2 qfy2011 result preview 01-10-10

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2QFY2011 Results P2QFY2011 Results P2QFY2011 Results P2QFY2011 Results P2QFY2011 Results Preview |review |review |review |review | October 1, 2010

Refer to important Disclosures at the end of the report

Note: Stock Prices as on October 1, 2010.

Table of Contents

Strategy 2

Angel Research Model Portfolio 15

2QFY2011 Sectoral Outlook 16

Automobile 26

Banking 29

Capital Goods 32

Cement 35

FMCG 38

Infrastructure 41

Logistics 44

Metals 47

Oil & Gas 50

Pharmaceutical 53

Power 56

Real Estate 59

Retail 62

Software 65

Telecom 68

Refer to important Disclosures at the end of the report 2


Endurance to pay...

A quarter of handsome gains after a year...

The Indian bourses picked up significant momentum during

2QFY2011. This resulted in markets breaking away from the

tight range, which they were confined to for the last three

quarters. The Sensex grew by 13.4% qoq during the quarter,

reporting the highest quarterly returns after an 18.2% qoq rise

in 2QFY2010. The strong surge came on the back of strong

inflows, which continue to chase emerging markets on account

of their high growth prospectus, in comparison to concerns

regarding the sustainability of the recovery underway in the

developed world.

Strategy

...Indian markets amongst the outperformers

After a quarter of listless performance, the global equity marketsrallied during 2QFY2011. Markets gained almost ~11% qoq,as the risk-appetite was back after concerns regarding sovereigndefaults in EU eased off. Developed markets, on an average,posted qoq gains of 10%, with the exception of Japan, whichalmost remained flat. Among the emerging markets, Indonesiacontinued to outperform, followed by Brazil and India. China,though witnessed a bounce back, continued to underperformits peers. With this, the Indian markets grew by 17.2% yoy, aheadof China (down 4.4%), while being outpaced by Russia andIndonesia, which gained 30.4% and 41.9% yoy, respectively.

Strong surge in FII inflows, DIIs turn sellers

The quarter witnessed one of the strongest-ever quarterly inflowsfrom FIIs in the last three years. FIIs pumped in almostUS $12bn into equity markets, taking the total investments toUS $14bn in 1HFY2011.

The attractiveness of India as an investment destination can begauged by the fact that India accounts for ~50% of the fundinflows in Asia (ex-Japan) YTD in CY2010 in comparison to25% during the same period in 2009. India is well on the pathof reverting to its high-growth orbit in the current uncertainglobal environment. Thus, India would continue to attract globalfund inflows, driven by its resilient domestic economy. Backhome, DIIs turned into net sellers, with net sales of Rs23,800cr(US $5bn) in 2QFY2011, thus being net sellers of Rs20,000crin 1HFY2011.

Global economy on the path of recovery,developing markets at the forefront

The global activity is recovering at varying speed,tepidly in many of the advanced economies, but strongly inmost emerging and developing economies. During 1HCY2010,the global economy grew at a faster-than-expected pace;however, growth across economies remained uneven. Whilethe advanced economies are yet to show a sustained growthpost the global financial crisis, emerging and developingeconomies have expanded at a much faster rate and almostreached their pre-crisis levels. Overall, IMF has advanced itsreal global GDP growth expectations to 4.6% in 2010, withadvanced economies expected to log in 2.6% growth, whiledeveloping economies are expected to post 6.8% growth(accounting for ~50% of global growth).

Source: Bloomberg

Exhibit 3: Net fund inflows

(30)

(20)

(10)

-

10

20

30

40

50

60

1Q

FY2008

2Q

FY2008

3Q

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4Q

FY2009

1Q

FY2010

2Q

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3Q

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1Q

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FY2011

FII DII

(‘ 000

Rscr

)

(20)

(10)

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20

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Russ

ia

Indo

nesia

Braz

il

Indi

a

Chi

na

Taiw

an

Sing

apor

e

Hon

gKon

g

Kore

a

Mal

aysia

US

Nas

daq

UK

FTSE

Japa

n

US

Dow

(%)

yoy qoq

Source: BSE, Bloomberg

Exhibit 2: Performance of key global markets

Source: BSE

Exhibit 1: Rise in Sensex (qoq)

(30)

(20)

(10)

0

10

20

30

40

50

60

4Q

FY2

00

6

1Q

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(%)

3



Amongst the advanced markets, the US, which has witnessedan uptrend since 3QCY2009 and posted strong 3.7% qoq(annualised) growth in 1QCY2010, witnessed a softening inGDP growth to 1.6% qoq (annualised) in 2QCY2010, thusraising concerns of the economy heading towards a doubledip. However, a closer look at the numbers reveals that privatefinal demand (excluding inventory) has grown at healthy4.4% qoq (annualised), though the main beneficiaries of thesame were businesses outside the US. However, given thatconsumption (70% of the GDP) continues to grow at ~2%, belowthe ~3% yoy growth before the pre-crisis levels and highunemployment rates, the US Fed has kept the option of furthermonetary stimulus open, if the economic condition deteriorates.

On the other hand, the Euro zone surprised positively in2QCY2010, as against expectation of moderation in growthon the back of the sovereign debt crisis. The region posted 4%qoq (annualised) growth on the back of strong domesticdemand. However, growth in the region could moderate onthe back of the high base effect and impact of austerity measuresundertaken.

Japan, on the other hand, witnessed moderation in 2QCY2010,after posting robust growth in 1QCY2010.

Strategy

During the quarter, emerging and developing economiesreported a sharp recovery, post the downtrend in 2008, drivingthe overall global economic growth. China and India, the keyeconomies in the region, surpassed their pre-crisis growthtrajectory. Although the Chinese economy's growth moderatedin 2QCY2010, the economy continues to log in double-digitgrowth in spite of its high dependence on external economies.

China is expected to end CY2010 with 10.5% GDP growth.India is also back to its high growth trajectory, as indicated bythe 8.6% and 8.8% yoy growth rates posted by the economy in1QCY2010 and 2QCY2010, respectively. With normalmonsoons and a broad recovery, the Indian economy is wellset to end FY2011 by registering 8.5% GDP growth. Apart fromIndia and China, the other emerging markets have alsowitnessed strong traction in CY2010 so far.

India having the most compelling growth drivers

Globally, at this juncture, India unquestionably has the mostcompelling combination of growth drivers-favourabledemographics, high domestic savings, globalisation, scope forrapid productivity improvement and sustained policy reforms.This would result in a virtuous cycle of productive jobcreation-income growth-savings- investments, thereby leadingto higher growth. Thus, India has all the levers to accelerate itssustainable real GDP growth from 8-9% to 9-10%. For the12th Plan, the government is targeting 10% real GDP growth,which we believe is achievable.

Favourable demographics

It is a known fact that there is an undeniably strong correlationbetween consistent high growth and a combination of favourabledemographics and high domestic savings. For instance, theworking population in East-Asian countries grew at a CAGR of2.5-3.5% between 1970 and 2005. China alone added 41crpeople to its workforce during that period, at a 2.5% CAGR,which was responsible for a corresponding portion of thecountry's 8.5% CAGR in GDP.

India's median age stands at 25 years, which is close to whereEast-Asian economies were at their respective growth inflectionpoints. Our working-age population is set to grow at one of thehighest rates of 1.3% CAGR over the next 40 years (and aneven faster rate of 2% until CY2025). This will lead to astaggering addition of 36cr people in the working-age bracket.In addition, the increasing participation of women in theworkforce will provide a further fillip to our growth rate. This isin contrast to China, which is expected to witness a decline inits working-age population by 4.8cr people, Russia by 2.6crpeople and G7 countries by 0.9cr people.

Source: Bloomberg, IMF

Exhibit 5: Growth of key economies

2.4

0.8

4.7

11.9

8.6 9.0

3.13.01.9

2.4

10.3

8.8 8.8

5.2

3.3

1.0

2.4

10.5

9.4

7.1

4.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

US Euro Zone Japan China India Brazil Russia

1QCY2010 2QCY2010 2010

(%yo

yre

algro

wth

)

Source: IMF

Exhibit 4: Global GDP growth trend

4.8

2.3

2.9

3.6

4.94.5

5.1 5.2

3.0

(0.6)

4.6

(1.0)

0.0

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(4.0)

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2000

2001

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2010E

Advanced Economies Developing Economies World (RHS)

(%yo

yre

algro

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)

(%yo

yre

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wth

)



Strategy

Significant scope for productivity improvement

The large gap in per capita incomes between developed andemerging economies mainly reflects differences in productivitylevels. For instance, per capita income in the US has grown atan average real rate of ~2% per annum since the past150 years. This can be taken as a good benchmark forinnovation-led growth. Emerging economies are in a positionto grow at a faster rate, as they progressively catch up withdeveloped economies on the productivity front, until innovationbarriers slowdown their growth rate. This has been the key driverbehind the rapid growth rates witnessed successively in Japan,South Korea and, more recently, China. Of course, capitalistreforms that essentially liberalised these economies created thenecessary platform for successive economies to take off oneafter the other.

In India too, productivity levels are increasing across the boardand yet we are starting with such a small base in per capitaincome (at US $1,030, less than 1/45th of US per capita incomein nominal terms and less than 1/18th in PPP terms) that evenafter four decades, this productivity-led growth will be far fromlosing steam. Increasing literacy levels and migration of the

labour pool to urban areas are further driving productivitygrowth. With sustained progress on the reform front, we believea heavy mix is in place to take India's growth trajectory to theaspired levels of over 9%.

High domestic savings and investments

Over 1970-2005, savings and investment rates averaged30-40% of the GDP in East-Asian economies. This was the otherimportant ingredient that went into their high growth, as highsavings and investment rates by the domestic private sectorsupported a high capital output ratio.

On an average, over FY2002-06, India received ~US $15bnin Forex inflows and still maintained real GDP growth of 6-7%.The reason behind the same has been strong internal accrualsin the form of gross domestic savings. India, which is amongstthe highest savers in the world, has seen savings increase from21-22% in the 1990s to 36% in FY2008, which has set pace forhigher GDP growth. The high savings were on the back ofdeclining dependency ratio and reduction in overall governmentdeficit. Going forward, the dependency ratio is likely to improvefurther, which, along with improving government finances, wouldcontinue to drive structural rise in overall savings, consequentlydriving investments and overall growth by over 9%.

Globalisation

Over the last couple of decades, growing globalisation haswidened export opportunities. However, India's integration withthe global economy (which started in 1990s unlike its peerswhere the process started in 1980s) has kept India's dependenceon exports (contributed ~23% of GDP in 2008) lower than itspeers in the emerging markets, including China and South Koreawhose exports contribute almost 37% and 53% of GDP (2008),respectively. Given the disparity between the per capita incomeof developed markets vis-à-vis developing countries, exportswould continue to increase. A case in point is Germany, adeveloped country that has witnessed a significant jump in its

Source:UN

Exhibit 6: India to witness largest workforce accretion

-3

0

3

6

9

12

-10

0

10

20

30

40

India (LHS) China Brazil Russia USA Japan

Additional WorkingPopulation (Cr)

Additional WorkingPopulation (Cr)

2008-2015 2015-2025 2025-2050

Exhibit 7: Median age trend would continue to favour20052005200520052005 2015E2015E2015E2015E2015E 2025E2025E2025E2025E2025E 2035E2035E2035E2035E2035E 2045E2045E2045E2045E2045E 2050E2050E2050E2050E2050E

Emerging Economies Emerging Economies Emerging Economies Emerging Economies Emerging Economies

Brazil 27.0 31.3 35.8 39.9 43.8 45.6

China 32.1 35.6 38.9 42.8 44.9 45.2

India 23.7 26.5 29.9 33.5 36.9 38.4

Indonesia 26.5 30.1 33.8 37.0 39.9 41.1

Russia 37.3 38.9 41.7 45.3 44.5 44.0

Developed EconomiesDeveloped EconomiesDeveloped EconomiesDeveloped EconomiesDeveloped Economies

USA 36.0 37.2 38.7 40.3 41.2 41.7

UK 38.9 40.3 40.8 42.0 42.4 42.5

Japan 43.1 46.6 50.6 53.5 54.9 55.1

Germany 42.1 46.4 48.8 50.3 51.7 51.7

France 38.9 41.3 42.9 44.0 44.4 44.8

Source: UN

Source: UN,RBI

Exhibit 8: Dependency ratio and savings rate

0

5

10

15

20

25

30

35

40

48.0

50.0

52.0

54.0

56.0

58.0

60.0

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64.0

1961

1963

1965

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1969

1971

1973

1975

1977

1979

1981

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1987

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1995

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1999

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2009

Working Population (as % of Total Population) -LHS

Savings Rate ( as % of GDP) - RHS

5



Strategy

per capita income on the back of exports. Germany's GDPimproved from 25% in 1990 to 47% in 2008. Similarly, amongthe emerging markets, like China, a part of overall growth hasbeen on the back of increased exports. As a matter of fact, in1970s, India and China were enjoying almost equal marketshares in exports. Thereon, China's thrust on exports aided thecountry's high growth and it emerged a main player in theexports market.

Accordingly, India has a lot of potential to increase its exports,as it is well below its major exporting peers in terms of percapita income. Though India's trade has accelerated post theliberalisation, leading to increased market share (up 0.7%during 1990-2009), India's share in total global exportscontinues to be a minuscule 1.2% (2009). Thus, India hassignificant potential to increase its market share and scale upits operations to accelerate growth and improve productivity,thus hastening overall savings and investments.

Momentum on reforms to continue

Since 1990-91, India has stepped up on reforms, which hasaccelerated the country's overall growth momentum. Recently,the government showed its commitment towards reformsthrough hiking urea prices by 10%; nutrient-based subsidy;de-regulation of petrol prices and partial decontrol of dieselprices; and APM gas price de-regulation. Going forward, India

needs to continue to focus on implementing new reforms tounleash its full potential.

Some of the structural reforms expected are:Some of the structural reforms expected are:Some of the structural reforms expected are:Some of the structural reforms expected are:Some of the structural reforms expected are:

TTTTTax reforms: ax reforms: ax reforms: ax reforms: ax reforms: The proposed Direct Tax Code (DTC) on the directtax front and Goods and Services Tax (GST) on indirect taxationswould widen the tax base and lead to higher tax collections.The GST would mark a transition from the multiple rates ofindirect taxes and different types of indirect taxes to a singleunified tax across goods and services, which would widen thetax base and would result in proper allocation of resources,thus improving overall productivity. On the other hand, the DTCaims to broaden the tax base and reduce exemptions. DTC islikely to be implemented by April 2012. Both these bills arelikely to augment tax collections by ~2% of GDP.

Enhanced investments in infrastructure: Enhanced investments in infrastructure: Enhanced investments in infrastructure: Enhanced investments in infrastructure: Enhanced investments in infrastructure: The 12th plan envisagesinfrastructure investments in FY2013-17 cumulatively at US $1trncompared to US $494bn in FY2008-12, taking infrastructurespending to ~10% of GDP. This seems possible given thatinfrastructure spending will increase to 8.4% of GDP in FY2012from 7.5% of GDP in FY2009. Moreover, high savings andprivate sector participation (expected to be 50% of infrastructurespend) would aid the process.

Disinvestment: Disinvestment: Disinvestment: Disinvestment: Disinvestment: The government is looking at disinvestment toboost its resources. For FY2011, government targets raisingRs40,000cr (0.6% of GDP) from divestments, compared to anestimated Rs25,000cr (0.4% of GDP) in FY2010.

FFFFFiscal consolidation:iscal consolidation:iscal consolidation:iscal consolidation:iscal consolidation: The government has set a roadmap forreduction in fiscal and revenue deficit over FY2010-15.According to the roadmap, the consolidated (centre plus stategovernment) fiscal deficit is expected to reduce to 7.3% of GDPby FY2012 and 5.4% of GDP by FY2015, mainly aided byimproved tax collection. This is expected to enable thegovernment to reduce its consolidated public debt to GDP to76.6% by FY2012 and to 67.8% by FY2015. The same wouldresult in reducing the crowding out, leading to improved savingsand investments.

Source: World Bank

Exhibit 9: Exports as a percentage of GDP

13.6

26.9

32.1 32

38.6

52.9

2.64.6

10.6 9.9

23.3

36.6

3.85.7 6.2 5.3

13.2

22.7

0

10

20

30

40

50

60

1970 1975 1980 1985 2000 2008

Korea Rep. China India

Source: Angel Reserach

Exhibit 10: India v/s other key economies

0

5,000

10,000

15,000

20,000

25,000

30,000

Uni

ted

State

s

PPP (Per Capita income, 2009) (LHS) Exports( Market Share) (RHS)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

35,000

40,000

45,000

50,000

Cana

da

Uni

ted

Kin

gdom

Ger

many

Franc

e

Japan

Italy

Sout

hKore

a

Russ

ia

Mex

ico

Brazi

l

Chi

na

India

(in $)

Source: 13th Finance Commission Report

Exhibit 11: Targeted improvements in public finances

State Deficit (LHS) Centre Deficit (LHS) Gross Debt to GDP (RHS)

3.2 2.6 2.5 2.5 2.4 2.4

6.7

5.74.8 4.2

3.03.0

62

64

66

68

70

72

74

76

78

80

-

2.0

4.0

6.0

8.0

10.0

12.0

FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E

9.9

8.37.3

6.75.4

5.4

(%to

GD

P)



Near-term macros too in fine fettle

GDP growth back in high gear

The Indian economy, after been straddled with 6-7% GDP growthduring the last two years, is well placed to revert to itshigh-growth phase of 8-9%, with all the three componentsof growth engines—agriculture, manufacturing andservices— contributing to its growth momentum.

The trend is already visible, as indicated by the 1QFY2011GDP growth numbers. For 1QFY2011, India’s GDP grew by8.8%, in line with growth posted during FY2006-10. This is thehighest growth rate reported by the Indian economy since4QFY2008. Growth in 1QFY2011 was driven by strong non-agriculture GDP growth, which continued its strong momentum,registering 9.9% growth, much higher than the 7.7% and 8.8%growth recorded in FY2009 and FY2010, respectively. Servicesand the manufacturing sectors (non-agricultural components)registered growth of 9.7% and 10.3%, respectively. Agriculturealso bounced back during the period, posting 2.8% growth,reporting the strongest performance in the past one year.

Strategy

Source: Bloomberg, Angel Research

Exhibit 12: India's real GDP growth trend

Going forward, the firm trend in GDP growth is likely to continue.Rainfalls at 104% of long-period averages (LPA) until September22, 2010, in line with expectations, would aid agriculture growthto bounce back. IIP, the cornerstone of manufacturing activity,

continues to exhibit strength. IIP growth in July 2010, at 13.8%,continues to remain strong. Even after adjusting the IIP numbersfor the base impact and taking a CAGR over a two-year period,IIP growth was around 10.4%, well above the 15-year averageof 7.0%. Until July FY2011, IIP growth has been at around11.4%. Strong traction in auto sales—both commercial vehiclesand passenger vehicles (over 25% growth in FY2011 untilAugust); continued order inflows; and steel consumption (up10% yoy in FY2011 until August) point towards continuedfirmness in the manufacturing sector.

Growth in the services sector, which contributes ~57% of theGDP, is expected to remain robust despite moderation ingovernment-linked community and social services. Growth inthe sector would be mainly driven by improvement in the hotel,transport, communication, finance and real estate sectors (whichcontribute ~70% of the service sector’s GDP), all of which wouldexpand at a faster pace as compared to that in FY2009-10 dueto revival in household demand and global economy.

On the expenditure front, private consumption, which postedan improvement over the last quarter, remained lower at 3.8%in 1QFY2011. This can be attributed to lower agricultural growthand high inflationary pressures. Going forward, with agricultureexpected to bounce back and inflationary pressures expectedto subside, overall private consumption is expected to contributeto growth momentum. Another key component, gross fixedcapital formation (at 7.6%) has grown at an average run rateof 7.2% in FY2010; however, with demand picking up, highcapacity utilisation across industries (auto, cement, steel andpower, among others) and lean corporate balance sheets haveled to an upturn in the capex cycle. This, along with the strongorder book position of capital goods and infrastructurecompanies, points towards continued healthy growth of grossfixed capital formation.

Services (LHS) Manufacturing (LHS) Agriculture (LHS) YoY Growth (RHS)

9.5 9.79.2

6.7

7.4

8.59.0

0

2

4

6

8

10

12

0

10,00,000

20,00,000

30,00,000

40,00,000

50,00,000

60,00,000

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

(Rs

cr)

Source: CSO

Exhibit 13: Growth in 1QFY11 surpasses FY08-10 trend

9.5

4.5

10.5 10.6

7.1

0.9

6.5

9.18.8

2.8

10.39.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

GDP Agriculture Manufacturing Services

FY2005-08 CAGR FY2008-10 CAGR 1QFY2011

(%yo

yRealG

row

th)


Exhibit 14: IIP growth trend (2-year rolling CAGR)

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Aug

-96

Feb

-97

Aug

-97

Feb

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Feb

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Aug

-99

Aug

-00

Aug

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Aug

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Feb

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Feb

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Aug

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Feb

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Aug

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Feb

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Aug

-09

Feb

-10

(%)

7



Strategy

Inflationary pressures cooling off

The WPI, which averaged around 9.8% during CY2010, hasshown signs of cooling, with WPI in August 2010 at 8.5%,making it the fourth consecutive month of the decline from thehigh of 11.0% in April 2010. The decline can be attributed tothe softening of food inflation, the key contributor to easinginflationary pressures. Further, though manufacturing and fuelinflation for FY2011 (till August 2010) has grown at 5.6% and13.6%, respectively, the month-on-month (mom) trends for thesame are showing stability.

Going forward, food inflation, which was exacerbated by lastyear’s bad monsoons, is set to moderate. Further, we do notexpect any significant jump in oil and metal prices. Thus, as wemove towards 2HFY2011, we expect inflation to ease off andonce again come down to the manageable 6% level.

Food inflation headed downwards

Food prices zoomed to a high of 21.4% in May 2010 and,directly and indirectly, contributed to the overall rise ininflationary pressures. However, they are now set for a downwardtrend. Normal monsoons across India (104% above the LPA)would set the pace for softening food prices. According to theIndian Meteorological Department (IMD), monsoons have beenin line with the forecast, with ~85% of the country receiving

excess/normal rainfall. The East and Northeast region in Indiawas the only region that recorded below-normal rainfall (20%below the LPA). However, the region accounts for ~13% of foodgrain production and, thus, will not adversely affect overallinflation. Moreover, water reservoir levels, which stood at 76%of their full reservoir level (FRL) and at 117% of their LPA, increaseprospects of a good Rabi crop. Thus, food inflation, whichreduced to 14.6% in August 2010, would further decline withmoderation in food prices and a high base effect.

Oil to remain range bound

As expected, crude continued to move in a narrow range of~US $71-83/bbl during 2QFY2011. After touching the highof US $83/bbl in August 2010, it fell and remained subduedafter government data showed an unexpected rise in US crudeand gasoline stockpiles. Further, expectations of easing demandweighed on crude prices. On an average, crude prices fell by2.5% qoq. Going forward, we maintain our stance of subduedoil prices in the near term and expect crude to consolidate atcurrent levels, especially owing to the inventory overhang inOECD countries and increasing NGL output by OPEC.Thus, crude price is expected to hover at US $75-85/bbl in thevisible future.

Source: CSO

Exhibit 15: Investments exhibiting strength

9.5 9.0

7.2

15.3

6.45.6

13.5

2.5

10.0

3.8

14.2

7.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

GDP Private Consumption Government Expenditure Gross Capital formation

FY2005-08 CAGR FY2008-10 CAGR 1QFY2011

(%yo

yRealG

row

th)

11

6

(3)

0

3

6

9

12

15

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

(yoy)

%


Exhibit 16: Inflationary pressures to decline


Exhibit 17: Food inflation trending downwards

21.8%

14.6%

0.0

5.0

10.0

15.0

20.0

25.0

Feb-0

8

Apr-

08

Jun-

08

Aug

-08

Oct

-08

Dec

-08

Feb-0

9

Apr-

09

Jun-

09

Aug

-09

Oct

-09

Dec

-09

Feb-1

0

Apr-

10

Jun-

10

Aug

-10

(% yoy)


Exhibit 18: Crude price trend

Crude

0

20

40

60

80

100

120

140

160

Jan

-00

Apr-

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Aug

-08

Dec

-08

Apr-

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(US$/bbl)



Strategy

Metal prices witness moderate hike

Internationally, both ferrous and non-ferrous metals remained

softer during the quarter, with ferrous metals facing higher

declines. In 2QFY2011, Indian steel prices declined by

7.6% qoq to Rs34,500/tonne because of low demand due to

monsoons and cheaper imports from China. On the non-ferrous

front, policy tightening measures in China, debt problems in

the Euro zone and slowing economic activity in the US kept

base metal prices under pressure. However, copper prices were

higher sequentially because of low inventory levels at LME

warehouses. Average LME prices remained high on a yearly

basis, as prices bottomed out in the corresponding period last year.

Going forward, we expect steel prices to witness moderate hikes

because of strong domestic demand, China's measures to cut

excess steel production and raw material cost push. On the

base metals front, we expect prices to remain range bound;

however, we believe significant upsides would be limited due to

high inventory levels at the LME warehouse. On the other hand,

the downside for some metals seems limited as prices are near

their marginal cost of production.

Fiscal deficit on a descend

After two years of being straddled by high fiscal deficit, India iswell on the path of fiscal consolidation. The government istargeting to reduce central fiscal deficit from the estimated 6.7%of GDP in FY2010 to 4.1% of GDP in FY2013E, the foundationof which is laid on improvement in overall gross tax collectionsat the centre, which is expected to improve from 10.3% as apercentage of GDP in FY2010 to 11.8% as a percentage ofGDP in FY2013. For FY2011 and FY2012, overall gross taxrevenue (at the centre) as a percentage of GDP is expected tobe around 10.8% and 11.5%, respectively.

We believe these targets are achievable, given that the Indianeconomy is well on track to revert to its high growth trajectory.These targets remain lower than the gross tax collection at 12%of GDP in FY2008, when GDP growth was around 9.2%. Further,during the downtrend in FY2009, gross tax-to-GDP at centrallevel was ~11.3%. Thus, with the economy’s growth revertingto the high growth trajectory and becoming more broad based,the targets are well within reach. Moreover, they are likely toget a further boost on the back of proposed reforms, includingdisinvestment, GST and DTC, which are expected to improvethe government's revenue collection. These reforms are expectedto result in the gross tax-to-GDP moving up by ~2%.

For FY2011, the fiscal deficit appears to be conforming to theestimates made in the Union Budget for FY2010-11.Higher-than-expected realisations on 3G and broadbandwireless access (BWA) auctions combined with buoyant taxrevenue (have registered growth of 30.7% till July 2010) haveeliminated the risk of the fiscal deficit overshooting the targeted5.5%, even after the supplementary demand for grants is takeninto account. This will help stabilise market expectations ofliquidity and interest rate movements.

Thus, we expect overall improvement in fiscal position, with thetotal fiscal deficit (state and centre) expected to improve from9.9% of GDP in FY2010 to 8.2% and 8.0% by FY2011E andFY2012E, respectively.

Spot US$/Spot US$/Spot US$/Spot US$/Spot US$/ Sept. 30,Sept. 30,Sept. 30,Sept. 30,Sept. 30, June 30,June 30,June 30,June 30,June 30, Sept. 30,Sept. 30,Sept. 30,Sept. 30,Sept. 30, % chg% chg% chg% chg% chg % chg% chg% chg% chg% chg

tonnetonnetonnetonnetonne 20092009200920092009 20102010201020102010 20102010201020102010 qoqqoqqoqqoqqoq yoyyoyyoyyoyyoy

Alumina 220 335 308 (8.2) 39.8

Lead 1,684 1,726 2,258 30.9 34.1

Zinc 1,534 1,760 1,943 10.4 26.7

Steel HR 446 685 542 (20.9) 21.5

Copper 5,083 6,484 6,147 (5.2) 20.9

Aluminum 1,607 1,951 1,856 (4.9) 15.5

Iron Ore 82 147 89 (39.2) 9.2

Tin 14,665 17,380 15,595 (10.3) 6.3

Exhibit 19: Global metal price performance

Source: Bloomberg; Note: Iron ore prices as on September 25, 2010,Steel HR prices as on September 28, 2010

Source: 13th Finance Commission Report, Finance Ministry

Exhibit 20: Gross central tax-to-GDP trend

Gross Tax to Centre ( as % of GDP)

9.4

9.9

11.1

12.0

11.3

10.310.8

11.511.8

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

FY2

00

5

FY2

00

6

FY2

00

7

FY2

00

8

FY2

00

9

FY2

01

0

FY2

01

1E

FY2

01

2E

FY2

01

3E

Source: Angel Research, RBI; Note: Excluding disinvestment proceeds andoff-balance sheet items

Exhibit 21: Fiscal deficit trend (% of GDP)

7.26.5

5.1

4.0

8.5

9.9

8.2 8.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

(as

%to

GD

P)

9



Strategy

CAD uncomfortable; Fund inflows to keep BoP healthy

Over the last two years, the Indian current account deficit (CAD)has been widening, touching 2.9% of GDP (2.4% of GDP inFY2009)—this level has been achieved for the first time afterthe balance of payment (BoP) crisis in FY1991. Over the lasttwo years, the pressure on the current deficit has come uponbecause of widening trade deficit, which moved from ~7% ofGDP during FY2006-08 to a run-rate of ~9% of GDP duringFY2009-10. While higher crude prices in FY2009 were the mainculprit for the same, a quick recovery in domestic economyahead of the global economy in FY2010 resulted in keepingthe deficit high, despite lower crude prices. Further, lowersoftware exports and reduction in other invisibles impacted CAD.

In a scenario of uneven global recovery and strong domesticgrowth, a high CAD is worrisome. It is also vulnerable to therise in global crude prices. Nonetheless, even though the currentmagnitude of the deficit is reaching the uncomfortable zone(worse than the FY1991 levels), the external balance is morerobust, with strong forex reserves of US $280bn, equivalent tocovering 11 months imports v/s 2.5 months imports duringFY1991. Moreover, with external debt of US $273bn (withshort-term debt contributing almost 20% of the sameor ~4% of the GDP) and capital inflows of ~4.1% of GDP (forthe last one year), the situation is comfortable.

For 1QFY2011, at ~3.7% of GDP, CAD continued to widen forthe fourth quarter, breaching the uncomfortable zone of 3%deficit. While exports grew by 37.2%, strength in overall importson the back of strong domestic demand along with a strongerrupee has kept the trade deficit at 9% of GDP (in line withFY2010). A higher trade deficit explains just a part of theworsening CAD. The main pressure is stemming from stagnationin service inflows for the last five quarters, mainly on the backof pressure on non-software inflows, which continued to dragCAD. On the positive side, capital inflows continued to surge.For the quarter, despite lower FDI and FII inflows, strong surgein debt inflows in the form of ECBs and trade credit aided capitalaccount to remain healthy at 4.9% of GDP, resulting in aUS $3.7bn accretion to forex reserves.

Going forward, while global trade has recovered from its lows,a slow pace of global recovery could put pressure on tradedeficit in the near term; however, the pressures should easeover the next 12-18 months, as new capacities get commissionedand saving rate improves. On the services front, softwareexports, which posted muted growth in FY2010, should alsoregister improved performance in FY2011 (estimated to be ~US$58bn in FY2011 by Nasscom). This coupled with crude pricesexpected to remain stable at these levels should keep a checkon CAD. Moreover, the recent move of China to allow its currencyto appreciate would benefit the India's exports growth.

(US$ bn)(US$ bn)(US$ bn)(US$ bn)(US$ bn) FY1991FY1991FY1991FY1991FY1991 FY1995FY1995FY1995FY1995FY1995 FY2000FY2000FY2000FY2000FY2000 FY2005FY2005FY2005FY2005FY2005 FY2010FY2010FY2010FY2010FY2010

Forex reserves 5.8 25.2 38.0 141.5 279.1

External debt 85 99 98 134 261

% of GDP 32.7 33.9 23.9 20.4 20.0

Short-term debt 7.1 4.3 3.9 17.7 52.5

% of GDP 2.7 1.5 1.0 2.7 4.0

Current account bal. (9.7) (3.4) (4.2) (2.5) (38.4)

% of GDP (3.0) (1.2) (1.0) (0.4) (2.9)

Capital inflows 7.1 8.5 10.2 28.8 53.6

% of GDP 2.7 2.9 2.5 4.4 4.1

Import cover Import cover Import cover Import cover Import cover ##### (x) (x) (x) (x) (x) 2.52.52.52.52.5 8.48.48.48.48.4 8.28.28.28.28.2 14.314.314.314.314.3 11.211.211.211.211.2

Source: RBI; Note: #No. of months

Exhibit 24: External balance sheet in shape

Source: RBI

Exhibit 22: Trade and CAD trend

(150)

(100)

(50)

0

50

100

150

200

250

300

350

FY2007 FY2008 FY2009 FY2010

Exports (LHS) Imports (LHS) Trade Deficit (LHS) CAD as % of GDP (RHS)(3.5)

(3.0)

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

(%)

($bn)


Exhibit 23: Quarterly trend in external trade

(%to

GD

P)

0.0

1.0

2.0

0.0

10.0

20.0

30.0

40.0

2Q

FY2008

1Q

FY2009

2Q

FY2009

4Q

FY2009

1Q

FY2010

3Q

FY2010

4Q

FY2010

FY2008 FY2009 FY2010 FY2011

Trade Deficit CAD Net Accretion to Reserves CAD as % of GDP (RHS)

1Q

FY2008

3Q

FY2008

4Q

FY2008

3Q

FY2009

2Q

FY2010

1Q

FY2011

(10.0)

(20.0)

(30.0)

(40.0)

(50.0)

(1.0)

(2.0)

(3.0)

(4.0)

(5.0)

($ bn)



Further, CAD has been adequately financed through strongcapital inflows in the form of FDI and FII. Over the last decade,capital inflows have averaged ~3.7% of GDP. Going forward,inflows to India are expected to remain healthy, as already beenwitnessed during FY2010—where the country ended upreceiving around US $19.7bn and US $32.3bn in FDI and FII,respectively. In FY2011, inflows to India continued to remainstrong, with FII inflows touching US $14bn in 1HFY2011.Going forward, given that emerging markets, especially India,would be at the forefront of global growth, we expect India tocontinue to attract strong foreign inflows.

Interest rates to rise, unlikely to hurt growth momentum

On the back of improving economy, the RBI has been focusingon anchoring inflationary pressures. Thus, during its maidenmid-quarter monetary policy review, it raised interest rates forthe fifth time since mid-March 2010 with an objective to controlinflationary expectations. The RBI raised the repo and reverserepo rates by 25bp and 50bp to 6.0% and 5.0%, respectively.

Inflationary pressures, though strong, are easing. In August2010, food and textile items contributed 46% to the WPI, ascompared to ~63% in February 2010. Manufacturing and fuelinflation until August 2010 was 5.6% and 13.6% and them-o-m growth trend for the same is showing stability. Thus,with food inflation set for moderation and commodity pricesexpected to remain stable, overall inflation is expected to easeoff and once again come down to the manageable 6% level.

On the liquidity front, 2QFY2011witnessed some respite, withdeposit accretion improving by marginally 1% qoq, whileincremental credit declined marginally by 1.5% qoq, taking theoverall deposit and credit growth in September 2010 in FY2011to 19.8% and 14.4%, respectively. Thus, with credit demandexpected to sustain at above 19%, in line with GDP and IIPgrowth, deposit moblisation would have to gather pace.

Moreover, higher-than-expected 3G funds that the governmentreceived as well as the RBI's monetisation of the fiscal deficit to~Rs1.8lakh-crore in 1HFY2011 to meet the economy's liquidityneeds in the absence of net forex reserve accretion reducedliquidity pressure. Going forward, we believe the rest of thegovernment's budgeted borrowing programme of aboutRs1.6lakh-crore will have to be met through market sources(banks and insurance companies).

Overall, with government market borrowing (central and state)kicking in and incremental credit off take expected to pick up,we expect the requirements for deposit mobilisation to acceleratein 2HFY2011. Thus, to balance the disparity between creditand deposits growth, banks raised FD rates (by 25-75bp) duringthe quarter. However, despite the rise, they continue to beunattractive to depositors, considering that real interest ratesare still in the negative territory, leading to a gap between savingsand investments, which at present is being plugged by highCAD. Accordingly, over the course of the year, deposit andlending rates are expected to be on an upward trajectory.

Source: Bloomberg

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan-

08

Mar-

08

May-

08

Jul-

08

Oct

-08

Dec

-08

Feb

-09

Apr-

09

Jun-

09

Aug-0

9

Oct

-09

Dec

-09

Feb

-10

Apr-

10

Jun-

10

Aug-1

0

Advances growth Deposits growth

(%)

Exhibit 25: Credit growth up; deposit growth dipped

Source: Bloomberg

Exhibit 26: Bond yields to remain firm

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Jan-

08

Mar

-08

May

-08

Jul-

08

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-

09

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-

10

Sep

-10

(%)

Strategy

11



However, the hike in interest rates is not expected to hurt thegrowth momentum. In fact, in the previous cycle, the strengthof credit demand reflected low elasticity to the 300-400bpincrease in interest rates amidst an environment of robusteconomic activity and opportunity, buoyed by cheap foreigncapital and strong domestic savings. Secondly, interest ratesare well below their peak levels, leaving ample scope for gradualmonetary tightening, without adversely affecting thegrowth outlook.

Going ahead, with global central banks holding their ratessteady, the rising interest rate differential along with India'srelatively stronger GDP growth outlook, capital inflows mayincreasingly exceed the large CAD. The potential increase inforex reserves may provide the much-needed respite on the M1front, thereby improving the liquidity situation. Moreover, theincreasing availability of foreign risk capital would provide a

thrust to investment-led credit demand and M3 growth.

