Sector All 20100625 Mosl Rp Pg260

July 2010

India Strategy

SENSEX

11 10

earnings

9

8

reforms

fund flow

6

5

interest rates

7

capex

consumption

4 3

payouts

monsoons

2 1

valuations

corporate events

global markets

India 2010: Watch out for the 2nd half Research Team ([email protected])

India Strategy

Contents India Strategy Sector & Companies

3-46 47-255

1. Automobiles Bajaj Auto Hero Honda Mahindra & Mahindra Maruti Suzuki India Tata Motors

48-56 52 53 54 55 56

2. Banking Andhra Bank Axis Bank Bank of Baroda Bank of India Canara Bank Corporation Bank Dena Bank Federal Bank HDFC HDFC Bank ICICI Bank Indian Bank LIC Housing Oriental Bank Punjab National Bank Shriram Transport South Indian Bank State Bank Union Bank Yes Bank

57-82 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82

3. Cement ACC Ambuja Cement Birla Corporation Grasim Industries India Cements Shree Cement UltraTech Cement

83-93 87 88 89 90 91 92 93

4. Engineering ABB BHEL Crompton Greaves Larsen & Toubro Siemens Thermax

94-104 99 100 101 102 103 104

5. FMCG Asian Paints Britannia Industries Colgate Palmolive Dabur India

105-121 111 112 113 114

GSK Consumer Godrej Consumer Products Hindustan Unilever ITC Marico Nestle India United Spirits

115 116 117 118 119 120 121

6. Information Technology122-134 HCL Technologies 128 Infosys 129 MphasiS 130 Patni Computer 131 TCS 132 Tech Mahindra 133 Wipro 134

11. Pharmaceuticals Aventis Pharma Biocon Cadila Healthcare Cipla Divi’s Laboratories Dishman Pharma Dr Reddy’s Labs. GSK Pharma Glenmark Pharma Jubilant Organosys Lupin Piramal Healthcare Ranbaxy Labs. Sun Pharmaceuticals

184-205 192 193 194 195 196 197 198 199 200 201 202 203 204 205

7. Infrastructure Hindustan Construction IVRCL Jaiprakash Associates Nagarjuna Construction Simplex Infrastructure

135-143 139 140 141 142 143

12. Real Estate Anant Raj Industries DLF HDIL Mahindra Lifespaces Phoenix Mills Unitech

206-216 211 212 213 214 215 216

8. Media Deccan Chronicle HT Media Jagran Prakashan Sun TV Network Zee Entertainment

144-153 149 150 151 152 153

13. Retailing Pantaloon Retail Titan Industries

217-222 221 222

9. Metals Hindalco Hindustan Zinc JSW Steel Nalco Sesa Goa SAIL Sterlite Industries Tata Steel

154-166 159 160 161 162 163 164 165 166

10. Oil & Gas BPCL Cairn India Chennai Petroleum GAIL Gujarat State Petronet HPCL IOC Indraprastha Gas MRPL ONGC Reliance Industries

167-183 173 174 175 176 177 178 179 180 181 182 183

14. Telecom 223-231 Bharti Airtel 228 Idea Cellular 229 Reliance Communication 230 Tulip Telecom 231 15. Textiles Alok Industries Arvind Mills Bombay Rayon Raymond Vardhman Textiles

232-241 237 238 239 240 241

16. Utilities CESC NTPC Power Grid Corp. PTC India Reliance Infrastructure Tata Power

242-253 248 249 250 251 252 253

17. Others Sintex Industries United Phosphorus

254-255 254 255

Note: All stock prices and indices for India Strategy as on 30 June 2010, unless otherwise stated

July 2010

2

2 July 2010

India Strategy BSE Sensex: 17,701

S&P CNX: 5,313

As on: 30 June 2010

T

O use football parlance, Earnings remains a star striker for Team India. It should remain in steady form in 1QFY11, with Sensex PAT growing 19% YoY. Second half of 2010 for Indian equities depends on the interplay of 11 different drivers. Monsoons and Global markets remain the near term triggers for market direction. Our model portfolio is overweight on domestic plays - Financials (SBI, ICICI Bank), Infrastructure & allied sectors (BHEL, ACC, Unitech) and Oil & Gas (BPCL, GAIL). Amongst the global plays, we prefer IT and Pharma over cyclicals. Steady 1QFY11 for the Indian corporate sector; Sensex PAT up 19% YoY We expect MOSL Universe (excluding oil marketing companies) to report 1QFY11 earnings growth of 17% YoY. This growth is a moderation compared to 31% YoY in 2HFY10, when earnings were largely driven by low base. Telecom sector and ONGC are the two key reasons for lower growth. Ex these, growth for rest of Universe would be 31%. 1QFY11 will also be a quarter, where absolute PAT will be lower QoQ (first time in last 4 years). This is driven by flat growth QoQ in Oil & Gas and drop in earnings in Metals and Telecom sector. Sensex performance is marginally better than aggregate with PAT growth of 19% YoY. QUARTERLY EARNINGS PERFORMANCE - MOSL UNIVERSE (RS B) SALES SECTOR

JUN-10

(NO OF COMPANIES)

Auto (5) Banks (20) Cement (7) Engineering (6) FMCG (11) IT (7) Infrastructure (5) Media (5) Metals (8) Oil Gas & Petchem (11) Pharma (14) Real Estate (6) Retail (2) Telecom (4) Textiles (5) Utilities (6) Others (2) MOSL (124)* MOSL Excl. RMs (121) Sensex (29) *Tata Steel Consolidated

317 267 114 218 185 283 72 19 713 2,210 130 35 33 197 35 238 24 5,090 3,821 2,520

EBITDA

VAR %

VAR %

YOY

QOQ

36.6 28.8 1.0 20.5 14.8 13.3 15.9 25.1 26.4 28.0 10.5 32.0 29.1 0.9 33.3 11.8 3.3 23.0 25.1 28.0

-4.9 -4.1 -4.0 -34.8 1.6 5.1 -20.7 4.3 -6.8 -8.0 3.7 -7.5 -2.5 3.4 -2.1 13.2 -9.2 -6.7 -4.3 -4.8

JUN-10

43 228 32 25 37 71 11 8 140 234 27 15 3 66 8 66 4 1,017 982 622

NET PROFIT

VAR %

VAR %

YOY

QOQ

29.7 22.9 -14.2 23.7 8.9 10.4 16.6 38.5 110.9 -4.2 14.9 14.6 34.7 -12.7 58.3 16.2 7.1 15.6 19.7 20.6

-7.9 -5.8 1.7 -59.0 2.6 1.9 -22.2 8.0 -16.2 -20.2 1.2 -6.8 -5.8 1.6 -6.5 21.6 -15.7 -11.2 -6.4 -4.7

JUN-10

VAR %

VAR %

YOY

QOQ

27 29.7 -4.6 115 16.4 2.8 19 -18.9 6.2 16 13.4 -59.7 25 7.6 4.1 55 15.0 -0.1 4 5.4 -23.2 5 25.1 25.2 82 461.4 -14.8 111 -26.3 -34.2 18 30.1 -5.4 7 3.1 -15.6 1 81.0 -23.0 26 -43.8 -26.7 2 125.8 -11.9 36 5.1 -5.8 2 -0.1 -36.5 551 8.9 -16.4 534 17.0 -9.3 338 19.3 -7.8 Source: Company/MOSL

Navin Agarwal ([email protected]) / Rajat Rajgarhia ([email protected])

July 2010

3

India Strategy

India 2010: Watch out for the second half Indian markets had a lackluster first half 2010, rising just 1-2%. However, just like the ongoing football World Cup, Indian equities could throw up a few surprises in the second half of the year. How the second half plays out for India depends on the interplay of 11 different forces that we have identified and lined up like a typical football team. TEAM INDIA LINE-UP (SUMMARY ASSESSMENT IN BRACKETS)

Forward line or Strikers

Mid-field

Defense

11. Earnings (good visibility)

8. Interest Rates (needs stability)

4. Monsoons (rainbow of hope)

10. Reforms (gathering momentum)

7. Capex Boom (key winger)

3. Corporate events (lower uncertainty)

6. Consumption (story goes on …)

2. Global markets (weak link)

5. Payouts (getting better)

1. Valuations (time correction underway)

9. Fund Flow (needs to improve)

SENSEX

Overall assessment The Indian market’s strikers seem to be in good form. The midfield has remained solid for quite some time now. Amongst the defense, Monsoons and Global markets remain near term triggers for market direction. If the defense holds out, and all drivers work in tandem, the Indian market could well be higher from current levels by March 2011.

Markets to remain range-bound; stock-picking to drive portfolio performance Accelerating economic and corporate profit growth will limit downside in the markets. At the same time, above-average valuations cap the upside. Expect benchmark indices to remain with a range of 10% from current levels. Thus, 2010 will be a year of stockpicking, with market contribution to aggregate performance being the lowest in three years. We believe stocks in our model portfolio offer growth at reasonable valuations. We are overweight on domestic plays - Financials (SBI, ICICI Bank), Infrastructure & allied sectors (BHEL, ACC, Unitech) and Oil & Gas (BPCL, GAIL). Amongst the global plays, we prefer IT and Pharma over cyclicals. SENSEX EPS TREND: A NEW CYCLE OF EARNINGS GROWTH FOR INDIAN MARKETS

FY10-12: 25% CAGR 1,276 FY08-10E: 1,052 -0.6% CAGR FY03-08: 25% CAGR

FY12E

FY11E

FY10

FY09

FY08

523

FY07

450

FY06

348

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

250 266 291 278 280 216 236 272

FY96

FY95

FY94

FY93

181 81 129

FY96-03: 1% CAGR

FY05

FY93-96: 45% CAGR

833 820 823 718

Source: MOSL

July 2010

4

India Strategy

India 2010: Watch out for the second half The World Cup football fever has truly spread far and wide. As the tournament progressed, surprises have continued to dominate the event. Indian markets have also surprised in 1HCY10 with their resilience to weak global cues. We draw a strong parallel between football and how the Indian market is set up for the second half of 2010 and beyond. The starting line-up The BSE Sensex has ended the June quarter at 17,700, marking its third consecutive quarter of consolidation, post the sharp ~100% appreciation during March-September 2009. For the Indian market, it was a lackluster first half 2010, with the major indices rising only 1-2%. Yet, in relative terms, India was one of the best performing markets. INDIA V/S WORLD: STOCK MARKET RETURNS FY10

Russia Brazil India - Sensex Taiw an India - Nifty Thailand China South Korea MSCI - Asia S&P 500 UK Japan US

1HCY10

129 83 81 78 76 63 62 50 29 23 22 19 19

Thailand India - Nifty India - Sensex South Korea MSCI - Asia US Russia S&P 500 UK China Taiw an Japan Brazil

2QCY10

9 2 1 1 -4 -6 -7 -8 -9 -10 -10 -11 -11

India - Nifty Thailand India - Sensex South Korea -7 Taiw an China -8 -8 MSCI - Asia -10 US -12 S&P 500 Brazil -13 UK -13 Russia -15 Japan -15

1 1 1 0

Source: MOSL

How the second half plays out for India depends on the interplay of 11 different forces that we have identified. And like a typical football team, these forces can be lined up in a 4-4-3 formation (corresponding to defense-midfield-forward line). TEAM INDIA LINE-UP (SUMMARY ASSESSMENT IN BRACKETS)

Forward line or Strikers

Mid-field

Defense

11. Earnings (good visibility)

8. Interest Rates (needs stability)

4. Monsoons (rainbow of hope)

10. Reforms (gathering momentum)

7. Capex Boom (key winger)

3. Corporate events (lower uncertainty)

6. Consumption (story goes on …)

2. Global markets (weak link)

5. Payouts (getting better)

1. Valuations (time correction underway)

9. Fund Flow (needs to improve)

SENSEX

Overall assessment The Indian market’s strikers seem to be in good form. The midfield has remained solid for quite some time now. Amongst the defense, Monsoons and Global markets remain near term triggers for market direction. If the defense holds out, and all drivers work in tandem, the Indian market could well be higher from current levels by March 2011.

We proceed to separately assess each individual driver. July 2010

5

India Strategy

Striker #11: Earnings - good visibility 11

earnings

Earnings growth has been the bedrock of Indian equities during the upcycle of FY03-08 (EPS CAGR of 25%). Post the global financial crisis, Indian earnings flattened for two consecutive years. While 2HFY10 marked the beginning of earnings growth, markets need more certainty about the resumption and sustenance of the trend. We estimate EPS CAGR of 25% over FY10-12. Importantly, our FY11 EPS estimate has not witnessed any major changes over the last one year, indicating greater confidence in the estimates. SENSEX EPS TREND: A NEW CYCLE OF EARNINGS GROWTH FOR INDIAN MARKETS

FY10-12: 25% CAGR 1,276 FY08-10E: 1,052 -0.6% CAGR FY03-08: 25% CAGR

FY12E

FY11E

FY10

FY09

FY08

523

FY07

450

833 820 823 718

FY06

348

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

250 266 291 278 280 216 236 272

FY96

FY95

FY94

FY93

181 81 129

FY96-03: 1% CAGR

FY05

FY93-96: 45% CAGR

TREND OF REVISION IN FY11 EPS ESTIMATE: MARGINAL UPGRADE IN 1QFY11

Earnings to grow at 25% CAGR till FY12. No major revisions in last 12 months.

FY 11 EPS 10.5

16.4

26.1 1,103

% Grow th Revision in FY11 EPS 32.1

29.5

27.9

1,042

1,052

Mar 10

Jun 10

1,076

1,028 980

Mar-09 Jun 09 EPS growth YoY (%)

Sep 09

Dec 09

Source: MOSL

Another feature of earnings growth in this cycle would be the rising contribution of domestic sectors. We expect domestic plays to contribute 56% of aggregate earnings in FY12 v/s 52.6% in FY08. The contribution in FY10 appears high due to insignificant profits and losses in few cases from global cyclicals. Domestic proportion of earnings would have further risen, if one were to include the gas profits from Reliance, GAIL, ONGC, etc.

July 2010

6

India Strategy

MOSL UNIVERSE PAT MIX (FY10-12 EARNINGS AGGREGATES) - RS B PAT (RS B) SECTOR

Rising share of domestic plays will lead to higher valuations

SENSEX

Domestic Plays Banking Utilities Engineering Auto Telecom FMCG Cement Real Estate Infrastructure Global Plays Cyclical Oil & Gas ex RMs Metals Non-Cyclical IT Pharma MOSL Universe ex RMs

FY06

FY08

FY10

508 1,033 1,300 199 334 494 86 111 157 36 65 103 49 72 106 30 134 152 51 71 98 25 80 88 9 123 38 9 18 27 545 930 889 431 727 617 278 410 420 153 317 197 113 204 272 84 148 211 29 56 61 1,053 1,964 2,189

% SHARE FY12

1,855 736 247 161 191 115 135 94 63 54 1,469 1,095 700 395 373 276 97 3,324

FY06

48.3 18.9 8.2 3.4 4.6 2.8 4.8 2.3 0.9 0.8 51.7 41.0 26.4 14.5 10.8 8.0 2.8 100.0

FY08

52.6 17.0 5.6 3.3 3.7 6.8 3.6 4.1 6.3 0.9 47.4 37.0 20.9 16.1 10.4 7.5 2.8 100.0

FY10

59.4 22.6 7.2 4.7 4.8 7.0 4.5 4.0 1.7 1.3 40.6 28.2 19.2 9.0 12.4 9.6 2.8 100.0

PAT CAGR (%) FY12

55.8 22.1 7.4 4.8 5.7 3.5 4.0 2.8 1.9 1.6 44.2 33.0 21.1 11.9 11.2 8.3 2.9 100.0

FY08-

FY10-

FY06-

FY10

FY12

FY12

12.2 19.5 24.1 21.7 22.0 24.4 19.0 25.6 19.3 26.0 25.1 28.6 21.6 34.0 25.5 6.4 -13.2 25.0 17.5 17.1 17.5 4.7 3.4 24.9 -44.3 28.4 37.3 25.0 41.0 35.2 -2.3 28.6 18.0 -7.8 33.2 16.8 1.3 29.1 16.6 -21.1 41.6 17.1 15.4 17.2 22.0 19.3 14.4 21.9 4.3 26.5 22.2 5.6 23.2 21.1 Source: MOSL

Assessment of role as Sensex driver Earnings (growth and visibility) is the star striker, having returned to make a meaningful contribution after being on holiday during FY08-10. Rising share of domestic plays provides greater stability to aggregate earnings growth and also lead to higher market valuations. We see this as a key source of market re-rating over the next few years.

Striker #10: Reforms - gathering momentum 10

The Congress-led UPA (United Progressive Alliance) government is in its second year of office following its re-election in 2009. The market had cheered the election of the government in May 2009 with a big gain on hopes of several reforms. We believe the stage is set for policy reforms to gather significant momentum with impact on both corporate earnings and stock valuations.

reforms

Oil Sector Reforms: LONG AWAITED! The first set of reforms have come in the Oil sector, with hike in GAIL’s pipeline tariff in April 2010, followed by a hike in APM gas price in May, and rounding up the quarter with a move towards deregulation of major oil products in June 2010. The scope and further hopes of these reforms have already driven PSU Oil & Gas stocks to significantly outperform the market indices in 1QFY11. India’s outperformance over the global markets has been driven by a rising confidence in the government reforms post the fuel price de-regulation. In this section, we explain the importance of the Oil sector reforms and their implications on stocks.

July 2010

7

India Strategy

SIGNIFICANT OUTPERFORMANCE OF OIL STOCKS IN 1QFY11 …

Sensex

ONGC

HPCL

IOC

150

… MAKES UP FOR MUCH OF THE PAST UNDERPERFORMANCE

Sensex

BPCL 149

ONGC

HPCL

IOC

BPCL

162

135

135 129

144

120

122

126

151 149 146 125 121 113

108 105

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

Dec-09

Nov-09

Oct-09

Jun-10

Sep-09

May-10

Aug-09

90 Apr-10

90 Jul-09

100

Source: MOSL

2010 will be marked as a year of oil sector reforms in the Indian markets. 1. Reforms for the sector began with an independent regulator giving out the tariff for the gas pipelines, resulting in earnings increase for GAIL over the coming years. 2. Then the APM gas price reforms: APM gas price had been stagnant for the last several years. As against the expectation of gradual increase over the 2-3 years, in a surprise move the government increased the APM gas price in a single instant from US$2/mmbtu to US$4.2/mmbtu. 3. The reforms have reached the crescendo with the government now freeing petrol and diesel prices.

Hike in fuel prices have surprised positively

Key announcements „ Petrol: Retail prices to be market-determined. As per the latest fortnight data, price hike is ~Rs3.5/liter. „ Diesel: Though the Empowered Group of Ministers (EGoM) has decided to eventually deregulate diesel prices, currently it has decided to increase price by just Rs2/liter. „ LPG: Domestic LPG cylinder price to be hiked by Rs35/cylinder (current loss is Rs262/cylinder). „ Kerosene: PDS kerosene price to be hiked by Rs3/liter from Rs9/liter to Rs12/liter (current loss is Rs17.9/liter). Previous hike was in March 2002. UNPRECENDENTED PRICE HIKE: KEROSENE PRICE HIKE WAS HIGHEST AT 33% PRODUCT

BEFORE

AFTER

CHG

CHG (%)

LAST PRICE HIKE

Petrol Rs/litre 47.93 Diesel Rs/litre 38.10 Kerosene Rs/litre 9.23 LPG Rs/Cylinder 310.35 Prices are at Delhi

UNIT

51.43 40.10 12.23 345.35

3.5 2.0 3.0 35.0

7.3 5.2 32.5 11.3

Feb.2010 Feb.2010 Mar.2002 Jun.2008

KIRIT PARIKH RECO'S

To deregulate To deregulate 6.0 100.0 Source: MOSL

These reforms have led to a significant reduction in the under-recoveries of the stateowned oil companies. We analyze the impact of these reforms.

July 2010

8

India Strategy

FY09 under-recoveries reached unprecedented levels, forcing the government to seek a sustainable solution „ In FY09, with crude price touching historic highs, under-recoveries reached an unprecedented level of Rs1t. This also resulted in the government doling out the highest ever oil bond compensation of ~Rs700b. „ Fiscal deficit climbed to a decade-high of 6.6% in FY10. Till FY09, the government used to share the subsidy through oil bonds, reducing the impact on reported fiscal deficit. From FY10, it decided to make cash payments for subsidies and include in fiscal deficit - this paved the way for the thought of deregulation.

GOI FISCAL DEFICIT HAD INCREASED OVER THE LAST 2 YEARS

6.0

4.5

1,200 1,000

Oil Bonds

Upstream

Dow nstream

800 600

1,269

400 200 2.6

*Prior to FY10 fiscal deficit excludes oil bonds to OMC's

0 FY10E

FY08

1,426

3.3

FY07

1,464

1,258 FY05

4.0

FY06

1,233

1,451 FY03

FY04

1,410

1,188 FY01

FY02

1,047

3.9

FY00

6.7

3,370

5.9

5.7

FY09

6.2 5.4

% of GDP 4,140

Fiscal Deficit (Rs b)

HIGHEST EVER OIL BONDS ISSUANCE BY THE GOI IN FY09 (RS B)

-200 FY06

FY07

FY08

FY09

FY10 Source: MOSL

FY11 - the year for deregulation „ After a roller-coaster ride in FY09 and FY10, crude prices seem to be stabilizing in FY11, albeit in a higher price band. „ From the government's point of view, this was the best time to deregulate fuel prices, given (1) largely stable crude oil price, (2) increased ability to withstand opposition from political rivals, and (3) continued pressure to improve the country's energy security (cannot allow financials of state-owned oil companies to suffer). „ The government had set up the Expert Group to recommend a viable strategy for the sector and the recent EGoM decision was based on the recommendations of the Expert Group headed by Kirit Parikh. „ FY11 is also the year when the government had windfall gains from the spectrum auction of 3G and BWA (cash inflow of Rs1.06t). Benign oil price would be positive for OMCs „ We believe that the profits of state-owned oil marketing companies (OMCs) would be favorably impacted (1) if oil prices remain benign i.e. below US$75/bbl, and (2) once diesel prices are fully deregulated. „ Diesel deregulation would provide a huge relief for the system: Higher oil prices result in higher under-recoveries, and the sharing mechanism of the losses gets complicated and delayed. We estimate gross under-recoveries (diesel, kerosene and LPG) of Rs433b at an oil price of US$75/bbl. However, once diesel prices are freed, under-recoveries would reduce to ~Rs347b. July 2010

9

India Strategy

„

Impact of diesel price deregulation would be significant at higher oil prices (refer exhibit below). A US$1/bbl change in crude price would increase the gross underrecoveries by Rs42b. If we exclude diesel, a change of US$1/bbl in crude price would impact under-recoveries by Rs11b (only LPG and kerosene). „ Impact of deregulation on retail fuel prices: In a free price scenario, we estimate an impact of Rs4/liter for petrol and Rs3.8/liter for diesel for a crude price increase of US$10/bbl. DIESEL DE-REGULATION WOULD MEAN A SIGNIFICANT REDUCTION IN SUBSIDY (RS B)

LPG

Kerosene

Diesel

600

850

0

185

293

239

0 119 65

0 138 101

0 157 136

60

65

70

400

550 395

413

240

66 175

194

212

231 278

172

207

243

75

80

85

250 314

268

138

119

100

347

239

200

349

95

293 185

0 90

Total

455

859 704

641

800

Kerosene

800

1,059

1,200

400

LPG

Total 1,477 1,267

1,600

157

65

101

136

60

65

70

175

509

401 194

212

231

563

618

250

268

243

278

349

207

314

172 75

80

85

90

95

100

Source: Kirit Parikh Report

Controlled pricing regime has eroded the financial strength of OMC's significantly „ During the period FY02-05, OMCs used to earn significantly higher RoE and RoCE as shown in the exhibits below. „ However, as the government began controlling prices, the under-recoveries mounted. Since the subsidy compensation to the OMCs was on an ad-hoc basis and mostly delayed, this resulted in working capital problems for the OMCs and hence higher debt levels. „ As compared to good return ratios of 20-27% during the period FY02-05, in the recent years, return ratios have been dismal at 9-16%. RETURN RATIOS HAVE ERODED SIGNIFICANTLY IN RECENT YEARS

RoE

26.9

RoCE 24.4

24.4

24.3 21.8

19.8

1.8

D/E 1.6

22.8 16.1

11.7

0.9

11.8 8.7

0.3

3.9

FY02- FY10 FY02- FY10 FY02- FY10 05 05 05 HPCL

BPCL

IOC

FY02- FY10 FY02- FY10 FY02- FY10 05 05 05 HPCL

0.9

0.7

BPCL

IOC

FY02- FY10 FY02- FY10 FY02- FY10 05 05 05 HPCL

BPCL

IOC Source: MOSL

July 2010

10

India Strategy

The big deterioration in their earnings profile and uncertainty over their growth led to a sharp de-rating for the OMCs. These stocks were completely ignored by global investors during the best period of inflows to India. While FIIs brought US$52 into India over FY0510, their holding in OMCs declined from 9% to 5% during this period. VALUATIONS OF OIL PSUS OVER SENSEX

FIIS REDUCED THEIR HOLDINGS IN OIL PSUS DESPITE HUGE INFLOWS

OMC's & ONGC 1 Yr Fw P/E

FII Net Investm ents (US$B) FII Holding Indian Market (%) FII Holding OMCs, ONGC & GAIL (%)

Sensex 1 Yr Fw P/E

25

9.2

9.0

18.1

18.2

8.7

20 15

15.6

10

9.4

16.1 9.2

10.9

16.7

14.2

16.1 23.4

8.1 13.1

5.8

6.0 5.0 -10.4

May-10

Jan-10

Aug-09

Apr-09

Nov-08

Jul-08

Feb-08

Oct-07

May-07

Jan-07

Aug-06

Apr-06

Nov-05

Jul-05

Mar-05

5 FY05

FY06

FY07

FY08

FY09

FY10 Source: MOSL

What could be the best case earnings scenario for OMCs Assuming, that OMC's will be compensated fully, we estimate the best case EPS at Rs55/ Rs77.7/Rs49 for HPCL/BPCL/IOC indicating an upside of 48%/20%/14% from our base case scenario for FY12. (Our FY12 base case scenario assumes 11% sharing of total under-recoveries by OMCs). BEST CASE EPS FOR FY12 + LIKELY RE-RATING SCENARIOS INDICATE FURTHER ROOM FOR STOCK PRICE INCREASE HPCL

Best case earnings for OMCs leads to significant returns in stocks

EPS (nil sharing) FY12E PE Multiple Implied Price Add: Investment Value Likely Value CMP (Rs) Upside (%)

55.0 8.0 440 87 527 470 12

55.0 10.0 550 87 637 470 35

BPCL

55.0 12.0 660 87 747 470 59

77.7 8.0 622 148 770 663 16

77.7 10.0 777 148 925 663 40

IOC

77.7 12.0 932 148 1,080 663 63

49.0 8.0 392 90 482 399 21

49.0 49.0 10.0 12.0 490 588 90 90 580 678 399 399 45 70 Source: MOSL

Valuation and view We believe that full clarity on subsidy sharing would provide higher earnings predictability for the state-owned oil companies. That, in turn, would be critical to the re-rating of stateowned oil stocks. The process has begun and we expect clarity to improve in the days to come. We have Buy ratings on ONGC, GAIL and the OMCs.

July 2010

11

India Strategy

OUR BASE CASE ESTIMATES ASSUME 11% SHARING BY DOWNSTREAM PLAYERS FY06

Clarity on subsidy sharing will be key to further changes in estimates

FY07

FY08

FY09

FY10

FY11E

FY12E

Fx Rate (Rs/US$) 44.3 45.2 40.3 46.0 47.5 Brent (US$/bbl) 58.0 64.4 82.3 84.8 69.6 Gross Under recoveries (Rs b) Petrol 27 20 73 52 52 Diesel 126 188 353 523 93 PDS Kerosene 144 179 191 282 174 Domestic LPG 102 107 156 176 143 Total 400 494 773 1,033 461 Sharing (Rsb) Oil Bonds/Cash 115 241 353 713 260 Upstream 140 205 257 329 145 OMC's sharing 138 48 163 (9) 56 Total 400 494 773 1,033 461 Sharing (%) Oil Bonds 29 49 46 69 56 Upstream 35 42 33 32 31 OMC's sharing 35 10 21 (1) 12 Total 100 100 100 100 100 *Nil diesel loss in FY12 is primarily due to lower exchange rate assumption

46.0 75.0

44.5 75.0

22 84 177 176 459

163 157 320

256 153 50 459

178 107 35 320

56 56 33 33 11 11 100 100 Source: MOSL

The Oil sector had been deprived of any major reforms for the past several years. The bold measures in this sector will bestow confidence to investors regarding likely major policy reforms in several other areas, even if there is some delay in the final implementation. 9 Direct Tax Code, expected to be implemented from FY12 9 Goods & Services Tax, also expected to be implemented from FY12 9 FDI relaxation in sectors like Insurance and Aviation 9 Clarity on 2G spectrum norms and M&A reforms in the Telecom sector 9 New licenses for Banks, relaxed norms for foreign banks, etc. Assessment of role as Sensex driver As seen in past situations, Reforms actually help Earnings perform better. Reforms combined with Earnings growth makes a lethal combination for Indian markets to move SENSEX

significantly higher over the next few years.

Striker #9: Fund Flow - needs to improve 9

fund flow

July 2010

The two important sources of fund flows to determine the direction of Indian markets in the last few years have been (1) FIIs, and (2) Domestic Institutions, largely led by Insurance. In 2HCY10 and beyond, Fund Flow is more critical than ever before due to three reasons: 1. Government norm of minimum 25% non-promoter holding for listed companies. (Our calculations suggest that this could imply funds requirement of over US$30b over the next five years). 2. Government's disinvestment program of Rs400b (US$8b) as per its FY11 budget, much of it likely in 2HCY10. We expect similar targets in FY12, also. 3. Large fund raising plans of companies in capital intensive sectors like Real Estate and Infrastructure, and also as part of a de-leveraging strategy in specific companies.

12

India Strategy

COMPANIES IN BSE 500 INDEX WHICH NEED TO DILUTE PROMOTER HOLDING (RS B) COMPANY

Hind.Copper MMTC HMT Natl.Fertilizer Neyveli Lignite RCF STC Engineers India Fres.Kabi Onco. NMDC Puravankar.Proj. Power Fin.Corpn. BOC India Omaxe Alfa Laval (I) Gillette India MRPL IVRCL Assets JP Power Ven. Natl. Aluminium NHPC Ltd Power Grid Corpn D B Corp SAIL Reliance Power NTPC United Bank (I) Godrej Propert. Atlas Copco (I) Essar Shipping Kwality Dairy Mahindra Holiday Ackruti City BGR Energy Sys. Oracle Fin.Serv. Central Bank Mundra Port SCI Indian Bank Jet Airways Wipro Godrej Inds. IOCL DLF Dredging Corpn. Oil India Tata Tele. Mah. Thomas Cook (I) Nirma Sun TV Network Bank of Maha JSW Energy Fortis Health. Novartis India Tata Comm 3M India Gammon Infra. Bharat Electron Berger Paints IL&FS Transport Total

July 2010

MKT CAP

452 1,627 54 56 262 46 25 106 27 1,066 22 331 24 16 25 55 133 24 148 281 382 435 44 821 415 1,639 26 43 25 56 19 44 35 51 185 58 286 69 93 46 967 53 966 495 16 335 43 13 30 165 26 210 63 21 74 31 20 139 26 55 13,300

NON-

YEAR 1

NON-

YEAR 2

NON-

YEAR 3

NON-

YEAR 4

NON-

PROMOTER

DILU-

PROMOTER

DILU-

PROMOTER

DILU-

PROMOTER

DILU-

PROMOTER

STAKE (%)

TION

STAKE (%)

TION

STAKE (%)

TION

STAKE (%)

TION

STAKE (%)

0.4 0.7 1.1 2.4 6.4 7.5 9.0 9.6 10.0 10.0 10.0 10.2 10.5 10.9 11.2 11.3 11.4 11.9 12.3 12.9 13.6 13.6 13.7 14.2 15.2 15.5 15.8 16.2 16.2 16.3 16.3 16.9 17.5 18.7 19.5 19.8 19.8 19.9 20.0 20.0 18.8 20.9 21.1 21.4 21.4 21.6 22.3 22.7 22.8 23.0 23.2 23.3 23.5 23.6 16.4 24.0 24.0 24.1 24.4 24.9

23 81 3 3 13 2 1 5 1 53 1 17 1 1 1 3 7 1 7 14 19 22 2 41 21 82 1 2 1 3 1 2 2 3 9 3 14 3 5 2 44 2 38 18 1 11 1 0 1 3 0 4 1 0 1 0 0 1 0 0 605

5.4 5.7 6.1 7.4 11.4 12.5 14.0 14.6 15.0 15.0 15.0 15.2 15.5 15.9 16.2 16.3 16.4 16.9 17.3 17.9 18.6 18.6 18.7 19.2 20.2 20.5 20.8 21.2 21.2 21.3 21.3 21.9 22.5 23.7 24.5 24.8 24.8 24.9 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0

23 81 3 3 13 2 1 5 1 53 1 17 1 1 1 3 7 1 7 14 19 22 2 41 20 74 1 2 1 2 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 428

10.4 10.7 11.1 12.4 16.4 17.5 19.0 19.6 20.0 20.0 20.0 20.2 20.5 20.9 21.2 21.3 21.4 21.9 22.3 22.9 23.6 23.6 23.7 24.2 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0

23 81 3 3 13 2 1 5 1 53 1 16 1 1 1 2 5 1 4 6 5 6 1 7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 242

15.4 15.7 16.1 17.4 21.4 22.5 24.0 24.6 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0

23 81 3 3 9 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 121

20.4 20.7 21.1 22.4 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0

YEAR 5

NON-

DILU- PROMOTER TION

STAKE (%)

21 25.0 70 25.0 2 25.0 1 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 0 25.0 95 Source: Company/MOSL

13

India Strategy

The above three factors are over and above „ The usually robust pipeline of IPOs in India, and „ Newer forms of fund raising like sale of treasury stock and stake divestment by minority promoters. FUND RAISING IN INDIA (RS B)

Domestic (Public & Rights) QIP 645

1,065

576

Fund raising is likely to accelerate at higher levels of markets

Overseas (ADR / GDR / FCCB) Stake Sale & Others

135

232 304

38 326

316

CY05

CY06

82

30 529

44

209

428

CY07

61

344

37

222

319

578

937

495

391

249

CY08

CY09

CY10 YTD Source: MOSL

Of the key Fund Flow sources, domestic mutual funds have been net sellers for the last six months. Fund Flow from insurance is fraught with some uncertainty due to new norms for ULIPs (unit-linked insurance plans) mandating assured return for pension and annuity plans. Thus, the onus of Fund Flow falls significantly on FII flows. FII inflows remained robust in 1HCY10. However, sustenance of the same is critical as in the past, 2H flows have tended to carry higher weight than 1H. FII FLOWS INTO INDIA: 2H TENDS TO BE HIGHER THAN 1H

20 1st Half

2nd Half

10

2H flows is always higher than 1H for past 7 years

0

0 1

0 2

0

5 1

5 4

6 5

6 3

12

13

6

5

7

2009

2010

0

-6 -6

-10 -20 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: MOSL

Assessment of role as Sensex driver Of the three strikers, Fund Flow carries risk of running out of form. Even if Earnings and Reforms combine well, non-performance of Fund Flow could lead to Sensex Goal 20,000 SENSEX

July 2010

remaining elusive for quite some time.

14

India Strategy

8

interest rates

Midfield #8: Interest Rates - stable rates key to upcycle The government has given strong indications of returning to the path of fiscal correction and has so far indicated its resolve to even better its budgeted fiscal deficit target from 5.5% of GDP for FY11 to 4.5% of GDP. A few factors add to our optimism in this regards. First, the return of growth and the high buoyancy in corporate taxes that has now become the single biggest source of revenue for the government. Second, since services occupy a dominant part of the Indian economy and service sector tax net has been widened further in FY11, higher service tax collection is a distinct possibility. Third, overall revenue projection at 12.9% of GDP in FY11 compares well with the low of 12% in FY10 and is way below the peak of 14.1% realized during FY08. GOVERNMENT CAN RIDE BACK ON REVENUE BUOYANCY ON RETURN OF GROWTH

Income tax Excise duties Non-tax Revenue

Corporate tax Service Tax Gross Tax Receipts

Customs duties Other taxes Gross revenue receipts

Revenue buoyancy will be key to containment of fiscal deficit

As % of GDP

15% 12% 9% 6% 3% FY11E

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

0%

Source: MOSL

However, a reduction in FY11 deficit still rests upon a few assumptions. First, the government has set a disinvestment target of Rs400b (as compared with Rs260b and the peak of Rs388b mobilized during FY08). Besides, the government also plans to effect major cuts in subsidies (especially petroleum subsidies) and non-plan expenditure. DETERMINATION IN THE AREA OF DISINVESTMENT, SUBSIDY REDUCTION AND NON-PLAN EXPENDITURE CRITICAL FOR DEFICIT TARGETS AND THEIR BETTERMENT

Disinvestment Gross fiscal deficit Non-plan expenditure

20%

Subsidies Total expenditure

As % of GDP

16% 12% 8% 4%

FY11E

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

0%

Source: MOSL

So far, the government has demonstrated its resolve to prune expenditure with early indicators (for April-May) pointing towards lower than budgeted expenditure and increased July 2010

15

India Strategy

revenue leading to a zero revenue deficit for the first two months of FY11. The 3G/BWA auction together fetched a bounty of Rs1,062b against a budgeted Rs350b. Even if a slippage of Rs300b is allowed on account of missed targets of disinvestment, subsidies and non-plan expenditure, it would leave ~Rs350b (0.5% of GDP) as additional revenue by which the government's borrowing requirement would be reduced.

Total Receipts Fiscal Deficit (RHS)

20%

Total Expenditure Revenue Deficit (RHS)

140%

Apr-May as % of budgeted amount

1QFY11 deficit levels will be lowered, as revenues got a boost from telecom sector

Apr-May as % of budgeted amount

GOVERNMENT'S FINANCES FOR APRIL-MAY

15%

105%

10%

70%

5%

35%

0%

0% FY06

FY07

FY08

FY09

FY10

FY11 Source: MOSL

Reduced borrowing program is a clear outcome of the budgetary consolidation process and the government's increased cash position is also reflected in recent measures such as pruning of the treasury bill calendar, prepayment of debt and lower than notified (as per the borrowing calendar) amount announced for the last tranche of dated securities auction. Going forward, the reduced borrowing requirement may be reflected in a pruned borrowing calendar for H2FY11; the second half being the busy season for credit provides the government an opportunity to vacate the space for credit growth to pick up. The firming up of short-term interest rates and the liquidity gap that exists now might be bridged in the second half with lower government borrowing, higher deposit mobilization, banks' recourse to borrowing and an expected decline in inflation in 2HFY10. While the immediate inflationary outlook has deteriorated somewhat with increase/freeing of petroleum prices, softening of food prices observed in latest week and expectation of normal monsoon coupled with softening of oil prices abroad holds the prospect of declining inflationary outlook for 2HFY10. INFLATION TO DECLINE IN 2HFY11 BUT LIKELY TO REMAIN AT ELEVATED LEVELS

12%

Inflation will remain a key driver of interest rates in 2HCY10

Projection - After oil price hike

WPI inflation

11%

Projection - After oil price hike and lower food inflation

10% 9% Projection - Before oil price hike

8%

Mar-11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

7%

Source: MOSL

July 2010

16

India Strategy

Assessment of role as Sensex driver Interest Rates is a key midfielder for markets and is expected to remain in form in second half of 2010. Deficit management and inflation will be key to direction of interest rates. The economy will need stable interest rates in this period when the capex cycle is about to SENSEX

begin. Stable interest rates will be a key to higher market indices.

Midfield #7: Capex Boom - key winger We believe that India is at the cusp of a meaningful capex boom, driven by impending large investments in infrastructure and industrial activities. The rapid economic growth over the past decade has put a massive strain on the country's existing infrastructure. Investment ratio (defined as percentage of GDP to the GDP growth rate) has declined from 50 for 1988-1997 to 38 for 1998-2007. Under-investments in a period of high economic growth have further aggravated the constraints. India, in our opinion, is now among the leading global destinations for infrastructure and investment spending over the next decade.

7

capex boom

INDIA'S INFRASTRUCTURE LAGS BEHIND GLOBAL PEERS, INCLUDING MANY DEVELOPING COUNTRIES… ROAD DENSITY

RAIL DENSITY

AIR PASSENGERS

TELECOM

PAVED ROAD/1,000 KM

RAIL / 1,000 KM

1,000 PASSENGERS/MILLION

SUBSCRIPTIONS/100 PEOPLE

ARABLE AREA

ARABLE AREA

URBAN CAPITA

Japan UK Sri Lanka Italy France S. Korea Malaysia Bangladesh US Germany Poland China Indonesia Canada India Russia Mexico S. Africa Thailand Brazil

19.8 6.5 6.1 5.5 5.4 5.1 4.4 2.5 2.2 2.0 2.0 1.2 1.1 1.1 0.9 0.6 0.5 0.4 0.4 0.2

Japan UK Bangladesh Germany S. Korea Italy France S. Africa Poland US Sri Lanka Malaysia Canada Mexico Russia Braxil China India Indonesia Thailand

1,595

Canada UK

1,587

Thailand

1,520

Malaysia

1,225

Germany

1,141 1,003

France

917

Japan Italy

906

S. Korea

840 530

Sri Lanka S. Africa

370

Indonesia

283

China

282

Mexico

268

Russia

243

Brazil Poland

UK Italy Germany France Spain US Japan Canada Russia Malaysia Poland Mexico China S. Korea Thailand S. Africa Indonesia Sri Lanka India Bangladesh

2,896

USA

430 335 309 289 198 189 159 136 135 123 111 103 98 69 68 55 49 35 34 28

231 140

India

72

Bangladesh

42

182 172 171 138 135 134 125 120 110 105 87 76 72 68 65 65 36 24 19 7

Source: World Bank … AND IS NOW DRIVING A NEW WAVE OF INVESTMENTS: TWELFTH PLAN TARGET INFRASTRUCTURE SPENDING… AT 4.5X OF TENTH PLAN

ACCOUNTS FOR 10% OF GDP

4.5x

7.6%

1,025

PRIVATE SECTOR SHARE TO GO UP FROM 25%

10.0%

US$b

5.1%

2.3x

25

514

% of total 36 186

50 512

56

227 10th plan actual

IN TENTH PLAN TO 50% IN TWELFTH PLAN

11th plan revised

12th plan target

10th plan actual

11th plan revised

12th plan target

10th plan actual

11th plan revised

12th plan target Source: IPA

July 2010

17

India Strategy

Eleventh Plan (FY08-12) targeted infrastructure spend on track at US$514b, ~2.3x of Tenth Plan (FY02-07) spend „ Revised estimate [based on the mid-term appraisal for Eleventh Plan (FY08-12) by the Planning Commission] for infrastructure investments under Eleventh Plan stands at US$514b, and is similar to the original target. „ Within the sector-wise composition, targeted investments in Telecom and Oil & Gas (given inclusion of Oil pipeline within definition of Infrastructure) have now increased v/s original estimates; sectors like Roads, Ports, Railways, etc have witnessed slippages. Excluding Telecom and Oil & Gas, targeted infrastructure investments in the Eleventh Plan now stand at US$393b (slippage of just 11.6% v/s original target), which is commendable. „ Actual investments in Infrastructure for the initial two years of the Eleventh Plan period (FY08 and FY09) have been higher than initial estimates by 12.4% and 11.7%, respectively. Initial estimate for Twelfth Plan (FY13-17) at US$1t, ~2x of Eleventh Plan target and 4.4x of Tenth Plan spending „ Based on initial estimates by Planning Commission for the Twelfth Plan period (FY1217), total investment in Infrastructure is estimated at US$1,025b. „ For the Twelfth Plan period, the target of private sector investment has been kept at "at least" 50% of the total investment at US$500b, which is nearly the entire infrastructure spending in the Eleventh Plan. Corporate capex also at an inflexion point Industrial capex is also at an inflexion point, as is evident from a V-shaped recovery in terms of new projects announced. According to CMIE, an estimated Rs50t worth of projects are under various stages of implementation and another Rs5t worth of projects are being added every quarter. PRIVATE CAPEX IS TURNING UP WITH A PHENOMENAL QUEUEING UP OF PROJECTS - PINK TO BE MADE A BAR

Project investments outstd at the end of the quarter All industries project investments under implementation Project investments added during the quarter (RHS) Project investments completed during the quarter (RHS) 120,000

10,000

90,000

7,500

60,000

5,000

30,000

2,500

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

Feb-08

Dec-07

Oct-07

Aug-07

0 Jun-07

0

Source: MOSL

A further evidence of capex cycle in play can be obtained from the runaway growth witnessed in the capital goods sector of IIP and eventual coming up of basic goods industry to record near double-digit growth in 2010 (up to April). A continuation of these trends would create the necessary condition for growth to inch up toward the double-digit level. July 2010

18

India Strategy

IIP-VERY STRONG SHOWING FROM THE CAPITAL GOODS SECTOR AND THE BASIC GOODS SECTOR ALSO HAS TURNED UP

IIP

Basic goods

Capital goods

90% 60% 30% 0%

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

-30%

Source: MOSL

Assessment of role as Sensex driver Aside from the glare, Capex Boom will quietly - and yet rapidly - wing its way up the field, paving the way for significant growth opportunities across industries. Over the next few years, capex will be amongst the most important drivers of both earnings and market valuations.

SENSEX

Midfield #6: Consumption - story goes on …

6

consumption

India's private final consumption expenditure (PFCE) accounts for 55-60% of GDP and remains the bedrock of the economy's resilience. The share of PFCE has steadily declined from 80%+ in the 1970s to the current levels; however, this is due to the faster growth of capital formation. In recent years, however, share of PFCE has stabilized, translating into significant growth in consumer-facing sectors.

LONG-TERM TREND OF PFCE AND GCF AS % TO GDP

Private final consumption exp (% of GDP) Gross capital formation (% of GDP)

Pvt Final consumption expenditure has been relatively stable in the last 5-years

100% 80%

59%

60% 57%

58%

58%

57%

FY06

FY07

FY08

58%

57%

FY09

FY10

40% 35% 20% FY05

FY10

FY07

FY04

FY01

FY98

FY95

FY92

FY89

FY86

FY83

FY80

FY77

FY74

FY71

0%

Source: MOSL

July 2010

19

India Strategy

In absolute terms, the consumer sector continues to display steady growth over a fairly long period. This is true in both categories - (1) Non-durables and (2) Durables.

KEY INDICATORS OF TREND IN CONSUMER NON-DURABLES FMCG SECTOR SALES (AC NIELSEN - RS B)

PAINT VOLUMES TREND ('000 TONS)

1,161 702

864

2008

2009

FY10

2007

FY09

2006

523

FY07

2005

609

FY06

2004

457

FY05

2003

FY04

2002

406

FY03

2001

400

446

331

369

FY02

494

585

FY01

468

542

FY00

711 504

775

FY08

8-year CAGR - 12%

899

10-year CAGR - 11%

1,016

KEY INDICATORS OF TREND IN CONSUMER DURABLES TWO-WHEELER SALES TREND (MILLION)

PASSENGER CARS SALES TREND ('000)

10-year CAGR - 13% 1,354

FY01

FY02

FY03

FY07

664

FY06

621

FY05

591

1,660

1,047 1,120

FY04

639

FY00

FY10

FY09

FY08

FY07

FY06

882

1,517

FY10

8.1

FY09

7.6

6.6

8.4

FY08

8.5

FY05

FY01

5.6

FY04

FY00

5.0

FY03

3.7

FY02

3.8

4.3

2,120

10.5

10-year CAGR - 11%

Source: MOSL

The cross-substitution effect In the last 5-7 years, there has emerged a unique phenomenon of cross-substitution by Indian consuming households. This substitution is of two kinds: 1. Substitution of products by new services, mainly Telecom; and 2. Substitution of products/services by EMIs, mainly for Housing and Durables.

TELECOM SUBSCRIBERS V/S CONSUMPTION GROWTH

5,000

600 (584) Wireless subscriber base - indexed (Figures in brackets is actual subs in millions) (392)

4,000 3,000

(261) 2,000 1,000

HOUSING LOANS V/S CONSUMPTION GROWTH

Retail bank loans - indexed (5,054) (5,521) (Figures in brackets is actual (4,342) 450 loans in Rs b) (3,527) 300

(2,558) (1,787)

(166) (13)

(35)

(55)

(96)

Pvt final consumption exp - indexed

150

(1,142) Pvt final consumption exp - indexed

0

0 FY 03 FY04

FY 05 FY 06 FY 07 FY 08 FY 09 FY 10

FY 03

FY 04

FY05

FY 06

FY 07

FY08

FY 09

Source: MOSL

July 2010

20

India Strategy

The strong consumption boom has enabled the economy to withstand the global meltdown. Autos, FMCG, Engineering, Banks, etc have made record profits in FY10, despite flat earnings growth for the aggregates. While the return of capex cycle and industrial growth will be a source of rebound in profits in FY10-12, consumption themes will provide stability to the aggregate profit growth. Assessment of role as Sensex driver Consumption is Team India's most dependable midfield force. It has helped the economy to maintain its growth momentum over the last two years, when the industrial and external sectors were under stress. We expect the consumption theme to remain strong as the benefits of the Next Trillion Dollar opportunity will provide several growth avenues.

SENSEX

Midfield #5: Payouts - getting better In FY10, corporate dividend payouts, both in absolute terms and as percentage of profits, bounced back after a sluggish trend for the previous three years in a row. FY09 also saw a surge of buyback offers.

5

Dividends and buybacks put cash into the hands of shareholders. This cash is typically ploughed back into purchase of stocks or into higher consumption, both of which are positive for the market. Simultaneously, higher payouts also reflect superior free cash flow generation of companies, and hence are a positive for valuation multiples.

payouts

Over the last few months, there have been several announcements of buyouts, buybacks and open offers by corporates. Prominent amongst them have been ABB, Piramal, Hindustan Unilever, Areva, etc. We believe these events would also boost funds flow into the market. DIVIDEND PAYOUT (%): RECOVERING IN FY10

Dividend (Rs b) 31

30

29

BUYBACK OFFERS IN FY09 WERE AT AN ALL-TIME HIGH (RS B)

Payout (%)

42

30

36

28

28 26 24

25

24

22

20

22 437

49

62

81

121

148

206

239

279

334

13

336 3

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

July 2010

9 1

4

3

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Payouts are computed for Nifty companies on standalone basis, excluding dividend tax

SENSEX

10

Source: MOSL

Assessment of role as Sensex driver Payouts has more of a supportive role in the line-up. It combines well with Consumption on one hand and with Valuations on the other. Improvement in payouts along with growth will enable the market indices to move higher.

21

India Strategy

Defense #4: Monsoons - rainbow of hope 4

monsoons

After the setback received in FY10 with 22% deficit in rainfall over the long period average (LPA) there has been some setback in the monsoon this year as well with June recording a 16% deficit. However, IMD has raised its forecast for the current year from 98% to 102% in its latest update for South West Monsoon. A few factors that provide us reason for optimism are: (1) lower weightage (18%) of June in overall monsoon, (2) expectation of La Nina conditions (60% probability) that are associated with either excess or normal rainfall, and (3) rare occurrence of drought in successive years (no occurrence of successive years of severe drought; moderate drought has occurred only thrice in the past century). INITIAL SETBACK OF JUNE CAN BE MADE UP BY SUBSEQUENT MONTS BECAUSE OF THEIR HIGHER WEIGHTAGE AND GREATER IMPORTANCE FOR CROP SOWING

Normal Rainfall (mm)

Actual/Expected Rainfall 98%

% of Normal in FY10-11 (RHS) 125%

101%

84% 294 160

288

258

261 178

135

June Actual

July IMD Est.

Aug IMD Est.

225

Sep Implied in IMD Est. Source: MOSL

Monsoons will be critical to the growth, inflation and interest rates in FY11

Monsoon has significant impact on the foodgrain production and food inflation in India. In general, years of drought have been succeeded by higher rainfall and agricultural production. Although the broader head of "agriculture and allied activities" (with 16-17% share of GDP) is now fairly diversified with horticulture, livestock and fisheries contributing close to 60% of the GDP originating from the broader agri-sector, and "cereals, pulses and oilseeds" grown during kharif season accounting for only 20% of the total agricultural output, an overwhelming percentage of the population (~55%) is dependent upon agriculture for livelihood. Besides, rainfall feeds the irrigation network and significantly affects hydroelectricity generation and lessens fiscal burden for agricultural support and food management operations for the government. The softening of food prices in the latest week augurs well for the outlook of food prices, going ahead. The softening of international prices could also keep a check on domestic prices. HIGHER FORECAST (102% OF LPA) BY IMD HAVE RAISED THE ODDS OF HIGHER FOODGRAIN OUTPUT

Increase in Foodgrains production

30%

Food inflation (WPI)

% deviation from LPA

15% 0% -15%

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

FY96

FY95

FY94

FY93

FY92

FY91

FY90

-30%

Source: MOSL

July 2010

22

India Strategy

Assessment of role as Sensex driver Monsoons is a key defender, albeit with a bit of unpredictability. When in form, it plays well for Consumption to take matters forward. Current indications suggest that such will be the case in second half 2010. However, any slip-ups here could be a setback for the market in 2HFY11.

SENSEX

Defense #3: Corporate Events - source of performance differential 3

corporate events

Corporate developments have been a key valuation driver over the last few years. While cross-border M&As in the past have been a major reason behind underperformance in stocks, India Inc's plans to expand globally continue. A big uncertainty has been terminated with the Supreme Court judgment in favor of Reliance as regards gas pricing, over-ruling the family MoU. Given the high weightage of Reliance in the benchmarks, clarity on this issue was critical to the markets. Over the next couple of years, we expect more Indian companies to announce global deals and partnerships. Moreover, interest of global companies in India will also rise, driving returns in specific sectors and stocks. GLOBAL DEALS HAVE LED TO UNDERPERFORMANCE OF STOCKS

258

Price Change Current Vs Announced (%)

91 20

81

79 41 0

6

23

45

41

19 22

19

9

-27

-8

8 0 -16

Bharti Sensex Idea

United Sensex ITC

GMR Infra Sensex Jaiprakash

Tata Sensex Maruti

Hindalco Sensex Sterlite

Tata Steel Sensex JSW Steel

Suzlon Sensex BHEL

-77

Source: MOSL

Assessment of role as Sensex driver Global acquisitions have resulted in underperformance for most of the corporates. Indian markets like certainty on growth, and hence domestic businesses get significant premium SENSEX

July 2010

over others. Uncertainty is best avoided for markets to move higher.

23

India Strategy

Defense #2: Global markets - weak link 2

global markets

Post the lows made in March 2009, global markets have recovered well, with average returns of 75-100%. Indian benchmarks have outperformed almost every other market over this time period (this was also driven by a 20% move post the election results). Since September 2009, global markets have held on to their levels well, despite adverse newsflowon Europe and recent concerns on China. INDIAN MARKETS HAVE OUTPERFORMED GLOBAL MARKETS FROM LOWS OF 2009

Sensex Hang Seng China ENT

S&P 500 KOSPI

FTSE 100 Brazil Bovespa

2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0

2.1

Jun-10

May-10

May-10

Apr-10

Mar-10

Feb-10

Feb-10

Jan-10

Dec-09

Nov-09

Nov-09

Oct-09

Sep-09

Sep-09

Aug-09

Jul-09

Jun-09

Jun-09

May-09

Apr-09

Mar-09

Mar-09

1.7 1.7 1.6 1.5 1.4

Source: MOSL

Given the strong correlation of Indian equities with global markets, any sharp sell-off will also impact the domestic market. In the last couple of months, global markets have again showed signs of weakness. While Indian equities have remained stable, further weakness in global markets could impact Indian equities too. GLOBAL MARKETS HAVE WELL CONSOLIDATED IN LAST 3 QUARTERS

Sensex Hang Seng China ENT

S&P 500 KOSPI

FTSE 100 Brazil Bovespa

1.21 1.12

1.0 1.0 1.0 1.0 1.0

1.03 0.94 Jun-10

Jun-10

May-10

May-10

Apr-10

Apr-10

Apr-10

Mar-10

Mar-10

Feb-10

Feb-10

Jan-10

Jan-10

Dec-09

Dec-09

Dec-09

Nov-09

Nov-09

Oct-09

Oct-09

While global markets have well consolidated in last three quarters, recent trends have turned weak

Oct-09

0.85

RECENT CORRECTION IN GLOBAL MARKETS HAS NOT YET IMPACTED INDIA

Sensex Hang Seng China ENT

S&P 500 KOSPI

FTSE 100 Brazil Bovespa

1.05 1.00

1.0 1.0

0.95 0.90

26-Jun-10

22-Jun-10

18-Jun-10

14-Jun-10

10-Jun-10

06-Jun-10

02-Jun-10

29-May-10

25-May-10

21-May-10

17-May-10

13-May-10

09-May-10

05-May-10

01-May-10

27-Apr-10

23-Apr-10

19-Apr-10

15-Apr-10

0.85 0.80

30-Jun-10

0.89 0.86 0.85 0.84

Source: MOSL

July 2010

24

India Strategy

Assessment of role as Sensex driver Global markets need to stabilize for Indian markets to move higher. In the immediate term, any threat to global equities will also adversely impact flows into India. SENSEX

Defense #1: Valuations - time correction underway With market indices being flat for the last three quarters, growth in earnings has led to a correction in valuations. From a premium of over 20% to 15-year averages in September 2009, the Sensex P/E has now corrected as earnings have grown. Consolidation for another couple of quarters will bring valuations in line with long-term averages.

