 Annual report review

Public & others 28%

BUY; CMP: RS825 SEPTEMBER 9, 2011 Price target revised to Rs1,040

SELAN EXPLORATION TECHNOLOGY

BUY; CMP: RS329 SEPTEMBER 14, 2011 Annual report review

Price target revised to Rs550

SEPTEMBER 21, 2011

Sky is not falling...hope persists

Infosys: Downgraded to Hold

Hold; CMP: Rs2,433

Tata Consultancy Services: Price target revised to Rs1,201

Buy; CMP: Rs1,043

Wipro: Downgraded to Reduce

Reduce; CMP: Rs356

HCL Technologies: Price target revised to Rs523

Buy; CMP: Rs406