Indian equities

Sensex earnings outlook

2QFY2011 earnings - Net profit growth to lag sales growth2QFY2011 earnings - Net profit growth to lag sales growth2QFY2011 earnings - Net profit growth to lag sales growth2QFY2011 earnings - Net profit growth to lag sales growth2QFY2011 earnings - Net profit growth to lag sales growth

For 2QFY2011, performance of India Inc. is expected to berobust on the sales front. However, net profit growth during thequarter would lag top-line growth. For 2QFY2011, while wehave estimated net sales of Sensex companies to increase by~20% yoy, net profit is expected to post 13.5% growth. A partof the same would be on account of a ~54bp dip in operatingmargins. Overall, OPMs are expected to be around 25.6%,while NPMs would decline to 14.4% for the quarter.

Sector-wise key features of the 2QFY2011 earnings season

The metals, financial, oil and gas, and capital goods sectorsare expected to deliver robust numbers for 2QFY2011. Themetal pack is expected to significantly contribute to overallearnings growth of the Sensex. Baring this pack, net profit ofSensex companies is expected to decline by 5.5%. Higherrealisations during the quarter would aid significantimprovement in OPMs, leading to increased net profit of themetal sector. Overall, metal companies in the Sensex areexpected to post 44% growth during the quarter. The oil andgas pack would post yoy growth of 29%, driven by a robust32% jump in Reliance Industries' net profit.

On the other hand, the heavyweight financial sector isexpected to post 21% yoy growth in net profit during theperiod. Growth for the sector would be driven by growth in

NII, which is expected to remain robust. The performance ofthe capital goods sector, which is expected to post 21%growth, would be driven by BHEL, which is expected to posta 33% jump in net profit, mainly driven by top-line growth.L&T, on other hand, is expected to maintain its 1QFY2011growth momentum, posting 13.5% growth.

The FMCG and IT sectors are expected to grow broadly inline with the expected Sensex earnings. FMCG heavyweightswill deliver 15% yoy growth, mainly driven by top-line growth,with margins remaining flat. Amongst the pack, ITC wouldbe the leader, while HUL is expected to register flat growth.The IT sector will likely post 21% yoy growth on the salesfront, while net profit is expected to rise by 14%, mainly onaccount of higher tax outgo. Margins, on the other hand,are expected to remain stable.

The key underperformers during the quarter would includethe auto, telecom, cement and power sectors. Autocompanies, though would continue to deliver strong growth(~28%) on the top-line front, would continue to reel underhigh raw-material pressures, which are expected to dentoverall operating margins, resulting in a dip in net profitability.Telecom companies, which have been reeling undercompetitive pressures, would also continue to post subduedperformance. Cement and power companies are expectedto witness pressure on the operating front on the back of lowrealisation and higher input cost, respectively.

Cipla and DLF—the lone representatives of thepharmaceuticals and real estate sectors, respectively—areexpected to post muted performance. While Cipla is likely toregister almost flat net profit growth, DLF is expected to witnessa 14% dip in profitability on the back of margin pressureduring the period.

Strategy



Net Sales (Rs cr)Net Sales (Rs cr)Net Sales (Rs cr)Net Sales (Rs cr)Net Sales (Rs cr) Net PNet PNet PNet PNet Profit (Rs cr)rofit (Rs cr)rofit (Rs cr)rofit (Rs cr)rofit (Rs cr) WWWWWeightageeightageeightageeightageeightage % Contribution% Contribution% Contribution% Contribution% Contribution

CompanyCompanyCompanyCompanyCompany 2QFY2011E2QFY2011E2QFY2011E2QFY2011E2QFY2011E 2QFY20102QFY20102QFY20102QFY20102QFY2010 % chg% chg% chg% chg% chg 2QFY2011E2QFY2011E2QFY2011E2QFY2011E2QFY2011E 2QFY20102QFY20102QFY20102QFY20102QFY2010 % chg% chg% chg% chg% chg (%) (%) (%) (%) (%) to Sensex growth to Sensex growth to Sensex growth to Sensex growth to Sensex growth

RIL 59,654 46,848 27.3 5,095 3,852 32.3 11.3 31.6

Tata Steel 6,342 5,630 12.6 1,742 903 92.9 2.6 27.2

Sterlite 5,863 6,086 (3.7) 1,066 959 11.1 1.7 2.2

Tata Motors 11,314 7,924 42.8 496 729 (31.9) 2.3 (7.0)

ONGC 18,942 15,192 24.7 6,198 5,090 21.8 3.8 10.2

ICICIBK 3,761 3,860 (2.6) 1,143 1,040 9.9 8.1 4.8

BHEL 8,914 6,728 32.5 1,144 858 33.3 2.8 4.6

ITC 5,110 4,293 19.0 1,227 1,010 21.5 6.0 7.0

JP Associates 2,427 1,824 33.1 118 138 (14.7) 0.9 (0.5)

HDFCBK 3,564 2,963 20.3 908 687 32.1 5.8 8.2

Maruti Suzuki 8,781 7,050 24.6 516 570 (9.5) 1.3 (1.2)

TCS 8,978 7,435 20.8 1,997 1,624 22.9 3.5 5.2

Hindalco 5,830 4,893 19.2 518 344 50.4 1.7 5.6

DLF 1,968 1,751 12.4 380 440 (13.6) 1.0 (0.7)

M&M 5,351 4,465 19.8 538 570 (5.7) 1.9 (1.1)

ACC 1,679 2,005 (16.3) 189 435 (56.6) 0.6 (6.3)

Hero Honda 4,435 4,040 9.8 510 597 (14.6) 1.2 (2.0)

Wipro 8,190 6,918 18.4 1,356 1,171 15.8 1.4 1.7

Cipla 1,447 1,371 5.5 273 276 (1.1) 1.1 (0.1)

Reliance Infra 3,020 2,650 14.0 305 307 (0.5) 1.0 0.0

L&T 8,829 7,919 11.5 637 562 13.5 7.1 3.1

Infosys 6,824 5,585 22.2 1,698 1,535 10.6 9.5 6.4

Bharti Airtel 15,308 10,378 47.5 1,734 2,263 (23.3) 3.0 (8.5)

HUL 4,632 4,228 9.6 557 564 (1.2) 2.1 (0.2)

HDFC 3,564 2,963 20.3 908 687 32.1 6.1 9.2

Jindal Steel 2,641 2,445 8.0 792 808 (2.0) 1.9 (0.3)

SBI 11,086 9,134 21.4 3,031 2,490 21.7 5.8 11.3

NTPC 13,395 11,252 19.0 1,845 2,152 (14.2) 2.3 (2.8)

Tata Power 1,809 1,721 5.1 218 183 18.9 1.4 1.1

RCOM 5,215 5,703 (8.5) 211 740 (71.5) 0.8 (8.6)

Total 248,871 205,251 21.0 37,297 33,561 11.1 100.0 100

Sensex # 20.0 13.5

Exhibit 27: Quarterly earnings trend for Sensex companies

Source: Angel Research; Note: #Sensex sales and earnings growth based on free-float weightages

Strategy

13



India Inc. earnings growth momentum to sustain

The earnings momentum, which gathered pace in FY2010(registering 13% growth after a dip in FY2009), is expected toaccelerate as we move into FY2011 and FY2012.

For FY2011, we expect Sensex EPS of Rs1,050, up 18.4% yoy,mainly on account of robust earnings in the metals pack, whichis expected to post 143.4% yoy growth, contributing 9.5% tooverall Sensex earnings growth. Other key drivers would be theauto sector and the financial sector, which would contributearound 6.0% and 4.7% to overall earnings growth, respectively.Major underperformance would come from the telecom sector,which will drag earnings growth by 3.6%.

For FY2012E, we expect Sensex EPS to grow 21.2% yoy toRs1,273 (marginally upgraded from Rs1,242 earlier on the backof upward revision in earnings of Tata pack—Tata Motors andTata Steel). Further, these estimates build in an ex-commodityspace to post net profit yoy growth of 22.3%. The keyoutperformer in terms of earnings growth will be the financialsector, which is expected to post 31.2% yoy growth, followed bythe oil and gas sector, which is expected to register 20.5% yoygrowth, contributing 6.2% and 4.3%, respectively, to overallgrowth. Other significant contribution to growth would come infrom the IT sector, which is expected to post 18.9% growth duringthe period. The telecom sector, which has been battered downdue to intense competition, is expected to bounce back inFY2012 and post yoy growth of 20.2%. Thus, with the expectedrobust growth in EPS in FY2012E, Sensex earnings are expectedto register a CAGR of ~20% over FY2010-12E.

Market outlook

India - The preferred investment destination

While the global recovery is underway, emerging markets asan asset class would continue to outperform, as these economieswould be at the forefront of global growth in the years to come.In this context, India is one of the fastest growing economiesacross the world. Going forward, structurally, India has all thelevers in the form of favourable demographics, high savingsand investments, which would play out in the future, resultingin India sustaining its high growth and stepping up its growthmomentum. Thus, India, on the back of its high long-term growthand profitability prospects, would continue to remain a preferredinvestment destination.

Valuations - Trading near fair zone, near-termupsides limited

At the current level of 20,455, the Sensex is trading at 19.5xand 16x our FY2011E and FY2012E EPS, respectively, close toits 10-year average of 15x one-year forward P/E. However,given that India has moved back to the +8% growth trajectoryand is well placed to move into the high-growth orbit, we believeIndian markets should trade at a premium to their long-termvaluations. Thus, valuing the markets at 17x FY2012E, we havea Sensex target of 21,624 by March 2011, leaving little upsidesin the near term.

3.4

(0.1)

0.4

5.4

0.8

1.8

5.6

2.4

0.1 0.3

(1.2)

0.3 0.5

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Auto

Cem

ent

Engg.

Finance

FMC

G IT

Met

als

Oil

&G

as

Pharm

a

Pow

er

Tele

com

Rea

lEst

.

Const

ru.

(%co

ntr

ibutio

nto

gro

wth

)

Source: Angel Research

Exhibit 30: Share in Sensex EPS CAGR (FY2010-12E)


Exhibit 29: Sectoral v/s Sensex - Net profit growth (FY10-12E)

Sectoral growth (% CAGR) Sensex growth (% CAGR)

47

(7)

6

28

15 15

69

1013

5

(17)

44

65

(30)

(10)

10

30

50

70

Auto

Cem

ent

Engg.

Finance

FMC

G IT

Met

als

Oil

&G

as

Pharm

a

Pow

er

Tele

com

Real E

st.

Const

ru.

(%gro

wth

)


Exhibit 28: Sensex EPS estimates

790

888

1,051

1,273

700

800

900

1,000

1,100

1,200

1,300

FY2009 FY2010 FY2011E FY2012E

(Rs)

12.4% growth18.4% growth

21.1%growth

Strategy



Moreover, a look back in history suggests that investors wouldhave earned good returns even if they had invested at the earlierhighs of 21,000. Most stocks that provided good alpha returnshad high ROEs (and were not high-growth stocks) or wereavailable at deep values in sectors facing challenges.

At this juncture also, there are stocks that meet these criteriaand would generate alpha returns for investors. RIL, Blue Star,Mphasis BFL, United Phosphorus, Electrosteel Casting andFinolex Cables are among the few stocks that can generatealpha for investors. (For more information, please refer to ourStrategy Report - Finding Alpha Returns at 20,000 Sensex, datedSeptember 21, 2010).

Hence, we recommend, investors to hold onto their investmentsand use dips to increase their exposure in the markets to reapbenefits, as there are numerous investment opportunities thatwill reward shareholders.

Market strategy - Endurance to pay…

The strong surge in global inflows towards India bears testimonyto the resilience of the Indian economy to the global slowdownand its ability to sustain high growth amidst such an environment.While the liquidity gush towards India could continue to providea further leg-up to markets, we believe, in the near term, it ismore probable that markets could consolidate at these levels.This is because Indian equities are trading close to their fairvaluations and a correction (though limited), if any, should beshort lived, given that overall global liquidity remainscomfortable (with a benign interest regime in developedeconomies) and would continue to chase high-growth assets.

Further, given the strong fundamentals (as discussed), thebull-run in Indian equity markets is well entrenched. Thus, eventhough the markets approach their earlier highs of 21,000, webelieve the Indian economy and, hence, Indian equities havemiles to go. Hence, even though the upsides in the near termwould be limited, we believe at this juncture, the risk-reward isfavourable for long-term investors and will eventually rewardtheir endurance.


Exhibit 31: One-year forward Sensex P/E

5

10

15

20

25

30


1-yr forward rolling PE (x) 5-yr Avg. P/E (x)

Source: Angel Research, Bloomberg

Exhibit 32: Bond yield v/s earnings yield

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0


Earnings Yield Bond Yield

(%)

Strategy

15



Sector Company CMP (Rs) Target Price (Rs) Weightage (%) Weightage (%) Stance

Auto & AncillariesAuto & AncillariesAuto & AncillariesAuto & AncillariesAuto & Ancillaries 6.26.26.26.26.2 3.03.03.03.03.0 UnderweightUnderweightUnderweightUnderweightUnderweight

Maruti Suzuki 1,483 1,640 0.9 1.0 Equalweight

JK Tyres 192 237 0.0 2.0 Overweight

BFSIBFSIBFSIBFSIBFSI 26.526.526.526.526.5 27.027.027.027.027.0 OverweightOverweightOverweightOverweightOverweight

SBI 3,261 3,187 3.9 4.0 Equalweight

Axis Bank 1,572 1,703 1.8 7.0 Overweight

ICICI Bank 1,135 1,350 5.5 12.0 Overweight

HDFC Bank 2,499 2,514 3.9 4.0 Equalweight

CementCementCementCementCement 1.61.61.61.61.6 0.00.00.00.00.0 UnderweightUnderweightUnderweightUnderweightUnderweight

FMCGFMCGFMCGFMCGFMCG 7.77.77.77.77.7 3.03.03.03.03.0 UnderweightUnderweightUnderweightUnderweightUnderweight

ITC 179 177 4.3 3.0 Underweight

HotelsHotelsHotelsHotelsHotels 0.20.20.20.20.2 3.03.03.03.03.0 OverweightOverweightOverweightOverweightOverweight

Taj GVK 161 240 0.0 3.0 Overweight

Infra. & Cap GoodsInfra. & Cap GoodsInfra. & Cap GoodsInfra. & Cap GoodsInfra. & Cap Goods 11.511.511.511.511.5 22.022.022.022.022.0 OverweightOverweightOverweightOverweightOverweight

Bluestar 492 589 0.0 4.0 OverweightOverweightOverweightOverweightOverweight

L&T 2,099 1,842 4.9 5.0 Equalweight

LMW 2,419 2,819 0.0 3.0 Overweight

Reliance Infrastructure 1,082 1,253 0.7 3.0 Overweight

Nagarjuna Construction 158 201 0.0 2.0 Overweight

Punj Lloyd 131 156 0.1 3.0 Overweight

Jyoti Structures 137 215 0.0 2.0 Overweight

MediaMediaMediaMediaMedia 0.40.40.40.40.4 2.02.02.02.02.0 OverweightOverweightOverweightOverweightOverweight

Jagran Prakashan 127 154 0.0 2.0 Overweight

MetalsMetalsMetalsMetalsMetals 8.58.58.58.58.5 5.05.05.05.05.0 UnderweightUnderweightUnderweightUnderweightUnderweight

Hindalco 204 204 1.1 1.0 Equalweight

Electrosteel Castings 46 72 0.0 2.0 Overweight

Godawari Power 210 313 0.0 2.0 Overweight

Oil & GasOil & GasOil & GasOil & GasOil & Gas 14.014.014.014.014.0 10.010.010.010.010.0 UnderweightUnderweightUnderweightUnderweightUnderweight

Reliance Industries 1,006 1,260 8.2 10.0 Overweight

PharmaPharmaPharmaPharmaPharma 3.63.63.63.63.6 5.05.05.05.05.0 OverweightOverweightOverweightOverweightOverweight

Dishman Pharma 191 279 0.0 2.0 Overweight

Aurobindo Pharma 1,056 1,288 0.0 3.0 Overweight

PPPPPowerowerowerowerower 3.83.83.83.83.8 0.00.00.00.00.0 UnderweightUnderweightUnderweightUnderweightUnderweight

Real EstateReal EstateReal EstateReal EstateReal Estate 1.51.51.51.51.5 3.03.03.03.03.0 OverweightOverweightOverweightOverweightOverweight

Anant Raj Industries 146 178 0.0 3.0 Overweight

SoftwareSoftwareSoftwareSoftwareSoftware 10.710.710.710.710.7 12.012.012.012.012.0 OverweightOverweightOverweightOverweightOverweight

Infosys 3,103 3,157 6.6 2.0 Underweight

TCS 960 1,032 2.4 2.0 Equalweight

Tech Mahindra 767 942 0.0 4.0 Overweight

Mphasis 630 872 0.0 4.0 Overweight

TTTTTelecomelecomelecomelecomelecom 3.03.03.03.03.0 0.00.00.00.00.0 UnderweightUnderweightUnderweightUnderweightUnderweight

OthersOthersOthersOthersOthers 0.7 0.7 0.7 0.7 0.7 5.05.05.05.05.0 OverweightOverweightOverweightOverweightOverweight

United Phosporus 182 228 0.0 2.0 Overweight

Finolex Cables 58 85 0.0 3.0 Overweight

Angel Research Model Portfolio



2QFY2011 Sectoral Outlook

17



Sector Trend Outlook

Automobile

The auto component industry is expectedto be on the path of recovery. Outlook for theindustry is good largely due to strong growthof autos in the domestic market.

Companies with high exposure to exportsare expected to show marginal recovery owingto volume recovery in some of the developedmarkets. However, rupee appreciation on ayoy basis would impact export realisation to acertain extent.

We maintain our positive stance on Exide,Automotive Axles and Fag Bearings, which areavailable at reasonable valuations. Owing tothe structural shift the tyre industry is goingthrough, we remain positive on the sectorwe remain positive on the sectorwe remain positive on the sectorwe remain positive on the sectorwe remain positive on the sectorand maintain Buy on JK Tand maintain Buy on JK Tand maintain Buy on JK Tand maintain Buy on JK Tand maintain Buy on JK Tyre and Ceat, whichyre and Ceat, whichyre and Ceat, whichyre and Ceat, whichyre and Ceat, whichare available at attractive valuations.are available at attractive valuations.are available at attractive valuations.are available at attractive valuations.are available at attractive valuations.

Auto Ancillaries are expected to report healthy top-linegrowth in 2QFY2011 on the back of better domesticvolume growth.

Margin pressure is expected to reduce marginally, owingto improving operating leverage. However, higherraw-material cost is expected to exert pressure on fewancillary companies (tyres) and would result in highermargin contraction.

Broadly, the sector is expected to deliver positiveearnings growth. Losses posted by few ancillaries (withexposure in the overseas market) during FY2010 areexpected to register profit aided by the cost restructuringexercise implemented by them in their overseas operationsduring 2QFY2011.

Auto Ancillaries

The macro-economic scenario appeared optimistic inFY2010 with most of the companies reporting sequentialspurt in volumes during the period. In 2QFY2011, mostauto companies continued to witness traction in volumegrowth, albeit on a low base. Fears of price increases dueto the increase in raw-material costs and change inemission norms resulted in advanced buying, perking upvolumes in 2QFY2011. Thus, most companies areexpected to post good top-line growth in 2QFY2011.However, an uptick in commodity prices over the last sixmonths is expected to exert pressure on margins in2QFY2011.

Substantial 25% volume growth is expected to boostsales growth of our auto universe for 2QFY2011 to a highof 31% yoy. However, margins are expected to contractby ~450bp yoy, reflecting higher input costs. All thesefactors combined would result in about 8% yoy decline inearnings growth.

Bajaj Auto and TVS Motor are expected to report strongearnings growth for 2QFY2011. The relative change inproduct mix and low base would support higher earningsgrowth of these companies.

On the back of a positive economic scenarioand improving consumer sentiment, we retainour positive outlook on the auto sector. Weexpect the ongoing economic recovery to helpthe auto sector (passenger vehicles,commercial vehicles and two-wheelers)register good growth in the domestic marketand a decent growth in export markets overFY2010-12E.

We estimate overall auto volumes to registera CAGR of around 13% over FY2010-12E,aided by improved economic environment forthe sector. Over the longer term,comparatively low penetration levels, a healthyeconomic environment and favourabledemographics supported by higher per capitaincome levels are likely to help autocompanies in sustaining their top-line growth.

Among the heavyweights, we prefer MarutiAmong the heavyweights, we prefer MarutiAmong the heavyweights, we prefer MarutiAmong the heavyweights, we prefer MarutiAmong the heavyweights, we prefer MarutiSuzuki, TSuzuki, TSuzuki, TSuzuki, TSuzuki, Tata Motors and M&M.ata Motors and M&M.ata Motors and M&M.ata Motors and M&M.ata Motors and M&M.

Continued...



Sector Trend Outlook

Continued...

Banking We believe rising retail and wholesale fixeddeposit rates may increasingly lead to NIMcompression, especially in the case of smalland mid-cap banks having relatively lowerCASA base. Correspondingly, larger banksthat have high CASA ratios and robust branchexpansion, such as SBI, ICICI Bank, HDFCBank and Axis Bank, are better placed tosustain or improve their NIMs.

The increase in interest rates will not havea negative effect on the banking sector, as itwill be outweighed by the acceleration in coreearnings growth on the back of improvementin credit growth and fee income coupled witha sharp reduction in NPA losses.

Considering the valuations, our top picksare ICICI Bank among large-cap banks andFederal Bank among mid-cap banks.Amongst PSU banks, we like Union Bank, IOBand Indian Bank on account of their relativelybetter deposit franchise compared to peers.

In 2QFY2011, credit declined marginally by 0.6% qoq,even as incremental deposit accretion was a nominal 1.2%qoq. During the quarter, banks had raised FD rates tobalance the disparity between credit and deposit growth;deposit growth is still lagging credit growth by at least fivepercentage points.

During the quarter, yields went up across the yield curve,especially more so at the shorter end. Hence, we expectmost of the banks under our coverage to have moderateMTM losses in 2QFY2011.

NIMs are likely to be flattish in 2QFY2011 as higherdeposit rates will take a quarter or two to flow throughthe Profit & Loss A/c. We expect asset quality divergencebetween PSUs and private banks to continue in 2QFY2011(with likely improvement from 2HFY2011), though, goingforward, the key trend to be monitored is likely to be onthe NIM front.

Capital Goods The IIP numbers (released during the current fiscal thisfar) have continued to maintain the double-digit growthrate, except for June 2010, when it came in at 5.8%. Thebetter-than-expected IIP numbers for July 2010 at 13.8%was aided by the all-round growth reported by most sectorsespecially the capital goods (CG) sector, which reported63% yoy growth.

Companies in our CG universe are expected to postcumulative top-line growth of 26% yoy. On the operatingfront, we expect our CG universe companies to report16bp expansion in OPM on the back of higher operatingefficiencies. Consequently, net profit is expected to increaseby 25% yoy.

The revival in the IIP numbers backed bythe sustained improvement in the productionof basic as well as intermediate goods is apointer to the ensuing recovery in the capexcycle. With major sectors of the economynearing peak capacity utilisation levels, weexpect the investment cycle to pick up in thenear term as robust corporate profits andfavourable financing conditions fuelinvestments.

On the valuation front, we believe that mostof the CG companies in our universe arepresently trading at premium valuationsoffering meagre upside from current levels.In such a scenario, we prefer a stock-specificapproach. KEC, Jyoti Structures and Blue StarKEC, Jyoti Structures and Blue StarKEC, Jyoti Structures and Blue StarKEC, Jyoti Structures and Blue StarKEC, Jyoti Structures and Blue Starfigure among our preferred picks.figure among our preferred picks.figure among our preferred picks.figure among our preferred picks.figure among our preferred picks.

19



Sector

FMCG We expect the FMCG companies to sustainmodest top-line growth buoyed by goodmonsoons and return of pricing power.However, rising input costs remain a near-termconcern and are likely to impact margins.Moreover, price hikes are likely to onlyneutralise impact of rising input costs asintense competition across categories will keepsignificant price hikes under check and ad-spends high.

Most FMCG companies have witnessed asharp rally in the recent past, and are currentlytrading at peak valuations (~15-20%premium to their historical averages). Whilethe long-term consumption story for theFMCG industry remains intact, we expect bothearnings upgrades and P/E re-rating to takea breather from current levels. Hence, wemaintain our underweight stance on the sectorand recommend selective stock approach.Asian PAsian PAsian PAsian PAsian Paints, Marico and GSK Consumer areaints, Marico and GSK Consumer areaints, Marico and GSK Consumer areaints, Marico and GSK Consumer areaints, Marico and GSK Consumer areour topour topour topour topour top-picks in the sector-picks in the sector-picks in the sector-picks in the sector-picks in the sector.....

For 2QFY2011, we expect our FMCG universe to poststeady top-line growth of 17.3% yoy (robust volume growthand selective price hikes) and earnings growth to slip to16% owing to margin pressures (rising input costs) exceptfor Colgate, GCPL and ITC.

GCPL, ITC and GSK Consumer are expected to reportstrongest earnings growth during the quarter. HUL isexpected to report a 9.6% top-line growth, largely volumedriven, as price cuts in the S&D segment will continue todrag overall growth and margins. Hence, bottom-line isalso expected to decline by1.2%. ITC is expected to witness~1-2% volume decline in cigarettes impacted by the recentprice hikes. We expect ITC to register a robust 19% yoygrowth in top-line and 21.5% growth in earnings, aidedby the recent price hikes in cigarettes, strong performanceof non-cigarette FMCG segment and rebound in its hotelsbusiness.

Continued...

We expect the demand situation for thecement industry to improve and pick up frommid-3QFY2011, post the monsoons. Weexpect a pick-up in rural construction activitiesin particular, as the country has experiencedgood monsoons. As for the situation in thesouthern region, we believe the demandscenario would bottom out and expect growthin despatches from 3QFY2011. We expectall-India capacity utilisation to bottom out at77% in 2QFY2011. However, we expect theovercapacity to continue to exert pressure onprices in all the regions, till the end of FY2011.

We believe this price hike is not sustainablein the southern region as it is basically an actaimed at bringing about price discipline andhas got nothing to do with demand. Cementmakers had increased prices in March 2010,but they soon rolled back the prices due tolow demand. Similarly, we expect correctionof Rs10-15 per bag over the next few weekson the back of lower utilisation.

WWWWWe maintain a Buy rating on Indiae maintain a Buy rating on Indiae maintain a Buy rating on Indiae maintain a Buy rating on Indiae maintain a Buy rating on IndiaCements, Madras Cements, KCements, Madras Cements, KCements, Madras Cements, KCements, Madras Cements, KCements, Madras Cements, Kesoram and JKesoram and JKesoram and JKesoram and JKesoram and JKLLLLLakshmi Cements.akshmi Cements.akshmi Cements.akshmi Cements.akshmi Cements.

In 2QFY2011, all-India despatches decelerated further,growing by a meager 3.7% yoy as compared to the 7%yoy growth recorded in 1QFY2011. During the quarter,despatches in the southern region continued to suffer, asthere was not much improvement seen in demand fromAndhra Pradesh, which is a major cement-consuming statein the region. The northern region witnessed a slowdownin demand as construction activity related to theCommonwealth Games ended. The region alsoexperienced above-normal rains, which paralysedconstruction activities in many areas.

Despite the slowdown in demand, cement prices werehiked twice in the southern region in September 2010.On an average, prices were higher by Rs60/bag post thetwo rounds of the price hike. Post these hikes, price perbag of cement stood at Rs260 in Chennai and aroundRs200 in Hyderabad. The price hikes were carried out bycement manufacturers to minimise their losses, as cementprices in the region, especially Andhra Pradesh, had fallenclose to the cost of production.

Cement

Trend Outlook



4th Quarter Trend OutlookSector

Continued...

Trend Outlook

Logistics For 2QFY2011, we expect Concor and GDL to reportdeclines of 7.2% and 5.4% yoy in their revenue,respectively, due to volume slippage in the Exim segmenton account of operations being halted at Jawaharlal NehruPort Trust (JNPT) port and heavy monsoon in the northernpart of the country. On the other hand, we expect AGL toreport strong revenue growth of 25.9% yoy on account ofthe low base effect and improving ECU Line numbers.However, we expect AGL's PAT to remain flat as thecompany had claimed MAT entitlement in 3QCY2009,which resulted in lower taxes. We expect operating marginsto remain stable for our coverage universe. Consequently,we expect a 10.1% decline in PAT for our coverageuniverse. Further, hike in haulage charges is detrimentalfor the rail container sector, which will impact profitabilityin 2HFY2011.

As per data released for FY2011 YTD(April-August 2010) by the Indian PortAssociation (IPA), container traffic at majorports grew moderately by 10.2% yoy. The JNPTport, which handles ~60% of the country'scontainer volumes, registered a decline of14.8% yoy in August 2010. This was due to acomplete closure of operations for five daysafter an oil spill, adversely affecting containerthroughput. Going ahead, we expect volumesto stabilise to pre-accident levels. We expectthe country's overall container volumes toregister 10-12% yoy growth at 12 Indianmajor ports in FY2011E. OPM too hasremained under pressure due to intensecompetition and inability to pass on rail freightcharges.

We continue to remain Neutral on thelogistics sector. We rate AGL as our top pickin the sector on account of revival in ECU Lineperformance in 2QCY2010 and reasonablevaluations.

Infrastructure We expect the infrastructure sector to post mutednumbers for 2QFY2011 as the second quarter is usuallythe weakest in any fiscal due to the monsoons. This yearIndia witnessed bountiful rains (4% above normal) onaccount of which we expect a delay in the pickup ofinfrastructure projects. Moreover, order inflow in FY2010was lop-sided with maximum share of orders bagged inthe last quarter of the fiscal, which are yet to contribute torevenues. Hence, we expect the quarter to be subdued onthe revenue front for most of the construction companies.

In light of the pivotal role that theinfrastructure sector plays in enabling futuregrowth, we believe that the government willhave to continue focusing on infrastructuredevelopment in the country. Over the next fewquarters, we expect healthy order backlogsof the companies in our universe to translateinto earnings growth. We are bullish on infrasector owing to recent underperformance andexpect 2HFY2011 to be robust.

Our top picks in the sector are IVRCL Infra,NCC and Patel Engineering - in sequence ofpreference. Our preference reflects our relativecomfort on execution front, order bookposition, funding and valuations within thesector.

21



Oil & Gas RIL is likely to report GRMs of US $8.0/bbl for thequarter. In petrochem, while the cracker margins haveweakened, PP and polyester margins were subdued on aqoq basis. Production of gas from the KG basin is likely toaverage at around 61mmscmd during the quarter.

We expect ONGC to register net realisation of US$62.8/bbl, a yoy increase of US $6.4/bbl. The increasecould be attributed to the increase in the prices of petrol,diesel and SKO coupled with increase in natural gas prices.

IGL's CNG volume growth is likely to slow down duringthe quarter due to the high base effect. CNG and PNGvolumes during the quarter are expected to increase by10.2% and 73.3% yoy, respectively. We also expect EBDITA/scm to improve qoq on account of the full impact of CNGprice hike taken in the previous quarter and PNG pricehike taken during the quarter.

GSPL is likely to report 10.1% yoy de-growth inbottom-line despite higher volumes as we expect tariffadjustment, which is happening over the last few quarterswill adversely impact the profitability. We expect volumesduring the quarter to increase by 15.9% yoy to 36mmscmd.

We expect RIL to deliver strong performancein its extant businesses driven by improvedrefining margins. Recent acquisition of theshale gas assets opens up new growth vistasand provides technological know-how toreplicate the same elsewhere. We believe RILhas addressed the issues associated withredeployment of cash-flows, which is positive.The huge unexplored E&P acreage with RILThe huge unexplored E&P acreage with RILThe huge unexplored E&P acreage with RILThe huge unexplored E&P acreage with RILThe huge unexplored E&P acreage with RILcould result in significant valuation upsidescould result in significant valuation upsidescould result in significant valuation upsidescould result in significant valuation upsidescould result in significant valuation upsidesfrom current levels.from current levels.from current levels.from current levels.from current levels.

In the upstream space, performance of thePSU companies, viz. ONGC and OIL, is likelyimprove on account of the gas price hike andimpact of increase in the petrol, diesel andkerosene prices. We expect ONGC to reportnet realisation of around US $60/bbl for thefiscal. Till clarity emerges over the subsidyTill clarity emerges over the subsidyTill clarity emerges over the subsidyTill clarity emerges over the subsidyTill clarity emerges over the subsidy-----sharing mechanism and further oil pricesharing mechanism and further oil pricesharing mechanism and further oil pricesharing mechanism and further oil pricesharing mechanism and further oil pricereforms, we recommend Neutral view onreforms, we recommend Neutral view onreforms, we recommend Neutral view onreforms, we recommend Neutral view onreforms, we recommend Neutral view onONGC. ONGC. ONGC. ONGC. ONGC. In the private upstream space, Cairn'sperformance is likely to be driven by the crude

With the economic scenario improving andlow inventory levels, steelmakers are expectedto raise prices in October. We believe that steelprices in India have bottomed out in2QFY2011 and expect them to remain firmin the coming quarters. However, we believethe short-term outlook for iron ore remainschallenging due to the slowdown in Chineseiron ore imports and government restrictionon illegal mining. WWWWWe remain positive on Te remain positive on Te remain positive on Te remain positive on Te remain positive on TataataataataataSteel and Godawari PSteel and Godawari PSteel and Godawari PSteel and Godawari PSteel and Godawari Powerowerowerowerower.....

On the non-ferrous side, we believedownside from current levels for some of themetals is limited as the prices are near themarginal cost of production. Moreover, basemetal prices are expected to continue theirstrong yearly performance, primarily due tothe lower base effect. WWWWWe recommende recommende recommende recommende recommendAccumulate on Hindustan Zinc.Accumulate on Hindustan Zinc.Accumulate on Hindustan Zinc.Accumulate on Hindustan Zinc.Accumulate on Hindustan Zinc.

For 2QFY2011, sales volume of the steel companiesunder coverage are likely to see an uptick on a sequentialbasis as companies were able to liquidate their highinventory. Moreover, in September 2010, companies hikedproduct prices by up to Rs1,000/tonne after a brief periodof low price levels. On the negative side, margins arelikely to be under pressure on account of high raw materialcost and lower realisations. We expect top-line to increaseby ~5-13% yoy except for SAIL. EBITDA margins are likelyto contract by 460-640bp yoy except for Tata Steel. Forthe mining companies, we expect iron ore sales volumesof Sesa Goa to be severely impacted in 2QFY2011 asexports from Goa are significantly reduced during themonsoons and shipments from Karnataka are expectedto be lower on account of the ban.

For 2QFY2011, average LME prices of aluminium,alumina and zinc fell 0.1%, 5.3%, and 0.2% respectively,while copper and lead prices were up 3.6% and 4.8% onqoq basis, respectively. We expect the non-ferrouscompanies (except for Sterlite) to register top-line growthof 14-22% yoy. Further, we expect margins to expand by150-1,570bp, except for Hindustan Zinc.

Metals

Sector

Continued...

Trend Outlook



Sector

During the past one year, the BSE HC indexhas been among the best performing indices,rallying 36.1% and outperforming the marketby 19.0%. On the back of rich valuations, wecontinue to recommend a bottom-upapproach. In the generic segment, we nowIn the generic segment, we nowIn the generic segment, we nowIn the generic segment, we nowIn the generic segment, we nowprefer Lprefer Lprefer Lprefer Lprefer Lupin, Cipla and Indoco Remedies.upin, Cipla and Indoco Remedies.upin, Cipla and Indoco Remedies.upin, Cipla and Indoco Remedies.upin, Cipla and Indoco Remedies.

We continue to favour CRAMS, though thesegment is witnessing near-term hiccupsbecause of inventory rationalisation andmultiple mega global pharma mergers inCY2009. However, most of the CRAMScompanies are now witnessing an uptick inorder enquiries from global innovators,indicating an improvement in the globalscenario. In CRAMSIn CRAMSIn CRAMSIn CRAMSIn CRAMS, we recommend, we recommend, we recommend, we recommend, we recommendDishman Pharma.Dishman Pharma.Dishman Pharma.Dishman Pharma.Dishman Pharma.

The Indian pharmaceutical sector is expected to postmodest growth on the sales front. We expect our coverageuniverse to register 4.7% yoy top-line growth, despite the3.8% yoy appreciation in the rupee against US dollar onan average during the quarter. Among large caps, Lupinand DRL are expected to post strong performance. While,among mid caps, Cadila and Ipca Labs are expected topost strong growth.

On the OPM front, we expect modest expansion forour coverage universe on the back of higher employeeand SG&A expenses. However, net profit is expected togrow by 10.3% yoy during the quarter, as 2QFY2010was marred by higher interest charges and one-timeexpenses.

Pharmaceutical

Continued...

Trend Outlook

We expect auto fuel and cooking fuelunder-recoveries to stand at Rs3,368cr and Rs9,100crrespectively, during the quarter. The decline in under-recoveries is due to the increase in the price of petrol,diesel and kerosene coupled with subdued crude oil prices.However, in spite of the decline in subsidy qoq, the fate ofthe OMCs will continue to depend on the issuance of oilbonds.

oil movement. Given our outlook of subduedcrude oil prices, we expect mute stockperformance.

WWWWWe remain positive on the gas companies,e remain positive on the gas companies,e remain positive on the gas companies,e remain positive on the gas companies,e remain positive on the gas companies,viz. GAILviz. GAILviz. GAILviz. GAILviz. GAIL, GSPL, GSPL, GSPL, GSPL, GSPL, IGL and P, IGL and P, IGL and P, IGL and P, IGL and Petronet LNGetronet LNGetronet LNGetronet LNGetronet LNG. . . . . Thesecompanies are the key beneficiaries of theincreasing gas demand in the country.

23



4th Quarter Trend OutlookSector

Power

We foresee good times ahead for the retailindustry, with economic growth back on trackalong with revived consumer sentiment andgood monsoons. Sensing the change, severalretailers have started chalking out expansionplans, which further bolsters our belief. Forinstance, PRIL plans to open 25 Big Bazaar,15 Pantaloon and 5 Central outlets. Besidesthese, the company will be adding Ezonestores and Home Town satellite stores. InFY2011, Titan plans to invest Rs1.5bn to open170 new stores, while SSL plans to open10-12 stores at a cost of Rs1.2bn. In addition,any positive news on FDI in retail will act as abig booster for the industry.