1

valuations P/E OF INDIAN EQUITIES TRENDING BACK TO LONG-TERM AVERAGES P/E

P/BV

Sensex P/E ( LHS)

Sensex ( RHS )

Sensex P/B (x)

Sensex ( RHS )

18.7

17,900

3.2

17,900

17.4

17,300

3.0

17,300

16.1

16,700

2.8

16,700

14.8

16,100

2.6

16,100 15 Year Average 2.5x

15 Year Average 14.4x

Mar-11

Dec-10

Sep-10

Mar-10

Sep-09

15-YEARS SENSEX P/E V/S SENSEX

Jun-10

15,500 Dec-09

2.4

Mar-11

Dec-10

Sep-10

Mar-10

Sep-09

Jun-10

15,500 Dec-09

13.5

15-YEARS SENSEX P/B V/S SENSEX

Sensex P/E ( LHS)

Sensex ( RHS )

Sensex P/B (x)

Sensex ( RHS )

27

21,700

4.8

21,700

22

16,700

3.9

16,700

11,700

3.0

12

6,700

2.1

6,700

7

1,700

1.2

1,700 Jun-10

Dec-08

Jun-07

11,700

Dec-05

Jun-04

Dec-02

Jun-01

Dec-99

Jun-98

Dec-96

15 Year Average 2.5x

Jun-95

Jun-10

Dec-08

Jun-07

Dec-05

Jun-04

Dec-02

Dec-99

Jun-98

Dec-96

Jun-95

Jun-01

15 Year Average 14.4x

17

Source: MOSL

July 2010

25

India Strategy

SENSEX PER BAND

SENSEX EARNINGS YIELD TO BOND YIELD

24,200

23x 20x

18,200

17x

2.2

2.0 1.6

1.7

14x 11x

1.2 15 Year Avg is 0.88x

Jun-09

Jun-08

Jun-07

Jun-06

Jun-05

Jun-04

Jun-03

Jun-99

Jun-98

Jun-97

Jun-96

Jun-95

Mar-09

Mar-07

Mar-05

Mar-03

Mar-01

Mar-99

Mar-97

Mar-95

Jun-02

0.4

0.2

200

0.83

0.7

Jun-01

6,200

Jun-00

8x

Jun-10

12,200

Source: MOSL

SENSEX

July 2010

Assessment of role as Sensex driver Valuations need to be supportive for market indices to resume their upward journey. With another quarter of consolidation, market indices will start trending towards the long-term averages. This along with good growth prospects will help to take the markets higher.

26

India Strategy

1QFY11 earnings preview Cement, Oil & Gas and telecom impact YoY earnings growth We expect MOSL Universe (excluding RMs) earnings growth to be 17% in 1QFY11. This growth is a moderation from the 2HFY10, when earnings grew by 31%, largely driven by low base. 1QFY11 will also be a quarter, where absolute PAT will be lower QoQ (first time in last 4 years). This is driven by flat growth QoQ by Oil & Gas and drop in earnings in Telecom and Engineering. Metals (up 461% YoY), Textiles (up 126% YoY), Retail (up 81% YoY), Pharma (up 30% YoY) and Auto (up 30% YoY) contribute significantly to the overall earnings growth of MOSL universe. Other sectors would however have relative muted earnings growth, Viz. Banks – up 16% YoY, IT – up 15% YoY, Engineering – up 13% YoY, FMCG – up 8%. Telecom sector would report highest negative earnings growth (down 44% YoY), followed by Cement (down 19% YoY) and Oil & Gas excl RMs (down 7% YoY). 1QFY11 will also see margin pressures at the aggregate level. While sales is expected to grow at 25%, EBITDA growth at 19.7% and PAT growth at 17% will witness a slow growth. Margins will decline in Autos, Cement, FMCG, IT, Oil & Gas and Telecom. QUARTERLY EARNINGS PERFORMANCE - MOSL UNIVERSE (RS B) SALES SECTOR

JUN-10

(NO OF COMPANIES)

July 2010

EBITDA

VAR %

VAR %

YOY

QOQ

JUN-10

NET PROFIT

VAR %

VAR %

YOY

QOQ

JUN-10

VAR %

VAR %

YOY

QOQ

-4.6 2.8 6.2 -59.7 4.1 -0.1 -23.2 25.2 -14.8 -34.2 -5.4 -15.6

Auto (5) Banks (20) Cement (7) Engineering (6) FMCG (11) IT (7) Infrastructure (5) Media (5) Metals (8) Oil Gas & Petchem (11) Pharma (14) Real Estate (6)

317 267 114 218 185 283 72 19 713 2,210 130 35

36.6 28.8 1.0 20.5 14.8 13.3 15.9 25.1 26.4 28.0 10.5 32.0

-4.9 -4.1 -4.0 -34.8 1.6 5.1 -20.7 4.3 -6.8 -8.0 3.7 -7.5

43 228 32 25 37 71 11 8 140 234 27 15

29.7 22.9 -14.2 23.7 8.9 10.4 16.6 38.5 110.9 -4.2 14.9 14.6

-7.9 -5.8 1.7 -59.0 2.6 1.9 -22.2 8.0 -16.2 -20.2 1.2 -6.8

27 115 19 16 25 55 4 5 82 111 18 7

29.7 16.4 -18.9 13.4 7.6 15.0 5.4 25.1 461.4 -26.3 30.1 3.1

Retail (2) Telecom (4) Textiles (5) Utilities (6) Others (2) MOSL (124)* MOSL Excl. RMs (121) Sensex (29) *Tata Steel Consolidated

33 197 35 238 24 5,090 3,821 2,520

29.1 0.9 33.3 11.8 3.3 23.0 25.1 28.0

-2.5 3.4 -2.1 13.2 -9.2 -6.7 -4.3 -4.8

3 66 8 66 4 1,017 982 622

34.7 -12.7 58.3 16.2 7.1 15.6 19.7 20.6

-5.8 1.6 -6.5 21.6 -15.7 -11.2 -6.4 -4.7

1 26 2 36 2 551 534 338

81.0 -23.0 -43.8 -26.7 125.8 -11.9 5.1 -5.8 -0.1 -36.5 8.9 -16.4 17.0 -9.3 19.3 -7.8 Source: MOSL

27

India Strategy

1QFY11 PAT YOY GROWTH ACROSS SECTORS

1QFY11 PAT QOQ GROWTH ACROSS SECTORS

25 6

4

3

0

81

-4 -5 -5 -6 -8 -9 -12 -15 -16

3

-23 -23 -27

Telecom

Infrastructure

Retail

Metals

Real Estate

-60 Textiles

Sensex

MOSL Excl.

Utilities

Auto

Pharma

IT

FMCG

Banks

-44 Media

Cement

Real Estate

Oil & Gas(Ex

Utilities

Infrastructure

FMCG

IT

Engineering

Banks

MOSL Excl.

Media

Sensex

Auto

Retail

Pharma

Metals

Textiles

-7 -19

Oil & Gas(Ex

5

Cement

5

Telecom

30 30 25 19 17 16 15 13 8

Engineering

461 126

Source: MOSL PAT GROWTH MOSL UNIVERSE EX RMS

217 242 240 274 294 338 380 397 423 450 466 505 529 534 408 426 457 483 509 589 534

QUARTERLY PAT TREND MOSL UNIVERSE EX RMS (RS B)

70

QoQ Grow th (%)

YoY Grow th (%)

45 20 -5

June-10

Dec-09

June-09

Dec-08

June-08

Dec-07

June-07

Dec-06

Jun-06

Dec-05

Jun-05

Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 June-07 Sep- 07 Dec-07 Mar-08 June-08 Sep- 08 Dec-08 Mar-09 June-09 Sep-09 Dec-09 Mar-10 June-10

-30

Source: MOSL

QUARTERLY PAT TREND - MOSL UNIVERSE (RS B) SECTOR

Automobiles Banking Cement Engineering FMCG IT Infrastructure Media Metals Oil & Gas Ex RMs Pharma Real Estate Retail Telecom Textiles Utilities Others MOSL Univ Excl RMS

July 2010

JUN

SEP

DEC

MAR

JUNE

SEP

DEC

MAR

JUNE

SEP

DEC

MAR

JUNE

SEP

DEC

MAR

JUN

2006

2006

2006

2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

2010

2010E

12.4 39.2 14.2 6.1 14.2 26.1 1.8 1.7 53.1 79.3 10.5 1.0 0.2 13.8 1.0 18.8 0.8 294

12.8 53.5 12.1 8.6 15.4 31.4 1.5 1.8 66.2 77.9 13.3 1.4 0.5 17.8 1.5 21.4 1.0 338

12.6 55.0 15.9 13.5 16.7 34.4 2.0 2.5 70.8 86.2 13.9 5.5 0.5 22.8 1.4 25.7 0.6 380

15.1 60.3 16.6 21.9 14.8 37.5 2.7 2.4 70.3 66.5 14.8 4.6 0.7 26.0 1.2 39.6 1.9 397

13.8 15.2 56.5 68.5 19.0 16.9 8.0 14.5 17.9 18.4 35.0 37.8 2.5 1.9 3.2 3.1 72.8 69.6 94.7 101.2 13.0 14.5 28.7 27.9 0.2 0.8 30.7 32.0 0.8 1.5 25.5 24.6 1.1 1.3 423 450

16.9 80.8 16.9 16.5 19.8 39.9 2.9 3.8 64.7 94.7 13.8 30.9 0.6 34.1 1.4 27.7 1.1 466

17.1 15.3 13.7 7.4 12.0 20.7 26.4 25.7 28.2 26.9 83.7 66.1 90.0 112.4 107.6 98.5 107.1 117.5 111.6 114.7 16.3 17.1 14.3 14.7 18.7 23.5 22.3 16.4 17.9 19.0 23.7 13.8 16.5 19.7 31.8 14.5 18.4 22.3 40.8 16.4 17.5 19.6 19.9 21.0 20.6 23.1 24.7 26.3 23.9 24.8 40.2 39.1 45.6 48.1 46.4 48.2 51.2 53.9 55.5 55.4 4.1 2.7 3.3 3.4 5.2 3.4 2.6 4.5 4.7 3.6 2.4 3.6 3.0 2.5 2.5 3.9 4.3 4.3 3.8 4.8 99.1 102.3 110.7 35.1 16.2 14.6 26.7 61.1 96.2 82.0 80.1 138.0 105.2 51.0 77.6 101.0 103.2 87.0 98.3 94.0 14.0 14.2 12.5 10.6 3.6 14.0 17.7 7.6 19.2 18.2 35.1 26.3 27.4 10.8 3.1 7.2 8.8 9.1 8.7 7.4 0.8 0.7 1.2 0.8 0.8 0.6 1.2 1.3 1.4 1.1 37.6 39.7 39.2 39.1 39.8 46.2 34.2 36.4 35.4 26.0 1.5 0.6 1.2 0.6 1.1 0.8 1.8 2.0 2.0 1.8 28.6 27.9 28.0 29.6 36.7 34.4 31.0 32.3 38.4 36.2 2.7 2.0 2.1 1.4 2.6 2.2 1.7 1.4 3.4 2.2 505 529 534 408 426 457 483 509 589 534 Source: MOSL

28

India Strategy

1QFY11 earnings growth 75% of companies in MOSL universe to report +ve growth „

1QFY11 earnings for MOSL universe is more broad-based with 75%of companies (vs 68% in June-09) in positive earnings growth trajectory and balance 25% (vs 32% in June-09) likely to report negative earnings growth. „ 54% of the companies in the MOSL Universe are expected to report PAT growth of 15%+ vs 65% in 4QFY10. „ However, 21% of the companies are expected to report PAT growth of 0-15%, vs 14% over a year ago and 10% in 4QFY10. Balance 21% of companies would report negative earnings growth, significantly lower than 32% a year ago and 25% in 4QFY10.

1QFY11 earnings growth distribution DISTRIBUTION OF COMPANIES BASED ON EARNINGS GROWTH

PROPORTION OF COMPANIES WITH EARNINGS GROWTH OF 0-15%

June 10

Mar 10

Dec 09

Sep 09

June 09

Mar 09

Dec 08

Sep 08

June 08

31

26

25 25

June 10

Mar 10

Dec 09

Sep 09

June 09

Mar 09

Dec 08

June 08

Mar 08

Mar 07

Dec 06

Sep 06

June 10

24 23

35

14 14

Dec 07

17

21

Sep 07

10

Mar 10

Dec 09

Sep 09

Mar 09

June 09

Dec 08

Sep 08

June 08

Mar 08

Dec 07

41

32

14 14 9

Sep 07

Mar 07

June 07

Dec 06

54

PROPORTION OF COMPANIES WITH EARNINGS GROWTH < 0%

12 11

Sep 06

65

54 51

48 36

June 07

11 11

53

18

12

11

60

21

15 12

57

42 41

22

19

67

Sep 08

24 26

73 75 71

Mar 08

24 23 26 26 22 42 18 41 14 32 14 35 9 31 10 25 21 25 Source: CompanyMOSL

76 79

Dec 07

53 48 36 41 54 51 60 65 54

<0%

Sep 07

25.6 19.7 -8.4 -15.5 -14.9 -11.3 22.7 38.5 17.0

>0-15%

Mar 07

>15%

June 07

June 08 Sep 08 Dec 08 Mar 09 June 09 Sep 09 Dec 09 Mar 10 June 10

YOY (%)

Dec 06

RANGE

PROPORTION OF COMPANIES WITH EARNINGS GROWTH > 15%

% OF COMPANIES WITH GROWTH OF

Sep 06

PAT

Source: MOSL

July 2010

29

India Strategy

INTRA-SECTOR 1QFY11 EARNINGS DIVERGENCE SECTORS

Autos

Banks

Cement

1QFY11 PAT

EARNINGS GROWTH IN

EARNINGS

NEGATIVE

EARNINGS

GROWTH (%)

EXCESS OF 15%

GROWTH OF 0-15%

EARNINGS GROWTH

MOMENTUM

29.7

Bajaj Auto, Tata Motors, Maruti Suzuki, Mahindra & Mahindra Yes Bank, Axis Bank, LIC Housing, HDFC Bank, PNB, ICICI Bank, HDFC, BoB Ambuja Cements

Hero Honda

16.4

-18.9

Engineering

13.4

BHEL

FMCG

7.6

Godrej Cons., Dabur, Marico, ITC Simplex Infra, Nagarjuna Construction, IVRCL Infra. TCS, Wipro, MphasiS Zee Entertainment Sun TV, H T Media Tata Steel, Hindalco, JSW Steel, Sesa Goa, Nalco, Sterlite Inds., Hind. Zinc Reliance Inds., GAIL Sun Pharma, Ranbaxy Lab, Glenmark Divis Lab, Lupin, Piramal Healthcare, Dr Reddy’ s Labs, Mahindra Lifespace, Unitech, Phoenix Mills Tital Industries Pantaloon Retail -

Infrastructure IT Media Metals

5.4 15.0 25.1 461.4

Oil Gas & Petchem

-6.9

Pharma

30.1

Real Estate Retail Telecom Textiles

3.1 81.0 -43.8 125.8

Utilities

5.1

Raymond, Vardhman Textiles, Bombay Rayon Power Grid Corp.

Others

-0.1

Sintex Industreis

0 1 4

State Bank, Andhra Bank, Indian Bank

Federal Bank, Bank of India

3 4 13

Crompton Greaves, L&T, Thermax, Siemens United Spirits, Asian Paints, Nestle Hindustan Construction HCL Technologies, Infosys Jagran Prakashan

Grasim Inds., ACC, Ultratech, Shree Cement, India Cements ABB

1

1

Hind. Unilever 5 Jaiprakash Associates Patni Computer

3 4

Deccan Chronicle 3

0

4 4 1 2 1

SAIL

6 1 2 1 1 1 1

0 7

Cipla, GSK Pharma

Cairn India, ONGC, Chennai Petroleum Jubilant Organosys,

4

0

4 2

3 9

HDIL, DLF

Anant Raj Industries

-

-

3

-

Bharti Airtel, Idea Cellular, Reliance Comm. Arvind Mills

2

0

0

0

4 Reliance Infra., Tata Power, NTPC -

PTC India United Phosphorous

2

0

1 0

4 1

1

4

1

1

0

1

Note: Earnings momentum represents number of companies in every sector in the MOSL Universe in each of the 3 buckets of earnings growth

July 2010

30

India Strategy

Distribution of earnings growth of companies within sectors „ Autos: Sector earnings growth of ~30% YoY boosted by Bajaj Auto (+83% YoY) and Tata Motors (+ 45% YoY). Hero Honda would show earnings growth of mere 5% YoY. Maruti and M&M are expected to report earnings growth of 24% and 21%, respectively. „ Banks: Sector earnings growth of 16% YoY. Amongst the Top 10 banks in terms of contribution to universe, HDFC Bank, Axis bank, and Canara bank will report 30%+ earnings growth, ICICI and PNB would report 25%+ earnings growth. SBI is expected to report earnings growth of 6%, while BOI would report negative earnings growth (down 26% YoY). „ Cement: Negative earnings growth of 19% YoY. Ambuja cement is only company in the universe with positive earnings growth at 30%. Earnings growth for Grasim is flat YoY, while ACC and Ultra tech would report negative earning growth of 20% and 42%, respectively. „ IT: Sector earnings growth of 15% YoY comprises of near 20% earnings growth for both TCS and Wirpo, while earnings growth for Infosys is expected at 4%. „ Engineering: Earnings growth of 13% YoY is largely driven by BHEL – up 22% YoY, while L&T and Crompton Greaves are the other 2 stocks with double digit earnings growth at 14% and 13%, respectively. ABB is expected to report negative earnings growth of 6% YoY. „ FMCG: 6% earnings growth in sector has stark dispersion with 15% earnings growth for ITC (41% contribution to Universe) and negative growth of 6% for HUL (20% contribution to Universe). Nestle and Asian paints have modest earnings growth of ~5% YoY, while Godrej consumer would lead the pack with 39% earnings growth and GSK consumer with 16% YoY growth. „ Infrastructure: Negative earning of 5% YoY is due to de-growth in Jaiprakash Associates (down 7% YoY and 56% contribution to Universe), while NCC, Simplex and IVRCL would have earnings growth of 29%, 54% and 25%, respectively. „ Pharmaceuticals: Earnings growth of 30% for sector boosted by Sun Pharma (+183% YoY), Ranbaxy Labs (+100% YoY), and Lupin (+32% YoY). Cipla and Sun Pharma contribute equally to Universe, but earnings growth for Cipla is relatively lower at 12% YoY, driving the overall Universe growth down. „ Telecom: Sector earnings de-growth of 44% YoY, led by RCom (down 82% YoY, contribution at 12%). Bharti (contribution of 76%) and Idea Cellular (contribution of 9%) earnings de-growth would be better than universe average at 21% and 25%, respectively. Key earnings divergence for Sensex stocks in 1QFY11 We expect Sensex Universe to report sales growth of 28%, EBIDTA growth of 21% and PAT growth of 19%. The growth rates in Sensex Universe earnings are expected to improve over the next 3 quarters with average growth of 22%. The EPS growth will be even higher due to the higher weightage of the growth stocks.

July 2010

31

India Strategy

SENSEX PAT GROWTH (YOY) - PENDING

43

39 42 25

33

28

40 33 30

31 30 24

26 17

12

19

24

20

19

15

6

-11 4QFY10

1QFY11E

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

4QFY08

3QFY08

2QFY08

1QFY08

4QFY07

3QFY07

2QFY07

1QFY07

4QFY06

3QFY06

2QFY06

1QFY06

4QFY05

3QFY05

2QFY05

1QFY05

-17 -20 -17

Source: MOSL

„

Commodity stocks are biggest contributor to the YoY earnings growth given low base of June 2009. This is explained by loss to profit scenario for Tata Steel, 783% earnings growth from Hindalco and 59% by Sterlite. „ Reliance (contribution of 14%) is expected to report strong earnings growth of 30%, while ONGC would report de-growth of 28% (contribution of 10%). Further, the muted earnings growth of 3% & 6% respectively by NTPC and SBI (total contribution at 14%) would bring the overall earnings growth down. „ Stock with 25%+ earnings growth include: Tata Motors (+45%), HDFC Bank (+31%), and ICICI Bank (+25%). Stocks with 20-25% earnings growth are Maruti Suzuki (+24%), BHEL (+22%), TCS (+22%), M&M (+21%) and HDFC (+21% YoY). „ RCom, ONGC and Bharti Airtel would report de-growth of 82%, 28% and 21%, respectively.

July 2010

32

India Strategy

1QFY11 EARNINGS COMPOSITION OF SENSEX (RS B) COMPANY

SALES JUN-10

EBITDA

VAR

VAR

% YOY

% QOQ

JUN-10

ACC 20.2 -3.2 -4.1 Bharti Airtel 103.9 4.5 3.3 BHEL 72.1 28.9 -46.8 Cipla 15.1 9.6 9.7 DLF 20.6 24.6 3.1 HDFC 9.1 25.4 -22.2 HDFC Bank 23.1 24.4 -1.8 Hero Honda 42.3 11.1 3.5 Hind. Unilever 49.1 9.0 12.0 Hindalco 164.3 36.6 -6.8 ICICI Bank 19.5 -1.6 -4.0 Infosys 62.8 14.7 5.6 ITC 46.2 11.7 -10.1 Jaiprakash Associates 24.9 20.5 -25.5 Larsen & Toubro 87.8 19.3 -34.3 Mahindra & Mahindra 53.5 26.5 1.4 Maruti Suzuki 84.3 29.8 0.0 NTPC 134.4 12.0 8.8 ONGC 146.1 -1.8 -0.7 Reliance Comm 50.9 -17.2 -0.1 Reliance Inds. 564.7 81.1 -1.9 Reliance Infrastructure 30.8 26.0 16.6 State Bank 65.3 30.0 -2.8 Sterlite Inds. 65.4 42.8 -9.5 Tata Motors 99.3 56.3 -18.4 Tata Power 18.7 -7.0 4.4 Tata Steel 290.9 24.9 5.8 TCS 81.2 12.7 5.0 Wipro 73.7 15.4 5.7 Sensex (29) 2,520 28.0 -4.8 Note: Tata Steel, Hindalco are Consolidated, excluding Jindal

July 2010

PAT

VAR

VAR

% YOY

% QOQ

5.9 -19.8 39.1 -5.8 8.5 43.4 3.8 3.9 10.0 33.9 9.6 21.5 16.7 10.3 6.2 -3.3 6.7 -6.7 18.4 13.1 24.3 -4.0 20.8 11.3 15.7 13.2 6.5 19.6 9.6 21.7 8.4 22.6 10.2 28.7 37.6 18.5 79.6 -16.2 16.2 -34.1 94.0 47.3 3.3 10.6 51.8 41.0 16.4 60.5 10.1 39.1 5.1 -20.0 50.1 LP 23.2 18.5 13.8 7.3 622 20.6 Steel & Power

-5.4 2.3 -75.8 36.8 -0.4 -25.0 -1.1 -9.5 12.1 -2.0 1.2 2.8 -3.0 -24.1 -48.0 -0.8 -8.1 41.2 -2.8 0.8 2.9 26.8 -0.2 -25.0 -17.8 12.7 8.9 0.5 3.5 -4.7

JUN-10

3.9 19.8 5.5 2.7 4.0 6.8 8.0 5.2 5.0 6.8 11.0 15.9 10.1 2.0 6.5 5.5 7.2 23.3 34.9 3.2 47.7 3.5 24.6 10.7 3.2 2.2 27.5 18.5 12.1 338

CONTRIBUTION TO %

VAR

VAR

% YOY

% QOQ

-20.1 -21.4 22.4 12.1 1.6 21.0 31.2 4.5 -6.1 782.8 25.3 3.9 15.2 -7.0 12.9 21.2 23.7 2.5 -28.1 -81.5 30.1 9.5 5.7 59.4 45.5 7.6 LP 21.8 19.5 19.3

-4.3 -3.7 -75.5 26.1 -5.6 -26.2 -4.9 -12.8 19.4 57.6 9.4 6.9 -1.5 -17.1 -51.2 -3.1 10.0 -6.5 -7.7 -71.8 1.3 38.0 31.9 -22.3 -24.6 -0.4 19.3 -4.1 -0.1 -7.8

PAT

PAT GROWTH

1.2 5.9 1.6 0.8 1.2 2.0 2.4 1.6 1.5 2.0 3.3 4.7 3.0 0.6 1.9 1.6 2.1 6.9 10.3 1.0 14.1 1.0 7.3 3.2 1.0 0.6 8.2 5.5 3.6

-1.8 -9.8 1.9 0.5 0.1 2.2 3.5 0.4 -0.6 11.1 4.1 1.1 2.5 -0.3 1.4 1.8 2.5 1.0 -25.0 -25.9 20.3 0.6 2.4 7.3 1.8 0.3 87.0 6.1 3.6

Source: MOSL

33

India Strategy

MOSL MODEL PORTFOLIO SECTOR WEIGHT /

BSE-100

PORTFOLIO PICKS

Banks 22.2 PSU 6.0 3.4 SBI PNB 0.8 Indian Bank 0.0 Private 10.8 ICICI Bank 4.9 HDFC Bank 3.6 Yes Bank 0.0 NBFCs 5.4 Dewan Housing 0.0 Infrastructure & Related sectors 13.1 BHEL 2.1 Larsen & Toubro 5.0 Unitech 0.5 ACC 0.5 Nagarjuna Construction 0.0 India Cements 0.1 Oil & Gas 16.4 Reliance Inds. 10.0 ONGC 2.9 BPCL 0.5 GAIL 1.2 Information Technology 10.9 Infosys Tech 6.9 HCL Tech 0.4 Mphasis 0.0 FMCG / Media 8.0 ITC 4.1 United Spirits 0.6 Zee Ent 0.4 Auto 6.1 Mahindra & Mahindra 1.4 Hero Honda 1.0 Maruti 1.0 Pharmaceuticals 3.9 Cipla 0.9 Divi's Lab 0.3 Metals 5.9 Sterlite 1.3 Hindalco 1.0 Telecom 2.9 Bharti Airtel 1.8 Utilities 6.7 NTPC 1.7 Others 3.9 Deccan Chronicle 0.0 Sintex Industries 0.0 Birla Corp 0.0 Anant Raj Industries 0.0 Prakash Inds 0.0 Cash 0.0 Total 100.0

July 2010

MOSL WEIGHT

24.0 11.0 6 3 2 11.0 5 4 2 2 2 19.0 5 5 3 2 2 2 15.0 6 4 3 2 11.0 7 2 2 7.0 3.0 2.0 2.0 6.0 2 2 2 5.0 3 2 4.0 2 2 2.0 2 2.0 2 5.0 1 1 1 1 1 0.0 100.0

WEIGHT RELATIVE TO BSE-100

1.8 5.0 2.6 2.2 2.0 0.2 0.1 0.4 2.0 -3.4 2.0 5.9 2.9 0.0 2.5 1.5 2.0 1.9 -1.4 -4.0 1.1 2.5 0.8 0.1 0.1 1.6 2.0 -1.0 -1.1 1.4 1.6 -0.1 0.6 1.0 1.0 1.1 2.1 1.7 -1.9 0.7 1.0 -0.9 0.2 -4.7 0.3 1.1 1.0 1.0 1.0 1.0 1.0 0.0

EFFECTIVE SECTOR STANCE

Overweight Overweight Buy Buy Buy Overweight Buy Buy Buy Underweight Buy Overweight Buy Neutral Buy Buy Buy Buy Underweight Buy Buy Buy Buy Overweight Buy Buy Neutral Underweight Buy Buy Buy Underweight Buy Buy Buy Overweight Buy Buy Underweight Buy Buy Neutral Buy Underweight Neutral Buy Buy Buy Buy Buy

34

India Strategy

MOSL Universe: 1QFY11 aggregate performance highlights QUARTER-WISE SALES GROWTH (% YOY)

QUARTER-WISE NET PROFIT GROWTH (% YOY)

29.2%

19.3%

23.0%

17.8% 13.7%

12.8%

8.9%

-12.9% Sep- 09

Dec-09

Mar-10

June-10

Sep- 09

Dec-09

Mar-10

June-10

SECTORAL SALES GROWTH - QUARTER ENDED JUNE 2010 (%)

29.1 28.8 28.0 26.4 25.1

MOSL Universe Sales Growth = 23%

15.9 14.8 13.3 11.8 10.5

Others

Pharma

Utilities

IT

FMCG

Infrastructure

Engineering

Media

Metals

Oil Gas & Pet.

Banks

Retail

Real Estate

Textiles

Auto

3.3

1.0

0.9 Telecom

20.5

Cement

36.6 33.3 32.0

SECTORAL EBITDA GROWTH - QUARTER ENDED JUNE 2010 (%)

110.9 58.3

Cement

Telecom

Oil Gas & Petchem

-4.2 -12.7 -14.2

Others

FMCG

IT

Real Estate

Pharma

Utilities

MOSL Universe EBITDA Growth = 15.6% 16.6 16.2 14.9 14.6 10.4 8.9 7.1

Infrastructure

Banks

23.7 22.9

Engineering

Auto

Retail

Media

Textiles

Metals

38.5 34.7 29.7

SECTORAL NET PROFIT GROWTH - QUARTER ENDED JUNE 2010 (%)

461.4 125.8 81.0

July 2010

Telecom

Oil Gas & Petchem

Cement

-18.9 -26.3 -43.8 Others

Real Estate

Utilities

Infrastructure

FMCG

Engineering

IT

Banks

Media

Auto

Pharma

Retail

Textiles

Metals

MOSL Universe Net Profit Growth = 8.9% 30.1 29.7 25.1 16.4 15.0 13.4 7.6 5.4 5.1 3.1 -0.1

35

India Strategy

QUARTERLY PERFORMANCE - MOSL UNIVERSE SECTOR

EBITDA MARGIN (%)

(NO. OF COMPANIES)

NET PROFIT MARGIN (%)

JUN.09

JUN.10

CHG. (%)

JUN.09

JUN.10

CHG. (%)

14.2 89.6 32.8 11.1 21.3 25.9 15.6 37.9 11.7 14.1 19.6 49.0 9.1 38.8 18.3 26.5 17.4 21.3 26.8 26.2

13.5 85.5 27.9 11.4 20.2 25.3 15.7 42.0 19.6 10.6 20.4 42.5 9.5 33.6 21.7 27.6 18.0 20.0 25.7 24.7

-0.7 -4.1 -4.9 0.3 -1.1 -0.7 0.1 4.1 7.9 -3.6 0.8 -6.5 0.4 -5.2 3.4 1.0 0.6 -1.3 -1.1 -1.5

8.9 47.6 20.8 8.0 14.3 19.3 5.5 24.9 2.6 8.7 11.9 27.4 2.3 23.7 3.0 16.2 9.4 12.2 14.9 14.4

8.5 43.0 16.7 7.5 13.5 19.6 5.0 24.9 11.5 5.0 14.0 21.4 3.3 13.2 5.1 15.2 9.1 10.8 14.0 13.4

-0.5 -4.6 -4.1 -0.5 -0.9 0.3 -0.5 0.0 8.9 -3.7 2.1 -6.0 0.9 -10.5 2.1 -1.0 -0.3 -1.4 -1.0 -1.0

Auto (5) Banks (20) Cement (7) Engineering (6) FMCG (11) IT (7) Infrastructure (5) Media (5) Metals (8) Oil Gas & Petchem (11) Pharma (14) Real Estate (6) Retail (2) Telecom (4) Textiles (5) Utilities (6) Others (2) MOSL (124)* MOSL Excl. RMs (121) Sensex (29) *Tata Steel Consolidated

Source: MOSL NET PROFIT MARGIN GROWTH - QUARTER ENDED JUNE 2010 (%)

MOSL Universe Net Profit Margin Growth = -140bp

0.0 -0.3

Telecom

-3.7-4.1 -4.6 -6.0 -10.5 Banks

Utilities

FMCG

Others

Media

IT

Retail

Textiles

Metals

Pharma

Real Estate

Cement

Telecom

Banks

FMCG

Oil Gas &

IT

Auto

Infrastructure

Retail

Engineering

Others

Utilities

Pharma

Textiles

Media

Metals

Engineering

-0.5-0.5-0.5 -0.9-1.0

-0.7 -0.7 -1.1 -3.6 -4.1-4.9 -5.2 -6.5

Real Estate

2.1 2.1 0.9 0.3

Cement

MOSL Universe EBITDA Margin Growth = -130bp 1.0 0.8 0.6 0.4 0.3 0.1

Oil Gas &

8.9 4.1 3.4

Infrastructure

7.9

Auto

EBITDA MARGIN GROWTH - QUARTER ENDED JUNE 2010 (%)

SECTORAL CONTRIBUTION TO GROWTH IN SALES, EBITDA AND NET PROFIT (%) SECTOR

CONTRIBUTION

SECTOR

TO SALES GR.

Oil Gas & Petchem (11) Metals (8) Auto (5) Banks (20) Engineering (6) IT (7) Utilities (6) FMCG (11) Pharma (14) Infrastructure (5) Textiles (5) Real Estate (6) Retail (2) Media (5) Telecom (4) Cement (7) Others (2)

July 2010

50.8 15.7 8.9 6.3 3.9 3.5 2.6 2.5 1.3 1.0 0.9 0.9 0.8 0.4 0.2 0.1 0.1

CONTRIBUTION

SECTOR

TO EBITDA GR.

Metals (8) Banks (20) Auto (5) Utilities (6) IT (7) Engineering (6) Pharma (14) FMCG (11) Textiles (5) Media (5) Real Estate (6) Infrastructure (5) Retail (2) Others (2) Cement (7) Telecom (4) Oil Gas & Petchem (11)

53.5 30.9 7.1 6.6 4.9 3.5 2.5 2.2 2.1 1.6 1.4 1.2 0.6 0.2 -3.8 -7.0 -7.4

CONTRIBUTION TO NP GR.

Metals (8) Banks (20) IT (7) Auto (5) Pharma (14) Engineering (6) Utilities (6) FMCG (11) Textiles (5) Media (5) Retail (2) Real Estate (6) Infrastructure (5) Others (2) Cement (7) Telecom (4) Oil Gas & Petchem (11)

149.2 35.8 16.0 13.6 9.3 4.3 3.9 3.9 2.2 2.1 1.1 0.5 0.4 0.0 -9.8 -44.8 -87.7 Source: MOSL

36

July 2010

83%

-49% -47% -47%

Britannia

India Cements

Ranbaxy Labs

-5%

Ultratech Cement

SAIL

United Phos.

-5%

Reliance Comm

Unitech

-5%

Shree Cement

Anant Raj Inds

Ultratech Cement

Chennai Petroleum

-6%

Britannia

172%

IOC

Tata Power

-7%

BPCL

-54%

Anant Raj Inds

-17%

Arvind Mills

-20% -9%

Ultratech Cement

Reliance Comm

59% -9%

IOC

India Cements

70%

HPCL

HPCL

MRPL

Anant Raj Inds

Phoenix Mills

142% 135%

India Cements

TOP 10 BY NET PROFIT GROWTH (%)

MRPL

TOP 10 BY EBITDA GROWTH (%)

Chennai Petroleum

70%

Godrej Consumer

Unitech

TOP 10 BY SALES GROWTH (%)

Reliance Comm

116%

60%

Bajaj Auto

78% 73%

Divis Labs

Alok Ind

60%

Ranbaxy Labs

Bajaj Auto

Bajaj Auto

62%

Vardhman Textiles

81%

Zee Entertainment

Godrej Consumer 73%

Nalco

91%

Titan Industries

Reliance Inds.

Oriental Bank

Sesa Goa

81%

Titan Industries

Glenmark Pharma

Nalco

Sesa Goa

Mahindra Lifespace

Cairn India

93%

Mahindra Lifespace

397% 183%

Sesa Goa

Sun Pharma

783% Mahindra Lifespace

Cairn India

301%

JSW Steel

Hindalco

India Strategy

Scoreboard (quarter ended June 2010) WORST 10 BY SALES GROWTH (%)

235% -5%

WORST 10 BY EBITDA GROWTH (%)

270% 225% -34% -34% -33% -39% -37%

-47%

-72% -63%

-90%

WORST 10 BY NET PROFIT GROWTH (%)

170% 168% 139% 135% 100%

-42%

-66%

-56%

-76% -81% -81% -79%

Source: MOSL

37

MOSL Universe

ANNUAL PERFORMANCE - MOSL UNIVERSE

(RS BILLION)

SALES FY10

FY11E

FY12E

EBITDA CHG *

CHG #

(%)

(%)

FY10

FY11E

FY12E

NET PROFIT CHG *

CHG #

(%)

(%)

FY10

FY11E

FY12E

CHG *

CHG #

(%)

(%)

Auto (5) 1,818 2,190 2,528 20.5 15.4 235 296 343 26.1 15.8 106 158 191 49.0 20.6 Banks (23) 1,117 1,379 1,663 23.4 20.6 889 1,121 1,364 26.0 21.7 494 594 736 20.1 23.9 Cement (8) 567 682 777 20.4 13.9 160 163 183 2.0 12.3 88 84 94 -4.5 11.8 Engineering (6) 941 1,144 1,446 21.6 26.4 139 178 232 28.4 30.1 103 126 161 22.1 28.2 FMCG (11) 695 798 921 14.8 15.4 149 168 199 12.6 18.7 98 112 135 13.8 20.5 IT (7) 1,052 1,224 1,413 16.4 15.4 281 320 363 14.2 13.3 211 245 276 16.1 12.8 Infrastructure (9) 350 446 538 27.5 20.6 92 112 154 20.9 37.4 27 38 54 40.1 42.0 Media (5) 68 82 94 19.4 14.9 27 34 40 24.3 18.8 16 20 25 23.9 22.3 Metals (9) 2,688 3,046 3,260 13.3 7.0 448 562 697 25.4 23.9 197 319 395 61.8 23.9 Oil Gas&Pet.(11) 8,606 9,491 9,479 10.3 -0.1 1,027 1,327 1,554 29.2 17.1 557 681 840 22.3 23.3 Pharma (14) 496 560 631 12.9 12.6 102 124 134 21.6 7.9 61 88 97 45.1 10.2 Real Estate (10) 144 189 271 31.7 42.9 63 82 108 31.0 31.3 38 46 63 21.3 35.8 Retail (2) 124 156 187 25.6 19.6 12 15 19 26.5 21.0 5 6 8 38.5 28.6 Telecom (4) 763 826 946 8.3 14.5 278 280 327 0.6 16.9 152 102 115 -33.0 12.6 Textiles (5) 153 181 209 18.2 15.5 29 36 43 26.6 18.6 7 9 14 29.2 51.1 Utilities (10) 846 1,086 1,312 28.3 20.8 244 335 437 37.6 30.2 157 184 247 17.6 34.0 Others (2) 88 103 121 17.4 16.9 16 20 24 29.8 19.3 9 11 14 32.5 22.0 MOSL (141) 20,517 23,585 25,795 15.0 9.4 4,191 5,175 6,220 23.5 20.2 2,325 2,824 3,464 21.4 22.7 Ex.RMS(138) 15,701 18,520 20,977 18.0 13.3 4,007 4,956 5,961 23.7 20.3 2,189 2,708 3,324 23.7 22.8 Sensex (30) 5,473 6,401 7,080 17.0 10.6 1,230 1,515 1,773 23.2 17.0 629 825 1,000 31.2 21.3 Nifty (50) 6,419 7,245 8,009 12.9 10.5 1,378 1,658 1,965 20.3 18.5 711 909 1,110 27.9 22.1 * Growth FY11 over FY10; # Growth FY12 over FY11. For Banks : Sales = Net Interest Income, EBIDTA = Operating Profits; Tata Steel Figures are consolidated including corus; Note: Sensex & Nifty Numbers are Free Float

VALUATIONS - MOSL UNIVERSE SECTOR

P/E

EV/EBITDA

(X)

(X)

P/BV

ROE

DIV.

EPS

(X)

(%)

YLD (%)

CAGR

(NO. OF COMPANIES)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

Auto (5) Banks (23) Cement (8) Engineering (6) FMCG (11) IT (7) Infrastructure (9) Media (5) Metals (9) Oil Gas & Petchem (11) Pharma (14) Real Estate (10) Retail (2) Telecom (4) Textiles (5) Utilities (10) Others (2) MOSL (141) MOSL Excl. RMs (138) Sensex (30) Nifty (50) N.M. - Not Meaningful

18.8 14.2 10.3 28.5 30.3 21.7 38.4 24.8 16.9 16.0 33.4 25.3 40.6 10.6 11.1 23.2 14.8 18.4 19.0 21.4 21.7

12.6 11.8 10.8 23.4 26.6 18.7 27.4 20.1 10.5 13.1 23.0 20.8 29.3 15.8 8.6 19.7 11.2 15.1 15.3 16.7 16.9

10.5 9.5 9.7 18.2 22.1 16.5 19.3 16.4 8.4 10.6 20.9 15.3 22.8 14.0 5.7 14.7 9.1 12.3 12.5 13.8 13.8

9.0 NM 5.7 20.6 19.5 15.4 16.5 14.3 8.5 9.6 20.4 20.3 17.0 6.7 7.9 17.5 9.3 N.M N.M N.M N.M

7.1 NM 5.4 16.2 17.3 13.1 14.2 11.2 6.8 7.2 16.6 14.9 13.5 7.6 6.0 14.3 7.1 N.M N.M N.M N.M

6.0 NM 4.5 12.5 14.4 11.1 10.2 9.1 5.2 5.9 15.1 11.1 11.2 6.1 5.0 12.6 5.6 N.M N.M N.M N.M

6.0 2.6 2.2 7.5 10.8 5.7 3.4 4.6 2.1 2.4 5.5 1.4 5.0 1.7 0.8 2.6 2.6 3.0 3.1 3.3 3.3

4.4 2.2 1.7 6.0 9.4 4.6 3.0 4.1 1.7 2.1 4.6 1.4 4.3 1.6 0.7 2.4 2.2 2.6 2.7 3.0 2.9

3.4 1.9 1.5 5.0 7.9 3.8 2.7 3.6 1.5 1.9 4.0 1.3 3.8 1.5 0.7 2.1 1.8 2.3 2.3 2.6 2.5

31.9 18.1 21.8 26.1 35.7 26.4 8.8 18.7 12.1 14.9 16.3 5.6 12.4 16.5 7.7 11.2 17.6 16.3 16.3 15.7 15.3

34.9 18.5 16.1 25.5 35.2 24.6 11.0 20.5 16.6 16.2 20.2 6.7 14.8 10.2 8.7 11.9 19.5 17.2 17.4 17.8 17.2

32.2 19.8 15.7 27.3 35.7 22.7 13.7 21.9 17.2 17.4 19.1 8.6 16.5 10.5 11.9 14.5 19.6 18.2 18.4 18.7 18.3

July 2010

FY10 FY10-12

2.0 1.4 1.6 0.8 2.3 1.4 0.5 1.7 1.0 1.7 0.7 0.4 0.5 0.4 0.7 1.2 0.8 1.4 1.3 1.3 1.2 Source:

34.0 22.0 3.4 25.1 17.1 14.4 41.0 23.1 41.6 22.8 26.5 28.4 33.5 -13.2 39.7 25.6 27.1 22.0 23.2 26.1 24.9 MOSL

38

MOSL Universe

Ready reckoner: quarterly performance CMP (RS)

RECO

25.06.10

Automobiles Bajaj Auto Hero Honda Mahindra & Mahindra Maruti Suzuki Tata Motors Sector Aggregate Cement ACC Ambuja Cements Birla Corporation Grasim Industries India Cements Shree Cement Ultratech Cement Sector Aggregate Engineering ABB BHEL Crompton Greaves Larsen & Toubro Siemens Thermax Sector Aggregate FMCG Asian Paints Britannia Colgate Dabur Godrej Consumer GSK Consumer Hind. Unilever ITC Marico Nestle United Spirits Sector Aggregate

2,418 2,050 615 1,397 769

Buy Buy Buy Buy UR

861 117 362 1,795 109 2,023 933

Buy Neutral Buy Buy Buy Buy Buy

SALES

EBITDA

NET PROFIT

JUN.10

VAR.

VAR.

JUN.10

VAR.

VAR.

JUN.10

VAR.

VAR.

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

37,936 42,348 53,517 84,264 99,255 317,320

62.2 11.1 26.5 29.8 56.3 36.6

11.6 3.5 1.4 0.0 -18.4 -4.9

7,891 6,174 8,423 10,211 10,128 42,828

73.3 -3.3 22.6 28.7 39.1 29.7

1.5 -9.5 -0.8 -8.1 -17.8 -7.9

5,685 5,224 5,549 7,221 3,201 26,880

83.1 4.5 21.2 23.7 45.5 29.7

0.6 -12.8 -3.1 10.0 -24.6 -4.6

20,152 20,978 5,478 31,520 9,040 9,138 17,748

-3.2 13.6 11.7 3.5 -5.2 -0.9 -9.1

-4.1 5.4 -9.0 -6.5 -6.3 -3.2 -7.0

5,887 6,025 1,645 9,152 1,326 3,259 4,483

-19.8 25.6 -6.3 3.4 -53.7 -23.3 -37.5

-5.4 5.7 -5.2 1.3 5.2 0.1 11.3

3,879 4,216 1,287 5,385 277 1,567 2,434

-20.1 29.9 -17.1 -0.1 -78.7 -46.8 -41.7

-4.3 8.8 -6.4 -10.7 -5.8 5841.6 6.5

114,054

1.0

-4.0

31,777

-14.2

1.7

19,045

-18.9

6.2

873 2,451 254 1,761 728 709

Buy Buy Neutral Neutral Neutral Neutral

16,555 72,117 13,806 87,813 21,575 6,172 218,038

10.0 28.9 17.7 19.3 12.5 14.8 20.5

13.7 -46.8 -14.7 -34.3 -3.1 -49.4 -34.8

1,159 8,491 2,092 9,572 2,697 802 24,813

-9.5 43.4 20.2 21.7 4.9 16.4 23.7

3915.3 -75.8 -22.7 -48.0 -5.7 -45.3 -59.0

788 5,548 1,308 6,529 1,749 507 16,430

-5.8 22.4 14.0 12.9 1.4 9.1 13.4

1086.7 -75.5 -31.4 -51.2 -4.4 -48.9 -59.7

2,393 1,872 848 200 342 1,814 267 302 126 2,908 1,300

Neutral Buy Buy Buy Buy Buy Neutral Buy Buy Buy Buy

16,939 8,556 5,391 8,801 7,592 5,672 49,079 46,151 7,594 14,151 14,775 184,700

16.0 17.0 15.2 18.5 73.0 21.0 9.0 11.7 9.0 17.0 19.0 14.8

-9.7 -8.0 4.4 3.7 49.1 -12.5 12.0 -10.1 26.1 -4.4 18.0 1.6

2,880 402 1,443 1,382 1,465 828 6,675 15,701 1,025 2,717 2,719 37,237

4.4 -32.9 17.8 16.9 69.6 11.0 -6.7 13.2 6.3 3.8 22.5 8.9

-7.4 LP 0.2 -14.7 36.3 -37.8 12.1 -3.0 20.7 -10.6 49.9 2.6

1,859 277 1,131 1,058 967 641 5,039 10,124 692 1,865 1,194 24,846

5.6 -49.0 10.1 15.7 38.7 16.1 -6.1 15.2 15.3 4.7 12.9 7.6

-3.0 302.6 7.3 -20.5 5.4 -33.3 19.4 -1.5 19.8 -5.4 110.0 4.1

PULL OUT

July 2010

39

MOSL Universe

Ready reckoner: quarterly performance CMP (RS)

RECO

25.06.10

Information Technology HCL Technologies 358 Infosys 2,778 MphasiS 571 Patni Computer 511 TCS 762 Tech Mahindra 738 Wipro 391 Sector Aggregate Infrastructure Hindustan Construction IVRCL Infra. Jaiprakash Associates Nagarjuna Construction Simplex Infra. Sector Aggregate Media Deccan Chronicle HT Media Jagran Prakashan Sun TV Zee Entertainment Sector Aggregate Metals Hindalco Hindustan Zinc JSW Steel Nalco Sesa Goa Sterlite Inds. SAIL Tata Steel Sector Aggregate Oil & Gas BPCL Cairn India Chennai Petroleum GAIL Gujarat State Petronet HPCL Indraprastha Gas IOC MRPL ONGC Reliance Inds. Sector Aggregate

Buy Buy Neutral Buy Neutral Neutral Neutral

SALES

EBITDA

NET PROFIT

JUN.10

VAR.

VAR.

JUN.10

VAR.

VAR.

JUN.10

VAR.

VAR.

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

32,641 62,780 12,857 7,906 81,204 11,713 73,726

12.2 14.7 16.3 2.3 12.7 5.2 15.4

6.1 5.6 5.3 2.1 5.0 -1.0 5.7

5,999 20,782 3,073 1,541 23,243 2,641 13,771

-4.0 11.3 5.3 -6.6 18.5 -5.9 7.3

2.8 2.8 -2.5 -9.0 0.5 -5.3 3.5

2,982 15,871 2,660 1,352 18,512 1,501 12,074

-3.7 3.9 16.0 -1.2 21.8 67.4 19.5

-7.2 6.9 -0.5 -9.7 -4.1 -19.5 -0.1

282,828

13.3

5.1

71,473

10.4

1.9

55,444

15.0

-0.1

116 183 129 188 481

Buy Neutral Buy Buy Buy

10,220 13,095 24,918 12,074 11,862 72,169

6.0 20.6 20.5 20.7 6.9 15.9

-6.1 -30.7 -25.5 -20.7 -5.3 -20.7

1,172 1,244 6,477 1,232 1,198 11,323

1.9 24.9 19.6 19.4 7.2 16.6

-4.7 -37.2 -24.1 -19.4 -6.9 -22.2

270 437 2,028 493 395 3,623

0.5 24.6 -7.0 28.9 53.8 5.4

-21.1 -48.5 -17.1 -20.7 -14.1 -23.2

122 151 121 412 291

Buy Neutral Neutral Neutral Buy

2,305 3,774 2,573 4,065 6,631 19,348

6.4 12.6 11.0 41.3 39.3 25.1

20.3 -2.0 8.9 3.7 2.1 4.3

1,159 755 846 3,278 2,081 8,119

9.4 9.3 20.0 46.6 77.8 38.5

42.6 -18.7 33.8 -0.9 13.3 8.0

707 430 518 1,676 1,488 4,820

-8.1 16.4 4.6 39.9 46.1 25.1

988.4 -13.2 42.3 1.6 16.9 25.2

149 966 1,043 425 367 168 196 490

Buy Buy Buy Sell Buy Buy Neutral Neutral

164,331 17,851 50,776 13,772 23,819 65,379 86,642 290,891 713,461

36.6 18.0 29.6 47.2 135.5 42.8 -5.3 24.9 26.4

-6.8 18,396 -29.9 10,068 -2.4 11,420 -15.3 4,548 -1.5 14,735 -9.5 16,382 -30.1 14,205 5.8 50,076 -6.8 139,830

13.1 31.1 52.9 171.7 225.2 60.5 -24.3 LP 110.9

-2.0 -35.0 -14.2 -15.9 -2.0 -25.0 -54.1 8.9 -16.2

6,816 8,338 4,806 2,976 11,396 10,724 9,444 27,529 82,030

782.8 16.0 396.6 135.3 169.9 59.4 -29.4 LP 461.4

57.6 -32.7 -21.7 -24.0 -6.0 -22.3 -53.8 19.3 -14.8

621 312 251 483 100 401 257 377 73 1,264 1,063

Buy Buy Buy Buy Buy Buy Neutral Buy Sell Buy Buy

323,334 10,143 52,959 76,433 2,684 273,611 3,216 671,498 88,436 146,098 564,709 2,209,843

26.8 395.0 -6.4 26.9 27.3 13.1 38.3 14.5 49.6 -1.8 81.1 28.0

-13.9 6,208 46.0 8,261 -3.1 472 17.2 13,672 4.1 2,523 -12.6 4,048 11.7 1,091 -13.1 25,195 1.7 1,696 -0.7 79,573 -1.9 94,037 -8.0 233,808

-16.7 525.0 -89.9 28.3 29.5 -62.8 28.5 -39.2 -71.5 -16.2 47.3 -4.2

-44.9 2,707 125.0 4,372 LP -526 3.8 7,942 6.4 1,040 -69.2 1,582 18.0 609 -65.5 12,537 -37.3 652 -2.8 34,862 2.9 47,710 -20.2 110,802

-55.9 109.0 PL 21.1 29.1 -75.6 26.2 -66.0 -80.6 -28.1 30.1 -26.3

-61.5 78.0 -12.8 -3.6 -79.1 18.4 -77.4 -45.5 -7.7 1.3 -34.2

PULL OUT

July 2010

40

MOSL Universe

Ready reckoner: quarterly performance CMP (RS)

RECO

25.06.10

Pharmaceuticals Aventis Pharma Biocon Cadila Health Cipla Divis Labs Dishman Pharma Dr Reddy’ s Labs Glenmark Pharma GSK Pharma Jubiliant Organosys Lupin Piramal Healthcare Ranbaxy Labs Sun Pharma Sector Aggregate Real Estate Anant Raj Inds DLF HDIL Mahindra Lifespace Phoenix Mills Unitech Sector Aggregate Retailing Pantaloon Retail Titan Industries Sector Aggregate Telecom Bharti Airtel Idea Cellular Reliance Comm Tulip Telecom Sector Aggregate Textiles Alok Ind Arvind Mills Bombay Rayon Raymond Vardhman Textiles Sector Aggregate

NET PROFIT

VAR.

JUN.10

VAR.

VAR.

JUN.10

VAR.

VAR.

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

2,785 5,918 10,542 15,083 2,881 2,328 17,556 7,343 5,179 10,367 13,446 9,141 18,103 9,375 130,049

11.5 19.3 16.7 9.6 40.0 2.3 -3.5 35.1 13.2 15.7 23.9 11.3 -4.5 19.0 10.5

10.8 -9.9 24.5 9.7 -8.3 -6.1 6.9 3.6 -4.3 4.7 4.7 -2.9 11.0 -15.5 3.7

483 1,145 2,342 3,830 1,131 508 2,721 2,316 1,857 1,988 2,456 1,774 1,204 2,771 26,526

-8.7 13.1 15.0 3.9 69.6 -4.6 -27.8 90.8 14.0 22.6 26.5 14.0 -0.9 64.5 14.9

32.7 -12.1 23.7 36.8 -25.3 2.5 26.9 29.9 -7.2 -8.1 -1.4 -18.0 -27.9 -19.1 1.2

480 698 1,502 2,710 899 229 2,064 949 1,463 1,058 1,852 1,064 399 2,785 18,153

1.9 22.3 19.6 12.1 51.4 -41.5 20.7 77.5 11.1 -15.9 32.2 25.1 99.7 182.6 30.1

33.0 -13.4 26.5 26.1 -31.1 14.9 23.8 -7.5 -9.3 -22.9 -16.0 -33.5 -25.2 -11.7 -5.4

Buy Buy Buy Buy Buy Buy

660 20,562 3,506 1,145 395 8,257 34,526

-20.0 24.6 18.7 142.3 59.4 60.4 32.0

93.6 3.1 -19.2 13.4 14.6 -27.1 -7.5

401 9,964 1,580 384 276 2,073 14,679

-47.3 33.9 36.1 269.8 46.3 -34.2 14.6

52.9 -0.4 -30.4 29.5 39.5 -24.0 -6.8

364 4,023 1,157 279 177 1,384 7,383

-47.2 1.6 7.6 167.6 15.4 17.4 3.1

22.3 -5.6 -34.9 17.7 12.6 -31.1 -15.6

Buy Neutral

20,279 12,580 32,859

22.0 42.5 29.1

-1.4 -4.1 -2.5

2,239 893 3,132

22.2 81.4 34.7

3.9 -23.6 -5.8

529 541 1,070

44.9 139.1 81.0

-5.4 -34.8 -23.0

103,852 36,665 50,899 5,366 196,781

4.5 23.2 -17.2 21.1 0.9

3.3 9.5 -0.1 1.1 3.4

39,110 9,331 16,151 1,491 66,083

-5.8 8.5 -34.1 37.3 -12.7

2.3 1.0 0.8 -3.5 1.6

19,787 2,243 3,206 726 25,963

-21.4 -24.5 -81.5 -3.2 -43.8

-3.7 -15.9 -71.8 -8.6 -26.7

12,617 6,189 5,120 3,366 8,091 35,382

60.5 -8.6 52.2 43.4 30.5 33.3

-14.2 7.5 8.0 0.0 7.0 -2.1

3,496 720 1,280 441 1,751 7,688

62.6 -18.1 60.8 LP 59.8 58.3

-18.3 8.5 11.8 -1.4 3.6 -6.5

487 64 564 70 619 1,805

52.3 -24.8 51.3 LP 115.6 125.8

-48.9 -58.1 12.0 96.7 53.6 -11.9

Neutral

321 640 347 767 217 1,484 273 2,169 339 1,918 494 453 1,793

Buy Buy Buy Buy Neutral UR Neutral Buy Neutral Buy Neutral Neutral Buy

420 2,258

EBITDA

VAR.

1,870

118 286 244 459 209 74

SALES JUN.10

263 57 193 853

Buy Buy UR Buy

20 33 253 217 271

Neutral Neutral Buy Buy Buy

PL: Profit to Loss; LP: Loss to Profit; UR=Under Review; Tata Steel and Sterlite numbers are consolidated

PULL OUT

July 2010

41

MOSL Universe

Ready reckoner: quarterly performance CMP (RS)

RECO

25.06.10

Utilities CESC NTPC PTC India Power Grid Corp. Reliance Infrastructure Tata Power Sector Aggregate Others Sintex Inds. United Phosphorous Sector Aggregate

374 196 101 101 1,168 1,303

313 192

CMP (RS)

NET PROFIT

VAR.

JUN.10

VAR.

VAR.

JUN.10

VAR.

VAR.

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

8,939 134,430 24,215 20,694 30,824 18,745 237,847

10.5 12.0 2.1 27.5 26.0 -7.0 11.8

18.6 8.8 94.8 -7.2 16.6 4.4 13.2

2,101 37,640 157 17,279 3,314 5,061 65,553

10.6 18.5 6.9 29.9 10.6 -20.0 16.2

14.2 41.2 74.5 -5.1 26.8 12.7 21.6

1,092 23,349 274 5,823 3,466 2,173 36,177

4.0 2.5 -24.8 15.8 9.5 7.6 5.1

9.2 -6.5 76.3 -23.1 38.0 -0.4 -5.8

Buy Buy

8,134 15,692 23,827

22.8 -4.6 3.3

-25.6 2.5 -9.2

1,139 3,154 4,293

30.3 0.6 7.1

-41.1 -0.2 -15.7

592 1,575 2,167

46.0 -10.7 -0.1

-51.4 -28.3 -36.5

RECO RS M

134 1,248 696 345 434 514 93 318 2,937 1,948 858 220 1,015 323 1,045 579 165 2,301 303 272

EBITDA

VAR.

Neutral Neutral Neutral Buy Buy Neutral

25.06.10

Banks Andhra Bank Axis Bank Bank of Baroda Bank of India Canara Bank Corporation Bank Dena Bank Federal Bank HDFC HDFC Bank ICICI Bank Indian Bank LIC Housing Fin Oriental Bank of Commerce Punjab National Bank Shriram Transport Fin. South Indian Bank State Bank Union Bank Yes Bank Sector Aggregate

SALES JUN.10

Buy Buy Buy Neutral Buy Buy Buy Buy Neutral Buy Buy Buy Buy Buy Buy Buy UR Buy Buy Buy

NET INT INCOME

OPERATING PROFIT

NET PROFIT

JUN.10

VAR.

VAR.

JUN.10

VAR.

VAR.

JUN.10

VAR.

% YOY

% QOQ

RS M

% YOY

% QOQ

RS M

% YOY

% QOQ

6,436 13,937 16,881 15,034 15,457 6,219 3,023 3,972 9,114 23,079 19,540 9,128 3,022 9,326 24,177 6,336 1,584 65,328 12,727 2,418 266,738

45.8 33.3 40.1 15.6 19.7 33.0 20.7 36.9 25.4 24.4 -1.6 23.7 43.2 92.6 34.2 34.7 3.9 30.0 58.8 47.7 28.8

-1.9 5,161 -4.5 13,630 -3.3 14,267 -3.1 11,658 -3.2 13,037 -2.8 5,591 -7.3 2,143 -3.0 3,442 -22.2 9,619 -1.8 16,750 -4.0 24,280 -2.3 7,349 -12.9 2,479 -5.7 7,379 -3.2 20,396 -2.1 5,061 100.8 1,040 -2.8 51,818 -8.8 10,647 -1.0 2,418 -4.1 228,164

48.3 15.9 41.3 6.6 25.2 -2.1 6.4 23.7 21.5 10.3 -4.0 16.6 38.6 42.7 30.0 48.0 -2.7 41.0 35.2 22.3 22.9

-2.1 2,689 -1.5 7,617 -12.4 7,970 -8.6 4,311 -8.9 7,344 2.6 3,054 -23.5 1,245 -2.1 1,348 -25.0 6,836 -1.1 7,953 1.2 11,002 -15.8 3,379 -13.2 1,663 -5.0 3,106 -12.6 10,674 -1.7 2,680 101.6 548 -0.2 24,630 -7.2 5,216 -6.1 1,387 -5.8 114,652

4.9 35.5 16.3 -26.2 32.2 16.9 8.3 -1.2 21.0 31.2 25.3 1.9 34.3 20.7 28.3 63.0 -8.9 5.7 18.0 38.6 16.4

VAR.

11.9 -0.4 -12.1 0.7 46.0 -2.2 -9.1 15.4 -26.2 -4.9 9.4 -17.6 -22.1 -2.0 -6.0 1.4 41.8 31.9 -12.1 -0.9 2.8

PULL OUT

July 2010

42

MOSL Universe

Ready reckoner: valuations CMP (RS)

RECO

25.06.10

Automobiles Bajaj Auto Hero Honda Mahindra & Mahindra Maruti Suzuki Tata Motors Sector Aggregate Cement ACC Ambuja Cements Birla Corporation Grasim Industries India Cements Kesoram Ind Shree Cement Ultratech Cement Sector Aggregate Engineering ABB BHEL Crompton Greaves Larsen & Toubro Siemens Thermax Sector Aggregate FMCG Asian Paints Britannia Colgate Dabur Godrej Consumer GSK Consumer Hind. Unilever ITC Marico Nestle United Spirits Sector Aggregate

July 2010

EPS (RS)

P/E (X)

EV/EBITDA (X)

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

2,418 2,050 615 1,397 769

Buy Buy Buy Buy UR

125.6 111.8 42.5 90.8 24.1

164.9 122.3 58.4 99.5 76.3

181.1 142.8 70.2 118.1 98.8

19.2 18.3 14.5 15.4 31.9 18.8

14.7 16.8 10.5 14.0 10.1 12.6

13.3 14.4 8.8 11.8 7.8 10.5

12.8 13.3 5.4 8.8 9.0 9.0

9.7 12.4 4.6 8.1 6.2 7.1

8.5 10.4 3.6 6.6 5.6 6.0

64.3 61.5 26.1 21.5 19.9 31.9

53.1 56.7 22.9 19.1 42.7 34.9

41.3 39.7 22.5 18.9 38.6 32.2

861 117 362 1,795 109 318 2,023 933

Buy Neutral Buy Buy Buy Buy Buy Buy

86.7 7.8 72.4 331.1 10.9 54.2 203.7 87.8

75.5 8.5 62.5 255.5 4.8 61.7 200.4 63.0

82.9 9.1 64.1 283.6 7.7 78.1 216.2 73.0

9.9 15.0 5.0 5.4 10.0 5.9 9.9 10.6 10.3

11.4 13.8 5.8 7.0 22.7 5.2 10.1 14.8 10.8

10.4 12.9 5.6 6.3 14.1 4.1 9.4 12.8 9.7

5.9 8.8 2.6 2.6 6.5 4.6 5.8 13.2 5.7

6.1 8.4 2.3 2.3 9.2 4.3 6.1 7.7 5.4

5.2 7.2 3.0 1.6 6.6 3.5 4.8 6.6 4.5

29.8 19.6 31.1 23.2 8.3 17.2 46.6 23.7 21.8

22.0 18.9 21.8 15.0 3.4 16.9 32.4 21.9 16.1

19.7 18.0 18.7 14.7 5.3 18.2 26.7 16.6 15.7

873 2,451 254 1,761 728 709

Buy Buy Neutral Neutral Neutral Neutral

16.7 95.7 12.9 61.7 13.7 21.8

20.1 118.8 14.4 71.9 23.3 24.8

33.9 155.5 17.6 89.2 26.9 32.0

52.2 25.6 19.7 28.6 53.1 32.6 28.5

43.5 20.6 17.7 24.5 31.3 28.6 23.4

25.7 15.8 14.4 19.7 27.0 22.1 18.2

34.0 17.6 18.4 23.0 22.6 21.0 20.6

28.0 12.5 14.8 20.7 16.5 18.4 16.2

16.1 9.6 11.8 16.4 15.0 14.5 12.5

15.6 32.5 39.2 19.7 12.7 27.0 26.1

16.3 32.5 34.8 17.8 24.9 28.7 25.5

23.1 34.0 33.3 18.8 24.9 32.1 27.3

2,393 1,872 848 200 342 1,814 267 302 126 2,908 1,300

Neutral Buy Buy Buy Buy Buy Neutral Buy Buy Buy Buy

79.9 68.9 29.7 5.8 11.7 55.4 9.4 10.6 4.0 72.4 28.0

86.5 88.4 32.3 6.6 15.2 64.6 9.5 12.4 4.7 81.4 43.1

104.6 116.8 38.1 8.2 18.4 79.1 11.3 14.6 5.9 99.3 61.0

29.9 27.2 28.6 34.8 29.3 32.8 28.2 28.4 31.7 40.2 46.3 30.3

27.7 21.2 26.2 30.2 22.5 28.1 28.2 24.4 26.6 35.7 30.1 26.6

22.9 16.0 22.3 24.5 18.6 22.9 23.7 20.7 21.3 29.3 21.3 22.1

19.0 29.8 22.4 27.2 24.6 22.1 20.0 17.0 20.6 26.8 16.4 19.5

17.4 16.7 19.2 22.6 17.7 19.9 19.9 14.7 17.9 24.1 15.6 17.3

14.4 12.1 16.3 18.6 15.0 15.7 16.5 12.4 14.7 19.8 12.3 14.4

48.2 42.2 156.0 45.8 50.3 25.7 64.0 28.9 37.3 120.0 8.3 35.7

41.2 44.2 120.1 41.5 52.4 25.4 71.5 28.5 32.3 116.0 11.4 35.2

39.9 46.1 114.4 40.0 49.8 26.1 74.4 28.5 30.0 120.0 14.1 35.7

43

MOSL Universe

Ready reckoner: valuations CMP (RS)

RECO

25.06.10

Information Technology HCL Technologies 358 Infosys 2,778 MphasiS 571 Patni Computer 511 TCS 762 Tech Mahindra 738 Wipro 391 Sector Aggregate Infrastructure GMR Infrastructure 57 GVK Power & Infra 44 Hindustan Construction 116 IVRCL Infra. 183 Jaiprakash Associates 129 Nagarjuna Construction 188 Simplex Infra. 481 Sector Aggregate Media Deccan Chronicle 122 HT Media 151 Jagran Prakashan 121 Sun TV 412 Zee Entertainment 291 Sector Aggregate Metals Hindalco 149 Hindustan Zinc 966 JSW Steel 1,043 Nalco 425 Prakash Inds 166 SAIL 196 Sesa Goa 367 Sterlite Inds. 168 Tata Steel 490 Sector Aggregate Oil & Gas BPCL

621

Cairn India 312 Chennai Petroleum 251 GAIL 483 Gujarat State Petronet 100 HPCL 401 Indraprastha Gas 257 IOC 377 MRPL 73 ONGC 1,264 Reliance Inds. 1,063 Sector Aggregate

Buy Buy Neutral Buy Neutral Neutral Neutral

EPS (RS)

P/E (X)

EV/EBITDA (X)

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

18.1 107.4 50.1 36.1 35.1 45.0 18.6

25.9 123.7 51.5 43.8 39.5 59.9 21.8

29.5 149.9 54.4 45.3 42.6 64.8 24.1

19.8 25.9 11.4 14.2 21.7 16.4 21.0

13.8 22.5 11.1 11.7 19.3 12.3 17.9

12.2 18.5 10.5 11.3 17.9 11.4 16.2

9.9 18.5 9.6 7.3 16.7 6.9 15.4

8.3 15.2 8.4 6.3 14.3 6.9 12.9

7.0 12.5 7.5 5.1 12.5 6.0 10.9

19.8 29.7 37.9 15.7 37.4 31.6 26.6

23.7 27.5 29.2 16.1 32.1 29.7 23.9

22.4 27.6 24.2 14.6 27.5 25.3 21.6

21.7

18.7

16.5

15.4

13.1

11.1

26.4

24.6

22.7

Neutral Buy Buy Neutral Buy Buy Buy

1.2 1.0 3.4 7.8 1.6 9.2 24.8

1.2 1.8 4.3 9.5 4.1 11.7 34.3

1.4 3.1 6.1 12.5 4.1 14.3 45.5

47.9 43.0 33.7 23.5 81.2 20.4 19.4 38.4

49.6 24.1 26.9 19.2 31.8 16.1 14.0 27.4

42.1 14.4 19.0 14.6 31.2 13.1 10.6 19.3

15.3 21.7 10.0 11.5 18.3 11.7 7.4 16.5

14.0 15.5 8.2 9.5 16.9 9.9 6.3 14.2

9.4 10.8 6.6 7.7 10.9 8.3 5.4 10.2

6.4 5.0 6.9 11.5 4.0 9.8 12.8 8.8

5.9 8.6 8.1 13.2 8.6 10.4 15.6 11.0

13.8 12.8 10.5 15.4 8.0 12.1 17.7 13.7

Buy Neutral Neutral Neutral Buy

10.8 5.7 5.8 14.4 10.5

13.4 7.6 6.5 18.0 12.6

15.9 9.2 6.9 22.1 16.1

11.3 24.6 20.8 28.6 27.7 24.8

9.1 19.8 18.7 22.9 23.1 20.1

7.7 16.4 17.6 18.6 18.0 16.4

5.9 12.4 12.2 14.2 22.2 14.3

4.8 10.2 11.1 11.1 15.7 11.2

3.9 8.6 10.4 9.0 12.0 9.1

20.9 14.5 28.7 28.2 12.9 18.7

23.1 15.1 30.0 28.1 15.1 20.5

24.3 15.6 31.8 27.8 17.7 21.9

Buy Buy Buy Sell Buy Neutral Buy Buy Neutral

4.2 95.6 59.4 12.9 21.6 16.4 31.6 24.0 -9.3

12.7 111.2 79.8 18.2 23.6 12.8 61.2 17.0 63.7

17.0 126.3 145.4 20.9 39.6 15.9 67.3 22.8 67.6

35.5 10.1 17.5 32.9 7.7 11.9 11.6 7.0 -52.7 16.9

11.7 8.7 13.1 23.4 7.0 15.3 6.0 9.9 7.7 10.5

8.7 7.6 7.2 20.4 4.2 12.3 5.5 7.4 7.3 8.4

7.0 6.0 9.8 20.9 7.4 7.6 8.4 7.4 11.2 8.5

7.0 4.4 9.5 13.3 5.4 10.1 3.3 5.2 7.0 6.8

6.0 3.2 4.1 10.9 3.6 8.5 2.3 3.2 6.5 5.2

6.2 22.2 12.3 8.0 21.9 20.0 33.8 10.9 -9.7 12.1

18.9 20.7 13.7 10.4 21.7 14.0 40.5 13.7 35.2 16.6

20.5 19.2 19.0 11.0 29.0 15.2 31.3 15.7 28.5 17.2

Buy

45.2

Buy Buy Buy Buy Buy Neutral Buy Sell Buy Buy

5.5 32.7 24.8 7.4 38.4 15.4 44.5 6.0 90.7 54.8

60.6 25.4 25.9 30.6 7.8 34.6 19.1 34.3 1.7 122.5 69.0

64.6 43.9 27.4 34.5 13.9 37.1 20.0 43.1 4.4 141.2 83.4

13.8 56.2 7.7 19.5 13.5 10.4 16.7 8.5 12.1 13.9 19.4 16.0

10.3 12.2 9.7 15.8 12.8 11.6 13.4 11.0 43.5 10.3 15.4 13.1

9.6 7.1 9.2 14.0 7.2 10.8 12.8 8.8 16.6 9.0 12.7 10.6

14.9 61.2 7.5 13.1 6.9 8.5 9.5 9.7 10.2 5.5 13.0 9.6

9.0 8.0 6.9 10.2 6.1 8.5 7.6 7.2 20.5 4.4 9.8 7.2

7.4 4.7 7.0 9.3 4.0 7.1 6.9 5.7 12.4 3.7 8.2 5.9

11.8 3.2 18.5 18.7 29.4 11.7 28.6 21.8 20.6 20.0 13.4 14.9

14.4 13.5 10.9 20.1 24.8 9.8 29.4 15.0 5.3 23.5 14.9 16.2

13.9 20.4 10.9 19.7 33.8 9.9 25.9 17.1 13.2 23.0 15.6 17.4

PULL OUT

July 2010

44

MOSL Universe

Ready reckoner: valuations CMP (RS)

RECO

25.06.10

Pharmaceuticals Aventis Pharma Biocon Cadila Health Cipla Divis Labs Dishman Pharma Dr Reddy’ s Labs GSK Pharma Glenmark Pharma Jubiliant Organosys Lupin Piramal Healthcare Ranbaxy Labs Sun Pharma Sector Aggregate Real Estate Anant Raj Inds Brigade Enterpr.

1,870

Neutral

321 640 347 767 217 1,484 2,169 273 339 1,918 494 453 1,793

Buy Buy Buy Buy Neutral UR Buy Neutral Neutral Buy Neutral Neutral Buy

EPS (RS)

P/E (X)

EV/EBITDA (X)

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

68.4 14.7 24.9 12.7 25.8 14.2 6.3 59.6 11.6 28.6 76.6 23.4 3.6 65.5

75.9 16.9 29.6 14.6 31.1 15.6 54.6 69.8 14.6 32.5 94.4 25.6 6.6 61.3

88.8 20.1 35.8 17.4 38.5 19.2 61.6 80.3 18.6 33.7 110.5 30.3 8.7 74.8

27.4 21.9 25.7 27.3 29.8 15.2 234.0 36.4 23.4 11.9 25.0 21.1 125.5 27.4 33.4

24.6 19.0 21.6 23.8 24.7 13.9 27.2 31.1 18.6 10.4 20.3 19.3 68.8 29.3 23.0

21.1 16.0 17.8 19.9 19.9 11.3 24.1 27.0 14.7 10.0 17.3 16.3 52.1 24.0 20.9

25.2 13.5 17.3 19.4 25.1 12.2 22.3 25.2 15.3 10.7 21.1 15.9 36.7 24.1 20.4

21.7 11.7 14.6 16.8 20.2 10.0 21.2 21.9 11.4 8.6 17.2 13.5 13.6 25.1 16.6

17.7 10.3 12.3 14.8 15.7 8.2 19.1 18.7 10.7 7.6 14.5 11.2 24.7 20.3 15.1

17.1 16.7 36.6 17.3 22.4 15.3 2.5 28.7 14.1 29.5 40.1 32.5 3.5 12.6 16.3

17.1 16.8 33.2 17.3 22.6 14.9 20.7 30.2 14.7 25.8 37.0 28.4 17.0 14.7 20.2

18.0 17.3 31.2 17.9 23.2 16.0 20.1 31.4 15.8 21.4 33.7 27.7 6.2 15.9 19.1

13.2

118

Buy

8.1

7.8

14.6

15.2

9.0

12.9

11.4

6.1

6.7

6.1

9.4

135 286 244 153 459 71 209 105 74

Buy Buy Buy Neutral Buy Neutral Buy Neutral Buy

4.2 10.0 15.8 -0.6 19.3 10.0 4.1 6.8 2.8

11.9 11.9 15.7 5.4 26.9 12.0 5.7 8.2 3.2

17.6 32.0 16.0 28.5 18.9 15.5 12.8 -246.5 30.3 23.8 13.2 7.1 9.6 51.6 9.8 15.4 4.3 26.5 25.3

11.3 24.1 15.6 28.2 17.1 6.0 36.6 12.8 23.2 20.8

7.7 17.9 12.9 11.9 15.1 5.4 21.8 10.6 17.2 15.3

33.0 19.9 15.5 -60.2 18.0 5.7 48.7 17.9 21.1 20.3

8.5 14.8 14.3 35.7 11.4 4.4 26.2 13.1 18.7 14.9

5.6 12.1 11.9 12.7 9.5 4.0 18.9 8.5 11.8 11.1

4.8 5.6 8.1 -0.2 7.9 24.3 3.8 9.8 6.3 5.6

12.4 6.9 7.6 1.4 9.9 24.8 5.1 10.8 6.7 6.7

16.4 9.0 8.7 3.3 10.0 23.5 8.0 11.8 8.3 8.6

Buy Neutral

9.9 58.9

14.5 76.2

19.0 96.0

42.6 38.3 40.6

29.0 29.7 29.3

22.1 23.5 22.8

12.7 26.3 17.0

10.4 19.8 13.5

8.8 15.8 11.2

6.8 34.9 12.4

9.1 34.5 14.8

10.7 33.5 16.5

Buy Buy UR Buy

24.0 3.1 23.7 84.8

21.0 1.7 6.2 107.6

22.8 2.3 7.7 145.8

11.0 18.4 8.1 10.1 10.6

12.5 32.6 30.9 7.9 15.8

11.5 24.3 25.2 5.9 14.0

6.1 7.0 7.5 6.3 6.7

6.6 7.9 10.3 4.8 7.6

5.3 5.7 8.4 2.8 6.1

24.1 7.6 12.6 34.6 16.5

17.0 4.9 3.2 32.6 10.2

16.2 6.2 3.8 32.6 10.5

Neutral Neutral Buy Buy Buy

3.4 2.4 14.4 1.3 42.5

3.9 3.0 26.4 5.6 40.4

6.7 4.0 39.7 15.7 45.9

5.8 13.8 17.5 163.5 6.4 11.1

5.1 11.1 9.6 38.9 6.7 8.6

3.0 8.4 6.4 13.8 5.9 5.7

6.8 6.1 14.6 26.0 5.1 7.9

5.6 4.9 8.2 8.6 4.6 6.0

5.0 4.3 5.8 6.3 3.8 5.0

9.8 2.7 10.5 -2.0 14.8 7.7

9.2 3.3 14.5 1.3 12.5 8.7

14.1 4.2 18.2 3.7 12.6 11.9

DLF HDIL Indiabulls Real Estate Mahindra Lifespace Peninsula Land Phoenix Mills Puravankara Projects Unitech Sector Aggregate Retailing Pantaloon Retail 420 Titan Industries 2,258 Sector Aggregate Telecom Bharti Airtel 263 Idea Cellular 57 Reliance Comm 193 Tulip Telecom 853 Sector Aggregate Textiles Alok Ind 20 Arvind Mills 33 Bombay Rayon 253 Raymond 217 Vardhman Textiles 271 Sector Aggregate UR = Under Review

PULL OUT

July 2010

45

MOSL Universe

Ready reckoner: valuations CMP (RS)

RECO

25.06.10

Utilities Adani Power 120 CESC 374 JSW Energy 127 NTPC 196 Power Grid Corp. 101 PTC India 101 Reliance Infra. 1,168 Reliance Power 168 Tata Power 1,303 Sector Aggregate Others Sintex Inds. 313 United Phosphorous 192 Sector Aggregate

CMP (RS)

EPS (RS)

P/E (X)

EV/EBITDA (X)

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

Not Rated Neutral Not Rated Neutral Buy Neutral Buy Not Rated Neutral

0.8 34.5 4.1 10.9 5.4 3.2 43.1 59.8

2.8 36.5 4.1 11.3 6.0 4.2 56.7 4.4 85.9

10.5 40.2 8.7 13.4 7.7 4.3 67.3 5.7 115.9

153.2 10.8 31.3 18.0 18.8 31.5 27.1 21.8 23.2

42.4 10.2 31.0 17.3 17.0 23.7 20.6 38.4 15.2 19.7

11.4 9.3 14.6 14.6 13.1 23.2 17.4 29.3 11.2 14.7

143.4 9.3 22.6 12.7 12.6 37.2 23.7 19.0 17.5

40.9 9.2 15.4 10.0 10.9 37.7 17.1 100.8 17.1 14.3

12.2 9.5 8.3 10.2 9.3 34.9 14.4 66.3 15.8 12.6

3.1 13.4 13.7 14.0 14.9 5.2 9.1 7.2 11.2

10.8 12.6 13.0 14.3 15.0 5.9 9.7 7.1 8.8 11.9

33.1 12.4 22.8 15.4 17.3 5.9 10.1 8.6 9.2 14.5

Buy Buy

22.5 12.0

29.8 15.8

38.0 18.8

13.9 16.0 14.8

10.5 12.1 11.2

8.3 10.2 9.1

10.6 8.6 9.3

7.3 6.9 7.1

5.8 5.4 5.6

18.0 18.8 17.6

18.9 21.0 19.5

20.0 20.4 19.6

RECO

25.06.10

EPS (RS)

P/E (X)

P/BV (X)

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

21.6 62.1 83.7 33.1 73.7 81.6 17.8 18.4 27.2 98.4 64.4 36.1 36.2 37.0 69.7 45.3 123.9 20.3 38.7 184.8 20.7 41.1 14.1

24.3 78.0 94.8 41.1 76.9 98.4 18.1 26.2 34.9 118.0 84.5 46.1 37.9 44.5 87.7 53.6 141.7 25.2 51.4 226.0 22.0 47.3 19.1

28.9 96.7 114.4 58.0 90.4 114.9 22.1 36.2 41.8 140.5 109.4 58.4 47.2 51.7 105.2 64.4 167.2 31.3 61.3 285.4 28.8 58.8 25.2

6.2 20.1 8.3 10.4 5.9 6.3 5.2 12.3 11.7 29.8 30.2 23.8 6.1 20.3 14.6 7.1 8.4 14.7 15.0 12.5 8.0 7.4 19.3 14.2

5.5 16.0 7.3 8.4 5.6 5.2 5.1 8.6 9.1 24.9 23.0 18.6 5.8 16.9 11.6 6.0 7.4 11.8 11.3 10.2 7.5 6.4 14.2 11.8

4.6 12.9 6.1 5.9 4.8 4.5 4.2 6.2 7.6 20.9 17.8 14.7 4.7 14.5 9.7 5.0 6.2 9.5 9.4 8.1 5.7 5.2 10.8 9.5

1.5 3.2 1.8 1.4 1.4 1.3 1.1 2.2 1.2 5.7 4.1 1.9 1.4 3.3 2.8 1.1 2.0 2.7 3.4 1.8 1.3 1.7 3.0 2.6

1.2 2.7 1.5 1.3 1.2 1.1 0.9 1.8 1.1 5.0 3.6 1.7 1.2 2.8 2.4 1.0 1.7 2.3 2.7 1.5 1.1 1.4 2.5 2.2

1.0 2.3 1.3 1.1 1.0 0.9 0.8 1.5 0.9 4.3 3.1 1.6 1.0 2.3 2.0 0.8 1.4 2.0 2.2 1.3 1.0 1.1 2.1 1.9

26.0 19.2 23.8 14.2 26.8 21.9 23.6 22.7 10.3 20.0 16.1 8.0 25.6 17.9 23.6 16.5 26.6 22.0 28.6 15.1 16.8 26.2 20.3 18.1

24.2 18.3 22.5 15.8 22.8 22.3 19.9 23.0 12.1 20.9 16.8 9.7 22.5 17.9 22.5 17.1 24.8 21.0 26.9 16.1 15.7 24.3 19.3 18.5

24.2 19.4 22.7 19.4 22.3 22.0 20.3 25.7 13.1 21.9 18.9 11.4 23.6 17.5 22.7 17.7 24.1 22.7 25.9 17.6 18.1 24.5 21.2 19.8

Banks Andhra Bank 134 1,248 Axis Bank Bank of Baroda 696 Bank of India 345 Canara Bank 434 Corporation Bank 514 Dena Bank 93 Dewan Housing 225 Federal Bank 318 HDFC 2,937 HDFC Bank 1,948 ICICI Bank 858 Indian Bank 220 Kotak Mahindra Bank 750 LIC Housing Fin 1,015 Oriental Bank 323 Punjab National Bank 1,045 Rural Electric. Corp. 298 Shriram Transport Fin. 579 State Bank 2,301 South Indian Bank 165 Union Bank 303 Yes Bank 272 Sector Aggregate

Buy Buy Buy Neutral Buy Buy Buy Buy Buy Neutral Buy Buy Buy Neutral Buy Buy Buy Buy Buy Buy UR Buy Buy

PULL OUT

July 2010

46

Results Preview QUARTER ENDING JUNE 2010

BSE Sensex: 17,701

S&P CNX: 5,313

As on: 30 June 2010

Sectors & Companies

Note: In our quarterly performance tables, our four-quarter numbers may not always add up to the full-year numbers. This is because of differences in classification of account heads in the company’s quarterly and annual results or because of differences in the way we classify account heads as opposed to the company. All stock prices and indices as on 25 June 2010, unless otherwise stated.

July 2010

47

Results Preview QUARTER ENDING JUNE 2010

Automobiles BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

Strong momentum in volumes: Volume momentum remains robust, driven by a strong economic recovery, availability of credit and new product launches. Growth continues for all the segments with two-wheelers growing by 29% YoY (up ~6% QoQ), cars by 28% YoY (down ~5% QoQ), commercial vehicles by 56% YoY (down ~16% QoQ) and UVs by 31% YoY (down ~4% QoQ).

Bajaj Auto Hero Honda Mahindra & Mahindra

EBITDA margins to moderate from peaks due to raw material cost inflation: EBITDA margins are estimated to moderate by 40bp sequentially to 13.5% due to increase in RM costs. Increase in raw material prices and the cost of upgrading engines to adhere to new emission norms will be partly offset by a price increase (0.5 to 1.5%) and higher operating leverage. The benefit of softening RM costs will reflect from 3QFY10 due to inventories and contracts.

Maruti Suzuki India Tata Motors

Sector outlook positive despite headwinds: The volume outlook for the industry is positive based on the continuing economic recovery, prospects of a normal monsoon, easy availability of finance and improved outlook for exports. This coupled with new product launches will aid volume growth in 1QFY11. However, hardening of interest rates, roll-back of excise duty cuts, pricing action to mitigate RM cost and compliance to BS-IV emission norms will be the short term impediments in 1HCY10. Valuation and view: Auto stocks have outperformed the benchmark over the past year due to recovery in volumes and margin expansion. While volume outlook remains positive, operating margins are expected to moderate from peak levels of FY10 but are expected to remain higher than historical average margins. Valuations in the sector are attractive. Our top pick is M&M. KEY OPERATING INDICATORS VOLUMES ('000 UNITS)

Bajaj Auto Hero Honda Maruti Suzuki M&M Tata Motors Aggregate

EBITDA MARGINS (%)

1QFY11E

1QFY10

YOY (%)

4QFY10

QOQ (%)

1QFY11E

1QFY10

YOY (BP)

908 1,238 289 133 1,817 4,385

548 1,119 227 102 1,280 3,275

65.8 10.6 27.6 30.2 42.0 33.9

809 1,187 287 133 2,167 4,583

12.2 4.3 0.6 0.4 -16.1 -4.3

20.8 14.6 12.3 15.6 10.2 13.5

19.5 16.8 12.5 16.2 11.5 14.3

130 -220 -10 -60 -130 -70

4QFY10

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS)

Automobiles Bajaj Auto Hero Honda Mahindra & Mahindra Maruti Suzuki Tata Motors Sector Aggregate

2,418 2,050 615 1,397 769

(RS MILLION)

RECO

25.06.10

SALES JUN.10

Buy Buy Buy Buy UR

QOQ (BP)

22.9 -210 16.7 -210 13.4 -110 16.0 -40 10.1 10 14.0 -40 Source: SIAM/ MOSL

37,936 42,348 53,517 84,264 99,255 317,320

EBITDA

VAR.

VAR.

% YOY

% QOQ

62.2 11.1 26.5 29.8 56.3 36.6

11.6 3.5 1.4 0.0 -18.4 -4.9

JUN.10

7,891 6,174 8,423 10,211 10,128 42,828

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

73.3 -3.3 22.6 28.7 39.1 29.7

1.5 -9.5 -0.8 -8.1 -17.8 -7.9

JUN.10

5,685 5,224 5,549 7,221 3,201 26,880

VAR.

VAR.

% YOY

% QOQ

83.1 4.5 21.2 23.7 45.5 29.7

0.6 -12.8 -3.1 10.0 -24.6 -4.6

Jinesh K Gandhi ([email protected])

July 2010

48

Automobiles

Robust performance continues in 1QFY11 Volume growth across segments is robust in 1QFY11, supported by overall improvement in consumer sentiment, availability of credit and new product launches. Retail demand continues to be strong, driven by continued improvement in the economic environment, and as a result, overall inventory in the system is below normal levels. „ Two-wheeler volumes are estimated to grow by 29% YoY (~6% QoQ). Bajaj Auto will benefit most with 65.8% YoY (~12.2% QoQ) growth in two-wheeler volumes and Hero Honda’s volumes will grow by 10.6% YoY (4.3% QoQ). „ Car volumes are estimated to grow by 28% YoY (down ~5.4% QoQ), driven by growth in the domestic markets and exports. Maruti Suzuki’s volumes will grow by 27.6% YoY (up ~0.6% QoQ) and Tata Motors’ car volumes (ex-Fiat) will grow by 54.7% YoY (down ~15.7% QoQ) driven by strong response to Indigo Manza and Nano. „ 1QFY11 demand for commercial vehicles will improve by 55.8% YoY (down ~16.3% QoQ), driven by 75% YoY growth (down ~21% QoQ) in M&HCV volumes and 42.5% YoY growth (down ~11.4% QoQ) in LCV volumes. Tata Motors’ 1QFY11 CV volumes will grow by 42% YoY (de-growth of ~16.6% QoQ), as M&HCV volumes rise 56.7% YoY (down ~21% QoQ) and LCV volumes grow by 29.1% YoY (down ~12.8% QoQ). AUTO VOLUMES SNAPSHOT FOR 1QFY11 (‘000 UNITS) 1QFY11E

1QFY10

YOY (%)

3,058 169 539 122 74 87 162 4,049

2,371 118 421 93 42 61 104 3,107

29.0 42.5 28.0 31.0 75.0 42.5 55.8 30.3

Two Wheelers Three Wheelers Passenger Cars UVs & MPVs M&HCV LCV Total CVs Total

4QFY10

QOQ (%)

2,883 174 569 127 94 99 193 3,947 Source: SIAM/

6.1 -2.9 -5.4 -4.0 -21.3 -11.4 -16.3 2.6 MOSL

Commodity prices to hurt in 1HFY11, moderate in 2HFY11 While commodity prices (except rubber) in the spot markets have moderated from their peaks of 4QFY10, auto companies will benefit from this in 2HFY11. Auto companies will be forced to re-negotiate their commodity contracts (especially steel contracts) at higher than 2HFY10 contracted prices. RM costs are expected to increase from 1HFY11, driven by higher contracted prices and due to a cost push for BS-IV engine compliance. Our estimates now factor in a ~130bp increase in RM costs in FY11, the impact of which will be diluted by a 0.5-2% increase in selling prices. TREND IN COMMODITY PRICES (INDEXED)

1QFY10

2QFY10

-7.9% QoQ 104

-15.2% QoQ

3QFY10

1QFY11

-15.8% QoQ

+2.9% QoQ

105

96

89

82

72 54

47

Copper

108

89

67

Steel (HRC)

4QFY10

-25.7% QoQ

Zinc

111

75

62

54

Aluminium

Rubber

Source: Bloomberg/MOSL

July 2010

49

Automobiles

Margins to moderate due to raw material cost inflation We estimate margins for the auto industry will decline from peak margins of 2Q and 3QFY10, driven by a RM cost push. However, the impact will be partly offset as automakers partly passed on the cost increase and higher operating leverage. We estimate EBITDA margins for the MOSL Universe will moderate by 40bp QoQ (down ~70bp YoY) to 13.5% in 1QFY11 and ~80bp decline in FY11. While margins are expected to come off their peaks of 3QFY10, we do not expect reversion to mean due to a) strong volume growth, b) relatively higher pricing power, c) cost controls, and d) increasing contribution from plants enjoying fiscal incentives. MARGINS TO MODERATE FROM PEAKS 1QFY11E

1QFY10

YOY CHG (BP)

4QFY10

20.8 14.6 12.3 15.6 10.2 13.5

19.5 16.8 12.5 16.2 11.5 14.3

130 -220 -10 -60 -130 -70

22.9 16.7 13.4 16.0 10.1 14.0

Bajaj Auto Hero Honda Maruti Suzuki Mahindra & Mahindra Tata Motors Aggregate

QOQ CHG (BP

-210 -210 -110 -40 10 -40 Source: MOSL

Forex fluctuation to have a mixed effect The exchange rate fluctuations have led to concerns about export revenue realizations, the cost of imported inputs and the effectiveness of hedging practices being followed by companies. After appreciating sequentially against all major currencies in the past two quarters, the rupee has depreciated against the US dollar and the Japanese yen by 2.9% and 6.3% QoQ respectively, but appreciated by 6.3% QoQ against the euro and stayed flat against the British pound. The impact will vary depending on forex exposure and hedging strategies deployed by companies. USD JPY EUR GBP

YOY

QOQ

-3.5 2.6 -15.6 -13.7

2.9 6.3 -6.3 0.0

TREND IN RUPEE MOVEMENT (INDEX)

USD

Euro

GBP

JPY

155

130

105

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

Jun-08

Mar-08

Dec-07

80

Source: Bloomberg

Sector outlook positive… There has been a recovery of volumes in the auto sector after the impact of the financial crisis in 2HFY09. While two-wheeler, passenger vehicles and LCV volumes resumed growth after a brief pause, M&HCVs, tractors and three-wheelers have recovered completely from the downturn. We are bullish on the sector because: „ Volume growth is expected to continue, driven by a strong economic recovery, pentup demand, increase in availability of finance and new product launches expanding the market; July 2010

50

Automobiles

„

Continued volume growth will enable pricing power for the industry and support a high operating leverage. Moreover, the leading companies have undertaken cost cut measures and productivity improvement programs, which will dilute the impact of RM cost inflation, supporting margins at higher levels. Also, ramping up of operations in tax-free zones like Uttaranchal will also help to counter cost pressures through a lower tax burden. „ Recovery in global economies augurs well for export demand. The export market is yet to be fully tapped by Indian auto makers; this segment might become a further volume growth driver for the industry. Companies like Bajaj Auto, Maruti, Tata Motors and M&M are in a position to increase their exports by tapping new markets and increasing penetration in existing markets.

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt A uto mo biles Index

Jun-10

May-10

Apr-10

Mar-10

110 105 100 95 90

RELATIVE PERFORMANCE - 1YR (%)

M OSt A uto mo biles Index Sensex

Valuation and view Volume growth in the domestic market is strong. Valuations in the sector are attractive, especially considering impending improvement in the macro environment for the auto industry, coupled with high operating margins. We prefer Bajaj Auto, M&M and Hero Honda due to their relatively benign competitive environment and attractive valuations compared with their peers.

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

200 170 140 110 80

CMP (RS)

RECO

25.06.10

Automobiles Bajaj Auto 2,418 Hero Honda 2,050 Mahindra & Mahindra 615 Maruti Suzuki 1,397 Tata Motors 769 Sector Aggregate

July 2010

…despite short-term hurdles There will be some headwind in 1QFY11, which is expected to have a short-term impact on demand. Events to watch out for are: „ Change in emission norms to BS-IV in the top-11 cities (BS-III in other parts of India) from September 2010 for CVs, which will result in engine modifications to comply with the new emission norms, thereby increasing costs. „ Full roll-back in excise duty cut (after a partial roll-back in the 2010 Budget), which was offered as part of a stimulus package in December 2008. The excise duty cut was a key measure to boost volumes for the auto sector. Increase in excise duty will have a short term impact on demand as it will be entirely passed-on to consumers. „ Expected increase in selling price of vehicles to partly offset RM cost inflation. This, along with engine modifications to conform to new emission norms and higher excise duty could result in a meaningful increase in the cost of ownership of a vehicle. „ Expected hardening in monetary policy, to combat inflation, will result in interest rates on auto loans increasing, which will further increase the cost of ownership/operating a vehicle. However, we expect availability of finance to improve.

Buy Buy Buy Buy UR

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

125.6 111.8 42.5 90.8 24.1

164.9 122.3 58.4 99.5 76.3

181.1 142.8 70.2 118.1 98.8

19.2 18.3 14.5 15.4 31.9 18.8

14.7 16.8 10.5 14.0 10.1 12.6

13.3 14.4 8.8 11.8 7.8 10.5

12.8 13.3 5.4 8.8 9.0 9.0

9.7 12.4 4.6 8.1 6.2 7.1

8.5 10.4 3.6 6.6 5.6 6.0

64.3 61.5 26.1 21.5 19.9 31.9

53.1 56.7 22.9 19.1 42.7 34.9

41.3 39.7 22.5 18.9 38.6 32.2

51

Results Preview SECTOR: AUTOMOBILES

Bajaj Auto STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 BJAUT IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

144.7

52 Week Range (Rs)

2,450/926

1,6,12 Rel Perf (%)

10/ 41/126

Mcap (Rs b) Mcap (USD b)

Rs2,418

Previous Recommendation: Buy

BJAT.BO

END

3/09A

349.8 7.5

NET SALES

PAT

(RS M)

(RS M)

88,104

EPS

EPS

(RS) GROWTH (%)

7,963

55.0

-3.4

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

44.6

38.3

21.1

29.5

EV/

EV/

SALES EBITDA

47.2

36.3

3/10A 119,210

18,177

125.6

128.3

19.2

17.9

12.4

12.8

64.3

58.3

3/11E

157,213

23,859

164.9

31.3

14.7

13.8

7.8

9.7

53.1

55.0

3/12E

177,849

26,206

181.1

9.8

13.3

12.5

5.5

8.5

41.3

46.5

„

Bajaj Auto volumes are expected to improve by 65.8% YoY (up 12.2 QoQ) in 1QFY11 to 907,764 units. Recovery in volumes continued in 1QFY11, driven by robust demand for recently launched products and two and three wheelers. „ We estimate net sales of Rs37.9b, a growth of 62.2% YoY. Realizations are estimated to decline by 2.1% YoY (down ~0.6% QoQ), as the contribution of three-wheelers declines. EBITDA margin is expected to decline by 210bp QoQ (up ~130bp YoY) to 20.8%, impacted by higher raw material costs. We estimate EBITDA at Rs.7.89b (up ~73.3%YoY) and adjusted PAT of Rs.5.7b, a growth of 83.1% YoY. „ Volume growth in FY11 will be driven by Discover 100, Pulsar 135, Discover 150 and exports, along with normal growth in the existing Pulsar and three-wheeler portfolio. The contribution from Pantnagar is expected to increase to 0.9m units in FY11 (v/s 0.6m units in FY10), which will boost the product mix and profitability. „ We upgrade our EPS estimates for FY11 by 6.5% to Rs164.9 and FY12 by 4.4% to Rs181.1, driven by 4.7% upgrade in volumes and 80bp upgrade in EBITDA in FY11. Our estimates factor in 31.3% growth in FY11 and 230bp YoY increase in RM costs, translating into a 90bp decline in EBITDA margins to 20.8%. The stock trades at 14.7x FY11E and 13.3x FY12E EPS. Maintain Buy. QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Volumes (nos) Change (%) Realization Change (%) Gross Sales Excise Excise (%) Net Sales Change (%) Total Cost EBITDA EBITDA Margins (%) Other Income Extraordinary Expenses Extraordinary Income Interest Depreciation PBT Tax Effective Tax Rate (%) Rep. PAT Change (%) Adj. PAT Change (%) E: MOSL Estimates

FY10

FY11E

FY10

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

547,662 -11.7 42,699 13.2 24,545 1,161 5.0 23,385 -0.1 18,831 4,554 19.5 231 458 218 60 331 4,155 1,220 29.4 2,935 43.6 3,105 51.9

686,823 7.3 42,042 6.8 30,392 1,517 5.3 28,875 14.6 22,510 6,365 22.0 217 458 0 0 336 5,788 1,760 30.4 4,028 117.9 4,347 91.2

809,218 63.9 40,725 -4.4 34,525 1,570 4.8 32,956 56.7 25,720 7,235 22.0 351 458 0 0 357 6,771 2,020 29.8 4,751 185.9 5,073 143.6

808,929 83.7 42,024 -1.8 35,843 1,849 5.4 33,995 80.5 26,224 7,771 22.9 425 458 0 0 341 7,397 2,075 28.1 5,322 308.7 5,651 201.8

907,764 65.8 41,791 -2.1 40,313 2,377 6.3 37,936 62.2 30,045 7,891 20.8 440 0 0 20 360 7,951 2,266 28.5 5,685 93.7 5,685 83.1

945,500 37.7 42,167 0.3 42,367 2,498 6.3 39,869 38.1 31,658 8,211 20.6 470 0 0 20 385 8,276 2,338 28.3 5,938 47.4 5,938 36.6

937,050 15.8 42,238 3.7 42,059 2,480 6.3 39,579 20.1 31,308 8,270 20.9 600 0 0 20 400 8,450 2,366 28.0 6,084 28.1 6,084 19.9

954,811 18.0 41,714 -0.7 42,324 2,496 6.3 39,829 17.2 31,473 8,356 21.0 553 0 0 19 430 8,460 2,308 27.3 6,152 15.6 6,152 8.9

FY11E

2,852,632 3,745,125 30.0 31.3 41,789 41,978 4.1 0.5 125,306 167,063 6,096 9,851 5.1 6.3 119,210 157,213 35.3 31.9 93,284 124,484 25,926 32,728 21.7 20.8 1,225 2,063 1,833 0 218 0 60 79 1,365 1,575 24,111 33,137 7,075 9,278 29.3 28.0 17,036 23,859 160.3 40.0 18,177 23,859 128.3 31.3

Jinesh K Gandhi ([email protected])

July 2010

52

Results Preview SECTOR: AUTOMOBILES

Hero Honda STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 HH IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

199.7

0/ 17/23

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

52 Week Range (Rs) 2,094/1,301 1,6,12 Rel Perf (%)

Rs2,050

Previous Recommendation:Buy

HROH.BO

409.4 8.8

3/09A 123,191

13,052

3/10A 157,582 3/11E

182,123

3/12E

206,974

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

65.4

34.8

31.3

27.5

10.8

21.8

38.5

48.7

22,318

111.8

71.0

18.3

16.9

11.8

13.3

61.5

72.8

24,416

122.3

9.4

16.8

15.5

8.0

12.4

56.7

65.3

28,518

142.8

16.8

14.4

13.3

5.7

10.4

39.7

46.7

„

Hero Honda’s volumes are estimated to grow by 10.6% YoY (4.3% QoQ) to 1.24m in 1QFY11. Realizations are expected to improve by 0.5% YoY (down ~0.8% QoQ) due to a higher contribution from the Haridwar plant (32.3% of volumes v/s 28.2% in 1QFY10). Our estimates factor in about 400,000 units from Haridwar in 1QFY11.

„

Net sales are estimated to increase by 11.1% YoY to Rs42.3b and operating margins are likely to decrease by 210bp QoQ to 14.6% ( down ~220bp YoY), due to tightening of commodity prices and compliance with BS-III norms. However, a lower tax rate (~70bp QoQ savings to 18.1%) due to a ramp-up at Haridwar production will lead to recurring PAT of Rs5.22b.

„

Retail demand is strong and, as a result, inventory levels are low. Capacity is not a constraint with ongoing debottlenecking exercise to add ~0.3m to current capacity of ~5.7m units by September 2010. However managing the supply chain will be a key challenge as it can be a constraint for growth.

„

Our estimates factor in FY11 volume growth of 15% (to 5.29m units), higher contribution from the Haridwar plant and a 120bp decline in margins to 15.7%. The stock trades at 16.8x FY11E EPS of Rs122.3 and 14.4x FY12EPS of Rs142.8. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

Total Volumes (nos) Change (%) Net Realization Change (%) Net Sales Change (%) Total Cost EBITDA As % of Sales Other Income Interest Depreciation PBT Tax Effective Tax Rate (%) PAT Change (%) E: MOSL Estimates

2Q

FY11E 3Q

4Q

1Q

2Q

FY10 3Q

FY11E

4Q

1,118,987 1,183,235 1,111,372 1,186,536 1,237,585 1,350,000 1,325,000 1,377,565 25.1 21.7 29.6 18.9 10.6 14.1 19.2 16.1 34,058 34,145 34,322 34,492 34,218 34,403 34,468 34,597 7.1 4.1 2.4 0.9 0.5 0.8 0.4 0.3 38,111 40,401 38,144 40,926 42,348 46,444 45,670 47,660 34.0 26.7 32.7 20.0 11.1 15.0 19.7 16.5 31,723 33,153 31,661 34,106 36,173 39,181 38,351 39,849 6,387 7,248 6,483 6,820 6,174 7,263 7,319 7,811 16.8 17.9 17.0 16.7 14.6 15.6 16.0 16.4 539 881 676 992 650 750 700 1,010 -55 -61 -46 -45 -55 -61 -46 -59 456 503 469 487 500 515 525 535 6,525 7,686 6,736 7,370 6,379 7,559 7,540 8,345 1,524 1,715 1,378 1,382 1,155 1,368 1,365 1,520 23.4 22.3 20.5 18.8 18.1 18.1 18.1 18.2 5,001 5,971 5,358 5,988 5,224 6,191 6,176 6,825 83.3 95.0 78.3 48.9 4.5 3.7 15.3 14.0

4,600,130 5,290,150 23.6 15.0 34,256 34,427 3.5 0.5 157,582 182,123 27.9 15.6 130,936 153,554 26,646 28,568 16.9 15.7 3,380 3,110 -206 -220 1,915 2,075 28,317 29,824 5,999 5,408 21.2 18.1 22,318 24,416 74.1 9.4

Jinesh K Gandhi ([email protected])

July 2010

53

Results Preview SECTOR: AUTOMOBILES

Mahindra & Mahindra STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 MM IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs615

REUTERS CODE

S&P CNX: 5,269

MAHM.BO

Equity Shares (m)

YEAR

573.5

52 Week Range (Rs)

645/322

1,6,12 Rel Perf (%)

9/ 15/52

Mcap (Rs b) Mcap (USD b)

NET SALES S/A PAT

END

352.5 7.6

CON.PAT

ADJ.EPS

CONS.

ROE

ROCE

(%)

(%)

23.4

18.3

13.2

2.3

22.7

42.5

14.5

26.1

25.8

1.6

9.9

58.4

10.5

22.9

24.8

1.3

8.2

70.2

8.8

22.5

25.4

1.0

6.6

(RS M)

(RS M)

(RS M)

(RS)

3/09A

130,937

9,604

15,047

16.7

26.2

3/10A

185,296

20,451

24,359

35.7

3/11E

225,292

24,090

33,481

42.0

3/12E

262,356

28,784

24,359

50.2

CONS,

EPS (RS) P/E (X)

EV/

EV/

SALES EBITDA

„

M&M is expected to report volume growth of 30.2% YoY (~0.4% QoQ) in 1QFY11, driven by 24.6% YoY growth (~15.1% QoQ) in tractor volumes, 10.5% YoY growth (down 6.1% QoQ) in UV volumes and 24.1% YoY growth (down ~12% QoQ) in three-wheelers. UV volumes are impacted by supply side constraints. Realization is expected to improve by 2.2% YoY (~1.2% QoQ), due to increasing contribution from the tractor segment. „ Net sales are estimated to grow 19.5% YoY to Rs53.5b. EBITDA margins are expected to decline by 40bp QoQ (~60bp YoY) to 15.6%. As a result recurring PAT is estimated to grow by 21.2% YoY to Rs5.54b. „ The management expects growth of at least 10-14% in the auto and tractor industry, with M&M growing at least in line with the industry. Volume growth will be driven by 6-7 new product launches in FY11 (details not shared), and new products launched in 2HFY10 (Maximmo and Gio). „ We upgrade our consolidated EPS estimates for FY11 by 8.2% to Rs58.4 and FY12 by 6.0% to Rs70.2, backed by strong volume growth in the auto and tractor divisions, and improvement in subsidiary performance. Our estimates factor in 21.3% volume growth in FY11 and 100bp YoY increase in RM costs, translating into a 60bp decline in EBITDA margins to 15.6%. The stock trades at 10.5x FY11E and 8.8x FY12E consolidated EPS. Maintain Buy. QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Total Volumes (nos) Change (%) Net Realization Change (%) Net Sales Change (%) Operating Other Income Total Cost EBITDA

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

102,281 23.8 414,797 3.9 42,295 28.7 131 35,557 6,869

109,292 29.3 410,394 3.4 44,650 35.1 203 37,173

113,510 61.0 396,187 -3.1 44,787 56.3 184 38,116

132,620 49.2 399,987 -2.5 52,789 45.8 258 44,554

133,189 30.2 404,814 2.2 53,517 19.5 400 45,493

136,200 24.6 402,677 0.7 54,345 2.9 500 46,403

135,000 18.9 404,670 3.0 54,330 -52.3 300 46,207

150,865 13.8 410,304 2.4 61,451 -52.7 450 52,006

457,702 40.0 404,840 1.1 183,795 41.5 1,501 155,334

555,254 21.3 405,747 0.2 223,642 21.7 1,650 190,110

8,423 8,442 15.6 15.4 22.9 -0.6 200 1,500 75 85 8,548 9,857 1,050 1,100 0 0 7,498 8,757 1,950 2,277 26.0 26.0 5,549 6,480 38.4 -7.8 5,549 5,368 21.2 -9.3 restatement

8,423 15.4 -38.7 200 100 8,523 1,150 0 7,373 1,917 26.0 5,456 31.9 5,562 31.1

9,894 16.0 -25.6 308 119 10,083 1,158 0 8,925 2,321 26.0 6,605 15.8 6,628 15.8

29,962 16.2 125.3 1,994 278 32,175 3,708 -498 28,468 7,590 26.7 20,878 140.7 20,451 121.9

35,183 15.6 17.4 2,208 379 37,012 4,458 0 32,553 8,464 26.0 24,090 15.4 24,090 17.8

7,680 6,855 8,492 As % of Sales 16.2 17.1 15.2 16.0 Change (%) 108.3 143.1 157.2 103.5 Other Income 236 1,333 244 181 Interest 60 128 82 9 Gross Profit 6,266 10,425 6,857 8,628 Depreciation 885 892 984 947 EO Expense 779 -1,539 160 36 PBT 5,381 9,533 5,873 7,681 Tax 1,373 2,504 1,736 1,978 Effective Tax Rate (%) 25.5 26.3 29.6 25.8 Reported PAT 4,009 7,029 4,137 5,703 Change (%) 158.1 185.0 NA 36.4 Adj PAT 4,580 5,917 4,243 5,726 Change (%) 109.5 98.2 159.2 104.9 E: MOSL Estimates; Quarterly results don't add-up to full year results due to Jinesh K Gandhi ([email protected])

July 2010

54

Results Preview SECTOR: AUTOMOBILES

Maruti Suzuki India STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 MSIL IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs)

YEAR

289.0

7/ -12/14

Mcap (Rs b) Mcap (USD b)

TOTAL INC.

PAT

(RS M)

(RS M)

END

1,740/995

1,6,12 Rel Perf (%)

Rs1,397

Previous Recommendation: Buy

MRTI.BO

403.7 8.7

ADJ. EPS

EPS

(RS) GROWTH (%)

P/E

P/CE

ROE

ROCE

(X)

(X)

(%)

(%)

30.3

19.8

3/09A 209,075

13,334

46.1

-22.0

3/10A 296,230

24,976

86.4

87.3

16.2

3/11E

344,902

26,710

92.4

6.9

15.1

3/12E

407,322

31,842

110.2

19.2

12.7

EV/

EV/

SALES EBITDA

4.3

17.6

13.0

18.7

12.1

3.5

9.0

21.5

29.5

11.1

2.9

8.4

19.1

26.4

9.2

2.4

6.8

18.9

25.9

„

Maruti’s volumes are expected to grow 27.6% YoY (~0.63% QoQ) in 1QFY11, driven by 27.9% YoY growth in the domestic market and 25% YoY growth in exports. Realization is expected to improve by 1.8% YoY (down ~0.6% QoQ), reflecting improvement in the product mix and price increase of 0.6-0.8% on select models. „ Net sales are estimated to grow by 29.8% YoY to Rs84.2b. EBITDA margins are estimated to decline by 110bp QoQ (~10bp YoY) to 12.1% due to raw material cost inflation of 120bp. EBITDA is estimated to grow by 28.7% YoY to Rs 10.2b, translating into 23.7% growth in recurring PAT to Rs7.2b. „ Margins are expected to remain under pressure in FY11 due to (a) a deteriorating export mix (higher non-EU v/s EU), (b) deteriorating product mix in the domestic market, with increasing contribution of the C segment and a refreshed product portfolio (without commensurate price increase), (c) unhedged forex exposure in 2HFY11, and d) competitive pressure curtailing pricing power. „ We are downgrading our earnings estimates by 4.7% for FY11 to Rs92.4 and 4.6% for FY12 to, Rs110.2. Our FY11 earnings estimate factors in 17.2% volume growth in FY11 and 160bp increase in RM cost, translating into 110 bp decline in EBITDA margins to 12.2%. The stock trades at 12.7x FY12E EPS and 9.2x FY12E Cash EPS. Maintain Buy. QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Total Volumes (nos) Change (%) Realizations (Rs/car) Change (%) Net Op. Revenues Change (%) Total Cost EBITDA As % of Sales Change (%) Non-Operating Income Interest Depreciation PBT Tax Effective Tax Rate (%) PAT Adjusted PAT Change (%) E: MOSL Estimates

FY10

FY11E

FY10

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

226,729 17.7 279,640 13.8 64,930 33.6 56,998 7,932 12.2 39.4 2,165 63 1,961 8,073 2,238 27.7 5,835 5,835 25.3

246,188 29.9 286,349 12.9 72,026 44.2 62,865 9,161 12.7 77.6 1,100 60 2,031 8,171 2,471 30.2 5,700 5,700 92.5

258,026 48.7 284,226 8.0 75,029 60.3 63,689 11,339 15.1 222.3 913 84 2,028 10,140 3,265 32.2 6,875 6,875 221.6

287,422 21.5 286,508 7.5 84,246 31.0 73,135 11,111 13.2 147.3 790 129 2,230 9,542 2,976 31.2 6,566 6,566 170.0

289,233 27.6 284,767 1.8 84,264 29.8 74,053 10,211 12.1 28.7 2,450 85 2,260 10,316 3,095 30.0 7,221 7,221 23.7

300,000 21.9 286,183 -0.1 87,715 21.8 77,159 10,556 12.0 15.2 1,250 90 2,300 9,416 2,825 30.0 6,591 6,591 15.6

295,500 14.5 279,029 -1.8 84,433 12.5 74,124 10,310 12.2 -9.1 1,100 95 2,375 8,940 2,682 30.0 6,258 6,258 -9.0

309,119 7.5 279,353 -2.5 88,490 5.0 77,644 10,846 12.3 -2.4 1,125 98 2,387 9,486 2,846 30.0 6,640 6,640 1.1

FY11E

1,018,365 1,193,852 28.6 17.2 284,362 282,301 10.4 -0.7 296,230 344,902 41.7 16.4 256,687 302,980 39,543 41,922 13.3 12.2 109.5 6.0 4,968 5,925 335 368 8,250 9,322 35,925 38,157 10,949 11,447 30.5 30.0 24,976 26,710 24,976 26,710 105.9 6.9

Jinesh K Gandhi ([email protected])

July 2010

55

Results Preview SECTOR: AUTOMOBILES

Tata Motors STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 TTMT IN

Under Review

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

624.1 882/254

Mcap (USD b)

YEAR

SALES

END

(RS M)

3/09A

5/ -3/105

Mcap (Rs b)

Rs769

Previous Recommendation: Neutral

TAMO.BO

3/10A

480.2 10.4

ADJ/ PAT ADJ EPS NORMAL (RS M)

709,389 -21,125 925,193

ROE

ROCE

(RS)

EPS (RS)

P/E (X)

CONS. NORMAL P/E (X)

(%)

(%)

-33.8

-114.0

-22.7

-6.7

-35.6

1.2

EV/

EV/

SALES EBITDA

1.0

31.5

15,051

24.1

-22.8

31.9

-33.8

19.9

9.8

0.8

8.5

3/11E

1,139,788 47,608

76.3

25.1

10.1

30.6

42.7

17.1

0.7

6.0

3/12E

1,309,101 61,639

98.8

48.0

7.8

16.0

38.6

19.1

0.6

5.3

'* Consolidated EPS; ^ Normalized for capitalized expenses

„

Tata Motors is estimated to post 42% YoY volume growth (down ~16% QoQ) in 1QFY11, driven by a 56.7% YoY growth in M&HCV, 29.1% YoY growth in LCVs and 54% YoY growth in cars (driven by Nano and Indigo Manza sales). Price increases from January 2010 will drive realizations by 10.7% YoY increase (down ~2% QoQ). „ Net sales are estimated to grow by 56.3% YoY to Rs99.2b. Margins are estimated to decline 130bp YoY (flat QoQ) to 10.1%, due to a rise in raw material costs. EBITDA is expected to grow by 39.1% YoY (down ~17.8% QoQ) to Rs10.1b, translating into a 45.5% YoY growth in recurring PAT of Rs3.2b. „ For JLR, we estimate volume growth of 56% YoY to 56,062 units and realizations to decline by 1% QoQ (13.3% YoY growth), resulting in revenue growth of 77% to 1.9b GBP. EBITDA margin is estimated at 11% (down ~40bp QoQ), translating into PAT of 107m GBP (v/s 74m GBP in 4QFY10). „ Our estimates factor in improvement in CV demand (25.2% growth in FY11), ~73.3% YoY growth in cars in FY11, ~34.9% YoY growth in UVs, 170bp QoQ increase in RM costs and improvement in JLR’s performance (~10.5% EBITDA margins in FY11 and 11% in FY12). The stock trades at 10.1x FY11E consolidated EPS and 7.8x FY12E consolidated EPS. Under Review. QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Total Volumes (nos) Change (%) Average Realization Change (%) Net Sales Change (%) Other Operating Income Total Cost EBITDA EBITDA Margins (%) Change (%) Non-Operating Income Interest Depreciation & Amort. Product Dev. Expenses PBT before EO Exp EO Exp/(Inc) PBT after EO Exp Tax Effective Tax Rate (%) PAT Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

127,967 -3.9 537,374 -8.2 63,502 -7.8 544 56,766 7,280 11.4 47.9 5 2,535 2,291 112 2,347 -3,134 5,480 343 6.3 5,138 2,200 -40.8

158,416 17.4 538,999 -8.0 79,241 12.7 548 69,131 10,657 13.4 99.0 510 2,856 2,634 154 5,522 -3,546 9,068 1,777 19.6 7,291 4,440 87.4

164,333 66.6 582,809 9.6 89,298 89.4 501 78,280 11,519 12.8 1,156.9 2 2,861 2,641 226 5,793 242 5,550 1,549 27.9 4,001 4,176 -376.5

216,721 55.4 606,867 16.6 121,697 83.2 600 109,970 12,326 10.1 111.7 6 2,786 2,772 948 5,826 -2,369 8,195 2,226 27.2 5,969 4,244 372.4

181,744 42.0 594,730 10.7 99,255 56.3 600 89,726 10,128 10.1 39.1 100 2,950 2,800 250 4,228 0 4,228 1,028 24.3 3,201 3,201 45.5

231,850 46.4 535,257 -0.7 114,009 43.9 620 102,266 12,363 10.8 16.0 750 2,975 3,100 350 6,688 0 6,688 1,625 24.3 5,063 5,063 14.0

253,150 54.0 524,552 -10.0 121,994 36.6 575 107,842 14,726 12.0 27.8 100 3,000 3,300 400 8,126 0 8,126 1,975 24.3 6,152 6,152 47.3

273,056 26.0 520,893 -14.2 130,648 7.4 706 115,463 15,891 12.1 28.9 303 3,080 3,479 593 9,042 0 9,042 2,197 24.3 6,845 6,845 61.3

FY10

FY11E

667,437 321.3 571,511 6.0 353,737 346.4 2,193 314,148 41,782 11.7 292.1 523 11,038 10,339 1,440 19,488 -8,807 28,294 5,895 20.8 22,400 15,428 284.8

939,800 471.9 539,701 (7.4) 465,906 421.7 2,501 415,299 53,109 11.3 361.0 1,253 12,005 12,679 1,593 28,085 0 28,085 6,825 24.3 21,260 21,260 37.8

Jinesh K Gandhi ([email protected])

July 2010

56

Results Preview QUARTER ENDING JUNE 2010

Banking BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

„

Maintain positive stance: We maintain our positive stance on the Banking sector. We expect strong core operating performance to continue in 1QFY11, driven by higher loan growth and margin expansion (YoY), strong fee income growth and abating concerns on asset quality following the strong economic revival. „ Gradual monetary tightening to continue: On the back of increased inflationary concerns, we expect gradual monetary tightening to continue in FY11. However, we view gradual monetary tightening positively, as sudden increase in policy rates and interest rates can derail economic growth. „ Expect aggregate PAT growth of 16% YoY for banks under our coverage: On a lower base (due to excess liquidity and lower pricing power), we expect margins to expand meaningfully on a YoY basis. However, on a sequential basis, margins are likely to decline 10-15bp. Our coverage universe NII would grow by ~29% YoY, operating profits by 23% YoY (despite lower trading profits), and PAT by 16% YoY (despite factoring in higher NPA provisions). „ Buy selectively: We prefer selective buying, and like banks with a strong core deposit franchise, higher tier-I capital and high provision coverage ratio. SBI, BoB, Indian Bank and Andhra Bank are our top picks among state-owned banks. ICICI Bank is our top pick among private banks. In the NBFC space, we like Shriram Transport.