We expect the growth trend to continue tostrengthen going ahead, thereby keeping thelong-term growth prospects for the organisedretail segment in India intact.

WWWWWe maintain our Accumulate rating on PRILe maintain our Accumulate rating on PRILe maintain our Accumulate rating on PRILe maintain our Accumulate rating on PRILe maintain our Accumulate rating on PRILwith a Twith a Twith a Twith a Twith a Target Parget Parget Parget Parget Price of Rs556.rice of Rs556.rice of Rs556.rice of Rs556.rice of Rs556.

Consumer confidence in India continued to remainrobust in 2QFY2011, after rebounding in 1QFY2011, toreach its highest level since the third quarter of CY2007.Annual sales in the form of Independence Day offers andMonsoon Sale witnessed overwhelming response, furthersignaling the return of buoyant times in the retail sector.

The Future Group, in its five-day long sale promotedas Mahabachat on the eve of the Independence Day,registered same store sales growth of 30-40%. SSL, whichconducts biannual sales during this period, witnessedstellar response from consumers.

We expect retail stocks under our coverage to reporttop-line growth of 39.7% yoy. We estimate PRIL to leadour universe, with 43.4% yoy top-line growth.

We estimate the OPM of our retail universe to dip by30bp to 9.5% in 2QFY2011E from 9.8% in 2QFY2010,as higher raw-material costs are expected to take a tollon margins. We estimate net profit margin to improve by20bp yoy to 4.1% in 2QFY2011E.

Retail

In 2QFY2011, we expect the power generatingcompanies in our universe to report top-line growth of20% yoy driven by capacity additions and increased tariffs.These companies had higher operating capacities duringthe quarter on a yoy basis. However, operating profit isexpected to decline by 11% on account of the increase infuel costs. Net profit is expected to decline by 8.5% yoy.

Spot global coal prices were substantially higher on ayoy basis during the quarter. Average prices of the NewCastle Mckloksey 6,700kc coal stood at around US $94/tonne in 2QFY2011 as against US $71/tonne recordedin 1QFY2010. However, the prices were lower by around5% on a qoq basis.

We expect capacity addition to gather paceover the last two years of the Eleventh Planperiod. However, the power deficit scenario islikely to persist, as supply is not likely to keepup with demand. Thus, players with the abilityto execute projects on time would be benefittedby the high merchant tariffs expected to prevailover the next two years.

Hike in the spot global prices is a negativefor companies relying on imported coal andhave not tied-up for supply at fixed rates.Increase in coal costs would increase the costof power generation. However, the companiesunder our coverage NTPC, CESC which useimported coal for certain portion of theirrequirements operate under the regulatedbusiness model and hence pass-on the hikein fuel costs.

WWWWWe maintain a Buy on GIPCLe maintain a Buy on GIPCLe maintain a Buy on GIPCLe maintain a Buy on GIPCLe maintain a Buy on GIPCL, PT, PT, PT, PT, PTC andC andC andC andC andCESC.CESC.CESC.CESC.CESC.

Continued...

OutlookTrend



Software The IT industry continues to witness a surgein volumes due to the sudden spurt in demandfor discretionary spend by clients. Though themacro-economic data paint a hazy picture,clients continue to spend. The trend inspending is broad-based spanning acrossindustries as well as service lines and primarilyby the US. The nature of spend has seen ashift since 1QFY2011 with deal discussionsrelating to change -the-business initiatives likeconsulting & package implementation as wellas engineering and R&D spend gaining strongmomentum.

We expect tier I companies to register robustUSD revenue growth of 20-24% over FY2010-12. WWWWWe remain positive on the Indian IT sectore remain positive on the Indian IT sectore remain positive on the Indian IT sectore remain positive on the Indian IT sectore remain positive on the Indian IT sectorand maintain Tand maintain Tand maintain Tand maintain Tand maintain TCSCSCSCSCS, Wipro, Mphasis and T, Wipro, Mphasis and T, Wipro, Mphasis and T, Wipro, Mphasis and T, Wipro, Mphasis and TechechechechechMahindra as our top picks in the sectorMahindra as our top picks in the sectorMahindra as our top picks in the sectorMahindra as our top picks in the sectorMahindra as our top picks in the sector.....

During 2QFY2011, the USD depreciated against majorcurrencies like Euro, GBP & AUD by 1.5%, 3.9% and 2.5%qoq, respectively. This will aid the tier I companies USDrevenues by 0.5-0.8% qoq. Also, the rupee hasdepreciated by 1.9% qoq against the USD, which will resultin higher rupee revenues as well as aid margins to thetune of 60-70bp qoq.

The hiring spree is likely to remain robust in 2QFY2011also. However, strong demand and abating attritions willhelp the companies to hold utilisation levels tightly.

In 2QFY2011, we expect the top-four IT companies toreport 6-8.1% qoq volume growth. Favourablecross-currency movement will further aid revenues.However, revenue would track volume growth largely onaccount of the higher offshore component.

EBIT margins would be mixed with companies likeInfosys and TCS expanding and holding margins,respectively. Wipro is expected to post a 34bp qoq declinein consolidated margins as the low-margin IT productsbusiness is expected to register strong growth. HCL Techis expected to record 239bp dip in margins qoq on theback of wage hikes and the BPO business continuing tobe loss making.

Sector

Real Estate The risk reward ratio is turning favourablefor the sector, with recovery widening towardstier-II and tier-III cities in the residentialsegment. Further, the commercial segment isrecovering with enquiries/leasing gainingmomentum. We believe stock performancesare related to macro factors interspersed withcompany-specific issues, such as the DLF-DALmerger and group-related issues at HDIL. Weare positive on the long-term outlook of therealty sector, with growing disposable income,shortage of 25mn houses in India andreasonable affordability. Given the currentscenario, we expect stability in residentialprices with an exception of certain micromarkets, where prices have overheated, andexpect an uptick in the commercial segmenttowards end-FY2011.

From our universe of stocks, we prefercompanies with visibility on cash flow, lowleverage and a strong project pipeline withattractive valuations. Our top picks are HDILand ARIL, which are trading at 32.8% and30.4% discount to their NAVs, respectively. Wemaintain a Neutral rating on DLF withconcerns of a weak operating cash flow,increasing gearing levels and the stock tradingat 21.2% premium to our one-year forward NAV.

For 2QFY2011, we expect volumes to report flat tomoderate decline on a sequential basis on account ofsubdued new launches due to seasonal weakness.Revenue of real estate companies will be largely drivenby execution of existing projects, which may be affecteddue to heavy rains. However, going ahead, we expect asurge in new launches, as we get into the festive season.It would be interesting to see whether companies such asDLF and Unitech (through UCP) continue to seesustainability in office lease volumes on a sequential basis.Banks are currently offering competitive mortgage rates,but we expect interest rates to inch up on RBI's concernson real estate inflation.

Among our universe of stocks, we expect DLF's revenueto be driven by the execution of its existing projects. Weexpect HDIL to report flat to 10% qoq decline in transferof development rights (TDR) volumes and prices. This ison account of the anticipation of Maharashtra stategovernment overruling Bombay High Court's decision andhiking FSI from 1x to 1.33x. Further, heavy rains affectedthe execution of the airport project, thereby slowing downTDR generation. We expect Anant Raj's (ARIL) revenue tobe driven by new launches and rental income.

OutlookTrend

Continued...

25



Sector

For 2QFY2011, we expect the downward trend inaverage revenue per minute (ARPM) to continue with a1.8-2.2% qoq decline for the top three operators-RCOM,Idea and Bharti Airtel (Airtel). Also, due to the seasonalityeffect, we expect minutes of usage (MOU) to drop by1% qoq for Airtel and Idea, bucking the trend of seculargrowth in MOU. RCOM has been registering a seculardecline in MOU, underperforming its peers. We expectthis decline to continue even in 2QFY2011 at 4% qoq.Hence, the average revenue per user (ARPU) for Airteland Idea will dip by 1.5-2.5% qoq, whereas RCOM willcontinue to register a 6.3% qoq decline.

We expect subscriber growth of 5.0-8.5% qoq for theseoperators, led by Idea.

We expect Airtel to report revenue growth of25.2% qoq on the back of full quarter impact of Zain'sintegration. Idea is expected to post growth of 4.8% qoq,whereas RCOM will likely grow by 2.1% qoq.

We expect EBITDA margins of Airtel, RCOM and Ideato fall by 60bp, 10bp and 17bp, respectively, on a qoqbasis in 2QFY2011E. Airtel's margin fall will be steepbecause of the effect of Zain's integration (which has lowerEBITDA margin of ~27.5%). RCOM will be able toovercome the negative impact of falling ARPU with goodgrowth in global and broadband services.

We continue to maintain our cautious viewon the telecom sector on account of high capexon 3G and BWA auctions, heightened pricingintensity, likely introduction of mobile numberportability (MNP) and uncertain regulatorypolicies (recent TRAI recommendation).However, we believe Airtel, with its low-costintegrated model (owned tower infrastructure),potential opportunity from Africa, highsubscriber/revenue market share andrelatively better key performance indicators(KPIs), will emerge as the winner in the longterm. Thus, we continue to remain positiveThus, we continue to remain positiveThus, we continue to remain positiveThus, we continue to remain positiveThus, we continue to remain positiveon Airtel.on Airtel.on Airtel.on Airtel.on Airtel.

Telecom

OutlookTrend



Automobile

Source: Company; Angel Research

Exhibit 1: Auto index v/s the Sensex

20

40

60

80

100

120

140

160

180

200

220

Apr-07 Aug-07 Jan-08 May-08 Oct-08 Mar-09 Jul-09 Dec-09 May-10 Sep-10

BSE Auto BSE_SENSEX

Commercial vehicles (CV) - Low base supports high growth

CV sales have a direct correlation with the country's GDP andIIP growth, which were caught in a cyclical downturn overFY2008-09. With GDP estimated to register a CAGR of ~8.5%over FY2010-12E, we expect demand for CVs to remainbuoyant. CV volumes witnessed good recovery in FY2010 andhave registered 48.1% yoy growth YTD in FY2011. Goingforward, we believe that further pick-up in domestic industrialactivities would support positive growth in CV demand. Thus,CV sales are estimated to record a CAGR of 13-14% over thenext two years. As most of the catalysts were in favour of the CVindustry in 2QFY2011, Tata Motors recorded substantial growthof 24% yoy in CV volumes, aided by 40.5% yoy and 13.2% yoygrowth in M&HCV and LCV, respectively.

For 2QFY2011, we expect our auto universe to post steadyrevenue growth of ~31% yoy, aided by strong ~25% yoy volumegrowth. Revenue growth is expected to be led by CV makers,Tata Motors and Ashok Leyland (strong recovery in volumes ona low base) and Bajaj Auto (BAL, new product launches andlow base effect). We expect Hero Honda (HH) to emerge as akey laggard in terms of revenue growth, as we model lowergrowth on a high base and intensifying competition. For mostcompanies, the focus continues to be on volume growth. Goingahead, near-term growth would be determined by festive seasonsales pick-up; while in the long run, industry growth would beaided by success of new launches, rising income levels andeasy availability of finance both in the two-wheeler andfour-wheeler segments.

…OPM pressures to increase

Input costs have spiraled in the last six months, following thespurt in steel, rubber and aluminum prices. Further, owing tochange in emission norms, production cost per vehilce for mostof the industry players has been increasing. Thus, the marginof our auto universe is expected to contract substantially by~450bp to reflect higher input costs. All these factors combinedwould result in an ~8% yoy decline in earnings. Thus, playersare expected to register a yoy decline in net profit in 2QY2011on a yoy increase in input cost.

Interest rate, fuel price and commodity price trend

Industry trend suggests that there is a negative correlationbetween auto finance rates and auto volume growth. Autofinance rates had moved down by 200-250bp in FY2010, whichalso supported robust growth during the period. A swift revivalin underlying vehicle sales volume, a benign financeenvironment and an increase in finance penetration andloan-to-value (LTV) ratio are the key factors responsible for theindustry's growth. However, the recent change in the trend ofmonetary measures is expected to increase the cost of borrowingfor consumers over the next six months. Further, the governmenthiked petrol and diesel prices substantially by Rs7.21/litre andRs5.28/litre YTD in 2010, respectively. This has a direct impacton ownership cost and freight operators' profitability; and couldmoderately impact auto volume growth in the medium term.For 1HFY2011, commodity prices in general registered anupturn. On yoy basis, prices of steel and aluminium increasedby around 15-25%; while rubber prices increased by around70%. Although average international crude oil prices remainedmore or less stable throughout the quarter, hike in domesticpetrol and diesel prices increased the cost of other key materialsand transportation for all the companies in our auto universe.

Auto index - Strong 14.5% gain in 2QFY2011

The auto index registered 14.5% jump during 2QFY2011, inline with the Sensex. Sentiment for auto stocks had turned positivein FY2010 on easing concerns over lower volume growthfollowing the various stimuli announced by the government andthe RBI to arrest the declining volumes of the industry. The positiveupturn in volume continued in 1HFY2011 on the back of positiveconsumer sentiment and partially due to advancement of buyingat dealers' desk in anticipation of healthy demand in the festiveseason. Further, the expected increase in price owing to changein emission norms and higher input cost boosted volume growthduring 1HFY2011. Heavyweight, Tata Motors smartlyoutperformed the auto index by 26.5% and 21% in 2QFY2011and 1HFY2011, respectively, post a substantial outperformancein FY2010. However, other heavyweights such as Maruti, M&Mand HH underperformed in 2QFY2011.

27



Automobile

Exhibit 4: BAL, HH, TVS - Quarterly volumesSegmentSegmentSegmentSegmentSegment 2QFY112QFY112QFY112QFY112QFY11 2QFY102QFY102QFY102QFY102QFY10 % chg% chg% chg% chg% chg 1HFY1HFY1HFY1HFY1HFY1111111111 1HFY101HFY101HFY101HFY101HFY10 % chg% chg% chg% chg% chg

Bajaj AutoBajaj AutoBajaj AutoBajaj AutoBajaj Auto 973,779973,779973,779973,779973,779 686,823686,823686,823686,823686,823 41.8 41.8 41.8 41.8 41.8 1,902,1151,902,1151,902,1151,902,1151,902,115 1,234,4851,234,4851,234,4851,234,4851,234,485 54.1 54.1 54.1 54.1 54.1

Motorcycles 858,957 599,737 43.2 1,687,348 1,082,464 55.9

Scooters - 1,840 - 27 3,533 (99.2)

TTTTTotal 2 Wheelersotal 2 Wheelersotal 2 Wheelersotal 2 Wheelersotal 2 Wheelers 858,957858,957858,957858,957858,957 601,577601,577601,577601,577601,577 42.842.842.842.842.8 1,687,3751,687,3751,687,3751,687,3751,687,375 1,085,9971,085,9971,085,9971,085,9971,085,997 55.4 55.4 55.4 55.4 55.4

Three Wheelers 114,822 85,246 34.7 214,740 148,488 44.6

Exports (Inc Above )Exports (Inc Above )Exports (Inc Above )Exports (Inc Above )Exports (Inc Above ) 305,372305,372305,372305,372305,372 224,430224,430224,430224,430224,430 36.136.136.136.136.1 629,271629,271629,271629,271629,271 402,725402,725402,725402,725402,725 56.356.356.356.356.3

Hero HondaHero HondaHero HondaHero HondaHero Honda 1,285,9441,285,9441,285,9441,285,9441,285,944 1,183,2351,183,2351,183,2351,183,2351,183,235 8.7 8.7 8.7 8.7 8.7 2,519,9832,519,9832,519,9832,519,9832,519,983 2,302,2222,302,2222,302,2222,302,2222,302,222 9.5 9.5 9.5 9.5 9.5

TVS MotorsTVS MotorsTVS MotorsTVS MotorsTVS Motors 524,954524,954524,954524,954524,954 393,627393,627393,627393,627393,627 33.433.433.433.433.4 988,788988,788988,788988,788988,788 742,938742,938742,938742,938742,938 33.133.133.133.133.1

Motorcycles 209,006 154,843 35.0 409,364 307,621 33.1

Scooters 124,356 86,239 44.2 219,842 153,489 43.2

Mopeds 181,636 149,307 21.7 341,827 276,460 23.6

Three WheelersThree WheelersThree WheelersThree WheelersThree Wheelers 9,9569,9569,9569,9569,956 3,2383,2383,2383,2383,238 207.5207.5207.5207.5207.5 17,75517,75517,75517,75517,755 5,3685,3685,3685,3685,368 230.8230.8230.8230.8230.8

Exports (Inc Above )Exports (Inc Above )Exports (Inc Above )Exports (Inc Above )Exports (Inc Above ) 58,46058,46058,46058,46058,460 35,08035,08035,08035,08035,080 66.6 66.6 66.6 66.6 66.6 112,504112,504112,504112,504112,504 66,43666,43666,43666,43666,436 69.3 69.3 69.3 69.3 69.3

Source:Company, Angel Research; Note: BAL - Sept. Nos. are estimated

Source: Company; Angel Research; Note: ALL - Sept. Nos. are estimated

Passenger vehicles (PV) - Maruti beats competition

YTD in FY2011, PV sales volume grew by a substantial 28.3%yoy aided by an increase in exports and recovery in domesticdemand. This was supported by a rebound in consumersentiment, which was reflected in improving volumes of thedomestic PV market. Impressive volume growth, low penetrationand low-cost manufacturing base have been attracting globalauto majors to India, who have started launching products forthe Indian market. During 9MCY2010, Volkswagen and Fordlaunched Polo and Figo, respectively, in the dominant A2segment, thereby escalating competition for market leaderMaruti Suzuki. However, Maruti recorded a robust 27.4% and26.2% yoy increase in volumes during 2QFY2011 and1HFY2011, respectively, supported by strong volume tractionin the A2 and C segments.

Two-wheelers - Momentum continues

The two-wheeler segment also registered robust 30.3% yoygrowth YTD in FY2011, aided by 28% growth in the dominantmotorcycle segment. HH reported 8.7% yoy growth in thedomestic market in 2QFY2011, indicating strength of its marketreach and better performance by the rural market. At the sametime, backed by a series of new launches and low base, BALreported 41.8% yoy jump in two-wheeler volumes in 2QFY2011.We believe that though the substantial ownership base of two-wheelers results in reduced headroom for higher growth andincreases dependence on replacement demand to sustainvolumes, rural markets will register better growth on demandarising from the relevant rural population. This is expected tohelp the two-wheeler industry to register around 12-13% CAGRin volumes over the next couple of years.

Auto Ancillaries: To track the auto sector

The auto ancillaries sector, which depends on OEMs for growth,was stuck in the midst of sluggish growth in the domestic marketin FY2009 and a recession-hit global export market. However,revival of domestic auto volumes in FY2010 supported recoveryof the players during the period. Growth of the Indian autocomponent industry is directly linked to growth of the auto sectorand has more than 65% of its domestic sales to OEMs. Thus,recovery of auto sales volume in FY2010 would help the OEMsegment to register a ~13% CAGR over FY2010-12E. Further,an overall increase in vehicle population (recorded a 10% CAGRover FY2000-10E) is expected to support consistent growth inreplacement demand of auto parts and register a 7-8% CAGRover FY2010-12E. The shift in focus of the Indian autocomponent industry to exports has been apparent from the risein its share in the overall turnover to 20% in FY2009(11% in FY1999).

Exhibit 2: TML, ALL - Quarterly volumes

SegmentSegmentSegmentSegmentSegment 2QFY112QFY112QFY112QFY112QFY11 2QFY102QFY102QFY102QFY102QFY10 % chg% chg% chg% chg% chg 1HFY1HFY1HFY1HFY1HFY1111111111 1HFY101HFY101HFY101HFY101HFY10 % chg% chg% chg% chg% chg

TTTTTata Motorsata Motorsata Motorsata Motorsata Motors 198,405198,405198,405198,405198,405 150,377150,377150,377150,377150,377 31.9 31.9 31.9 31.9 31.9 380,116380,116380,116380,116380,116 273,490273,490273,490273,490273,490 39.0 39.0 39.0 39.0 39.0

M&HCV 53,435 38,043 40.5 98,733 67,008 47.3

LCV 65,530 57,865 13.2 127,169 105,223 20.9

T T T T Total CVotal CVotal CVotal CVotal CV 118,965118,965118,965118,965118,965 95,90895,90895,90895,90895,908 24.0 24.0 24.0 24.0 24.0 225,902225,902225,902225,902225,902 172,231172,231172,231172,231172,231 31.2 31.2 31.2 31.2 31.2

Utility Vehicles 9,746 7,856 24.1 19,541 15,973 22.3

Cars 69,694 46,613 49.5 134,673 85,286 57.9

T T T T Total PVotal PVotal PVotal PVotal PV 79,44079,44079,44079,44079,440 54,46954,46954,46954,46954,469 45.8 45.8 45.8 45.8 45.8 154,214154,214154,214154,214154,214 101,259101,259101,259101,259101,259 52.352.352.352.352.3

Exports (Inc Above ) Exports (Inc Above ) Exports (Inc Above ) Exports (Inc Above ) Exports (Inc Above ) 14,45514,45514,45514,45514,455 8,0028,0028,0028,0028,002 80.6 80.6 80.6 80.6 80.6 26,69826,69826,69826,69826,698 13,22213,22213,22213,22213,222 101.9101.9101.9101.9101.9

Ashok LAshok LAshok LAshok LAshok Leylandeylandeylandeylandeyland 21,63721,63721,63721,63721,637 14,30114,30114,30114,30114,301 51.3 51.3 51.3 51.3 51.3 43,03743,03743,03743,03743,037 21,99421,99421,99421,99421,994 95.7 95.7 95.7 95.7 95.7

MDV Passenger 6,095 4,192 45.4 11,183 6,677 67.5

MDV Goods 15,368 9,855 55.9 31,406 14,832 111.7

LCV 174 254 (31.5) 448 485 (7.6)

Export (Inc Above )Export (Inc Above )Export (Inc Above )Export (Inc Above )Export (Inc Above ) 2,2552,2552,2552,2552,255 1,6951,6951,6951,6951,695 33.033.033.033.033.0 4,1954,1954,1954,1954,195 2,5982,5982,5982,5982,598 61.561.561.561.561.5

Exhibit 3: Maruti, M&M - Quarterly volumes

SegmentSegmentSegmentSegmentSegment 2QFY112QFY112QFY112QFY112QFY11 2QFY102QFY102QFY102QFY102QFY10 % chg% chg% chg% chg% chg 1HFY1HFY1HFY1HFY1HFY1111111111 1HFY101HFY101HFY101HFY101HFY10 % chg% chg% chg% chg% chg

Maruti SuzukiMaruti SuzukiMaruti SuzukiMaruti SuzukiMaruti Suzuki 313,654313,654313,654313,654313,654 246,188246,188246,188246,188246,188 27.427.427.427.427.4 596,978596,978596,978596,978596,978 472,917472,917472,917472,917472,917 26.226.226.226.226.2

Total Passenger Cars 277,118 208,311 33.0 517,016 404,343 27.9

MUV Gypsy, Vitara 818 772 6.0 3,807 2,155 76.7

Domestic 277,936 209,083 32.9 520,823 406,498 28.1

ExportsExportsExportsExportsExports 35,71835,71835,71835,71835,718 37,10537,10537,10537,10537,105 (3.7) (3.7) (3.7) (3.7) (3.7) 76,15576,15576,15576,15576,155 66,41966,41966,41966,41966,419 14.7 14.7 14.7 14.7 14.7

M&MM&MM&MM&MM&M 137,637137,637137,637137,637137,637 113,892113,892113,892113,892113,892 20.8 20.8 20.8 20.8 20.8 269,879269,879269,879269,879269,879 220,146220,146220,146220,146220,146 22.6 22.6 22.6 22.6 22.6

Domestic Auto 87,444 70,798 23.5 165,762 132,522 25.1

Exports 4,685 2,612 79.4 8,460 3,757 125.2

Domestic Tractor 42,287 38,648 9.4 90,004 80,611 11.7

Exports 3,221 1,834 75.6 5,653 3,256 73.6




Analyst - VAnalyst - VAnalyst - VAnalyst - VAnalyst - Vaishali Jajoo/Yaishali Jajoo/Yaishali Jajoo/Yaishali Jajoo/Yaishali Jajoo/Yaresh Karesh Karesh Karesh Karesh Kothariothariothariothariothari

Automobile

Exhibit 5: Quarterly estimates - Automobile Rs cr

Source: Company, Angel Research; Note: Price as on October 1, 2010, Note: @Adjusted for extraordinary items;* FY2010-12E EPS on consolidated basis

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTaaaaargrgrgrgrgeeeeettttt Reco.Reco.Reco.Reco.Reco.

(Rs)(Rs)(Rs)(Rs)(Rs) 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E chg bpchg bpchg bpchg bpchg bp 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (Rs)(Rs)(Rs)(Rs)(Rs)

Ashok Leyland 75 2,559 62.2 10.0 (53) 134.4 51.7 1.01 51.7 2.9 4.5 5.4 26.0 16.7 14.0 - Neutral

Bajaj Auto@ 1,544 3,940 41.0 19.6 (243) 608.4 51.0 21.0 51.0 58.8 79.6 93.7 26.2 19.4 16.5 - Neutral

Hero Honda 1,844 4,435 9.8 13.9 (445) 509.7 (14.6) 25.5 (14.6) 104.2 113.7 125.7 17.7 16.2 14.7 - Neutral

Maruti 1,483 8,781 24.6 9.7 (307) 516.0 (9.5) 17.9 (9.5) 83.7 82.8 102.5 17.7 17.9 14.5 1,640 Accumulate

M&M @ 714 5,351 19.8 14.9 (338) 538.0 (5.7) 9.5 (8.9) 35.1 38.3 43.6 20.3 18.6 16.4 778 Accumulate

Tata Motors @* 1,119 11,314 42.8 10.9 (229) 496.3 (31.9) 8.7 (38.7) 18.1 123.9 135.3 61.7 9.0 8.3 1,214 Accumulate

TVS Motors 74 1,573 41.0 6.9 134 52.5 113.7 1.1 113.7 2.3 4.5 5.9 31.4 16.5 12.6 - Neutral

Exhibit 6: Quarterly estimates - Auto Ancillary Rs cr

Source: Company, Angel Research, Price as on October 1, 2010, Note: * Consolidated Results; # December year ending; ^ September year ending; @ FY2010-12E EPS onconsolidated basis and adjusted for FCCB interest after tax



Auto Axle^ 517 206 115.9 14.0 (151) 15.8 126.4 10.4 126.4 6.4 33.2 38.5 80.9 15.6 13.4 578 Accumulate

Bharat Forge& 371 619 47.3 24.6 62 62.3 132.1 2.8 132.1 (2.8) 12.2 17.5 - 30.4 21.2 - Neutral

Bosch India# 6,214 1,739 34.8 17.4 (223) 205.1 5.3 64.8 4.4 168 258 316 37.0 24.1 19.7 6,766 Accumulate

Exide Industries 164 1,198 26.0 21.8 (416) 161.4 7.8 1.9 1.5 6.3 7.7 8.9 26.0 21.2 18.5 171 Accumulate

FAG bearing# 847 274 34.3 18.9 643 32.4 95.6 19.5 95.6 39.4 70.9 77.6 21.5 11.9 10.9 931 Accumulate

Motherson Sumi* 185 1,893 19.2 9.7 206 62.6 318.3 1.7 297.0 6.2 8.4 11.2 29.7 22.0 16.4 - Neutral

Apollo Tyres& 84 1,143 (6.3) 10.4 (599) 42.1 (58.8) 0.8 (58.8) 13.0 7.9 10.8 6.5 10.6 7.8 - Neutral

Europe and US contribute around 66% to the sector's exportrevenue. Economic slowdown has been adversely impactingvehicle sales in these markets in the last two years. However,with these markets now showing signs of a revival, exportvolumes are expected to recover in FY2011-12E. At the end ofFY2009, auto component players were finding it difficult to makefuture projections, as two of their key markets, the OEM andreplacement markets, had been hit by poor demand andinstability in final product prices, which were trendingdownwards. However, the industry is now recovering onbetter-than-expected revival in the domestic market andmarginal improvement in exports. Companies in thesubsegments of the auto components sector (tyres, bearingsand batteries), with larger share of revenue from the replacementand domestic markets, have been less affected than those thatsupply exclusively to the overseas market. Broadly, the sector isexpected to deliver good yoy earnings performance in2QFY2011 on improved volumes and better operating leverage.

Outlook

Going ahead, we expect economic upturn to help the auto sector,which includes PVs, CVs and two-wheelers, in registering goodgrowth in the domestic market and decent growth in the exportmarket over FY2010-12E. We estimate overall auto volumes toregister a CAGR of ~13% over FY2010-12E, aided by theimproved business environment for the sector.

Over the longer term, comparatively low penetration levels, ahealthy economic environment and favourable demographicssupported by higher per capita income levels are likely to helpauto companies in sustaining their top-line growth. Corebusiness performance of auto companies improved in FY2010and visibility restored, with substantial 25% yoy and 31% yoygrowth witnessed in volumes in FY2010 and YTD FY2011,respectively. Thus, while this quarter's performance is likely tobe robust on a yoy basis, we expect auto companies to report asequential spurt in revenue on better volumes. Most stocks havebeen positive in the last one year due to better visibility for thesector. We remain positive on the long-term prospects of theIndian auto sector. However, most of the auto stocks registereda sharp run up in the recent past and we advise to Accumulatethe stocks at lower levels, keeping in mind long-term growthprospects of the auto industry. We prefer stocks where strongand improving fundamentals could deliver positive earningssurprises.

Among auto heavyweights, we prefer Maruti Suzuki, Tata Motorsand M&M. Among ancillary stocks, we maintain our positivestance on Exide, Automotive Axles and Fag Bearings, which areavailable at reasonable valuations. Owing to the structural shiftthe tyre industry is going through, we remain positive on thesector and maintain Buy on JK Tyre and Ceat, which areavailable at attractive valuations.

29



Banking

In 2QFY2011, credit declined marginally by 0.6% qoq, evenas incremental deposit accretion was a nominal 1.2% qoq. Thisled to some respite in liquidity (LAF averaging Rs4,400cr positivefrom mid-August to mid-September). However, with marketborrowing from the central and state governments kicking inand incremental credit offtake expected to pick up again, weexpect the requirements for deposit mobilisation to acceleratein 2HFY2011.

Going forward, this is expected to necessitate further deposithikes (25-75bp already done in 2QFY2011). NIMs are likely tobe flattish in 2QFY2011 as higher deposit rates will take aquarter or two to flow through the Profit & Loss A/c. Hence,NIM pressures are expected to increase, especially for smallerbanks, in the coming quarters. In 2QFY2011, G-sec yields alsoincreased across the yield curve, especially at the short end(110bp for one year and 51bp for three years), reflecting highergovernment borrowing; the increase in G-sec yields is expectedto lead to moderate MTM losses for banks. We expect assetquality divergence between PSUs and private banks to continuein 2QFY2011 (with likely improvement from 2HFY2011),though, going forward, the key trend to be monitored is likelyto be on the NIM front.

During 2QFY2011, banking stocks rallied on the back of robust1QFY2011 performance by the entire banking sector andcontinuance of healthy credit demand. BSE Bankex gained 32%sequentially, outperforming the Sensex by 16%. All the banks inour coverage universe, from the private as well as the PSU bankspace, gave robust returns between 16% and 51%. Within ourcoverage universe, UCO Bank gave the highest returns of 51%sequentially, followed by Bank of India and South Indian Bank,with gains of 50% and 49%, respectively.

Mid-cap and small-cap banks within our coverage universeoutperformed the larger ones by 8.6% in the first half of2QFY2011. At that time, we had recommended a switch tolarger banks on account of the rising trend in FD rates; largerbanks subsequently outperformed mid and small-cap banksby 4.8%.

Deposit growth yet to pick up meaningfully

As per data available for the week ended September 11, 2010,total credit increased 19.8% yoy compared to 19.7% yoy in July2010. Banks incrementally lent Rs142,500cr YTD in FY2011(compared to a meager Rs49,000cr during the same periodlast year). Deposit growth stood at 14.8% yoy for the week endedSeptember 11, 2010, compared to 19.8% yoy in thecorresponding period last year. Consequently, credit-depositratio, which bottomed out during 2QFY2010 at 68.8%,improved to 72.1% in 2QFY2011; and the investment-to-depositratio fell to 31.3% in 2QFY2011 from the high of 33.5% in2QFY2010.

Source: RBI, Bloomberg, Angel Research

Exhibit 2:Deposits growth continues to lag credit growth

Exhibit 1: 2QFY2011 - Stock performance

Source: BSE, Angel Research; Prices as on Ocrober 1, 2010

(%)(%)(%)(%)(%) Returns (qoq)Returns (qoq)Returns (qoq)Returns (qoq)Returns (qoq) Returns (yoy)Returns (yoy)Returns (yoy)Returns (yoy)Returns (yoy)

UCOBK 51 107

BOI 50 27

SIB 49 98

OBC 43 96

SBI 42 49

YESBK 33 74

BankexBankexBankexBankexBankex 32 32 32 32 32 45 45 45 45 45

CRPBK 32 65

ICICIBK 32 25

IOB 31 8

HDFCBK 31 52

AXSB 27 60

UNBK 26 64

FEDBK 25 58

INDBK 25 73

PNB 25 64

DENABK 17 61

SensexSensexSensexSensexSensex 16 16 16 16 16 19 19 19 19 19

During the telecom borrowings-led credit spurt in April-June2010, absolute credit growth had exceeded deposit mobilisationby ~Rs90,000cr. The government had borrowed ~Rs7,000crduring this period on account of higher-than-expectedrealisations from 3G and BWA auctions. However, in July-August2010, absolute credit dropped by ~Rs51,000cr (primarily dueto the high base effect of last quarter), while deposits increasedby more than Rs37,000cr and government borrowing cameback on expected lines, with borrowings of ~Rs45,000cr.

Advances growth Deposits growth(%)

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan

-08

Mar

-08

May

-08

Jul-

08

Oct

-08

Dec

-08

Feb

-09

Apr

-09

Jun

-09

Aug

-09

Oct

-09

Dec

-09

Feb

-10

Apr

-10

Jun

-10

Aug

-10



Forex Reserves (US $bn) YoY growth rate (%, RHS)

(10)

(5)

0

5

10

15

20

260

265

270

275

280

285

290

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun

-10

Jul-

10

Aug

-10

Sep

-10

Banking

Going forward, credit demand is expected to sustain at least

above the 19% level. We expect central government's borrowings

to pick up momentum and state government's borrowings to

kick in, leading to excess supply in the market, thus adding to

the upward pressure on yields. Hence, banks will have to

continue to increase deposit rates to mobilise sufficient deposits

to meet the expected increase in credit; this will eventually lead

to higher lending rates.

In 2QFY2011, most of the banks within our coverage universe

raised FD rates by 25-75bp to balance the disparity between

credit and deposit growth. Further, on the last day of the quarter,

banks like SBI and PNB again raised their FD rates by

25-75bp. However, FDs continue to be unattractive to depositors,

leading to a gap between savings and investments, which is

being plugged by the high current account deficit at present.

Also Axis Bank, PNB and a few other banks raised their base

rates by 25-50bp. Accordingly, over the course of the year, we

expect deposit and lending rates to be on an upward trajectory.

Exhibit 4: PExhibit 4: PExhibit 4: PExhibit 4: PExhibit 4: Peak retail fixed deposit rateseak retail fixed deposit rateseak retail fixed deposit rateseak retail fixed deposit rateseak retail fixed deposit rates

Source: Company, Angel Research

(%)(%)(%)(%)(%) 2QFY112QFY112QFY112QFY112QFY11 1QFY111QFY111QFY111QFY111QFY11 ChgChgChgChgChg. . . . . (qoq)(qoq)(qoq)(qoq)(qoq) 2QFY102QFY102QFY102QFY102QFY10 Chg Chg Chg Chg Chg. (yoy). (yoy). (yoy). (yoy). (yoy)

BOI 7.75 7.00 0.75 6.50 1.25

PNB 7.50 7.00 0.50 7.50 -

UNBK 7.80 7.50 0.30 6.75 1.05

OBC 7.50 7.00 0.50 7.75 (0.25)

CRPBK 7.50 7.25 0.25 7.25 0.25

IOB 7.75 7.00 0.75 7.25 0.50

INDBK 7.75 7.25 0.50 7.25 0.50

ICICIBK 7.75 7.75 - 7.75 -

HDFCBK 7.50 7.50 - 7.00 0.50

AXSB 7.35 7.35 - 7.30 0.05

YESBK 7.75 7.65 0.10 7.25 0.50

In the latter half of the quarter, capital inflows have been

relatively strong. Going ahead, capital inflows may increasingly

exceed the large current account deficit on the back of a) global

central banks holding their rates steady, leading to the rising

interest rate differential and b) India's relatively strong GDP

growth outlook.

Going forward, the potential increase in forex reserves may

provide the much needed respite on the M1 front, improving

the liquidity situation. Moreover, the increasing availability of

foreign risk capital would provide a thrust to investment-led

credit demand and M3 growth.


Exhibit 5: Forex reserves increasing...

Large banks better placed to sustain/improve NIMs

Though NIMs are likely to be flattish in 2QFY2011, we believe

rising retail and wholesale FD rates may increasingly lead to

NIM compression in the case of small and mid-cap banks having

relatively lower CASA base. Correspondingly, larger banks that

have high CASA ratios and robust branch expansion, such as

SBI, ICICI Bank, HDFC Bank and Axis Bank, are better placed

to sustain or improve their NIMs.

Higher G-sec yields might lead to moderate MTM losses

During the quarter, yields went up across the yield curve,

especially more so at the shorter end. The benchmark 10-year


Exhibit 6: ...led by robust FII flows

(1,200 )

(800 )

(400 )

0

400

800

1,200

1,600

2,000

Sep

-09

Nov-

09

Jan-

10

Mar-

10

May-

10

Jul-

10

Sep

-10

Repo (-ve) / Reverse Repo (+ve)(Rs bn)

Source: RBI, Angel Research

Exhibit 3: Moderately tight liquidity situation

0.7

6.78.6

10.98.3

18.5

(12.9)

17.6 18.2

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10(YTD)

US $bn

31



Analyst - VAnalyst - VAnalyst - VAnalyst - VAnalyst - Vaibhav Agrawal/Amit Rane/Shrinivas Bhutdaaibhav Agrawal/Amit Rane/Shrinivas Bhutdaaibhav Agrawal/Amit Rane/Shrinivas Bhutdaaibhav Agrawal/Amit Rane/Shrinivas Bhutdaaibhav Agrawal/Amit Rane/Shrinivas Bhutda

Banking

G-sec yield was up by 29bp to 7.84%, while the three-year

G-sec yield was up by 51bp and the one-year G-sec yield

increased by 110bp. Hence, we expect most of the banks under

our coverage to have moderate MTM losses in 2QFY2011.

get a licence, given the synergies in having a common platform

for life insurance and deposits, among others. We believe, while

this will increase competition in the sector, it is unlikely to be

disruptive for existing private banks due to the inherently long

gestation period required to build up a large, granular balance

sheet, especially a retail liability franchise.

Outlook

In our view, the increase in interest rates will not have a negative

effect on the banking sector, as it will be outweighed by the

acceleration in core earnings growth on the back of

improvement in credit growth and fee income coupled with a

sharp reduction in NPA losses.

Hence, on a relative basis, we prefer banks with a high CASA

ratio and lower-duration investment book, given the rising

interest rate scenario. Broadly, this combination is available in

large banks, viz. HDFC Bank, ICICI Bank, Axis Bank and SBI.

We expect these banks to outperform on account of their stronger

core competitiveness and likelihood of credit and CASA market

share gains, driven by strong capital adequacy and robust

branch expansion. Generally, we expect mid-size banks to

underperform on the net interest income front from 2HFY2011

and expect stock returns to reflect the same.

Considering the valuations, our top picks are ICICI Bank among

large-cap banks and Federal Bank among mid-cap banks.

Amongst PSU banks, we like Union Bank, IOB and Indian Bank

on account of their relatively better deposit franchise compared

to peers.


Exhibit 7: Sharper increase in yields at the shorter end

RBI releases discussion paper on new banking licenses

The RBI's discussion paper on new banking licenses examined

the pros and cons of allowing foreign banks, industrial houses

and NBFCs to set up banks. We believe several aspirants would

be able to meet RBI's requirements, such as having Rs1,000cr

of net worth, while the intention appears to grant only limited

licenses at this stage.

If we apply the criteria of an applicant having diversified

shareholding with market capitalisation of more than

Rs10,000cr (hence, strong enough to promote a bank), L&T

Finance appears to be a strong contender. In addition, LIC

Housing, based on its strong track record and parentage, could

30-Sep-10 30-Jun-10 31-Mar-10(%)

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

12 mth T-bill 3 yr Gsec 5 yr Gsec 7 yr Gsec 10 yr Gsec

Exhibit 8: Quarterly estimates (Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr)CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Operating Income Net P Operating Income Net P Operating Income Net P Operating Income Net P Operating Income Net Profit EPS (Rs) Adj Brofit EPS (Rs) Adj Brofit EPS (Rs) Adj Brofit EPS (Rs) Adj Brofit EPS (Rs) Adj BVPS (Rs)VPS (Rs)VPS (Rs)VPS (Rs)VPS (Rs) P/E (x) P/AB P/E (x) P/AB P/E (x) P/AB P/E (x) P/AB P/E (x) P/ABV (x)V (x)V (x)V (x)V (x) TTTTTargetargetargetargetarget Reco.Reco.Reco.Reco.Reco.

(Rs)(Rs)(Rs)(Rs)(Rs) 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (Rs)(Rs)(Rs)(Rs)(Rs)

AXSB 1,572 2,505 13.1 706 32.8 62.1 78.0 104.3 393.8 453.1 532.3 25.3 20.2 15.1 4.0 3.5 3.0 1,703 Accum.

FEDBK 399 516 10.7 127 25.8 27.2 37.1 47.8 273.9 303.4 341.3 14.7 10.8 8.3 1.5 1.3 1.2 427 Accum.

HDFCBK 2,499 3,564 20.3 908 32.1 64.4 85.5 119.9 470.2 535.9 628.5 38.8 29.2 20.8 5.3 4.7 4.0 - Neutral

ICICIBK 1,135 3,761 (2.6) 1,143 9.9 36.1 45.1 61.9 449.8 486.9 519.8 31.4 25.2 18.3 2.5 2.3 2.2 1,350 Buy

SIB* 25 208 (9.9) 63 (13.1) 20.7 2.3 2.9 129.1 14.8 17.3 11.9 10.7 8.4 1.9 1.7 1.4 - Neutral

YESBK 357 419 34.4 138 23.5 14.1 17.0 19.7 91.0 106.4 124.6 25.4 21.0 18.1 3.9 3.4 2.9 - Neutral

BOI 524 2,321 11.3 635 96.4 33.1 52.1 62.9 215.6 274.9 322.8 15.8 10.1 8.3 2.4 1.9 1.6 - Neutral

CRPBK 692 955 18.5 303 3.9 81.6 93.1 105.6 398.3 474.0 554.5 8.5 7.4 6.5 1.7 1.5 1.2 - Neutral

DENABK 109 467 27.6 138 10.3 17.8 18.1 18.9 73.8 99.3 115.1 6.1 6.0 5.8 1.5 1.1 0.9 121 Accum.

INDBK 283 1,248 25.2 377 1.3 35.1 34.9 41.7 154.3 182.0 214.3 8.0 8.1 6.8 1.8 1.6 1.3 300 Accum.

IOB 137 1,113 (3.8) 183 4.0 13.0 15.0 20.1 96.5 123.7 143.5 10.5 9.1 6.8 1.4 1.1 1.0 158 Buy

OBC 466 1,290 48.9 402 48.3 45.3 63.8 66.9 278.0 334.8 386.5 10.3 7.3 7.0 1.7 1.4 1.2 - Neutral

PNB 1,308 3,489 26.2 1,007 8.6 123.9 134.3 151.6 509.1 621.1 740.6 10.6 9.7 8.6 2.6 2.1 1.8 - Neutral

SBI 3,261 11,086 21.4 3,031 21.7 148.0 180.3 227.6 944.5 1,140.6 1,353.3 22.0 18.1 14.3 3.5 2.9 2.4 - Neutral

UCOBK 117 1,149 53.0 165 (20.6) 18.4 16.5 23.1 63.9 88.4 106.8 6.3 7.1 5.1 1.8 1.3 1.1 - Neutral

UNBK 393 1,752 23.5 624 23.5 41.1 51.0 56.5 168.5 209.3 252.2 9.6 7.7 7.0 2.3 1.9 1.6 - Neutral

Source: Company, Angel Research; Price as on October 1 , 2010; Note: * EPS and Book Value for FY10 before face value split from Rs10 to Re1



Capital Goods

Source: C-line, Angel Research

Exhibit 2: Capital goods index: Relative returns to the SensexExhibit 2: Capital goods index: Relative returns to the SensexExhibit 2: Capital goods index: Relative returns to the SensexExhibit 2: Capital goods index: Relative returns to the SensexExhibit 2: Capital goods index: Relative returns to the Sensex

23.5

1.3

17.2

(6.2)

(14.1)

9.4

(9.7)(7.1)

48.6

(10.7)

0.6

(0.6)

3.5

(4.6)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

(%)


Abs. ReturnsAbs. ReturnsAbs. ReturnsAbs. ReturnsAbs. Returns Relative to SensexRelative to SensexRelative to SensexRelative to SensexRelative to Sensex(%)(%)(%)(%)(%) (%)(%)(%)(%)(%)

BSE Sensex 13.4 0.0BSE Cap Goods 8.7 (4.6)A B B 6.8 (6.6)Areva T&D 0.1 (13.3)B H E L 0.9 (12.5)BGR Energy Sys. 3.6 (9.8)Crompton Greaves 21.1 7.7Jyoti Structures (11.1) (24.5)K E C Intl. 4.5 (8.9)Thermax 5.1 (8.3)

Exhibit 1: Sensex v/s capital goods stocks (2QFY2011)Exhibit 1: Sensex v/s capital goods stocks (2QFY2011)Exhibit 1: Sensex v/s capital goods stocks (2QFY2011)Exhibit 1: Sensex v/s capital goods stocks (2QFY2011)Exhibit 1: Sensex v/s capital goods stocks (2QFY2011)

Source: CMIE, Angel Research

Exhibit 3: GDP growth to bounce backExhibit 3: GDP growth to bounce backExhibit 3: GDP growth to bounce backExhibit 3: GDP growth to bounce backExhibit 3: GDP growth to bounce back

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

(%)

On a stock specific basis, Crompton Greaves was the topperformer gaining ~21% in absolute terms and outperformedthe Sensex by ~7.7%. The company consistently gained by over6% during July, August and September 2010. Relatively cheapervaluations together with the company's ability to improve itsprofit margins vis-à-vis its competitors such as ABB and Arevapositively impacted the stock price. Jyoti Structures was the majorloser during the quarter. The scrip lost ~11% in absolute termsand underperformed the Sensex by ~24%. Despite reportingsteady growth in sales and profitability, the scrip lost ground onexpected dilution in equity resulting from the Rs40cr QIP thatthe Board approved in August 2010.

Capital goods index - LCapital goods index - LCapital goods index - LCapital goods index - LCapital goods index - Lagging behindagging behindagging behindagging behindagging behind

While most of the BSE indices registered double-digit growthduring 2QFY2011, the capital goods (CG) index ended thequarter with a meagre growth of 8.7% and underperformedthe Sensex by 4.6%. After reporting marginal negative growthin the first two months of the quarter, the CG index bouncedback in September with ~10% returns in absolute terms. Theindex of industrial production (IIP) numbers released duringSeptember reported a sharp spike in CG production, whichpositively impacted the CG index stocks during the latter partof the quarter. Despite underperforming the broad-based Sensexfor a major portion of the quarter, valuation of the stockscomprising the CG index continue to trade at a premium to theSensex.

The IIP numbers (released during the current fiscal this far) havecontinued to maintain the double-digit growth rate except forJune 2010, when it came in at 5.8%. The better-than-expectedIIP numbers for July 2010 at 13.8% was aided by the all-roundgrowth reported by most sectors especially the CG sector, whichreported 63% yoy growth. We believe that the revival in the IIPnumbers backed by the sustained improvement in the productionof basic as well as intermediate goods is a pointer to the ensuingrecovery in the capex cycle. With major sectors of the economynearing peak capacity utilisation levels, we expect the investmentcycle to pick up in the near term as robust corporate profit andfavourable financing conditions fuel investments. We also notethat the recovery in the CG sector has been more broad-basedand extended to various segments apart from the commercialvehicles segment such as diesel engines, industrial machinery,protection systems, ship building and repair, agricultureimplements, power cables, electric motors, power-driven pumpsand material handling equipment.

Macro indicators showing strength

At a time when major global economies have been strugglingto maintain positive growth, the Indian economy posted a GDPgrowth of 7.4% during FY2010. Notably, despite the partialwithdrawal of the economic stimulus packages, the Indianeconomy grew by 8.8% during April -June 2010, led by therobust 12% growth in industrial production. Having successfullyovercome the effects of the global economic slowdown, theIndian economy is now poised to clock 8.5%+ growth for thecurrent fiscal. We expect the government's focus on infrastructurespending, increase in investment demand by the corporatesand improved consumption to provide further fillip to industrialproduction.

33



Capital Goods


Exhibit 4: IIP growthExhibit 4: IIP growthExhibit 4: IIP growthExhibit 4: IIP growthExhibit 4: IIP growth(%)

(2)

2

6

10

14

18

22

Jul-

07

Oct

-07

Jan

-08

Apr

-08

Jul-

08

Oct

-08

Jan

-09

Apr

-09

Jul-

09

Oct

-09

Jan

-10

Apr

-10

Jul-

10

Key Developments

ABB

At the analyst meet held at its Neelamangala facility during thequarter management indicated that the demand for automationtechnologies has started flowing from the cement and steelsectors, while other process industries such as pulp and paper,chemicals and pharma are likely to place orders in the nearfuture. Management also informed that ~Rs2bn worth of ruralelectrification (RE) projects are yet to be executed and expectsto completely exit from RE projects by 1QCY2011. During thequarter, ABB also acquired the Bangalore-based engineeringand technical consultancy firm, Metsys Engineering andConsultancy Pvt. Ltd (Metsys). Going ahead, managementexpects the acquisition to strengthen its position in the metalsbusiness and enhance its portfolio of offerings in the automationsegment.

Areva T&D India

Subsequent to the acquisition of Areva Global by the Alstomand Schindier consortium, the open offer proceedings wereinitiated to acquire up to 20% of Areva T&D India's equity capitalat Rs295/share. However, the open offer was subsequentlypostponed to be announced at a later date. During the quarter,Areva T&D won orders totaling to Rs390cr from the GMR Group,PGCIL and Indiabulls.

BGR Energy

BGR entered into joint ventures (JV's) with Hitachi, Japan andHitachi Power EuropeGmBH, Germany. The first JV with Hitachi,Japan is for the design, manufacture, installation andcommissioning of supercritical steam turbines and generatorsfor thermal power plants, while the second JV with Hitachi PowerEurope GmbH, Germany is for the supercritical steamgenerators for thermal power plants.

Crompton Greaves

Crompton Greaves (CG) through its subsidiary, CG HoldingsBelgium, would be setting up a second JV company with theSaudi-based EIC group to consolidate its business presence inthe EPC segment in the Middle East. In another such agreement,CG has entered into a JV with ZIV Aplicaciones y Tecnologia,S.L (ZIV)., headquartered in Spain for the manufacture ofsubstation automation systems (in EHV and UHV range).

KEC International

KEC acquired 100% equity in SAE Towers, the largest latticetower manufacturing company in the Americas for US $95mnon a cash-free, debt-free basis. We expect KEC to leverage SAETowers' customer base to develop relationships with the powerutilities and secure EPC contracts in the future, while ensuring

(12)

(5)

2

9

16

23

30

Jul-

07

Oct

-07

Jan

-08

Apr-

08

Jul-

08

Oct

-08

Jan

-09

Apr-

09

Jul-

09

Oct

-09

Jan

-10

Apr-

10

Jul-

10

(%)


Exhibit 7: Intermediate goods component growthExhibit 7: Intermediate goods component growthExhibit 7: Intermediate goods component growthExhibit 7: Intermediate goods component growthExhibit 7: Intermediate goods component growth


Exhibit 6: Basic goods components growthExhibit 6: Basic goods components growthExhibit 6: Basic goods components growthExhibit 6: Basic goods components growthExhibit 6: Basic goods components growth

(2)

1

4

7

10

13

16

Jul-

07

Oct

-07

Jan

-08

Apr-

08

Jul-

08

Oct

-08

Jan

-09

Apr-

09

Jul-

09

Oct

-09

Jan

-10

Apr-

10

Jul-

10

(%)


Exhibit 5: CG component growthExhibit 5: CG component growthExhibit 5: CG component growthExhibit 5: CG component growthExhibit 5: CG component growth

(8)

5

18

31

44

57

70

Jul-

07

Oct

-07

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

Oct

-09

Jan-

10

Apr

-10

Jul-

10(%)



Capital Goods

Analyst - John PAnalyst - John PAnalyst - John PAnalyst - John PAnalyst - John Perinchery/Hemang Thakererinchery/Hemang Thakererinchery/Hemang Thakererinchery/Hemang Thakererinchery/Hemang Thaker

Exhibit 8: Quarterly estimates Rs cr

Source: Company; Angel Research; Note: Price as on October 1, 2010; * December year ending

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.

(Rs.)(Rs.)(Rs.)(Rs.)(Rs.) 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E chg bpchg bpchg bpchg bpchg bp 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (Rs)(Rs)(Rs)(Rs)(Rs)

ABB 926 1,484 1.0 7.5 (185.9) 64 (22.7) 3.0 (22.7) 16.7 23.1 30.6 55.3 40.1 30.2 - Neutral

Areva 293 851 15.0 9.5 90.8 31 38.6 1.3 38.6 8.0 5.6 9.9 36.6 51.8 29.6 218 Sell

BHEL 2,590 8,914 32.5 19.0 69.0 1,143 33.3 23.4 33.3 88.1 109.5 129.9 29.4 23.7 19.9 - Neutral

BGR 773 1,048 125.0 12.0 (30.8) 75 145.8 10.4 145.6 28.0 38.7 48.1 27.7 20.0 16.1 - Neutral

Cromp Greav 317 2,298 5.0 12.5 (151.1) 180 (7.1) 2.8 (7.1) 13.4 13.7 15.4 23.7 23.1 20.6 - Neutral

Kec Intl' 495 1,049 20.0 10.0 (36.6) 44 3.9 8.5 (0.3) 33.3 41.9 49.8 14.9 11.8 9.9 648 Buy

Jyoti Stryctures 137 568 20.0 11.5 10.0 27 29.8 3.3 29.4 11.2 13.5 16.5 12.2 10.2 8.3 215 Buy

Thermax 799 918 35.0 12.0 35.6 75 38.0 6.3 38.0 21.8 29.7 37.4 36.7 26.9 21.4 - Neutral

that the equipment is supplied by SAE Towers. On the domesticfront, KEC acquired Jay Railway Signaling Pvt. Ltd, the railwayssignaling automation systems and technology player. With thisacquisition, KEC is poised to undertake the entire gamut ofactivities under the railway infrastructure segment - civilinfrastructure and track works, railway electrification andsignaling works.

BHEL

BHEL bagged orders from Dainik Bhaskar Power and Visa Powervalued at Rs2,665cr each for installation of 2x600 MW thermalsets. Another significant order was received from Abhijit Infravalued at Rs2,525cr for setting up an 1,080MW thermal plantin Jharkhand.

2QFY2011 expectations

We expect the companies in our CG universe to post cumulativetop-line growth of 25.8% yoy on improving order executionsand favourable base effect. Companies like BGR Energy,Thermax and BHEL are expected to report strong top-line growthof 125%, 35% and 33%, respectively. We expect Jyoti Structuresand KEC International to maintain steady top-line growth of20%, while ABB is expected post subdued growth.

On the operating front, we expect our CG universe companiesto report 16bp expansion in OPM on the back of higheroperating efficiencies. We expect Crompton Greaves to reportmarginal dip in the OPM to 12.5%, while BHEL is expected toreport OPM of 19%. ABB and Areva T&D are likely to continuereporting subdued operating margins owing to increasingcompetitive pressures and additional provisions on unexpiredcontracts.

The expected top-line growth of 25.8% yoy coupled with marginexpansion of 16bp would result in 25% yoy growth in net profit.BGR Energy, Thermax and BHEL are expected to report strongprofitability growth, while ABB is likely to witness erosion inprofit in 2QFY2011 as well.

Outlook

The revival in the IIP numbers during the past few quarters signalsthe strong recovery of the Indian economy in general and thatof the CG industry in particular. Almost all the companies inour CG universe are highly dependent on the generation,transmission and distribution segments of the power sector.

The generation segment has attracted increasing domesticcompetition in addition to the Chinese imports. In transmission,companies like ABB and Areva T&D have consistently lost groundto lower priced imports. However, with the governmentmandating domestic manufacturing to be a pre-requisite to bidfor NTPC and PGCIL tenders, we expect the flow of imports totemporarily slow down thereby benefitting the domesticcompanies. Foreign companies can still enter into JV's with thelocal manufactures and supply equipment manufactured atIndian facilities. However, similar restrictions do not apply tothe private sector projects, which can place direct orders withthe foreign companies. We would therefore keenly watch thequantum and the prices at which the new orders get booked inthe capital equipment industry over the next 8-10 months ratherthan the revenues and profitability posted during the next coupleof quarters.

KEC and Jyoti Structures are expected to benefit from the capexplans of PGCIL and other state utilities. With increasing numberof power projects likely to be commissioned over the next coupleof years, we expect the work orders for setting up transmissionfacilities to be released over the next 6-9 months.

On the valuation front, we believe that most of the CGcompanies in our universe are presently trading at premiumvaluations offering meagre upside from current levels. In sucha scenario, we prefer a stock-specific approach. KEC, JyotiKEC, JyotiKEC, JyotiKEC, JyotiKEC, JyotiStructures and Bluestar figure among our preferred picks.Structures and Bluestar figure among our preferred picks.Structures and Bluestar figure among our preferred picks.Structures and Bluestar figure among our preferred picks.Structures and Bluestar figure among our preferred picks.

35



Cement

Despatches slow down in 2QFY2011

In 2QFY2011, all-India despatches decelerated further, growingby a meager 3.7% yoy as compared to the 7% yoy growthrecorded in 1QFY2011. During 2QFY2011, despatches in thesouthern region continued to suffer as there was not muchimprovement seen in demand from Andhra Pradesh, which isa major cement-consuming state in the region. The northernregion witnessed a slowdown in demand as construction activityrelated to the Commonwealth Games ended. The region alsoexperienced above-normal rains, which paralysed constructionactivities in many areas. The western, eastern and central regionsregistered modest yoy growth of 4.5%, 6% and 7%, respectively.

JulyJulyJulyJulyJuly-August 2010E-August 2010E-August 2010E-August 2010E-August 2010E JulyJulyJulyJulyJuly-August 2009-August 2009-August 2009-August 2009-August 2009 Change (%)Change (%)Change (%)Change (%)Change (%)

North 4.5 4.3 5.0

South 8.6 8.8 (2.0)

West 4.4 4.2 4.5

East 4.4 4.1 6.0

Central 4.0 3.7 7.0

All IndiaAll IndiaAll IndiaAll IndiaAll India 25.925.925.925.925.9 25.125.125.125.125.1 3.73.73.73.73.7

Exhibit 1: Region-wise cement despatches

Source: CMA, Angel Research

Performance of top players

Among the major players, JP Associates emerged the top per-former posting a 55.7% yoy jump in sales volumes in July-Au-gust 2010 to 2.2mn tonnes (1.4mn tonnes) on the back of sub-stantial capacity addition. UltraTech Cement also reported amodest 5.1% yoy increase in despatches. However, ACC andAmbuja Cements reported declines of 8.7% yoy and 0.6% yoy,respectively.

CompanyCompanyCompanyCompanyCompany JulyJulyJulyJulyJuly- August 2010E- August 2010E- August 2010E- August 2010E- August 2010E JulyJulyJulyJulyJuly-August-August-August-August-August GrowthGrowthGrowthGrowthGrowth

20092009200920092009 (yoy(yoy(yoy(yoy(yoy, %), %), %), %), %)

ACC 3.1 3.4 (8.7)

Ambuja Cements 2.8 2.9 (0.6)

JP Associates 2.2 1.4 55.7

UltraTech Cement 5.9 5.6 5.1

Exhibit 2:Cement despatches of leading players

Source: Company, Industry

Price situation

Prices increase in the south

Despite the slowdown in demand, cement prices were hikedtwice in the southern region in September 2010. On an average,prices were higher by Rs60/bag post the two rounds of theprice hike. Post these hikes, price per bag of cement stood at

MarketMarketMarketMarketMarket 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E 2QFY102QFY102QFY102QFY102QFY10 % chg % chg % chg % chg % chg 1QFY111QFY111QFY111QFY111QFY11 % chg% chg% chg% chg% chg.....

(yoy)(yoy)(yoy)(yoy)(yoy) (qoq)(qoq)(qoq)(qoq)(qoq)

Mumbai 245 257 (4.7) 255 (3.9)

Delhi 215 232 (7.3) 225 (4.4)

Chennai 210 240 (12.5) 230 (8.7)

Kolkata 250 275 (9.1) 270 (7.4)

Average price (Rs) 230 251 (8.4) 245 (6.1)

Exhibit 3: Average cement prices (Rs/bag)


Rs260 in Chennai and around Rs200 in Hyderabad. The pricehikes were carried out by cement manufacturers to minimisetheir losses, as cement prices in the region, especiallyAndhra Pradesh, had fallen close to the cost of production.However, we believe this price hike is not sustainable in theregion as it is basically an act aimed at bringing about pricediscipline and has got nothing to do with demand. Cementmakers had increased prices in March 2010, but they soonrolled back the prices due to low demand. Similarly, we expectcorrection of Rs10-15 per bag over the next few weeks on theback of lower utilisation.

Prices in the west to increase in 3QFY2011

Cement prices have been hiked by around Rs20 per 50kg bagfrom October 1, 2010, in Gujarat, while a similar hike is beingconsidered for Maharashtra, including the key market ofMumbai, to cash in on the spurt in demand following themonsoons. Cement price had cracked to around Rs150 inAugust from Rs225 in mid-May, owing to sluggish constructionactivity in the monsoon season and scarcity of sand. With theproposed hike, prices of the commodity will increase to aroundRs180 per bag in Ahmedabad. Companies such asUltraTech Cement, Ambuja Cements, Sanghi Industries,Gujarat Siddhi Cement, Saurashtra Cement, Binani Cement,JK Lakshmi Cement and Jaiprakash Associates will raise theircement prices. In Mumbai, the hike is being considered andmay be implemented in a different way by withdrawing adiscount of at least Rs10 per bag, which is being offered todealers, as per a city-based large cement stockist.

Prices likely to increase in northern and central regions

With regard to the central and northern regions, where priceshad declined by Rs15-25 per bag during the quarter, stockistsand dealers have not yet been intimated about any hike.However, we expect cement players to announce some hikes inthese regions depending on the response to the hikes in thesouthern and western regions.



Cement

Performance on the bourses

During 2QFY2011, all the cement stocks under our coverageexcept Ambuja underperformed the Sensex. India Cements wasthe biggest loser with negative returns of 11.8%.

Coal prices surge

Spot global coal prices were substantially higher on a yoy basisduring the quarter. Average prices of the New Castle Mckloksey6,700kc coal stood at around US $94/tonne in 2QFY2011, asagainst US $71/tonne in 1QFY2010. However, prices werelower by around 5% on a qoq basis. The rise in the price ofcoal, the primary fuel in power generation, is expected to resultin higher power costs for cement manufacturers.

Source: BSE, Angel Research

Abs. ReturnsAbs. ReturnsAbs. ReturnsAbs. ReturnsAbs. Returns Relative to SensexRelative to SensexRelative to SensexRelative to SensexRelative to Sensex(%)(%)(%)(%)(%) (%)(%)(%)(%)(%)

Sensex 13.4 -

ACC 4.2 (9.1)

Ambuja 17.6 4.2

India Cements (11.8) (25.2)

JK Lakshmi (9.8) (23.2)

Kesoram Industries 3.1 (10.3)

Madras Cements (5.1) (18.5)

Ultra Tech (7.7) (21.1)

Exhibit 6: Sensex v/s cement stocks (2QFY2011)

Cement universe to report a 8.6% yoy top-line decline

We expect our cement universe (excluding Grasim Industries)to report a 8.6% yoy top-line decline primarily on account ofthe 10.5% decline in realisations. However, cement despatchesfor companies under our universe are expected to be marginallyhigher by 1.9% yoy. We expect south-based players to be theworst affected in terms of top line, despite the price hikes takenduring the quarter. With the demand situation already poor inthe region, we expect the price hike to cause further pressureon the volume off-take front, thus having minimal impact onthe top-line front.

Among the major players, we expect UltraTech Cement to postmediocre top-line growth of 1.3%. However, we expect ACCand Ambuja Cements to report a 3.5% and 16.3% top-linedecline, respectively. JK Lakshmi Cement is expected to reporta 27% decline due to low capacity utilisation in its plant. IndiaCements and Madras Cements, predominantly south-basedplayers, are also expected to report top-line decline of 16%and 19%, respectively.


Exhibit 7: Realisation per tonne3,847

3,443

2,400

2,800

3,200

3,600

4,000

2QFY10 2QFY11E2QFY10 2QFY11E

(Rs)

Source: IPA, Angel Research

Exhibit 5: Global thermal coal prices

0

50

100

150

200

250

Jan-

05

May-

05

Sep

-05

Jan-

06

May-

06

Sep

-06

Jan-

07

May-

07

Sep

-07

Jan-

08

May-

08

Sep

-08

Jan-

09

May-

09

Sep

-09

Jan-

10

May-

10

Sep

-10

(US$

/tonn

e)

All-India capacity to increase by 23mt in FY2011

ACC’s 3mtpa plant in Chanda, Maharashtra, is expected to beoperational by 3QFY2011. India Cements' 1.5mtpa greenfieldplant at Rajasthan, through its subsidiaryIndo Zinc Ltd., is also expected to be operational in the nextquarter. JP Associates too is expected to add around 3.8mtpaof capacity in 3QFY2011. However, there were no significantcapacity additions during the 2QFY2011. Overall, we expectIndia's cement capacity to grow by 23mt in FY2011 to 290mtpa.

Further, we expect all-India capacity utilisation to bottom out at77% in 2QFY2011 and touch 81% in FY2011.


Exhibit 4: All-India capacity addition

(mtp

a)

146

154

158

167

198

219

267

290

309

7

8

4

9

31

21

48

23

19

0 100 200 300 400

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011E

FY2012E

Year-end Capacity Additions during the year

37



CementCementCementCementCement

Analyst - Rupesh Sankhe / V SrinivasanAnalyst - Rupesh Sankhe / V SrinivasanAnalyst - Rupesh Sankhe / V SrinivasanAnalyst - Rupesh Sankhe / V SrinivasanAnalyst - Rupesh Sankhe / V Srinivasan

CompanyCompanyCompanyCompanyCompany Installed CapacityInstalled CapacityInstalled CapacityInstalled CapacityInstalled Capacity EV/TEV/TEV/TEV/TEV/Tonne (US $)onne (US $)onne (US $)onne (US $)onne (US $)

(mtpa) FY10 (mtpa) FY10 (mtpa) FY10 (mtpa) FY10 (mtpa) FY10 FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E

ACC^ 26.2 135.1 117.9 112.7

Ambuja^ 23.5 166.6 156.5 154.0

India Cements 14.0 67.6 66.0 74.0

JK Lakshmi Cement 5.4 53.1 39.6 41.8

Madras Cements 11.0 95.8 81.0 71.0

UltraTech 23.1 136.8 132.9 117.6

Exhibit 10: EV/tonne analysis

Source: Company, Angel Research; Note: ^December year ending

Operating margins to decline

The operating margin of our cement universe is expected todecline by 1,596bp during the quarter. The margin decline canprimarily be attributed to the substantial reduction in realisationsand the increase in the cost of inputs such as coal and limestone.India Cements is expected to report the highest decline in OPMat 2,510bp. JK Lakshmi is also set to witness a 2,043bp declinein OPM to 12.7%.

2QFY11E (%)2QFY11E (%)2QFY11E (%)2QFY11E (%)2QFY11E (%) 2QFY10 (%)2QFY10 (%)2QFY10 (%)2QFY10 (%)2QFY10 (%) yoy (bp)yoy (bp)yoy (bp)yoy (bp)yoy (bp) 1QFY11 (%)1QFY11 (%)1QFY11 (%)1QFY11 (%)1QFY11 (%) qoqqoqqoqqoqqoq (bp)(bp)(bp)(bp)(bp)

ACC^ 19.4 35.1 (1,565) 29.4 (996)

Ambuja^ 26.0 28.1 (217) 30.8 (485)

India Cements 5.3 30.4 (2,510) 10.3 (505)

JK Lakshmi 12.7 33.1 (2,043) 17.4 (471)

Madras Cements19.5 39.9 (2,043) 27.9 (845)

UltraTech 17.0 30.5 (1,353) 23.5 (652)

Exhibit 9: Margins likely to decline in 2QFY2011

Source: Company, Angel Research; Note: ^December year ending

Outlook and valuation

We expect the demand situation for the cement industry toimprove and pick up from mid-3QFY2011, post the monsoons.We expect a pick-up in rural construction activities in particular,as the country has experienced good monsoons. As for thesituation in the southern region, we believe the demand scenariowould bottom out and expect growth in despatches from3QFY2011. However, we expect the overcapacity to continueto exert pressure on prices in all the regions, till the endof FY2011.

We remain positive on India Cements, Madras Cements andJK Lakshmi Cement due to their attractive valuations (based onEV/tonne and EV/EBITDA multiples). On an EV/tonne basis,India Cements and Madras Cements are trading atUS $74/tonne and US $71/tonne, which are at (18-21%)discount to their replacement value, respectively. Hence,we maintain a Buy rating on them.we maintain a Buy rating on them.we maintain a Buy rating on them.we maintain a Buy rating on them.we maintain a Buy rating on them.

Source: Company, Angel Research; Note: UltraTech’s top line for 2QFY2010includes Samruddhi Cement’s numbers

Exhibit 8: Top-line performance in 2QFY2011 (yoy)(%)

(30)

(20)

(10)

0

10

ACCAmbuja

CemIndia

CementsJK Lakshmi

CementMadras

Cements Ultra Tech


Source: Company, Angel Research; Note: Price as on October 1, 2010; Note: ^December year ending; *Consolidated numbers; Note:* Estimates for merged entity


(Rs.)(Rs.)(Rs.)(Rs.)(Rs.) 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E chg bpchg bpchg bpchg bpchg bp 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (Rs)(Rs)(Rs)(Rs)(Rs)

ACC 1,000 1,671 (16.7) 19 (1,565) 189 (56.6) 10 (56.6) 85.5 63.7 74.5 11.7 15.7 13.4 - Neutral

Ambuja 142 1,585 (4) 26 (217) 263 (17.6) 2 (17.7) 8.0 7.9 8.2 17.8 18.0 17.4 - Neutral

Grasim 2,233 4,397 (13) 20 (1,281) 498 (36.2) 54 (36.2) 337.6 200.2 250.6 6.6 11.2 8.9 - Neutral

India Cem. 119 836 (16) 5 (2,510) (37) (127.1) (1) (124.9) 11.5 2.8 4.2 10.3 41.9 28.0 139 Buy

JK Lakshmi 66 251 (27) 13 (2,043) 1 (97.6) 0 (97.6) 19.7 9.1 11.7 3.4 7.3 5.6 92 Buy

Kesoram Ind. 317 1,350 20 7 (1,034) 9 (88.8) 2 (88.8) 51.9 47.9 66.4 6.1 6.6 4.8 437 Buy

Madras Cem. 115 692 (19) 19 (2,043) 32 (80.9) 1 (80.9) 14.9 6.4 8.8 7.8 18.1 13.1 139 Buy

UltraTech Cem.* 1,089 3,267 112 17 (1,353) 268 6.9 22 6.9 87.8 59.6 74.5 12.4 18.3 14.6 - Neutral



For 2QFY2011, we expect our FMCG universe to post steadytop-line growth of 17.3% yoy aided by robust volume growthand selective price hikes. While the buoyant economy, bountifulmonsoons, new product launches and sustained ad-spends areexpected to drive steady volume growth, selective price hikesacross categories to offset input cost pressures is likely to drivehigher value growth for FMCG companies this quarter (thoughfull impact of price hikes is likely to be felt only in 2HFY2011E).Godrej Consumer is expected to post the highest top-line growththis quarter aided by first quarter of full consolidation of itsrecent acquisitions albeit growth in the domestic business isexpected to remain muted. Amongst others, Dabur, Nestle, ITCand GSK Consumer are expected to post strong top-line growththis quarter.

FMCG

Bountiful monsoon spell good times

Bountiful monsoons (4% above normal till the third week ofSeptember 2010) and better spatial distribution with 31 out ofthe 36 sub-divisions getting excess/normal rainfall comparedto 13 same time last year spell good times for the FMCGcompanies ahead. We believe the same will positively impactagri-dependent input cost companies like Marico, Nestle andGSK Consumer as it will help stem an increase in the rawmaterial costs. Companies like HUL, Colgate, Godrej Consumerand ITC will benefit from the increase in demand, as goodmonsoons would cool food inflation, thereby increasing buyingpower, especially among the low/middle income group (spend~60% of the earnings on groceries).

Input costs pose near-term concerns

In agri-commodities, while wheat and sugar are benign otherslike barley and tea have witnessed sharp surge qoq. However,milk and coffee are finally showing signs of cooling and tobaccois down 24% yoy. Among others, all vegetable oils haveregistered ~10-20% spike qoq (only exception being saffloweroil) and copra has risen a steep 21% rise qoq.

Going ahead, we expect agri-commodities to show signs ofeasing due to good monsoons. However, prices of crude-basedinputs tend to follow the increase in crude oil prices with a lag.Hence, we expect vegetable oils and crude linked derivatives torise going ahead.

Price hikes to neutralise input cost increase

While the last several quarters witnessed FMCG companiesundertaking price cuts to battle competition, rising input costpressures are pushing companies to re-work their pricingstrategy by resorting to price hikes and grammage cuts. Webelieve the move will help protect margins, but incrementalmargin gains are less likely.