Andhra Bank Axis Bank Bank of Baroda Bank of India Canara Bank Corporation Bank Dena Bank HDFC HDFC Bank Federal Bank ICICI Bank Indian Bank LIC Housing Oriental Bank Punjab National Bank Shriram Transport South Indian Bank State Bank Union Bank Yes Bank

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Banks Andhra Bank Axis Bank Bank of Baroda Bank of India Canara Bank Corporation Bank Dena Bank Federal Bank HDFC HDFC Bank ICICI Bank Indian Bank LIC Housing Fin Oriental Bank of Commerce Punjab National Bank Shriram Transport Fin. South Indian Bank State Bank Union Bank Yes Bank Sector Aggregate

134 1,248 696 345 434 514 93 318 2,937 1,948 858 220 1,015 323 1,045 579 165 2,301 303 272

(RS MILLION)

RECO

NET INT INCOME JUN.10

Buy Buy Buy Neutral Buy Buy Buy Buy Neutral Buy Buy Buy Buy Buy Buy Buy UR Buy Buy Buy

6,436 13,937 16,881 15,034 15,457 6,219 3,023 3,972 9,114 23,079 19,540 9,128 3,022 9,326 24,177 6,336 1,584 65,328 12,727 2,418 266,738

VAR.

VAR.

% YOY

% QOQ

45.8 33.3 40.1 15.6 19.7 33.0 20.7 36.9 25.4 24.4 -1.6 23.7 43.2 92.6 34.2 34.7 3.9 30.0 58.8 47.7 28.8

OPERATING PROFIT JUN.10

-1.9 5,161 -4.5 13,630 -3.3 14,267 -3.1 11,658 -3.2 13,037 -2.8 5,591 -7.3 2,143 -3.0 3,442 -22.2 9,619 -1.8 16,750 -4.0 24,280 -2.3 7,349 -12.9 2,479 -5.7 7,379 -3.2 20,396 -2.1 5,061 100.8 1,040 -2.8 51,818 -8.8 10,647 -1.0 2,418 -4.1 228,164

VAR.

VAR.

% YOY

% QOQ

48.3 15.9 41.3 6.6 25.2 -2.1 6.4 23.7 21.5 10.3 -4.0 16.6 38.6 42.7 30.0 48.0 -2.7 41.0 35.2 22.3 22.9

NET PROFIT JUN.10

-2.1 2,689 -1.5 7,617 -12.4 7,970 -8.6 4,311 -8.9 7,344 2.6 3,054 -23.5 1,245 -2.1 1,348 -25.0 6,836 -1.1 7,953 1.2 11,002 -15.8 3,379 -13.2 1,663 -5.0 3,106 -12.6 10,674 -1.7 2,680 101.6 548 -0.2 24,630 -7.2 5,216 -6.1 1,387 -5.8 114,652

VAR.

VAR.

% YOY

% QOQ

4.9 35.5 16.3 -26.2 32.2 16.9 8.3 -1.2 21.0 31.2 25.3 1.9 34.3 20.7 28.3 63.0 -8.9 5.7 18.0 38.6 16.4

11.9 -0.4 -12.1 0.7 46.0 -2.2 -9.1 15.4 -26.2 -4.9 9.4 -17.6 -22.1 -2.0 -6.0 1.4 41.8 31.9 -12.1 -0.9 2.8

Alpesh Mehta ([email protected])

July 2010

57

Banking

Expect strong core operating performance in 1QFY11, on a lower base On a lower base in 1QFY11, we expect sharp YoY improvement in margins for banks under our coverage. In 1QFY10, margins had suffered due to excess liquidity in the balance sheet, lower pricing power and increasing cost of funds (due to lag impact of high cost deposits contracted in 2HFY09). Sequentially, margins are likely to decline due to full impact of CRR hike, savings deposits repricing and higher proportion of priority sector loans (specially for private sector banks). On a lower base, YoY NII growth (~29% growth for our coverage universe) would look strong. Andhra Bank, BoB, OBC and Union Bank among the state-owned banks are likely to post 40%+ NII growth. ICICI Bank is the only bank in our coverage which is likely to post a decline in NII. 10-year G-sec yields have declined by ~30bp QoQ on a higher base. Though trading profits are unlikely to very strong YoY, we expect strong improvement on a QoQ basis. For most banks, we expect lower other income YoY due to a fall in trading profits. On the back of strong operating performance, we expect operating profit growth of 23% YoY, despite factoring in lower trading profits. We expect banks to prudently make higher NPA provisions; provisions can surprise positively. We expect aggregate earnings growth of 16% YoY. We expect SBI to post 6% earnings growth YoY. BoI's PAT is likely to fall ~25%. Axis Bank, HDFC Bank, Canara Bank, Shriram Transport Finance and Yes Bank are likely to post earnings growth of over 30%. While we expect ICICI Bank to report decline in operating profits, lower NPA provisions will lead to 25% YoY growth in net profit. Strong economic growth; but inflation remains a concern Strong IIP, auto numbers, cement dispatches, increasing order backlog of engineering companies and increase in housing sales indicate speedy economic revival. RBI has so far been supportive of the growth process and has taken the evolving global economic outlook and capital flows into consideration while framing its monetary policy stance. Upward risks to inflation have materialized in the meantime, with rising food prices, revision in oil and gas prices, and move towards decontrol of auto fuels. Expect further monetary tightening On the back of increasing inflationary concerns and expected decline in fiscal deficit (due to higher revenues from 3G/BWA and possibility of higher tax collection), we expect RBI to take a mid-course corrective policy action by raising repo and reverse repo rates. Once the current liquidity situation eases, RBI could effect a cumulative 75bp increase for 2HFY11. Lower fiscal deficit may lead to lower government borrowing, acting as a check on policydriven upward movement in yields and interest rates. Liquidity tightens during the quarter; expect easing in 2QFY11 In 1QFY11, liquidity in the system dried up significantly on the back of higher than expected fund demand for 3G/BWA and advance tax outflow. Rates have moved up from the lower end of the LAF corridor to the upper end. Long-term rates continue to be lower than at the end of FY10. We expect the tightness in liquidity to ease in 2QFY11, as the government begins spending. July 2010

58

Banking

Interest rates to increase gradually On the back of drying up of liquidity in 1QFY11, bulk deposit rates (up 200bp since April 2010) have started inching up. If loan growth picks up faster than expected, banks could raise deposit rates again in 2QFY11. While we expect all state-owned banks to withdraw teaser loan schemes for car and home loans in 2QFY11, we expect a broad-based rise in lending rates only in 2HFY11. Loan growth likely to remain strong Loan growth has improved to ~20% YoY as on 18 June 2010. On a QoQ basis, loans grew 2.2% or Rs700b (significantly higher than a decline of Rs20b during the same period in the previous year), led by sudden increase in demand for funds from 3G and BWA. We expect the gradual recovery in loan growth to continue because of (1) improved sales and higher inflation, which will lead to higher working capital requirements, (2) a drawdown of sanctions made to the infrastructure sector, and (3) improved business confidence, which will lead to higher capex and investment related loan growth. A lower statistical base, which started from 4QFY10, will also lead to better loan growth until December 2010. We expect the industry to grow ~20% in FY11-12. Deposit growth calibrated to loan growth While the reported loan growth is very strong, deposit growth is moderating every fortnight. After strong deposit mobilization in FY09, banks are moderating deposit growth as they were faced with excess liquidity. However, as excess liquidity in the balance sheet has declined in 1QFY11 and banks have become net borrowers from RBI, we expect deposit rates to increase in 2QFY11. Deposit growth, which started moderating from 22% in 1QFY10 to 19.8% in 2QFY10, 17.6% in 3QFY10, and 17.1% in 4QFY10, has further moderated to 13.9% as of 18 June 2010. We expect deposit growth to remain calibrated to loan growth. However, CASA deposit mobilization will continue to show strong traction. Payment of interest on daily average basis has made savings deposits more attractive. Incremental loans during the quarter are funded by liquidating SLR and MF investments thus, CD ratio is likely to expand QoQ. Margins to decline sequentially, but improve sharply YoY On a sequential basis, we expect margins to decline 10-15bp for most banks due to upward repricing of savings deposits, full impact of CRR hike, higher share of priority sector loans and falling benefit of capital raising (for HDFC, Axis and Yes Bank). On a sequential basis, we expect NII to decline for banks under our coverage. Trading profits to increase QoQ, but decline YoY Yields have declined 25-30bp on 10-year G-secs, but have increased 25bp on 1-year and 5bp on 2-year G-secs due to drying up of liquidity. As yields have declined QoQ for longer tenors and yield volatility has been higher (75bp change in minimum and maximum rate in 10-year G-sec) during the quarter, we expect higher trading profits QoQ. However, trading profits are likely to be significantly lower YoY. We also expect banks to transfer securities from AFS to HTM category; however, transfer losses are unlikely due to lower G-sec yields QoQ. July 2010

59

Banking

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt B anking Index

110 105 100 95 Jun-10

May-10

Apr-10

Mar-10

90

Asset quality pressure continues; expect slippages to increase QoQ for state-owned banks We expect slippages to increase during the quarter. While in 4QFY10 some signs of slippages from the restructured portfolio were noticed, we believe the real test of asset quality from the restructured portfolio will be in 1HFY11. Some banks may decide to declare the agri relief scheme amount as NPA in 1QFY11, depending on the profitability. Due to strong operating profitability, we expect banks to make higher NPA provisions. Among the large banks, ICICI and SBI will have to make additional NPA provisions to comply with 70% PCR, as per RBI directive.

RELATIVE PERFORMANCE - 1YR (%)

M OSt B anking Index Sensex

Valuation and view We prefer selective buying, and like banks with a strong core deposit franchise, higher tier-I capital and high provision coverage ratio. SBI, BoB, Indian Bank and Andhra Bank are our top picks among state-owned banks. ICICI Bank is our top pick among private banks. In the NBFC space, we like Shriram Transport.

165 130 95

BANKS

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

60

CMP (RS)

RECO

25.06.10

Banks Andhra Bank 134 Axis Bank 1,248 Bank of Baroda 696 Bank of India 345 Canara Bank 434 Corporation Bank 514 Dena Bank 93 Dewan Housing 225 Federal Bank 318 HDFC 2,937 HDFC Bank 1,948 ICICI Bank 858 Indian Bank 220 Kotak Mahindra Bank 750 LIC Housing Fin 1,015 Oriental Bank 323 Punjab National Bank 1,045 Rural Electric. Corp. 298 Shriram Transport Fin. 579 South Indian Bank 165 State Bank 2,301 Union Bank 303 Yes Bank 272 Sector Aggregate

July 2010

Buy Buy Buy Neutral Buy Buy Buy Buy Buy Neutral Buy Buy Buy Neutral Buy Buy Buy Buy Buy UR Buy Buy Buy

EPS (RS)

P/E (X)

P/BV (X)

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

21.6 62.1 83.7 33.1 73.7 81.6 17.8 18.4 27.2 98.4 64.4 36.1 36.2 37.0 69.7 45.3 123.9 20.3 38.7 20.7 184.8 41.1 14.1

24.3 78.0 94.8 41.1 76.9 98.4 18.1 26.2 34.9 118.0 84.5 46.1 37.9 44.5 87.7 53.6 141.7 25.2 51.4 22.0 226.0 47.3 19.1

28.9 96.7 114.4 58.0 90.4 114.9 22.1 36.2 41.8 140.5 109.4 58.4 47.2 51.7 105.2 64.4 167.2 31.3 61.3 28.8 285.4 58.8 25.2

6.2 20.1 8.3 10.4 5.9 6.3 5.2 12.3 11.7 29.8 30.2 23.8 6.1 20.3 14.6 7.1 8.4 14.7 15.0 8.0 12.5 7.4 19.3 14.2

5.5 16.0 7.3 8.4 5.6 5.2 5.1 8.6 9.1 24.9 23.0 18.6 5.8 16.9 11.6 6.0 7.4 11.8 11.3 7.5 10.2 6.4 14.2 11.8

4.6 12.9 6.1 5.9 4.8 4.5 4.2 6.2 7.6 20.9 17.8 14.7 4.7 14.5 9.7 5.0 6.2 9.5 9.4 5.7 8.1 5.2 10.8 9.5

1.5 3.2 1.8 1.4 1.4 1.3 1.1 2.2 1.2 5.7 4.1 1.9 1.4 3.3 2.8 1.1 2.0 2.7 3.4 1.3 1.8 1.7 3.0 2.6

1.2 2.7 1.5 1.3 1.2 1.1 0.9 1.8 1.1 5.0 3.6 1.7 1.2 2.8 2.4 1.0 1.7 2.3 2.7 1.1 1.5 1.4 2.5 2.2

1.0 2.3 1.3 1.1 1.0 0.9 0.8 1.5 0.9 4.3 3.1 1.6 1.0 2.3 2.0 0.8 1.4 2.0 2.2 1.0 1.3 1.1 2.1 1.9

26.0 19.2 23.8 14.2 26.8 21.9 23.6 22.7 10.3 20.0 16.1 8.0 25.6 17.9 23.6 16.5 26.6 22.0 28.6 16.8 15.1 26.2 20.3 18.1

24.2 18.3 22.5 15.8 22.8 22.3 19.9 23.0 12.1 20.9 16.8 9.7 22.5 17.9 22.5 17.1 24.8 21.0 26.9 15.7 16.1 24.3 19.3 18.5

24.2 19.4 22.7 19.4 22.3 22.0 20.3 25.7 13.1 21.9 18.9 11.4 23.6 17.5 22.7 17.7 24.1 22.7 25.9 18.1 17.6 24.5 21.2 19.8

60

Banking

DEPOSITS GROWTH MODERATED FURTHER IN 1QFY11

Deposits (Rs t) 24.6 24.4

LOAN GROWTH IMPROVING AT A FASTER PACE

Chg YoY (%)

Loans (Rs t)

25.5 23.2 21.7

25.6

24.2

23.8

22.1

21.9

20.1 21.4 19.8

19.8

17.6 17.1 13.9

Chg YoY (%)

26.0 22.8

22.4

17.0

17.3

19.6 16.3

12.6

28.7

30.2

2QFY10

3QFY10

33.1

28.0 1QFY10

18-Jun-10

27.7 4QFY09

32.4

26.6 3QFY09

4QFY10

25.5

23.6 4QFY08

2QFY09

21.5 3QFY08

24.1

20.3 2QFY08

1QFY09

19.1

42.6 3QFY10

1QFY08

41.2 2QFY10

45.2

40.3 1QFY10

18-Jun-10

38.3 4QFY09

44.9

36.3 3QFY09

4QFY10

34.4

32.0 4QFY08

2QFY09

29.9 3QFY08

33.0

28.6 2QFY08

1QFY09

27.1 1QFY08

13.7

DEPOSITS MODERATION CONTINUES LED BY FALL IN BULK DEPOSITS (RS T) STRONG LOAN GROWTH IN 1QFY11 LED BY 3G/BWA DISBURSEMENTS

2,130

2,036

2,087 1,874

2,220

1,657

1,505

1,445

1,353

1,239

1,196

2,196

2,154

1,984

1,477

1,454 1,211 1,109

1,071

1,124 1,066

913

744

700

437 287

310

CD RATIO IMPROVED TO ~73% (%)

72.2

18-Jun-10

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

28.4 27.0

27.5

69.7

28.1

28.5

27.4

18-Jun-10

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

1QFY09

3QFY08

2QFY08

1QFY08

18-Jun-10

04-Jun-10

4QFY10

25.6

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

4QFY08

69.5

3QFY08

4QFY08

28.5 28.128.2

70.8

70.7

2QFY08

72.4

2QFY09

72.3

71.8

1QFY08

3QFY08

30.1 30.3 30.2 73.3

73.3

72.8

4QFY07

2QFY08

74.2

73.9

70.5

1QFY08

SLR RATIO (%)

4QFY08

74.1

4QFY07

18-Jun-10

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

4QFY08

3QFY08

2QFY08

1QFY08

4QFY07

-87

Source: Company/MOSL

July 2010

61

Banking

LIQUIDITY DRIED UP IN 1QFY11 ...

... LEADING TO INCREASE IN G-SEC YIELD AT SHORTER END

1-Year G-Sec Yield 2-Year G-Sec Yield

Net Repo (Rs B) 1,500

10-Year G-Sec Yield

9.0

1,000

8.0 6.94

500

7.0

0

7.21

7.01

6.20 5.63

5.66

5.43

5.0 5.02

-1,000

7.55

6.15

5.87

6.0

-500

7.84

7.59

4.40

4.23

4.39

5.42

5.15

CP RATES HAVE ALSO INCREASED ACROSS MATURITIES

1 Month

3 Month

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

Dec-09

Oct-09

Nov-09

Sep-09

Aug-09

Jul-09

Jun-09

May-09

Apr-09

May-09

Jun-10

Apr-10

Jan-10

Nov-09

Aug-09

Jun-09

Apr-09

Jan-09

Nov-08

Aug-08

Apr-08

Jun-08

4.0

CD RATES HAVE INCREASED BY 75-150BP IN 1QFY11

6 Month

12 Month

7.5 6 Month (%)

12.0

12 Month (%)

6.5

10.0

6.05

5.5

6.65

5.85

5.65 8.0

6.90

5.25 5.20

6.0 4.5

4.45

4.0 3.95

4.15 2.0

Jun-10

May-10

Mar-10

Feb-10

Dec-09

Nov-09

Sep-09

Aug-09

Jun-09

May-09

Apr-09

Jun-10

May-10

Mar-10

Feb-10

Dec-09

Nov-09

Sep-09

Aug-09

Jun-09

May-09

Apr-09

Feb-09

Jan-09

3.5

Source: Company/MOSL

July 2010

62

Results Preview SECTOR: BANKING

Andhra Bank STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 ANDB IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs134

REUTERS CODE

S&P CNX: 5,269

ADBK.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

485.0 145/74 -3/ 23/40

Mcap (Rs b) Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

END

64.8 1.4

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

23,923

6,531

13.5

13.5

9.9

1.8

13.2

18.9

1.0

1.8

3/10A

31,594

10,459

21.6

60.2

6.2

1.5

13.9

26.0

1.3

1.5

3/11E

36,863

11,774

24.3

12.6

5.5

1.2

14.1

24.2

1.2

1.2

3/12E

43,315

14,006

28.9

19.0

4.6

1.0

13.0

24.2

1.2

1.1

„

On a lower base, we expect net interest income (NII) to grow 45%+ YoY to Rs6.5b in 1QFY11. We expect loan growth to remain strong at 25%+ YoY.

„

We expect fee income growth to outpace loan growth however, other income will be flat YoY due to lower trading profits.

„

Operating expenses are expected to fall sequentially. In 4QFY10, bank had made provisions of ~Rs200m for wage revisions and Rs400m for pension liability.

„

While we expect operating profit to grow ~50% YoY, PAT growth is likely to be just 5% YoY as we expect the bank to make higher NPA provisions on a prudent basis. Our provisions estimates can provide positive surprises considering the strong asset quality.

„

The stock trades at 1.2x FY11E BV and 1x FY12E BV. The stock also offers an attractive dividend yield of ~4%. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Interest Income 15,046 Interest Expense 10,633 Net Interest Income 4,414 % Change (Y-o-Y) 27.5 Other Income 2,381 Net Income 6,794 Operating Expenses 3,314 Operating Profit 3,480 % Change (Y-o-Y) 69.5 Other Provisions -32 Profit before Tax 3,512 Tax Provisions 950 Net Profit 2,562 % Change (Y-o-Y) 230.1 Interest Exp/Interest Income (%) 70.7 Other Income/Net Income (%) 35.0 Cost/Income Ratio (%) 48.8 Provisions/Operating Profits (%) -0.9 Tax Rate (%) 27.0 E: MOSL Estimates

15,577 10,431 5,147 18.7 2,332 7,479 2,950 4,528 62.6 578 3,950 1,210 2,740 69.6 67.0 31.2 39.5 12.8 30.6

16,026 10,200 5,825 28.9 2,242 8,068 3,250 4,818 29.3 964 3,854 1,100 2,754 29.5 63.6 27.8 40.3 20.0 28.5

17,079 10,518 6,562 66.0 2,691 9,253 3,981 5,272 22.1 2,229 3,043 640 2,403 19.4 61.6 29.1 43.0 42.3 21.0

18,107 11,672 6,436 45.8 2,325 8,761 3,600 5,161 48.3 1,320 3,841 1,152 2,689 4.9 64.5 26.5 41.1 25.6 30.0

19,489 12,839 6,651 29.2 2,350 9,001 3,626 5,374 18.7 1,370 4,004 1,201 2,803 2.3 65.9 26.1 40.3 25.5 30.0

20,976 14,123 6,854 17.7 2,400 9,254 3,677 5,577 15.7 1,270 4,307 1,292 3,015 9.5 67.3 25.9 39.7 22.8 30.0

23,053 15,912 7,141 8.8 2,706 9,847 3,225 6,623 25.6 1,955 4,668 1,400 3,267 36.0 69.0 27.5 32.7 29.5 30.0

FY10

FY11E

63,729 41,781 21,948 34.9 9,646 31,594 13,495 18,099 40.5 3,740 14,359 3,900 10,459 60.2 65.6 30.5 42.7 20.7 27.2

81,626 54,545 27,081 23.4 9,781 36,863 14,127 22,735 25.6 5,915 16,820 5,046 11,774 12.6 66.8 26.5 38.3 26.0 30.0

Alpesh Mehta ([email protected])

July 2010

63

Results Preview SECTOR: BANKING

Axis Bank STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 AXSB IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

405.2

52 Week Range (Rs)

1318/705

1,6,12 Rel Perf (%)

-2/ 25/38

Mcap (Rs b) Mcap (USD b)

Rs1,248

Previous Recommendation: Buy

AXBK.BO

NET INCOME

PAT

(RS M)

(RS M)

END

505.6 10.9

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

65,831

18,154

50.6

68.9

24.7

4.4

13.7

19.1

1.4

4.5

3/10A

89,503

25,145

62.1

22.7

20.1

3.2

15.8

19.2

1.5

3.2

3/11E

104,438

31,617

78.0

25.7

16.0

2.7

14.2

18.3

1.6

2.8

3/12E

126,592

39,165

96.7

23.9

12.9

2.3

12.7

19.4

1.6

2.4

„

On a lower base, the loan book growth is expected to be ~35% but it is expected to remain flat sequentially. We model loan growth of 25% in FY11

„

We expect NII growth of ~33% YoY due to strong loan growth and improved margins (due to capital raising and a sharp fall in the cost of deposit). We expect margins to fall sequentially due to higher savings deposit costs, the full impact of CRR and a higher share of priority sector loans.

„

We have factored in 25% YoY growth in fee income. We expect higher trading gains sequentially but significantly lower than in 1QFY10.

„

Conservatively we have factored in higher credit costs. Movement in asset quality is a key factor to watch out for.

„

The stock trades at 2.7x FY11E BV and 2.3x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Exp/Interest Income (%) Other Income/Net Income (%) Cost/Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

29,056 18,599 10,456 29.0 9,586 20,042 8,278 11,764 46.6 3,153 8,611 2,990 5,620 70.2 64.0 47.8 41.3 26.8 34.7

28,604 17,107 11,497 25.9 10,656 22,153 9,095 13,058 49.3 4,989 8,069 2,752 5,316 32.0 59.8 48.1 41.1 38.2 34.1

28,837 15,345 13,491 45.1 9,881 23,372 9,626 13,746 51.1 3,731 10,015 3,455 6,560 31.0 53.2 42.3 41.2 27.1 34.5

29,885 15,284 14,601 41.4 9,335 23,936 10,098 13,838 21.5 2,019 11,819 4,171 7,649 31.5 51.1 39.0 42.2 14.6 35.3

30,584 16,647 13,937 33.3 10,095 24,032 10,403 13,630 15.9 2,000 11,630 4,012 7,617 35.5 54.4 42.0 43.3 14.7 34.5

34,144 19,311 14,833 29.0 10,502 25,335 11,023 14,312 9.6 2,425 11,887 4,101 7,786 46.5 56.6 41.5 43.5 16.9 34.5

39,846 24,138 15,708 16.4 11,017 26,725 12,167 14,558 5.9 2,225 12,333 4,255 8,078 23.1 60.6 41.2 45.5 15.3 34.5

45,480 28,595 16,886 15.6 11,461 28,346 12,662 15,684 13.3 3,263 12,421 4,285 8,136 6.4 62.9 40.4 44.7 20.8 34.5

FY10

FY11E

116,380 66,335 50,045 35.8 39,458 89,503 37,097 52,406 40.7 13,892 38,514 13,368 25,145 38.5 57.0 44.1 41.4 26.5 34.7

150,054 88,691 61,364 22.6 43,074 104,438 46,254 58,184 11.0 9,913 48,271 16,653 31,617 25.7 59.1 41.2 44.3 17.0 34.5

Alpesh Mehta ([email protected])

July 2010

64

Results Preview SECTOR: BANKING

Bank of Baroda STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 BOB IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs696

REUTERS CODE

S&P CNX: 5,269

BOB.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

365.5 753/371 -7/ 35/38

Mcap (Rs b) Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

END

254.3 5.5

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

78,811

22,272

60.9

55.1

11.4

2.2

14.1

20.8

1.1

2.2

3/10A

87,458

30,583

83.7

37.3

8.3

1.8

14.4

23.8

1.2

1.9

3/11E

101,876

34,639

94.8

13.3

7.3

1.5

13.3

22.5

1.1

1.6

3/12E

119,260

41,819

114.4

20.7

6.1

1.3

12.4

22.7

1.2

1.3

„

On a lower base, we expect NII growth of 40%+ YoY led by sharp improvement in margins YoY and strong loan growth. In 1QFY10, on back of excess liquidity in the balance sheet, margins had fallen sharply to 2.3%.

„

We expect loan growth of 25%+ YoY in 1QFY11. Deposit growth is expected to be calibrated. We expect CD ratio to improve sequentially.

„

We expect other income to stay largely flat YoY however, trading profits are expected to fall YoY. A decline in trading profits is expected to be compensated by higher fee income growth of 20%+.

„

The bank is expected to make higher NPA provisions on a prudent basis due to strong operating profits.

„

The stock trades at 1.5x FY11E BV and 1.3x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Exp/Interest Income (%) Other Income/Net Income (%) Cost/Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

40,321 28,274 12,047 14.0 7,030 19,077 8,978 10,099 17.4 -390 10,489 3,635 6,854 84.8 70.1 36.9 47.1 -3.9 34.7

41,354 27,468 13,886 22.5 5,953 19,839 9,523 10,316 22.0 1,163 9,153 2,811 6,342 60.4 66.4 30.0 48.0 11.3 30.7

41,770 25,757 16,012 9.5 6,597 22,609 9,959 12,650 -10.6 2,425 10,225 1,900 8,325 17.5 61.7 29.2 44.1 19.2 18.6

43,538 26,089 17,450 18.6 8,483 25,933 9,645 16,288 24.9 3,773 12,515 3,452 9,063 20.4 59.9 32.7 37.2 23.2 27.6

44,437 27,556 16,881 40.1 7,116 23,997 9,731 14,267 41.3 2,881 11,385 3,416 7,970 16.3 62.0 29.7 40.5 20.2 30.0

49,842 32,103 17,739 27.7 7,174 24,913 10,356 14,557 41.1 2,593 11,964 3,589 8,375 32.1 64.4 28.8 41.6 17.8 30.0

56,040 37,239 18,801 17.4 6,874 25,674 10,824 14,850 17.4 2,016 12,835 3,850 8,984 7.9 66.5 26.8 42.2 13.6 30.0

63,770 44,267 19,503 11.8 7,788 27,291 11,546 15,745 -3.3 2,444 13,301 3,990 9,311 2.7 69.4 28.5 42.3 15.5 30.0

FY10

FY11E

166,983 107,589 59,395 15.9 28,064 87,458 38,106 49,353 14.6 6,972 42,381 11,797 30,583 37.3 64.4 32.1 43.6 14.1 27.8

214,088 141,164 72,924 22.8 28,951 101,876 42,457 59,419 20.4 9,934 49,485 14,845 34,639 13.3 65.9 28.4 41.7 16.7 30.0

Alpesh Mehta ([email protected])

July 2010

65

Results Preview SECTOR: BANKING

Bank of India STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 BOI IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

1,6,12 Rel Perf (%)

YEAR

525.9

52 Week Range (Rs)

-2/ -10/-22

Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

END

475/295

Mcap (Rs b)

Rs345

Previous Recommendation: Neutral

BOI.BO

181.5 3.9

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

85,508

30,077

57.2

49.7

6.1

1.6

13.0

29.2

1.5

1.6

3/10A

83,726

17,411

33.1

-42.1

10.5

1.4

12.9

14.2

0.7

1.6

3/11E

97,740

21,611

41.1

24.1

8.5

1.3

11.4

15.8

0.7

1.4

3/12E

117,503

30,518

58.0

41.2

6.0

1.1

10.3

19.4

0.8

1.2

„

We expect loans to remain flat QoQ and to increase by 17-18% YoY in 1QFY11. CD ratio is expected to remain stable QoQ.

„

Other income is expected to decline on account of lower expected trading profits than 1QFY10. We model in fee income growth of 15% YoY

„

NPA provisions are likely to remain higher as asset quality stays under pressure. Slippage from restructured loans is the key factor to watch out for. In 1QFY10, the bank had MTM write back of Rs1.3b.

„

On a higher base, we expect 1QFY11 earnings to decline ~25% YoY due to lower trading gains and higher provisions. The stock trades at 1.3x FY11E BV and 1.1x FY12E BV. Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Exp/Interest Income (%) Other Income/Net Income (%) Cost/Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

43,777 30,771 13,006 10.1 6,459 19,465 8,529 10,936 2.0 2,234 8,702 2,859 5,843 4.0 70.3 33.2 43.8 20.4 32.9

44,890 30,801 14,089 3.4 6,760 20,849 8,789 12,060 -0.7 6,021 6,038 2,805 3,233 -57.6 68.6 32.4 42.2 49.9 46.5

44,862 29,915 14,948 -1.8 5,716 20,664 9,366 11,298 -35.9 5,764 5,534 1,479 4,055 -53.5 66.7 27.7 45.3 51.0 26.7

45,251 29,734 15,517 8.3 7,232 22,749 9,995 12,754 -9.4 8,090 4,664 385 4,279 -47.2 65.7 31.8 43.9 63.4 8.3

46,320 31,287 15,034 15.6 6,325 21,359 9,701 11,658 6.6 5,500 6,158 1,847 4,311 -26.2 67.5 29.6 45.4 47.2 30.0

52,249 35,630 16,620 18.0 6,450 23,070 9,749 13,322 10.5 5,850 7,472 2,242 5,230 61.8 68.2 28.0 42.3 43.9 30.0

60,463 41,522 18,941 26.7 5,925 24,866 10,889 13,977 23.7 5,490 8,487 2,716 5,771 42.3 68.7 23.8 43.8 39.3 32.0

71,379 50,055 21,324 37.4 7,120 28,444 10,936 17,508 37.3 7,844 9,664 3,365 6,299 47.2 70.1 25.0 38.4 44.8 34.8

FY10

FY11E

178,780 121,220 57,559 4.7 26,166 83,726 36,678 47,048 -13.8 22,109 24,938 7,528 17,411 -42.1 67.8 31.3 43.8 47.0 30.2

230,413 158,494 71,919 24.9 25,821 97,740 41,275 56,465 20.0 24,684 31,781 10,170 21,611 24.1 68.8 26.4 42.2 43.7 32.0

Alpesh Mehta ([email protected])

July 2010

66

Results Preview SECTOR: BANKING

Canara Bank STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 CBK IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs434

REUTERS CODE

S&P CNX: 5,269

CNBK.BO

Equity Shares (m) 52 Week Range (Rs)

443/235

1,6,12 Rel Perf (%)

-1/ 6/46

Mcap (Rs b) Mcap (USD b)

YEAR

410.0

NET INCOME

PAT

(RS M)

(RS M)

END

177.7 3.8

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

70,290

20,724

50.5

32.4

8.6

1.8

14.1

22.6

1.0

2.0

3/10A

85,384

30,214

73.7

45.8

5.9

1.4

13.4

26.8

1.3

1.6

3/11E

96,249

31,526

76.9

4.3

5.6

1.2

12.5

22.8

1.1

1.3

3/12E

111,677

37,061

90.4

17.6

4.8

1.0

12.0

22.3

1.0

1.1

„

We expect 1QFY11 loan growth to remain healthy at 22% YoY despite a higher base. Deposit growth is expected to be calibrated and CD ratio is expected to improve QoQ. We expect NII to grow at ~20% YoY.

„

Unlike peers, in 1QFY10 Canara Bank’s trading profits were muted thus, on a lower base other income is expected to grow 30%+ YoY. We model in 15% fee income growth.

„

We expect the bank to make higher NPA provisions on a prudent basis due to a 25% growth in operating profits.

„

The stock trades at 1.2x FY11E BV and 1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Exp/Interest Income (%) Other Income/Net Income (%) Cost/Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

45,584 32,669 12,915 26.7 4,736 17,651 7,237 10,413 48.0 3,360 7,053 1,500 5,553 352.7 71.7 41.0 26.8 32.3 21.3

47,092 33,955 13,137 14.3 8,929 22,066 7,875 14,191 83.5 3,086 11,105 2,000 9,105 72.0 72.1 35.7 40.5 21.7 18.0

46,878 32,100 14,778 18.8 7,813 22,591 7,891 14,700 21.1 1,674 13,026 2,500 10,526 50.0 68.5 34.9 34.6 11.4 19.2

47,966 31,990 15,976 22.4 7,101 23,077 8,772 14,305 12.4 7,274 7,031 2,000 5,031 -30.0 66.7 38.0 30.8 50.8 28.4

49,799 34,342 15,457 19.7 6,331 21,787 8,750 13,037 25.2 3,500 9,537 2,194 7,344 32.2 69.0 40.2 29.1 26.8 23.0

54,121 37,776 16,345 24.4 6,599 22,944 9,231 13,713 -3.4 3,600 10,113 2,326 7,787 -14.5 69.8 40.2 28.8 26.3 23.0

61,656 44,198 17,458 18.1 6,622 24,080 9,642 14,438 -1.8 3,950 10,488 2,412 8,076 -23.3 71.7 40.0 27.5 27.4 23.0

68,048 49,140 18,908 18.4 8,530 27,438 10,042 17,396 21.6 6,590 10,805 2,485 8,320 65.4 72.2 36.6 31.1 37.9 23.0

FY10

FY11E

187,520 130,714 56,805 20.4 28,579 85,384 34,776 50,608 27.7 12,394 38,214 8,000 30,214 45.8 69.7 40.7 33.5 24.5 20.9

233,623 165,456 68,167 20.0 28,082 96,249 37,665 58,584 15.8 17,640 40,943 9,417 31,526 4.3 70.8 39.1 29.2 30.1 23.0

Alpesh Mehta ([email protected])

July 2010

67

Results Preview SECTOR: BANKING

Corporation Bank STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 CRPBK IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs514

REUTERS CODE

S&P CNX: 5,269

CRBK.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

143.4 590/276 -7/ 23/31

Mcap (Rs b) Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

END

73.7 1.6

EPS

EPS

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

(RS) GROWTH (%)

3/09A

27,982

8,928

62.2

21.5

8.3

1.5

13.6

19.6

1.2

1.5

3/10A

33,967

11,703

81.6

31.1

6.3

1.3

16.0

21.9

1.2

1.3

3/11E

38,913

14,113

98.4

20.6

5.2

1.1

15.2

22.3

1.2

1.1

3/12E

45,873

16,482

114.9

16.8

4.5

0.9

14.4

22.0

1.1

0.9

„

On a lower base, 1QFY11 loan growth is expected to be ~35% YoY. We expect loans to remain flattish QoQ. Deposit growth is also expected to remain strong at ~30% YoY.

„

We expect NII growth of ~33% YoY led by YoY improvement in margins.

„

We expect other income to decline sharply YoY. More than 50% of the other income in 1QFY10 was derived from trading profits, which is expected to decline sharply. We model fee income growth of 20%.

„

The stock trades at P/BV of 1.1x of FY11E BV and P/BV of 0.9x of FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Interest Income 17,422 Interest Expense 12,747 Net Interest Income 4,675 % Change (Y-o-Y) 23.7 Other Income 3,593 Net Income 8,269 Operating Expenses 2,556 Operating Profit 5,712 % Change (Y-o-Y) 78.0 Other Provisions 1,550 Profit before Tax 4,162 Tax Provisions 1,550 Net Profit 2,612 % Change (Y-o-Y) 41.8 Interest Exp/Interest Income (%) 73.2 Other Income/Net Income (%) 43.5 Cost/Income Ratio (%) 30.9 Provisions/Operating Profits (%) 27.1 Tax Rate (%) 37.2 E: MOSL Estimates

17,695 12,660 5,035 23.8 3,028 8,063 2,707 5,356 52.4 940 4,417 1,500 2,917 52.3 71.5 37.6 33.6 17.5 34.0

18,606 12,612 5,994 25.4 2,517 8,511 2,995 5,516 22.7 1,271 4,245 1,195 3,050 18.9 67.8 29.6 35.2 23.0 28.2

19,222 12,824 6,398 49.4 2,727 9,124 3,674 5,450 -19.2 1,651 3,799 676 3,123 19.9 66.7 29.9 40.3 30.3 17.8

19,383 13,164 6,219 33.0 2,468 8,687 3,096 5,591 -2.1 1,100 4,491 1,437 3,054 16.9 67.9 28.4 35.6 19.7 32.0

21,306 14,875 6,431 27.7 2,782 9,213 3,142 6,071 13.3 1,295 4,776 1,576 3,200 9.7 69.8 30.2 34.1 21.3 33.0

24,164 17,256 6,909 15.3 2,967 9,876 3,261 6,614 19.9 1,130 5,484 1,810 3,675 20.5 71.4 30.0 33.0 17.1 33.0

28,491 20,940 7,552 18.0 3,586 11,137 3,454 7,684 41.0 1,371 6,313 2,128 4,185 34.0 73.5 32.2 31.0 17.8 33.7

FY10

FY11E

72,946 50,844 22,103 30.7 11,864 33,967 12,600 21,367 18.9 4,744 16,623 4,921 11,703 31.1 69.7 34.9 37.1 22.2 29.6

93,345 66,235 27,110 22.7 11,803 38,913 12,953 25,960 21.5 4,896 21,064 6,951 14,113 20.6 71.0 30.3 33.3 18.9 33.0

Alpesh Mehta ([email protected])

July 2010

68

Results Preview SECTOR: BANKING

Dena Bank STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 DBNK IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs93

Previous Recommendation: Buy

DENA.BO

YEAR

286.8

NET INCOME

PAT

(RS M)

(RS M)

END

96/45 5/ 10/50 26.8 0.6

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

14,976

4,257

14.8

18.3

6.3

1.4

10.7

24.2

1.0

1.5

3/10A

16,887

5,113

17.8

20.1

5.2

1.1

13.3

23.6

1.0

1.3

3/11E

18,957

5,198

18.1

1.7

5.1

0.9

12.3

19.9

0.8

1.1

3/12E

22,233

6,340

22.1

22.0

4.2

0.8

11.8

20.3

0.8

0.9

„

We expect NII to grow ~21% YoY to Rs.3b. We expect margins to decline sequentially due to repricing of saving deposits and the full impact of the CRR increase.

„

Loan growth is expected to be 27% YoY on a lower base and deposit growth is expected to be 22% YoY.

„

Other income is expected to decline QoQ and YoY. We model fee income growth of 15% YoY. Decline in other income will be largely due to lower trading profits in 1QFY11.

„

The stock trades at P/BV of 0.9x of FY11E BV and P/BV of 0.8x of FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Expense/Int. Income (%) Other Income/Net Income (%) Cost to Income Ratio (%) Provisions/Operating Profits (%) Tax Payout (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

9,685 7,180 2,505 14.5 1,554 4,059 2,045 2,013 62.2 406 1,607 457 1,150 68.4 74.1 38.3 50.4 20.2 28.4

9,628 7,223 2,405 -5.4 1,253 3,658 2,043 1,615 8.2 15 1,600 354 1,246 21.2 75.0 34.3 55.9 0.9 22.1

10,159 7,329 2,830 -19.7 1,331 4,161 2,185 1,977 -25.5 293 1,684 339 1,345 -4.2 72.1 32.0 52.5 14.8 20.1

10,632 7,371 3,261 36.5 1,749 5,010 2,208 2,801 49.2 824 1,977 606 1,371 23.3 69.3 34.9 44.1 29.4 30.7

11,041 8,018 3,023 20.7 1,305 4,327 2,185 2,143 6.4 425 1,718 472 1,245 8.3 72.6 30.1 50.5 19.8 27.5

11,971 8,820 3,151 31.0 1,383 4,534 2,156 2,378 47.3 650 1,728 475 1,253 0.6 73.7 30.5 47.5 27.3 27.5

13,348 9,878 3,470 22.6 1,458 4,927 2,350 2,577 30.4 750 1,827 502 1,324 -1.5 74.0 29.6 47.7 29.1 27.5

14,675 11,137 3,538 8.5 1,630 5,168 2,313 2,855 1.9 959 1,897 522 1,375 0.3 75.9 31.5 44.8 33.6 27.5

FY10

FY11E

40,104 29,103 11,000 3.1 5,886 16,887 8,481 8,406 15.2 1,538 6,868 1,755 5,113 20.1 72.6 34.9 50.2 18.3 25.6

51,035 37,853 13,182 19.8 5,776 18,957 9,004 9,953 18.4 2,784 7,170 1,972 5,198 1.7 74.2 30.5 47.5 28.0 27.5

Alpesh Mehta ([email protected])

July 2010

69

Results Preview SECTOR: BANKING

Federal Bank STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 FB IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs318

REUTERS CODE

S&P CNX: 5,269

FED.BO

Equity Shares (m) 52 Week Range (Rs)

355/211

1,6,12 Rel Perf (%)

-5/ 31/9

Mcap (Rs b) Mcap (USD b)

YEAR

171.0

NET INCOME

PAT

(RS M)

(RS M)

END

54.4 1.2

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

18,312

5,005

29.3

36.0

10.9

1.3

20.1

12.1

1.4

1.3

3/10A

19,417

4,646

27.2

-7.2

11.7

1.2

17.6

10.3

1.1

1.2

3/11E

21,848

5,966

34.9

28.4

9.1

1.1

17.1

12.1

1.2

1.1

3/12E

25,239

7,151

41.8

19.9

7.6

0.9

15.8

13.1

1.2

1.0

„

On a lower base, we expect NII growth of 35%+ YoY in 1QFY11. We expect loan growth of 2% QoQ and 18% YoY.

„

We expect other income to remain flat sequentially and decline YoY due to lower trading gains and muted fee income growth.

„

We factor in higher NPA provisions as the pressure on asset quality prevails. However, improving asset quality trend in the past two quarters can provide upside to our earnings estimates.

„

We have modeled a tax rate of 34% v/s 39% in 1QFY10. On a higher base we expect profit to remain flat YoY.

„

The stock trades at 1.1x FY11E BV and 0.9x FY12E BV with an RoA of 1.2%+. However RoE is likely to stay lower due to lower leverage. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit

8,744 5,843 2,901 4.3 1,474 4,375 1,592 2,783

9,011 5,711 3,300 -0.6 1,364 4,664 1,631

9,446 5,635 3,811 -0.9 1,165 4,976 1,661

9,531 5,435 4,097 27.7 1,306 5,403 1,885

9,754 5,781 3,972 36.9 1,295 5,267 1,825

10,475 6,360 4,115 24.7 1,404 5,519 1,875

11,358 7,123 4,235 11.1 1,242 5,477 1,925

12,587 8,240 4,347 6.1 1,238 5,585 1,985

36,732 22,624 14,108 7.2 5,309 19,417 6,769

44,173 27,504 16,669 18.1 5,179 21,848 7,610

% Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Exp/Interest Income (%) Other Income/Net Income (%) Cost/Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

9.8 520 2,263 900 1,364 100.1 66.8 33.7 36.4 18.7 39.7

3,032 0.1 1,501 1,531 520 1,011 -11.6 63.4 29.3 35.0 49.5 34.0

3,315 -13.8 1,053 2,262 1,160 1,103 -45.9 59.7 23.4 33.4 31.8 51.3

3,518 10.3 979 2,539 1,370 1,169 2.3 57.0 24.2 34.9 27.8 54.0

3,442 23.7 1,400 2,042 694 1,348 -1.2 59.3 24.6 34.6 40.7 34.0

3,644 20.2 1,450 2,194 746 1,448 43.3 60.7 25.4 34.0 39.8 34.0

3,552 7.1 1,275 2,277 774 1,503 36.3 62.7 22.7 35.1 35.9 34.0

3,600 2.3 1,073 2,526 859 1,667 42.7 65.5 22.2 35.5 29.8 34.0

12,649 0.4 4,053 8,596 3,950 4,646 -7.2 61.6 27.3 34.9 32.0 46.0

14,238 12.6 5,198 9,039 3,073 5,966 28.4 62.3 23.7 34.8 36.5 34.0

Alpesh Mehta ([email protected])

July 2010

70

Results Preview SECTOR: BANKING & FINANCE

HDFC STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 HDFC IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

287.1

52 Week Range (Rs) 3,027/2,145 1,6,12 Rel Perf (%) Mcap (Rs b)

Rs2,937

Previous Recommendation: Neutral

HDFC.BO

3/ 9/1 843.1

Mcap (USD b)

18.2

NET INCOME

PAT

END

(RS M)

(RS M)

ADJ. EPS

(RS) GROWTH (%)

EPS

AP/E*

P/BV

CAR

ROAE

ROAA

AP/ABV*

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

35,852

22,825

80.2

3/10A

42,978

28,265

98.4

17.5

30.5

6.4

15.1

23.3

2.6

7.2

22.7

22.4

5.7

14.6

25.3

2.7

5.5

3/11E

51,127

33,875

118.0

19.9

17.8

5.0

14.2

25.7

2.8

4.5

3/12E

60,526

40,325 140.5

19.0

14.0

4.3

14.1

26.1

2.8

3.6

* Price is adjusted for value of key ventures. Book Value is adjusted by deducting investments in key ventures from net worth

„

We expect 1QFY11 loan growth of ~15% YoY and ~2% QoQ. We expect HDFC Bank will continue to buy out home loans from HDFC Ltd in 1QFY11 which would hamper HDFC's own loan growth.

„

We expect spreads to remain stable sequentially or decline marginally.

„

We model lower other operating income as we factor in lower dividend and lower fees than those a year earlier. We have modeled dividend from HDFC Bank in our 2QFY11 earnings estimates.

„

Overall, we expect strong profit growth of 20%+, led by improving loan growth and stable spreads.

„

HDFC trades at 4.5x FY11E AP/ABV and 3.6x FY12E AP/ABV (price adjusted for value of other businesses and book value adjusted for investments made in those businesses). Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income YoY Change (%) Profit on Sale of Investments Other Operating Income Net Operating Income YoY Change (%) Other Income Total Income Operating Expenses Pre Provisioning Profit YoY Change (%) Provisions PBT YoY Change (%) Provision for Tax PAT (Excl exceptional) YoY Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

26,894 19,628 7,266 7.6 513 1,035 8,814 18.3 49 8,863 944 7,919 20.0 120 7,799 20.0 2,150 5,649 20.7

26,209 18,365 7,844 1.8 613 1,627 10,083 17.5 54 10,137 868 9,269 19.5 140 9,129 20.1 2,490 6,639 24.3

25,994 17,042 8,952 9.7 514 1,061 10,527 20.1 53 10,580 847 9,733 22.6 160 9,573 22.5 2,860 6,713 22.8

27,307 15,595 11,712 23.3 454 1,162 13,328 23.1 70 13,398 579 12,819 23.3 160 12,659 23.2 3,395 9,264 26.3

25,966 16,851 9,114 25.4 600 600 10,314 17.0 40 10,354 735 9,619 21.5 125 9,494 21.7 2,658 6,836 21.0

29,455 19,379 10,076 28.5 600 1,350 12,026 19.3 60 12,086 872 11,214 21.0 150 11,064 21.2 3,043 8,022 20.8

34,834 24,030 10,805 20.7 600 1,250 12,655 20.2 70 12,725 1,075 11,650 19.7 250 11,400 19.1 3,192 8,208 22.3

42,210 28,744 13,465 15.0 694 1,723 15,882 19.2 80 15,962 892 15,070 17.6 142 14,928 17.9 4,118 10,810 16.7

FY10

FY11E

106,404 70,631 35,773 11.4 2,094 4,885 42,752 20.0 226 42,978 3,238 39,740 21.6 580 39,160 21.7 10,895 28,265 23.8

132,465 89,004 43,461 21.5 2,494 4,923 50,877 19.0 250 51,127 3,574 47,554 19.7 667 46,887 19.7 13,011 33,875 19.9

Alpesh Mehta ([email protected])

July 2010

71

Results Preview SECTOR: BANKING

HDFC Bank STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 HDFCB IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

457.7

-2/ 13/11

Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

END

2010/1333

Mcap (Rs b)

Rs1,948

Previous Recommendation: Buy

HDBK.BO

891.6 19.2

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

(X)

(X)

(%)

(%)

(%)

P/ABV (X)

3/09A 107,118

22,449

52.8

27.7

36.9

5.5

15.8

15.6

1.3

5.7

3/10A 121,942

29,487

64.4

22.1

30.2

4.1

17.4

16.1

1.5

4.2

3/11E

147,948

38,686

84.5

31.2

23.0

3.6

16.1

16.8

1.6

3.7

3/12E

181,379

50,066

109.4

29.4

17.8

3.1

14.3

18.9

1.7

3.2

„

We expect strong 1QFY11 loan growth of ~27% YoY (~5% QoQ) backed by a lower base and strong up-tick in retail disbursements.

„

We expect NII growth of ~25% YoY led by strong loan growth of 27% YoY. Margins are expected to decline QoQ due to savings deposits repricing, higher share of priority sector loans and full impact of CRR hike.

„

Other income is expected to remain flat YoY despite lower expected trading gains. With the up-tick in loan growth, we have modeled ~20% YoY growth in fee-based income (largely flattish QoQ).

„

We model 20% growth in operating expenses with an up-tick in income growth.

„

Provisions are expected to decline from Rs6.6b in 1QFY10 to Rs4.5b in 1QFY11. We expect the bank to make higher NPA provisions on a prudent basis.

„

We estimate PAT CAGR of ~31% over FY10-12 with RoE increasing to ~19% by FY12. The stock trades at 3.6x FY11E BV and 3.1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Exp/Interest Income (%) Other Income/Net Income (%) Cost/Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

40,931 22,375 18,556 7.7 10,437 28,992 13,806 15,187 47.8 6,588 8,598 2,537 6,061 30.5 54.7 36.0 47.6 43.4 29.5

39,919 20,361 19,558 4.8 10,074 29,632 13,702 15,930 41.9 5,941 9,989 3,114 6,875 30.2 51.0 34.0 46.2 37.3 31.2

40,348 18,109 22,239 12.4 8,530 30,769 14,532 16,237 11.4 4,477 11,760 3,575 8,185 31.6 44.9 27.7 47.2 27.6 30.4

40,531 17,018 23,514 27.0 9,036 32,549 15,605 16,944 7.9 4,399 12,545 4,178 8,366 32.6 42.0 27.8 47.9 26.0 33.3

42,011 18,932 23,079 24.4 10,238 33,317 16,567 16,750 10.3 4,514 12,236 4,282 7,953 31.2 45.1 30.7 49.7 27.0 35.0

47,069 22,340 24,730 26.4 10,848 35,578 16,784 18,794 18.0 4,957 13,837 4,843 8,994 30.8 47.5 30.5 47.2 26.4 35.0

53,560 26,807 26,753 20.3 11,315 38,068 17,408 20,659 27.2 5,355 15,304 4,591 10,713 30.9 50.1 29.7 45.7 25.9 30.0

60,719 31,873 28,847 22.7 12,138 40,985 19,445 21,541 27.1 6,026 15,514 4,488 11,026 31.8 52.5 29.6 47.4 28.0 28.9

FY10

FY11E

161,729 77,863 83,866 13.0 38,076 121,942 57,645 64,297 24.2 21,400 42,897 13,410 29,487 31.3 48.1 31.2 47.3 33.3 31.3

203,360 99,951 103,408 23.3 44,540 147,948 70,205 77,743 20.9 20,853 56,891 18,205 38,686 31.2 49.2 30.1 47.5 26.8 32.0

Alpesh Mehta ([email protected])

July 2010

72

Results Preview SECTOR: BANKING

ICICI Bank STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 ICICIBC IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs858

REUTERS CODE

S&P CNX: 5,269

ICBK.BO

Equity Shares (m) 52 Week Range (Rs)

YEAR

1,114.9 1,010/607

1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

3/09A

159,703

37,581

33.8

3/10A

155,920

40,250

3/11E

169,391

51,445

3/12E

195,782

65,069

END

-4/ -2/0 956.0 20.6

EPS

EPS

P/E

AP/E*

AP/ABV*

CAR

(X)

(X)

(X)

(%)

COREROE ROAA (%)

(%)

-9.7

25.4

21.0

2.1

15.5

9.3

1.0

36.1

6.9

23.8

18.6

1.9

19.4

9.7

1.1

46.1

27.8

18.6

14.0

1.7

19.0

11.7

1.4

58.4

26.5

14.7

10.6

1.5

16.8

13.7

1.5

*Price is adjusted for value of key ventures; Book value adjusted for investment in subsidiaries

„

„ „ „ „ „

„

We expect loans to decline ~7% YoY and to grow ~2% QoQ in 1QFY11. The sequential increase will be driven by domestic corporates, auto loans and housing loans. We expect deposits to decline ~7% YoY due to net repayment of bulk deposits and moderation in loan book growth. We expect margins to decline QoQ due to a higher share of priority sector loans, the impact of repricing of savings deposits and the full impact of the CRR revision. Despite the decline in loans YoY, NII is expected to stay flattish YoY driven by margin expansion. We expect other income to remain flat YoY despite lower trading profit. We expect fees to grow 2% QoQ and 18% YoY (on a lower base). On a higher base, we model a 4% QoQ rise in operating expenses as branch expansion has been strong in the past two quarters. NPA provisions are likely to fall on a YoY basis. In 1QFY10, the bank had provided Rs2b as provision for Dabhol restructuring. We have modeled an NPA charge of Rs9b (v/s Rs10b in 4QFY10) in 1QFY11 despite the falling slippages as the bank is likely to make higher provisions to reach 70% PCR. Excluding subsidiaries value, the stock trades at 1.7x FY11E ABV and 1.5x FY12E ABV (BV adjusted for NPA and investment in subsidiaries). Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Exp/Interest Income (%) Other Income/Net Income (%) Cost/Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

71,334 51,482 19,853 -5.0 20,899 40,751 15,460 25,291 47.5 13,237 12,055 3,273 8,782 20.6 72.2 51.3 37.9 52.3 27.1

66,569 46,209 20,361 -5.2 18,238 38,599 14,245 24,353 6.6 10,713 13,640 3,239 10,401 2.6 69.4 47.3 36.9 44.0 23.7

60,896 40,315 20,581 3.4 16,731 37,312 13,624 23,688 -14.5 10,022 13,667 2,656 11,011 -13.4 66.2 44.8 36.5 42.3 19.4

58,270 37,920 20,349 -4.9 18,908 39,258 15,269 23,989 11.3 9,898 14,091 4,036 10,056 35.2 65.1 48.2 38.9 41.3 28.6

59,259 39,720 19,540 -1.6 20,590 40,130 15,850 24,280 -4.0 9,000 15,280 4,278 11,002 25.3 67.0 51.3 39.5 37.1 28.0

64,790 43,692 21,098 3.6 19,764 40,862 16,229 24,633 1.1 7,750 16,883 4,727 12,156 16.9 67.4 48.4 39.7 31.5 28.0

71,250 48,061 23,189 12.7 19,912 43,102 16,933 26,169 10.5 7,250 18,919 5,297 13,621 23.7 67.5 46.2 39.3 27.7 28.0

79,124 53,667 25,457 25.1 19,840 45,297 18,111 27,186 13.3 6,816 20,370 5,704 14,666 45.9 67.8 43.8 40.0 25.1 28.0

FY10

FY11E

257,069 175,926 81,144 -3.0 74,777 155,920 58,598 97,322 9.0 43,869 53,453 13,203 40,250 7.1 68.4 48.0 37.6 45.1 24.7

274,423 185,139 89,285 10.0 80,106 169,391 67,123 102,268 5.1 30,816 71,452 20,006 51,445 27.8 67.5 47.3 39.6 30.1 28.0

Alpesh Mehta ([email protected])

July 2010

73

Results Preview SECTOR: BANKING

Indian Bank STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 INBK IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs220

REUTERS CODE

S&P CNX: 5,269

INBA.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

429.8 236/115 -2/ 25/37

Mcap (Rs b) Mcap (USD b)

94.4 2.0

NET INCOME

PAT

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

36,440

12,453

29.0

23.5

7.6

1.7

14.0

24.8

1.6

1.7

3/10A

44,776

15,550

36.2

24.9

6.1

1.4

12.7

25.6

1.7

1.4

3/11E

51,115

16,277

37.9

4.7

5.8

1.2

11.7

22.5

1.5

1.2

3/12E

59,938

20,276

47.2

24.6

4.7

1.0

11.1

23.6

1.5

1.0

„

We expect NII to grow 23%+ YoY . We expect deposit growth to be calibrated to loan growth. In 1QFY11 loans are expected to grow ~23% YoY and CD ratio to improve sequentially.

„

Other income growth is expected to decline YoY due to lower treasury gains expected in the current quarter compared with Rs1b in 1QFY10. Even recoveries from written-off accounts were high in 1QFY10 of Rs800m. Fee income is expected to grow by ~15% YoY in 1QFY11.

„

On a higher base we model flat operating expense YoY. In 1QFY11 the bank made an ad hoc provision of Rs450m towards wage revision.

„

We have conservatively modeled higher NPA provisions in our earnings estimates.

„

The stock trades at 1.2x FY11E BV and 1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Interest Income 18,802 Interest Expense 11,426 Net Interest Income 7,377 % Change (Y-o-Y) 36.7 Other Income 3,502 Net Income 10,878 Operating Expenses 4,573 Operating Profit 6,305 % Change (Y-o-Y) 44.4 Other Provisions 1,209 Profit before Tax 5,096 Tax Provisions 1,780 Net Profit 3,317 % Change (Y-o-Y) 52.4 Interest Exp/Interest Income (%) 60.8 Other Income/Net Income (%) 32.2 Cost/Income Ratio (%) 42.0 Provisions/Operating Profits (%) 19.2 Tax Rate (%) 34.9 E: MOSL Estimates

19,372 11,780 7,591 11.3 2,372 9,963 4,425 5,539 4.0 293 5,246 1,526 3,720 31.5 60.8 23.8 44.4 5.3 29.1

20,148 11,418 8,730 21.3 2,935 11,665 4,178 7,487 20.0 320 7,166 2,172 4,994 42.4 56.7 25.2 35.8 4.3 30.3

20,249 10,908 9,341 39.9 2,929 12,270 3,545 8,724 37.2 2,136 6,589 2,488 4,101 4.1 53.9 23.9 28.9 24.5 37.8

21,217 12,089 9,128 23.7 2,821 11,949 4,600 7,349 16.6 2,229 5,120 1,741 3,379 1.9 57.0 23.6 38.5 30.3 34.0

22,960 13,540 9,419 24.1 3,004 12,424 4,700 7,724 39.5 1,866 5,858 1,992 3,866 3.9 59.0 24.2 37.8 24.2 34.0

25,296 15,436 9,860 12.9 2,900 12,760 4,500 8,260 10.3 1,834 6,426 2,185 4,241 -15.1 61.0 22.7 35.3 22.2 34.0

27,334 16,681 10,654 14.1 3,329 13,982 4,581 9,401 7.8 2,142 7,259 2,468 4,791 16.8 61.0 23.8 32.8 22.8 34.0

FY10

FY11E

78,571 45,532 33,039 26.7 11,737 44,776 17,302 27,473 22.9 3,957 23,516 7,966 15,550 24.9 58.0 26.2 38.6 14.4 33.9

96,807 57,746 39,061 18.2 12,054 51,115 18,381 32,734 14.2 8,071 24,662 8,385 16,277 4.7 59.7 23.6 36.0 24.7 34.0

Alpesh Mehta ([email protected])

July 2010

74

Results Preview SECTOR: BANKING & FINANCE

LIC Housing Finance STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 LICH IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

95.0 1,049/558 5/ 27/39

Mcap (Rs b) Mcap (USD b)

Rs1,015

Previous Recommendation: Buy

LICHF.BO

96.5 2.1

NET INCOME

PAT

EPS

EPS

P/E

P/BV

ROAE

ROAA

P/ABV

END

(RS M)

(RS M)

(RS)

GROWTH (%)

(X)

(X)

(%)

(%)

(X)

3/09A

8,867

5,316

62.5

37.3

16.2

3.9

26.2

2.0

3.9

3/10A

10,740

6,622

69.7

11.4

14.6

2.8

23.6

1.9

2.8

3/11E

14,240

8,330

87.7

25.8

11.6

2.4

22.5

1.8

2.4

3/12E

17,078

9,992

105.2

20.0

9.7

2.0

22.7

1.8

2.0

„

We expect 1QFY11 loans to grow ~35% YoY led by continued buoyancy in disbursement growth.

„

We expect NIM to remain fall marginally QoQ however, we expect sharp improvement on a YoY basis due to repricing of wholesale borrowings (leading to lower cost of funds). Strong loan growth and margin improvement will translate into net income growth of 40%+ YoY.

„

Asset quality is robust and the provision charge is likely to be negligible.

„

The stock trades at P/BV of 2.4x FY11E and 2x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Operating Income Other Income Total income Y-o-Y Growth (%) Interest Expenses Net Income Operating Expenses Operating Profit Y-o-Y Growth (%)

7,802 17 7,819 25.5 5,709 2,110 322 1,788 17.4

8,349 42 8,391 18.6 5,979 2,413 552 1,861 4.5

8,782 22 8,805 14.8 6,057 2,748 428 2,320 26.8

9,629 53 9,683 20.1 6,214 3,469 613 2,856 30.8

9,819 35 9,854 26.0 6,832 3,022 543 2,479

10,864 40 10,904 29.9 7,516 3,388 563 2,825

12,171 45 12,216 38.8 8,417 3,799 578 3,221

13,806 40 13,846 43.0 9,815 4,031 606 3,425

34,562 135 34,697 19.5 23,957 10,740 1,911 8,829

46,660 160 46,820 34.9 32,580 14,240 2,290 11,950

Provisions and Cont. Profit before Tax Tax Provisions Net Profit Y-o-Y Growth (%) Int Exp/ Int Earned (%) Other Income / Net Income (%) Cost to Income Ratio (%) Tax Rate (%) E: MOSL Estimates

100 1,688 450 1,238 18.3 73.2 0.8 15.3 26.6

-417 2,278 566 1,712 26.8 71.6 1.8 22.9 24.8

158 2,162 629 1,533 14.1 69.0 0.8 15.6 29.1

-126 2,982 847 2,135 35.5 64.5 1.5 17.7 28.4

38.6 200 2,279 615 1,663 34.3 69.6 1.2 18.0 27.0

51.8 100 2,725 744 1,981 15.7 69.2 1.2 16.6 27.3

38.8 120 3,101 847 2,254 47.1 69.2 1.2 15.2 27.3

19.9 80 3,345 914 2,431 13.8 71.1 1.0 15.0 27.3

20.7 -283 9,113 2,491 6,622 24.6 69.3 1.3 17.8 27.3

35.3 500 11,450 3,120 8,330 25.8 69.8 1.1 16.1 27.3

Alpesh Mehta ([email protected])

July 2010

75

Results Preview SECTOR: BANKING

Oriental Bank of Commerce STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 OBC IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs323

REUTERS CODE

S&P CNX: 5,269

ORBC.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

250.5 357/152 -7/ 23/56

Mcap (Rs b) Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

END

80.9 1.7

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

30,678

9,054

36.1

7.7

8.9

1.3

13.0

14.8

0.9

1.3

3/10A

41,075

11,347

45.3

25.3

7.1

1.1

12.5

16.5

0.9

1.2

3/11E

49,338

13,437

53.6

18.4

6.0

1.0

12.1

17.1

0.9

1.0

3/12E

57,856

16,130

64.4

20.0

5.0

0.8

11.5

17.7

0.9

0.9

„

On a lower base (NII up only 8% YoY), we expect NII to increase by 90%+ YoY to Rs9.3b. We expect NII to decline by 6% QoQ. We expect the margins to moderate on a QoQ basis. In 4QFY10, margins improved 100bp YoY (up 27bp QoQ) to 3.3% due to repricing of bulk deposits.

„

We expect 19% YoY growth in loans, and 19% YoY growth in deposits.

„

Non-interest income is expected to decline YoY due to lower trading profit in 1QFY11. Fee income is expected to show strong traction.

„

We expect operating expenses to decline sequentially as in 4QFY10 the bank booked exceptional expenses due to a wage revision provision of Rs1.5b.

„

Conservatively we expect the bank to make higher NPA provisions due to high restructured assets (~6.8% of the loan book)

„

The stock trades at P/BV of 1x FY11E and 0.8x of FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Interest Income 24,042 Interest Expense 19,201 Net Interest Income 4,842 % Change (Y-o-Y) 8.4 Other Income 3,919 Net Income 8,760 Operating Expenses 3,591 Operating Profit 5,169 % Change (Y-o-Y) 46.1 Other Provisions 1,514 Profit before Tax 3,656 Tax Provisions 1,082 Net Profit 2,574 % Change (Y-o-Y) 16.7 Interest Exp/Interest Income (%) 79.9 Other Income/Net Income (%) 44.7 Cost/Income Ratio (%) 41.0 Provisions/Operating Profits (%) 29.3 Tax Rate (%) 29.6 E: MOSL Estimates

24,958 19,347 5,611 8.0 3,051 8,662 3,612 5,049 24.1 551 4,498 1,789 2,709 14.3 77.5 35.2 41.7 10.9 39.8

26,716 17,987 8,729 53.7 2,377 11,106 4,878 6,228 61.2 1,921 4,307 1,413 2,894 14.8 67.3 21.4 43.9 30.8 32.8

26,855 16,961 9,894 114.9 2,654 12,548 4,779 7,769 44.3 4,174 3,595 425 3,170 61.9 63.2 21.2 38.1 53.7 11.8

27,242 17,915 9,326 92.6 2,494 11,820 4,441 7,379 42.7 2,600 4,779 1,673 3,106 20.7 65.8 21.1 37.6 35.2 35.0

29,395 20,065 9,330 66.3 2,753 12,083 4,614 7,469 47.9 2,550 4,919 1,623 3,296 21.7 68.3 22.8 38.2 34.1 33.0

33,545 24,078 9,466 8.4 2,935 12,401 5,116 7,285 17.0 2,200 5,085 1,627 3,458 19.5 71.8 23.7 41.3 30.2 32.0

38,914 29,409 9,505 -3.9 3,528 13,034 5,158 7,876 1.4 2,899 4,977 1,400 3,577 12.8 75.6 27.1 39.6 36.8 28.1

FY10

FY11E

102,571 73,497 29,074 45.6 12,000 41,075 16,860 24,215 43.7 8,176 16,039 4,692 11,347 25.3 71.7 29.2 41.0 33.8 29.3

129,096 91,468 37,628 29.4 11,710 49,338 19,330 30,008 23.9 10,249 19,760 6,323 13,437 18.4 70.9 23.7 39.2 34.2 32.0

Alpesh Mehta ([email protected])

July 2010

76

Results Preview SECTOR: BANKING

Punjab National Bank STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 PNB IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

315.3 1,067/598 1/ 14/43

Mcap (Rs b) Mcap (USD b)

Rs1,045

Previous Recommendation: Buy

PNB.BO

329.4 7.1

NET INCOME

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

99,505

30,909

98.0

50.9

10.7

2.5

14.0

25.8

1.4

2.5

3/10A

120,882

3/11E

138,737

39,054 123.9

26.4

8.4

2.0

14.2

26.6

1.4

2.1

44,679 141.7

14.4

7.4

1.7

12.7

24.8

1.4

1.8

3/12E

163,093

52,727 167.2

18.0

6.2

1.4

11.6

24.1

1.3

1.4

„

On a higher base of 1QFY10, we expect reported loan growth of 21% YoY v/s 38% a year ago, and 21% in FY10. We expect loans to grow 2% QoQ.

„

Deposit growth is expected to moderate to 16% v/s 19% in 3QFY10 and 4QFY10. In 1QFY10 deposits grew by 27% YoY. On a lower base, NII growth is expected to be 34% YoY. We expect a sequential decline in NII due to pressure on margins.

„

We expect other income to decline YoY due to lower trading profits. We have modeled 20% YoY growth in fee income in 1QFY11.

„

Due to strong operating profit growth of 30% we expect the bank to make higher NPA provisions on a prudent basis.

„

The stock trades at 1.7x FY11E BV and 1.4x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

FY11E 3Q

4Q

1Q

2Q

3Q

4Q

Interest Income 51,466 53,241 53,885 56,076 Interest Expense 33,456 33,123 31,764 31,097 Net Interest Income 18,010 20,118 22,121 24,980 % Change (Y-o-Y) 24.7 17.5 12.4 31.0 Other Income 10,309 7,518 8,480 9,346 Net Income 28,320 27,636 30,601 34,326 Operating Expenses 12,626 11,573 12,419 11,001 Operating Profit 15,693 16,063 18,182 23,325 % Change (Y-o-Y) 59.7 17.4 0.7 46.9 Other Provisions 3,018 2,160 2,819 6,219 Profit before Tax 12,676 13,903 15,363 17,106 Tax Provisions 4,355 4,634 5,250 5,756 Net Profit 8,321 9,270 10,113 11,350 % Change (Y-o-Y) 62.4 31.1 0.5 31.1 Interest Exp/Interest Income (%) 65.0 62.2 58.9 55.5 Other Income/Net Income (%) 36.4 27.2 27.7 27.2 Cost/Income Ratio (%) 44.6 41.9 40.6 32.0 Provisions/Operating Profits (%) 19.2 13.4 15.5 26.7 Tax Rate (%) 34.4 33.3 34.2 33.6 E: MOSL Estimates; FY10 quarterly reclassified for first three quarters

58,025 33,848 24,177 34.2 8,970 33,146 12,750 20,396 30.0 4,700 15,696 5,023 10,674 28.3 58.3 27.1 38.5 23.0 32.0

63,534 38,776 24,759 23.1 8,441 33,200 13,388 19,812 23.3 4,225 15,587 4,988 10,599 14.3 61.0 25.4 40.3 21.3 32.0

71,402 45,134 26,268 18.7 9,218 35,486 14,726 20,760 14.2 4,125 16,635 5,323 11,312 11.9 63.2 26.0 41.5 19.9 32.0

80,830 53,433 27,397 9.7 9,508 36,905 14,403 22,502 -3.5 4,716 17,786 5,691 12,094 6.6 66.1 25.8 39.0 21.0 32.0

FY10

FY11E

214,669 129,440 85,229 21.2 35,653 120,882 47,619 73,263 27.5 14,215 59,048 19,994 39,054 26.4 60.3 29.5 39.4 19.4 33.9

273,792 171,191 102,600 20.4 36,137 138,737 55,267 83,471 13.9 17,766 65,704 21,025 44,679 14.4 62.5 26.0 39.8 21.3 32.0

Alpesh Mehta ([email protected])

July 2010

77

Results Preview SECTOR: BANKING & FINANCE

Shriram Transport Finance STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 SHTF IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs579

REUTERS CODE

S&P CNX: 5,269

SRTR.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

225.5 614/284 -2/ 23/76

Mcap (Rs b) Mcap (USD b)

130.6 2.8

NET INCOME

PAT

EPS

EPS

P/E

P/BV

ROAE

ROAA

P/ABV

END

(RS M)

(RS M)

(RS)

GROWTH (%)

(X)

(X)

(%)

(%)

(X)

3/09A

17,535

6,124

30.1

56.8

19.2

5.2

30.3

3.1

5.3

3/10A

22,528

8,731

38.7

28.7

15.0

3.4

28.6

3.9

3.4

3/11E

29,426

11,598

51.4

32.8

11.3

2.7

26.9

4.8

2.8

3/12E

35,748

13,834

61.3

19.3

9.4

2.2

25.9

4.7

2.2

„

Total income is expected to increase by 22% YoY (3% QoQ) in 1QFY11. Net income, including securitization income, is expected to grow ~35% YoY.

„

We model operating profit growth of 35% YoY, led by higher net income growth and a fall in C/I ratio on a YoY basis.

„

Conservatively we are assuming higher NPA provisions for STF at Rs1b. Considering an improved outlook on asset quality and comfortable provision coverage ratio at 76%, NPA provisions can surprise us positively.

„

Net profit is expected to grow 60%+ YoY. The stock trades at 2.7x FY11E BV and 2.2x FY12E BV with RoE at ~26% over FY10-12. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

Interest Income 9,052 9,476 Interest expenses 5,384 5,248 Net Interest Income 3,668 4,227 Y-o-Y Growth (%) 13.6 14.8 Securitisation income 1,037 1,044 Net Inc. (Incl. Securitisation) 4,705 5,272 Y-o-Y Growth (%) 14.6 19.1 Fees and Other Income 168 140 Net Operating Income 4,873 5,412 Y-o-Y Growth (%) 16.6 20.0 Operating Expenses 1,454 1,227 Operating Profit 3,418 4,185 Y-o-Y Growth (%) 17.8 34.4 Provisions 949 1,122 Profit before Tax 2,469 3,063 Tax Provisions 825 988 Net Profit 1,644 2,075 Y-o-Y Growth (%) 14.5 25.3 Int Exp/ Int Earned (%) 59.5 55.4 Securitisation Inc. / Net Inc. (%) 21.3 19.3 Cost to Income Ratio (%) 29.8 22.7 Tax Rate (%) 33.4 32.3 E: MOSL Estimates; Quaterly nos and full year nos will

FY11E 3Q

4Q

1Q

2Q

3Q

FY10

FY11E

37,544 21,862 15,683 11.3 6,531 22,214 28.6 651 22,865 29.3 5,512 17,353 42.2 4,107 13,246 4,515 8,732 42.6 58.2 28.6 24.1 34.1

42,297 27,618 14,679 -6.4 13,602 28,281 27.3 1,145 29,426 28.7 6,709 22,716 30.9 5,144 17,572 5,975 11,598 32.8 65.3 46.2 22.8 34.0

4Q

10,264 8,753 8,971 9,869 11,053 12,404 5,708 5,522 5,936 6,529 7,247 7,905 4,557 3,231 3,036 3,339 3,805 4,498 34.7 -14.9 -17.2 -21.0 -16.5 39.2 1,208 3,242 3,300 3,366 3,433 3,502 5,765 6,473 6,336 6,705 7,239 8,001 36.2 43.7 34.7 27.2 25.6 23.6 154 189 252 275 298 321 5,919 6,661 6,588 6,980 7,536 8,321 37.2 42.4 35.2 29.0 27.3 24.9 1,318 1,513 1,527 1,534 1,713 1,935 4,601 5,149 5,061 5,446 5,823 6,387 52.3 62.4 48.0 30.1 26.6 24.0 1,014 1,022 1,000 1,250 1,350 1,544 3,588 4,127 4,061 4,196 4,473 4,842 1,219 1,482 1,381 1,427 1,521 1,646 2,369 2,644 2,680 2,769 2,952 3,196 58.6 71.9 63.0 33.5 24.6 20.9 55.6 63.1 66.2 66.2 65.6 63.7 20.4 48.7 50.1 48.2 45.6 42.1 22.3 22.7 23.2 22.0 22.7 23.3 34.0 35.9 34.0 34.0 34.0 34.0 not tally due to different way of reporting financial nos

Alpesh Mehta ([email protected])

July 2010

78

Results Preview SECTOR: BANKING

South Indian Bank STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 SIB IN

Under Review

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

1,6,12 Rel Perf (%)

YEAR

113.0

52 Week Range (Rs)

184/84 -3/ 12/60

Mcap (Rs b) Mcap (USD b)

Rs165

Previous Recommendation: Under Review

SIBK.BO

18.6 0.4

NET INCOME

PAT

END

(RS M)

(RS M)

EPS

EPS

3/09A

6,872

1,948

17.2

4.6

9.6

1.4

14.8

15.8

1.0

1.5

3/10A

7,768

2,338

20.7

20.0

8.0

1.3

15.4

16.8

1.0

1.3

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/11E

9,060

2,488

22.0

6.4

7.5

1.1

13.0

15.7

0.9

1.1

3/12E

10,760

3,251

28.8

30.7

5.7

1.0

11.1

18.1

0.9

1.0

„

We expect loans to grow by 30% YoY and deposits to grow by 25%+. Reported NII is expected to grow by 4% YoY. But adjusted for technical errors in accounting for interest expenses in 1QFY10 (interest expense was under stated by Rs230m) NII is expected to grow 22% YoY.

„

We expect other income to decline in 1QFY11 due to lower trading gains. Fee income is expected to grow 15% YoY.

„

Reported profits are expected to decline 9% YoY, adjusted for the technical error in accounting for interest expenses (Rs152m post tax) we expect PAT to grow 22% YoY.

„

The stock trades at 1.1x FY11E BV and 1x FY12E BV with RoE of 18-19%. Under Review.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Interest Income Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income % Change (Y-o-Y) Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Expense/Int. Income (%) Other Income/Net Income (%) Cost to Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

4,653 3,128 1,524 48.3 560 2,084 52.1 1,015 1,069 54.1 104 965 364 601 55.6 67.2 26.9 48.7 9.8 37.7

4,689 3,037 1,652 28.5 655 2,307 39.9 968 1,339 44.0 165 1,174 448 726 40.3 64.8 28.4 42.0 12.3 38.2

4,878 3,160 1,718 17.5 431 2,149 11.6 967 1,182 18.0 195 987 363 625 15.2 64.8 20.1 45.0 16.5 36.7

5,138 4,349 789 -46.7 439 1,227 -36.2 711 516 -46.4 -31 547 161 386 -23.2 84.6 35.7 58.0 -6.0 29.4

5,438 3,854 1,584 3.9 456 2,040 -2.1 1,000 1,040 -2.7 210 830 282 548 -8.9 70.9 22.4 49.0 20.2 34.0

5,928 4,239 1,689 10.8 464 2,153 3.3 1,032 1,121 4.9 250 871 296 575 -4.4 71.5 21.5 47.9 22.3 34.0

6,566 4,727 1,840 11.4 490 2,330 1.0 1,069 1,261 -5.8 270 991 337 654 -9.9 72.0 21.0 45.9 21.4 34.0

7,377 5,330 2,047 19.1 491 2,537 18.1 1,138 1,400 18.4 322 1,077 366 711 13.8 72.3 19.3 44.8 23.0 34.0

FY10

FY11E

19,357 13,674 5,683 8.7 2,085 7,768 13.0 3,662 4,106 14.5 433 3,673 1,336 2,338 20.0 70.6 26.8 47.1 10.5 36.4

25,309 18,150 7,159 26.0 1,901 9,060 16.6 4,239 4,821 17.4 1,052 3,769 1,281 2,488 6.4 71.7 21.0 46.8 21.8 34.0

Alpesh Mehta ([email protected])

July 2010

79

Results Preview SECTOR: BANKING

State Bank of India STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 SBIN IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

634.9

1,6,12 Rel Perf (%)

-3/ 2/12

Mcap (Rs b)

1,460.7

NET INCOME

PAT

EPS

CON.EPS

CON.

(RS M)

(RS M)

(RS)

(RS)

P/E (X)

END

52 Week Range (Rs) 2,500/1,512

Mcap (USD b)

Rs2,301

Previous Recommendation: Buy

SBI.BO

31.5

3/09A 335,639

91,212

143.7

172.6

12.7

3/10A 386,396

CON.

CON.

P/BV (X) P/ABV (X)

1.9

2.1

CAR

ROAE

(%)

(%)

(%)

17.1

1.1

14.3

ROAA

91,661

144.4

184.8

11.9

1.7

1.9

13.4

14.8

0.9

3/11E

470,255 113,841

179.3

226.0

9.6

1.4

1.6

12.5

16.2

1.0

3/12E

549,821 143,832

226.5

285.4

7.6

1.2

1.3

11.9

17.9

1.1

* valuation multiples are adjusted for SBI Life

„

We expect loans to grow 19%+ YoY and 3% QoQ. Deposit growth is expected to be calibrated with loan growth. We expect CD ratio to improve sequentially.

„

We expect sharp improvement in margins on a YoY basis. In 1QFY10, on back of excess liquidity in the balance sheet, lag impact of rise in deposits cost and lower pricing power margins were at an abysmally lower level of 2.3%.

„

While we expect margins to decline QoQ due to savings deposits repricing and full impact of CRR hike however; extant of decline is expected to be lower than peers as the bank has used the excess liquidity to fund the loan growth.

„

We expect fee growth of 25% YoY. Overall, we expect other income to grow 12% YoY.

„

Due to strong operating profit of 40% YoY, we conservatively model higher NPA provisions of Rs14b. In 1QFY10 the bank had MTM provisions write back of Rs12b. The trend in the asset quality will be the key factor to watch out for.

„

The stock trades at 1.6x FY11E and 1.3x FY12E consolidated ABV. SBI is our top pick in the sector.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Interest Income 174,728 Interest Expense 124,479 Net Interest Income 50,249 % Change (Y-o-Y) 4.3 Other Income 35,688 Net Income 85,936 Operating Expenses 49,198 Operating Profit 36,739 % Change (Y-o-Y) -7.3 Other Provisions 1,727 Profit before Tax 35,011 Tax Provisions 11,708 Net Profit 23,304 % Change (Y-o-Y) 42.0 Interest Exp/Interest Income (%) 71.2 Other Income/Net Income (%) 41.5 Cost/Income Ratio (%) 57.2 Provisions/Operating Profits (%) 4.7 Tax Rate (%) 33.4 E: MOSL Estimates

177,759 121,671 56,088 2.8 35,252 91,340 42,990 48,350 15.3 10,161 38,190 13,289 24,900 10.2 68.4 38.6 47.1 21.0 34.8

177,797 114,634 63,163 9.7 33,657 96,820 50,639 46,181 3.0 8,566 37,615 12,825 24,791 0.0 64.5 34.8 52.3 18.5 34.1

179,656 112,442 67,214 38.8 45,085 112,300 60,361 51,939 -1.6 23,494 28,445 9,779 18,666 -31.9 62.6 40.1 53.7 45.2 34.4

186,498 121,170 65,328 30.0 40,016 105,344 53,526 51,818 41.0 14,500 37,318 12,688 24,630 5.7 65.0 38.0 50.8 28.0 34.0

200,680 129,196 71,484 27.5 39,026 110,510 53,252 57,258 18.4 14,900 42,358 14,402 27,956 12.3 64.4 35.3 48.2 26.0 34.0

217,380 141,061 76,320 20.8 38,767 115,087 57,649 57,438 24.4 13,100 44,338 15,075 29,263 18.0 64.9 33.7 50.1 22.8 34.0

244,448 157,810 86,638 28.9 52,675 139,314 62,265 77,048 48.3 28,576 48,472 16,481 31,992 71.4 64.6 37.8 44.7 37.1 34.0

FY10

FY11E

709,939 473,225 236,714 13.4 149,682 386,396 203,187 183,209 2.3 43,948 139,261 47,600 91,661 0.5 66.7 38.7 52.6 24.0 34.2

849,006 549,236 299,770 26.6 170,485 470,255 226,693 243,562 32.9 71,076 172,487 58,645 113,841 24.2 64.7 36.3 48.2 29.2 34.0

Alpesh Mehta ([email protected])

July 2010

80

Results Preview SECTOR: BANKING

Union Bank of India STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 UNBK IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs303

REUTERS CODE

S&P CNX: 5,269

UNBK.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

505.1 322/201 -1/ 12/10

Mcap (Rs b) Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

END

153.0 3.3

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

52,961

17,265

34.2

24.5

8.9

2.2

13.3

27.2

1.2

2.2

3/10A

61,672

20,749

41.1

20.2

7.4

1.7

12.5

26.2

1.2

1.9

3/11E

75,901

23,882

47.3

15.1

6.4

1.4

11.7

24.3

1.1

1.5

3/12E

89,581

29,678

58.8

24.3

5.2

1.1

10.9

24.5

1.1

1.2

„

On a lower base, loan growth is expected to be 25%+. We expect flattish sequential loan growth in 1QFY11. We expect deposit growth of ~20%.

„

On a lower base, we expect NII to grow by 55%+ YoY (down ~10% QoQ) led by margin expansion due to deposit repricing and improving CD ratio. In 4QFY10, the bank had higher interest income on investments due to recognition of interest on CDs at the end of the year. We expect margins to decline from an elevated level of 3.4% in 4QFY10 to 3-3.1% in 1QFY11. In 1QFY10, on back of excess liquidity in the balance sheet, margins had fallen to abysmally lower level of 2.3%.

„

We model in core fee income growth of 25% YoY in 1QFY11 due to the bank's increased thrust on scaling up traditional non-fund based revenue. Overall other income is expected to decline by 13% led by lower trading profit.

„

Considering asset quality deterioration in 2HFY10, we estimate higher provision for NPAs compared with previous quarters. Asset quality is expected to deteriorate in 1QFY11.

„

The stock trades at 1.4x FY11E and 1.1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Interest Income 31,753 Interest Expense 23,737 Net Interest Income 8,016 % Change (Y-o-Y) 1.6 Other Income 5,287 Net Income 13,303 Operating Expenses 5,429 Operating Profit 7,875 % Change (Y-o-Y) 27.8 Other Provisions 1,903 Profit before Tax 5,972 Tax Provisions 1,550 Net Profit 4,422 % Change (Y-o-Y) 93.7 Interest Exp/Interest Income (%) 74.8 Other Income/Net Income (%) 39.7 Cost/Income Ratio (%) 40.8 Provisions/Operating Profits (%) 24.2 Tax Rate (%) 26.0 E: MOSL Estimates

32,056 23,420 8,636 -11.2 5,553 14,189 6,086 8,103 15.8 1,350 6,753 1,700 5,053 39.8 73.1 39.1 42.9 16.7 25.2

32,936 22,289 10,647 -5.4 4,648 15,294 6,152 9,142 7.0 1,611 7,531 2,190 5,341 -20.5 67.7 30.4 40.2 17.6 29.1

35,617 21,656 13,961 50.7 4,925 18,887 7,411 11,475 25.9 3,400 8,075 2,140 5,935 27.6 60.8 26.1 39.2 29.6 26.5

36,206 23,479 12,727 58.8 4,584 17,311 6,664 10,647 35.2 3,300 7,347 2,130 5,216 18.0 64.8 26.5 38.5 31.0 29.0

39,558 26,283 13,275 53.7 4,598 17,874 6,819 11,055 36.4 2,800 8,255 2,394 5,861 16.0 66.4 25.7 38.2 25.3 29.0

44,356 29,961 14,395 35.2 4,868 19,263 7,314 11,949 30.7 3,200 8,749 2,537 6,212 16.3 67.5 25.3 38.0 26.8 29.0

51,133 35,779 15,354 10.0 6,099 21,453 7,565 13,888 21.0 4,601 9,287 2,693 6,594 11.1 70.0 28.4 35.3 33.1 29.0

FY10

FY11E

133,027 91,103 41,924 9.9 19,747 61,672 25,078 36,593 18.7 8,264 28,329 7,580 20,749 20.2 68.5 32.0 40.7 22.6 26.8

171,254 115,502 55,751 33.0 20,150 75,901 28,363 47,538 29.9 13,901 33,637 9,755 23,882 15.1 67.4 26.5 37.4 29.2 29.0

Alpesh Mehta ([email protected])

July 2010

81

Results Preview SECTOR: BANKING

Yes Bank STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 YES IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs272

REUTERS CODE

S&P CNX: 5,269

YESB.BO

Equity Shares (m)

YEAR

339.7

52 Week Range (Rs)

300/124

1,6,12 Rel Perf (%)

-4/ -1/72

Mcap (Rs b) Mcap (USD b)

NET INCOME

PAT

(RS M)

(RS M)

END

92.4 2.0

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

CAR

ROAE

ROAA

P/ABV

(X)

(X)

(%)

(%)

(%)

(X)

3/09A

9,462

3,038

10.2

51.3

26.6

5.0

16.6

20.6

1.5

5.1

3/10A

13,635

4,777

14.1

37.5

19.3

3.0

20.6

20.3

1.6

3.0

3/11E

19,008

6,500

19.1

36.1

14.2

2.5

18.6

19.3

1.5

2.5

3/12E

25,085

8,568

25.2

31.8

10.8

2.1

16.1

21.2

1.5

2.1

„

We expect strong loan and deposit growth of 90%+ YoY. We expect NII growth of 45%+ and margins are likely to decline sequentially.

„

Non-interest income is expected to improve YoY due to higher advisory and transaction banking income. Trading profits are expected to be lower YoY. Strong improvement in capital markets and pick up in economic activities augurs well for various streams of fee income and the bank can surprise us positively.

„

GNPA ratio of 27bp and provision coverage ratio of 78% are among the best in the industry. We do not expect higher NPA provisions.

„

The stock trades at P/BV of 2.5x FY11E and 2.1x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

FY11E 3Q

4Q

1Q

2Q

3Q

4Q

10,267 7,080 3,188 51.1 1,944 5,132 1,850 3,282 51.8 600 2,682 925 1,756 39.5 69.0 37.9 36.1 18.3 34.5

12,087 8,632 3,455 41.5 1,943 5,398 1,944 3,454 34.1 690 2,764 954 1,810 29.3 71.4 36.0 36.0 20.0 34.5

Interest Income

5,427

5,269

6,264

6,646

7,439

8,761

Interest Expense Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) Interest Expense/Interest Inc. (%) Other Income/Net Income (%) Cost to Income Ratio (%) Provisions/Operating Profits (%) Tax Rate (%) E: MOSL Estimates

3,789 1,637 44.9 1,452 3,089 1,111 1,978 116.4 455 1,523 522 1,001 84.0 69.8 47.0 36.0 23.0 34.3

3,670 1,600 30.5 1,516 3,115 1,197 1,918 95.8 234 1,684 567 1,117 75.6 69.6 48.7 38.4 12.2 33.7

4,154 2,109 69.5 1,278 3,387 1,226 2,162 17.2 254 1,908 649 1,259 19.0 66.3 37.7 36.2 11.7 34.0

4,204 2,442 62.9 1,601 4,043 1,467 2,576 67.3 426 2,150 750 1,400 74.8 63.3 39.6 36.3 16.5 34.9

5,021 2,418 47.7 1,550 3,968 1,550 2,418 22.3 300 2,118 731 1,387 38.6 67.5 39.1 39.1 12.4 34.5

6,025 2,736 71.1 1,774 4,510 1,650 2,860 49.1 500 2,360 814 1,546 38.4 68.8 39.3 36.6 17.5 34.5

FY10

FY11E

23,697 15,818 7,880 54.7 5,755 13,635 5,002 8,633 63.6 1,368 7,265 2,487 4,777 57.2 66.7 42.2 36.7 15.9 34.2

38,555 26,758 11,797 49.7 7,211 19,008 6,994 12,014 39.2 2,090 9,924 3,424 6,500 36.1 69.4 37.9 36.8 17.4 34.5

Alpesh Mehta ([email protected])

July 2010

82

Results Preview QUARTER ENDING JUNE 2010

Cement BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

Snapshot of 1QFY11 Cement Preview „ Expect volumes to grow 9.1% YoY, but decline 1.9% QoQ „ Expect domestic prices to be flat QoQ (~7% YoY decline) - price recovery in March and April negated by pricing pressure in May and June „ Capacity utilization to fall to 79% (v/s 90% in 1QFY10 and 88% in 4QFY10), impacted by ~50MT capacity added in last one year „ 1QFY11 aggregate EBITDA margin to decline by 710bp YoY (~70bp QoQ improvement) „ Cement prices likely to exhibit high volatility over the next 6-9 months, as seasonality in demand and new capacities impact pricing „ We estimate decline in pace of capacity addition, with ~38MT of capacity addition over 18 months from 3QFY11 as against ~66MT addition over 18 months till 2QFY11 (from 1QFY10 to 2QFY11) „ Cement stocks have underperformed over the last three months on the back of negative short term outlook. Valuations are attractive and offer good entry point for the next upcycle. We prefer companies that are ahead of the curve in adding capacity and where strong cost-saving possibilities exist. We prefer ACC, UltraTech, India Cement, Birla Corp and Shree Cement.

COMPANY NAME

ACC

Ambuja Cements

Birla Corporation

Grasim Industries

India Cements

Shree Cement

UltraTech Cement

CEMENT INDUSTRY DYNAMICS: DEMAND AND PRICE TRENDS

(MT) 52

238

238

250

50.3

49.8

34

44.4

41.6

44.7

(Rs/bag)

252 229

43

YOY QOQ YOY QOQ

46.1

232

232

55.4

54.3

49.0

255 230 205

25 1QFY11

4QFY10

3QFY10

2QFY10

3QFY09

180 2QFY09

1QFY11E 9.1 -1.9 -7.0 Flat FY09 12.1 -5.4 FY10E 10.4 1.7

Avg National Retail Prices (Rs/bag)

1QFY10

PRICES

238

4QFY09

DISPATCHES

(%)

235

1QFY09

CHANGE

Despatches (MT)

Source: CMA/MOSL EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Cement ACC Ambuja Cements Birla Corporation Grasim Industries India Cements Shree Cement Ultratech Cement Sector Aggregate

861 117 362 1,795 109 2,023 933

(RS MILLION)

RECO

SALES JUN.10

Buy Neutral Buy Buy Buy Buy Buy

20,152 20,978 5,478 31,520 9,040 9,138 17,748 114,054

EBITDA

VAR.

VAR.

% YOY

% QOQ

-3.2 13.6 11.7 3.5 -5.2 -0.9 -9.1 1.0

-4.1 5.4 -9.0 -6.5 -6.3 -3.2 -7.0 -4.0

JUN.10

5,887 6,025 1,645 9,152 1,326 3,259 4,483 31,777

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

-19.8 25.6 -6.3 3.4 -53.7 -23.3 -37.5 -14.2

-5.4 5.7 -5.2 1.3 5.2 0.1 11.3 1.7

JUN.10

3,879 4,216 1,287 5,385 277 1,567 2,434 19,045

VAR.

VAR.

% YOY

% QOQ

-20.1 29.9 -17.1 -0.1 -78.7 -46.8 -41.7 -18.9

-4.3 8.8 -6.4 -10.7 -5.8 5841.6 6.5 6.2

Jinesh K Gandhi ([email protected])

July 2010

83

Cement

MOSL CEMENT UNIVERSE: 1QFY11 PERFORMANCE AT A GLANCE VOL (M TON)

GROWTH (%)

REAL (RS/BAG)

1QFY11

YOY

FY11E

ACC Ambuja Cement Grasim UltraTech

5.4 5.6 5.3 5.3

-1.3 15.1 7.8 -0.8

Birla Corp India Cement Shree Cement Industry

1.5 2.8 2.6 54.3

19.7 11.7 0.1 9.1

CHANGE (%)

4QFY10

YOY

QOQ

FY11E

3.0 12.2 9.5 7.1

188 191 169 168

-1.9 -1.3 -7.8 -8.4

0.0 0.0 0.0 0.5

-1.7 -2.3 -7.7 -8.1

11.0 11.9 8.8 12.1

173 156 166 232

-6.7 -16.4 -4.4 -7.0

0.0 -6.8 0.0 -6.7 -0.9 -5.0 0.0 -7.1 Source: CMA/MOSL

Volumes to grow by 9.1% in 1QFY11 We expect cement dispatches to grow 9.1% YoY in 1QFY11. There has been slowdown in the momentum of dispatches since February 2010. Demand growth has been impacted due to continuous slowdown in southern region, especially Andhra Pradesh. The organized real-estate segment is witnessing gradual recovery. Increase in launch of new housing projects would drive cement consumption with a lag of 6-9 months. DEMAND TO GROW AT 10.6% IN FY10

Despatches (MT)

Grow th (%) 12.2%

44.7

9.1%

55.4

54.3

1QFY11

41.6

10.0%

49.0

3QFY10

44.4

46.1

2QFY10

40.9

49.8

1QFY10

38.8

50.3

4QFY09

41.6

46.1

3QFY09

6.8%

6.3%

1QFY09

10.4 9.1 12.1

4QFY08

GROWTH (%)

3QFY08

MT

200 54.3 224.6

1QFY08

FY10 1QFY11 FY11E

2QFY08

PERIOD

7.6%

9.4%

9.2%

9.3% 7.4%

2QFY09

9.2%

4QFY10

10.8%

10.7%

Source: CMA/MOSL

CAP UTILIZATION

%

FY08 FY09 FY10 1QFY11E FY11E

99 92 86 79 84

Seasonality and new capacity addition suppress capacity utilization to 79% Capacity utilization for 1QFY11 is likely to be 79% (v/s 90% in 1QFY10 and 88% in 4QFY10), impacted by new capacity additions (~50MT in TTM) and slowdown in demand momentum. Capacity utilization for the industry is expected to ease from ~92% in FY09 to ~84% in FY11, on the back of further 50-55MT capacity addition over the next two years. Prices under pressure; expect volatility to prevail till 3QFY11 We expect domestic cement prices to remain flat QoQ (~7% YoY decline) - price recovery in March and April is negated by pricing pressure in May and June. Cement prices are likely to exhibit high volatility over next 6-9 months, as seasonality in demand and new capacities impact pricing. Prices are likely to remain under pressure at least till September 2010. We factor in Rs10/bag QoQ decline in 2QFY11, flat prices in 3QFY11 and recovery of Rs5/bag QoQ in 4QFY11, translating into ~Rs12/bag decline in FY11.

July 2010

84

Cement

CEMENT PRICES UNDER PRESSURE SINCE MAY 2010

6.4% 3.0%

2.6% -3.8%

235

238

1QFY09

2QFY09

250 238

232

232

3QFY10

2QFY10

1QFY10

229

4QFY09

-7.2%

252

238

3QFY09

-2.5%

1QFY11

3.5%

5.9%

4QFY10

4.4%

Source: CMA/MOSL TREND IN 1QFY11 KEY OPERATING PARAMETERS VOLUME (M TON) 1QFY11

ACC Birla Corp Grasim Ambuja Cement India Cement Shree Cement UltraTech Sector Aggregate

5.4 5.6 5.3 5.3 1.5 2.8 2.6 28.2

YOY

QOQ

(%)

(%)

-1.3 15.1 7.8 -0.8 19.7 11.7 0.1 5.7

-4.1 5.4 -1.3 -7.5 -12.4 -6.8 -4.4 -3.3

REALIZATION (RS/TON) 1QFY11

188 189 169 168 173 156 166 175

YOY

QOQ

(RS/T)

(RS/T)

-3.7 -2.6 -14.3 -15.4 -12.4 -30.5 -7.7 -11.0

0.0 0.0 0.0 0.9 0.0 0.0 -1.5 0.4

EBITDA (RS/TON) 1QFY11

YOY

QOQ

(RS/T)

(RS/T)

55 -12.7 -0.7 54 4.5 0.1 53 -21.0 -5.0 43 -24.9 7.2 57 -19.6 -2.5 24 -34.1 2.8 58 -20.1 1.2 50 -16.5 0.8 Source: CMA/MOSL

TREND IN 1QFY11 KEY FINANCIAL PARAMETERS NET SALES (RS M) 1QFY11

EBITDA MARGIN (%)

YOY

QOQ

(%)

(%)

1QFY11

ACC 20,152 -3.2 -4.1 29.2 Birla Corp 20,978 13.6 5.4 28.7 Grasim* 22,111 3.1 -3.7 25.9 Ambuja Cement 17,748 -9.1 -7.0 25.3 India Cement 5,478 11.7 -9.0 30.0 Shree Cement 9,040 -5.2 -6.3 14.7 UltraTech 9,138 -0.9 -3.2 35.7 Sector Aggregate* 104,645 0.7 -3.2 27.1 * Grasim's sales and EBITDA Margin for cement business

NET PROFIT (RS M)

YOY

QOQ

(BP)

(BP)

1QFY11

YOY

QOQ

(%)

(%)

-600 -40 3,879 -20.1 -4.3 280 10 4,216 29.9 8.8 -860 -190 5,385 -0.1 -10.7 -1,140 420 2,434 -41.7 6.5 -580 120 1,287 -17.1 -6.4 -1,540 160 277 -78.7 -5.8 -1,040 120 1,567 -46.8 5,841.6 -710 70 13,660 -24.5 14.7 only; Sector PAT excl Grasim Source: CMA/MOSL

Revising estimates We are revising our FY11 earnings estimates to factor in the current pricing environment. Our estimates factor in flat prices QoQ in 1QFY11, and ~Rs4/bag increase in FY11 (over FY10 average). We are downgrading our FY11 earnings estimates by 1-34%, with the highest downgrade for UltraTech (~15%) and India Cement (~34%) due to very high sensitivity to cement prices.

July 2010

85

Cement

REVISING ESTIMATES FY11E

ACC Ambuja Cement Grasim UltraTech Birla Corp India Cement Shree Cement

FY12E

REV

OLD

CHG (%)

REV

OLD

75.5 8.5 255.5 63.0 62.5 4.8 200.4

76.5 8.7 276.7 74.1 65.9 7.3 214.1

-1.2 -2.1 -7.7 -14.9 -5.0 -34.4 -6.4

82.9 9.1 283.6 73.0 64.1 7.7 216.2

83.5 9.3 305.4 84.8 65.1 9.0 229.2

CHG (%)

-0.6 -2.3 -7.1 -13.9 -1.6 -13.8 -5.7 Source: MOSL

Valuation and view Short-term outlook is negative based on seasonally low demand and impact of new capacities. News flow on pricing is likely to be negative. We expect cement prices to remain under pressure in 2HCY10. However, presence of sustainable demand drivers and expected gradual recovery in utilization from 3QFY11 would create the foundation for the next upcycle.

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt Cement Index

106 98

We prefer companies that are ahead of the curve in adding capacity, and where strong cost-saving possibilities exist. Among large cap stocks, ACC and UltraTech remain our top picks; we prefer India Cement, Birla Corp and Shree Cement among mid-caps. VALUATIONS - ATTRACTIVE DESPITE RECENT RUN UP (FY12)

90 82 74

UltraTech, (17%, $111)

Jun-10

May-10

$105

RELATIVE PERFORMANCE - 1YR (%)

M OSt Cement Index Sensex

140

EV (US$/Ton)

Apr-10

Mar-10

$140

Replacement Cost at US$110/ton

Shree, (18%, $79)

$70

ACC, (20%, $89)

India Cement, (6%, $70)

Grasim, (14%, $37) Birla Corp, (19%, $49)

$35

125 110 95

$0 0%

6%

12%

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

80

Ambuja, (18%, $125)

18%

24%

RoE (%)

Source: MOSL

CMP (RS)

RECO

25.06.10

Cement ACC 861 Ambuja Cements 117 Birla Corporation 362 Grasim Industries 1,795 India Cements 109 Kesoram Ind 318 Shree Cement 2,023 Ultratech Cement 933 Sector Aggregate

July 2010

Buy Neutral Buy Buy Buy Buy Buy Buy

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

86.7 7.8 72.4 331.1 10.9 54.2 203.7 87.8

75.5 8.5 62.5 255.5 4.8 61.7 200.4 63.0

82.9 9.1 64.1 283.6 7.7 78.1 216.2 73.0

9.9 15.0 5.0 5.4 10.0 5.9 9.9 10.6 10.3

11.4 13.8 5.8 7.0 22.7 5.2 10.1 14.8 10.8

10.4 12.9 5.6 6.3 14.1 4.1 9.4 12.8 9.7

5.9 8.8 2.6 2.6 6.5 4.6 5.8 13.2 5.7

6.1 8.4 2.3 2.3 9.2 4.3 6.1 7.7 5.4

5.2 7.2 3.0 1.6 6.6 3.5 4.8 6.6 4.5

29.8 19.6 31.1 23.2 8.3 17.2 46.6 23.7 21.8

22.0 18.9 21.8 15.0 3.4 16.9 32.4 21.9 16.1

19.7 18.0 18.7 14.7 5.3 18.2 26.7 16.6 15.7

86

Results Preview SECTOR: CEMENT

ACC STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 ACC IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs861

REUTERS CODE

S&P CNX: 5,269

ACC.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

YEAR

187.9

NET SALES

PAT

(RS M)

(RS M)

END

1,017/686 -7/ -1/-12 161.8 3.5

EPS*

EPS

P/E

P/BV

ROE

ROCE

EV/

EV/TON

(X)

(X)

(%)

(%)

EBITDA

(US$)

-7.9

14.9

3.3

26.0

27.3

8.7

139

(RS) GROWTH (%)

12/08A 72,829

11,787

62.7

12/09A 80,272

16,292

86.7

38.2

10.3

2.7

29.8

33.7

5.9

120

12/10E 81,244

14,193

75.5

-12.9

11.7

2.3

22.0

23.8

6.1

94

12/11E

15,586

82.9

9.8

10.4

2.0

19.7

22.6

5.2

88

91,026

„

We expect dispatches to decline 1.3% YoY (~4.1% QoQ) to 5.35MT in 2QCY10, as ACC continues to face capacity constraints. Average realizations are likely to decline 1.9% YoY (flat QoQ) to Rs3,767/ton.

„

Net sales would de-grow by 3.2% YoY to Rs20.15b. EBITDA margins are likely to decline by 610bp YoY (~40bp QoQ decline) to 29.2%, impacted by lower realizations. As a result, we expect EBITDA to decline 20% YoY (~5% QoQ) to Rs5.9b and PAT to decline 19% YoY to Rs3.9b.

„

Ramp-up of the recently commissioned capacity at Orissa (~1.2MT) and Karnataka (~3MT) will drive volume growth in 2HCY10. Also, 3MT capacity expansion at Maharashtra is likely to be operational by 3QCY10, further aiding volumes.

„

We are downgrading our EPS estimates by 1.2% for CY10 to Rs75.5 and by 0.6% for CY11 to Rs82.9. Valuations at 11.7x CY10E EPS and an EV of 6.1x CY10E EBITDA appear rich. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E DECEMBER

Cement Sales (m ton) YoY Change (%) Cement Realization YoY Change (%) QoQ Change (%) Net Sales YoY Change (%) EBITDA Margins (%) Depreciation Interest Other Income PBT Tax Rate (%) Reported PAT Adjusted PAT Margins (%) YoY Change (%) E: MOSL Estimates

CY09

CY10

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

5.73 6.1 3,587 7.9 2.5 20,551 14.4 6,474 31.5 789 368 508 5,825 1,777 30.5 4,048 4,048 19.7 22.2

5.42 2.4 3,840 13.8 7.1 20,813 16.5 7,337 35.3 784 159 570 6,963 2,107 30.3 4,856 4,856 23.3 84.7

5.01 3.1 3,931 10.1 2.4 19,694 10.0 6,679 33.9 796 135 509 6,257 1,900 30.4 4,356 4,356 22.1 53.7

5.36 -1.8 3,585 2.4 -8.8 19,215 0.6 4,307 22.4 1,052 -44 825 4,123 1,092 26.5 3,031 3,031 15.8 -9.4

5.58 -2.6 3,767 5.0 5.1 21,018 2.3 6,222 29.6 935 127 609 5,769 1,717 29.8 4,051 4,051 19.3 0.1

5.35 -1.3 3,767 -1.9 0.0 20,152 -3.2 5,887 29.2 1,050 135 800 5,502 1,623 29.5 3,879 3,879 19.2 -20.1

5.40 7.8 3,567 -9.3 -5.3 19,260 -2.2 4,420 23.0 1,150 150 650 3,770 1,112 29.5 2,658 2,658 13.8 -39.0

5.84 8.9 3,567 -0.5 0.0 20,814 8.3 5,378 25.8 1,174 154 1,041 5,091 1,486 29.2 3,605 3,605 17.3 18.9

CY09

CY10E

21.5 2.4 3,730 7.6

22.2 3.0 3,665 -1.7

80,272 10.2 24,797 30.9 3,421 619 2,411 23,168 6,877 29.7 16,292 16,292 20.3 38.2

81,244 1.2 21,908 27.0 4,309 567 3,100 20,132 5,939 29.5 14,193 14,193 17.5 -12.9

Jinesh K Gandhi ([email protected])

July 2010

87

Results Preview SECTOR: CEMENT

Ambuja Cements STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 ACEM IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs117

Previous Recommendation: Neutral

GACM.BO

YEAR

1,523.7

NET SALES

PAT

(RS M)

(RS M)

END

126/82 2/ 17/11 178.7 3.9

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

EV/

EV/TON

(X)

(X)

(%)

(%)

EBITDA

(US$)

12/08A 62,203

11,616

7.6

-11.2

15.4

3.2

22.6

31.5

9.6

194

12/09A 70,769

11,872

7.8

2.1

15.0

2.8

19.6

28.4

8.8

142

12/10E 77,596

12,976

8.5

9.3

13.8

2.5

18.9

25.9

8.4

133

12/11E

13,876

9.1

6.9

12.9

2.2

18.0

24.7

7.2

125

88,372

„

We expect dispatches to grow 15% YoY (~5% QoQ) to 5.56MT and average realizations to decline 1.3% YoY (flat QoQ) to Rs3,776/ton. Volume growth would be driven by recently commissioned new capacities.

„

Net sales are likely to grow 13.6% YoY to Rs21b. We expect EBITDA margin to expand 270bp YoY (~10bp QoQ) to 28.7%, benefiting from lower reliance on purchased clinker. EBITDA is likely to grow 26% YoY (~6% QoQ) to Rs6b, whereas recurring PAT is estimated to grow 30% YoY (~9% QoQ) to Rs4.2b.