A step back from head-to-head competition saw both HUL andP&G taking price hikes in detergents. HUL hiked Rin prices by8% in Gujarat and Uttar Pradesh, while P&G indirectly hikedprices by 12% on Tide by reducing the extra grammage (250gmsextra on 1kg). Reeling under the pressure of rising palm oilprices, HUL undertook 4-6% price hike in select SKUs across its

Exhibit 3: Input cost trendCMPCMPCMPCMPCMP yoy (%)yoy (%)yoy (%)yoy (%)yoy (%) qoq (%)qoq (%)qoq (%)qoq (%)qoq (%)

Wheat (Rs/Quintal) 1,244 4 0

Barley (Rs/Quintal) 1,206 44 10

Sugar (Rs/ Quintal) 2,560 (12) 4

Tea (Rs/Kg) 180 27 29

Coffee (US$/Ton) 3,100 36 4

Cocoa (US$/Ton) 2,877 (17) (12)

Milk Liquid (Rs/Ltr) 26 24 4

Palm Oil (MYR/Ton) 2,739 23 11

Copra (Rs/Quintal) 4,350 45 21

Safflower (Rs/ Quintal) 2,200 (6) (1)

Soyabean Oil (Rs/10Kg) 477 12 14

Groundnt Oil (Rs/MT) 89,000 44 20

Coconut Oil (Rs/Quintal) 6,068 29 15

Rice Bran Oil (Rs/MT) 7,300 24 14

Tobacco (Rs/Quintal) 4,239 (24) 3

Caustic Soda (Rs/Kg) 895 (23) 3

Soda Ash (Rs/Kg) 885 3 3

Source: Bloomberg, CMIE, Angel Research

Source: IMD, Angel Research

Exhibit 2: Monsoon Trend for June-Sept

(%)

-2%-1%

3%

-1%

-22%

4%

(30)

(20)

(10)

0

10

0

10

20

30

40

50

2005 2006 2007 2008 2009 2010

Excess RainfallNormal Rainfall

Defecient/ ScantyDeviation from Normal rainfall (RHS)

(No

of

Su

bd

ivis

ion

s)

Source: Company; Angel Research; Note: Nestle, GSKCHL figures - 3QCY2010E

Exhibit 1: Revenue Growth yoy (2QFY2011E)

60.9

20.2 19.0 19.0 18.0 16.3 15.7 15.09.6

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

GC

PL

Dab

ur ITC

Nes

tle

GSK

CH

L

Mar

ico

Col

gate

Asi

anPa

ints

HU

L

(%)

39



FMCG

soaps portfolio and stopped the promotional offer on Lux.Recently, Godrej also followed suit with a 5% price hike in soaps.In the hair care segment, Marico raised prices of Parachutecoconut oil by ~3-5% while Dabur is contemplating a 2-3%price hike across Vatika shampoo and hair oils after atwo year gap. Godrej Consumer has also hiked prices of itshair colours. In F&B categories, ITC has undertaken grammagereduction and price hikes in biscuit packs, Nestle reduced thegrammage on Maggi Noodles by 5gm (first time in two years)and Marico undertook a Rs3/litre price hike in its edible oilbrand, Saffola.

However, while P&G is showing signs of taking a backseat inthe detergents segment, it has taken a 20% price cut in WhisperChoice and a 12% drop in the price of Pampers Active Baby.We believe J&J is likely to follow suit.

Product launches continue unabated

2QFY2011 continues to witness steady rate of new launches bythe FMCG companies particularly in foods & beverages (F&B),personal care and household care segments. In the householdcare category, Jyothy Labs launched new variants under itsmosquito repellent brand, Maxo, in the form of wet wipes andointments. Reckitt Benckiser also revamped its mosquito repellentunder the brand name, Mortein PowerGard. In personalproducts, Emami launched a new range of hair colors underthe brand, Emami Hair Life, Marico launched ParachuteAyurvedic hair oil (test marketed in South) and P&G re-launchedPantene.

During the quarter, maximum action was seen in the F&Bcategory - GSK Consumer launched Lucozade Sport, its sportsdrink from the parent's stable; Marico entered breakfast cerealsby extending Saffola to oats; HUL re-positioned its staples brand,Annapurna on the health platform; Danone launched its rangeof fortified plain and flavoured yogurt, Danone Dahi; HeinzIndia launched Heinz Home Style Chutneys, Heinz Chef Styledsauces, Heinz Kitchen Klassics ready-to-eat meals and instantmixes and Heinz Golden Circle Juices; and Nestle iscontemplating product launches several F&B categoriesincluding breakfast cereals.

M&A activity heating up

While FY2011 began on a strong note with a series ofacquisitions by Godrej Consumer, 2QFY2011 continued themomentum with the biggest deal this quarter being Dabur'sacquisition of Hobi Group of firms, a Turkish personal careproducts firm, for a consideration of US $69mn. On a smallernote, Marico acquired a South African OTC healthcare brandIngwe for Rs10-15cr, and Colgate amalgamated its

wholly-owned subsidiary, CC Health Care Products Pvt Ltd(manufactured toothpowder at Andhra Pradesh).

The FMCG companies have upped the ante for acquisitionsand are targeting both the domestic and internationalcompanies. Hence, while Dabur has taken an in-principleapproval to raise Rs2,000cr to prepare a war-chest foracquisitions, Jyothy Labs completed its QIP raising Rs228cr tofund couple of domestic acquisitions likely to be completed byDecember 2010. Among others, Nestle management statedthat it is mulling acquisitions in India with a view to expand itsproduct line and Godrej Consumer is considering partneringwith PE funds to acquire Kiwi from Sara Lee. However, the mostspeculated deal during the quarter continues to be the chase toacquire Paras Pharma. Media reports suggest Actis (holds 60%in Paras) has put the company on the block and several notableFMCG players like Marico, Dabur and Emami are in the fray.

FMCG outperforms, Heavyweights shine

During 2QFY2011, BSE FMCG Index outperformed the Sensexmarginally by 1.8% driven by sharp rally in heavyweights ITCand HUL which outperformed the Sensex by ~2-4%. While ITCwitnessed sustained buying on account of strong performanceby cigarettes division (expectations of a positive surprise incigarette volumes and strong EBIT growth due to price hikes),HUL staged a comeback after several quarters ofunderperformance attaining near all-time high buoyed by firstsigns of competitive pressures easing (price hikes in detergentsand soaps) and expectations of a better earnings growth.Amongst other top performers, Godrej Consumer (consolidationof recent acquisitions) and Asian Paints (three rounds of pricehikes in last six months and significant capacity expansionsannounced by various paint companies) outperformed theSensex by ~3-4%. Amongst worst performers, were Marico(rising copra prices) and Dabur (had witnessed uptick due tonews-flow on acquisitions which hasn't fructified) whichunderperformed the Sensex by ~11-15%.


Exhibit 4: Relative outperformance to Sensex (2QFY11)

(2.1)

2.5

4.1

12.0

15.4

15.8

15.9

16.8

17.3

15.1

13.4

(5.0

)

- 5.0

10

.0

15

.0

20

.0

Marico

Dabur

Colgate

GSKCHL

HUL

Asian Paints

Nestle

ITC

GCPL

BSE FMCG

Sensex



FMCG

Analyst: Anand Shah / Chitrangda KAnalyst: Anand Shah / Chitrangda KAnalyst: Anand Shah / Chitrangda KAnalyst: Anand Shah / Chitrangda KAnalyst: Anand Shah / Chitrangda Kapur/Sreekanth Papur/Sreekanth Papur/Sreekanth Papur/Sreekanth Papur/Sreekanth P.V.V.V.V.V.S.S.S.S.S


Source: Company, Angel Research; Note: Price as on October 1, 2010; Note: * December year ending; ^ Consolidated



Asian Paints ^ 2,667 1,982 15.0 18.6 (13) 241.2 23.1 26.4 23.1 80.5 95.8 114.4 33.1 27.8 23.3 2,974 Accumulate

Colgate Palmolive 885 564 15.7 21.5 200 103.8 15.8 7.6 15.8 31.1 32.4 38.1 28.4 27.3 23.2 838 Reduce

Dabur India ^ 109 1,019 20.2 20.0 (74) 159.0 14.3 1.8 13.7 2.9 3.4 4.0 37.9 32.1 27.1 - Neutral

GCPL ^ 409 926 60.9 20.9 140 144.4 55.3 4.5 23.3 10.5 14.9 18.7 39.0 27.5 21.9 - Neutral

GSK Consumer * 2,005 584 18.0 16.1 18 72.4 20.7 17.2 20.7 54.7 67.4 81.5 36.6 29.7 24.6 2,118 Accumulate

HUL 310 4,632 9.6 12.8 (165) 556.8 (1.2) 2.6 (1.3) 9.6 10.3 11.8 32.2 30.1 26.3 271 Reduce

ITC 179 5,110 19.0 36.3 47 1,227.4 21.5 3.2 21.5 5.3 6.4 7.4 33.6 28.0 24.3 - Neutral

Marico ^ 129 805 16.3 13.2 (57) 73.2 17.4 1.2 17.4 3.9 4.8 5.8 32.8 26.7 22.1 135 Accumulate

Nestle * 3,346 1,550 19.0 19.9 (39) 212.1 16.1 22.0 16.1 67.9 83.3 101.3 49.3 40.2 33.0 - Neutral

Top-line steady, near-term pressure on margins

For 2QFY2011, we expect our FMCG universe to post steady17.3% growth in top-line aided by a mix of robust volume growthand selective price hikes. Amongst heavyweights, HUL isexpected to post 9.6% yoy growth in top-line (model in ~12%volume growth aided by low base, 1% volume growth in2QFY2010) partially impacted by negative value growth (pricecuts in S&D segment, price hikes to reflect only in 2HFY2011E).Hence, recurring earnings is expected to decline by 1.2% dueto margin pressures (165bp contraction). In case of ITC, wehave modeled in a 19% top-line growth aided by 14.6% yoygrowth in cigarettes (largely price led, model in ~1-2% volumedecline) and steady ~20%+growth in other businesses (exceptpaperboards). Moreover, we expect earnings to grow a robust21.5% yoy driven by 47bp margin expansion (price hikes incigarettes, better margins in other businesses).

Valuations rich, maintain underweight

Most FMCG companies have witnessed a sharp rally in therecent past, and are currently trading at peak valuations(~15-20% premium to their historical averages). While the

long-term consumption story for the FMCG industry remainsintact, we expect both earnings upgrades and P/E re-rating totake a breather from current levels. (Hence, we maintain ourHence, we maintain ourHence, we maintain ourHence, we maintain ourHence, we maintain ourunderweight stance on the sector and recommend selectiveunderweight stance on the sector and recommend selectiveunderweight stance on the sector and recommend selectiveunderweight stance on the sector and recommend selectiveunderweight stance on the sector and recommend selectivestock approachstock approachstock approachstock approachstock approach). Upside risks to our stance include - 1) sustaineddemand conditions due to good monsoons, 2) signs ofcompetitive pressures easing resulting into lower ad-spends and3) emergence of significant pricing power.

Amongst heavyweights, we maintain Neutral on ITAmongst heavyweights, we maintain Neutral on ITAmongst heavyweights, we maintain Neutral on ITAmongst heavyweights, we maintain Neutral on ITAmongst heavyweights, we maintain Neutral on ITC (strongC (strongC (strongC (strongC (strongearnings growth but valuations at premium) and Reduce onearnings growth but valuations at premium) and Reduce onearnings growth but valuations at premium) and Reduce onearnings growth but valuations at premium) and Reduce onearnings growth but valuations at premium) and Reduce onHUL (premium valuations for weak earnings growth unjustified).HUL (premium valuations for weak earnings growth unjustified).HUL (premium valuations for weak earnings growth unjustified).HUL (premium valuations for weak earnings growth unjustified).HUL (premium valuations for weak earnings growth unjustified).Amongst others, while we have upgraded GSK ConsumerAmongst others, while we have upgraded GSK ConsumerAmongst others, while we have upgraded GSK ConsumerAmongst others, while we have upgraded GSK ConsumerAmongst others, while we have upgraded GSK Consumer(Reduce to Accumulate) and Nestle (Reduce to Neutral) as we(Reduce to Accumulate) and Nestle (Reduce to Neutral) as we(Reduce to Accumulate) and Nestle (Reduce to Neutral) as we(Reduce to Accumulate) and Nestle (Reduce to Neutral) as we(Reduce to Accumulate) and Nestle (Reduce to Neutral) as weroll over to CY2012E numbers, we maintain Reduce on Colgateroll over to CY2012E numbers, we maintain Reduce on Colgateroll over to CY2012E numbers, we maintain Reduce on Colgateroll over to CY2012E numbers, we maintain Reduce on Colgateroll over to CY2012E numbers, we maintain Reduce on Colgatedue to weak earnings growth (sharp rise in tax rate) anddue to weak earnings growth (sharp rise in tax rate) anddue to weak earnings growth (sharp rise in tax rate) anddue to weak earnings growth (sharp rise in tax rate) anddue to weak earnings growth (sharp rise in tax rate) anddowngrade Godrej Consumer to Neutral due to sharp run updowngrade Godrej Consumer to Neutral due to sharp run updowngrade Godrej Consumer to Neutral due to sharp run updowngrade Godrej Consumer to Neutral due to sharp run updowngrade Godrej Consumer to Neutral due to sharp run upin stock. Win stock. Win stock. Win stock. Win stock. We continue to maintain Accumulate on Asian Pe continue to maintain Accumulate on Asian Pe continue to maintain Accumulate on Asian Pe continue to maintain Accumulate on Asian Pe continue to maintain Accumulate on Asian Paintsaintsaintsaintsaints(robust volume growth and strong pricing power) and Marico(robust volume growth and strong pricing power) and Marico(robust volume growth and strong pricing power) and Marico(robust volume growth and strong pricing power) and Marico(robust volume growth and strong pricing power) and Marico(strong earnings growth, underperformance provides a good(strong earnings growth, underperformance provides a good(strong earnings growth, underperformance provides a good(strong earnings growth, underperformance provides a good(strong earnings growth, underperformance provides a goodentry point).entry point).entry point).entry point).entry point).

41



Infrastructure

Muted quarter in sight

We expect the infrastructure sector to post muted numbers for2QFY2011 as the second quarter is usually the weakest in anyfiscal due to the monsoons. This year India witnessed bountifulrains (4% above normal) on account of which we expect a delayin the pickup of infrastructure projects. Moreover, order inflowin FY2010 was lop-sided with maximum share of the ordersbagged in the last quarter of the fiscal, which are yet to contributeto revenues. Hence, we expect 2QFY2011 to be subdued onthe revenue front for most construction companies.


Larsen and Toubro (L&T)

We expect L&T to record revenues of Rs8,829cr, a modest yoyjump of 11.5%. Management has guided for revenue growthof 20% for FY2011, which implies growth of ~24% in9MFY2011. On the EBITDA front, we expect margins at 11.4%as against 10.1% in 2QFY2010 on the back of improved marginguidance by management. We project net profit at Rs637.4cr,a modest yoy jump of 13.5%.

IVRCL Infra (IVRCL)

The company is aggressively pursuing BOT projects in the roadsegments owing to which its exposure to the road segment willincrease in the overall order book. We project revenue de-growthof ~8% yoy for 2QFY2011 primarily on the back of theslow-moving orders from Andhra Pradesh (AP). Managementhas guided for a minimum 22% yoy growth in revenues forFY2011, implying a growth of ~30% in 9MFY2011, whichexceeds our expectation of ~25%. We project marginalimprovement in EBITDA margins at 9.3% and net profitde-growth of >30% for the quarter to Rs32.8cr mainly onaccount of higher interest costs and top-line de-growth.

Nagarjuna Construction (NCC)

We project revenue growth of 12.6% yoy for 2QFY2011.Management had guided for revenue growth of ~20% forFY2011 (standalone), which implies growth of 25% in9MFY2011, and we expect the company to deliver as per theguidance given its diversified order book. We project stableEBITDA margins of 10.4% and net profit growth of 16.5% forthe quarter to Rs51.1cr.

Hindustan Construction Company (HCC)

We project marginal ~5% yoy growth in revenues for 2QFY2011impacted by the AP crisis and delay in pick up of the hydroprojects due to heavy rains. We project stable EBITDA marginsat 12.1%, but net profit de-growth of ~50% to Rs10.5cr for thequarter primarily due to higher interest and depreciation costs.

IRB

We estimate revenue growth of 30.7% yoy for 2QFY2011 dueto increase in both the toll and construction revenues. However,EBITDA margins are expected to decline by 424bp given lowertop-line growth compared to its past performance. We projectnet profit at Rs66.9cr in 2QFY2011, a yoy decline of 5.5% .

Key Developments

Temporary lull of awards from NHAI

There has been a lull in the award activity from NHAI over thelast couple of months primarily due to policy and capacity issues.A majority of the projects (mainly annuity projects) have beenstalled primarily due to viability issues. We believe that NHAI isin the process of making changes to the concession agreement,which could potentially include suggestions from the PlanningCommission and require approvals, implying extended timeline.NHAI is also mulling over the proposal of upfront paying 40%of the annuity payment to the contractors and the balance laterin installments. Currently, in the BOT mode where payment islinked to annuity, a private contractor builds the road and laterrecovers the cost from the government in installments aftercompletion of construction. We believe that switching to thenew model where a higher amount would be paid by thegovernment initially could reduce the debt burden on the privatebuilders and in turn enhance viability of the projects.

Lack of a succession plan at the NHAI has also impacted theaward of projects. Appointment of a successor to the outgoingchairman, Brijeshwar Singh, is still pending. In the interim, theministry has asked Brijeshwar Singh, who retired on August 31,2010, to continue for another three months till such time a new


Exhibit 1: Revenue trend (2QFY2011E)

Top-line (Rs cr, LHS) yoy change (%, RHS)

5.2

30.7

(7.6)

33.1 36.0

12.6

37.7

4.9

11.5

(10.0)

-

10.0

20.0

30.0

40.0

0

2,000

4,000

6,000

8,000

10,000

HC

C

IRB

Infr

a

IVRC

LIn

fra

JAL

MPL

NC

C

SEL

Sim

plex

Infr

a.

L&T



Infrastructure

Execution woes persisted due to company/project specific issues,viz. land acquisition, delay in financial closure, etc. However,while we believe that the lull in execution is temporary, theresulting underperformance of the sector has led to attractivestock valuations. Several stocks have limited downside fromcurrent levels owing to which we recommend investors to seizethe opportunity and increase their exposure to the infra sector.

Outlook - Execution trend to reverse

In FY2010, order inflow was high towards the second half ofthe fiscal with the average OB/sales ratio spiking from 3.0x in1HFY2010 to 3.6x by the year end (TTM revenues), which willenter execution phase only in 2HFY2011. It is important to notehere that the second half of a fiscal is a seasonally strong periodfor the infrastructure players and execution usually picks upduring that period. Managements of various companies havealso not reduced their top-line growth guidance for FY2011.Overall, we expect execution to pick up on the back of thefollowing:

Robust order book position

The order book position of most infrastructure players has beenon the rise and the average backlog ratio at 3.6x revenues(TTM) renders strong visibility on the top-line front. Thus,assuming a 36-month average execution period and similarquantum of order inflow over the next three years as in FY2010,the order book position is likely to be substantial and coulddeliver ~20% growth on the top-line front over the mentionedperiod. The companies have also diversified into newer segmentsand geographies, which would de-risk their business model incase of a slow down in any segment or region. Further, a strongbacklog ratio implies that the companies are likely to retaintheir bargaining power and margins would remain stable.

Source: Company, Angel Research: Note: We have includedL&T, HCC, IVRCL Infra, NCC, Patel Engg. and Simplex Infra for calculatingthe average; OB/Sales = OB/TTM revenues

Exhibit 3: 1QFY2011 top-line growth one of the worst

Major C&EPC companies turned in one of their worstperformances on the top-line front (yoy) in 1QFY2011 with theaverage top-line standing at a mere 7.4%, which was muchbelow expectations.


Exhibit 2: Relative under performance to Sensex

chairman is appointed. This delay in the appointment of a newchairman has affected the award of new projects. For instance,out of the 2,873kms of new projects awarded in FY2011,majority of the projects were awarded in the first two months,while the last three months have seen few projects gettingawarded. We believe that NHAI requires to spruce up itsoperational and execution capabilities to avoid bunching ofprojects.

NHAI is also hampered by manpower crunch particularly withthe Detailed Project Reports (DPR) for 7,000km scheduled to bereceived from September 2010. However, these projects willtake at least 2-3 months before reaching the awarding stage,and hence we believe that the slowdown would be temporary.

Sensex v/s infrastructure stocks

The infrastructure stocks have taken a beating in recent times(barring L&T and Sadbhav Engg.) on account of the dismalperformance on the execution front.

13.4

(1.4)

(2.2)

(14.3)

(6.0)

0.9

(17.0)

16.8

(4.1)

13.3

(20.0) (15.0) (10.0) (5.0) - 5.0 10.0 15.0 20.0

BSE Sensex

HCC

IRB Infra

IVRCL Infra

JAL

MPL

NCC

SEL

Simplex Infra.

L&T

38.5

45.4

47.2

43.040.6

47.1

34.2

18.1

9.3

12.5

5.7

18.3

7.4

2.5

2.7

2.9

3.1

3.3

3.5

3.7

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

1QFY

08

2QFY

08

3QFY

08

4QFY

08

1QFY

09

2QFY

09

3QFY

09

4QFY

09

1QFY

10

2QFY

10

3QFY

10

4QFY

10

1QFY

11

Average OB/Sales (x,LHS) Average Top-line growth (%,RHS)

Source: Company, Angel Research; Note: The backlog ratio is calculatedon FY2010 revenues

Exhibit 4: Major C&EPC companies - Order backlog

8,00012,262 16,051 17,406

23,275

107,816

2.5

2.7

3.4

4.8

4.2

2.9

-

1.0

2.0

3.0

4.0

5.0

6.0

-

20,000

40,000

60,000

80,000

100,000

120,000

Patel SI NCC HCC IVRCL L&T

OB (Rs cr, LHS) OB Ratio (x, RHS)

43



Infrastructure

Analyst: Shailesh KAnalyst: Shailesh KAnalyst: Shailesh KAnalyst: Shailesh KAnalyst: Shailesh Kanani / Nitin Aroraanani / Nitin Aroraanani / Nitin Aroraanani / Nitin Aroraanani / Nitin Arora

Funding in place

We believe that the other leg of execution, viz. funding is also inplace with most companies having raised money in the last 12months. Many PE deals and other fund raising plans are alsolined up. We believe that value unlocking at the subsidiary levelwould act as the next catalyst - Sadbhav Engineering is therecent example.

TTTTTailwinds visibleailwinds visibleailwinds visibleailwinds visibleailwinds visible

CY2009 was marred by uncertainty, general elections andliquidity crunch, which slowed the capex to the infrastructuresector. However, with the UPA government back in power,infrastructure is once again in limelight. Changes are particularlybeing witnessed in the road sector, which has the highest C&EPCcomponent (~100%) and also accounts for the second largestshare after power in the Eleventh Five-year Plan. Projects to thetune of ~18,000km are expected to be awarded inFY2011-12E, which is supported by positive policy changes (asper the BK Chaturvedi report). The recent fund raising drive bythe power companies would result in significant capacityadditions in the space creating opportunities for the playersinvolved in the EPC, BoP and transmission related activities. Weexpect pick up in the oil and gas and private capex as well, onthe back of a recovering economy.

Valuation - Available at lower P/E band

Majority of the infrastructure stocks are trading at reasonablevaluations post the quarterly under performance. We believethat improved execution (which the market has been lookingforward to for quite some time) and fund raising at the subsidiarylevel would act as a potential trigger for the next level ofre-rating. At current levels, most infrastructure stocks (exceptL&T) are trading at P/E of 8-12x FY2012E earnings (adjustedfor investments), which we believe are at their lower P/E band.We believe that next leg of the rally would be mainly on accountof execution surprises as current expectations from constructionstocks are low in spite of a strong order book-to-sales position.Besides, the infra sector still offers tremendous 'Infusion-DilutionOpportunity', which will lead to companies trading at 2.0-2.5xP/BV over the longer run owing to higher growth opportunities.We prefer companies that provide a decent blend of growthopportunities, strong management and relatively attractivevaluations.

At the current juncture, we prefer mid-caps to large-caps asthere exists some headroom for factoring in subsidiaryvaluations. Our top picks in the sector are IVRCL Infra,Our top picks in the sector are IVRCL Infra,Our top picks in the sector are IVRCL Infra,Our top picks in the sector are IVRCL Infra,Our top picks in the sector are IVRCL Infra,Nagarjuna Construction and PNagarjuna Construction and PNagarjuna Construction and PNagarjuna Construction and PNagarjuna Construction and Patel Engineering - in sequenceatel Engineering - in sequenceatel Engineering - in sequenceatel Engineering - in sequenceatel Engineering - in sequenceof preference. Our preference reflects our relative comfort onof preference. Our preference reflects our relative comfort onof preference. Our preference reflects our relative comfort onof preference. Our preference reflects our relative comfort onof preference. Our preference reflects our relative comfort onthe execution front, order book position, funding and valuationsthe execution front, order book position, funding and valuationsthe execution front, order book position, funding and valuationsthe execution front, order book position, funding and valuationsthe execution front, order book position, funding and valuationsin the sectorin the sectorin the sectorin the sectorin the sector.....


Source: Company, Angel Research; Note: Price as on October 1, 2010, Note: Target prices are based on SOTP basis; ^Consolidated numbers; *(1) For HCC value of Lavasa andRoad BOT totals to Rs37.4/share; (2) For IRB, investments in BOT and real estate totals to Rs161.5/share; (3) For IVRCL, value of IVRCL Assets and BOT projects totals toRs63.2/share; (4) For JAL, no investments have been adjusted; (5) For Madhucon Projects, Road BOT and other investments total to Rs76/share; (6) For Nagarjuna - value of landbank, BOT projects and investments total to Rs38.6/share;(7) For Sadbhav, its investments in BOT projects total to Rs840/share; (8)For Simplex Infra, there are no majorinvestments in subsidiary; and (9) For L&T, investments in subsidiaries amount to Rs376/share.

CompanyCompanyCompanyCompanyCompany CMPCMPCMPCMPCMP Net SalesNet SalesNet SalesNet SalesNet Sales OPM (%)OPM (%)OPM (%)OPM (%)OPM (%) Net PNet PNet PNet PNet Profitrofitrofitrofitrofit EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) *Adj. P/E (x) *Adj. P/E (x) *Adj. P/E (x) *Adj. P/E (x) *Adj. P/E (x) TTTTTararararargggggeeeeettttt Reco.Reco.Reco.Reco.Reco.

(Rs)(Rs)(Rs)(Rs)(Rs) 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E chg bpchg bpchg bpchg bpchg bp 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY102QFY102QFY102QFY102QFY10 % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (Rs)(Rs)(Rs)(Rs)(Rs)

HCC 61 823 5.2 12.1 66.7 10.5 (49.7) 0.2 (4.1) 1.3 1.6 1.8 17.4 14.8 12.7 - Neutral

IRB Infra^ 266 465 30.7 44.9 (424.0) 66.9 (5.5) 2.0 (5.5) 11.6 12.3 14.5 9.0 8.5 7.2 - Neutral

IVRCL Infra 163 1,150 (7.6) 9.3 42.6 32.8 (32.8) 2.5 (32.8) 7.8 8.8 10.9 12.8 11.4 9.1 216 Buy

Jaiprakash Asso. 124 2,427 33.1 27.2 219.4 118.0 (14.7) 0.6 (14.7) 4.7 4.5 7.6 26.6 27.5 16.3 178 Buy

MPL 149 346 36.0 9.3 (192.8) 8.5 (28.8) 1.2 (29.0) 5.8 7.7 9.8 12.5 9.5 7.4 174 Buy

NCC 158 1,201 12.6 10.4 15.3 51.1 16.5 2.0 7.7 7.8 8.6 9.8 15.3 13.9 12.2 201 Buy

Sadbhav Engg 1,490 255.0 37.7 10.7 (35.1) 10.6 186.6 8.5 186.6 43.0 77.4 89.8 15.1 8.4 7.2 1,702 Accumu.

Simplex Infra 482 1,075 4.9 10.5 11.1 34.1 22.1 6.9 22.2 25.6 33.0 40.9 18.8 14.6 11.8 573 Buy

L&T 2,099 8,829 11.5 11.4 134.5 637.4 13.5 10.4 13.5 47.4 54.9 68.7 35.6 30.7 24.6 - Neutral



Logistics

For 2QFY2011, we expect Concor and GDL to report a declineof 7.2% and 5.4% yoy in their revenue, respectively, due tovolume slippage in the Exim segment on account of operationsbeing halted at Jawaharlal Nehru Port Trust (JNPT) port andheavy monsoon in the northern part of the country. On theother hand, we expect AGL to report strong revenue growth of25.9% yoy on account of the low base effect and improvingECU Line numbers. However, we expect AGL's PAT to remainflat as the company had claimed MAT entitlement in 3QCY2009,which resulted in lower taxes. We expect operating margins toremain stable for our coverage universe. Consequently, weexpect a 10.1% decline in PAT for our coverage universe. Further,hike in haulage charges is detrimental for the rail containersector, which will impact profitability in 2HFY2011.

Oil spill and heavy rains will impact container volumes

As per data released for FY2011 YTD (April-August 2010) bythe Indian Port Association (IPA), container traffic at major portsgrew moderately by 10.2% yoy. The JNPT port, which handles~60% of the country's container volumes, registered volumegrowth of 4.7% yoy for April-August 2010; however, it declinedby 14.8% yoy in August 2010. This was mainly due to thecomplete closure of JNPT for five days after an oil spill from anaccident between two cargo vessels. The port operated at50-60% capacity for nearly a week thereafter, affecting containerthroughput. However, Chennai port, which handles around 17%of the country's container volumes, continued to record strongvolumes, with 31.2% yoy growth in April-August 2010.

For 2QFY2011E, we estimate Concor to post a ~3.0% yoydecline in Exim volumes and GDL to report a 5.8% yoy drop inCFS volumes. However, we expect the country's overall containervolumes to register 10-12% yoy growth at 12 Indian major portsin FY2011E.

Key developments

Hike in haulage charges will impact rail operator's marginsHike in haulage charges will impact rail operator's marginsHike in haulage charges will impact rail operator's marginsHike in haulage charges will impact rail operator's marginsHike in haulage charges will impact rail operator's margins

The Indian Railways (IR) has revised haulage charges forcontainer operators on transportation of five commodities, viz.cement; stone other than marble; iron and steel; alloys andmetals; and petroleum, oil and lubricants. Nearly 20% ofConcor's Exim business and around 25% of domestic businesscomes from the above mentioned commodity categories. Therevision shall be effective from October 1, 2010, till March 31,2011. As per the norms, the train operator will have to declaredetails of the commodities to be transported. If the declarationis found to be misleading, railways will levy four times the highestrate for the commodity and can cancel the operator's license incase of repeated misdeclaration.

We believe this could result in a substantial traffic moving to theroad segment if the operators choose to pass on majority of thehike. However, given the intense competition, the operators maynot be in a position to pass on the hike substantially, whichcould impact profitability for rail container operators for2HFY2011.

Cash infusion and additional rail sidings to boost GDL'srail operations

GDL's subsidiary, Gateway Rail Freight Ltd. (GRFL) has receivedRs300cr via compulsorily convertible preference shares (CCPS)issued to Blackstone under the deal entered between GDL andBlackstone in November 2009. The deal, which valued GRFLat Rs600cr-800cr, entitles Blackstone to a 37.3-49.9% stakeafter five years, depending upon GRFL's operationalperformance.

GRFL plans to use ~Rs215cr for adding another 10 rakes to itscurrent 21 rakes over the next two years. GRFL also plans toincur capex at its Faridabad ICD, which is expected to beoperational by 4QFY2011. Further, GDL would be paid Rs85cr

Exhibit 2: Container traffic - Sustaining post recovery


518538 559

607

553 553 569554

604 608555

654 630649

608640

562

(20)

(10)

-

10

20

30

40

0

100

200

300

400

500

600

700

Apr

-09

May

-09

Jun

-09

Jul-

09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun

-10

Jul-

10

Aug

-10

Container Volumes (LHS) YoY change (RHS)

('000

TEU

s)

(%)

Source: Company, Angel Research; Note: Allcargo-December year ending

Exhibit1: Revenue and PAT estimates for 2QFY2011E

(7.2) (8.7)(5.4)

(22.3)

25.9

0.7

(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

Revenue PAT

(%) Concor Gateway Distriparks Allcargo Logistics

45



Logistics

as consideration for transferring its Garhi ICD land (~78 acres)to GRFL. GRFL constructed two new rail lines/siding at GarhiHarsaru Rail Terminal during 1QFY2011 and commenced itscontainer train operations on these lines in September 2010.This would improve turn-around time and increase per-rake-per-month trips, thereby boosting its top line.

AGL to expand Mundra CFS

AGL has undertaken expansion at its Mundra CFS by setting upa second warehouse of 6,085 sq. mt. vis-à-vis the existingcapacity of a single warehouse of 6,125 sq. mt. with 19,125sq. mt. of paved yard. The warehouse would increase the exportand import handling capacity by 2,000 TEUs (double the existingcapacity) and 1,600 TEUs, respectively, per month. The secondwarehouse would increase total handling capacity, includingexport, import and empty handling, from 4,100 TEUs to 7,700TEUs per month.

Competition and higher haulage charges will impactConcor's Exim growth

Concor's OPM has been declining over the years, havingstabilised at around 25-27% since the last two-three years. Thefall is mainly on account of lower ground rent revenue, inabilityto completely pass on the hike in haulage charges due to intensecompetition and rebates to clients, all of which has pulled downExim performance. We expect Concor's Exim segment to remainsubdued in FY2011 on account of the drop in volumes, owingto the closure of operations at JNPT, slowdown on northernroutes owing to heavy monsoons and lower exports, leading tohigher empties. In addition, the increase in haulage charges byIndian Railways would further dent Exim growth.

current decade increased from 11.5% to 18.0% in FY2010,following increased private participation in handling containerterminals and customer preference in transporting cargo incontainerised form as it reduces handling costs.

While the slowdown in global trade in FY2009 impactedcontainerisation more than the overall cargo traffic, the trendreversed in 2HFY2010 and container traffic is expected tooutperform overall cargo going ahead.


0

5

10

15

20

25

30

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

EXIM growth YoY Container growth YoY

3rd container terminal at JNPT cameinto existence boosting volumes

Slowdown in global trade has impactedcontainer volumes more than overall cargo

(%)

Exhibit 4: Container vol. to exceed cargo vol. in FY2011E


Exim Revenue (LHS) yoy chg (RHS)

(15)

(10)

(5)

0

5

10

15

20

0

100

200

300

400

500

600

700

800

900

Q1

FY0

9

Q2

FY0

9

Q3

FY0

9

Q4

FY0

9

Q1

FY1

0

Q2

FY1

0

Q3

FY1

0

Q4

FY1

0

Q1

FY1

1

(%)

(Rs

cr)

Exhibit 3: Concor’s quarterly Exim revenue trend

Container traffic outperforming overall cargo traffic

Container traffic increased from 3.4mn TEUs in FY2003 to6.9mn TEUs in FY2010, registering an 11% CAGR during theperiod. Meanwhile, cargo at major ports posted a 9% CAGRduring the same period. The share of container traffic in the

Bullish on the container industry on low penetrationand customer preference

Non-bulk cargo, which constitutes ~35% of the total cargo atmajor ports, has the potential to be transported in containerisedform. Earlier, only basic goods were suitable for shipment incontainers, but now most items can be shipped in a container.It is estimated that 75-80% of the total non-bulk cargo can becontainerised. Currently, the level of containerisation in India isat ~51%, compared to 80% globally, which indicates the scopeof growth on account of improved infrastructure. The share ofcontainerisation traffic increased by around 700bp duringFY2007-09 despite the slowdown in trade in FY2009; however,it has tapered down in FY2010. We expect the share ofcontainerisation to sustain at the current level in the near termas it helps to reduce handling costs. However, it is expected toincrease to 62-65% over the next five years.


Exhibit 5: Improving levels of containerisationEXIM traffic at major ports -LHS Non-bulk cargo-LHS

Container share in non bulk cargo -RHS

('000

TE

Us)

(%)

45.2

47.446.2

47.2 47.5

52.2

54.2

51.5

53.7

40

45

50

55

0

100

200

300

400

500

600

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY11

YTD



Analyst: PAnalyst: PAnalyst: PAnalyst: PAnalyst: Param Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salot

Logistics

Sensex v/s. logistics stocks

During 2QFY2011, Sensex has posted a healthy gain of 13.4%.However, during the quarter, GDL, Concor and AGLunderperformed the Sensex by 1,721bp, 1,709bp and 1,822bp,respectively. This was mainly due to the likely impact on volumespost the closure of JNPT port, intense competition suppressingoperating margins and continued weakness in the high-marginexport business. Markets expect the IR freight hike from Octoberto severely impact rail container operator margins and have,thus, begun discounting the same. For GDL, we expect increasedpace of capex post the cash infusion by Blackstone and PATbreakeven in rail business to be the key triggers for stockperformance. AGL's performance shall be largely driven by theuptick in volumes and realisations at its European subsidiaryECU Line, which contributes ~70% to its revenue. This coupledwith euro appreciation could boost AGL's bottom line. Goingforward, we believe Concor's ability to sustain operating marginsalong with market share in rail freight will determine its stockperformance.

Outlook

We believe sustained growth in the Indian economy, with GDPgrowth expected at 8.5-9% over the next two years, as well asemergence of India as a global outsourcing hub, will facilitatethe country's container trade. In the current decade, containertraffic registered a 12% CAGR compared to the 9% CAGR postedby the total traffic at major ports. We expect this trend to continueand container traffic to register an 11% CAGR over the nextfive years, driven by the addition of new container terminalsand increased containerisation.

Improving trade visibility has seen a re-rating of the sector,resulting in a rally in the stocks. We prefer companies thatprovide a decent blend of growth opportunities and are quotingat attractive valuations. AccordinglyAccordinglyAccordinglyAccordinglyAccordingly, we maintain a Reduce, we maintain a Reduce, we maintain a Reduce, we maintain a Reduce, we maintain a Reducerating on Concor as the company is losing its pricing power inrating on Concor as the company is losing its pricing power inrating on Concor as the company is losing its pricing power inrating on Concor as the company is losing its pricing power inrating on Concor as the company is losing its pricing power inthe high-margin Exim segment, coupled with having expensivethe high-margin Exim segment, coupled with having expensivethe high-margin Exim segment, coupled with having expensivethe high-margin Exim segment, coupled with having expensivethe high-margin Exim segment, coupled with having expensivevaluations. Wvaluations. Wvaluations. Wvaluations. Wvaluations. We maintain an Accumulate rating on GDL ande maintain an Accumulate rating on GDL ande maintain an Accumulate rating on GDL ande maintain an Accumulate rating on GDL ande maintain an Accumulate rating on GDL andexpect the company to register a 14.1% EPS CAexpect the company to register a 14.1% EPS CAexpect the company to register a 14.1% EPS CAexpect the company to register a 14.1% EPS CAexpect the company to register a 14.1% EPS CAGR overGR overGR overGR overGR overFY2010-12E on account of being present at strategic locations,FY2010-12E on account of being present at strategic locations,FY2010-12E on account of being present at strategic locations,FY2010-12E on account of being present at strategic locations,FY2010-12E on account of being present at strategic locations,its ongoing expansion plans and breakits ongoing expansion plans and breakits ongoing expansion plans and breakits ongoing expansion plans and breakits ongoing expansion plans and break-----even in the rail businesseven in the rail businesseven in the rail businesseven in the rail businesseven in the rail businessat the Pat the Pat the Pat the Pat the PAAAAAT level. HoweverT level. HoweverT level. HoweverT level. HoweverT level. However, we maintain a Buy rating on A, we maintain a Buy rating on A, we maintain a Buy rating on A, we maintain a Buy rating on A, we maintain a Buy rating on AGL onGL onGL onGL onGL onimproved performance by ECU Line in 2QCY2010 and as it isimproved performance by ECU Line in 2QCY2010 and as it isimproved performance by ECU Line in 2QCY2010 and as it isimproved performance by ECU Line in 2QCY2010 and as it isimproved performance by ECU Line in 2QCY2010 and as it iscurrently trading at reasonable valuations.currently trading at reasonable valuations.currently trading at reasonable valuations.currently trading at reasonable valuations.currently trading at reasonable valuations.


Exhibit 6: Underperforming the Sensex in 2QFY2011

(4.8)(3.8) (3.7)

13.4

(10.0)

(5.0)

0.0

5.0

10.0

15.0

AGL GDL Concor Sensex

(%)


Source: Company, Angel Research; Note: Price as on October 1, 2010; Note: *Calendar year closing



Allcargo* 164 627 25.9 10.6 (106.0) 36.5 0.7 2.8 0.7 9.9 9.9 11.5 16.5 14.2 10.9 195 Buy

Concor 1,306 891 (7.2) 27.0 60.3 186.5 (8.7) 14.3 (8.7) 59.8 64.9 72.5 21.8 20.1 18.0 1,194 Reduce

Gateway Dist. 115 126 (5.4) 24.0 (22.4) 13.3 (22.3) 1.2 (22.3) 7.3 7.5 9.5 15.6 15.3 12.0 123 Accumulate

47



Metals

Metals saw major turning pointsMetals saw major turning pointsMetals saw major turning pointsMetals saw major turning pointsMetals saw major turning points

During 2QFY2011, the ban on iron ore exports and denial oftransport licenses by the Karnataka Government, lower metaldemand due to monsoons, and company specific events stifledthe industry. However, on the positive side, Chinese steelproduction cuts and removal of export rebates restricted theprice fall. In September 2010, steel companies increased flatproduct prices by ~Rs1,000/tonne, with more price hikes onthe anvil.

The BSE Metals Index outperformed the Sensex by 1.3% andgained 14.7% in absolute terms. A series of industry andcorporate events took place during the quarter, which dictatedthe direction for few stocks. In the ferrous space, Tata Steeltopped the charts, outperforming the Sensex by 20.8%, as theTeesside Cast Plant (TCP) deal was consummated. JSW Steeloutperformed the Sensex by 12.2% as the company concludedthe deal with JFE Steel. Mining stocks like Sesa Goa and NMDC,underperformed the Sensex by 20.3% and 14.9%, respectively.On the non-ferrous front, Hindalco outperformed the broaderindices by 23.0%, while Nalco, Sterlite and Hindustan Zincunderperformed the Sensex with losses of 2-20%.

Domestic steel demand forecast revised upwards

The Indian steel ministry has raised its FY2011 forecast for steelconsumption to 10% from the earlier target of 9% on accountof increased demand from the automobile segment. While steelconsumption rose 9.7% in the five months of FY2011 to 24.8mntonnes, steel output increased by a mere 2.7% during the period.

Major events

KKKKKarnataka ban gives miners tough time:arnataka ban gives miners tough time:arnataka ban gives miners tough time:arnataka ban gives miners tough time:arnataka ban gives miners tough time: The KarnatakaGovernment banned the export of iron ore in two orders datedJuly 26 and 28, 2010, restricting the issue of mineral dispatchpermits to mining companies to curb illegal mining. As permedia reports, mining output in Karnataka has been cut by~80%. We expect iron ore sales volumes of Sesa Goa to beseverely impacted in 2QFY2011 as exports from Goa aresignificantly reduced during the monsoons and shipments fromKarnataka are expected to be lower on account of the ban.

Metal MajorsMetal MajorsMetal MajorsMetal MajorsMetal Majors Abs.Abs.Abs.Abs.Abs. Relative toRelative toRelative toRelative toRelative to

Returns (%)Returns (%)Returns (%)Returns (%)Returns (%) Sensex (%) Sensex (%) Sensex (%) Sensex (%) Sensex (%)

Sensex 13.4

BSE Metals 14.7 1.3

SAIL 6.4 (6.9)

Tata Steel 34.2 20.8

JSW Steel 25.6 12.2

Hindalco 36.4 23.0

Nalco (6.3) (19.7)

Sterlite Ind (1.8) (15.1)

Hindustan Zinc 11.3 (2.1)

NMDC (1.5) (14.9)

Sesa Goa (6.9) (20.3)

Exhibit 1: Sensex v/s metal stocks (2QFY2011)


Ferrous sector: Roller coaster ride

Withdrawal of the 9% export rebate on hot-rolled coils and13% rebate on cold-rolled coils with effect from July 15, 2010by the Chinese Government led to lower steel exports fromChina in July and August 2010. Chinese steel exports weredown by 20.5% mom to 4.2mn tonnes in July and 41.1% momto 2.5mn tonnes in August as against 5.3mn tonnes in June.


Exhibit 2: Declining Chinese steel exports…

0.0

1.0

2.0

3.0

4.0

5.0

6.0

(mn

tonnes

)

The decline in Chinese imports helped the domestic steel playersto liquidate their high inventory during the quarter. Moreover,the domestic companies also hiked prices by up toRs1,000/tonne in September 2010. The long product priceshave however been left unchanged.


Exhibit 3: …supported the prices in September

World HRC prices China export HRC prices (FOB)

450

500

550

600

650

700

750

800

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10

(US

$/t

onne)



Outlook - Demand to recover

As per World Steel, global capacity utlisations levels have fallento 73-74% in 2QF20Y11 as compared to 80-82% in 1QFY2011.With the economic scenario improving and low inventory levels,steelmakers are expected to raise prices in October. We believethat steel prices in India have bottomed out in 2QFY2011 andexpect them to remain firm in the coming quarters.

Iron market to remain challenging: Iron market to remain challenging: Iron market to remain challenging: Iron market to remain challenging: Iron market to remain challenging: We believe the short-termoutlook for iron ore remains challenging due to the slowdownin Chinese iron ore imports, which fell to 44.6mn tonnes inAugust, down 13.0% mom and 10.2% yoy. While steelproduction cuts would lower the demand for iron ore in thecoming quarter, Indian iron ore output and exports may fall in3QFY2011 because of a government crackdown on illegal

China shuts 57 blast furnaces:China shuts 57 blast furnaces:China shuts 57 blast furnaces:China shuts 57 blast furnaces:China shuts 57 blast furnaces: From September 4, 2010, Chinashut 57 blast furnaces and production lines after the governmentrestricted power supply to meet its five-year energy efficiencytargets. Approx. 25mn tonnes of steel capacity will besuspended, which in our view is positive as it will curb excessproduction and restrict exports.

Sesa Goa to invest in Cairn India:Sesa Goa to invest in Cairn India:Sesa Goa to invest in Cairn India:Sesa Goa to invest in Cairn India:Sesa Goa to invest in Cairn India: On August 16, 2010,Vedanta, along with Sesa Goa, entered into an agreement withCairn Energy Plc to acquire a 51–60% stake in its Indiansubsidiary, Cairn India, at a price of Rs405 per share. SesaGoa will make a 20% mandatory open offer at Rs355 per share.However, the deal is pending subject to regulatory approvals.Going ahead, we believe the company will have to leverage itsbalance sheet for any potential acquisitions in its iron orebusiness given the cushion of excess cash (80% of FY2010balance sheet) not available.

VVVVVedanta Aluminium denied Niyamgiri mines; Sterlite’s Tedanta Aluminium denied Niyamgiri mines; Sterlite’s Tedanta Aluminium denied Niyamgiri mines; Sterlite’s Tedanta Aluminium denied Niyamgiri mines; Sterlite’s Tedanta Aluminium denied Niyamgiri mines; Sterlite’s Tuticorinuticorinuticorinuticorinuticorinsmelter under trouble:smelter under trouble:smelter under trouble:smelter under trouble:smelter under trouble: On August 24, 2010, the Ministry ofEnvironment and Forests rejected Vedanta Aluminium's (VAL)application for Stage-II forest licence for its Niyamgiri miningproject in Orissa. VAL is a subsidiary of Vedanta Resources (71%)and Sterlite (29%). In our view, the mining denial is a bigdampener for VAL's expansion projects. Recently, onSeptember 29, 2010, the Madras High Court (HC) ordered theclosure of Sterlite's copper smelter at Tuticorin on grounds ofenvironmental concerns. We await more clarity as the SupremeCourt stayed the HC order on October 1, 2010. The next hearingis expected on October 18, 2010.

Corus sells TCorus sells TCorus sells TCorus sells TCorus sells Teesside plant for US $500mn:eesside plant for US $500mn:eesside plant for US $500mn:eesside plant for US $500mn:eesside plant for US $500mn: After months ofnegotiation, Corus finally decided to sell the mothballed TCP toThailand's Sahaviriya Steel. If the deal is successfully concluded,the company expects to restart TCP’s operations in the1HCY2011. We believe the deal is a positive development forTata Steel as TCP’s operations were unviable after its four keyclients walked away from a long-term contract in 2009 (~80%of TCP's business). Further, the decision to mothball the TCPplant had sparked strong political and labour opposition as ithad put at risk jobs of over 700 employees.

JSW Steel finally concludes agreement with JFE Steel:JSW Steel finally concludes agreement with JFE Steel:JSW Steel finally concludes agreement with JFE Steel:JSW Steel finally concludes agreement with JFE Steel:JSW Steel finally concludes agreement with JFE Steel: Followingextensive deliberations after a partnership agreement signedon November 19, 2009, the strategic alliance between JFE Steeland JSW Steel was finally concluded on July 27, 2010. JFESteel will make an initial investment of Rs4,800cr in JSW Steel.The deal has been innovatively structured with options availableto JFE Steel to maintain/increase its stake in the event of futureequity (warrants and FCCBs) dilution. In September 2010, JSWSteel issued convertible debentures to JFE Steel and it proposes

Metals


Exhibit 4: Iron ore prices and inventory in China

(mn

tonnes)

(US

$/t

onne)

0

15

30

45

60

75

90

0

30

60

90

120

150

180

210

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10

Iron ore inventory (RHS) Indian Iron ore 63% Fe, CFR China (LHS)

to utilise the proceeds to repay debt and for its expansion plans.

New mining policy in limbo:New mining policy in limbo:New mining policy in limbo:New mining policy in limbo:New mining policy in limbo: The new draft mining bill approvedon September 17, 2010 by the Group of Ministers requiresminers to share 26% of revenue/profits/equity with the localpeople affected by their mining projects. The proposed bill isexpected to be placed in Parliament for approval during theupcoming winter session. The bill seeks to eradicate the Naxalproblems and fast-track approvals for mining rights. However,it lacks clarity on how the transfer pricing for the captive mineswill be calculated, applicability on the old captive mines whereit is difficult to trace the affected families, and assurance of thedistribution of share to the affected families.

3QFY2011 raw material prices fixed slightly lower:3QFY2011 raw material prices fixed slightly lower:3QFY2011 raw material prices fixed slightly lower:3QFY2011 raw material prices fixed slightly lower:3QFY2011 raw material prices fixed slightly lower: Thesettlement of benchmark coking coal contracts for theOctober-December 2010 quarter was lower by 7.1% at US$209/tonne (US $225/tonne for July-September 2010). In caseof the iron ore negotiations, media reports suggest a cut of10-13% than that of 2QFY2011. During the quarter, averagespot iron ore prices for 63% Fe grade (CFR, China) increasedby a substantial 55.5% yoy to US $143/tonne (US $92/tonne),however it declined 13.9% sequentially.

49



Analyst : PAnalyst : PAnalyst : PAnalyst : PAnalyst : Paresh Jain/Paresh Jain/Paresh Jain/Paresh Jain/Paresh Jain/Pooja Jainooja Jainooja Jainooja Jainooja Jain

Metals

Exhibit 5: Average base metal prices (US $/tonne)


2QFY112QFY112QFY112QFY112QFY11 2QFY102QFY102QFY102QFY102QFY10 yoy %yoy %yoy %yoy %yoy % 1QFY111QFY111QFY111QFY111QFY11 qoq %qoq %qoq %qoq %qoq %

Copper 7,260 5,848 24.2 7,011 3.6

Aluminium 2,090 1,806 15.8 2,092 (0.1)

Alumina 317 270 17.7 335 (5.3)

Zinc 2,015 1,755 14.8 2,020 (0.2)

Lead 2,039 1,921 6.1 1,945 4.8

mining and a ban on exports by the Karnataka Government,thus providing support to the prices.

2QFY2011 expectations:2QFY2011 expectations:2QFY2011 expectations:2QFY2011 expectations:2QFY2011 expectations: During 2QFY2011, we expect salesvolume to see an uptick qoq. While realisations are likely to belower sequentially following the price cuts undertaken in June2010, they are expected to be higher on a yoy basis. We expecttop-line of the companies under our coverage to grow by ~5-13% yoy except for SAIL. Further, due to relatively higher rawmaterial costs, margins of steel companies are likely to contractby 460-640bp yoy except for Tata Steel. Given the negativenews-flow and a seasonally weak quarter for the miningcompanies, we expect iron ore sales volume of Sesa Goa to beseverely hit. However, Sesa Goa is likely to benefit from increasein prices and clock topline growth of 145% yoy. WWWWWe remaine remaine remaine remaine remainpositive on Tpositive on Tpositive on Tpositive on Tpositive on Tata Steel and Godawari Pata Steel and Godawari Pata Steel and Godawari Pata Steel and Godawari Pata Steel and Godawari Powerowerowerowerower.....

Non-Ferrous sector: Prices recover marginally

Metal prices on the LME were weak since the beginning of thequarter on account of policy tightening measures initiated inChina and concerns over demand due to the debt problems inthe Euro zone and slowing economic activity in the US. However,in September 2010 sentiment improved slightly with a firmingtrend after a weak dollar raised commodities appeal as analternative investment.

During the quarter, the average LME prices of aluminium,alumina and zinc fell 0.1%, 5.3%, and 0.2% respectively, whilecopper and lead prices were up 3.6% and 4.8% on qoq basis,respectively. On YTD basis, inventory levels of copper andaluminium, at the LME warehouse, were down 25.5% and 5.9%respectively, but higher by 26.4% and 30.9% for zinc and lead,respectively. However, the base metal prices continued to showa strong yearly performance, primarily due to the lower baseeffect.


Source: Company, Angel Research; Note: Price as on October 1, 2010; Full year EPS calculations based on fully diluted equity * FY2010, FY2011 and FY2012 numbers areconsolidated and quarterly estimates are standalone numbers; JSW Steel quarter EPS calculations excludes shares issue to JFE Steel



Hindalco* 204 5,830 19.2 14.0 157 518 50.4 2.7 33.7 20.5 18.9 20.3 10.0 10.8 10.0 - Neutral

Hind. Zinc 1,111 2,049 14.5 53.2 (525) 966 3.3 22.9 3.3 95.6 96.5 124.7 11.6 11.5 8.9 1,227 Accumulate

JSW Steel* 1,369 5,005 4.7 20.5 (465) 284 (37.2) 13.5 (43.8) 63.8 77.0 99.4 21.5 17.8 13.8 - Neutral

Nalco 407 1,394 22.0 28.1 1,568 284 77.8 4.4 77.8 12.9 15.8 18.7 31.5 25.7 21.8 316 Sell

SAIL 223 9,110 (8.4) 17.6 (640) 994 (40.3) 2.4 (40.3) 16.4 14.0 17.2 13.7 16.0 13.0 - Neutral

Sesa Goa 344 1,320 145.1 63.3 3,495 903 442.4 10.4 442.4 29.2 51.1 48.9 11.8 6.7 7.0 - Neutral

Sterlite Inds 175 5,863 (3.7) 26.3 453 1,065 11.1 3.2 11.1 11.9 14.3 19.7 14.8 12.3 8.9 196 Accumulate

Tata Steel* 668 6,342 12.6 41.1 699 1,742 92.9 19.6 89.3 (25.0) 73.1 80.7 - 9.1 8.3 702 Accumulate

Outlook - Downside limited for prices

In the near term, we believe upside for prices is capped as:a) the Chinese appetite for base metals is expected to be low,and b) the surplus situation for some metals is likely to continue.However, the downside from current levels for some of the metalsis limited as the prices are near the marginal cost of production.

We expect the non-ferrous companies (except Sterlite) to registerpositive growth in top-line owing to surge in the LME prices ona yoy basis. Further, margins are expected to expand by150-1,570bp, except for Hindustan Zinc. WWWWWe recommende recommende recommende recommende recommendAccumulate on Hindustan Zinc.Accumulate on Hindustan Zinc.Accumulate on Hindustan Zinc.Accumulate on Hindustan Zinc.Accumulate on Hindustan Zinc.


Exhibit 6: Base metal inventory levels (Indexed to 100)Exhibit 6: Base metal inventory levels (Indexed to 100)Exhibit 6: Base metal inventory levels (Indexed to 100)Exhibit 6: Base metal inventory levels (Indexed to 100)Exhibit 6: Base metal inventory levels (Indexed to 100)

Copper Aluminium Zinc Lead

0

50

100

150

200

250

Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10



Oil & Gas


Exhibit 2: Natural gas - Henry Hub prices

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan-0

7

Henry Hub Price Average Henry Hub NG Price

Mar-

07

May-

07

Jul-

07

Sep

-07

Nov-

07

Jan-0

8

Mar-

08

May-

08

Jul-

08

Sep

-08

Nov-

08

Jan-0

9

Mar-

09

May-

09

Jul-

09

Sep

-09

Nov-

09

Jan-1

0

Mar-

10

May-

10

Jul-

10

Sep

-10

(US$

/mm

btu

)

On the supply side, as per the IEA's September outlook, theOECD industry stocks rose by 19mnbbl in July 2010 to2,785mnbbl. Thus, end-July demand cover rose to 61.4 days,approaching the record levels of August 1998. Preliminary datapoints to a fifth consecutive monthly build up of 8.7mnbbl inAugust. The global oil supply fell by 0.25mnbpd to 86.8mnbpdin August as the non-OPEC output dipped to 52.4mnbpd onseasonal maintenance in Canada, UK and Russia. However,non-OPEC projections for CY2010 and CY2011 have beenraised marginally to 52.6mnbpd and 52.9mnbpd, respectively.OPEC crude supplies were however lower by 60kbpd in Augustto 29.2mnbpd. The 'call on OPEC crude and stock change' for3QCY2010 has been raised to 29.3mnbpd and then loweredto 28.8mnbpd for 4QCY2010 due to the downward revision inOPEC natural gas liquids (NGLs). The CY2011 'call' is29.2mnbpd, a yoy increase of 0.3mnbpd.

On the demand side, IEA has revised the global oil demand to86.6mnbpd in CY2010 and 87.9mnbpd in CY2011, anincrement of 1.9mnbpd and 1.3mnbpd, respectively. TheCY2010 forecast has been marginally revised higher due tostronger data from the OECD countries. However, IEA believesthat significant downside risk persists arising from fears thatthe world economic recovery could stall.

Average gas prices flat qoq; dips towards end of quarter

Natural gas prices, which were ruling firm (aroundUS $4.5-5/mmbtu) in the latter part of the previous quarter,showed weakness (ruling around US $3.75-4.25/mmbtu)towards end of 2QFY2011. From the highs of US $4.94/mmbturegistered at the beginning of August, Henry Hub natural gasprices touched a low of US $3.74/mmbtu towards the end ofthe month. Average natural gas prices however stood flat qoqat US $4.3/mmbtu on account of firm prices in the first half ofthe current quarter. Thus, natural gas prices, which were onrecovery path through 1QFY2011 and in the first half of2QFY2011, have again given up much of the gains due tosubdued demand and sufficient availability of LNG with increasingshale gas production in the US.


Exhibit 1: WTI Crude, Indian Basket of Crude Oil

WTI Crude Avg. WTI price

Indian Crude oil basket Avg. Indian Crude oil basket

0

25

50

75

100

125

150

Jan

-07

Mar-

07

May-

07

Jul-

07

Sep

-07

Nov-

07

Jan

-08

Mar-

08

May-

08

Jul-

08

Sep

-08

Nov-

08

Jan

-09

Mar-

09

May-

09

Jul-

09

Sep

-09

Nov-

09

Jan

-10

Mar-

10

May-

10

Jul-

10

Sep

-10

(US

$/

bbl)

Prices stabilise, margins mixed

During 2QFY2011, crude prices moved in the narrow range ofaround US $71-83/bbl. Natural gas prices, which were rulingfirm (at around US $4.5-5/mmbtu) in the latter part of theprevious quarter, showed weakness (at aroundUS $3.75-4.25/mmbtu) towards end of 2QFY2011.Petrochemical margins weakened during the quarter followingreduction in cracker margins and subdued PP margins. However,non-integrated PE margins and PVC margins improved duringthe quarter. Refining margins were higher on a qoq basis onaccount of improvement in diesel, SKO and fuel oil cracks.

Crude steady in a narrow rangeCrude prices were stable in the range of US $71-83/bbl duringthe quarter. However, on an average, crude prices fell by 2.5%.During the first fortnight of the quarter, crude prices touchedthe higher end of the range, while in the second fortnight crudeprice touched the lower end of the range. After touching highsof US $83/bbl around the first fortnight of August, it fell andremained subdued after the government data showed anunexpected rise in the US crude and gasoline stockpiles. In fact,inventory increased towards mid-September, despite the weeklong shutdown of the biggest pipeline shipping Canadian crudeto the US, reaffirming the belief that prices would mostly remainrange bound for the rest of the year between US $70- 80/bbl,the preferred level for the OPEC producers. Expectations ofeasing demand growth also weighed on the prices.

OPEC is expected to keep its oil output targets unchanged at itsmeeting in Vienna on October 14, 2010. OPEC has not formallychanged its output policy since agreeing on the record cut inDecember 2008.

The Indian basket of crude averaged at US $75/bbl during2QFY2011 as against the 1QFY2011 average ofUS $78.4/bbl. We maintain our stance of subdued oil prices inthe near term and expect crude to consolidate at current levels,especially owing to the inventory overhang in the OECDcountries and increasing NGL output by OPEC. Thus, crude isexpected to hover at US $75-85/bbl in the visible future.

51



Oil & Gas

Spot LNG prices were subdued on a qoq basis with cargoesbeing sold at US $7.0-8.25/mmbtu. Platts LNG DES West Indianet forward, which adds the cost of freight to Platts LNG FOBMiddle East assessment, has risen ranging betweenUS $7.23/mmbtu in mid-August to a high of US $8.11/mmbtu.Similarly, the forward LNG rates are also trading at similar levels.Notably, in spite of the uptick in demand, the market is expectedto remain amply supplied in 2010-11 as new production inRussia, Yemen, Indonesia and Qatar comes on stream. Thus,we expect spot LNG prices to be subdued going ahead.

Petchem margins weakened, Refining margins improve

Petrochemical margins weakened during the quarter followingreduction in cracker margins and subdued PP margins. However,non-integrated PE and PVC margins improved during thequarter. HDPE and LDPE margins improved during the quarter.

Global refining margins were mixed during 2QFY2011 withgains seen in the Asia markets, while weakness was seen in theUS, Mediterranean and European markets. Improvement in thebenchmark Asian region is on account of improvement in diesel,SKO and fuel oil cracks. Moreover, the margins for the complexrefineries are likely to improve on account of increase in theheavy-light spreads during the quarter. Gasoline and naphthacracks were largely subdued on a qoq basis. The benchmarkSingapore margins are likely to average at aroundUS $4.25-4.5/bbl as against US $3.75-4.0/bbl during1QFY2011. Meanwhile, the BP's generic Refining GlobalIndicator Margin witnessed a decline during the quarter.

Key Developments

Vedanta to buy majority stake in Cairn India

Vedanta Resources Plc entered into an agreement with CairnEnergy Plc to acquire 40-51% stake in Cairn India. The successof the 20% mandatory open offer to minorities will determinethe extent of stake sale by Cairn Energy Plc. The open offer willbe made through Sesa Goa. The all-cash deal is being executedat Rs405/share, wherein Rs355/share will be towards the saleand purchase agreement and the balance Rs50/shareconstituting the non-compete fee. Currently, the deal is pendinggovernment clearance.

The petroleum ministry has also indicated that it would approvethe deal only if it meets the twin criteria of protection of interestsof ONGC and the minority investors, and complete compliancewith the production sharing contract (PSC) that Cairn has withthe PSU. Vedanta's inexperience in the oil sector may also actas a hurdle when it gets down to vetting the deal. However, webelieve that the deal will sail through as ONGC has stated that

it will not make any counter-bid. But, it remains to be seen whatprice the minority shareholders get in the open offer.

RIL's acquisition spree continues

Shale gas acquisition:Shale gas acquisition:Shale gas acquisition:Shale gas acquisition:Shale gas acquisition: RIL, which began its shale gas foray byacquiring 40% stake in Atlas Energy's Marcellus shale acreageand 45% stake in Pioneer Natural Resources' Eagle Ford shaleacreage, acquired a majority 60% stake in its third shale gasasset deal by entering the Marcellus Shale joint venture (JV)with the United States-based Carrizo Oil & Gas, Inc. RIL willpay a total consideration of US $392mn, comprising cash ofUS $340mn and US $52mn towards the drilling carryobligations. The drilling carry obligations provides for 75% ofCarrizo's share of development costs over an anticipatedtwo-year development program. The JV has approximate104,400 net acres to support the drilling of approximately 1,000wells over the next 10 years, with a net resource potential ofabout 3.4Tcfe (2.0Tcfe net to RIL). We believe that this is aconsolidation of RIL's shale-gas position in the US, where themarket is huge and shale resources are plenty. However, thesuccess will depend on how quickly they can produce and rampup and capture a share of the market.

Hospitality foray:Hospitality foray:Hospitality foray:Hospitality foray:Hospitality foray: RIL acquired 14.12% stake in EIH by buyingthe shares from Oberoi Hotels Pvt Ltd and certain otherpromoters of EIH at a total cost of around Rs1,021cr.

Oil & Gas Index underperforms Sensex

On the bourses, the oil & gas index underperformed the Sensexby 17.3% during 2QFY2011. The quarter saw a remarkableshift in winners, with outperformance by the OMCs and gascompanies (not part of the oil & gas index). Significant gainswere seen in Petronet LNG (up 36.6%), Gujarat Gas (up 32.1%)and IGL (up 18.7%). OMCs outperformed the oil & gas indexon subdued crude oil prices leading to check on under-recoveriesand expectations of further oil reforms going ahead. HPCL,BPCL and IOC gained 8.3%, 13.2% and 3.9% respectively,whereas ONGC moved up 6.1% during the quarter. GAIL washowever up by a mere 1.8% as subdued crude price keeps incheck the delta that it enjoys in its petrochemical business. Cairnrecorded robust gains of 10.6%, despite the average crude pricelosing 4.3% during the quarter, mainly on account of Vedanta'sbid to acquire a controlling stake in the company atRs355/share. However, RIL (has weightage of 56.4% in the index)was the biggest drag. RIL lost a substantial 9.3% during thequarter on account of stagnant gas production and subduedrefining and petrochemical margins.



Oil & Gas

Analyst: Deepak PAnalyst: Deepak PAnalyst: Deepak PAnalyst: Deepak PAnalyst: Deepak Pareek / Amit Vareek / Amit Vareek / Amit Vareek / Amit Vareek / Amit Voraoraoraoraora


Source: Company, Angel Research; Note: Price as on October 1, 2010; Note: * Calender year, ^ standalone numbers for quarter and consolidated numbers for full year



Cairn India 338 3,324 1,346.5 79.5 2,658 1,855 295.1 9.8 295.1 5.5 23.2 46.1 61.0 14.6 7.3 - Neutral

GAIL 485 6,944 12.0 21.9 554 942 32.1 7.4 32.1 24.8 29.5 33.3 19.6 16.4 14.6 534 Accumulate

GSPL 112 248 (2.5) 93.7 (222) 99 (10.1) 1.8 (10.1) 7.4 7.7 8.4 15.2 14.5 13.2 120 Accumulate

Gujarat Gas* 402 442 14.0 21.1 285 57 28.5 4.4 28.5 13.6 18.3 21.8 29.6 22.0 18.5 - Neutral

IGL 325 436 59.5 29.8 (701) 70 24.0 5.0 24.0 15.4 17.2 21.1 21.1 18.8 15.4 345 Accumulate

Petronet LNG 109 3,072 (9.8) 8.6 113 119 (1.8) 1.6 (1.8) 5.4 6.4 8.3 20.2 17.1 13.2 116 Accumulate

ONGC ^ 1,406 18,942 24.7 64.2 604 6,198 21.8 29.0 21.8 90.7 114.6 123.3 15.5 12.3 11.4 - Neutral

RIL ^ 1,006 59,654 27.3 16.6 117 5,095 32.3 15.6 32.3 48.6 69.5 87.3 20.7 14.5 11.5 1,260 Buy


Exhibit 3: Relative performance to Sensex

(40.0)

(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Q3'FY09 Q4'FY09 Q1'FY10 Q2'FY10 Q3'FY10 Q4'FY10 Q1'FY11 Q2'FY11

(%)

BSE Sensex BSE Oil & Gas

GAIL'sGAIL'sGAIL'sGAIL'sGAIL's performance on the qoq basis is likely to be driven bythe lower subsidy burden and higher petrochemical salesvolumes. Transmission volumes during the quarter are likely todecline on qoq basis to 111.7mmscmd on account of shutdownof the Panna-Mukta oil and gas fields.

PPPPPetronet LNGetronet LNGetronet LNGetronet LNGetronet LNG is expected to witness growth in volumes on aqoq basis with the company importing Spot LNG cargoes dueto disruption in gas supply from the Panna-Mukta field. Weexpect volumes during the quarter to stand at 102.7 TBTUs.

GSPLGSPLGSPLGSPLGSPL is likely to report 10.1% yoy de-growth in bottom-linedespite higher volumes, as we expect tariff adjustment, which ishappening over the last few quarters to adversely impactprofitability. We expect volumes to increase by 15.9%yoy to36mmscmd during the quarter .

IGL's IGL's IGL's IGL's IGL's CNG volume growth is likely to slow down during thequarter on a high base to around 2.16mmscmd. CNG andPNG volumes during the quarter are expected to increase by10.2% and 73.3% yoy, respectively. We also expectEBDITA/scm to improve on a qoq basis during the quarter onaccount of the full impact of CNG price hike taken in the previousquarter and PNG price hike taken during the quarter (w.e.ffrom July 1, 2010).

Gujarat GasGujarat GasGujarat GasGujarat GasGujarat Gas volumes will continue to be supported by subduedLNG (including 0.6mmscmd sourced from BG) LNG prices andshutdown at the Panna-Mukta field. We expect the company toreport volume of 3.37mmscmd for the quarter, a growth of10.3% yoy and 4.4% qoq. Gross spread is expected to declinemarginally qoq due to higher dependence on LNG followinglower off-take from the Panna-Mukta field.

Overall, 2QFY2011E is likely to be mixed for our universe ofOverall, 2QFY2011E is likely to be mixed for our universe ofOverall, 2QFY2011E is likely to be mixed for our universe ofOverall, 2QFY2011E is likely to be mixed for our universe ofOverall, 2QFY2011E is likely to be mixed for our universe ofstocks.stocks.stocks.stocks.stocks.


ONGC ONGC ONGC ONGC ONGC is likely to report better performance for the quarterdriven by lower subsidy burden on account of subdued crudeoil prices and full impact of deregulation of the petrol pricescoupled with increase in prices of diesel and kerosene.Profitability is also likely to be boosted on account of completeimpact of the gas price hike. For the current quarter, upstreamcompanies are likely to bear 33% of the total subsidy burden,which lends visibility to earnings. For 2QFY2011E, ONGC islikely to report average crude realisation of US $78.4/bbl atthe gross level; we expect the company to bear subsidy ofUS $15.6/bbl leading to net realisation of US $62.8/bbl.

RILRILRILRILRIL is likely to report lacklustre performance on a qoq basisprimarily on account of subdued margins in the petrochemicalbusiness and stagnant gas production, though offset to an extentby an improvement in the refining margins during the quarter.We expect RIL to report average refining margins ofUS $8.0/bbl for the quarter. On the petrochemical front,performance is likely to be flat qoq, with cracker margins andmargins for integrated petrochemical players declining.Production of gas from the KG basin is likely to average ataround 61mmscmd during the quarter.

53



Pharmaceutical

In our coverage universe, among large caps, Ranbaxy gained21.0% on the back of expectation of US FDA and DOJ resolutionin the near future. The company also received unexpectedmarket exclusivity on Aricept. Sun Pharma gained 13.2% oncompletion of Taro Pharma’s acquisition. However DRL, Lupinand GSK Pharma remained flat qoq during the quarter.

Among midcaps, PHL gained 4.2% as the company has closedthe deal with Abbott and is likely to announce one-time specialdividend. Orchid Chemical gained 41.1% during the quarteras its promoter increased its stake in the company, while Ranbaxyexited the stock. However, Cadila remained flat qoq.

Among small caps, Alembic gained 14.0% during the quarteron the back of announcement of de-merger of its pharmabusiness into a separate company.

Key developments

Sun Pharma-Sun Pharma-Sun Pharma-Sun Pharma-Sun Pharma-TTTTTaro saga ends:aro saga ends:aro saga ends:aro saga ends:aro saga ends: During the quarter, Sun Pharmaannounced its acquisition of controlling stake in Taro post theclosure of the tender offer. Consequently, Sun Pharma's stakein Taro would increase to 48.7% (36.6%) with voting rights of65.8% (24%). Further, directors of Sun Pharma and Taro havesettled all outstanding litigations among themselves. Theacquisition of Levitt family's stake would result in an outflow ofUS $37.2mn for Sun Pharma, taking the total investment inTaro to US $165mn (including warrant conversions). We viewthis as a positive development, as Sun Pharma would now getaccess to Taro's dermatology product portfolio in the US andnew geographies, viz. Israel and Canada. For 1HCY2010, Taro

Pharma sector takes a breather

During 2QFY2011, the BSE healthcare (HC) indexunderperformed the BSE Sensex for the first time in the last fourquarters. The HC index surged by only 4.3% as against theSensex, which surged by 13.4%. The underperformance of thesector was on account of its fair valuation.

recorded net sales of US $187mn with OPM of 19.7%. However,pending clarity on Taro's financials (audited financials forCY2008 and CY2009 have not been filed), we have valuedSun Pharma's stake in Taro at Rs85 per share (1x Mcap/Sales).

However, Sun Pharma announced that its wholly ownedsubsidiary, Sun Pharmaceutical Industries (SPI), has receivedwarning letter from US FDA for its manufacturing facility inCranbury, New Jersey, US, with respect to violation of cGMPregulations. The warning letter was issued as a follow up to theinspection, initiated in February 2010, of the aforesaidmanufacturing facility. The facility is used for manufacturing ofcontrolled substances and was part of the acquisition ofAble Labs done in CY2005 by Sun Pharma. However, thecompany has maintained its FY2011 top-line guidance of18-20% growth, as the financial impact seems to be minimal.This is the second facility of the company to have come underUS FDA's scrutiny (earlier US FDA in June 2009 had seizeddrugs manufactured at Caraco's Michigan facility).

Ranbaxy receives unexpected exclusivity for Ranbaxy receives unexpected exclusivity for Ranbaxy receives unexpected exclusivity for Ranbaxy receives unexpected exclusivity for Ranbaxy receives unexpected exclusivity for AriceptAriceptAriceptAriceptAricept: : : : : The USFDA announced that Ranbaxy would have sole 180-daymarketing exclusivity for selling generic Aricept in the US. TheFDA order prohibits Teva from launching Aricept during theexclusivity period. However, the company is yet to receive finalapproval for the product. Further, the company has mixedfortune on the FTF front (launched generic Valtrex on time andhad no approval for Flomax). The product is expected tocontribute Rs17 per share during the exclusivity period, in casethe company receives the final approval from the regulator.

Aurobindo enters into a pact with AstraZeneca:Aurobindo enters into a pact with AstraZeneca:Aurobindo enters into a pact with AstraZeneca:Aurobindo enters into a pact with AstraZeneca:Aurobindo enters into a pact with AstraZeneca: AurobindoPharma (Aurobindo) has entered into a supply agreement withAstraZeneca for the supply of several solid dosage and sterileproducts for emerging markets covering therapeutic segmentssuch as anti-infective, CVS and CNS. We believe the supplyagreement will aid margin expansion for Aurobindo, thusleading to higher capacity utilisation for the company.

Abbott LAbbott LAbbott LAbbott LAbbott Labs to layoff 3,000 employees:abs to layoff 3,000 employees:abs to layoff 3,000 employees:abs to layoff 3,000 employees:abs to layoff 3,000 employees: On the global front,Abbott Labs has announced the restructuring plan related tothe acquisition of Solvay Pharma. As per the plan, it would cutabout 3,000 jobs, of which a vast majority would be from SolvayPharma. Further, Solvay's pharma unit in Marietta, GA, will beshut by end-CY2011, and nearly 500 positions in theNetherlands will be eliminated along with 300 jobs in Germany.The entire plan is likely to be implemented within the next twoyears. We view this as a positive development for the IndianCRAMS sector in the long term, especially for Dishman Pharmaas this would increase more order inflows from Abbott Labs.