„

„

Ambuja would benefit from commissioning of new capacities at Chattisgarh (~2.2MT by end-2QCY10) and Himachal Pradesh (~2.2MT in 1QCY09), which will not only drive volume growth but also profitability (due to lower reliance on purchased clinker). We are downgrading our EPS estimates by 2.1% for CY10 to Rs8.5 and by 2.3% for CY11 to Rs9.1. Valuations at 13.8x CY10E earnings and an EV of 8.4x CY10E EBITDA are a fair reflection of business fundamentals. Maintain Neutral.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E DECEMBER

Sales Volume (m ton) YoY Change (%) Realization (Rs/ton) YoY Change (%) QoQ Change (%) Net Sales YoY Change (%) EBITDA Margins (%) Depreciation Interest Other Income PBT before EO Item Extraordinary Inc/(Exp) PBT after EO Exp/(Inc) Tax Rate (%) Reported Profit Adj PAT YoY Change (%)

CY09

CY10

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

5.10 6.3 3,619 5.0 5.0 18,456 11.5 5,228 28.3 686 52 416 4,905 0 4,905 1,565 31.9 3,341 3,341 1.2

4.83 10.3 3,828 7.1 5.8 18,474 18.2 4,797 26.0 704 52 692 4,732 0 4,732 1,486 31.4 3,247 3,247 6.7

4.10 4.6 3,929 11.1 2.6 16,110 16.2 4,300 26.7 719 52 433 3,962 462 4,423 1,238 28.0 3,185 2,852 21.3

4.77 1.5 3,714 7.7 -5.5 17,729 9.3 4,344 24.5 860 68 556 3,972 0 3,972 1,560 39.3 2,412 2,412 -17.4

5.27 3.3 3,776 4.4 1.7 19,902 7.8 5,701 28.6 767 108 546 5,372 726 6,098 1,476 24.2 4,622 3,874 16.0

5.56 15.1 3,776 -1.3 0.0 20,978 13.6 6,025 28.7 900 80 800 5,845 0 5,845 1,724 29.5 4,121 4,216 29.9

4.80 17.1 3,576 -9.0 -5.3 17,167 6.6 3,648 21.2 1,025 75 500 3,048 0 3,048 899 29.5 2,149 2,198 -22.9

5.47 14.5 3,576 -3.7 0.0 19,550 10.3 4,292 22.0 1,145 75 654 3,726 0 3,726 1,118 30.0 2,608 2,687 11.4

CY09

CY10E

18.80 5.6 3,764 7.7

21.09 12.2 3,679 -2.3

70,769 259.6 18,669 26.4 2,970 224 2,097 17,571 462 18,033 5,849 32.4 12,184 11,872 2.2

77,596 197.7 19,666 25.3 3,837 338 2,500 17,991 726 18,717 5,217 27.9 13,500 12,976 9.3

E: MOSL Estimates Jinesh K Gandhi ([email protected])

July 2010

88

Results Preview SECTOR: CEMENT

Birla Corporation STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 BJUT IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs362

REUTERS CODE

S&P CNX: 5,269

BRLC.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

77.0

-5/ 15/68

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

422/187

27.9 0.6

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

EV/

EV/TON

(X)

(X)

(%)

(%)

EBITDA

(US$)

03/09A 17,907

3,235

42.0

-17.8

8.6

2.2

25.1

27.9

5.1

82

03/10A 21,570

5,572

72.4

72.2

5.0

1.6

31.1

34.6

2.6

53

03/11E

22,290

4,815

62.5

-13.6

5.8

1.3

21.8

28.1

2.3

42

03/12E 24,843

4,938

64.1

2.6

5.6

1.1

18.7

24.2

3.0

49

„

During 1QFY11, we expect Birla Corporation's revenues to grow 11.7% YoY to Rs5.48b. Volumes are likely to grow 20% YoY (~12% QoQ decline) to 1.45MT, whereas cement realizations are likely to decline 6.7% YoY (flat QoQ) to Rs3,468/ton.

„

Lower realizations would translate into 580bp YoY (~120bp QoQ) improvement in EBITDA margin to 30%. As a result, EBITDA is likely to grow 6% YoY (~5% QoQ) to Rs1.65b, translating into 17% YoY decline in PAT to Rs1.29b.

„

Birla Corp's volume growth would pick up from 2QFY11, as its brownfield expansion (~1.5MT) in Madhya Pradesh is expected to commission from April 2010.

„

We are downgrading our EPS estimates by 5% for FY11 to Rs62.5 and by 1.6% for FY12 to Rs64.1. The stock trades at 5.8x FY11E and 5.6x FY12E EPS - at a discount to comparable peers. We believe the discount is not justified and valuations, based on earnings as well as replacement cost, are compelling. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Cement Sales (m ton) YoY Change (%) Cement Realization YoY Change (%) QoQ Change (%) Net Sales YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest Other Income Profit before Tax Tax Rate (%) Adjusted PAT Margins (%) YoY Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1.21 1.8 3,717 20.0 14.0 4,904 23.9 3,148 1,756 35.8 133 60 519 2,082 528 25.4 1,553 31.7 69.2

1.22 9.9 3,813 23.7 2.6 5,057 36.0 3,122 1,935 38.3 137 64 249 1,983 463 23.3 1,521 30.1 154.7

1.50 7.0 3,448 17.6 -9.6 5,589 23.6 3,964 1,624 29.1 144 60 215 1,636 513 31.4 1,123 20.1 38.0

1.66 3.6 3,468 6.4 0.6 6,020 5.5 4,284 1,736 28.8 143 86 400 1,907 532 27.9 1,375 22.8 52.2

1.45 19.7 3,468 -6.7 0.0 5,478 11.7 3,833 1,645 30.0 145 75 350 1,775 488 27.5 1,287 23.5 -17.1

1.30 6.4 3,268 -14.3 -5.8 4,628 -8.5 3,360 1,268 27.4 165 80 250 1,273 350 27.5 923 19.9 -39.3

1.60 6.8 3,268 -5.2 0.0 5,609 0.4 4,153 1,456 26.0 170 82 200 1,404 386 27.5 1,018 18.1 -9.4

1.85 11.8 3,376 -2.7 3.3 6,575 9.2 4,565 2,010 30.6 173 83 435 2,189 602 27.5 1,587 24.1 15.4

FY10

FY11E

5.59 5.6 3,592 15.7

6.20 11.0 3,347 -6.8

21,570 20.5 14,519 7,051 32.7 556 270 1,383 7,608 2,036 26.8 5,572 25.8 72.2

22,290 3.3 15,911 6,380 28.6 653 320 1,235 6,642 1,826 27.5 4,815 21.6 -13.6

Jinesh K Gandhi ([email protected])

July 2010

89

Results Preview SECTOR: CEMENT

Grasim Industries STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 GRASIM IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

91.7

52 Week Range (Rs) 2,952/1,741 1,6,12 Rel Perf (%)

-32/ -27/-46

Mcap (Rs b) Mcap (USD b)

Rs1,795

Previous Recommendation: Buy

GRAS.BO

164.6 3.5

YEAR

NET SALES

PAT

END*

(RS M)

(RS M)

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

EV/

EV/TON

(X)

(X)

(%)

(%)

EBITDA

(US$)

03/09A 184,039

21,867

238.5

-18.9

7.5

1.4

21.1

20.7

4.8

87

03/10A 203,789

30,355

331.1

38.8

5.4

1.1

23.2

24.4

2.6

41

03/11E* 212,965

23,426

255.5

-22.8

7.0

1.0

15.0

19.1

2.3

31

03/12E* 238,035

26,004

283.6

11.0

6.3

0.9

14.7

19.4

1.6

36

* Consolidated; Demerger of cement business assumed w.e.f 1 April 2010

„

We expect Grasim (standalone) to post sales growth of 3.5% YoY to Rs31.5b in 1QFY11 despite hive-off of sponge iron business with effect from 22 May 2009. However, strong momentum in VSF would be negated by pressure on margins in cement business, translating into flat margins YoY (~220bp YoY improvement). Higher depreciation and interest cost would restrict PAT to Rs5.39b - flat YoY. „ Cement volumes are likely to grow 7.8% YoY (~1% QoQ) to 5.26MT. However, 7.8% YoY decline (flat QoQ) in realizations to Rs3,378/ton would translate into 860bp YoY (~180bp QoQ) decline in PBIDT margins to 25.9%. „ VSF business production would be impacted by suspension of operations at Nagda plant from 4 June 2010 due to water shortage. VSF volumes are likely to grow 6.8% YoY and realizations would increase 15.5% YoY (~1% QoQ) to Rs113/kg. Higher realizations would dilute cost inflation in pulp and sulphur. Operating margins for the VSF business are likely to improve by 810bp YoY (~100bp QoQ) to 35.8%. „ We are downgrading our EPS estimates by 7.7% to Rs255.5 for FY11 and by 7.1% to Rs283.6 for FY12. The stock is quoting at very attractive valuations of 9.8x FY11E consolidated EPS, 1.4x FY11E BV and an EV of 3.2x FY11E EBITDA. Implied valuation of cement business is US$60/ton. Maintain Buy. QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Net Sales YoY Change (%) EBITDA Margins (%) Depreciation Interest Other Income PBT before EO Items Extraordinary Inc/(Exp) PBT after EO Items Tax Rate (%) Reported PAT Adj. PAT YoY Change (%) VSF Business Snapshot Volume (ton) YoY Change (%) Realization (Rs/ton) YoY Change (%) PBIDT PBIDT Margin (%) E: MOSL Estimates

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

30,453 18.1 8,853 29.1 1,370 475 620 7,628 3,447 11,075 2,322 21.0 8,752 5,392 4.9

29,838 11.0 10,162 34.1 1,359 505 1,432 9,729 0 9,729 2,986 30.7 6,743 6,743 60.7

30,519 14.8 9,860 32.3 1,424 504 888 8,820 0 8,820 2,861 32.4 5,959 5,959 80.8

33,702 16.4 9,031 26.8 1,490 590 1,329 8,280 0 8,280 2,250 27.2 6,030 6,030 56.7

31,520 3.5 9,152 29.0 1,515 605 500 7,532 0 7,532 2,147 28.5 5,385 5,385 -0.1

30,707 2.9 7,988 26.0 1,560 595 1,500 7,333 0 7,333 2,090 28.5 5,243 5,243 -22.2

32,318 5.9 8,658 26.8 1,580 585 1,200 7,693 0 7,693 2,193 28.5 5,501 5,501 -7.7

35,054 4.0 10,457 29.8 1,611 579 1,550 9,817 0 9,817 2,798 28.5 7,019 7,019 16.4

124,627 15.1 37,921 30.4 5,643 2,075 4,253 34,456 3,447 37,903 10,420 27.5 27,483 24,123 46.3

129,600 4.0 36,254 28.0 6,266 2,364 4,750 32,375 3,447 35,822 9,227 25.8 26,595 23,235 -3.7

67,418 18.8 97,543 -4.3 1,981 27.7

73,993 18.3 105,217 3.4 3,548 41.8

81,306 51.2 109,600 13.4 4,037 41.9

85,714 31.0 111,644 28.7 3,632 34.8

72,000 6.8 112,644 15.5 3,230 35.8

80,000 8.1 109,644 4.2 3,323 34.1

85,000 4.5 107,144 -2.2 3,431 33.9

88,626 3.4 107,238 -3.9 3,442 33.9

302,092 26.7 106,481 10.2 13,215 37.0

325,626 7.8 109,000 2.4 13,425 34.4

Jinesh K Gandhi ([email protected])

July 2010

90

Results Preview SECTOR: CEMENT

India Cements STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 ICEM IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs109

REUTERS CODE

S&P CNX: 5,269

ICMN.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

307.2 156/97 -10/ -10/-45

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

33.5 0.7

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

EV/

EV/TON

(X)

(X)

(%)

(%)

EBITDA

(US$)

03/09A 34,268

4,851

17.7

-27.3

6.1

0.8

15.7

16.8

4.9

76

03/10A 37,713

3,253

10.9

-38.5

10.0

0.8

8.3

10.4

6.4

82

03/11E

39,565

1,431

4.8

-56.0

22.7

0.8

3.4

5.5

9.0

73

03/12E 47,502

2,308

7.7

61.4

14.1

0.7

5.3

7.7

6.5

70

„

We expect India Cement to report 5% YoY sales de-growth to Rs9b, impacted by 16.4% YoY decline in realizations (flat QoQ) to Rs3,125/ton. However, volumes would grow 11.7% YoY (~7% QoQ decline) to 2.75MT. We estimate revenues of Rs300m from IPL.

„

Higher contribution from IPL would translate into EBITDA margin improvement of 160bp QoQ (~15.3pp YoY decline) to 14.7%. EBITDA is likely to decline 54% YoY (~5% QoQ growth) to Rs1.32b. This coupled with higher depreciation and tax provisioning would result in 79% YoY decline in PAT to Rs277m.

„

The operating environment for India Cement has deteriorated further, with severe pricing pressure in its key markets of South India, impacted by new capacities and muted demand.

„

We are downgrading our EPS estimates by 34% to Rs4.8 for FY11 and by 14% to Rs7.7 for FY12. The stock quotes at 22.7x FY11E EPS and an EV of 9x FY11E EBITDA - valuations are attractive. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Dispatches (m ton) YoY Change (%) Realization (Rs/ton) YoY Change (%) QoQ Change (%) Net Sales YoY Change (%) EBITDA Margins (%) Depreciation Interest Other Income PBT before EO Expense Extra-Ord Expense PBT Tax Rate (%) Reported PAT Adj PAT YoY Change (%) Margins (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2.46 3.9 3,736 8.6 0.2 9,535 13.9 2,863 30.0 571 385 68 1,976 -210 2,186 745 34.1 1,441 1,302 -16.7 13.7

2.79 15.0 3,438 -4.1 -8.0 9,894 4.6 2,977 30.1 572 374 55 2,086 13 2,074 704 34.0 1,369 1,378 -10.9 13.9

2.76 38.1 3,028 -16.6 -11.9 8,641 14.8 1,165 13.5 573 299 119 412 -117 528 180 34.1 348 271 -61.3 3.1

2.95 27.0 3,125 -16.2 3.2 9,643 8.5 1,260 13.1 616 369 129 404 -122 526 143 27.1 383 294 -71.8 3.1

2.75 11.7 3,125 -16.4 0.0 9,040 -5.2 1,326 14.7 620 370 75 411 0 411 134 32.5 277 277 -78.7 3.1

3.10 11.1 2,925 -14.9 -6.4 9,351 -5.5 936 10.0 635 375 60 -14 0 -14 -5 32.5 -10 -10 -100.7 -0.1

3.00 8.7 2,925 -3.4 0.0 9,204 6.5 1,014 11.0 660 380 130 104 0 104 34 32.5 70 70 -74.2 0.8

3.42 15.7 3,125 0.0 6.8 11,971 24.1 2,596 21.7 678 414 115 1,619 0 1,619 526 32.5 1,093 1,093 271.4 9.1

FY10

FY11E

10.96 20.2 3,304 -8.1

12.27 11.9 3,083 -6.7

37,713 10.1 8,266 21.9 2,331 1,426 370 4,878 -436 5,313 1,770 33.3 3,543 3,253 -32.9 8.6

39,565 4.9 5,871 14.8 2,593 1,539 380 2,120 0 2,120 689 32.5 1,431 1,431 -56.0 3.6

Jinesh K Gandhi ([email protected])

July 2010

91

Results Preview SECTOR: CEMENT

Shree Cement STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 SRCM IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs)

YEAR

34.8

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

2542/1140

1,6,12 Rel Perf (%)

Rs2,023

Previous Recommendation: Buy

SHCM.BO

-5/ 6/51 70.5 1.5

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

EV/

EV/TON

(X)

(X)

(%)

(%)

EBITDA

(US$)

03/09A 27,106

5,983

171.7

107.8

11.8

5.8

63.6

35.0

7.6

173

03/10A 36,321

7,097

203.7

18.6

9.9

3.8

46.6

31.9

4.8

101

03/11E

41,014

6,982

200.4

-1.6

10.1

2.8

32.4

23.3

5.0

93

03/12E 51,130

7,532

216.2

7.9

9.4

2.2

26.7

22.8

3.9

79

„

We expect sales to decline 1% YoY to Rs9.14b in 1QFY11, driven by 83% YoY growth in merchant power revenues. Cement volumes are likely to remain muted at 2.55MT, while realizations should decline 4.4% YoY (~1% QoQ) to Rs3,325/ton. We estimate surplus power sales of Rs660m (110m units).

„

Higher merchant power sales coupled with stable cement business profitability would result in margin improvement of 120bp QoQ (~10.4pp YoY decline) to 35.7%. Cement business EBITDA/ton is likely to decline 26% YoY (flat QoQ) to Rs1,157/ton.

„

We expect depreciation to increase to ~Rs1.6b, as new 50MW power plant is capitalized during the quarter. As a result, recurring PAT would de-grow 46.8% YoY to Rs1.57b.

„

We are downgrading our EPS estimates by 6.4% to Rs200.4 for FY11 and by 5.7% to Rs216.2 for FY12. The stock trades at attractive valuations of 10.1x FY11E EPS and an EV of 5x FY11E EBITDA. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Sales Dispatches (m ton) YoY Change (%) Realization (Rs/ton) YoY Change (%) QoQ Change (%) Net Sales YoY Change (%) EBITDA

2.55 32.8 3,479 8.7 10.2 9,224 50.2 4,250

2.48 23.1 3,447 13.0 -0.9 8,996 43.2

2.56 21.7 3,205 5.2 -7.0 8,660 30.3

2.67 10.8 3,355 6.2 4.7 9,440 17.2

2.55 0.1 3,325 -4.4 -0.9 9,138 -0.9

2.60 4.8 3,125 -9.4 -6.0 9,274 3.1

2.85 11.2 3,125 -2.5 0.0 10,500 21.2

3.15 18.1 3,242 -3.4 3.7 12,101 28.2

10.25 21.3 3,373 8.4

11.15 8.8 3,203 -5.0

36,321 34.0

41,014 12.9

Margins (%) Depreciation Interest Other Income PBT before EO Exp Extra-Ord Expense PBT Tax Rate (%) Reported PAT Adj PAT YoY Change (%) Margins (%)

46.1 973 152 473 3,599 42 3,557 645 18.1 2,911 2,946 153.0 31.9

4,082 45.4 998 155 316 3,245 29 3,215 326 10.1 2,889 2,915 153.2 32.4

3,353 38.7 947 115 160 2,451 14 2,436 762 31.3 1,674 1,684 31.8 19.4

3,255 34.5 2,786 662 212 20 549 -529 185 -34.9 -714 26 -98.9 0.3

3,259 35.7 1,600 220 520 1,959 22 1,937 387 20.0 1,549 1,567 -46.8 17.1

2,941 31.7 1,500 225 300 1,516 15 1,501 300 20.0 1,201 1,213 -58.4 13.1

3,518 33.5 1,450 235 200 2,033 15 2,018 404 20.0 1,615 1,627 -3.4 15.5

4,526 37.4 1,503 230 425 3,219 18 3,201 654 20.4 2,547 2,561 9611.5 21.2

15,025 41.4 5,704 1,291 1,284 9,313 634 8,679 1,918 22.1 6,761 7,097 18.6 19.5

14,245 34.7 6,053 910 1,445 8,727 70 8,657 1,745 20.2 6,912 6,968 -1.8 17.0

E:MOSL Estimates Jinesh K Gandhi ([email protected])

July 2010

92

Results Preview SECTOR: CEMENT

UltraTech Cement STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 UTCEM IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs933

REUTERS CODE

S&P CNX: 5,269

ULTC.BO

Equity Shares (m) 52 Week Range (Rs)

YEAR

274.2 1,172/656

1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

-9/ 3/9 255.9 5.5

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

EV/

EV/TON

(X)

(X)

(%)

(%)

EBITDA

(US$)

03/09A

63,831

9,770

78.5

-3.0

11.9

3.2

31.0

29.2

15.9

118

03/10A

70,497

10,932

87.8

11.9

10.6

2.5

26.6

28.2

13.2

112

03/11E *

158,415

17,287

63.0

-28.2

14.8

2.3

15.5

19.9

7.7

121

03/12E *

179,502

20,025

73.0

15.8

12.8

2.0

16.6

21.6

6.5

109

* Consolidated; Merger of cement business assumed w.e.f 1 April 2010

„

We expect net sales (standalone) to decline 9% YoY to Rs17.7b, impacted by 1% YoY volume de-growth to 5.27MT and 10.2% YoY decline (flat QoQ) in realizations to Rs3,174/ton. RMC business revenues are likely to grow 36% YoY to Rs1b.

„

Decline in realizations would drive 11.4pp YoY decline (~420bp YoY improvement) in EBITDA margin to 25.3%. EBITDA is likely to decline 37% YoY (~11% YoY growth) to Rs4.5b. PAT would decline 42% YoY to Rs2.4b.

„

Post merger of Grasim's cement assets into UltraTech (by 2QFY11), UltraTech would become the largest cement company in India and the 10th largest in the world, with 49.4MT capacity.

„

We are downgrading our EPS estimates (post-merger) by 14.9% to Rs63 for FY11 and by 13.9% to Rs73 for FY12. The stock trades at 14.8x FY11E EPS and an EV of 7.7x FY11E EBITDA. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales (m ton) YoY Change (%) Realization (Rs/ton) YoY Change (%) QoQ Change (%) Net Sales YoY Change (%) EBITDA Margins (%) Depreciation Interest Other Income PBT after EO Expense Tax Rate (%) Reported PAT Adj PAT YoY Change (%) E: MOSL Estimates

FY10

FY11E

1Q*

2Q

3Q

4Q

1Q

2Q

3Q

4Q

5.31 24.4 3,534 6.3 6.0 19,528 30.5 7,168 36.7 936 330 342 6,244 2,067 33.1 4,178 4,178 57.6

4.16 4.6 3,548 5.9 0.4 15,408 10.4 4,700 30.5 967 299 308 3,743 1,234 33.0 2,509 2,509 52.8

5.04 10.2 3,107 -8.5 -12.4 16,518 1.3 3,836 23.2 985 262 300 2,888 928 32.1 1,960 1,960 -17.8

5.70 6.6 3,174 -4.8 2.2 19,094 2.6 4,027 21.1 993 285 259 3,007 721 24.0 2,286 2,286 -26.1

5.27 -0.8 3,174 -10.2 0.0 17,748 -9.1 4,483 25.3 1,000 280 350 3,553 1,119 31.5 2,434 2,434 -41.7

4.58 10.1 2,974 -16.2 -6.3 14,440 -6.3 2,748 19.0 1,030 285 425 1,858 585 31.5 1,272 1,272 -49.3

5.50 9.1 2,974 -4.3 0.0 17,304 4.8 2,834 16.4 1,050 270 400 1,914 603 31.5 1,311 1,311 -33.1

6.31 10.7 3,094 -2.5 4.0 20,566 7.7 4,033 19.6 1,060 265 275 2,983 940 31.5 2,043 2,043 -10.6

FY10

FY11E

20.21 9.4 3,326 1.0

21.7 7.1 3,058 -8.1

70,497 10.4 19,711 28.0 3,881 1,175 1,227 15,882 4,949 31.2 10,932 10,932 10.0

70,057 -0.6 14,097 20.1 4,140 1,100 1,450 10,307 3,247 31.5 7,060 7,060 -35.4

Jinesh K Gandhi ([email protected])

July 2010

93

Results Preview QUARTER ENDING JUNE 2010

Engineering BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

In 1QFY11, we expect the engineering companies under our coverage to post revenue growth of 21% YoY, adjusted EBITDA growth of 24% YoY and adjusted net profit growth of 14% YoY. „ Capital Goods Index, growth accelerates: Recent IIP data and the Capital Goods Index show signs of improvement in industrial activity. IIP growth in April 2010 was 17.6% and the Capital Goods Index rose by 73%, largely led by a base effect. Revenue in the industrial segment of our engineering universe grew 20% in 4QFY10 and for FY10 as a whole growth was muted at 5%. Hence the growth in the IIP/ Capital Goods Index translates into revenue growth for companies with a lag effect. „ Execution momentum to continue in 1QFY11: The engineering sector’s 4QFY10 revenue grew 23% YoY. In 1QFY11, we expect revenue to grow 21% YoY, given a pick up in execution in the power and infrastructure segments. The growth improvement is largely driven by BHEL, L&T and Crompton. We expect them report revenue growth of 29%, 19% and 18% YoY respectively. Order intake growth in 4QFY10 was up 62% YoY for the universe resulting in aggregate BTB of 2.1x. „ 1QFY11 EBITDA margins to rise 30bp YoY, RM prices have increased: In 1QFY11, we expect EBITDA margins to remain stable. Margin improvement is expected for BHEL (+119bp) and Crompton Greaves (+32bp) YoY. Prices of steel and copper have more than doubled since their lows in 3QFY09 and 4QFY09, and would lead to increased raw material costs for BHEL, L&T etc on projects under fixed price contracts (35-40% of the order backlog). „ Valuations fair, maintain Neutral: Our engineering sector universe trades at FY11 P/E of 23x and P/BV of 5.3x. We expect earnings CAGR of 24% over FY10-12 and RoE of 25% in FY11. We estimate our engineering universe factors in most of the execution pick up resulting in accelerated earnings momentum in late FY11 and FY12. We retain our Neutral view on the sector and maintain our Buy ratings on ABB and BHEL.

ABB

BHEL

Crompton Greaves

Larsen & Toubro

Siemens

Thermax

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Engineering ABB BHEL Crompton Greaves Larsen & Toubro Siemens Thermax Sector Aggregate

873 2,451 254 1,761 728 709

(RS MILLION)

RECO

SALES JUN.10

Buy Buy Neutral Neutral Neutral Neutral

16,555 72,117 13,806 87,813 21,575 6,172 218,038

EBITDA

VAR.

VAR.

% YOY

% QOQ

10.0 28.9 17.7 19.3 12.5 14.8 20.5

13.7 -46.8 -14.7 -34.3 -3.1 -49.4 -34.8

JUN.10

1,159 8,491 2,092 9,572 2,697 802 24,813

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

-9.5 43.4 20.2 21.7 4.9 16.4 23.7

3915.3 -75.8 -22.7 -48.0 -5.7 -45.3 -59.0

JUN.10

788 5,548 1,308 6,529 1,749 507 16,430

VAR.

VAR.

% YOY

% QOQ

-5.8 22.4 14.0 12.9 1.4 9.1 13.4

1086.7 -75.5 -31.4 -51.2 -4.4 -48.9 -59.7

Satyam Agarwal ([email protected])/Navneet Iyengar ([email protected])

July 2010

94

Engineering

Capital Goods Index rise indicative of industrial capex revival

54

28

39

Mar 10

Jan 10

Sept 09

Nov 09

2 July 09

Mar 09 -8 -7 May 09 -3

Jan 09

Nov 08

Sep 08

8 13 12 12

13

16 12

21 4 0 7

18 May 08

July 08

1

4 8

20 12 Mar '08

Jan '08

Sep '07

Jul '07

May '07

Nov '07

3

11

18 11 22 23 12 31 21 21 24 18 Mar '07

Although the index growth of 73% reflects a pick-up in industrial capex, it follows a -7% decline in April 2009

45

73

CAPITAL GOOD INDEX (% YOY): GROWTH ACCELERATES, BASE EFFECT PERSISTS

10 12

Mar 10

Jan 10

Nov 09

Sept 09

July 09

May 09

-1 Mar 09 -1

Jan 09

Nov 08

-1

0

1

1 2

2

1 Sep 08

July 08

May 08

Mar '08

Sep '07

Jul '07

9

8 7 6

4 5 6

6

5 Jan '08

3

5 Nov '07

7

8

9

10

12

11

11 9 8 May '07

From August 2009 IIP growth rates have averaged 13% YTD and for FY10 it was 11%, largely driven by capital goods

18 16 15 14 18

IIP GROWTH (% YOY): WELL INTO RECOVERY MODE

Source: Company/MOSL

Execution momentum to continue in 1QFY11 PACE OF PROJECT EXECUTION REMAINS SOUND IN 1QFY11

From lows of 3.2% revenue growth in 3QFY10, expect revenue growth of 21% revenue in 1QFY11

44% 33% 22% 11% 0% 1QFY11

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

4QFY08

3QFY08

2QFY08

1QFY08

4QFY07

3QFY07

2QFY07

1QFY07

4QFY06

3QFY06

2QFY06

1QFY06

4QFY05

3QFY05

2QFY05

1QFY05

Source: Company/MOSL BHEL, L&T TOP REVENUE GROWTH IN 1QFY11 (% YOY)

We expect BHEL to report revenue growth of 29% YoY and L&T at 19% YoY in 1QFY11

July 2010

ABB BHEL Crompton Greaves Larsen & Toubro Siemens Industry

1QFY10

1QFY11E

-7 29 8 7 6 11

10 29 18 19 13 21

FY10

-6 25 15 9 3 13 Source: Company/MOSL

95

Engineering

EBITDA margins to improve, NPM to decline given increased depreciation, lower other income

11.3

16.0

18.3 1QFY11

7.5

12.5

10.8

4QFY10

3QFY10

13.2 9.0 2QFY10

11.0 1QFY10

8.0

11.8

9.7

8.8 2QFY09

3QFY09

8.4 1QFY09

4QFY09

14.2

12.6

11.2 4QFY08

11.4

13.2 9.8 3QFY08

14.2

13.0 9.9

11.7

2QFY08

15.4 1QFY08

4QFY07

3QFY07

6.3

10.5

8.4

14.2

Net Profit Margin (%)

9.6 7.7

6.6 1QFY07

4QFY06

2QFY07

12.2

9.1

11.6 8.6 3QFY06

6.7

8.0 7.1

5.0 1QFY06

4QFY05

2QFY06

10.0

8.6 7.0 3QFY05

5.6 2QFY05

1QFY05 3.7

4.6

7.4

13.6

15.6

EBITDA Margin (%)

In 1QFY11, we expect margin improvement for BHEL (+119bp) and Crompton (+32bp) YoY

17.0

MARGIN IMPROVEMENT OF 30BP YOY IS EXPECTED IN 1QFY11

Source: Company/MOSL

Commodity prices more than double since lows of 4QFY09 (US$/ton) STEEL PRICES RANGE-BOUND, COPPER PRICES MORE THAN DOUBLE SINCE 4QFY09

10,000

Steel and copper prices have more than doubled since their lows in 3Q and 4QFY09

Steel (USD/Tonne; RHS)

1,200

Copper (USD/Tonne)

7,500

900

5,000

600

2,500

300

1QFY11

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

4QFY08

3QFY08

2QFY08

1QFY08

4QFY07

3QFY07

2QFY07

1QFY07

4QFY06

3QFY06

2QFY06

1QFY06

4QFY05

3QFY05

2QFY05

0 1QFY05

0

Source: Company/MOSL

Initial improvements in order intake 4QFY10 ORDER INTAKE (RSB): BETTER BUSINESS ENVIRONMENT BOOSTS AWARDS

ABB

Order intake in the JanuaryMarch 2010 quarter improved 62% YoY for our engineering universe, to Rs522b

BHEL

Crompton Greaves

Larsen & Toubro

Siemens

500 375 250 125 0 4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

4QFY08

3QFY08

2QFY08

1QFY08

4QFY07

3QFY07

2QFY07

1QFY07

Source: Company/MOSL

July 2010

96

Engineering

ORDER INTAKE (RS B): FY10 SECTOR INTAKE GROWTH OF 16% YOY

FY10 order intake for companies like ABB and Siemens was weak due to poor pick up of capex in process related industries and price-driven competition on T&D projects

FY08 3Q

FY09

FY10

4Q

1Q

2Q

3Q

4Q

1Q

2Q

ABB* 20.0 27.0 BHEL 109.3 137.3 Crom.Greaves 9.2 11.1 L&T 130.2 119.8 Siemens** 18.8 23.4 * YE Dec, ** YE Sept

22.1 159.3 13.8 122.3 20.9

18.9 148.0 14.0 124.5 24.1

12.6 159.5 10.2 146.3 20.5

23.0 146.3 14.6 120.7 18.1

21.1 128.0 11.5 95.7 23.5

18.9 80.2 17.0 183.7 26.3

YOY 3Q

4Q

(%)

23.8 16.9 -26.7 155.9 226.3 54.6 14.0 20.6 41.2 177.9 238.4 97.5 51.8 20.5 13.1 Source: Company/MOSL

ORDER BACKLOG (RS B) AND BTB (X)

BHEL offers the best earnings visibility

ORDER BOOK (MAR 09)

REVENUES (TTM, MAR 10)

BOOK TO BILL (X)

88 1,438 64 1,002 134

63 329 94 367 84

1.4 4.4 0.7 2.7 1.6 Source: Company/MOSL

ABB BHEL Crompton Greaves Larsen & Toubro Siemens

Industrial business: execution improves, order intake yet to pick-up INITIAL SIGNS OF REVENUE TRACTION IN THE INDUSTRIAL SEGMENT

Revenues (Rs b)

Revenue Grow th(%), (RHS)

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

4QFY08

3QFY08

2QFY08

1QFY08

4QFY07

3QFY07

-10.0 2QFY07

0.0 1QFY07

10.0

4QFY06

15.0

3QFY06

30.0

2QFY06

30.0

1QFY06

50.0

4QFY05

45.0

3QFY05

70.0

2QFY05

60.0

1QFY05

In the January-March 2010 quarter, the industrial business rebounded with revenue growth of 22.7% YoY against de-growth of 1.5% YoY in 9MFY10

10.4

11.5

3QFY09

11.1

12.3

11.5

12.2 2QFY09

12.6 4QFY08

14.4 12.7 3QFY08

12.1

12.5

12.1

11.2

10.2

11.5

11.1 4QFY06

8.7 1QFY06

11.3

8.8 4QFY05

3QFY06

8.8 3QFY05

10.7 8.6 2QFY05

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

1QFY09

2QFY08

1QFY08

4QFY07

3QFY07

2QFY07

1QFY07

2QFY06

6.6 1QFY05

The industrial segment's EBIT margins in JanuaryMarch 2010 declined 109bp to 10.4%, given MTM forex provisions on hedging derivatives, largely for ABB and Siemens

14.9

INDUSTRIAL EBIT MARGINS DECLINE 109BP IN JAN - MAR 10, IMPACTED BY MTM ON FOREX HEDGE

Source: Company/MOSL

July 2010

97

Engineering

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt Engineering Index

108 104 100 Jun-10

ENGINEERING SECTOR UNIVERSE TRADES AT FY11E P/E OF 23X

Engg PAT Gr (LHS) 55

70

50

35

Sensex

19

16

23

20

29

May-10

May-09

5 May-08

-19

May-07

-14

May-06

-18

May-05

May-97

May-96

May-95

Jun-10

Mar-10

Dec-09

41 26

17

-25 Sep-09

53

36

May-04

0

18

May-02

112 102 92

12

May-01

25

May-00

132 122

May-98

M OSt Engineering Index

Jun-09

Engg P/E (x) - RHS 53 51

May-03

75 RELATIVE PERFORMANCE - 1YR (%)

May-99

May-10

Apr-10

Mar-10

96

Valuations fair, maintain Neutral Our engineering sector universe trades at FY11E P/E of 23x and P/BV of 5.3x. We expect earnings CAGR of 24% over FY10-12 and RoE of 25% in FY11. We estimate that our engineering universe factors in most of the execution pick up, resulting in accelerated earnings momentum in late FY11 and FY12. We retain our Neutral view on the sector and maintain our Buy ratings on ABB and BHEL.

Source: Company/MOSL COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

Engineering ABB 873 BHEL 2,451 Crompton Greaves 254 Larsen & Toubro 1,761 Siemens 728 Thermax 709 Sector Aggregate

July 2010

Buy Buy Neutral Neutral Neutral Neutral

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

16.7 95.7 12.9 61.7 13.7 21.8

20.1 118.8 14.4 71.9 23.3 24.8

33.9 155.5 17.6 89.2 26.9 32.0

52.2 25.6 19.7 28.6 53.1 32.6 28.5

43.5 20.6 17.7 24.5 31.3 28.6 23.4

25.7 15.8 14.4 19.7 27.0 22.1 18.2

34.0 17.6 18.4 23.0 22.6 21.0 20.6

28.0 12.5 14.8 20.7 16.5 18.4 16.2

16.1 9.6 11.8 16.4 15.0 14.5 12.5

15.6 32.5 39.2 19.7 12.7 27.0 26.1

16.3 32.5 34.8 17.8 24.9 28.7 25.5

23.1 34.0 33.3 18.8 24.9 32.1 27.3

98

Results Preview SECTOR: ENGINEERING

ABB STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 ABB IN

Buy

REUTERS CODE

S&P CNX: 5,269

YEAR

Equity Shares (m)

Rs873

Previous Recommendation: Buy

ABB.BO

211.9

NET SALES

PAT

EPS

EPS GR.

P/E

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS)

(%)

(X)

(X)

(%)

(%)

END

EV/

EV/

SALES EBITDA

52 Week Range (Rs)

887/641

12/08A

68,370

5,325

25.1

8.3

34.1

8.6

28.4

46.2

2.6

23.1

1,6,12 Rel Perf (%)

-4/ 12/-8

12/09A

62,372

3,546

16.7

-33.4

38.5

5.6

15.6

24.3

2.1

24.8

Mcap (Rs b) Mcap (USD b)

185.0

12/10E

70,436

4,252

20.1

19.9

43.5

6.6

16.3

25.6

2.5

28.0

4.0

12/11E

86,378

7,188

33.9

69.0

25.7

5.4

23.1

35.8

2.0

16.1

„

Order backlog at the end of 1QCY10 was Rs87b, up 25% YoY, BTB ratio was 1.4x TTM revenue, having increased from 0.9x in CY08. This was driven by an increased share of projects in the order book, which entails a comparatively higher execution period.

„

Order intake during 1QCY10 was worth Rs17b, down 27% YoY. Excluding mega projects, the management stated that order intake is up 40% YoY.

„

1QCY10 revenue growth was up 4.5% YoY, but was down 23% QoQ. Sluggish growth in the power systems (revenue down 14.5% YoY in 1QCY10 and down 25% in CY09) impacted revenue growth through CY09. For 2QCY10 we expect revenue growth of 10% YoY. Poor order intake, project withdrawals and extended thresholds of revenue and margin recognition led to revenue and PAT de-growth of 9% and 33% respectively in CY09.

„

1QCY10 EBITDA margins were 0.2%, down 892bp YoY. This contraction was due to a decline in power systems where EBIT margins were negative 12.7% v/s 6.3% YoY. For power products they were down 437bp YoY at 8.3%. Cost escalations of Rs400m on one project which is 96% complete, forex loss of Rs695m, exit from rural electrification (to be completed by Dec 2010), price driven competition in the product business, etc have been some of the reasons for the margin decline. For 2QCY10, we expect EBITDA margins of 7%, down 150bp YoY as cost escalations, forex loss, etc will be limited.

„

1QCY10 PAT declined 92% YoY and for CY09 it was down 34%. For 2QCY10 we expect PAT to decline 6% as profitability in the power systems (20% of revenue) continues to be a drag. For CY10, we expect PAT decline of 6% given margin contraction of 150bp to 7%.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E DECEMBER

Sales Change (%) EBITDA Change (%) As % of Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Repoted PAT Adj. PAT Change (%) E: MOSL Estimates

CY09

CY10

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

13,931 (9.3) 1,271 -26.4 9.1 109 103 143 1,202 419 34.8 783 783 -33.4

15,050 (6.9) 1,281 -32.7 8.5 125 80 209 1,284 448 34.9 836 836 -35.1

14,538 (4.3) 1,223 -9.3 8.4 127 44 159 1,212 381 31.4 831 831 -10.4

18,852 (13.0) 1,279 -52.3 6.8 125 26 215 1,343 480 35.7 864 864 -55.3

14,559 4.5 29 -97.7 0.2 120 38 212 83 17 20.4 66 66 -91.5

16,555 10.0 1,159 -9.5 7.0 130 55 220 1,194 406 34.0 788 788 -5.8

16,864 16.0 2,007 64.0 11.9 132 50 240 2,065 702 34.0 1,363 1,363 64.1

22,458 19.1 3,123 144.1 13.9 137 107 222 3,101 1,066 34.4 2,035 2,035 135.6

CY09

CY10E

62,372 -8.8 5,287 -31.0 8.5 485 254 726 5,274 1,728 32.8 3,546 3,546 -33.4

70,436 12.9 6,318 19.5 9.0 519 250 894 6,443 2,191 34.0 4,252 4,252 19.9

Satyam Agarwal ([email protected])/Navneet Iyengar ([email protected])

July 2010

99

Results Preview SECTOR: ENGINEERING

BHEL STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 BHEL IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

489.5

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

03/09A 267,880

35,671

72.9

03/10A 335,728

46,839

95.7

03/11E

423,138

58,156

118.8

24.2

20.6

6.1

32.5

03/12E

547,768

76,118

155.5

30.9

15.8

4.8

34.0

END

52 Week Range (Rs) 2,585/1,940 1,6,12 Rel Perf (%)

Rs2,451

Previous Recommendation: Buy

BHEL.BO

-1/ 2/-8 1,199.8 25.9

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

42.1

20.7

5.7

30.1

46.9

2.4

15.1

31.3

24.9

7.3

32.5

51.4

3.3

17.1

54.6

2.7

12.5

56.0

2.1

9.6

SALES EBITDA

„

For 1QFY11, we expect revenue of Rs72b, up 29% YoY led by steady execution as 4QFY10 order backlog was Rs1,438b, up 23% YoY. We expect FY11 backlog to be Rs1,604b, up 12% YoY and revenue growth of 26.4% YoY.

„

For 1QFY11 adjusted EBITDA margins are expected to be 11.8%, an expansion of 120bp YoY, driven by operating leverage.

„

Of the overall order book of Rs1,438b at the end of FY10, 80% was from the power business, 13% from industry and the rest from export markets. BHEL started receiving orders from its JVs with various SEBs for the supply of supercritical BTG. It received Rs63b BTG order from the Karnataka Power Corporation in April 2010.

„

For 1QFY11 we expect PAT growth of 23% YoY and for FY11 24%. We expect an EPS and revenue CAGR of 27% and 28% over FY10-12.

„

In 1QFY11 BHEL signed an agreement with Sheffield Forgemasters, UK for JV to make forgings for turbines and generators with up to 1,000MW rating.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales (Net) Change (%) EBITDA Change (%) As a % Sales Adjusted EBITDA Change (%) As a % Sales Interest Depreciation Other Income PBT Tax Effective Tax Rate (%) Reported PAT Change (%) Adj. PAT Change (%) Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

55,957 29.3 5,920 28.8 10.6 5,920 9.3 10.6 43 961 2,271 7,187 2,481 34.5 4,706 22.4 4,533 3.5 97.1

66,252 24.0 12,318 51.6 18.6 12,318 35.6 18.6 45 934 1,955 13,294 4,715 35.5 8,579 39.3 8,579 26.6 9.1

71,003 17.9 15,617 36.1 22.0 15,617 24.5 22.0 69 1,038 1,933 16,443 5,717 34.8 10,726 35.7 11,096 29.0 22.0

135,591 28.6 28,728 43.2 21.2 35,074 47.3 25.9 178 1,647 2,080 28,983 9,887 34.1 19,096 41.7 22,633 42.2 36.7

72,117 28.9 8,491 43.4 11.8 8,491 43.4 11.8 110 1,600 1,755 8,536 2,988 35.0 5,548 17.9 5,548 22.4 7.5

83,256 25.7 15,190 23.3 18.2 15,190 23.3 18.2 110 1,608 1,838 15,310 5,359 35.0 9,952 16.0 9,952 16.0 26.6

89,396 25.9 18,330 17.4 20.5 18,330 17.4 20.5 165 1,602 1,922 18,485 6,470 35.0 12,015 12.0 12,015 8.3 29.0

178,369 31.5 46,074 60.4 25.8 46,074 31.4 25.8 165 1,611 2,841 47,140 16,499 35.0 30,641 60.5 30,641 35.4 22.7

FY10

FY11E

328,803 25.3 62,583 41.4 19.0 68,929 35.5 21.0 335 4,580 8,239 65,907 22,800 34.6 43,106 37.4 46,839 31.3 31.5

415,557 26.4 88,086 40.8 21.2 88,086 27.8 21.2 550 6,421 8,356 89,471 31,315 35.0 58,156 34.9 58,156 24.2 23.1

Satyam Agarwal ([email protected])/Navneet Iyengar ([email protected])

July 2010

100

Results Preview SECTOR: ENGINEERING

Crompton Greaves STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 CRG IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs254

Previous Recommendation: Buy

CROM.BO

YEAR

641.6

NET SALES

PAT*

EPS*

EPS GR.

P/E

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS)

(%)

(X)

(X)

(%)

(%)

END

280/146 4/ 4/29 162.9 3.5

EV/

EV/

SALES EBITDA

3/09A

46,107

5,599

8.7

53.2

29.1

5.5

36.6

52.9

1.4

10.0

3/10A

52,840

8,247

12.9

47.3

19.7

7.5

39.2

54.7

2.3

14.2

3/11E

62,621

9,227

14.4

11.9

17.7

7.3

34.8

51.0

2.5

14.8

3/12E

75,477

11,298

17.6

22.5

14.4

5.7

33.3

49.3

2.0

11.8

* Consolidated; pre-exceptionals

„

In 1QFY11 we expect Crompton Greaves to report standalone revenue of Rs14b, up 18% YoY and for FY11 Rs62b up 19%. In 1QFY11, we expect PAT of Rs1.31b, up 14% YoY and for FY11 Rs6.8b, up 18.3%.

„

The consolidated order backlog at the end of 4QFY10 was Rs64b, down 2.5% YoY. The international business has a backlog of Rs30b and forms 46% of the consolidated backlog. Management has guided for a standalone revenue growth of 18-20% YoY and for the international business, the FY11 growth guidance is +5% YoY in local currency. In FY10 Crompton emerged as the biggest player in the 765kV market with 45% share in transformers and reactor orders from PGCIL.

„

In 4QFY10 international business revenue declined 19% YoY (including ~10% decline due to volumes dip) and PAT growth was 20% YoY mainly due to a 440bp expansion in EBITDA margins. In FY10, revenue declined 6.5% and PAT grew 49% due to EBITDA margin expansion of 320bp to 10.9%. In FY11 we expect this business to post 7% revenue decline and stable PAT as risks to revenues in the EU has increased.

„

4QFY10 EBITDA margins for the standalone business were 16.7%, up 80bp due to a drop in other expenditure by 337bp YoY. In 1QFY11 we expect margins of 15.2%, up 40bp YoY and for FY11 of 16.7%, up 50bp.

„

We expect Crompton to post consolidated FY11 earnings of Rs14.4 (up 12%) and Rs17.6 (up 23%) in FY12 and EPS CAGR of 17% over FY10-12.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Sales Change (%) EBITDA Change (%) As of % Sales (Adj) Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

11,735 8.4 1,740 26.1 14.8 128 -6 84 1,702 555 32.6 1,147 1,147 29.1

12,686 16.8 2,094 46.7 16.5 129 0 99 2,064 703 34.1 1,361 1,361 47.1

12,238 13.3 2,036 46.9 16.6 132 11 167 2,060 705 34.2 1,354 1,354 59.8

16,182 18.8 2,707 24.9 16.7 129 38 337 3,281 970 29.6 2,311 1,907 45.7

13,806 17.7 2,092 20.2 15.2 132 44 97 2,013 704 35.0 1,308 1,308 14.0

14,404 13.5 2,348 12.1 16.3 138 44 113 2,279 798 35.0 1,481 1,481 8.8

15,046 22.9 2,445 20.1 16.3 145 44 201 2,457 860 35.0 1,597 1,597 17.9

19,365 19.7 3,574 32.0 18.5 174 44 395 3,751 1,313 35.0 2,438 2,438 27.8

FY10

FY11E

52,840 14.6 8,578 34.8 16.2 519 44 688 9,106 2,933 32.2 6,173 5,770 46.0

62,621 18.5 10,458 21.9 16.7 589 175 805 10,499 3,675 35.0 6,825 6,825 18.3

Satyam Agarwal ([email protected])/Navneet Iyengar ([email protected])

July 2010

101

Results Preview SECTOR: ENGINEERING

Larsen & Toubro STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 LT IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

601.8

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT *

EPS*

(RS M)

(RS M)

(RS)

339,264

30,046

51.5

END

52 Week Range (Rs) 1,844/1,305 1,6,12 Rel Perf (%)

Rs1,761

Previous Recommendation: Neutral

LART.BO

3/09A

3/ 3/-7 1,060.0 22.9

EPS GR.

P/E*

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

31.1

19.8

4.8

24.5

26.0

1.9

16.7

(%)

EV/

EV/

SALES EBITDA

3/10A

370,347

37,110

61.7

20.2

24.1

4.7

19.7

23.7

2.5

19.6

3/11E

451,425

43,257

71.9

16.6

24.5

5.0

17.8

20.5

2.5

20.7

3/12E

577,789

53,699

89.2

24.1

19.7

4.3

18.8

20.9

2.0

16.4

* Consolidated; EPS is fully diluted

„

In 1QFY11 order intake announced till date was Rs63b. Order intake in 4QFY10 was Rs238b and in 3QFY10 it was Rs177b. Order backlog at the end of 4QFY10 was Rs1,002b (up 42% YoY) and BTB ratio was 2.7x TTM revenue. We project FY11 intake of Rs891b (up 28%).

„

Major orders announced in 1QFY11 include (a) construction of offshore platforms for GSPC in the KG-D6 basin worth Rs10b, (b) construction of the Krishnagiri-Walajahpet national highway on a BOT basis for Rs14b, (c) buildings and factories worth Rs14b, and (d) sewage and water treatment works for the public works authorities, worth Rs8.5b.

„

In 1QFY11 we expect EBITDA margins of 11%, up 30bp YoY and for FY11, margins of 11.6%, down 60bp.

„

The EBG business posted 4QFY10 revenue growth of 25% YoY, MIP grew by 10% YoY. Demand for industrial automation continues to stay weak in developed markets including the Middle East.

„

The management has guided for 20% revenue growth and 25% intake growth in FY11. We factor in revenue and PAT CAGR of 25% and 20% over FY10-12.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Net Sales Change (%) EBITDA Margin (%) Adjusted EBITDA Adjusted Margin (%) Depreciation Interest Other Income Extraordinary Inc/(Exp) Reported PBT Tax Effective Tax Rate (%) Reported PAT Adjusted PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

73,627 6.7 7,863 10.7 7,863 10.7 937 1,096 2,683 10,199 18,712 2,730 14.6 15,982 5,783 17.9

78,662 2.3 7,846 10.0 7,846 10.0 1,001 1,310 2,702 120 8,357 2,707 32.4 5,650 5,530 10.5

80,714 -6.1 9,561 11.8 9,561 11.8 1,045 1,339 2,844 626 10,646 3,058 28.7 7,589 6,103 -4.7

133,749 27.8 18,406 13.8 18,406 13.8 1,162 1,356 5,401 961 22,249 7,914 35.6 14,335 13,374 25.6

87,813 19.3 9,572 10.9 9,572 10.9 1,200 1,390 2,550 0 9,532 3,002 31.5 6,529 6,529 12.9

99,288 26.2 9,135 9.2 9,135 9.2 1,215 1,410 2,900 0 9,410 2,964 31.5 6,446 6,446 16.6

100,857 25.0 11,094 11.0 11,094 11.0 1,310 1,400 2,700 0 11,084 3,492 31.5 7,593 7,593 24.4

160,274 19.8 22,020 13.7 22,020 13.7 1,465 1,436 3,096 0 22,216 6,989 31.5 15,227 15,227 13.9

FY10

FY11E

366,752 9.0 44,559 12.1 44,559 12.1 4,146 5,053 12,699 10,748 58,807 16,409 27.9 42,398 30,790 14.2

448,233 22.2 51,821 11.6 51,821 11.6 5,190 5,636 11,246 0 52,241 16,447 31.5 35,794 35,794 16.3

Satyam Agarwal ([email protected])/Navneet Iyengar ([email protected])

July 2010

102

Results Preview SECTOR: ENGINEERING

Siemens STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 SIEM IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs728

Previous Recommendation: Neutral

SIEM.BO

YEAR

337.2 765/376 -1/ 24/29 245.6 5.3

NET SALES

PAT*

EPS*

EPS GR.

P/E

P/BV

ROE

ROCE

END

(RS M)

(RS M)

(RS)

(%)

(X)

(X)

(%)

(%)

EV/

EV/

9/09A

84,585

4,623

13.7

-11.3

53.1

4.1

12.7

39.2

1.3

10.4

SALES EBITDA

9/10E

95,889

7,856

23.3

69.9

31.3

7.2

24.9

41.4

2.4

16.5

9/11E

112,036

9,086

26.9

15.7

27.0

6.3

24.9

39.1

1.9

15.0

9/12E

129,344

11,539

34.2

27.0

21.3

5.4

27.3

42.1

1.5

11.6

*Consolidated

„

In 3QFY10 (September year ending), we expect Siemens to post revenue of Rs21b, up 12.5% YoY, EBITDA of Rs2.6b (up 5% YoY), and net profit of Rs1.7b (up 1.4% YoY). In 2QFY10, the industry segment posted revenue growth of 25% YoY and revenue in the energy segment fell 29% YoY. PAT fell 19% as margins declined 178bp to 13%.

„

The order book at end of 2QFY10 was Rs134b (up 39% YoY, and 1% QoQ). In 2QFY10, order intake was Rs22b (up 18% YoY, 58% QoQ). During the quarter Siemens signed an agreement with Delhi Metro Rail to build coaches and complete signaling systems for line two.

„

In 2QFY10, EBIT margins for the industry segment improved by 90bp YoY to 6.2% and the energy segment posted margins of 16.4%, down 188bp YoY. The industry segment posted considerable margin erosion across all divisions like drives (down 350bp YoY), and the mobility division posted margins of 11% against -32% a year earlier due to the completion of the Mumbai railway order. In the energy segment, power generation posted margins of 58% due to margin recognition threshold levels on projects and hence they remain one-offs.

„

PGCIL orders totaling Rs5.7b in FY10 in the 765kV substation space have been awarded to Siemens.

„

We expect Siemens to post FY10 consolidated EPS of Rs24 (up 70% YoY) and for FY11, Rs27 (up 16%).

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E SEPTEMBER

FY09 1Q

Total Revenues Change (%) EBITDA Change (%) As % of Revenues Depreciation Interest Income Other Income Extra-ordinary Items PBT Tax Effective Tax Rate (%) Reported PAT Adjusted PAT Change (%) E: MOSL Estimates

FY10

2Q

3Q

4Q

1Q

2Q

3QE

4QE

16,399 23,830 -14.6 10.6 1,702 3,489 10.0 2,192.9 10.4 14.6 181 184 165 94 2,233 30 0 0 3,919 3,429 613 1,174 15.6 34.2 3,306 2,255 1,193 2,255 9.5 13,428.5

19,177 5.3 2,571 -3.1 13.4 199 118 125 2,059 4,674 1,304 27.9 3,370 1,725 2

25,180 2.2 2,469 -28.2 9.8 213 87 -47 0 2,296 780 34.0 1,516 1,516 -33

18,666 13.8 3,633 113.4 19.5 212 157 0 0 3,579 1,214 33.9 2,365 2,365 98.2

22,261 -6.6 2,861 -18.0 12.9 237 136 0 0 2,760 930 33.7 1,830 1,830 -18.9

21,575 12.5 2,697 4.9 12.5 252 165 0 0 2,610 861 33.0 1,749 1,749 1.4

33,387 32.6 4,616 87.0 13.8 228 236 0 0 4,624 1,740 37.6 2,884 2,884 90.2

FY09

FY10E

84,585 1.2 10,231 31.3 12.1 778 464 2,341 2,059 14,318 3,870 27.0 10,448 5,912 -5.8

95,889 13.4 13,808 35.0 14.4 929 675 0 0 13,553 4,745 35.0 8,809 8,809 49.0

Satyam Agarwal ([email protected])/Navneet Iyengar ([email protected])

July 2010

103

Results Preview SECTOR: ENGINEERING

Thermax STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 TMX IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

1,6,12 Rel Perf (%)

YEAR

119.2

52 Week Range (Rs)

-5/ 18/57

Mcap (USD b)

NET SALES

PAT*

EPS*

EPS GR.*

P/E*

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS)

(%)

(X)

(X)

(%)

(%)

END

750/382

Mcap (Rs b)

Rs709

Previous Recommendation: Neutral

THMX.BO

84.5

EV/

03/09A 32,644

2,889

24.2

0.5

27.4

8.2

33.7

48.7

2.3

18.3

03/10A 31,855

2,592

21.8

-10.3

30.6

8.5

27.0

40.7

2.4

19.7

03/11E

1.8

EV/

SALES EBITDA

36,304

2,952

24.8

13.9

26.9

7.5

28.7

43.3

2.1

17.2

03/12E 41,072

3,817

32.0

29.3

20.8

6.3

32.1

46.5

1.8

13.5

* Consolidated

„

In 1QFY11 we expect revenue of Rs61b, up 15% YoY, EBITDA of Rs802m, up 16.5% and margins of 13% (up 20bp YoY). We expect net profit of Rs507m, up 9% YoY. In FY11 we expect revenue growth of 14% and margins of 12% (up 30bp) and PAT growth of 12%.

„

Thermax's consolidated order book at the end of 4QFY10 was Rs59b (up 94% YoY, up 6.3%QoQ) and BTB ratio was 1.9x. The energy division contributed Rs51b and the environment division contributed Rs8.2b to the order backlog. The signing of a JV agreement with Babcox & Wilcox and a settlement with Purolite of Rs1.14b for patent infringement in the ion exchange business will pave the way for Thermax to grow these businesses.

„

Thermax could also probably bid for NTPC's bulk tendering of super-critical boilers after the tie-up with B&W. The JV with B&W (51:49) will have peak production capacity of 3GW, to be set up over 18 months, and will employ about 500 people.

„

Thermax's revenue is increasingly becoming skewed towards the second half of the year due to the inherent nature of utility orders with longer threshold limits for margin recognition.

„

Our consolidated EPS for FY11 and FY12 is Rs25 (up 14%) and Rs32 (up 29%) respectively. Our estimates factor in revenue and PAT CAGR of 14% and 21% over FY10-12 respectively.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Sales Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income Extra-ordinary Items PBT Tax Effective Tax Rate (%) Reported PAT Change (%) Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

5,376 -25.0 689 -24.4 12.8 95 5 103 0 692 227 32.8 465 -27.0 465 (27.0)

6,678 -15.5 667 -16.5 10.0 104 1 267 0 829 288 34.7 541 -5.0 541 (5.0)

7,483 -5.9 894 -7.6 11.9 104 6 74 0 858 292 34.1 565 -21.8 565 (21.8)

12,193 28.6 1,466 10.0 12.0 101 3 179 -1,149 392 549 140.0 -157 -116.6 992 6.7

6,172 14.8 802 -16.4 13.0 103 10 91 0 780 273 35.0 507 9.1 507 9.1

7,261 8.7 888 -63.5 12.2 103 10 114 0 888 311 35.0 577 6.7 577 6.7

7,987 6.7 955 -76.7 12.0 103 15 136 0 973 341 35.0 633 11.9 633 11.9

14,884 22.1 1,697 -57.7 11.4 103 15 114 0 1,692 592 35.0 1,100 -801.6 1,100 10.9

FY10

FY11E

31,730 -2.4 3,716 -7.4 11.7 404 15 623 -1,149 2,771 1,356 49.0 1,414 -50.8 2,563 (10.4)

36,304 14.4 4,341 16.8 12.0 412 50 454 0 4,334 1,475 34.0 2,858 102.1 2,858 11.5

Satyam Agarwal ([email protected])/Navneet Iyengar ([email protected])

July 2010

104

Results Preview QUARTER ENDING JUNE 2010

FMCG BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

Expect lower YoY growth in 1QFY11: We expect slowdown in sales and profit growth of our FMCG coverage universe on YoY basis. Sales growth will decline from 21% in 4QFY10 to 14.8% in 1QFY11 mainly due to lower realizations in a few categories. EBITDA will grow by 8.9% v/s 17.9% in 4QFY10 and 23% in 1QFY10. We estimate 110bp decline in EBITDA margin on YoY basis due to high input costs and price-based competition. PAT growth is estimated at 7.6% v/s 15.9% in 4QFY10 and 20% in FY10.