Exhibit 1: BSE HC index v/s SensexExhibit 1: BSE HC index v/s SensexExhibit 1: BSE HC index v/s SensexExhibit 1: BSE HC index v/s SensexExhibit 1: BSE HC index v/s Sensex


(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

4Q 'FY09 1Q 'FY10 2Q 'FY10 3Q 'FY10 4Q 'FY10 1Q 'FY11 2Q 'FY11

(%)

BSE HC Index BSE SENSEX



Pharmaceutical

Abbott's contract (ex-Solvay) had contributed ~13% to Dishman'sFY2010 top line.

ANDA approvals for the quarter

During the quarter, Aurobindo received four approvals, theprominent one being the approval for injectable products(Ampicllin and Ampicillin Sulbactam), which would increase thecapacity utilisation at its SSP facilities. Further, Sun Pharma,Aurobindo and Cadila received approvals for Atomoxetine HCL(Strattera), which would lead to shared exclusivity.


The Indian pharmaceutical sector is expected to post modestgrowth on the sales front. We expect our coverage universe toregister 4.7% yoy top-line growth, despite the 3.8% yoyappreciation in rupee against the US dollar on an averageduring the quarter. Lupin is expected to record strong top-linegrowth, driven by the US and domestic segments. We expectDRL to surprise on the PAT level as 2QFY2010 was marred byinventory and goodwill amortisation. DRL is likely to post strongUS sales on the back of increased market share in key genericproducts Lotrel and Prograf. On the mid-cap and small-capfronts, Cadila and Ipca Labs are expected to post strong netsales and profit growth.

On the OPM front, we expect modest expansion for our coverageuniverse on the back of higher employee and SG&A expenses.However, net profit is expected to grow by 10.3% yoy duringthe quarter, as 2QFY2010 was marred by higher interest chargesand one-time expenses.

Exhibit 2: ANDA approvals for selected companiesCompanyCompanyCompanyCompanyCompany Generic productsGeneric productsGeneric productsGeneric productsGeneric products Approvals Approvals Approvals Approvals Approvals

Aurobindo Ranitidine HCL, Atomoxetine HCL,

Ampicillin Sodium, Ampicillin Sulbactam 4

Cadila Pramipexole Dihydrochloride, Atomoxetine HCL 2

DRL Desloratadine, Mycophenolate Mofetil

Orchid Chem Levetiracetam 1

Sun Pharma Tamsulosin HCL, Atomoxetine HCL, Venlafaxine HCL 3

Source: US FDA, Angel Research

Lupin and DRL to outperform

Among the large caps in our coverage universe, for2QFY2011E, Lupin is likely to record 11.7% top-line growth toRs1,245cr, as the company continues to enjoy over 20% marketshare in generic product Lotrel and strong growth on thedomestic formulation front. However, concerns regarding thescale-up of Antara remains. On the operating front, we expectOPMs to expand by 422bp to 19.0%, albeit on low base.However, due to lower other income, we expect net profit togrow by mere 6.9% to Rs172cr (Rs161cr). In 2QFY2010, Lupinreceived Rs25cr licensing income from Salix Pharma. Excludingthe one-time licensing fee, net profit is expected to grow by23.0% yoy.

DRL is expected to post top-line growth of 4.9% to Rs1,897cr,driven by the US market. US is expected to post sales of Rs552cr,up 28.8% yoy, on the back of increased market share in keygeneric products Lotrel and Prograf. Similarly, the company isexpected to witness strong traction in the Indian and Russianformulation businesses. However, the PSAI segment is expectedto post a decline on the back of price fall. The company isexpected to post OPM of 16.7%, up 492bp, as 2QFY2010 wasaffected by inventory write-downs. As a result, the company'snet profit is expected to increase by 25.2% to Rs272cr.

Cipla is expected to post net sales growth of 5.5% to Rs1,447cr,mainly driven by the domestic formulation segment. On theoperating front, OPM (excluding technical know-how fees) isexpected to fall by 73bp to 21.8% due to higher employeeexpenses. Further, net profit is expected to remain flat at Rs273cras top-line growth is offset by the decline in OPM.

During the quarter, we expect Sun Pharma to post muted salesgrowth of 2.4% to Rs1,213cr, as 2QFY2010 was boosted byProtonix sales. Caraco is expected to report sales of US $65mn,primarily driven by the launch of generic Effexor XR tablets. Onthe domestic front, sales are expected to grow at 17.8% toRs555cr. The company's OPM is expected to compress by 375bpto 34.0% as 2QFY2010 margins were boosted by Protonix.Further, net profit is expected to decline by 25.6% to Rs338cron the back of low other income. In 2QFY2010, the companyreported one-time income of US $20mn from Forest Labs onLexapro settlement.

Ranbaxy is expected to post top-line growth of 1.8% to Rs1,746cron the back of its US business, as the company continues tobenefit from generic Valtrex in this quarter also, despiteincreasing competition. Ranbaxy is expected to report OPM of4.7%, an improvement from 3.1% recorded in 3QCY2009. The


Exhibit 3: Sales growth and OPM for 2QFY2011

Sales growth OPM

2.4

11.7

5.5

1.8

4.9

34.0

19.021.8

4.7

16.7

0.0

10.0

20.0

30.0

40.0

Sun Pharma Lupin Cipla Ranbaxy DRL

(%)

55



Pharmaceutical

Analyst: Sarabjit KAnalyst: Sarabjit KAnalyst: Sarabjit KAnalyst: Sarabjit KAnalyst: Sarabjit Kour Nangra / Sushant Dalmiaour Nangra / Sushant Dalmiaour Nangra / Sushant Dalmiaour Nangra / Sushant Dalmiaour Nangra / Sushant Dalmia


Source: Company, Angel Research; Price as on October 1, 2010; Note: Our numbers include MTM on Foreign Debt; PHL estimates include the sold domestic formulation business;Alembic estimates include the demerged pharma business; # 3QCY2010; * The quarterly numbers are standalone financials



Alembic 63 297 4.6 12.8 84 18.9 41.9 1.4 41.9 3.0 5.6 6.4 21.1 11.2 9.8 74 Buy

Aventis# 1,963 285 10.3 16.1 82 43.3 (1.1) 18.8 (1.1) 68.4 80.8 92.1 28.7 24.3 21.3 1,658 Sell

Cadila 697 1,067 16.9 20.5 159 155.5 17.9 7.6 17.9 24.7 30.6 39.6 28.2 22.8 17.6 - Neutral

Cipla 324 1,447 5.5 21.8 (73) 272.7 (1.1) 3.5 (1.1) 13.5 13.8 17.1 24.1 23.5 18.9 360 Accumulate

Dishman 191 213 (2.0) 22.5 211 25.2 4.9 3.1 4.9 14.5 17.4 21.4 13.2 11.0 8.9 279 Buy

Dr. Reddys 1,476 1,897 4.9 16.7 492 272.0 25.2 16.2 25.2 20.8 59.0 78.0 70.9 25.0 18.9 - Neutral

Glaxo# 2,248 510 11.4 36.4 (69) 143.5 8.7 16.9 8.7 60.0 65.4 73.9 37.5 34.4 30.4 1,700 Sell

Indoco 419 113 17.9 15.6 260 14.3 55.6 11.6 55.6 34.2 40.4 54.1 12.2 10.4 7.7 541 Buy

Ipca Labs 307 487 13.6 22.6 (88) 72.5 13.5 5.8 13.5 16.4 19.5 23.7 18.7 15.7 13.0 - Neutral

Lupin 396 1,245 11.7 19.0 422 171.7 6.9 3.9 3.5 15.4 18.7 23.3 25.8 21.2 17.0 420 Accumulate

Orchid Chem* 267 315 3.3 18.9 (701) 5.1 - 0.7 - 48.2 13.3 17.1 5.5 20.1 15.6 - Neutral

Piramal Health 521 849 (15.1) 14.2 (349) 100.6 (5.3) 4.8 (5.3) 23.1 27.2 33.8 22.6 19.1 15.4 - Neutral

Ranbaxy Lab# 569 1,746 1.8 4.7 160 281.0 141.0 6.7 140.7 7.1 25.8 28.7 80.7 22.1 19.9 - Neutral

Sun Pharma 2,029 1,213 2.4 34.0 (375) 337.7 (25.6) 16.3 (25.6) 65.2 71.6 84.8 31.1 28.3 23.9 1,781 Reduce

company is expected to report MTM profit on its forex hedges.As a result, the company is estimated to report net profit ofRs281cr (Rs117cr).

Cadila and Ipca Labs are expected to outperform

Cadila is expected to post strong 16.9% growth in net sales toRs1,067cr on the back of robust growth on the export anddomestic formulation fronts. The company continues to enjoyover 25% market share in generic Flomax in the US, which is anear-term key driver. We expect the company's OPM to expandby 159bp to 20.5% on the back of favourable product mix.Net profit is expected to increase by 17.9% to Rs156cr, drivenby top-line growth and OPM expansion.

We estimate Ipca Laboratories' top line to grow by 13.6% toRs487cr during 2QFY2011. The company is expected to poststrong growth both on the export and domestic fronts. Thecompany is witnessing strong traction in the anti-malarialsegment, both in the domestic and export fronts. OPMs areexpected to compress by 88bp to 22.6% on the back of anincrease in employee expenses. However, net profit is expectedto rise by 13.5% to Rs73cr, driven by top-line growth and lowerinterest cost.

Indoco Remedies is expected to report top-line growth of 17.9%to Rs113cr, driven by the domestic and export segments. Thedomestic formulation segment is expected to grow by 17.5% toRs78cr. The company's OPM is expected to expand by 260bpto 15.6%, driven by top-line growth. As a result, net profit isexpected to increase by 55.6% to Rs14.3cr.


During the past one year, the BSE HC index has been amongthe best performing indices, rallying 36.1% and outperformingthe market by 19.0%. On the back of rich valuations, we continueto recommend a bottom-up approach. In the generic segment, In the generic segment, In the generic segment, In the generic segment, In the generic segment,we now prefer Lwe now prefer Lwe now prefer Lwe now prefer Lwe now prefer Lupin, Cipla and Indoco Remedies.upin, Cipla and Indoco Remedies.upin, Cipla and Indoco Remedies.upin, Cipla and Indoco Remedies.upin, Cipla and Indoco Remedies.

We continue to favour CRAMS, though the segment is witnessingnear-term hiccups because of inventory rationalisation andmultiple mega global pharma mergers in CY2009. However,most of the CRAMS companies are now witnessing an uptick inorder enquiries from global innovators, indicating animprovement in the global scenario. In this segment, weIn this segment, weIn this segment, weIn this segment, weIn this segment, werecommend Dishman Pharma.recommend Dishman Pharma.recommend Dishman Pharma.recommend Dishman Pharma.recommend Dishman Pharma.



The western region's overall deficit of 15.1% during 5MFY2011was the highest amongst all the regions. Maharashtra had anoverall power deficit of 20.0%, while its peak deficit stood at22.1%.

Power

In 2QFY2011, we expect the power generating companies inour universe to report top-line growth of 20% yoy driven bycapacity additions and increased tariffs. These companies hadhigher operating capacities during the quarter on a yoy basis.However, operating profit is expected to decline by 11% yoy onaccount of the increase in fuel costs. Net profit too is expectedto decline by 8.5% yoy.

Primary market activity

OGPL, India's leading renewable energy-based powergeneration company, made its IPO during the quarter. OGPL,which has operational capacity of 213MW plans to increasecapacity by more than four-folds to 1,049MW. The IPO wasavailable at slightly expensive valuations of P/BV of 1.7x - 1.9xon FY2012E financials (at the lower and upper price bandrespectively), considering the risks associated with lower PLFs.Hence, our Neutral view on the IPO.

Capacity addition: Status check

Generation

During the Eleventh Plan, the CEA expects addition of62,488MW in the country's generation capacity. This is muchbelow the target of 78,000MW set at the beginning of the Planperiod. Inordinate delays in the completion of projects haveled to the CEA revising its Eleventh Plan capacity estimates.Capacity addition till August 2010 from the beginning of theEleventh Plan period stood at 26,110MW, which is just 53% ofthe capacity targeted to be achieved during the period. Capacityaddition has generally been delayed due to execution issuesrelating to land acquisition and obtaining environment and otherstatutory clearances.

Aug’10Aug’10Aug’10Aug’10Aug’10 Aug’09Aug’09Aug’09Aug’09Aug’09 chg (%)chg (%)chg (%)chg (%)chg (%) 5MFY115MFY115MFY115MFY115MFY11 5MFY105MFY105MFY105MFY105MFY10 chg (%)chg (%)chg (%)chg (%)chg (%)

Thermal 51.3 50.6 1.3 270.1 259.7 4.0

Hydro 12.2 12.4 (1.1) 50.7 49.4 2.7

Nuclear 1.9 1.0 88.8 8.8 7.2 23.0

TTTTTotalotalotalotalotal 65.465.465.465.465.4 64.064.064.064.064.0 2.22.22.22.22.2 329.7329.7329.7329.7329.7 316.3316.3316.3316.3316.3 4.24.24.24.24.2

Exhibit 2: Power generation (BU)

Source: CEA, Angel Research

Transmission lines

During April-July 2010, 1,825 circuit kilometers (ckm) wereadded to the 400kV-HVDC transmission lines v/s the targeted2,811ckm. Total addition to other categories of transmissionlines was at 2,514ckm, as against the targeted 2,206ckm.

Power deficit situation

The country continues to face power deficit due to the delay inthe commissioning of new capacities, fuel shortage in the existingplants and deficiencies in the T&D system. The country's overalland peak power-deficit levels during 5MFY2011 stood at 10.4%and 13.8%, respectively.

Transmission sub-stations

During April-July 2010, total addition to the 400kV substationstood at 3,150MW, which was significantly lower than thetargeted 4,725MW. The addition to 220kV sub-station categorystood at 6,480MW as against the targeted 9,325MW.

Operational highlights

During 5MFY2011, the amount of power generated in Indiarose by 4.2% yoy to 329.7BU (316.3BU). The country's thermalpower generation rose by 4.0% yoy to 270.1BU. The plant loadfactor (PLF) of thermal plants for 5MFY2011 stood at 73.6%,which was 159bp higher than the target of 72.0%. The hydropower generated increased by 2.7% yoy to 50.7BU, while theamount of nuclear power generated grew substantially by 23.0%yoy to 8.8BU during the period.


Exhibit 1: Generation capacity addition below target

Target (T) Achievement (A) A as a % of T

20

40

60

80

100

0

5,000

10,000

15,000

20,000

FY2003 FY2005 FY2007 FY2009 5MFY2011

(MW

)

(%)


Exhibit 3: India - Power deficit scenario

8.87.1 7.3

8.49.6 9.9

11.09.9

10.4

12.2 11.2 11.712.3

13.8

16.6

12.0 12.6 13.8

0.0

4.0

8.0

12.0

16.0

20.0

FY2

00

3

Fy2

00

5

FY2

00

7

FY2

00

9

5M

FY2

01

1

Overall Peak

(%)

Fy2

00

4

Fy2

00

6

Fy2

00

8

Fy2

01

0

57



Power

Exhibit 4: Region-wise power deficitExhibit 4: Region-wise power deficitExhibit 4: Region-wise power deficitExhibit 4: Region-wise power deficitExhibit 4: Region-wise power deficit

Source: CEA

Region (%)Region (%)Region (%)Region (%)Region (%) OverallOverallOverallOverallOverall PPPPPeakeakeakeakeak

Northern (10.1) (10.0)

Western (15.1) (18.8)

Southern (7.3) (9.8)

Eastern (5.6) (6.1)

North Eastern (11.4) (16.3)

All IndiaAll IndiaAll IndiaAll IndiaAll India (10.4)(10.4)(10.4)(10.4)(10.4) (13.8)(13.8)(13.8)(13.8)(13.8)

Fuel scenario

Coal

Coal-based plants account for 53% of India's total powergeneration capacity. During FY2002-10, the country's coalconsumption for power generation grew at a 6% CAGR from240mn tonnes to 366mn tonnes. Thus, the availability of coalplays a critical role in the total power generated in the country.As on August 31, 2010, 25 critical thermal power stations outof the 82 monitored by the CEA had critical coal stocks for lessthan seven days. Coal shortage at the power plants has beenon account of various reasons such as delay in procuring coallinkages, issues in obtaining environment clearances and otherregulatory approvals for developing coal blocks, hurdles inexpansion and logistical and infrastructural issues.

Spot global coal prices were substantially higher on a yoy basisduring the quarter. Average prices of the New Castle Mckloksey6,700kc coal stood at around US $94/tonne in 2QFY2011 asagainst US $71/tonne recorded in 1QFY2010. However, theprices were lower by around 5% on a qoq basis.

Gas

In FY2010, gas-based plants contributed 12.5% to the totalamount of electricity generated in the country. Out of the presentavailability of 160mmscmd of natural gas, nearly 40% is beingsupplied to the power sector. During the quarter, the Ministry ofPower (MoP) announced the criteria to be fulfilled for

Key developments

NTPC

NTPC has signed an MoU with the Bangladesh PowerDevelopment Board (BPDB) for setting up two coal-based powerprojects of 1,320MW each at Chittagong and Khulna inBangladesh. The power plants are likely to come up at aninvestment of approximately Rs13,200cr and are likely to beinstalled on a 50:50 equity basis. The projects will be operatedby NTPC and run on imported coal. NTPC will also providetraining and development to the employees of BPDB and helpin enhancement of productivity and efficiency of its existing powerstations. Bangladesh has a power generation capacity of5,000MW, of which 83% is gas-based. However, in the comingyears, Bangladesh targets to increase the share of its coal-basedpower plants for which it needs technology from India. Thus, apower plant in joint venture with NTPC will help Bangladeshuse the former's technology.

recommending gas allocation for the Twelfth Plan powerprojects. The MoP had asked the CEA to prepare a list of projectsrequesting gas allocation in accordance with the criteria. Thenew policy has assigned different weightage for the conditionsto be fulfilled for getting the priority. Further, as per the newpolicy, 42% of the gas would be allocated to the PSUs, and40% to the IPPs. Out of the remaining gas, SEZ's and CPP'swould be allotted 4% and 5%, respectively.


Exhibit 6: Global coal prices

0

50

100

150

200

250

Jan-0

5

Apr-

05

Jul-

05

Oct

-05

Jan-0

6

Apr-

06

Jul-

06

Oct

-06

Jan-0

7

Apr-

07

Jul-

07

Oct

-07

Jan-0

8

Apr-

08

Jul-

08

Oct

-08

Jan-0

5

Apr-

09

Jul-

09

Oct

-09

Jan-1

0

Apr-

10

Jul-

10

Prices have firmed up post the dramatic

decline in CY08

Source: Infraline

Exhibit 7: Gas demand by the power sector

0

20

40

60

80

100

120

140

FY2008 FY2009 FY2010 FY2011E FY2012E

(mm

scm

d)

240253 263

278 280302

330355

366

0

50

100

150

200

250

300

350

400

(Mn

tonnes

)


Exhibit 5: Coal consumption for power generation



Analyst - Rupesh Sankhe / VAnalyst - Rupesh Sankhe / VAnalyst - Rupesh Sankhe / VAnalyst - Rupesh Sankhe / VAnalyst - Rupesh Sankhe / V. Srinivasan. Srinivasan. Srinivasan. Srinivasan. Srinivasan

Power

PTC

PTC India Financial Services (PFS), a 77.6% subsidiary of PTCIndia, has been given the infrastructure financial company (IFC)status by the Reserve Bank of India (RBI). Post this development,PFS would be allowed higher exposure to lending and investmentto a single borrower or a group of borrowers. PFS would alsohave better access to resources as the exposure limit for banks'funding to IFCs has improved.

CESC

CESC has signed an agreement with Resource Generation, anAustralian company, for purchase of 37 million tonnes of coalover 20 years from the Boikarabelo mine being developed inSouth Africa for meeting part of its coal requirements.

Reliance Power

During the quarter, the boards of Reliance Power (Rpower) andReliance Natural Resources (RNRL) decided to merge RNRL withRpower. The merger was done on share swap basis in the ratioof 4:1, whereby RNRL shareholders will get one share of Rpowerfor every four shares of RNRL held by them. As per the deal,RNRL was valued at Rs7,157cr, i.e. 31% discount to its totalmarket capitalisation on the date of the merger announcement.This deal will result in fresh issue of 41cr shares by Rpower asthe total number of shares outstanding of RNRL currently standsat 163cr. The total outstanding shares of Rpower post the mergerwould stand at 280cr.

Exhibit 9: Quarterly estimatesExhibit 9: Quarterly estimatesExhibit 9: Quarterly estimatesExhibit 9: Quarterly estimatesExhibit 9: Quarterly estimates Rs cr

Source: Company, Angel Research; Note: Price as on October 1, 2010



CESC 394 1,162 21.8 24.0 144 125 7.9 10.0 7.9 34.5 40.6 46.1 11.4 9.7 8.5 470 Buy

GIPCL 116 278 38.6 22.7 52 33 162.4 2.2 162.4 7.1 9.9 11.6 16.3 11.7 10.0 135 Buy

NTPC 219 13,395 19.0 24.0 (876) 1,845 (14.2) 2.2 (14.2) 10.7 9.7 11.1 20.5 22.6 19.7 230 Accumulate

PTC 117 3,040 23.7 1.2 - 33 6.3 1.1 6.3 3.2 5.1 6.5 36.7 23.0 18.1 136 Buy

2QFY2011expectation

We expect NTPC to grow its top-line by 19.0% yoy to Rs13,395crduring the quarter, aided by volume growth due tocommencement of new capacities, and increase in tariffs inline with the fuel price hike. However, the company's operatingprofit is expected to decline by 12.8% yoy to Rs3,211cr. Weestimate NTPC's net profit to dip by 14.2% yoy to Rs1,845cr, onhigh depreciation costs.

We expect CESCCESCCESCCESCCESC to register 21.8% yoy growth in standalonetop-line to Rs1,162cr aided by higher volumes due to the recentcommissioning of the 250MW Budge-Budge plant, and highertariffs charged in its regulated area during the quarter. Thecompany's OPM is expected to expand by 144bp yoy to 24.0%.We expect CESC to record 7.9% yoy growth in net profit toRs125cr.

We expect GIPCLGIPCLGIPCLGIPCLGIPCL to register 38.6% yoy increase in revenues in2QFY2011, primarily on account of higher volumes. In2QFY2011 volumes increased on a low base as the companyhad a plant shut down in 2QFY2010, which resulted in lowervolumes. Further, the company's capacity has been augmentedby 250MW with the commissioning of Unit 3 and 4 in Surat.OPM is expected to expand by 52bp to 22.7%, whilebottom-line is set to increase by 162.4% yoy to Rs32.7cr in2QFY2011.

We expect PTPTPTPTPTCCCCC to record 23.7% yoy jump in standalonetop-line to Rs3,040cr. We have assumed average realisation ofRs4.6/unit. We expect net profit to increase by 6.3% yoy toRs32.8cr.

Industry Outlook

We expect capacity addition to gather pace over the last twoyears of the Eleventh Plan period. However, the power deficitscenario is likely to persist, as supply is not likely to keep upwith demand. Thus, players with the ability to execute projectson time would be benefitted by the high merchant tariffs expectedto prevail over the next two years.

WWWWWe maintain a Buy on GIPCLe maintain a Buy on GIPCLe maintain a Buy on GIPCLe maintain a Buy on GIPCLe maintain a Buy on GIPCL, PT, PT, PT, PT, PTC and CESC.C and CESC.C and CESC.C and CESC.C and CESC.

Source: BSE, Angel Research

Exhibit 8: Performance on the bourses in 2QFY2011

-10.4%

-3.9%

-1.6%

-3.8%

2.1%

1.0%

-12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0%

PTC

NTPC

BSE Power

59



Supply can be a concern in Central Mumbai

Recently IBREL won the auction for two NTC mill land parcels of11 acres in Central Mumbai for Rs1,980cr. Central Mumbaihas an FSI of 1.33x, but a developer can avail FSI of 4x undercar parking provision norms. Assuming FSI of 4x and loadingof 30%, the land cost works out to be ~Rs8,000/sq. ft. CentralMumbai has witnessed a number of new launches since March2009, which will be completed over the next 4-5 years, andhas large unsold inventory. We believe the entire supply comingup through the existing projects and incremental supply throughNTC mill auction will be difficult to absorb at current prices.

Real Estate

For 2QFY2011, we expect volumes to report flat to moderatedecline on a sequential basis on account of subdued newlaunches due to seasonal weakness. Revenue of real estatecompanies will be largely driven by execution of existing projects,which may be affected due to heavy rains. However, goingahead, we expect a surge in new launches, as we get into thefestive season. It would be interesting to see whether companiessuch as DLF and Unitech (through UCP) continue to seesustainability in office lease volumes on a sequential basis. Banksare currently offering competitive mortgage rates, but we expectinterest rates to inch up on RBI's concerns on real estate inflation.

From our universe of stocks, we expect DLF's revenue to bedriven by the execution of its existing projects. We expect HDILto report flat to 10% qoq decline in transfer of developmentrights (TDR) volumes and prices. This is on account of theanticipation of Maharashtra state government overrulingBombay High Court's decision and hiking FSI from 1x to 1.33x.Further, heavy rains affected the execution of the airport project,thereby slowing down TDR generation. We expect Anant Raj's(ARIL) revenue to be driven by new launches and rental income.

HDIL raises US $250mn through QIP

HDIL has successfully raised equity up to US $250mn througha QIP at a price of Rs268.18/share. This would lead to equitydilution of 10%. The amount would be utilised to part-financethe second phase of the airport project and for fresh landacquisitions. As of June 2010, the company had quitemanageable net debt position of Rs3,533cr (0.47x) with unpaidland cost of Rs300cr, where majority of repayment obligationlargely starts from FY2012. This is the fourth round of equitydilution since June 2009, which is quite surprising given thekind of successful new launches taken place over the last yearand comfortable net debt position. We believe the stock priceto remain range bound on account of the slowdown in Mumbai'srealty market, likely hike in FSI affecting TDR volumes andoverhang of equity dilution at this level. However, faster executionof phase II of the airport project and winning of new

NAV-accretive SRA projects through QIP issuance will act as apositive share price catalyst.

Hike in FSI will impact TDR realisations

The Maharashtra state government is likely to hike FSI from1x to 1.33x in suburbs, which will empower BMC and overrulethe High Court's ruling, thus affecting TDR prices. This wasreflected in the MMRDA's recent bid for the sale of34,045sq. mt. of TDR at a reserve price of Rs3,000/sq. ft. forGoregaon, which failed to attract developers. We believedevelopers are adopting the wait and watch policy in anticipationof the FSI hike. We have factored stable TDR prices of Rs2,400/sq. ft. for HDIL's airport project.

ARIL increases focus on mid-income residential projects

ARIL has acquired 10,000 equity shares (representing 100% ofshare capital) of Jubilant Software Services for Rs81cr. JubilantSoftware Services owns 15.58 acres of land in Gurgaon (nearDwarka expressway highway), which is eligible for a grouphousing project. The project is entitled for 1.75x FSI, which worksout to Rs682/sq. ft. of land cost. Management has indicatedthat the going rate in the vicinity is Rs3,500/sq. ft., and it intendsto launch the project by end-FY2011. The company has acquired90 acres of land (~6.4mn sq. ft. of saleable area) at an averagecost of Rs375/sq. ft. in the last six months. This is in line with thecompany's strategy to spend Rs1,000cr on land acquisition inFY2011 at a cheaper cost and increasing focus on mid-incomeresidential projects.

Locationocationocationocationocation AcquistionAcquistionAcquistionAcquistionAcquistion AcresAcresAcresAcresAcres Saleable areaSaleable areaSaleable areaSaleable areaSaleable area AcquistionAcquistionAcquistionAcquistionAcquistioncost (Rs cr)cost (Rs cr)cost (Rs cr)cost (Rs cr)cost (Rs cr) (mn sq. ft.) (mn sq. ft.) (mn sq. ft.) (mn sq. ft.) (mn sq. ft.) cost (Rs/sq ft)cost (Rs/sq ft)cost (Rs/sq ft)cost (Rs/sq ft)cost (Rs/sq ft)

Gurgaon-Sec 91 81 15.6 1.6 506

Neemrana 13 18.0 1.7 76

Punjab Khor 23 40.0 1.7 132

Gurgaon 85 25.0 1.6 531

Exhibit 2: Recent land acquisitions by ARIL



Exhibit 1: Revenue and PAT estimates for 2QFY2011E

Revenue PAT

12.8 12.4

20.8

(39.5)

(13.6)

28.6

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

ARIL DLF HDIL(%)



Retail segment - Still some pain left

Vacant space in shopping centres increased during 2008-09.This was primarily on account of higher real estate costs andlower consumption, because of which many retailers startedshifting from their rapid expansion mode to a consolidationmode. Consequently, the absorption of retail space fell to4mn sq. ft. in 2009. Retail supply is projected to be around16.4mn sq. ft. in 2010, with an expected absorption of onlyaround 8.9mn sq. ft. Therefore, vacant spaces are likely toincrease in the short term, given the considerable rationalisationin the supply pipeline. We believe demand is yet to pick up,especially in tier-II and tier-III cities, which is not the case withmetros where catchment areas are high. We expect prices toremain under pressure, as the segment has fragmented supplydynamics. Initial recovery volumes are likely to be cornered byexperienced players, such as Phoenix Mills, and not necessarilylarge ones.

Real Estate

Commercial demand to pick up over the next 12 months

After witnessing a sharp drop in the past few quarters, capitalvalues have started to strengthen and have registered marginalappreciation across most micro markets. Industry participantshave indicated that the surge in leasing enquiries is due torenewed interest from corporates. This has already beenreflected for companies like DLF that leased out 1mn sq. ft. in1QFY2011, which was higher than the entire area leased outin FY2010.

In the IT/ITES sector, we expect net employee addition of 15%over FY2010-12E. Accordingly, we believe demand in officespace will start picking up from 2HFY2011E. Cushman andWakefield estimates pan India cumulative demand for officespace during CY2009-13E to be 196mn sq. ft.

Source: Jones Lang LaSalle, Angel Research

Exhibit 3: Absorption trend of top 10 Indian citiesAbsorption (LHS) yoy growth (RHS)

(50)

0

50

100

150

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1QC

Y08

2QC

Y08

3QC

Y08

4QC

Y08

1QC

Y09

2QC

Y09

3QC

Y09

4QC

Y09

1QC

Y10

2QC

Y10

(%)

(Uni

ts)

Source: Cushman & Wakefield, Angel Research

Exhibit 4: Pan-India commercial demand

0

10

20

30

40

50

60

2009E 2010E 2011E 2012E 2013E

(mn

sq.ft.)

Residential recovery has slowed, but not stopped

Prices in Mumbai and Delhi are 15-30% above their peak levelsin 2008, whereas prices in most other markets are still 10-15%lower than their last peak levels. This has resulted in the taperingof volumes in cities like Mumbai, where prices have gone upsubstantially. Volumes slowed down in 2QFY2011, on accountof seasonal weakness. Launch activity also remained subduedduring this period. However, going ahead, we could see asurge in new launches as we get into the festive season. Responseto new launches and absorption trends over the next quartershould provide us greater clarity on sustainability of volumesseen in FY2010, especially in Mumbai/NCR.

Deleveraging holds key for stock performance

Real estate companies came out of the woods with new projectsbeing successfully launched and liquidity position of developersimproving on the back of QIPs. Despite the reduction in debt,interest expenses as a percentage of EBITDA remain on thehigher side. This is on account of change in the product mix,which is in favour of the low-margin mid-income segment.Going forward, we believe deleveraging hinges on the timelyexecution of projects, successful new launches and recovery inthe non-residential segment. DLF has allotted Rs1,100crpreference shares to Lehman in the Shivaji Marg project(Rs5.9bn) and in the DLF Southern Homes subsidiary (Rs5.6bn),which is due for redemption in 2QFY2011.

Sensex v/s realty stocks

For 2QFY2011, the BSE realty index outperformed the Sensexby 491bp on the back of revived investor interest, given that itis the only index to underperform the benchmark index on a

Source: Cushman & Wakefield, Angel Research

Exhibit 5: Pan-India retail demand

0

2

4

6

8

10

12

14

2009E 2010E 2011E 2012E 2013E

(mn

sq.ft.)

61



Real Estate

Analyst - PAnalyst - PAnalyst - PAnalyst - PAnalyst - Param Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salotaram Desai / Mihir Salot

Exhibit 7: Quarterly estimatesExhibit 7: Quarterly estimatesExhibit 7: Quarterly estimatesExhibit 7: Quarterly estimatesExhibit 7: Quarterly estimates Rs cr

Source: Company, Angel Research; Note: Price as on October 1 , 2010



DLF 388 1,968 12.4 47.0 (518.9) 380.0 (13.6) 2.2 (13.6) 10.2 11.6 21.0 38.0 33.5 18.5 - Neutral

Anant Raj Ind 146 98 12.8 55.0 (3,667.7) 43.2 (39.5) 1.5 (39.5) 7.6 6.6 13.8 19.3 21.9 10.6 178 Buy

HDIL 270 427 20.8 55.0 419.4 191.1 28.6 4.6 28.6 12.9 18.9 30.1 21.0 14.3 9.0 302 Accumulate

yoy basis. From our real estate universe, DLF outperformed theSensex as well as the BSE realty index by 1,764bp and 1,273bp,respectively, on account of sustained buying by ETFs in Sensex/Nifty-based stocks and gradual improvement in leasing activity.However, we still believe that visibility on debt reduction is mutedon account of low visibility on asset sales and new launches.ARIL also outperformed the Sensex following news flow ofhealthy land acquisition in NCR at attractive rates and withimproving leasing scenario. However, HDIL underperformedthe Sensex due to a ~10% equity dilution and likely increase inFSI by the Maharashtra state government from the current levelof 1.0x to 1.33x in suburbs, thereby impacting TDR prices. Goingforward, the deployment of QIP proceeds will fasten executionof phase II of the Mumbai airport project, and winning of newNAV-accretive SRA projects could act as a positive share pricecatalyst.


Exhibit 6: Realty stocks outperforms the Sensex

31.0

20.3

3.7

13.4

18.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

DLF ARCP HDIL Sensex BSE Realty Index

(%)


The risk reward ratio is turning favourable for the sector, withrecovery widening towards tier-II and tier-III cities in theresidential segment. Further, the commercial segment isrecovering with enquiries/leasing gaining momentum. We arepositive on the long-term outlook of the realty sector, withgrowing disposable income, shortage of 25mn houses in Indiaand reasonable affordability. Given the current scenario, weexpect stability in residential prices with an exception of certainmicro markets, where prices have overheated, and expect anuptick in the commercial segment towards end-FY2011.

Among our universe of stocks, we prefer companies with visibilityon cash flow, low leverage and a strong project pipeline withattractive valuations. Our top picks are HDIL and ARIL Our top picks are HDIL and ARIL Our top picks are HDIL and ARIL Our top picks are HDIL and ARIL Our top picks are HDIL and ARIL, which, which, which, which, whichare trading at 32.8% and 30.4% discount to their NAare trading at 32.8% and 30.4% discount to their NAare trading at 32.8% and 30.4% discount to their NAare trading at 32.8% and 30.4% discount to their NAare trading at 32.8% and 30.4% discount to their NAVs,Vs,Vs,Vs,Vs,respectivelyrespectivelyrespectivelyrespectivelyrespectively. W. W. W. W. We maintain a Neutral rating on DLF with concernse maintain a Neutral rating on DLF with concernse maintain a Neutral rating on DLF with concernse maintain a Neutral rating on DLF with concernse maintain a Neutral rating on DLF with concernsof a weak operating cash flowof a weak operating cash flowof a weak operating cash flowof a weak operating cash flowof a weak operating cash flow, increasing gearing levels and, increasing gearing levels and, increasing gearing levels and, increasing gearing levels and, increasing gearing levels andthe stock trading at 21.2% premium to ourthe stock trading at 21.2% premium to ourthe stock trading at 21.2% premium to ourthe stock trading at 21.2% premium to ourthe stock trading at 21.2% premium to ouroneoneoneoneone-year forward NA-year forward NA-year forward NA-year forward NA-year forward NAVVVVV.....



Retail

Sustained consumer confidence cheers retailers

Consumer confidence in India continued to remain robust in

2QFY2011, after rebounding in 1QFY2011, to reach its highest

level since the third quarter of 2007. Annual sales in the form

of Independence Day offers and Monsoon Sale witnessed

overwhelming response, further signaling the return of buoyant

times in the retail sector.

Indian retailers have successfully created newer shopping

seasons to drive consumption by doling out eye-popping special

deals. Independence Day has matured to be just one of them,

other popular ones being Republic Day, Valentine's Day and

the Christmas-New Year week. These promotions offer a

win-win situation to brands, retailers and consumers. Such deals

ensure assured higher returns, which allow companies to offer

better terms to retailers, which they pass on to consumers.

Interestingly, these sales contribute 20-40% to the overall revenue

of companies, including Pantaloon (PRIL), Shoppers Stop (SSL)

and Spencer's Retail.

The Future Group, in its five-day long sale promoted as

Mahabachat on the eve of the Independence Day, registered

same store sales growth of 30-40%. SSL, which conducts

biannual sales during this period, witnessed stellar response

from consumers.

With the signs of the economic downturn fading over time, Indian

consumers have loosened their purse, thus bringing back cheers

to the Indian retail sector. Further, taking cue from August

Independence Day sales, retailers expect the upward trend to

continue in the upcoming festival season. This festival season,

domestic retailers expect their sales to grow 20-25% yoy. The

festival season in FY2010 failed to cheer retailers as consumers

tightened their spending amid job losses and pay cuts. As a

result, inventories piled up and retailers had to resort to heavy

discounts to promote sales. With demand picking up, we expect

retailers to moderate the quantum of discounts offered in this

festive season as compared to FY2010.

We believe the organised retail sector in India is currently at an

inflexion point and is ready to take the next leap in its growth

trajectory, at a steady and stable pace. We maintain that the

segment has a tremendous growth potential, driven by positive

developments such as allowing FDI in multi-brand retail, which

could further boost growth prospects.