Asian Paints Britannia Industries Colgate Palmolive Dabur India

Volume growth steady, low price increases impact sales growth: FMCG volume growth has been steady in most categories despite high food inflation (currently ruling at 16.5%). However, some slowdown has been visible in toilet soaps, shampoo and toothpaste. FMCG companies desisted from price increases, rather some categories like detergents, soaps and shampoos have seen price cuts. We expect steady volume growth but lower sales growth due to lower realization growth.

GSK Consumer Godrej Consumer Products Hindustan Unilever ITC

A normal monsoon will aid demand growth, margin expansion: A normal monsoon will be a key trigger for the sector. On one hand, it will boost the incomes of small and marginal farmers in rural India, while on the other, resulting decline in food inflation will benefit the urban lower income class. The lower income sections in both urban and rural India will report demand resurgence. Increase crop output and lower prices of agri inputs will also boost the profitability of processed food companies.

Marico Nestle India United Spirits

Valuations challenging; play selectively for long haul: FMCG companies are trading near their peak valuations even as current quarter profitability is under pressure. We expect competitive intensity to increase further, as long-term potential will continue to attract new players (both domestic and foreign) in various categories. We continue to prefer niche plays which face low competition. We remain positive on ITC, Nestle and Colgate for the long term. Britannia remains a favored play among mid-caps.

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

FMCG Asian Paints Britannia Colgate Dabur Godrej Consumer GSK Consumer Hind. Unilever ITC Marico Nestle United Spirits Sector Aggregate

2,393 1,872 848 200 342 1,814 267 302 126 2,908 1,300

(RS MILLION)

RECO

SALES JUN.10

Neutral Buy Buy Buy Buy Buy Neutral Buy Buy Buy Buy

16,939 8,556 5,391 8,801 7,592 5,672 49,079 46,151 7,594 14,151 14,775 184,700

EBITDA

VAR.

VAR.

% YOY

% QOQ

16.0 17.0 15.2 18.5 73.0 21.0 9.0 11.7 9.0 17.0 19.0 14.8

-9.7 -8.0 4.4 3.7 49.1 -12.5 12.0 -10.1 26.1 -4.4 18.0 1.6

JUN.10

2,880 402 1,443 1,382 1,465 828 6,675 15,701 1,025 2,717 2,719 37,237

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

4.4 -32.9 17.8 16.9 69.6 11.0 -6.7 13.2 6.3 3.8 22.5 8.9

-7.4 LP 0.2 -14.7 36.3 -37.8 12.1 -3.0 20.7 -10.6 49.9 2.6

JUN.10

1,859 277 1,131 1,058 967 641 5,039 10,124 692 1,865 1,194 24,846

VAR.

VAR.

% YOY

% QOQ

5.6 -49.0 10.1 15.7 38.7 16.1 -6.1 15.2 15.3 4.7 12.9 7.6

-3.0 302.6 7.3 -20.5 5.4 -33.3 19.4 -1.5 19.8 -5.4 110.0 4.1

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

105

FMCG

Expect lower YoY growth in 1QFY11 We expect slowdown in sales and profit growth of our FMCG coverage universe on YoY basis. Sales growth will decline from 21% in 4QFY10 to 14.8% in 4QFY10 mainly due to lower realizations and price cuts in a few categories. EBITDA will grow by 8.9% v/s 17.9% in the previous quarter and 23% in 1QFY10. We estimate 110bp decline in EBITDA margin on YoY basis due to high input costs and price-based competition. PAT growth is estimated at 7.6% v/s 15.9% in 4QFY10 and 20% in FY10. Volume growth steady in most categories despite high food inflation FMCG volume growth has been steady in most categories despite high food inflation (currently ruling at 16.5%). However, some slowdown has been visible in toilet soaps, shampoo and toothpaste. Food inflation has impacted purchasing power of low income groups in both urban and rural India. We note that food accounts for 40% of the monthly spend of an average Indian; this proportion is much higher for low income consumers who contribute a major chunk to the incremental volume growth in FMCG. Steady volume growth in this environment indicates higher allocation for FMCG in the non-food spends. We expect volume growth to remain steady in 1QFY11 also. We estimate 4.5% decline in cigarette volumes (14% increase in consumer spends) for ITC due to 17% increase in excise duty; United Spirits’ volume growth will suffer due to lower volumes in Andhra Pradesh (20% of sales) on account of renewal of retail licenses. FMCG: TOILET SOAPS, SHAMPOO AND CIGARETTE VOLUME GROWTH SUFFERS QUARTER ENDING

DEC-08

MAR-09

JUN-09

SEP-09

DEC-09

MAR-10

JUN-10E

Asian Paints Colgate (Toothpaste) Dabur Godrej Consumer Soaps Hair Color GSK Consumer Hindustan Unilever ITC (cigarette) Marico Parachute Hair Oil Saffola

2.0 14.0 14.0

13.0 15.2 13.0

11.5 14.0 16.0

17.5 18.0 13.0

25.0 15.0 14.5

16.0 11.0 12.0

15.0 13.0 14.5

19.0 7.0 13.0 2.3 -3.5

34.0 13.0 20.0 -4.2 -3.0

15.0 14.0 12.0 2.0 5.0

16.0 35.0 9.0 1.0 7.5

11.0 11.0 10.0 5.0 8.5

0.0 14.0 13.0 10.9 8.8

3.0 12.0 12.0 12.0 -4.5

9.0 14.0 3.0

N.A N.A N.A

14.0 9.0 13.0

10.0 17.0 22.0

8.0 10.0 18.0

10.0 27.0 13.0

9.0 25.0 14.0

United Spirits

19.0

24.0

17.0

11.1

12.3

16.0 11.5 Source: Company/MOSL

FOOD INFLATION HURTING LOWER INCOME STRATA (%)…

20 16.5

15 10 7.5

5 2.1

0

May-10

Aug-09

Dec-08

Mar-08

Jun-07

Sep-06

Dec-05

Mar-05

Jun-04

Sep-03

Dec-02

Mar-02

-5

Source: Bloomberg

July 2010

106

FMCG

Pricing actions mixed – HUL, P&G cut prices, ITC, Britannia increase prices FMCG players have been cautious on increasing prices despite increase in input costs. However, ITC has increased cigarette prices by 15% post excise duty increase (10.2% of MRP) in the budget, displaying strong pricing power. Product categories that have seen price cuts in the last six months include toilet soaps (selective), mid-priced detergents, shampoos and hair oils. The price reductions have mainly been in the form of actual reductions as well as higher quantities being offered at the same price. Categories like biscuits, glucose and malted food drinks have seen price increases. Major pricing actions during the quarter include sharp reduction in detergent cake prices by both HUL and P&G and consumer offers in shampoos by P&G. Dabur has increased Amla oil and glucose prices by 5%. DETERGENTS AND SHAMPOOS HAVE SEEN PRICE CUT IN 1QFY11 (RS)

Detergents Powder(Rs/Kg) Wheel Rin Surf Excel Blue Tide Natural Tide Detergent Cake (Rs/100gm) Wheel Bar Rin Shakti Bar Tide bar Toilet Soaps (Rs/100gm) Lux Lifebuoy Godrej No 1 Santoor Toothpaste (Rs/200gm SKU) Pepsodent Colgate (CDC) Shampoo (Rs/100gm) Pantene Head & Shoulders Clinic Plus Sunsilk

JUN-10

MAR’10

JUN-09

3M (%)

12M (%)

30 50 110 40 56

30 50 110 40 56

30 70 124

0.0 -28.6 -11.3

70

0 0 0 0 0

-20.0

2 4 5

2.5 5.0 3.6

2.5 6 9

-20 -20 39

-20.0 -33.3 -44.4

16.4 12.5 11 18

16.4 12.5 11 18

18 13.3 10

0 0 0

-9.1 -6.2 9.0

57 56

57 56

61 56

0 0

-5.9 0.0

49 59 47 56

66 77 47 56

59 69 44 54

-25 -16.9 -23 -14.5 0 6.8 0 3.7 Source: Company/MOSL

New launches gathering momentum… Competitive intensity is increasing, as the Indian FMCG market is attracting the attention of all global players; domestic players are also increasing their aggressiveness in launching new products and variants. We have seen increasing number of product launches by players like J&J (Neutrogena), Glaxo (Horlicks Cookies), ITC (Lucky Strike cigarettes, Vivel Deo Spirit and Vivel Active Fair), Garnier (deodorant), HUL (Sure anti-perspirant), Marico (Saffola oats), Britannia (Milk Bikis Almond and cookies). Processed foods and skin care are attracting maximum attention from the marketers. The premium segment seems to be attracting attention, more so from new MNC entrants. HUL has launched a Rs1,000 variant in its Pure IT water purifier while ITC launched small filters on a test market basis.

July 2010

107

FMCG

NEW PRODUCT LAUNCHES TO INTENSIFY COMPETITION COMPANY

CATEGORY

BRAND

VARIANT

Britannia

Biscuits

Almond Cookies Elachi cookies

GSK Consumer Garnier HUL

Biscuits Deo Skin Care Water Skin Creams Cigarettes Cigarette Facial Scrub Oats Deo

Milk Bikis Cookies Horlicks Cookies Garnier Minerals Sure Roll on Pure IT Vivel Active Fair Lucky Strike Capstan, Berkeley, Scissors Neutrogena Saffola Santoor

ITC

Johnson’s Marico Wipro

Compact

Rs1.5/stick variant

Source: Company/MOSL

…in a scenario of rising media inflation FMCG companies have seen significant increase in ad spends in FY10. The media industry indicated 48% increase in ad spend by the FMCG industry in CY09, as the operating environment was favorable and ad rates were benign due to lower inventory utilization. However, media inventory utilization levels have improved significantly and leading players have increased ad rates by 8-15% in the last few months. This could pose a challenge in the coming quarters, as increasing competition will require higher ad spends from the industry in a rising media inflation scenario. We factor in moderate increase in absolute ad spends by FMCG companies post high ad spends of FY10. AD SPENDS IS LIKELY TO DECLINE (%) COMPANY

FY08

FY09

FY10

Britannia Inds Colgate Dabur* GSK Consumer Hind. Unilever Marico Nestle India United Spirits

32.5 24.0 15.5 14.4 11.8 15.0 24.0 4.2

17.5 6.0 16.1 18.0 15.7 2.6 12.9 14.4

27.0 12.0 10.0 13.0 35.9 9.4 55.6 15.2 41.4 10.0 35.2 13.5 37.6 24.8 27.3 13.5 Source: Company/MOSL

FY11E

Input costs mixed; agri input prices likely to soften Prices of major raw materials are showing a mixed trend. Palm fatty acid (PFA) prices are up 41% since October 2009. LAB prices are down 8% since December 2009. Sugar and wheat prices have softened 35% and 10%, respectively from the peak. Input costs for paints (titanium dioxide and mineral turpentine oil) are up by 6.5% in three months. We expect agri input prices to remain soft if the monsoon is normal post the sharp increase last year.

July 2010

108

FMCG

IMPACT OF INPUT PRICE CHANGES INPUT

PRICE TREND

UNIT

52 WEEK

YOY

CURRENT

H/L

IMPACT

COMPANIES

PRICE

LAB

Up

Rs/Kg

90/71

84

Negative

HUL

Soda Ash

Down

Rs/75Kg

1,038/837

838

Positive

HUL

Palm Fatty Acid

Up

US$/MT

700/319

700

Negative

HUL, Godrej Consumer

Wheat

Up

Rs/Qtl

1,304/1,137

1,304

Negative

Nestle, ITC and Britannia

Milk

Up

Index

266/233

266

Negative

Nestle, GSK Consumer

Copra

Down

Rs/Qtl

3,825/2,900

3,255

Positive

Marico Source: MOSL

PALM FATTY ACID: ~ UP 41% SINCE OCTOBER 2009

LAB PRICES: DOWN 8% SINCE DECEMBER

850

140 713

120 629

550

109 Rs/Kg

100

400

94.1 86

80

May-10

Dec-09

Feb-09

Sep-08

Apr-08

Nov-07

Jun-07

Aug-06

May-10

Jan-10

Sep-09

May-09

Jan-09

Sep-08

May-08

Jan-08

Sep-07

May-07

Jan-07

Sep-06

Jan-06

May-06

HDPE: TRENDING CRUDE

79.1

67

60

Jul-09

340 250

Jan-07

USD/MT

119

683

700

SUGAR PRICES: 35% DECLINE IN 4 MONTHS

2,250

4,600 4,105

2,655 2,200

Jun-10

May-10

Feb-10

Nov-09

Sep-09

Jun-09

Apr-09

Jan-09

Oct-08

Aug-08

May-08

COPRA PRICES: MOVING IN NARROW BAND

1,848 Feb-10

1,400

650

Oct-09

1,230

1,240

1,050

3,000

Jun-09

1,285

Feb-09

1,670

Oct-08

1,450

3,800 INR/Qtl

USD/MT

1,850

TITANIUM DIOXIDE: INCHING UP

5,000

260

4,450

235

Rs/Qtl

239

3,900

3,555

3,550

3,350

223

210

185 163 Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Jul-08

Oct-08

Apr-08

Jan-08

Oct-07

Jul-07

Apr-07

Jan-07

Oct-06

160 Jul-06

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

2,800

Source: Bloomberg/MOSL

July 2010

109

FMCG

Valuations challenging; play selectively for long haul FMCG companies are trading near their peak valuations even as current quarter profitability is under pressure. We expect competitive intensity to increase further, as long-term potential will continue to attract new players (both domestic and foreign) in various categories. We continue to prefer niche plays which face low competition. We remain positive on ITC, Nestle and Colgate for the long term. Britannia remains a favored play among midcaps. RELATIVE PERFORMANCE - 1YR (%)

120

97

105

90

90 Jun-10

Apr-10

Dec-09

104

Jun-09

135

May-10

111

Mar-10

150

Sensex

Mar-10

MOSt FMCG Index

MOSt FMCG Index

Sep-09

Sensex 118

Jun-10

RELATIVE PERFORMANCE - 3M (%)

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

FMCG Asian Paints Britannia Colgate Dabur Godrej Consumer GSK Consumer Hind. Unilever ITC Marico Nestle United Spirits Sector Aggregate

July 2010

2,393 1,872 848 200 342 1,814 267 302 126 2,908 1,300

Neutral Buy Buy Buy Buy Buy Neutral Buy Buy Buy Buy

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

79.9 68.9 29.7 5.8 11.7 55.4 9.4 10.6 4.0 72.4 28.0

86.5 88.4 32.3 6.6 15.2 64.6 9.5 12.4 4.7 81.4 43.1

104.6 116.8 38.1 8.2 18.4 79.1 11.3 14.6 5.9 99.3 61.0

29.9 27.2 28.6 34.8 29.3 32.8 28.2 28.4 31.7 40.2 46.3 30.3

27.7 21.2 26.2 30.2 22.5 28.1 28.2 24.4 26.6 35.7 30.1 26.6

22.9 16.0 22.3 24.5 18.6 22.9 23.7 20.7 21.3 29.3 21.3 22.1

19.0 29.8 22.4 27.2 24.6 22.1 20.0 17.0 20.6 26.8 16.4 19.5

17.4 16.7 19.2 22.6 17.7 19.9 19.9 14.7 17.9 24.1 15.6 17.3

14.4 12.1 16.3 18.6 15.0 15.7 16.5 12.4 14.7 19.8 12.3 14.4

48.2 42.2 156.0 45.8 50.3 25.7 64.0 28.9 37.3 120.0 8.3 35.7

41.2 44.2 120.1 41.5 52.4 25.4 71.5 28.5 32.3 116.0 11.4 35.2

39.9 46.1 114.4 40.0 49.8 26.1 74.4 28.5 30.0 120.0 14.1 35.7

110

Results Preview SECTOR: FMCG-PAINTS

Asian Paints STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 APNT IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

95.9

52 Week Range (Rs) 2,465/1,081 1,6,12 Rel Perf (%)

6/35/ 90

Mcap (Rs b) Mcap (USD b)

„ „ „ „ „ „ „

Rs2,393

Previous Recommendation: Neutral

ASPN.BO

229.5 5.0

NET SALES ADJ. PAT

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

-3.9

57.2

17.6

33.4

39.4

3.9

31.6

79.9

91.0

29.9

13.3

48.2

56.1

3.3

17.5

86.5

8.2

27.7

10.5

41.2

50.4

2.7

16.0

10,037 104.6

21.0

22.9

8.4

39.9

50.7

2.3

13.2

END

(RS M)

(RS M)

(RS) GROWTH (%)

3/09A

54,632

4,014

41.8

3/10A

64,193

7,666

3/11E

75,359

8,295

3/12E

87,958

EV/

EV/

SALES EBITDA

We expect Asian Paints to report net sales of Rs17b in 1QFY11, a growth of 16% YoY. We estimate 15% volume growth in domestic decorative paints; value growth reflects the impact of increase in excise duty and price changes. We estimate 120bp YoY decline in gross margin to 43% (44.2% in 4QFY10) and 190bp YoY decline in EBITDA margin to 17% (16.6% in 4QFY10). We expect 4.4% YoY increase in EBITDA and 5.6% YoY increase in PAT. Decorative paints demand remains robust in most parts of the country; tier-II and tier-III cities are growing faster than big cities. Input cost index has increased by 6% in the last three months while excise duty has increased 2%. The company has increased prices by 4.1% from 1 May, which will partially neutralize the impact of increase in costs. We expect competitive intensity to increase in the coming quarters, as Akzo India (earlier ICI India) and Kansai Nerolac are adopting aggressive strategies to increase their presence in the high growth Indian market. The stock is trading at 27.7x FY11E and 22.9x FY12E earnings. Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

FY11E 3Q

4Q

1Q

2Q

3Q

4Q

Volume Growth % * 11.5 17.5 25.0 16.0 15.0 Titanium Dioxide Price Index # 106 106 103 105 108 Net Sales 14,602 17,239 16,200 18,768 16,939 Change (%) 17.6 16.9 22.6 31.7 16.0 Raw Material/Packing Material 8,191 9,798 9,127 10,464 9,655 Gross Profit 6,411 7,441 7,073 8,304 7,284 Gross Margin (%) 43.9 43.2 43.7 44.2 43.0 Operating Expenses 3,653 4,213 3,892 5,195 4,404 % of Sales 25.0 24.4 24.0 27.7 26.0 EBITDA 2,758 3,228 3,181 3,109 2,880 Margin (%) 18.9 18.7 19.6 16.6 17.0 Change (%) 60.2 54.6 191.0 73.6 4.4 Interest 72 64 79 69 58 Depreciation 198 200 197 241 225 Other Income 156 247 167 208 170 PBT 2,645 3,211 3,072 3,006 2,767 Tax 844 1,065 955 868 858 Effective Tax Rate (%) 31.9 33.2 31.1 28.9 31.0 PAT before Minority 1,801 2,146 2,117 2,138 1,909 Minority Interest 40 89 133 221 50 Adjusted PAT 1,761 2,057 1,985 1,917 1,859 Change (%) 64.9 55.4 232.8 86.8 5.6 Exceptional / Prior Period Items 1 -627 -1 -9 0 Reported PAT 1,760 2,684 1,986 1,926 1,859 E: MOSL Estimates; * Domestic Decotrative Paints; # FY08 avareage as 100

14.0 110 19,998 16.0 11,439 8,559 42.8 5,119 25.6 3,440 17.2 6.6 62 230 185 3,333 1,033 31.0 2,299 80 2,219 7.9 0 2,219

16.0 112 19,035 17.5 10,945 8,090 42.5 4,759 25.0 3,331 17.5 4.7 66 232 178 3,211 963 30.0 2,248 100 2,148 8.2 0 2,148

15.0 114 19,388 3.3 11,161 8,227 42.4 4,951 25.5 3,276 16.9 5.4 62 232 235 3,217 1,029 32.0 2,188 119 2,069 7.9 0 2,069

FY10

FY11E

17.5 105 66,809 22.3 37,580 29,230 43.8 16,954 25.4 12,276 18.4 83.4 285 836 778 11,934 3,731 31.3 8,203 483 7,720 92.4 -636 8,356

15.0 111 75,359 12.8 43,199 32,160 42.7 19,233 25.5 12,926 17.2 5.3 248 919 768 12,528 3,884 31.0 8,644 349 8,295 7.4 0 8,295

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

111

Results Preview SECTOR: FMCG

Britannia Industries STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 BRIT IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

23.9

52 Week Range (Rs) 1,922/1,497 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs1,872

Previous Recommendation: Buy

BRIT.BO

2/ 14/-2 44.7 1.0

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

03/09A

31,122

2,011

84.2

9.7

22.2

5.0

24.4

36.4

EV/

EV/

SALES EBITDA

1.2

13.9

03/10A

34,014

1,634

68.9

-18.2

27.2

10.5

42.2

28.2

1.2

24.8

03/11E

38,993

2,112

88.4

28.4

21.2

8.6

44.2

37.7

1.0

13.8

03/12E

44,626

2,791

116.8

32.2

16.0

6.7

46.1

43.6

0.9

9.8

„

We expect Britannia to report sales of Rs8.6b, a growth of 17% YoY. Volume growth is likely to be in double digits, realizations will increase in low to mid-single digits due to grammage reduction and price increases.

„

We estimate EBITDA margin at 4.7% as against -1.2% in 4QFY10, a considerable improvement QoQ (though down 350bp YoY), given the benefits of declining sugar and wheat prices.

„

We expect EBITDA to decline 33% YoY to Rs402m, and PAT to decline 49% YoY to Rs277m due to interest on bonus debentures.

„

Britannia has gone aggressive, with Rs5 pack of its flagship GoodDay, which should enable it to compete with ITC’s Sunfeast. In addition, it has launched Milk Bikis Almond cookies and Britannia Elachi cookies to upgrade consumers. We expect competitive intensity to remain high, as GSK Consumer is entering the premium cookies segment.

„

Sugar prices have declined by 35% from the peak while wheat prices are lower by 10%. We expect lower input costs to boost margins in the coming quarters; YoY expansion would be visible from 3QFY11.

„

The stock trades at 21.2x FY11E and 16x FY12E EPS. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Net Sales YoY Change (%) Raw Material Cost Gross Profit Margins (%) Other Exp % of Sales Total Exp EBITDA Margins (%) YoY Growth (%) Depreciation Interest Other Income PBT Tax Rate (%) Adjusted PAT YoY Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

7,312 5.5 5,070 2,243 30.7 1,643 22.5 6,713 599 8.2 4.1 91 8 153 653 109 16.7 544 18.7

8,585 2.4 5,918 2,668 31.1 1,930 22.5 7,848 737 8.6 9.9 94 9 126 762 101 13.3 660 10.7

8,814 7.7 6,418 2,396 27.2 2,017 22.9 8,434 380 4.3 -42.1 95 8 113 390 29 7.4 361 -31.4

9,303 22.1 7,168 2,134 22.9 2,250 24.2 9,418 -116 -1.2 -116.9 96 17 161 -67 -136 201.9 69 -84.0

8,556 17.0 6,246 2,310 27.0 1,908 22.3 8,153 402 4.7 -32.9 98 90 120 334 57 17.1 277 -49.0

10,130 18.0 7,243 2,887 28.5 2,229 22.0 9,472 658 6.5 -10.7 101 94 115 578 102 17.6 477 -27.8

10,136 15.0 6,994 3,142 31.0 2,260 22.3 9,254 882 8.7 132.2 103 96 125 808 146 18.1 662 83.4

10,171 9.3 6,950 3,221 31.7 2,279 22.4 9,229 942 9.3 -914.3 105 102 120 855 158 18.5 696 912.3

FY10

FY11E

34,014 9.3 24,573 9,441 27.8 7,840 23.0 32,413 1,601 4.7 -44.2 376 42 553 1,736 103 5.9 1,634 -18.8

38,993 14.6 27,433 11,561 29.6 8,676 22.3 36,109 2,885 7.4 57.2 407 382 480 2,575 464 18.0 2,112 29.3

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

112

Results Preview SECTOR: FMCG

Colgate Palmolive STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 CLGT IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs848

REUTERS CODE

S&P CNX: 5,269

COLG.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

136.0 862/542 13/ 27/28

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

115.3 2.5

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A

16,948

2,902

21.3

25.2

34.3

46.1

153.3

150.2

5.7

28.7

03/10A

19,625

4,038

29.7

39.1

24.7

30.6

156.0

154.0

4.9

19.3

03/11E

22,620

4,396

32.3

8.9

22.7

24.6

120.1

119.3

4.2

16.5

03/12E

26,128

5,178

38.1

17.8

19.3

20.0

114.4

113.8

3.6

13.9

„

We expect sales to grow 15% YoY to Rs 5.4b; volume growth at 13%.

„

We estimate 410bp YoY expansion in gross margin to 60.3%, mainly due to the merger of subsidiaries. EBITDA margin is likely to increase 60bp YoY to 25.9%.

„

We expect PBT to increase by 17.5% YoY; however, 520bp increase in tax rate to 23% will curtail PAT growth to 10%.

„

Competitive intensity is increasing, as HUL is aggressively pushing Pepsodent to prevent steady erosion in its market share. We expect increase in ad spends.

„

We believe that Colgate will be able to grow at above market average rates in oral care due to strong brand and its presence across price segments.

„

Colgate remains the best pure play on the growth potential in the oral care segment in India. The stock is trading at 22.7x FY11E and 19.3x FY12E EPS. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Toothpaste Volume Gr. (%) Net Sales YoY Change (%) COGS Gross Profit Gross Margin (%) Other Operating Expenses % to Sales Other Operating Income EBITDA Margins (%) Depreciation Interest Financial Other Income PBT Tax Rate (%) PAT YoY Change (%) Extraordinary Expenses Reported PAT E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

14.0 4,680 14.8 2,050 2,630 56.2 1,579 33.7 174 1,226 25.3 56 5 86 1,251 223 17.8 1,028 42.9 0 1,028

18.0 4,873 18.1 2,076 2,797 57.4 1,847 37.9 156 1,106 22.0 58 1 66 1,113 216 19.4 897 41.3 0 897

15.0 4,906 17.0 2,100 2,806 57.2 1,798 36.6 203 1,212 23.7 56 5 74 1,225 166 13.6 1,059 36.2 -105 1,164

11.0 5,166 13.4 1,543 3,623 70.1 2,376 46.0 194 1,441 26.9 206 4 28 1,259 204 16.2 1,055 36.9 -89 1,144

13.0 5,391 15.2 2,143 3,248 60.3 1,995 37.0 190 1,443 25.9 80 4 110 1,469 338 23.0 1,131 10.1 0 1,131

12.0 5,511 13.1 2,210 3,301 59.9 2,133 38.7 170 1,338 23.6 80 5 80 1,333 320 24.0 1,013 13.0 0 1,013

13.5 5,667 15.5 2,289 3,377 59.6 2,131 37.6 210 1,457 24.8 85 6 90 1,456 342 23.5 1,114 5.2 0 1,114

15.0 6,051 17.1 2,452 3,599 59.5 2,287 37.8 212 1,524 24.3 86 5 55 1,488 350 23.5 1,138 7.9 0 1,138

FY10

FY11E

14.0 19,625 15.8 7,768 11,856 60.4 7,599 38.7 727 4,985 24.5 376 15 254 4,848 810 16.7 4,038 39.2 -194 4,233

13.5 22,620 15.3 9,094 13,525 59.8 8,545 37.8 782 5,763 24.6 331 20 335 5,747 1,350 23.5 4,396 8.9 0 4,396

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

113

Results Preview SECTOR: FMCG

Dabur India STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 DABUR IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs200

REUTERS CODE

S&P CNX: 5,269

DABU.BO

Equity Shares (m)

YEAR

864.0

52 Week Range (Rs)

206/115

1,6,12 Rel Perf (%)

3/ 22/43

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

03/09A 28,054

3,912

4.5

03/10A 33,657

5,015

5.8

03/11E

39,851

5,735

03/12E 46,778

7,053

END

172.8 3.7

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

17.1

42.5

20.3

47.7

44.5

5.8

34.7

28.3

33.4

15.3

45.8

46.9

4.9

26.2

6.6

14.2

29.0

11.9

41.5

47.8

4.1

21.7

8.2

23.0

23.5

9.4

40.0

47.2

3.4

17.8

SALES EBITDA

„

We expect Dabur India to report net sales of Rs8.8b, up 18.5% YoY, with 14.5% volume growth. We estimate 20bp decline in EBITDA margin, with lower ad spends neutralizing the impact of lower gross margins. PBT is likely to increase 19.5% YoY; 180bp increase in tax rate will reduce the PAT growth to 15.7%.

„

Glucose, juices and oral care will be the key drivers in the domestic market. International business will maintain high double-digit growth in sales. Vatika shampoo will report yet another quarter of subdued performance.

„

Dabur has increase the prices of Amla Oil, glucose and Babool Gel – full benefits will be reflected in the coming quarters.

„

Increase in price of HDPE is likely to impact margins; although decline in sugar prices provide some solace.

„

The stock is trading at 29x FY11E and 23.5x FY12E EPS. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Volume Growth (%) Net Sales YoY Change (%) Total Exp EBITDA Margins (%) YoY Growth (%) Depreciation Interest Other Income PBT Tax Rate (%) Minority Interest Adjusted PAT YoY Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

16.0 7,427 23.0 6,244 1,182 15.9 35.7 123 37 78 1,101 190 17.3 -4 914 29.4

13.0 8,480 22.7 6,726 1,754 20.7 40.6 139 33 107 1,690 286 16.9 11 1,392 29.1

14.0 9,262 18.9 7,489 1,773 19.1 37.5 146 37 59 1,650 271 16.4 1 1,378 27.0

12.0 8,488 16.0 6,868 1,620 19.1 25.0 149 25 143 1,589 258 16.2 0 1,331 27.6

15.0 8,801 18.5 7,419 1,382 15.7 16.9 152 28 115 1,317 250 19.0 9 1,058 15.7

14.0 10,092 19.0 8,013 2,079 20.6 18.5 161 32 127 2,013 413 20.5 5 1,595 14.6

13.0 10,836 17.0 8,756 2,081 19.2 17.3 182 35 80 1,944 365 18.8 6 1,572 14.1

16.0 10,123 19.3 8,165 1,958 19.3 20.9 189 39 158 1,889 369 19.5 10 1,510 13.5

FY10

FY11E

15.0 33,657 20.0 27,327 6,330 18.8 34.5 557 132 387 6,028 1,006 16.7 8 5,015 27.5

14.5 39,851 18.4 32,352 7,499 18.8 18.5 684 134 480 7,162 1,397 19.5 30 5,735 15.7

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

114

Results Preview SECTOR: FMCG

GlaxoSmithKline Consumer STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 SKB IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs)

YEAR

42.1

3/ 37/78

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

1,895/902

1,6,12 Rel Perf (%)

Rs1,814

Previous Recommendation: Buy

GLSM.BO

76.4 1.6

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

12/08A 15,431

1,883

44.8

16.3

40.5

9.2

24.8

38.4

4.2

27.4

12/09A 19,213

2,328

55.4

23.6

32.8

7.7

25.7

39.6

3.2

19.8

12/10E 23,510

2,717

64.6

16.7

28.1

6.5

25.4

38.9

2.6

18.0

12/11E

3,327

79.1

22.4

22.9

5.5

26.1

40.0

2.2

14.1

27,681

„

We expect GSK Consumer to report net sales of Rs5.7b, a YoY growth of 21%.

„

Volume growth is likely to remain strong at 12%, aided by increasing penetration and per capita consumption, and 5% price increase from January 2010.

„

We estimate 130bp decline in EBITDA margin due to increased excise duty and high input costs of milk and sugar. Higher ad spends on new launches like Foodles will also impact margins.

„

The company is increasing focus on new launches; it has extended Horlicks Foodles to South and East India.

„

It has entered the cookies segment, which is 15% of Rs100b biscuits market. This will mark the entry of Horlicks into the high growth (20-25% CAGR) high margin segment of the biscuit industry.

„

GSK will continue to strengthen leadership in the malted foods category; success of non-MFD products will determine medium-term growth prospects.

„

The stock has seen a major re-rating in the past one year; future returns would be a function of growth in existing segments and success of new launches.

„

GSK is currently trading at 28.1x CY10E and 22.9x CY11E EPS. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E DECEMBER

CY09

CY10

CY09

CY10E

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

MFD Volume Growth (%) Net Sales YoY Change (%)

14.0 5,394 31.3

12.0 4,687 24.5

6.0 4,951 17.2

16.0 4,181 25.4

12.5 6,484

12.0 5,672

13.5 6,089

10.0 5,265

10.0 19,213

12.0 23,510

Total Exp EBITDA Margins (%) YoY Change (%) Depreciation Interest Other Income PBT Tax Rate (%) PAT YoY Change (%) E: MOSL Estimates

4,207 1,187 22.0 46.7 106 13 256 1,324 485 36.6 839 48.4

3,941 746 15.9 36.6 105 11 228 858 307 35.7 552 19.6

4,165 786 15.9 24.6 105 10 213 884 283 32.1 600 13.2

3,814 368 8.8 -8.6 104 9 218 473 136 28.8 337 3.4

20.2 5,154 1,331 20.5 -6.7 96 6 236 1,465 503 34.4 962 14.6

21.0 4,843 828 14.6 11.0 112 10 280 986 345 35.0 641 16.1

23.0 5,194 895 14.7 13.9 115 12 310 1,078 361 33.5 717 19.5

25.9 4,859 406 7.7 10.4 125 17 336 599 202 33.6 398 18.1

24.5 16,127 3,086 16.1 29.2 420 43 916 3,539 1,211 34.2 2,328 23.6

22.4 20,050 3,460 14.7 12.1 448 45 1,162 4,129 1,411 34.2 2,717 16.7

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

115

Results Preview SECTOR: FMCG

Godrej Consumer Products STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 GCPL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs342

REUTERS CODE

S&P CNX: 5,269

GOCP.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

308.2 373/160 -5/ 30/74

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

03/09A 13,957

1,824

5.9

03/10A 20,412

3,396

11.0

86.2

31.1

15.0

50.3

48.1

5.2

25.0

03/11E

38,090

4,994

15.4

39.7

22.2

12.0

52.4

54.8

3.4

18.0

03/12E 45,248

6,334

19.5

26.8

17.5

9.4

49.8

51.1

2.9

15.3

END

105.5 2.3

EPS

EPS

-16.1

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

57.8

15.8

30.4

27.2

EV/

EV/

SALES EBITDA

6.3

43.4

* Estimates from FY10 factor in 49% consolidation for Godrej Saralee

„

We expect consolidated net sales of Rs7.6b, a growth of 73% YoY; sales include the benefits of recent acquisitions like Megasari, Godrej Home Care (earlier GSL), Issue Group and Argencos.

„

We estimate 40bp decline in EBITDA margin. Higher interest burden (acquisitions) will curtail PAT growth to 38%.

„

We expect low single digit volume growth in toilet soaps due to high base effect and slow industry growth; hair color sales will increase in mid-teens due to gains from rising penetration and price increases.

„

GCPL has acquired Megasari (Indonesia), Issue Group and Argencos (Argentina), Tura (Nigeria), and the balance stake in Godrej Saralee. We estimate total acquisition cost at Rs26b.

„

We believe that GCPL is now an emerging markets play, with focus on personal wash, hair care and household care in Asia, Latin America and Africa. We believe integrating operations would be a key factor to watch out for in the coming quarters.

„

The stock is trading at 22.2x FY11E and 17.5x FY12E EPS. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

Palm Oil Price Index* 78 103 Net Sales 4,389 5,756 YoY Change (%) 21.4 65.4 EBITDA 864 1,119 Margins (%) 19.7 19.4 Depreciation 52 68 Interest -56 26 Other Income 8 139 PBT 876 1,164 Tax 179 234 Rate (%) 20.5 20.1 PAT 697 930 YoY Change (%) 78.2 112.3 E: MOSL Estimates; * Palm Fatty Acid Distillate with a 3

FY11E 3Q

91 5,176 51.3 1,014 19.6 56 20 111 1,049 198 18.8 851 112.4 month lag

4Q

1Q

2Q

3Q

4Q

94 5,092 7,592 10,165 48.1 73.0 76.6 1,075 1,465 1,942 21.1 19.3 19.1 61 99 108 27 150 135 122 6 8 1,110 1,222 1,707 192 255 365 17.3 20.9 21.4 918 967 1,341 54.5 38.7 44.2 (FY08 average as 100)

9,955 92.3 1,881 18.9 117 130 11 1,645 360 21.9 1,285 51.0

10,378 103.8 2,004 19.3 106 125 15 1,788 387 21.6 1,401 52.7

FY10

FY11E

91 20,412 46.2 4,073 20.0 236 17 379 4,199 803 19.1 3,396 86.2

38,090 86.6 7,292 19.1 430 540 40 6,362 1,368 21.5 4,994 47.1

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

116

Results Preview SECTOR: FMCG

Hindustan Unilever STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 HUVR IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

2,177.5

52 Week Range (Rs)

306/218

1,6,12 Rel Perf (%)

6/ -1/-20

Mcap (Rs b) Mcap (USD b)

Rs267

Previous Recommendation: Neutral

HLL.BO

NET SALES

PAT

(RS M)

(RS M)

END

580.4 12.5

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A* 167,617

20,636

9.5

18.4

28.1

26.6

121.3

122.8

2.6

17.5

03/10A

177,253

20,590

9.4

-0.4

28.2

17.1

64.0

82.5

3.0

18.9

03/11E

198,129

20,630

9.5

0.2

28.2

19.0

71.5

89.8

2.6

18.8

03/12E

225,073

24,577

11.3

19.1

23.7

16.7

74.4

95.5

2.3

15.5

* EPS for 12 months (April 2008-March 2009)

„

„

„ „

„

We expect HUL to report 9% YoY increase in sales for 1QFY11 to Rs49b, with volume growth at ~12% (1QFY10 volume growth of 2%). Volume growth at 12% YoY is led by (1) impact of higher grammage in detergents and shampoo sachets, (2) price reductions in toilet soaps, and (3) increased brand building and trade promotions. Gross margin is likely to decline 90bp YoY to 48.6%, led by higher input costs and impact of price cuts in laundry, soaps and shampoo. We estimate 230bp decline in EBITDA margin due to the impact of higher ad spend and royalty payments to the parent. 50% increase in financial other income will curtail PAT decline at 6.7%. HUL has increased ad spend significantly in FY10 (up 41.4% to 13.5% of sales); we see no let up in the trend as it continues to invest aggressively in brand building. We believe that sales and profit trend in soaps and detergents will be a key factor to watch out for. Price war with P&G had resulted in 1.9% sales decline and 24% EBIT decline in 4QFY10, though the full impact of price war was yet to be reflected. We have EPS estimates of Rs9.5 for FY11 and Rs11.3 for FY12. The stock is currently trading at 28.2x FY11E and 23.7x FY12E earnings. Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Volume Growth (%) Palm Fatty Acid Net Sales (incl service inc) YoY Change (%) COGS Gross Profit Margin (%) Operating Exp % to Sales EBITDA YoY Change (%) Margins (%) Depreciation Interest Other Income PBT Tax Rate (%) Adjusted PAT YoY Change (%) Extraordinary Inc/(Exp) Reported Profit YoY Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2.0 81 45,026 6.3 23,198 21,828 48.5 14,678 32.6 7,150 12.5 15.9 425 52 335 7,009 1,643 23.4 5,367 -0.6 65 5,432 -2.7

1.0 120 42,692 3.9 21,512 21,181 49.6 14,661 34.3 6,520 16.6 15.3 462 15 473 6,515 1,520 23.3 4,995 9.4 -710 4,285 -21.6

5.0 110 45,732 4.4 22,111 23,622 51.7 15,747 34.4 7,875 3.1 17.2 450 2 389 7,812 1,822 23.3 5,990 -1.8 501 6,491 5.4

11.0 130 43,802 8.5 22,175 21,627 49.4 15,672 35.8 5,955 -0.1 13.6 503 1 284 5,735 1,513 26.4 4,221 -7.6 1,591 5,812 47.1

12.0 167 49,079 9.0 25,717 23,361 47.6 16,687 34.0 6,675 -6.7 13.6 515 21 500 6,639 1,600 24.1 5,039 -6.1 0 5,039 -7.2

12.0 163 47,346 10.9 24,951 22,395 47.3 16,240 34.3 6,155 -5.6 13.0 534 27 620 6,214 1,460 23.5 4,754 -4.8 0 4,754 10.9

9.0 163 51,906 13.5 26,057 25,849 49.8 17,804 34.3 8,045 2.2 15.5 561 31 540 7,993 1,918 24.0 6,075 1.4 0 6,075 -6.4

7.0 163 49,798 13.7 25,922 23,876 47.9 17,359 34.9 6,517 9.4 13.1 578 33 500 6,406 1,644 25.7 4,763 12.8 0 4,763 -18.1

FY10

FY11E

4.8 110 177,253 5.4 88,779 88,474 49.9 60,975 34.4 27,500 7.6 15.5 1,840 70 1,481 27,071 6,481 23.9 20,590 0.7 1,430 22,020 4.1

10.0 164 198,129 11.8 102,648 95,481 48.2 68,090 34.4 27,392 -0.4 13.8 2,188 112 2,160 27,252 6,622 24.3 20,630 0.2 0 20,630 -6.3

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

117

Results Preview SECTOR: FMCG

ITC STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 ITC IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs302

REUTERS CODE

S&P CNX: 5,269

ITC.BO

Equity Shares (m) 52 Week Range (Rs)

308/187

1,6,12 Rel Perf (%)

6/ 17/33

Mcap (Rs b) Mcap (USD b)

„

„

„ „

„ „

YEAR

3,774.4

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

03/09A

155,827

32,636

8.6

03/10A

183,822

40,610

03/11E

204,315

46,951

03/12E

234,108

55,045

END

1140.4 24.6

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

4.6

34.9

7.7

23.8

32.8

6.7

20.3

10.8

24.4

28.1

7.9

30.3

41.3

5.6

16.1

12.4

15.6

24.3

6.7

29.5

40.0

5.0

14.2

14.6

17.2

20.7

5.7

29.2

40.2

4.3

11.8

SALES EBITDA

We expect ITC to post revenue growth of 11.7% YoY to Rs46.1b in 1QFY11. EBITDA is likely to increase 13.2% YoY, with 40bp margin expansion. We estimate PAT growth of 15.2% YoY to Rs10.1b, aided by 10% increase in other income and 80bp lower tax rate. We expect the cigarette business to report 4.5% volume decline in 1QFY11 following a sharp ~17% increase in excise duty and 15% price increase by ITC. We estimate 8% increase in EBIT, led by 250bp margin expansion. ITC has entered the 59mm filter cigarette segment, the benefits of which will be reflected in the coming quarters. We estimate 18% increase in New FMCG sales and 22% decline in EBIT loss. ITC has launched Vivel Deo Spirit and Fiama Di Wills gel bars. It has also entered the skin creams segment, with Vivel Active Fair. The paper and paperboard unit is likely to sustain another quarter of strong growth due to low base effect (3.5% decline in EBIT in 1QFY10). Agri business will report moderate sales growth and small decline in EBIT due to higher margins in 1QFY10. Hotels occupancies have increased to ~70%; however the ARR (average revenue per room) remains lower YoY. We estimate 20% increase in sales and 50% increase in EBIT (65% decline in 1QFY10) on a low base. The stock is currently trading at 24.3x FY11E EPS of Rs12.4 and 20.7x FY12E EPS of Rs14.6. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Cigarette Vol Gr (%) Net Sales YoY Change (%) Total Exp EBITDA Growth (%) Margins (%) Depreciation Interest Other Income PBT Tax Rate (%) Adjusted PAT YoY Change (%) Sales Growth (YoY, %) Cigarettes FMCG - Others EBIT Growth (YoY, %) Cigarettes FMCG - Others (loss) E: MOSL Estimates

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

5.5 41,329 5.1 27,456 13,873 19.5 33.6 1,516 58 876 13,175 4,388 33.3 8,787 17.4

7.5 43,453 12.5 27,552 15,901 30.8 36.6 1,484 182 684 14,920 4,821 32.3 10,099 25.8

8.5 45,802 18.7 28,725 17,076 23.9 37.3 1,549 109 1,591 17,010 5,569 32.7 11,442 26.7

8.8 51,316 28.7 35,137 16,180 24.6 31.5 1,539 185 592 15,048 4,766 31.7 10,282 27.1

-4.5 46,151 11.7 30,450 15,701 13.2 34.0 1,620 42 960 14,999 4,875 32.5 10,124 15.2

-2.5 49,500 13.9 31,200 18,300 15.1 37.0 1,700 140 650 17,110 5,475 32.0 11,635 15.2

2.5 52,500 14.6 32,300 20,200 18.3 38.5 1,750 130 1,250 19,570 6,262 32.0 13,308 16.3

4.5 60,103 17.1 40,612 19,490 20.5 32.4 1,799 183 411 17,920 5,659 31.6 12,261 19.2

8.3 183,822 16.3 120,792 63,031 24.7 34.3 6,087 534 3,743 60,153 19,543 32.5 40,610 24.4

0.0 208,254 13.3 134,562 73,691 16.9 35.4 6,869 495 3,271 69,599 22,272 32.0 47,327 16.5

14.4 9.5

15.3 14.0

17.0 23.6

15.0 25.0

3.0 18.0

6.0 17.0

9.0 14.0

11.0 14.0

19.8 20.9

8.6 15.7

17.1 -18.6

24.3 -27.3

15.5 -27.3

16.5 -24.0

8.0 -22.0

11.5 -17.0

15.0 -17.0

16.5 -24.0

18.0 -27.7

12.8 -20.0

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

118

Results Preview SECTOR: FMCG

Marico STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 MRCO IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs126

REUTERS CODE

S&P CNX: 5,269

MRCO.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

15/ 19/50

Mcap (USD b)

„

„ „ „ „

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

03/09A 23,884

2,038

3.3

03/10A 26,608

2,454

03/11E

30,519

2,845

03/12E 36,077

3,555

END

135/70

Mcap (Rs b)

„

YEAR

609.0

76.5 1.7

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

28.5

37.6

14.4

44.9

42.5

4.0

20.4

31.2

10.1

37.3

49.7

2.5

17.6

4.7

17.1

26.6

7.4

32.3

47.1

2.1

15.2

5.9

24.9

21.3

5.5

30.0

45.3

1.7

12.4

SALES EBITDA

2.8

22.3

We expect Marico to report net sales of Rs7.6b, up 9% YoY. Volume growth should remain robust at 13%; value growth would be impacted by price reductions effected in key categories. Marico had cut prices of Parachute by 5-17% in small packs for smooth up-trading from loose oil to branded oil. The company has also initiated sales promotion schemes in large packs of Parachute and Shanti Amla oil, which will impact margin. Raw material prices continued to be benign during the quarter as the prices of copra (though higher on YoY basis) and safflower oil remained benign. We estimate 100bp decline in gross margin and 30bp decline in EBITDA margin. 300bp decline in tax rate will enable the company to post 15.3% PAT growth. International business continues to be strong with steady sales growth and margin expansion. Kaya will continue to be under pressure. Presence of strong brands and lower threat of entry of MNC's in coconut oil makes Marico one of the most consistent performers in FMCG. The stock trades at 26.6x FY11E EPS and 21.3x FY12E EPS. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Volume Growth (%) Net Sales YoY Change (%) COGS Gross Profit Gross Margin (%) Other Expenditure % to Sales EBITDA Margins (%) YoY Change (%) Depreciation Interest Other Income PBT Tax Rate (%) Minority Interest Adjusted PAT YoY Change (%) Exceptional Items Reported PAT E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

14.0 6,967 16.8 3,501 3,466 49.7 2,501 35.9 965 13.8 27.5 99 86 31 811 210 25.9 0 600 29.6 -41 560

15.0 6,922 14.4 3,262 3,660 52.9 2,711 39.2 950 13.7 28.5 179 56 42 757 133 17.5 0 624 32.4 0 624

14.0 6,696 7.8 3,167 3,528 52.7 2,540 37.9 988 14.8 24.8 166 64 56 814 183 22.5 9 622 22.2 0 613

14.0 6,023 7.3 2,646 3,377 56.1 2,527 42.0 849 14.1 15.9 157 50 53 695 117 16.9 0 578 -2.7 -57 520

13.0 7,594 9.0 3,896 3,698 48.7 2,673 35.2 1,025 13.5 6.3 125 55 42 887 195 22.0 6 692 15.3 -9 683

13.5 7,683 11.0 3,880 3,803 49.5 2,781 36.2 1,022 13.3 7.6 135 60 50 877 158 18.0 5 719 15.2 -8 711

14.5 8,035 20.0 3,993 4,042 50.3 2,885 35.9 1,157 14.4 17.1 147 65 59 1,004 231 23.0 8 765 23.0 -5 760

13.5 7,207 19.7 3,428 3,778 52.4 2,779 38.6 999 13.9 17.6 157 71 54 825 135 16.3 11 680 17.6 -8 672

FY10

FY11E

14.0 26,608 11.4 12,577 14,031 52.7 10,240 38.5 3,791 14.2 24.7 601 257 183 3,116 643 20.6 19 2,454 20.4 -61 2,393

13.5 30,519 14.7 15,198 15,321 50.2 11,118 36.4 4,203 13.8 10.9 564 251 205 3,594 719 20.0 30 2,845 15.9 -30 2,815

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

119

Results Preview SECTOR: FMCG

Nestle India STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 NEST IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

96.4

52 Week Range (Rs) 3,065/1,701 1,6,12 Rel Perf (%)

-5/ 15/40

Mcap (Rs b) Mcap (USD b)

Rs2,908

Previous Recommendation: Buy

NEST.BO

280.3 6.0

NET SALES ADJ. PAT

EPS

EPS

END

(RS M)

(RS M)

(RS) GROWTH (%)

12/08A

43,242

5,650

58.6

31.0

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

49.6

57.3

119.4

169.9

6.2

31.1

SALES EBITDA

12/09A

51,294

6,976

72.4

23.5

40.2

46.6

120.0

165.2

5.2

25.9

12/10E

60,574

7,847

81.4

12.5

35.7

40.1

116.0

157.0

4.4

23.3

12/11E

72,413

9,577

99.3

22.1

29.3

34.0

120.0

161.3

3.7

19.2

„

We expect Nestle to report net sales of Rs14.2b in 2QCY10, a growth of 17% YoY. We expect the company to sustain volume growth in mid teens.

„

EBITDA will likely increase 3.8% on account of 240bp decline in margins. Higher input costs of milk and sugar, low price increases, and higher ad spend will impact profitability.

„

We believe that prepared dishes will continue to be the key volume growth driver for the company. The instant noodles category (~80% of prepared dishes sales) has seen the entry of GSK Consumer (Foodles) and HUL (Knorr Soupy noodles), which would require increased innovation and ad spends from Nestle.

„

The chocolates and confectionary category is likely to return to double-digit volume growth, as the inflationary impact in sugar is waning and SKUs have stabilized after frequent changes of last year.

„

Monsoons could be a key factor to watch out for in Nestle. Good monsoons can lower milk price inflation (milk constitutes 45% of raw material cost) and boost demand. We believe Nestlé’s margins had bottomed out in 1QCY10 and the coming quarters could see recovery.

„

The stock is trading at 35.7x CY10 EPS and 29.3x CY11E EPS. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E DECEMBER

Net Sales YoY Change (%) Total Exp EBITDA Margins (%) YoY Growth (%) Depreciation Interest Other Income PBT Tax Rate (%) Adjusted PAT YoY Change (%) Extraordinary Inc/(Exp) Reported PAT YoY Change (%) E: MOSL Estimates

CY09

CY10E

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

12,659 16.0 9,562 3,097 24.5 24.4 256 2 103 2,943 864 29.4 2,078 22.2 -105 1,973 23.2

12,095 16.8 9,478 2,618 21.6 34.2 264 6 88 2,436 654 26.9 1,782 43.5 -102 1,680 38.7

13,022 17.6 10,380 2,642 20.3 27.5 286 2 88 2,443 659 27.0 1,784 34.6 44 1,828 38.8

13,518 24.0 11,537 1,981 14.7 -6.7 307 5 106 1,775 442 24.9 1,333 -3.4 -204 1,129 -6.7

14,798 16.9 11,758 3,040 20.5 -1.8 310 6 91 2,816 845 30.0 1,971 -5.2 48 2,019 2.3

14,151 17.0 11,434 2,717 19.2 3.8 315 3 104 2,503 638 25.5 1,865 4.7 -79 1,786 6.3

15,366 18.0 12,447 2,920 19.0 10.5 322 2 115 2,711 651 24.0 2,060 15.5 -109 1,951 6.8

16,258 20.3 13,431 2,828 17.4 42.7 335 4 84 2,574 623 24.2 1,951 46.4 -329 1,622 43.7

CY09

CY10E

51,294 18.6 40,956 10,338 20.2 19.7 1,113 14 385 9,596 2,620 27.3 6,976 23.5 -367 6,609 23.8

60,574 18.1 49,069 11,505 19.0 11.3 1,282 14 395 10,604 2,757 26.0 7,847 12.5 -469 7,378 11.6

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

120

Results Preview SECTOR: FMCG

United Spirits STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 UNSP IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

„ „ „

„

„

Rs1,300

Previous Recommendation: Buy

UNSP.BO

YEAR

117.8

NET SALES

PAT

(RS M)

(RS M)

END

1514/810 9/ -1/19 153.1 3.3

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 54,681

1,875

23.0

24.9

56.6

5.1

7.8

9.9

3.0

19.1

03/10A 64,771

3,287

28.0

22.0

46.3

3.8

8.3

13.0

2.7

16.4

03/11E

69,502

5,056

43.1

53.8

30.1

3.5

11.4

13.2

2.6

15.7

03/12E 81,495

7,150

61.0

41.4

21.3

3.0

14.1

15.8

2.2

12.3

We expect Untied Spirits to register 19% growth in topline to Rs14.8b in 1QFY11. EBITDA margins are likely to expand by 50bp to 18.4% due to 3% lower ENA prices and partial booking of ad-spends on IPL in 4QFY10. EBITDA should increase 22% to Rs2.7b. However, 46% increase in interest burden (higher working capital and conversion of W&M acquisition debt to rupee debt) will curtail PAT growth to 12.9% YoY. We expect IMFL volumes to increase by 11.5% in 1QFY11, as low offtake in Andhra Pradesh will impact volume growth. We note that Andhra Pradesh volumes will be impacted due to renewal of licenses – Andhra Pradesh accounts for 20% of United Spirits’ volumes. ENA prices are estimated at Rs147/case for 1QFY11 and the current ruling prices are Rs141/case. The impact of further reduction will be reflected in the coming quarter. We expect ENA prices to trend lower post 2QFY11 as sugarcane production is likely to increase by 25% in the current year. We expect volume growth of 13.8% in FY11 and 15% in FY12. We estimate 130bp margin expansion in FY11 due to higher realizations and expected softening in ENA prices. We believe that United Spirits continues to be the best bet in the liquor space in India due to wide product portfolio and dominating market share. Success of successful branding strategy in W&M would be a key variable to watch out for in the medium term. The stock is trading at 30.1x FY11E EPS of 43.1 and 21.3x FY12E EPS of Rs61. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Volume Growth (%) ENA Price/Case Net Sales YoY Change (%) Total Exp EBITDA Margins (%) Depreciation Interest PBT from Operations YoY Change (%) Other Income PBT Tax Rate (%) PAT YoY Change (%) Extraordinary Inc/(Exp) Reported PAT E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

17.0 150 12,417 22.5 10,198 2,219 17.9 80 592 1,547 1 63 1,610 553 34.4 1,057 -9.8 700 1,757

10.0 150 10,801 19.7 8,980 1,821 16.9 83 751 987 -25 109 1,097 401 36.5 696 -25.9 0 696

12.3 151 13,468 30.8 11,256 2,212 16.4 93 747 1,372 207 85 1,456 488 33.5 968 216.6 0 968

16.0 152 12,521 37.9 10,708 1,813 14.5 114 1,023 677 -14 146 822 254 30.9 569 2.2 0 569

11.5 145 14,775 19.0 12,056 2,719 18.4 115 870 1,734 12 75 1,809 615 34.0 1,194 12.9 0 1,194

15.0 141 13,150 21.8 10,783 2,367 18.0 117 840 1,410 43 120 1,530 536 35.0 995 42.9 0 995

14.5 125 16,100 19.5 13,138 2,962 18.4 120 800 2,042 49 100 2,142 728 34.0 1,414 46.0 0 1,414

14.0 125 14,894 18.9 12,502 2,392 16.1 45 788 1,560 131 149 1,709 559 32.7 1,151 102.4 0 1,151

FY10

FY11E

13.5 151 49,207 27.9 52,697 8,065 16.4 370 3,112 4,583 13 422 5,004 1,695 33.9 3,309 11.3 700 4,009

13.8 135 58,919 19.7 48,479 10,440 17.7 397 3,298 6,746 47 444 7,190 2,438 33.9 4,753 43.6 0 4,753

Amnish Aggarwal ([email protected]) / Nikhil Kumar N ([email protected])

July 2010

121

Results Preview QUARTER ENDING JUNE 2010

Information Technology BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

Infosys to outperform on revenue growth for third consecutive quarter: We expect Infosys to post the best 1QFY11 results among the top tier universe with US dollar revenue growth of 5.3% QoQ, ahead of its guided range of 2.6-3.4%. TCS and Wipro are expected to follow with growth of 4.7% QoQ and 3.7% QoQ respectively. Growth is expected to be broad-based, led by BFSI, with improved traction in Manufacturing/discretionary service lines. The US is expected to lead growth. Cross currency impacts to depress US$ revenues by 1-1.5%.

HCL Technologies Infosys MphasiS Patni Computer TCS Tech Mahindra

EBITDA margins to fall due to wage inflation, currency movement: We expect EBITDA margins to fall by 90-130bp QoQ at the top three IT players due to cross currency movements and wage inflation, with declines at Infosys expected to be lower. HCL Tech is expected to decline by 60bp due to impact of global customer meet related expenses and higher contractor charges. Improved utilization at Infosys and TCS, along with staggering of wage inflation in 1QFY11 and promotions in 2QFY11 at TCS, will cushion the margin impact.