Value retailing maintains positive momentum

The value retailing segment is expected to witness decent growth

in 2QFY2011, despite high food prices. Value retail formats

such as Big Bazaar, Food Bazaar, More and D'Mart tried to

cushion the impact of inflation on demand by stepping up

bargains and discount offers across product categories that have

been hit hard by spiraling prices. PRIL reported 11.5% growth

in value retailing in 4QFY2010. We expect the value retailing

format to register double-digit growth for 2QFY2011. Hence,

major players in the value retailing segment, including PRIL,

Reliance Retail, Spencer's and More, stand to benefit from this

ongoing trend.

Lifestyle retailing on a roll

Stable economic conditions and a pick-up in consumer

confidence resulted in consumers opening up their wallets for

purchasing lifestyle goods. PRIL reported 19.4% growth in

lifestyle retailing in 4QFY2010. We expect lifestyle retailing to

witness higher double-digit growth for 2QFY2011.

Proposal to ease FDI rules in the retail sector - Positivefor the industry

The concept note introduced during the previous quarter on

allowing 51% FDI in multi-brand retail is still in the discussion

stage. The department of industrial policy and promotion (DIPP),

under the commerce ministry, is seeking comments on putting

FDI cap in multi-brand retail, which is currently banned. The

paper, however, remains silent on the quantum of FDI cap,

even after the draft paper had proposed 51% FDI in multi-

brand retail.

We concur with industry experts that enabling FDI would be

good for the sector, as it will result in increased employment

and a higher level of consumerism, on account of a substantial

range of competitively priced products. The government also

stands to benefit from this, as the exchequer would receive

increased collections, since large organised trade players are

tax-compliant, contribute robust tax revenue and are unable to

avail exemption limits. On the supply-chain front, we believe

wastage in farm-to-fork will reduce with the transfer of

technology used by global players.

According to a recent research by Crisil, the entry of FDI in

multi-brand retail has the potential to bring down prices of

perishable goods such as fruits and vegetables over the long

term. The report states that an efficient supply chain will enable

63



Retail

large retailers to source fruits and vegetables directly from

co-operatives, lowering annual wastage amounting to around

Rs630bn. The wastage in the supply chain and commission to

trade intermediaries inflate the final price paid by Indian

consumers. They shell out almost 2x-2.5x the price a farmer

gets as compared to 1x-1.5x in developed markets, where

penetration of organised retail is much higher. As per the

research, the overall investment required to set up the

supply-chain infrastructure for fruits and vegetables would be

close to Rs650bn over the medium term. This is estimated after

taking into consideration the number of cold storage facilities

and refrigerated trucks that would be required for handling

perishable goods. About 30% of the country's total production

of fruits and vegetables is wasted every year because of

inadequate cold storage and transport facilities.

Retail stocks outperform the Sensex in 2QFY2011

Retail sector stocks broadly outperformed the Sensex in

2QFY2010. Titan emerged as a clear winner by outperforming

the benchmark BSE Sensex by a whopping 26%. PRIL and SSL

outperformed the Sensex by 1% and 4% respectively.

2QFY2011 - Preview

During 2QFY2011, consumer sentiment continued to remain

upbeat as the economic outlook looked stable, thereby providing

the much-needed security to people. With footfalls rising and

consumers opening up their wallets on discretionary spending,

we expect retailers to continue to foresee good growth going

ahead. We expect value retailing to strengthen further, while

lifestyle retailing is expected to extend its growth trajectory as

upbeat consumer sentiment should translate into higher demand

for lifestyle goods. We expect retail stocks under our coverage

to report top-line growth of 39.7% yoy. We estimate PRIL to

lead our universe, with 43.4% yoy top-line growth.

On the operating margin front, we expect SSL to show a yoy

improvement of 80bp, while we expect PRIL's and Titan's margins

to dip by 50bp and 53bp, respectively. Even though we expect

the operating margins of our retail universe to dip by 20bp yoy

to 9.5%, increases in the top line and EBITDA by 39.7% yoy

and 35.1% yoy, respectively, would result in improvement of

our retail universe's net profit margins by 20bp yoy to 4.1%.


We foresee good times ahead for the retail industry, with

economic growth back on track along with revived consumer

sentiment and good monsoons. Sensing the change, several

retailers have started chalking out expansion plans, which further

bolsters our belief. For instance, PRIL plans to open

25 Big Bazaar, 15 Pantaloon and 5 Central outlets. Besides

these, more Ezone stores and Home Town satellite stores will

be added by the company. In FY2011, Titan plans to invest

Rs1.5bn to open 170 new stores, while SSL plans to open

10-12 stores at a cost of Rs1.2bn. Any positive news on FDI in

retail will act as a big booster for the industry. Going ahead, we

expect the growth trend to continue to strengthen, thereby

keeping long-term growth prospects for the organised retail

segment in India intact.


Exhibit 2: Retail universe sales and EBITDA estimates

Net Sales (LHS) EBITDA (RHS)(Rs cr) (%)

9.8%9.5%

8.5

8.9

9.3

9.7

10.1

10.5

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

2QFY2010 2QFY2011E


Exhibit 3: Retail universe - Net profit estimates

3.9%

4.1%

3.5

3.7

3.9

4.1

4.3

4.5

0.0

50.0

100.0

150.0

200.0

2QFY2010 2QFY2011E

Net Profit (LHS) Net Profit Margin (RHS)(Rs cr) (%)


Exhibit 1: Retail stocks outperform the SensexSensex PRIL Titan SSL

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

2/7/

2010

9/7/

2010

16/0

7/20

10

23/0

7/20

10

30/0

7/20

10

6/8/

2010

13/0

8/20

10

20/0

8/20

10

27/0

8/20

10

3/9/

2010

9/9/

2010

17/0

9/20

10

23/0

9/20

10

30/0

9/20

10



Analyst - Viraj NadkarniAnalyst - Viraj NadkarniAnalyst - Viraj NadkarniAnalyst - Viraj NadkarniAnalyst - Viraj Nadkarni

Retail

The value retailing segment is likely to witness steady growth

over the next few years, as more and more consumers are

expected to go for value-for-money goods. However, we expect

the lifestyle retailing segment to continue to post higher growth

compared to the value retailing segment, driven by revival in

consumer confidence. We expect players such as PRIL, who are

straddled across price and product points, to benefit in the short

as well as in the long term. The retail sector remains one of the

fastest growing sectors in India and we remain positive on its

growth prospects.

PRIL continues to be our preferred pick

PRIL's presence across price points and categories helps the

company to be in a better position than its peers. Additionally,

the company's ongoing restructuring initiative would enable it

to enhance its focus on different segments and provide a good

opportunity for value unlocking. At Rs501, the stock is trading

at 24.6x its FY2012E earnings and at 2.9x FY2012E P/BV. Our

sum-of-the-parts target for PRIL (standalone) is Rs495, and we

have valued its stake in FCH, HSRIL and Future Bazaar at Rs31,

Rs12 and Rs18, respectively. PRIL continues to be our top pick

in the retail sector. WWWWWe maintain our Accumulate rating on PRILe maintain our Accumulate rating on PRILe maintain our Accumulate rating on PRILe maintain our Accumulate rating on PRILe maintain our Accumulate rating on PRIL

with a Twith a Twith a Twith a Twith a Target Parget Parget Parget Parget Price of Rs556.rice of Rs556.rice of Rs556.rice of Rs556.rice of Rs556.

Titan has a stable and niche business model in the jewellery

segment. The surge in gold volumes witnessed during the

previous quarter indicates that consumers are adapting to rising

gold prices. Continuance of this trend could have a positive

impact on the company. Moreover, the company's watch

segment is performing well. Further, the company has recently

intensified the brand campaigning for its eyeware division. The

company's precision engineering division is also expected to

breakeven in 2HFY2011. We expect consumer-driven segments

to perform well as there has been a revival in the demand for

lifestyle category goods. At Rs3,316, the stock is trading at 36x

its FY2012E earnings and at 12x FY2012E P/BV. W W W W We remaine remaine remaine remaine remain

Neutral on Titan, due to its rich valuations.Neutral on Titan, due to its rich valuations.Neutral on Titan, due to its rich valuations.Neutral on Titan, due to its rich valuations.Neutral on Titan, due to its rich valuations.

We expect SSL's performance to continue to improve in the

coming quarters on the back of pick-up in consumer demand

for lifestyle retailing. At Rs674, the stock is trading at 32.9x its

FY2012E earnings and at 5.2x FY2012E P/BV. Considering the

recent run-up in price, we maintain our Neutral view on SSLwe maintain our Neutral view on SSLwe maintain our Neutral view on SSLwe maintain our Neutral view on SSLwe maintain our Neutral view on SSL.....


Source: Company, Angel Research; Note: Price as on October 1, 2010, Note: * June year ending, Estimates are 1QFY2010 for PRIL, Figures on standalone basis



Pantaloon* 501 2,548 43.4 10.2 (50) 73.5 67.8 3.6 54.9 11.2 15.6 20.4 44.8 32.2 24.6 556 Accumulate

Titan 3,316 1,601 39.6 8.9 (53) 101.0 30.1 22.7 30.1 56.5 72.5 92.0 58.7 45.7 36.0 - Neutral

Shoppers Stop 674 471 23.3 7.4 76 14.1 62.3 4.0 62.1 10.3 17.4 20.5 65.4 38.7 32.9 - Neutral

65



Software

BFSI vertical was largely related to the M&A activity, which isnow tapering off. However, the spending momentum in thesegment continues because of the surge in demand for ITservices relating to regulatory changes, financial compliance,risk management, i.e. primarily compliance related work. Incase of the retail vertical, the IT spend is being driven by thebusiness need to tap the digital consumer behaviour, socialmedia, multi-channel commerce, etc. The hi-tech andmanufacturing segments are also in growth phase, whereastelecom continues to be a laggard in the western markets thoughinvestments are surging in the emerging markets.

Macro picture hazy but micro upbeat

The global cues are painting a hazy picture with the US macrodata for August being mixed (positives like capacity utilisationat 74.7% v/s 74.6%, manufacturing index at 56.3 v/s 55.5 jobchange at 0.2 v/s 0.1mn and negatives like IIP 6.2% v/s 7.4%,retail sales at 3.6% v/s 5.4%) whereas Europe's macro data ispoor (with manufacturing index declining to 55.1 from 56.7 inJuly). Although these data point towards macroeconomicuncertainty, at the micro level the IT spending continues withincreasing intent to spend on change in the business initiatives.Clients are looking forward to investing in growth and plantheir future to emerge stronger.

Following are the trends observed in IT spend across variousdimensions:-

The US is coming forth in making technological investmentswhereas the European clients are still in wait and watch modedue to the prevailing high economic uncertainties. Thoughspending is subdued in Europe, continental Europe is showinga structural shift by opening up to both outsourcing andoff-shoring.

There is a surge in discretionary spending with the onset ofrevival because companies are looking at a change in businessinitiatives via IT spending. This has resulted in demand forconsulting work gaining traction because organisations arelooking at technological innovations to drive growth as well asprune costs. On the package implementation side, incrementalgrowth is emerging out of implementation work rather thansale of new licences. In fact, the need for standardisation ofenterprise platforms i.e. conversion of multi-versionimplementation into single-version or limited-version as wellas global level roll out of the same is pacing up. Evenengineering and R&D services are witnessing spurt in demandwith product companies getting aggressive and trying to launchseries of new products by shortening the go-to-market cycle.

Cross-currency movement favourable


Exhibit 1: Trend in IT spend (geography-wise)% (qoq) 3QFY093QFY093QFY093QFY093QFY09 4QFY094QFY094QFY094QFY094QFY09 1QFY101QFY101QFY101QFY101QFY10 2QFY102QFY102QFY102QFY102QFY10 3QFY103QFY103QFY103QFY103QFY10 4QFY104QFY104QFY104QFY104QFY10 1QFY111QFY111QFY111QFY111QFY11

InfosysInfosysInfosysInfosysInfosys

US 1.5 (4.1) 0 4.6 7.7 4.5 6.8

Europe (1.2) (5.3) (3.4) (7.0) 0 11.8 (5.3)

HCL THCL THCL THCL THCL Techechechechech

US 5.8 14.2 3.8 3.5 0.5 9.6 11.3

Europe 14.7 17.5 1.6 1.5 3.3 1.4 4.2


Exhibit 2: Trend in IT spend (industry-wise)% (qoq)% (qoq)% (qoq)% (qoq)% (qoq) 3QFY093QFY093QFY093QFY093QFY09 4QFY094QFY094QFY094QFY094QFY09 1QFY101QFY101QFY101QFY101QFY10 2QFY102QFY102QFY102QFY102QFY10 3QFY103QFY103QFY103QFY103QFY10 4QFY104QFY104QFY104QFY104QFY10 1QFY111QFY111QFY111QFY111QFY11

InfosysInfosysInfosysInfosysInfosys

BFSI 4.1 (9.04) (1.5) 3.3 9.4 6.7 8.8

Retail 2.9 3.53 (3.1) 8.5 (0.9) 4.8 6.4

Manufacturing (3.7) 2.02 (2.2) (3.9) 5.8 11.3 1.3

Telecom (3.4) (1.2) (4.6) (5.4) 4.2 1.2 (3.1)

HCL THCL THCL THCL THCL Techechechechech

BFSI 13.1 (2.6) 6.8 7.3 0.4 5.5 8.3

Retail 4.4 2.4 (0.6) 7.5 16.5 1.0 19.6

Manufacturing 1.4 12.6 7.5 (8.3) (4.1) 10.5 10.4

Telecom 7.6 (12.1) 6.4 5.3 (0.9) 0.4 2.9

The growth witnessed in 1QFY2011 was broad-based with everysector contributing. In 2QFY2011, the financial services andretail verticals are continuing to be the major spenders. Thepent up demand that was seen in the previous quarters in the


Exhibit 3: Trend in IT spend (service-wise for 1QFY11)

-

5.0

10.0

15.0

20.0

25.0

Infosys HCL Tech Wipro TCS

%Q

oQ

gro

wth

Consulting Services and Package Implementation Product Engineering Services


Exhibit 4: USD v/s AUD,GBP & Euro

AUD/USD GBP/USD EUR/USD

0.8

1

1.2

1.4

1.6

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10



The cross-currency movement, which had proved to be the banein 4QFY2010 and 1QFY2011 impacting USD revenues to thetune of 0.8-1.5% (qoq), has turned into a boon in 2QFY2011.The USD has depreciated by 3.9%, 1.5% and 2.5% against theGBP, Euro and AUD, respectively. This will aid USD revenues oftier I companies by 0.5-0.8% (qoq). The rupee has alsodepreciated by 1.8% (qoq) against the USD, which will result inhigher rupee revenue growth and aid operating margins by60-70bp.

Hiring spree to continue

Software

The IT players got into hiring mode from 3QFY2010. In1QFY2011 players raised their annual gross hiring target by15-20% on the back of pent up demand for discretionaryservices and to keep a bench ready to meet sudden spurt indemand going ahead. We expect the hiring trend to remainupbeat with Infosys expected to hire 14,000 and TCS around14,850 employees in 2QFY2011.

Utilisation to be held tightly

Traditionally 2Q is strong for the IT companies (baring2QFY2010 due to effects of recession) because of the strongbudget flush that happens before close of the annual capexcycle by clients. Owing to the return of strong demand for ITservices, volume growth in 1QFY2011 reverted to

Utilisation levels (including trainees) of tier I companies stoodat 71-78% in 1QFY2011. In 2QFY2011, almost 30-35% of thegross hiring target is expected to be absorbed. Overall, on theback of pent up demand for discretionary services and abatingattrition, we expect utiisation to remain tightly held.

Attrition blues behind

Attrition levels had shot up in 1QFY2011 to the pre-recessionarylevels of FY2008 with the job markets opening up to absorblaterals on immediate basis to map in the surge in volumes,end of annual appraisals and employees leaving for higherstudies. However, going forward, we expect these rates tonormalise as the strong campus hiring across companies willcreate a stable bench as well as map in any surge in demandand abate poaching of laterals. Besides, the seasonality effectof appraisal as well as leaving for higher studies will not bepresent over the rest of the year. Thus, we do not expect attritionto be a spoilsport anymore causing any lapse in the billableposition of the companies.

Cyclically a strong quarter with robust volume growth


Exhibit 5: Trend in USD/INR

42

43

44

45

46

47

48

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10


Exhibit 6: Trend in net additionNo ofNo ofNo ofNo ofNo ofemployeesemployeesemployeesemployeesemployees 1Q091Q091Q091Q091Q09 2Q092Q092Q092Q092Q09 3Q093Q093Q093Q093Q09 4Q094Q094Q094Q094Q09 1Q101Q101Q101Q101Q10 2Q102Q102Q102Q102Q10 3Q103Q103Q103Q103Q10 4Q104Q104Q104Q104Q10 1Q111Q111Q111Q111Q11

Infosys 3,192 5,927 2,772 1,772 (945) 1,548 4,429 3,914 1,026

TCS 4,895 5,328 8,692 13,418 (2,746) 320 7,692 10,775 3,271

HCL Tech 863 2,124 657 332 (184) 665 1,691 3,152 5,409

Wipro 108 1,877 (587) 845 711 (630) 4,855 5,325 4,854


Exhibit 7: Trend in utilisation rates

Infosys TCS HCL Tech Wipro

60.0

65.0

70.0

75.0

80.0

85.0

1Q

FY0

8

2Q

FY0

8

3Q

FY0

8

4Q

FY0

8

1Q

FY0

9

2Q

FY0

9

3Q

FY0

9

4Q

FY0

9

1Q

FY1

0

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

(%)


Exhibit 9: Trend in volume growth (qoq)

Infosys TCS HCL Tech Wipro(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1Q

FY07

1Q

FY08

2Q

FY08

3Q

FY08

4Q

FY08

4Q

FY09

1Q

FY10

2Q

FY10

(%Q

oQ

)

2Q

FY07

3Q

FY07

4Q

FY07

1Q

FY09

2Q

FY09

3Q

FY09

3Q

FY10

4Q

FY10

1Q

FY11

2Q

FY11E


Exhibit 8: Trend in attrition rate (%)

Infosys TCS HCL Tech

10

12

14

16

18

20

22

3Q

FY0

7

4Q

FY0

7

1Q

FY0

8

2Q

FY0

8

3Q

FY0

8

4Q

FY0

8

1Q

FY0

9

2Q

FY0

9

3Q

FY0

9

4Q

FY0

9

1Q

FY1

0

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

1Q

FY0

7

2Q

FY0

7

67



Analyst - Srishti AnandAnalyst - Srishti AnandAnalyst - Srishti AnandAnalyst - Srishti AnandAnalyst - Srishti Anand

Software

pre-recessionary levels of 1QFY2008. In 2QFY2011, we expectthe momentum in volume growth to persist at 6-8.1% (qoq) fortier I companies.

Revenues to surge

Since the past two quarters despite strong volume growth, theUSD revenue growth stood lower owing to unfavourablecross-currency movements. However, in 2QFY2011, we expectrevenues to surge on robust volumes, stable pricing andfavourable currency impact. We expect USD revenue growth tospan in the range of 6.8-7.8% (qoq) for tier I companies.

Outlook and Valuation

In 3QFY2010, when recovery in IT spend began, most of therecovery happened in terms of run-the-business, which is moreannuity, maintenance and infrastructure contracts that drive costefficiency, etc. Over the last two quarters, there has been anuptick in discretionary spending instilling confidence back inthe sector. Thus, we expect 2QFY2011 to be a strong quarterwith 6.5-8% qoq growth in USD revenues for tier I companiesaided by buoyant demand driving volumes, favourablecross-currency movement and stable pricing environment. WWWWWeeeeeremain positive on the IT sector with Tremain positive on the IT sector with Tremain positive on the IT sector with Tremain positive on the IT sector with Tremain positive on the IT sector with TCS and Wipro being ourCS and Wipro being ourCS and Wipro being ourCS and Wipro being ourCS and Wipro being ourpreferred picks amongst the tier I companies.preferred picks amongst the tier I companies.preferred picks amongst the tier I companies.preferred picks amongst the tier I companies.preferred picks amongst the tier I companies.

Margins to be mixed

We expect Infosys to post expansion in its EBIT margins by 175bpqoq as wage hikes are behind, the periodic visa cost will belower, rupee depreciation to the tune of 2% will cushion marginsby 70bp and higher offshore efforts will aid them. In case ofTCS, the effect of promotions will sweep away gains leaving it


Source: Company, Angel Research; Note: Price as on October 1, 2010; * June ending and 1QFY2011 estimates, % chg is qoq



Infosys 3,103 6,809 9.9 30.1 174.8 1,692 13.7 29.7 13.7 109.5 117.7 143.5 28.3 26.4 21.6 - Neutral

TCS 960 8,959 9.0 27.1 0.0 1,990 7.9 10.2 7.9 35.1 41.0 46.9 27.3 23.4 20.5 1,032 Accumulate

Wipro 461 8,177 13.0 19.7 (34.3) 1,352 2.5 5.6 2.5 18.9 22.7 25.7 24.4 20.3 17.9 489 Accumulate

HCL Tech.* 431 3,563 4.0 12.9 (239.4) 269 (15.3) 3.9 (15.3) 17.6 24.0 31.3 24.4 18.0 13.8 - Neutral


Exhibit 12: IT index v/s Sensex

90

95

100

105

110

115

120

30

-Jun

-10

30

-Jul

-10

14

-Aug

-10

13

-Sep

-10

28

-Sep

-10

(Rs)

BSE Sensex: Rs104.3

BSE IT Index: Rs104.7

BSE IT Index BSE Sensex

15

-Jul

-10

29

-Aug

-10

flat qoq. Wipro is expected to post a 60bp expansion qoq in itsIT services, but post a 34bp qoq dip on consolidated basis dueto strong growth in IT products, which is a thin margin business.HCL Tech’s margins are expected to decline by 239bp qoq dueto the wage hikes taken in 2QFY2011 and continued losses inthe BPO business. Thus, 2QFY2011 is expected to mixed onthe EBIT margin front for tier I companies.

BSE IT v/s BSE Sensex relative performance

During 2QFY2011, the BSE IT index gained 11.8% qoq,marginally underperforming the Sensex, which gained 13.4%during the period. This was despite developments like the banof outsourcing-offshoring by the state of Ohio, increase in H1Band L1 visa costs as well as the hike in MAT rate from 18% to20%.Thus, the IT index posted a decent performance despitethe above developments on the back of the positive demandenvironment witnessed during the quarter.


Exhibit 11: Change in EBIT margins (bp)

(300)

(250)

(200)

(150)

(100)

(50)

0

50

100

150

200

2QFY10 3QFY10 4QFY10 1QFY11 2QFY11E

BP(

QoQ

)

Infosys TCS HCL Tech Wipro (IT services)


Exhibit 10: Trend in USD revenue growth

Infosys TCS HCL Tech Wipro

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1Q

FY0

9

2Q

FY0

9

3Q

FY0

9

4Q

FY0

9

1Q

FY1

0

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

2Q

FY1

1E

(%Q

oQ

)



Telecom

During 2QFY2011, stocks of Airtel and Idea rallied by 38%and 23%, respectively. The surge in major telecom stocksindicated the end of the overhang related to the irrationalpricings in the 3G auction and the bottoming out of the pricewar, as operators are now ceasing the full talk time scheme togain better price points.

The quarter also witnessed developments indicating a possibleconsolidation scenario for the Indian telecom industry in themedium term. The Department of Telecom (DoT) is consideringseveral possibilities, such as a) allowing the merger of newoperators with larger ones, b) shortening of the three-yearlock-in period for a company's promoter to sell out its stakeand c) relaxing rules pertaining to buyouts and mergers byallowing incumbents to retain airwaves held by new operators.

On the contrary, the much talked about sell-out of RCOM'stower business to GTL Infra failed in September 2010. This hasagain put RCOM's much-awaited deleveraging plan on hold,though the company maintains that it is still in talks with otherstrategic and financial investors to sell ~26% stake of itsbusiness.

New players continue to gain subscriber market share

Over June-August 2010, the Indian wireless subscriber basegrew at an average rate of 2.8% mom. Incumbents such asAirtel, RCOM, Vodafone, BSNL and Idea grew at an averagerate of 1.7-2.8% mom, whereas Aircel outperformed its peersby growing at an average rate of 3.8% mom. New entrants,including Uninor, Videocon and Etisalat, grew at average ratesof 23.9%, 27.3% and 55.0% mom, respectively.

Thus, a trend was spotted with most of the incumbents losingtheir market share to new entrants, with Airtel leading the losingbandwagon. Over June-August 2010, subscriber market shareof Uninor and Videocon increased by 0.4% and 0.2%,respectively. Whereas, Aircel bucked the trend of losing out itsmarket share to new entrants and gained 0.2% share over thesame period.

CompanyCompanyCompanyCompanyCompany Mar '10 Mar '10 Mar '10 Mar '10 Mar '10 Apr '10Apr '10Apr '10Apr '10Apr '10 May '10May '10May '10May '10May '10 Jun '10Jun '10Jun '10Jun '10Jun '10 July '10July '10July '10July '10July '10 Aug '10Aug '10Aug '10Aug '10Aug '10

(mn)Airtel 127.6 130.6 133.6 136.6 139.2 141.3

RCOM 102.4 105.2 107.9 110.8 113.3 115.3

Vodafone Essar 100.7 103.5 106.1 108.8 111.2 113.5

BSNL 63.5 64.7 65.8 66.9 68.1 70.4

IDEA 63.8 65.3 66.7 68.9 70.7 72.7

TTSL 65.8 67.7 69.6 72.4 74.7 76.8

Aircel Cellular 36.9 38.5 40.1 41.7 43.3 44.9

MTNL 4.8 4.8 4.9 4.9 4.9 5.0

BPL Mobile 2.8 2.9 2.9 2.9 2.9 3.0

HFCL 0.3 0.3 0.3 0.7 0.9 0.9

Shyam Telelink 3.8 4.2 4.7 5.1 5.5 6.0

S Tel 0.8 0.9 1.0 1.1 1.1 1.2

Uninor 4.3 5.0 5.0 6.0 6.9 9.1

Videocon - 1.0 2.4 3.0 3.9 4.9

DB Etisalat - 0.0 0.0 0.0 0.0 0.0Source: COAI, AUSPI, Angel Research

Exhibit 2: Total wireless subscriber base


(%)Airtel 22.1 22.0 21.9 21.7 21.5 21.2

RCOM 17.7 17.7 17.7 17.6 17.5 17.3

Vodafone Essar 17.4 17.4 17.4 17.3 17.2 17.1

BSNL 11.0 10.9 10.8 10.6 10.5 10.6

IDEA 11.1 11.0 10.9 10.9 10.9 10.9

TTSL 11.4 11.4 11.4 11.5 11.5 11.5

Aircel Cellular 6.4 6.5 6.6 6.6 6.7 6.8

MTNL 0.8 0.8 0.8 0.8 0.8 0.8

BPL Mobile 0.5 0.5 0.5 0.5 0.5 0.4

HFCL 0.1 0.1 0.1 0.1 0.1 0.1

Shyam Telelink 0.7 0.7 0.8 0.8 0.9 0.9

S Tel 0.1 0.2 0.2 0.2 0.2 0.2

Uninor 0.7 0.8 0.8 1.0 1.1 1.4

Videocon - 0.2 0.4 0.5 0.6 0.7

DB Etisalat - 0.0 0.0 0.0 0.0 0.0Source: COAI, AUSPI, Angel Research

Exhibit 3: Operator-wise subscriber market share


Exhibit 1: Stock return analysis of leading Indian TSPs

% Chg (3 Mths.) % Chg (1 yr.)

(60)

(50)

(40)

(30)

(20)

(10)

0

10

20

30

40

50

Bharti Airtel RCOM Idea Cellular

69



The net addition run rate of Airtel, RCOM and Vodafone taperedoff significantly in the first two months of 2QFY2011, as newoperators such as Uninor, Etisalat and Videocon rolled out their2G services across various circles. Thus, incumbents witnesseda downward trend in their share of subscriber net additions.

Telecom


(mn)Airtel 3.0 3.0 3.0 3.0 2.6 2.0

RCOM 3.0 2.7 2.7 2.9 2.5 2.0

Vodafone Essar 3.6 2.9 2.6 2.7 2.4 2.3

BSNL 2.5 1.3 1.0 1.1 1.2 2.3

IDEA 1.7 1.5 1.4 2.2 1.9 2.0

TTSL 2.8 1.9 1.9 2.7 2.3 2.1

Aircel Cellular 2.0 1.6 1.6 1.6 1.6 1.6

MTNL 0.1 0.0 0.0 0.0 0.0 0.0

BPL Mobile 0.1 0.0 0.0 0.0 0.0 0.0

HFCL 0.0 (0.0) (0.0) 0.3 0.2 0.1

Shyam Telelink 0.7 0.4 0.5 0.4 0.5 0.5

S Tel 0.2 0.1 0.1 0.1 0.1 0.1

Uninor 0.7 0.8 (0.0) 1.0 0.9 2.2

Videocon - 1.0 1.4 0.6 0.9 1.0

DB Etisalat - 0.0 0.0 0.0 0.0 0.0

TTTTTotalotalotalotalotal 20.420.420.420.420.4 17.217.217.217.217.2 16.416.416.416.416.4 18.718.718.718.718.7 17.117.117.117.117.1 18.318.318.318.318.3Source: COAI, AUSPI, Angel Research

Exhibit 4: Trend in wireless subscriber net additions

Circle-wise net additions

In the first two months of 2QFY2011, Metro, A and C circlesposted 2.3-2.8% mom subscriber growth, while B circle posted3% mom growth despite having the highest subscriber base.

In August 2010, Metro lost its share to C circle in a big way,which stood tall with 14% market share in subscriber netaddition. On an absolute basis, all circles (ex-metro) grewrapidly, with C circle leading at 2.5mn net addition (101% mom),followed by B circle at 7.6mn (11% mom), while net additionsin Metro and A circles were down by 11% and 8% mom,respectively.

CircleCircleCircleCircleCircle Mar '10 Mar '10 Mar '10 Mar '10 Mar '10 Apr '10Apr '10Apr '10Apr '10Apr '10 May '10May '10May '10May '10May '10 Jun '10Jun '10Jun '10Jun '10Jun '10 July '10July '10July '10July '10July '10 Aug '10Aug '10Aug '10Aug '10Aug '10

Metro 8.2 11.0 13.2 13.3 13.1 10.9

A 33.2 36.1 32.3 32.9 39.1 33.6

B 42.8 39.0 39.3 39.6 40.3 41.7

C 15.8 13.9 15.1 14.2 7.4 13.9Source: COAI, AUSPI, Angel Research

Exhibit 5: Market share in subscriber addition (%)

Circle-wise operator launches during 2QFY2011

Various circle-specific launches were witnessed during thequarter. Videocon launched its services in A circle, including

VAS share to remain steady

We assume VAS share to remain steady in 2QFY2011, whichwill help the downside in average revenue per minute (ARPM)to be limited due to lower voice ARPM resulting from highergrowth in B and C circles.

ARPM to continue its downward trend

ARPM has registered a free fall of 5% CQGR over the past eightquarters on the back of entry of new players and the price war.However, the price war logged by these new entrants has turnedinto a curse for their own sustainability. Hence, we expectconsolidations to happen in the Indian telecom sector, whichwill arrest the possibility of any price war resurfacing. Also,operators have recently reduced the talk time value on rechargecards, which will help ARPM to stabilise, thus covering up forthe decline in overall ARPM due to higher additions in B and Ccircles. Therefore, we have built in a moderate 3% CQGR fall

Andhra Pradesh, Karnataka and Maharashtra; B circle, includingRajasthan and West Bengal; and C circle, including HimachalPradesh, Bihar and Orissa. Also, Aircel launched its services inGujarat, Punjab and Haryana, with an impressive net additionof 96,248 subscribers in Punjab. Even Loop Mobile launchedits services in Haryana, Kolkata, Madhya Pradesh, Orissa,Punjab and Rajasthan, while S Tel forayed into the northeast.

Thus, new as well as existing operators have started aggressivelyfocusing on underpenetrated circles like B, C and A, which haveattractive teledensity levels of 38%, 49% and 66%, respectively,to gain higher subscriber market shares.

MOU to be weak because of the seasonality effect

In the past 2-3 quarters, Airtel and Idea witnessed a seculargrowth trend in their minutes of usage (MOU), while RCOMwitnessed a drop in its MOU. The second quarter of a fiscalyear is generally a weak quarter, due to seasonality effect. Thus,in 2QFY2011, we expect MOU of Airtel and Idea to fall by 1%each and that of RCOM to drop by 4% qoq.


Exhibit 6: Trend in MOU per month per subscriber

Airtel(ex-africa) Idea RCOM

250

350

450

550

1Q

FY0

9

2Q

FY0

9

3Q

FY09

4Q

FY0

9

1Q

FY1

0

2Q

FY1

0

3Q

FY1

0

4Q

FY10

1Q

FY1

1

2Q

FY1

1E

min

utes

per

user

Telecom

Analyst - Srishti AnandAnalyst - Srishti AnandAnalyst - Srishti AnandAnalyst - Srishti AnandAnalyst - Srishti Anand


Source: Company, Angel Research; Note: Price as on October 1 , 2010, % chg qoq


Rs)Rs)Rs)Rs)Rs) 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E chg bpchg bpchg bpchg bpchg bp 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg 2QFY11E2QFY11E2QFY11E2QFY11E2QFY11E % chg% chg% chg% chg% chg FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E (Rs)(Rs)(Rs)(Rs)(Rs)

Bharti Airtel 365 15,308 25.2 35.5 (60.0) 1,734.5 6.5 4.6 6.5 32.0 20.3 24.6 11.4 18.0 14.8 - Neutral

RCOM 168 5,215 2.1 31.8 (10.0) 211.2 (15.8) 1.0 (15.8) 21.8 8.8 10.4 7.7 19.1 16.2 140 Sell

Idea Cellular 74 3,828 4.8 24.2 (17.0) 192.5 (4.7) 0.6 (4.7) 2.9 2.4 3.1 25.5 30.2 23.8 65 Reduce

ARPUs to decline, but to bottom out soon

The combination of declining ARPM and MOU in 2QFY2011will pull down average revenue per user (ARPU) by1.5-3.0% qoq for Airtel and Idea; whereas for RCOM, ARPU isexpected to continue to fall steeply by 6.3% qoq. However, goingforward, we expect ARPUs to stabilise with steadiness in MOUand ARPM.

EPMs to remain timid

For 2QFY2011, we expect EBITDA per minute (EPM) to dip by2.5-5.0% qoq on the back of the decline in ARPU, cyclicallyhigher employee cost and sustained spending on advertisementand business promotions.


For 2QFY2011, we expect revenue growth to be driven by stronggrowth in subscriber base, negating the effect of falling ARPU.Amongst the top three operators, we expect Idea to registerrevenue growth of 4.8% qoq and RCOM to grow at 2.1% qoq.Airtel is expected to post growth of 25.2% qoq, as this quarterwill include the full quarter effect of Zain's integration. On theEBITDA margin front, we expect Airtel to post a 60bp qoq dip,as full integration of Zain (with EBITDA margin of 27.5%, whichis much lower than Airtel's average margin) will dilute thecompany's margins. Idea and RCOM are expected to postEBITDA margin declines of 17bp and 10bp qoq, respectively,for 2QFY2011.

With the bottoming out of the price war, operators are lookingat increasing the pre-paid call cost by offering less talk time inrecharges. Also, they continue to focus on increasing their VASshare to aid profitability, as India is still highly underpenetratedwith less than 4% of the population using broadband. Valuationsof telecom stocks have shot up steeply over the past three monthsin anticipation of stable tariffs here on, launch of MNP as a nonevent and 3G service roll out as an ARPM accretive.

We believe there is an over optimism associated with the telecomsector and, hence, maintain a cautious view on the same. Airtelremains our preferred pick due to its low-cost integrated model(owned tower infrastructure), potential opportunity to scale upin Africa, established leadership in revenue and subscribermarket share, and relatively better KPIs.

in ARPM (ex-VAS) over 1QFY2011-4QFY2011E and expectstabilisation in FY2012E. In fact, the persistence of VAS sharewill limit the downside in ARPM, leading to a decline of1.8-2.2% only in 2QFY2011.


100

200

300

400

1Q

FY09

2Q

FY09

3Q

FY09

4Q

FY09

1Q

FY10

2Q

FY10

3Q

FY10

4Q

FY10

1Q

FY11

2Q

FY11E

Rs/m

onth


Exhibit 8: Trend in ARPU per month


Exhibit 9: EPM trend


0.10

0.15

0.20

0.25

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11E

Rs/m

inSource: Company, Angel Research

Exhibit 7: Trend in ARPM per subscriber


0.4

0.5

0.6

0.7

1Q

FY09

2Q

FY09

3Q

FY09

4Q

FY09

1Q

FY10

2Q

FY10

3Q

FY10

4Q

FY10

1Q

FY11

2Q

FY11E

ARP

M(R

s/m

in)

71


Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Ratings (Returns) :

Disclaimer

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investmentdecision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should makesuch investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companiesreferred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits andrisks of such an investment.

Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investmentdecisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document arethose of the analyst, and the company may or may not subscribe to all the views expressed within.

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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to theNote: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to theNote: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to theNote: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to theNote: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to thelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may havelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may havelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may havelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may havelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may haveinvestment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.

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Research Team

Fundamental:

Sarabjit Kour Nangra VP-Research, Pharmaceutical [email protected]

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Vaishali Jajoo Automobile [email protected]

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Anand Shah FMCG , Media [email protected]

Deepak Pareek Oil & Gas [email protected]

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Amit Rane Banking [email protected]

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Chitrangda Kapur Research Associate (FMCG, Media) [email protected]

Pooja Jain Research Associate (Metals & Mining) [email protected]

Yaresh Kothari Research Associate (Automobile) [email protected]

Shrinivas Bhutda Research Associate (Banking) [email protected]

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Hemang Thaker Research Associate (Capital Goods) [email protected]

Nitin Arora Research Associate (Infra, Real Estate) [email protected]

Technicals:

Shardul Kulkarni Sr. Technical Analyst [email protected]

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Derivatives:

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Institutional Sales Team:

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