Wipro

Expect Infosys FY11 EPS guidance of Rs117, revenue growth guidance of 1719%: For FY11 we expect Infosys to give a US dollar revenue growth guidance of 1719% (v/s 16-18% earlier) and an EPS guidance of Rs116-117 (v/s Rs111 at the top-end earlier). Caution on guidance might be due to uncertainty about the European crisis. We expect Infosys and Wipro to guide for 4-5% QoQ growth in 2QFY11. Prefer Infosys, HCL Tech, Mphasis: We expect IT demand to revive in FY11 with 20-23% volume growth and expect 1QFY11 results to reinforce this expectation. We prefer playing the sector through companies gaining from [1] a pick-up in discretionary demand, [2] better operational scope, and [3] greater MNC offshoring. We like Infosys, HCL Tech and Mphasis on these parameters. Amongst the other top tier companies, we prefer TCS over Wipro.

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Information Technology HCL Technologies 358 Infosys 2,778 MphasiS 571 Patni Computer 511 TCS 762 Tech Mahindra 738 Wipro 391 Sector Aggregate

(RS MILLION)

RECO

SALES JUN.10

Buy Buy Neutral Buy Neutral Neutral Neutral

32,641 62,780 12,857 7,906 81,204 11,713 73,726 282,828

EBITDA

VAR.

VAR.

% YOY

% QOQ

12.2 14.7 16.3 2.3 12.7 5.2 15.4 13.3

6.1 5.6 5.3 2.1 5.0 -1.0 5.7 5.1

JUN.10

5,999 20,782 3,073 1,541 23,243 2,641 13,771 71,473

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

-4.0 11.3 5.3 -6.6 18.5 -5.9 7.3 10.4

2.8 2.8 -2.5 -9.0 0.5 -5.3 3.5 1.9

JUN.10

2,982 15,871 2,660 1,352 18,512 1,501 12,074 55,444

VAR.

VAR.

% YOY

% QOQ

-3.7 3.9 16.0 -1.2 21.8 67.4 19.5 15.0

-7.2 6.9 -0.5 -9.7 -4.1 -19.5 -0.1 -0.1

Ashwin Mehta ([email protected])

July 2010

122

Information Technology

Cross currency impacts to depress US dollar revenue: In 1QFY11 the rupee has stayed stable on average against the US dollar and the Euro and the GBP have depreciated against the US dollar by 8% and 4.3% respectively. The negative impact of cross currency movements is expected to be 1-1.5%. HCL Tech is expected to be worst affected and Infosys is expected to be least affected. Upgrades to be driven by pricing up-ticks, deal renegotiation win-rate: We expect 1QFY11 results and commentary to provide greater clarity on [1] the possibility of pricing increases, driven by a growth skew towards discretionary service lines like Package Implementation/products/consulting. and [2] market share gains in impending deal renegotiations (v/s MNC incumbents). We see these factors as key determinants for the next level of upgrades in the sector. Consistent QoQ revenue growth for top companies We expect consistent 3.7-5.3% QoQ revenue growth for the top three IT companies in 1QFY11, despite a 1-1.3% negative impact of cross currency movements. We expect Infosys to post the highest sequential growth at 5.3%, followed by TCS with 4.7% and Wipro with 3.7%. Revenue growth of 6% QoQ or higher, despite the impact of cross currency movements would be taken positively. HCL Tech might under-perform peers on revenue growth with 3.6% QoQ growth, partly contributed by higher cross currency impacts (1.5%) and lower BPO revenue (1% negative impact). INFOSYS REVENUE GROWTH TO OUTPERFORM FOR THE THIRD CONSECUTIVE QUARTER (QOQ US$)

TCS

Infosys

Wipro

8% 4% 0% -4%

1QFY11E

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

-8%

Source: Company/MOSL

EBITDA margin moderation due to wage inflation, currency movement We expect EBITDA margin declines of 90-130bp for the top three IT companies due to [1] wage inflation, and [2] cross-currency movement. We expect utilization improvement at TCS and Infosys and SGA leverage at TCS to cushion the margin declines. Individual company expectations: „ TCS: We expect wage inflation (10% offshore, 2-4% in developed markets and 210% in emerging markets), along with cross-currency movement to lead to moderation of EBITDA margins by 130bp. Improvement in utilization, SGA leverage on the reset of higher provisions for doubtful debts and staggering of wage inflation in 1QFY11 and promotions in 2QFY11 will restrict EBITDA margin declines. July 2010

123

Information Technology

„

Infosys: We expect EBITDA margins to decline by 90bp (v/s guidance of 250bp) to 33.1%, largely due to wage inflation (13% offshore and 2-3% onsite). Margin declines will be lower than guided due to better rupee realizations (US$/INR average of 46 v/ s guidance of 44.5), higher than guided growth of 5.3% QoQ (v/s 2.6-3.4%) and improved utilization. „ Wipro: We expect a decline of 130bp in IT services EBIT margins due to a residual impact of one month of wage inflation (effective February 2010), cross-currency movement and a growth skew towards emerging markets/IMS and BPO. „ HCL Tech: We expect HCL Tech’s EBITDA margin to decline by 60bp due to impact of one off expense items like global customer meet related expenses and higher contractor charges in their EAS segment. A fall in BPO revenue is another key margin depressant.

Future margin impacts of promotions at TCS in 2QFY11 and the possibility of a wage hike at Wipro will be closely watched. We expect EBITDA margins to be largely resilient at top tier IT players in FY11, with declines of 0-60bp, unless the rupee appreciates materially. WAGE INFLATION, CROSS-CURRENCY MOVEMENT DEPRESS EBITDA MARGINS

33%

23%

20.6% 4QFY09

18%

21.5%

27.2% 23.0% 21.5% 1QFY10

28%

26.2%

34.6%

35.5%

28.7%

29.7%

22.1%

21.6%

21.8%

20.3%

HCLT 34.0% 29.9%

21.9%

19.0%

33.1% 28.6%

21.2%

19.7% 1QFY11E

34.1%

2QFY10

33.6%

Wipro (overall)

4QFY10

TCS

3QFY10

Infosys 38%

Source: Company/MOSL

FY11 revenue, earnings guidance expectations at Infosys We expect Infosys’ 1QFY11 revenue to grow 5.3% QoQ, ahead of its guidance of 2.63.4%. Our expectations build a basic EPS of Rs27.8 in 1QFY11 v/s guidance of Rs.24.4 at the higher end. We expect the company to guide for FY11 US dollar revenue growth of 17-19%. We also expect Infosys to guide for higher end FY11 EPS guidance of Rs117. We expect Wipro’s revenue to be in line with its guided range of 2-4.2% QoQ growth at 3.7% QoQ. This is above the top end of its guidance, adjusting for negative cross currency impacts of 1.2%. We expect Infosys and Wipro to guide US dollar revenue growth of 45% QoQ in 2QFY11.

July 2010

124

Information Technology

INFOSYS GUIDANCE V/S EXPECTATIONS 1QFY11G

FY11G

FY11RG

1QFY11E

FY11E

59.2-59.6 -0.4 to 0.3

248-252.4 9-11

258.5-263.1 13.7-15.7

62.8 5.6

272.5 19.8

31.5

33.1

33.6

33.1

34.0

250bp

150bp

100bp

90bp

60bp

INR EPS US$ Revenue (b) Sequential Growth (%)

24.3-24.4 1.33-1.34 2.6-3.4

106.8-111.3 5.57-5.67 16-18

116-117 5.62-5.72 17-19

27.8 1.37 5.3

123.8 5.93 23.3

US$ EPS Guidance

0.55-0.56

2.4-2.5

2.5-2.55

0.60

2.69

44.5

44.5

46.0

46.0

46.0

INR Revenue (b) Sequential Growth (%) EBITDA Margin (%) Decline

INR/US$

Note: RG implies revised guidance after 1QFY11

COMMENTS

Expect rupee growth guidance upgrade of 4.7% Expect EBITDA margins to decline by 60bp (v/s guidance of 150bp) Mix based pricing increases could provide upsides Expect higher end EPS to be upgraded by 5% Expect increase of 1% in US dollar revenue growth guidance Expect ~2% increase in US dollar EPS guidance Implies currency appreciation of 2.7% v/s 6% guided earlier Source: Company/MOSL

1QFY11 GUIDANCE EXCHANGE RATE ASSUMPTIONS GUIDED AT

EUR

GBP

AUD

INR/US$

Infosys Wipro Actual (average)

1.35 1.46 1.27

1.51 1.63 1.49

0.92 44.50 0.91 46.64 0.88 45.66 Source: Company/MOSL

We expect Infosys to guide cautiously on FY11 US dollar revenue growth on the uncertainty of the impact of the European crisis on its clients. A guidance exceeding 21% would be taken positively. Commentary on pricing, deal pipeline, hiring and further wage hikes at Wipro (given wage hike differentials) will be keenly watched. Cross currency impact to depress US dollar revenue; USD/INR stable The key currency impacts are: „ Cross currency negative impact of 1-1.5% across companies, based on their European invoicing proportions. Infosys will be hit less and HCL Tech will be hit hardest. The euro appreciated by 8%, GBP by 4.3% and the AUD by 2.3%, on average, against the US dollar in 1QFY11. „ The US dollar has, on average, stayed stable against the rupee, so substantial revenue contributions (60-70%) were largely unaffected by currency movements. 1QFY11 CURRENCY HIGHLIGHTS (IN INR) RATES (INR)

Average Closing

CHANGE (QOQ, %)

US$

EUR

GBP

AUD

US$

EUR

GBP

AUD

45.7 46.6

58.0 56.8

68.0 70.1

40.3 39.9

-0.6 3.7

-8.7 -6.2

-4.9 2.9

-2.9 -3.0

1QFY11 CURRENCY HIGHLIGHTS (IN US$) RATES (US$)

Average Closing

July 2010

CHANGE (QOQ, %)

EUR

GBP

AUD

EUR

1.27 1.22

1.49 1.50

0.88 0.86

-8.0 -9.7

GBP

AUD

-4.3 -2.3 -0.9 -6.6 Source: Company/MOSL

125

Information Technology

What will stocks react positively to? NEAR TERM UNDER-PERFORMANCE OF IT STOCKS V/S SENSEX RELATIVE

ABSOLUTE

COMPANY

1M

3M

6M

12M

YTD

1M

3M

Sensex Infosys TCS Wipro HCLT Cognizant

0 (0) 2 (1) (3) (0)

0 (1) (4) (6) 2 3

0 4 1 (5) 1 11

0 35 87 59 79 85

0 5 4 (1) 2 16

9 8 11 8 6 8

2 1 (3) (5) 4 5

6M

8 12 9 2 9 18 Source:

12M

YTD

23 2 58 8 110 6 82 2 102 5 108 18 Company/MOSL

The top three stocks under-performed the Sensex over the past three months as business improvements have been built into estimates and valuations range from 17-19x FY12E earnings. With our assumptions already building in volume growth of 20-23% in FY11, absolute upsides from current levels will be driven by: [1] Pricing upticks: Growth skew towards discretionary service lines like Package Implementation/products/consulting would be key determinants of a pricing uptick. [2] Guidance increases suggesting growth trajectory moving from 20-25% to 2530%. We believe an increase in Infosys guidance to 21% or beyond would be taken positively. [3] Market share gains on impending deal renegotiations, where incumbents are MNC vendors. US$37b worth of deals are expected to come up for renegotiation over 3-6 months. With most of the deals being Infrastructure Management Services (IMS) focused, a sudden acceleration in deal wins or deal ramp-ups in IMS would be keenly watched. [4] Improvement in Europe [5] Shift towards long term transformational deals v/s short-term ROI focused deals. We remain positive on the long term outlook for the IT industry with favorable business proposition, huge market potential with limited penetration and ability of Indian IT companies to scale up to take opportunities. However, near term stock performance could be clouded by uncertainty on Europe, caution on discretionary demand recovery, wage inflation concerns and fair valuations. We see progressive improvement over the course of FY11 and would be buyers on any intermittent disappointments. GROWTH CONTINUANCE IN BFSI/MANUFACTURING KEY TO UPGRADES AGGREGATE VERTICAL GROWTH (QOQ)

BFSI

Retail

Telecom

Manufacturing

15%

Sustenance of growth in BFSI/manufacturing and recovery in telecom key to further upsides

10% 5% 0% -5%

4QFY10

3QFY10

2QFY10

1QFY10

4QFY09

3QFY09

2QFY09

1QFY09

4QFY08

3QFY08

-10%

Source: Company/MOSL

July 2010

126

Information Technology

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt IT Index

102 100

Jun-10

May-10

Apr-10

Mar-10

97 95 92

RELATIVE PERFORMANCE - 1YR (%)

M OSt IT Index Sensex

200 170

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

140 110 80

Prefer Infosys, HCL Tech, Mphasis We expect IT demand to revive in FY11 with 20-23% volume growth, against flattish revenue growth in FY10. We expect cost efficiencies to be sustained despite wage inflation pressures, with margin decline expectation of 0-60bp in FY11. We believe discretionary pick-up is a matter of time and prefer stocks with higher correlation to pick-up in discretionary spending and greater operational scope. Consequently, we prefer Infosys and HCL Tech among large caps. Aggressive MNC offshoring is a continuing trend to save market share against Indian offshorers. We prefer Mphasis among mid-caps as a clear play on this trend. We would be buyers into intermittent disappointments in the sector as the long term trends towards offshoring are positive. ? Infosys is our preferred IT pick because [1] it is best suited to capitalize on discretionary demand (43% contribution from Package Implementation and Application Development), and [2] it has the best operational scope across utilization, fixed bid, a skew towards higher margin discretionary segments, lowest European exposure and lowest tax increases; [3] it is expected to lead US dollar revenue (CAGR of 22.4% over FY10-12) and EPS growth (18% CAGR over FY10-12) v/s its peers. Maintain Buy. ? We are positive on HCL Tech due to [1] continued traction in IMS (22% of revenue), [2] expected pick-up in lagging segments like Engineering Services (ERS)/Enterprise Application Services (EAS) (40% of revenue); [3] HCL Tech’s large deals prowess in a returning deals scenario; [4] the BPO lag on margins will reduce in future. Valuations are attractive at 13.8x FY11E and 12.2x FY12E. Maintain Buy with a target price of Rs445. ? Mphasis is our preferred mid-cap pick on [1] volumes compensating for price cuts, [2] pricing at or below market average rates after impending pricing cuts in 3QFY10 limits significant further price erosion, [3] possible beat on growth expectations of US dollar revenue CAGR of 25% (higher than top tier peers) over FY09-11 on aggressive offshoring from HP to save its market share. With valuations at 11.1x FY11E (Y/E October), we believe upsides are possible after clarity on the quantum and impact of pricing cuts in 3QFY10. Maintain Neutral, target price of Rs670. ? Among large caps, we prefer TCS to Wipro because of its [1] greater participation in BFSI trend strengthening, [2] better operational scope, [3] wider geographical and services footprint, and [4] better client profile. The appreciation of the rupee is the key risk to earnings and valuations.

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

EPS (RS) FY10

FY11E

P/E (X)

EV/EBITDA

FY12E

FY10

FY11E

FY12E

FY10

FY11E

ROE (%) FY12E

FY10

FY11E

FY12E

Information Technology HCL Technologies Infosys

358

Buy

18.1

25.9

29.5

19.8

13.8

12.2

9.9

8.3

7.0

19.8

23.7

22.4

2,778

Buy

107.4

123.7

149.9

25.9

22.5

18.5

18.5

15.2

12.5

29.7

27.5

27.6 24.2

MphasiS

571

Neutral

50.1

51.5

54.4

11.4

11.1

10.5

9.6

8.4

7.5

37.9

29.2

Patni Computer

511

Buy

36.1

43.8

45.3

14.2

11.7

11.3

7.3

6.3

5.1

15.7

16.1

14.6

TCS

762

Neutral

35.1

39.5

42.6

21.7

19.3

17.9

16.7

14.3

12.5

37.4

32.1

27.5

Tech Mahindra

738

Neutral

45.0

59.9

64.8

16.4

12.3

11.4

6.9

6.9

6.0

31.6

29.7

25.3

Wipro

391

Neutral

18.6

21.8

24.1

21.0

17.9

16.2

15.4

12.9

10.9

26.6

23.9

21.6

21.7

18.7

16.5

15.4

13.1

11.1

26.4

24.6

22.7

Sector Aggregate * FY10 corresponds to CY09 and so on.

July 2010

127

Results Preview SECTOR: INFORMATION TECHNOLOGY

HCL Technologies STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 HCLT IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs358

REUTERS CODE

S&P CNX: 5,269

HCLT.BO

Equity Shares (m) 52 Week Range (Rs)

449/164

1,6,12 Rel Perf (%)

-9/ -6/69

Mcap (Rs b) Mcap (USD b)

YEAR

685.0

NET SALES

PAT*

(RS M)

(RS M)

(RS) GROWTH (%)

106,014

12,008

17.8

END

6/09A

245.5 5.3

EPS*

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

16.9

20.1

4.2

22.0

17.3

EV/

EV/

SALES EBITDA

2.4

11.2

6/10E

124,037

11,937

17.3

-2.4

20.6

3.5

19.1

13.8

2.0

9.9

6/11E

145,471

17,989

25.9

49.3

13.8

2.9

23.9

19.8

1.6

8.2

6/12E

167,659

20,598

29.4

13.7

12.2

2.4

22.5

19.8

1.3

6.9

* After ESOP charges; # Axon consolidated in December 2008

„ „ „ „ „ „ „ „

HCL Tech is expected to post US dollar revenue of US$710m, up 3.6% QoQ. Cross currency impacts are expected to depress revenue by 1.5%. Rupee revenue is expected at Rs32.6b, up 6.1% QoQ and up 12.2% YoY, driven by translation at a higher INR/US$ rate of 46 in 4QFY10 (v/s 44.9 in 3QFY10) EBITDA margin is expected to decrease by 60bp QoQ to 18.4% (including the impact of ESOP charges). This is due to impact of global customer meet related expenses and higher contractor charges. HCL Tech had forward covers of US$458m as of March 2010. We expect the company to book forex losses of Rs1.1b (US$23.8m) in 4QFY10. This is higher than guided forex losses of US$18.8m due to the rupee's depreciation. We expect HCL Tech to post net profit (after ESOP charges) of Rs3b against Rs3.2b in 3QFY10, down 7.2% QoQ. The stock trades at 13.8x FY11E and 12.2x FY12E earnings estimates (after ESOP charges). Maintain Buy with a target price of Rs445. Key things to watch for: Large deal flow, Engineering Services/Enterprise Application Services recovery, BPO outlook and wage inflation in 1QFY11. Key risks: Slower ramp-up in large deals, deterioration in hi-tech manufacturing demand, currency volatility.

QUARTERLY PERFORMANCE (US GAAP)

(RS MILLION)

Y/E JUNE

FY09 1Q

2Q

FY10 3Q

4Q

1Q

2Q

3Q

4QE

Revenues 23,623 24,691 28,615 29,085 Q-o-Q Change (%) 8.9 4.5 15.9 1.6 Direct Expenses 14,567 15,178 18,207 18,328 Sales, General & Admin. Exp. 4,019 4,332 4,503 4,508 Operating Profit 5,037 5,181 5,905 6,249 Margins (%) 21.3 21.0 20.6 21.5 Other Income 558 1,206 -24 -116 Forex Gain / (Loss) -904 -1,205 -2,016 -886 Depreciation & Amort. 908 971 1,417 1,197 PBT bef. Extra-ordinary 3,783 4,211 2,448 4,050 Provision for Tax 422 667 470 955 Rate (%) 11.2 15.8 19.2 23.6 Minority Interest -14 1 -17 0 PAT after ESOP Chrg 3,375 3,543 1,995 3,095 Q-o-Q Change (%) 264.9 5.0 -43.7 55.1 Rep. PAT excl ESOP Charge 3,562 3,729 2,178 3,307 Q-o-Q Change (%) 152.6 4.7 -41.6 51.8 US$ Revenues 505 512 564 607 Q-o-Q Change (%) 0.1 1.3 10.3 7.6 E: MOSL Estimates; Axon is consolidated since December 2008

30,314 4.2 19,349 4,279 6,686 22.1 -63 -1,504 1,418 3,701 687 18.6 1 3,013 -2.6 3,199 -3.3 630 3.8

30,325 0.0 19,749 4,432 6,144 20.3 -133 -1,257 1,361 3,393 665 19.6 0 2,728 -9.5 2,956 -7.6 652 3.4

30,757 1.4 20,619 4,304 5,834 19.0 -141 -626 1,099 3,968 754 19.0 0 3,214 17.8 3,438 16.3 685 5.1

32,641 6.1 21,872 4,771 5,999 18.4 -68 -1,094 1,155 3,682 700 19.0 0 2,982 -7.2 3,198 -7.0 710 3.6

FY09

FY10E

106,014 38.8 66,280 17,362 22,372 21.1 1,624 -5,011 4,493 14,492 2,514 17.3 -30 12,008 15.9 12,776 13.6 2,188 16.4

124,037 17.0 81,589 17,786 24,663 19.9 -405 -4,481 5,033 14,744 2,806 19.0 1 11,937 -0.6 12,791 0.1 2,676 22.3

Ashwin Mehta ([email protected])

July 2010

128

Results Preview SECTOR: INFORMATION TECHNOLOGY

Infosys STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 INFO IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

573.9

Mcap (Rs b)

0/ 6/36 1,594.1

Mcap (USD b)

„

„ „ „ „ „

„ „ „

NET SALES

PAT*

(RS M)

(RS M)

3/09A

216,930

58,800

102.5

29.5

27.1

8.7

36.7

40.2

6.9

20.7

3/10A

227,420

61,340

107.4

4.7

25.9

6.9

29.7

33.7

6.4

18.4

3/11E

272,550

70,442

123.7

15.1

22.5

5.7

27.5

32.4

5.2

15.2

3/12E

320,386

85,632

149.9

21.2

18.5

4.7

27.6

31.8

4.2

12.4

END

52 Week Range (Rs) 2,875/1,635 1,6,12 Rel Perf (%)

Rs2,778

Previous Recommendation: Buy

INFY.BO

34.4

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

We expect Infosys' consolidated revenue to grow by 5.3% QoQ in US dollar terms to US$1,365m. Infosys had guided for 1QFY11 US dollar revenue growth of 2.6-3.4% QoQ. In rupee terms, revenues are expected to grow by 5.6% QoQ to Rs62.8b. Our revenue growth estimates factor in 6.1% QoQ volume growth and negative pricing impact of 0.7% (combination of mix and cross currency impacts). Cross currency impacts are expected to be 1% on the GBP and euro depreciation v/s the US dollar. EBITDA margin is expected to decline QoQ by 90bp to 33.1% due to wage inflation and the impact of cross currency movements. EBITDA at Rs20.8b is expected to grow by 2.8% QoQ and 11.3% YoY. Infosys held hedges worth US$515m as of March 2010. We expect Infosys to book other income of Rs2.7b in 1QFY11 against Rs2.1b in 4QFY10. Net profit is expected to decline by 1.8% QoQ to Rs15.9b implying an EPS of Rs27.8, ahead of Infosys' higher end basic EPS guidance of Rs24.4. We expect Infosys to guide for FY11 US dollar revenue growth of 17-19%, FY11 higher end EPS of Rs117 and 2QFY11 US dollar revenue growth of 4-5%. The stock trades at 22.5x FY11E and 18.5x FY12E earning estimates. Maintain Buy. Key things to watch for: Continued discretionary traction, pricing commentary and hiring updates. Key risks: Delay in discretionary spends, increased attrition, currency volatility.

QUARTERLY PERFORMANCE (INDIAN GAAP)

(RS MILLION)

Y/E MARCH

Revenues Q-o-Q Change (%) Direct Expenses SG&A Operating Profit Margins (%) Other Income Depreciation PBT bef. Extra-ordinary Provision for Tax Rate (%) PAT before EO Q-o-Q Change (%) Extra-ordinary Items PAT aft. Minority and EO Q-o-Q Change (%) Diluted EPS US$ Revenues Q-o-Q Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

54,720 -2.9 29,150 6,890 18,680 34.1 2,690 2,220 19,150 3,880 20.3 15,270 -4.4 0 15,270 -5.3 26.6 1,122 0.1

55,850 2.1 29,630 6,890 19,330 34.6 2,360 2,320 19,370 3,970 20.5 15,400 0.9 0 15,400 0.9 26.8 1,154 2.9

57,410 2.8 30,090 6,940 20,380 35.5 2,310 2,310 20,380 4,550 22.3 15,830 2.8 0 15,830 2.8 27.7 1,232 6.8

59,440 3.5 31,840 7,380 20,220 34.0 2,080 2,200 20,100 5,250 26.1 14,850 -6.2 1,320 16,170 2.1 26.0 1,296 5.2

62,780 5.6 34,213 7,785 20,782 33.1 2,736 2,356 21,162 5,290 25.0 15,871 6.9 0 15,871 -1.8 27.8 1,365 5.3

67,025 6.8 36,128 8,177 22,720 33.9 2,619 2,385 22,954 5,739 25.0 17,216 8.5 0 17,216 8.5 30.1 1,457 6.8

69,998 4.4 37,544 8,540 23,914 34.2 2,888 2,412 24,390 6,098 25.0 18,293 6.3 0 18,293 6.3 32.0 1,522 4.4

72,747 3.9 38,732 8,875 25,140 34.6 2,981 2,437 25,683 6,421 25.0 19,262 5.3 0 19,262 5.3 33.7 1,581 3.9

FY10

FY11E

227,420 4.8 120,710 28,100 78,610 34.6 9,430 9,050 78,990 17,650 22.3 61,340 4.3 1,320 62,660 4.6 107.4 4,804 3.0

272,550 19.8 146,617 33,377 92,556 34.0 11,223 9,790 93,989 23,547 25.1 70,442 14.8 0 70,442 12.4 123.7 5,925 23.3

Ashwin Mehta ([email protected])

July 2010

129

Results Preview SECTOR: INFORMATION TECHNOLOGY

Mphasis STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 MPHL IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

209.2

-19/ -23/24 119.4

Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

796/331

Mcap (Rs b)

Rs571

Previous Recommendation: Neutral

MBFL.BO

2.6

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

10/08A* 19,065

2,954

14.1

98.4

23.7

8.3

39.1

37.9

3.6

17.8

10/09A 42,638

9,086

43.2

79.4

13.2

5.1

48.1

48.8

2.6

9.8

10/10E

50,366

10,530

50.1

15.9

11.4

3.7

37.9

38.4

2.1

8.4

10/11E

61,807

10,820

51.5

2.8

11.1

2.9

29.2

32.6

1.6

6.7

*Financial year end changed to YE Oct from March in FY08 (corresponds to 7month period)

„

We expect Mphasis to post US dollar revenue of US$277m, up 2.3% QoQ.

„

Mphasis is expected to post rupee revenue of Rs12.9b in 3QFY10, up 5.3% QoQ. Higher rupee revenue growth on better rupee realization and forex gains in revenue.

„

We expect ITO (IT outsourcing) to continue to lead growth at Mphasis. Applications are expected to be flattish due to the impact of pricing cuts (assumed at 5%) in 3QFY10.

„

EBITDA margin is expected to decline by 190bp QoQ to 23.9% in 3QFY10 due to a pricing cut in applications.

„

EBITDA is expected to decline by 2.4% QoQ to Rs3.1b and grow at 5.3% YoY.

„

Net profit is expected to be sequentially flat at Rs2.7b and grow at 16% YoY.

„

The stock trades at 11.4x FY10E and 11.1x FY11E earnings estimates. Maintain Neutral with a target price of Rs670.

„

Key things to watch for: Quantum and impact of pricing cuts, hiring outlook and impact of restoration of fixed wage inflation.

„

Key risks: Further adverse pricing renegotiations with HP, further declines in BPO and attrition.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E OCTOBER

Revenues Q-o-Q Change (%) Direct Expenses Sales, General & Admin. Exp. Operating Profit Margins (%) Other Income Depreciation PBT bef. Extra-ordinary Provision for Tax Rate (%) PAT bef. Extra-ordinary Q-o-Q Change (%) US$ Revenues Q-o-Q Change (%) E: MOSL Estimates

FY09

FY10

1Q

2Q

3Q

4Q

1Q

2Q

3QE

4QE

9,777 NA 6,118 1,067 2,592 26.5 64 486 2,170 70 3.2 2,100 NA 199 196.2

10,485 7.2 6,555 1,111 2,818 26.9 153 552 2,419 174 7.2 2,245 6.9 212 6.6

11,056 5.4 6,986 1,150 2,919 26.4 32 514 2,438 145 6.0 2,292 2.1 232 9.2

11,321 2.4 7,242 1,134 2,945 26.0 226 471 2,700 251 9.3 2,449 6.8 232 0.3

11,916 5.3 7,794 983 3,139 26.3 330 458 3,011 325 10.8 2,686 9.7 257 10.5

12,205 2.4 8,077 978 3,150 25.8 275 402 3,023 350 11.6 2,673 -0.5 271 5.4

12,857 5.3 8,675 1,109 3,073 23.9 362 446 2,989 329 11.0 2,660 -0.5 277 2.3

13,388 4.1 9,103 1,156 3,128 23.4 134 465 2,797 308 11.0 2,489 -6.4 289 4.3

FY09

FY10E

42,638 129.5 26,901 4,463 11,274 26.4 476 2,022 9,726 641 6.6 9,085 178.5 875 101.7

50,366 18.1 33,628 4,227 12,511 24.8 1,101 1,771 11,841 1,311 11.1 10,530 15.9 1,094 25.0

Ashwin Mehta ([email protected])

July 2010

130

Results Preview SECTOR: INFORMATION TECHNOLOGY

Patni Computer Systems STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 PATNI IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs511

REUTERS CODE

S&P CNX: 5,269

PTNI.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

YEAR

128.4

NET SALES

PAT*

(RS M)

(RS M)

END

624/240 -14/ 7/73 65.6 1.4

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

12/08A 31,991

3,671

28.6

-11.9

17.9

2.5

13.0

12.6

1.6

9.9

12/09A 31,620

4,660

36.1

26.3

14.2

1.9

15.7

15.2

1.5

7.3

12/10E 32,879

5,830

43.8

21.3

11.3

1.7

16.1

15.7

1.3

6.4

12/11E

6,030

45.3

3.4

11.0

1.5

14.6

14.3

1.0

5.1

37,010

* Reflects adjusted PAT

„

We expect Patni to post US dollar revenue of US$172m, flat QoQ, in line with its guidance of US$171m-172m.

„

Rupee revenue is expected to grow by 2.1% QoQ to Rs7.9b in 2QCY10.

„

EBITDA margin is expected to be down by 240bp at 19.5% against 21.9% in 1QCY10. This is due to wage inflation of 12-14% offshore and 2-4% onsite.

„

EBITDA is expected to fall by 9% QoQ and 6.5% YoY to Rs1.54b

„

Expected other income is Rs384m against Rs413m in 1QCY10.

„

We expect net profits (before EOI) to decline by 9.7% QoQ to Rs1.35b.

„

The stock trades at 11.3x CY10E and 11x CY11E earnings estimates. Maintain Buy, target price of Rs592.

„

Key things to watch for: Ramp-up in Universal American deal, large deal announcements, hiring trends and attrition and 3QCY10 guidance.

„

Key risks: Persistent stake sale rumours could affect growth, client concentration, attrition, currency volatility and delays in deal announcements.

QUARTERLY PERFORMANCE (US GAAP)

(RS MILLION)

Y/E DECEMBER

Revenues Q-o-Q Change (%) Direct Expenses Sales, General & Admin. Expenses Operating Profit Margins (%) Other Income Depreciation PBT bef. Extra-ordinary Provision for Tax Rate (%) Net Income bef. Extra-ordinary Q-o-Q Change (%) Extra-ordinary Items Net Income aft. Extra-ordinary Q-o-Q Change (%) US$ Revenues % Chg (QoQ) E: MOSL Estimates

CY09

CY10

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

7,955 -7.2 5,143 1,380 1,432 18.0 -202 288 941 180 19.1 761 -2.5 0 761 -2.5 156 -11.4

7,729 -2.8 4,851 1,229 1,649 21.3 339 294 1,694 326 19.2 1,368 79.9 0 1,368 79.9 162 3.5

8,040 4.0 4,922 1,456 1,662 20.7 74 308 1,428 260 18.2 1,168 -14.7 -548 1,716 25.4 167 3.3

7,896 -1.8 4,697 1,524 1,675 21.2 272 278 1,669 305 18.3 1,363 16.8 -515 1,879 9.5 170 1.8

7,745 -1.9 4,596 1,457 1,693 21.9 413 280 1,825 328 18.0 1,497 9.8 0 1,497 -20.3 172.3 1.3

7,906 2.1 4,962 1,403 1,541 19.5 384 277 1,648 297 18.0 1,352 -9.7 0 1,352 -9.7 171.9 -0.3

8,323 5.3 5,256 1,459 1,608 19.3 404 291 1,721 310 18.0 1,411 4.4 0 1,411 4.4 181 5.3

8,905 7.0 5,571 1,533 1,801 20.2 425 312 1,915 345 18.0 1,570 11.3 0 1,570 11.3 194 7.0

CY09

CY10E

31,620 -1.2 19,612 5,589 6,418 20.3 482 1,169 5,732 1,072 18.7 4,660 27.0 0 4,660 2.6 656 -8.8

32,879 4.0 20,385 5,851 6,643 20.2 1,626 1,160 7,109 1,279 18.0 5,830 25.1 0 5,830 25.1 719 9.6

Ashwin Mehta ([email protected])

July 2010

131

Results Preview SECTOR: INFORMATION TECHNOLOGY

Tata Consultancy Services STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 TCS IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

Rs762

Previous Recommendation: Neutral

TCS.BO

YEAR

1,957.2

52 Week Range (Rs)

844/361

1,6,12 Rel Perf (%)

-1/ 0/78

Mcap (Rs b)

1,490.5

Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

32.2

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

278,129

51,367

26.2

3.0

29.0

9.5

36.4

44.2

5.3

20.4

3/10A

300,289

68,730

35.1

33.8

21.7

7.1

37.4

41.0

4.8

16.7

3/11E

346,256

77,290

39.5

12.5

19.3

5.5

32.1

36.0

4.1

14.3

3/12E

394,471

83,353

42.6

7.8

17.9

4.4

27.5

32.0

3.5

12.5

„

TCS is expected to post revenue of US$1,765m, growth of 4.7% QoQ. In rupee terms, we expect revenue of Rs81.2b, growth of 5% QoQ and 12.7% YoY. Expect 1.3% negative cross currency impact on US dollar revenue.

„

EBITDA margin is expected to be 28.6%, down by 130bp QoQ led by wage inflation, cushioned by utilization improvement and SGA leverage.

„

Utilization (including trainees) is expected to increase by 270bp to 77%, after strong hiring in 4QFY10.

„

SG&A expenses (including depreciation) as a percentage of sales are expected to decline to 17.6% v/s 18.4% in 4QFY10 due to a higher revenue base and normalization of bad debt provisions.

„

We expect other income at Rs0.9b against Rs1.6b in 4QFY10.

„

The tax rate will progressively increase over FY11 to 18%, building tax rates of 15.5% in 1QFY11

„

Net profit is expected to grow to Rs18.5b, de-growth of 4.1% QoQ.

„

The stock trades at 19.3x FY11E and 17.9x FY12E earnings estimates. Maintain Neutral.

„

Key things to watch for: Promotion impacts in 2QFY11, BFSI traction and a change to hiring guidance.

„

Key risks: Slower growth in BFSI, sluggishness in Manufacturing, and currency volatility.

QUARTERLY PERFORMANCE (US GAAP)

(RS MILLION)

Y/E MARCH

Revenues Q-o-Q Change (%) Direct Expenses Sales, General & Admin. Exp. Operating Profit Margins (%) Other Income Depreciation PBT bef. Extra-ordinary Provision for Tax Rate (%) Minority Interest Net Income after. EO Q-o-Q Change (%) US$ Revenues % Chg (QoQ) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

72,070 0.5 38,208 14,243 19,619 27.2 194 1,727 18,086 2,655 14.7 228 15,203 15.7 1,480 3.3

74,351 3.2 39,215 13,794 21,342 28.7 -144 1,811 19,387 2,909 15.0 239 16,239 6.8 1,538 3.9

76,503 2.9 39,841 13,945 22,717 29.7 570 1,829 21,458 3,241 15.1 242 17,975 10.7 1,635 6.3

77,365 1.1 39,980 14,264 23,121 29.9 1,636 1,841 22,916 3,284 14.3 320 19,312 7.4 1,686 3.1

81,204 5.0 43,691 14,270 23,243 28.6 933 1,898 22,277 3,453 15.5 312 18,512 -4.1 1,765 4.7

85,203 4.9 46,037 14,678 24,487 28.7 730 1,983 23,233 4,066 17.5 312 18,855 1.9 1,852 4.9

88,421 3.8 47,752 15,204 25,465 28.8 900 2,052 24,312 4,376 18.0 312 19,624 4.1 1,922 3.8

91,429 3.4 49,389 15,546 26,494 29.0 1,067 2,117 25,445 4,835 19.0 312 20,299 3.4 1,988 3.4

FY10

FY11E

300,289 8.0 157,243 56,246 86,800 28.9 2,255 7,209 81,846 12,088 14.8 1,029 68,729 33.8 6,339 5.4

346,256 15.3 186,869 59,698 99,689 28.8 3,629 8,051 95,268 16,730 17.6 1,248 77,290 12.5 7,527 18.7

Ashwin Mehta ([email protected])

July 2010

132

Results Preview SECTOR: INFORMATION TECHNOLOGY

Tech Mahindra STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575

TECHM IN

25 June 2010

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

1,158/617

1,6,12 Rel Perf (%)

5/ -28/-23

Mcap (USD b)

„

„ „

„ „ „ „ „ „

YEAR

130.7

52 Week Range (Rs)

Mcap (Rs b)

Rs738

Previous Recommendation: Neutral

TEML.BO

NET SALES

PAT

(RS M)

(RS M)

END

96.4 2.1

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

56.9

EV/

EV/

SALES EBITDA

3/09A

44,647

10,147

77.6

31.9

9.5

4.6

57.6

1.8

6.7

3/10A

46,254

7,546

45.0

-42.0

16.4

3.1

31.6

31.5

3.1

6.3

3/11E

48,519

9,483

59.9

33.0

12.3

2.6

29.7

24.2

2.6

6.3

3/12E

52,974

10,012

64.8

8.3

11.4

2.0

25.3

22.6

2.0

5.5

Tech Mahindra's revenue of US$255m is expected to decline by 1.5% QoQ, depressed by the impact of cross currency movements of 2.5% on US dollar revenue and a ramp-down in BT to normalized revenue run rate of GBP72m (v/s GBP76m in 4QFY10). We expect Tech Mahindra to post 1% QoQ rupee revenue de-growth in 1QFY11 to Rs11.7b. Reported EBITDA margin of 22.5% is expected to contract by 110bp QoQ due to the GBP depreciation of 4.3% (57% of revenue from Europe, largely the UK). The company has postponed wage inflation to 2QFY11. Adjusted EBITDA margin (excluding the impact of restructuring charge) is expected to decline by 110bp to 19.2%. Restructuring charges assumed at Rs0.5b per quarter. Other income is expected to be Rs0.4b (v/s Rs0.7b) in 4QFY10. The tax rate is expected to be about 17% v/s 19.2% in 4QFY10. We expect net profit to decline by 15.5% QoQ to Rs1.9b. The stock trades at 12.3x FY11E and 11.4x FY12E earnings including Satyam excluding restructuring charge. Neutral. Key things to watch for: BT revenues, growth in the non-BT portfolio and wage inflation. The hardware component on new Telecom deals could lead to revenue volatility on a QoQ basis. Key risks: Dependence on BT (46% of revenue), growth skew towards lower margin BPO and telco rollouts, Satyam financials and legal issues and currency volatility.

QUARTERLY PERFORMANCE (INDIAN GAAP)

(RS MILLION)

Y/E MARCH

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Revenues 11,130 Q-o-Q Change (%) 5.9 Direct Cost 6,838 Other Operating Exps 1,487 Operating Profit 2,805 Margins (%) 25.2 Other Income -261 Interest 571 Depreciation 296 PBT bef. Extra-ordinary 1,677 Provision for Tax 268 Rate (%) 16.0 Net Income aft. Extra-ordinary 1,317 Q-o-Q Change (%) -42.9 Effect of Restructuring Fees 420 Adjusted Net Income 897 Q-o-Q Change (%) -61.1 US$ Revenues 228 Q-o-Q Change (%) 7.7 E: MOSL Estimates

11,418 2.6 6,986 1,507 2,925 25.6 270 843 312 2,040 345 16.9 1,690 28.3 415 1,275 42.2 237 3.9

11,873 4.0 7,514 1,552 2,807 23.6 6 459 331 2,023 285 14.1 1,729 2.3 430 1,299 2.0 254 7.3

11,833 -0.3 7,373 1,672 2,788 23.6 739 311 399 2,817 542 19.2 2,269 31.2 404 1,865 43.5 259 1.9

11,713 -1.0 7,433 1,640 2,641 22.5 383 297 410 2,316 394 17.0 1,916 -15.5 415 1,501 -19.5 255 -1.5

12,006 2.5 7,904 1,621 2,482 20.7 211 285 420 1,987 338 17.0 1,643 -14.2 415 1,228 -18.2 261 2.5

12,246 2.0 8,006 1,653 2,587 21.1 183 273 429 2,068 352 17.0 1,711 4.1 415 1,296 5.5 266 2.0

12,553 2.5 8,147 1,695 2,711 21.6 175 260 439 2,186 372 17.0 1,808 5.7 415 1,393 7.5 273 2.5

FY10

FY11E

46,254 3.6 28,711 6,218 11,325 24.5 754 2,184 1,338 8,557 1,440 16.8 7,005 -31.0 1,669 5,336 -47.4 977 -0.9

48,519 4.9 31,490 6,609 10,420 21.5 951 1,116 1,698 8,557 1,455 17.0 7,079 1.1 1,660 5,419 1.6 1,055 8.0

Ashwin Mehta ([email protected])

July 2010

133

Results Preview SECTOR: INFORMATION TECHNOLOGY

Wipro STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 WPRO IN

25 June 2010

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

2,443.3

52 Week Range (Rs)

452/217

1,6,12 Rel Perf (%)

-7/ -7/51

Mcap (Rs b) Mcap (USD b)

„ „ „ „ „ „

„ „ „ „ „

Rs391

Previous Recommendation: Neutral

WIPR.BO

954.2 20.6

YEAR

NET SALES

PAT

(RS M)

(RS M)

END

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

256,891

38,677

15.9

22.1

24.6

6.4

28.0

23.2

3.7

18.1

3/10A

271,957

45,647

18.6

17.4

21.0

4.8

26.6

21.8

3.4

15.4

3/11E

316,714

52,903

21.8

17.2

17.9

3.8

23.9

20.5

2.8

12.9

3/12E

365,751

59,140

24.1

10.5

16.2

3.2

21.6

19.7

2.3

10.9

We expect Wipro's IT services segment to post US dollar revenue growth of 3.7% QoQ to US$1,209m, within its guided revenue of US$1,190m-1,215m (2-4.2% QoQ). This is above its top-end guidance, excluding the negative impact of 1.2% due to cross-currency movements. Wipro is expected to post consolidated revenue growth of 5.7% QoQ to Rs73.7b due to expectations of stronger traction in its IT products business. Global IT services volumes are expected to grow by 4.7% QoQ. We expect Wipro to guide for US dollar revenue growth of 4-5% QoQ in 2QFY11. Consolidated EBIT margin is expected to decline to 18.7% from 19.1%. IT services EBIT margins are expected to moderate by 120bp to 23% on a skew towards emerging markets business, wage inflation (one month impact) and cross-currency movements. Expected EBIT is Rs13.8b, a growth of 3.5% QoQ and 7.3% YoY. We expect 1QFY11 consolidated net profit to be flat at Rs12.1b. At CMP the stock trades at 17.9x FY11E and 16.2x FY12E. Maintain Neutral. Key things to watch for: The possibility of a further wage hike, attrition and next quarter outlook. Key risks: Fixed-price project overruns, delay in Telecom recovery, currency volatility.

CONSOLIDATED QUARTERLY PERFORMANCE (IFRS)

(RS MILLION)

Y/E MARCH

IT Services and Products Other Businesses Revenues Q-o-Q Change (%) Y-o-Y Change (%) Direct Expenses SG&A EBIT Margins (%) Other Income Forex Gain/(Loss) Income from Equity Investees PBT Provision for Tax Rate (%) Minority Interest Net Income Q-o-Q Change (%) US$ Revenues (IT Services) Q-o-Q Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q*

1Q

2Q

3Q

4Q

55,603 8,265 63,868 -2.2 5.7 43,247 7,791 12,830 20.1 355 -1,406 114 11,893 1,740 14.6 49.0 10,104 0.9 1,033 -1.2

61,835 7,102 68,937 7.9 5.6 47,522 8,466 12,949 18.8 681 240 112 13,982 2,217 15.9 58.0 11,707 15.9 1,065 3.1

61,762 7,618 69,380 0.6 5.3 47,766 8,472 13,142 18.9 721 394 128 14,385 2,321 16.1 31.0 12,033 2.8 1,127 5.8

61,496 8,276 69,772 0.6 6.9 47,764 8,701 13,307 19.1 1,612 57 176 15,152 3,015 19.9 46.0 12,091 0.5 1,166 3.5

65,373 8,352 73,726 5.7 15.4 50,826 9,129 13,771 18.7 928 48 176 14,922 2,802 18.8 46.0 12,074 -0.1 1,209 3.7

70,840 8,441 79,281 7.5 15.0 54,856 9,625 14,800 18.7 1,202 0 176 16,178 3,040 18.8 46.0 13,092 8.4 1,276 5.5

70,641 8,958 79,599 0.4 14.7 54,369 9,771 15,459 19.4 1,318 0 176 16,953 3,188 18.8 46.0 13,720 4.8 1,337 4.7

75,300 8,809 84,108 5.7 20.5 57,513 10,158 16,438 19.5 1,447 0 176 18,061 3,398 18.8 46.0 14,617 6.5 1,390 4.0

FY10

FY11E

240,696 31,261 271,957

282,155 34,560 316,714

5.9 186,299 33,430 52,228 19.2 3,369 -715 530 55,412 9,293 16.8 184.0 45,935 18.5 4,391 1.6

16.5 217,564 38,683 60,468 19.1 4,895 48 704 66,115 12,428 18.8 184.0 53,503 16.5 5,212 18.7

Ashwin Mehta ([email protected])

July 2010

134

Results Preview QUARTER ENDING JUNE 2010

Infrastructure BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

Book-to-Bill ratio near recent highs, but composition poor „ For the construction sector, BTB ratio as at March 2010 was 3.5x, up from 3x in March 2009. But excluding Andhra irrigation projects, which are slow moving, the sector BTB ratio is 3x, similar to March 2009 levels. Excluding in-house BOT projects awarded in 2HFY10 (where execution is to some extent contingent on fund raising, and thus slow moving), BTB as at March 2010 was 2.5x. Thus, we believe a higher BTB ratio is unlikely to result in improved execution in 1QFY11. „ The macro environment has showed initial signs of improvement with strong order intake expected from sectors like roads, power (thermal, hydro, etc), urban infrastructure (UI), ports and irrigation.

COMPANY NAME

Hindustan Construction

IVRCL

Jaiprakash Associates

Nagarjuna Construction

Simplex Infrastructure

Andhra projects impact 1QFY11 execution, NCC/IVRCL revenue growth expected at 20%+ „ We expect 1QFY11 revenue growth of 13.6% YoY against 9.6%YoY in FY10. Execution in FY10 was impacted by slow execution in Andhra Pradesh (particularly in irrigation and real estate projects), labor scarcity and scarce government finances (particularly in the states). A lower base effect will lead to improved 1QFY11 execution. „ We expect HCC and Simplex to post muted revenue growth of 6% and 6.9% respectively in 1QFY11. For HCC, revenue growth is impacted given increased intake from hydro power projects (which entail a higher gestation period), in-house BOT projects (execution ramp up contingent on fund raising to some extent) and slowdown in Andhra irrigation projects.

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Infrastructure Hindustan Construction IVRCL Infra. Jaiprakash Associates Nagarjuna Construction Simplex Infra. Sector Aggregate

116 183 129 188 481

(RS MILLION)

RECO

SALES JUN.10

Buy Neutral Buy Buy Buy

10,220 13,095 24,918 12,074 11,862 72,169

EBITDA

VAR.

VAR.

% YOY

% QOQ

6.0 20.6 20.5 20.7 6.9 15.9

-6.1 -30.7 -25.5 -20.7 -5.3 -20.7

JUN.10

1,172 1,244 6,477 1,232 1,198 11,323

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

1.9 24.9 19.6 19.4 7.2 16.6

-4.7 -37.2 -24.1 -19.4 -6.9 -22.2

JUN.10

270 437 2,028 493 395 3,623

VAR.

VAR.

% YOY

% QOQ

0.5 24.6 -7.0 28.9 53.8 5.4

-21.1 -48.5 -17.1 -20.7 -14.1 -23.2

Satyam Agarwal ([email protected])

July 2010

135

Infrastructure

EBITDA margins expected to be stable, NPM to improve due to cut in interest costs „ In FY10, EBITDA margins for most construction companies improved (industry margins up 37bp). We expect sustained profitability at higher levels in 1QFY11 driven by improved execution and benefits from lower commodity price inventory. We expect EBITDA margins of 10.3% (maintained) in 1QFY11. „ PAT margins in 1QFY11 are expected to improve by 55bp YoY to 3.4%, due to a 85bp YoY decline in interest costs (as a percentage of revenue). Interest costs declined largely for HCC, Simplex and Nagarjuna Construction. Exposure to Andhra Pradesh „ The Andhra Pradesh government has set in motion the hiving off Telangana into a separate state. This along with the deterioration in state finances led to execution delays. Among key construction companies with large order books from Andhra Pradesh are: Patel (25.9%), IVRCL (18%) and HCC (20.1%). In FY10, most of these companies posted a slowdown in execution, partly given political changes in Andhra Pradesh, which impacted project execution. „ Based on our recent meeting with the Andhra Pradesh Irrigation Department, we understand that execution in FY11 will be impacted as a large part of the budgeted spending will be directed towards outstanding dues and 39 projects in which over 75% of the work has been completed. Execution is expected to pick up from FY12 in a more moderate manner, given that the contractual execution time for most irrigation projects has been increased. ORDER BOOK COMPOSITION (RS B) ORDER BOOK FROM AP

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt Infrastructure Index

Jun-10

May-10

Apr-10

Mar-10

105 100 95 90 85

RELATIVE PERFORMANCE - 1YR (%)

M OSt Infrastructure Index Sensex

130 110

July 2010

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

90 70 50

HCC IVRCL NCC Patel Engineering Simplex

38 39 12 22 Negligible

% ORDER BOOK

20.0 18.4 7.8 25.9 Negligible Source: Company/MOSL

Key risks in FY11: funding constraints, higher commodity prices, interest rates „ We believe the key risks for the construction sector are: increased commodity prices, a possible increase in interest rates and funding constraints. While the commodity prices have corrected from their recent peaks, the average prices in FY11 are expected to be higher. „ Interest costs as a percentage of revenue is 2.8% and compares with NPM of 3.4%. Thus earnings are highly sensitive to interest rate movements. „ Most construction companies including HCC and IVRCL plan equity fund raising as part of project SPVs/holding companies. The equity fund raising could be through a combination of PE investments, QIP and structured transactions. Any delay in fund raising could also impact execution as in-house projects account for a meaningful part of the order book.

136

Infrastructure

TREND IN ORDER BOOK (RS B) 1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

94 95 78 50 70 387 10.3

96 96 90 54 71 407 5.3

91 110 98 55 89 442 8.7

102 127 114 60 100 502 13.7

102 124 122 60 100 507 1.0

108 138 124 60 107 537 5.7

122 143 124 71 102 562 4.8

164 145 122 72 101 604 7.3

154 139 139 74 100 606 0.4

155 150 143 70 105 623 2.8

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

7 7 8 3 6 31

5 7 7 2 6 27

8 10 8 3 7 35

11 13 13 5 8 49

9 9 10 4 10 42

6 11 11 3 10 42

8 12 10 3 13 46

10 16 11 8 14 59

10 11 10 5 11 46

9 12 11 4 10 46

1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

10.8 8.9 10.4 10.9 10.0 10.2

11.0 8.0 12.6 17.8 10.0 10.7

12.9 11.1 11.1 17.9 10.0 11.4

12.6 10.5 8.7 16.5 8.5 10.4

10.2 8.8 9.4 14.3 10.8 10.3

12.0 8.0 10.3 18.5 9.8 10.4

12.1 9.1 8.8 20.8 9.1 10.4

14.7 8.7 7.6 11.1 8.1 9.7

13.0 9.2 10.3 15.2 10.1 10.8

12.5 9.4 10.2 18.3 10.4 10.7

HCC IVRCL NCC Patel Simplex Aggregate % Growth (QoQ)

3QFY10

4QFY10

YOY (%)

157 188 15 173 212 46 148 154 26 63 85 18 106 115 14 648 753 25 4.0 16.3 Source: Companies

TREND IN REVENUE (RS B)

HCC IVRCL NCC Patel Simplex Aggregate

3QFY10

4QFY10

YOY (%)

9 11 5.7 12 19 16.2 12 15 38.7 4 11 38.7 11 13 (9.8) 48 68 3.6 Source: Companies

TREND IN EBIDTA MARGINS (%)

HCC IVRCL NCC Patel Simplex Industry

3QFY10

4QFY10

YOY (%)

12.2 11.3 -335 9.8 8.0 -72 9.9 10.0 240 18.6 12.0 92 9.1 10.3 219 10.6 10.0 31 Source: Companies

QUARTERLY INTEREST COSTS (RS M, % OF REVENUE) 1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

HCC % Revenues IVRCL % Revenues NCC % Revenues Patel Engg % Revenues Simplex Infra

322.0 4.4 56.9 0.8 145.2 1.9 27.1 0.8 247.0

341.9 6.2 76.0 1.1 233.3 3.4 27.5 1.2 251.0

407.9 5.5 176.8 1.8 166.9 2.1 29.5 1.1 295.6

452.3 4.4 207.7 1.6 174.0 1.4 131.9 2.6 213.7

390.6 4.4 193.9 2.1 238.5 2.5 145.0 3.7 274.5

492.0 7.1 304.2 2.7 274.6 2.6 162.5 5.3 324.2

572.7 6.5 419.1 3.5 237.6 2.3 195.0 6.1 435.8

649.8 6.3 391.8 2.4 212.8 1.9 150.0 2.0 392.3

613.0 6.4 389.4 3.6 346.3 3.5 241.5 5.1 347.6

499.1 5.8 353.7 2.9 322.3 3.0 252.9 6.3 288.6

496.5 5.3 368.4 3.1 305.7 2.6 210.2 5.0 262.1

443.0 4.1 525.4 2.8 348.1 2.3 390.1 3.7 213.7

% Revenues Total % Revenues

4.2 798 2.2

4.4 930 2.9

4.2 1,077 2.7

2.2 1,180 2.0

2.7 1,242 3.0

3.2 1,557 3.7

3.4 1,860 4.0

2.8 1,797 3.0

3.1 1,938 4.2

2.8 2.5 1.7 1,717 1,643 1,920 3.8 3.4 2.8 Source: Company/MOSL

We are positive on the sector We are positive on the construction sector, given expected improvement in BTB ratio, stable margins and value unlocking opportunities. Adjusted for the value of BOT/real estate projects, sector P/E is an attractive 11.6x FY12E earnings. Our top picks are NCC and Simplex.

July 2010

137

Infrastructure

COMPARATIVE VALUATION CMP (RS) RECO 25.06.10

Infrastructure GMR Infrastructure GVK Power & Infra Hindustan Construction IVRCL Infra. Jaiprakash Associates Nagarjuna Construction Simplex Infra. Sector Aggregate

July 2010

57 44 116 183 129 188 481

Neutral Buy Buy Neutral Buy Buy Buy

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

1.2 1.0 3.4 7.8 1.6 9.2 24.8

1.2 1.8 4.3 9.5 4.1 11.7 34.3

1.4 3.1 6.1 12.5 4.1 14.3 45.5

47.9 43.0 33.7 23.5 81.2 20.4 19.4 38.4

49.6 24.1 26.9 19.2 31.8 16.1 14.0 27.4

42.1 14.4 19.0 14.6 31.2 13.1 10.6 19.3

15.3 21.7 10.0 11.5 18.3 11.7 7.4 16.5

14.0 15.5 8.2 9.5 16.9 9.9 6.3 14.2

9.4 10.8 6.6 7.7 10.9 8.3 5.4 10.2

6.4 5.0 6.9 11.5 4.0 9.8 12.8 8.8

5.9 8.6 8.1 13.2 8.6 10.4 15.6 11.0

13.8 12.8 10.5 15.4 8.0 12.1 17.7 13.7

138

Results Preview SECTOR: INFRASTRUCTURE

Hindustan Construction STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 HCC IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs116

REUTERS CODE

S&P CNX: 5,269

HCNS.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

303.3 162/89 4/ -24/-8

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

EPS

EPS GR.

P/E

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS)

(%)

(X)

(X)

(%)

(%)

END

35.2 0.8

EV/

EV/

SALES EBITDA

3/09A

33,137

843

3.3

19.0

19.4

1.6

8.4

12.0

1.1

8.6

3/10A

36,442

1,044

3.4

4.6

33.7

2.3

8.3

9.0

1.6

13.3

3/11E

42,476

1,306

4.3

25.1

26.9

2.2

8.3

9.4

1.4

11.3

3/12E

54,103

1,851

6.1

41.7

19.0

2.0

11.0

11.5

1.2

9.2

* Fully Diluted

„

„ „

„

„

In 1QFY11, we expect HCC to post revenue (excluding JVs) of Rs9.8b, up 12% YoY; EBIDTA of Rs1.2b (up 1.9% YoY) and net profit of Rs270m (maintained YoY). Revenue growth has been impacted by poor execution in Andhra Pradesh projects. As certain hydro power projects including the Kishanganga project (Rs27b) bagged in 2HFY09 have not crossed the margin recognition threshold of 10%. We expect 1QFY11 EBITDA margins of 11.5%, down 150bp YoY. Order book at the end of 4QFY10 was Rs188b (+15% YoY and +20% QoQ), BTB ratio was 5.2x TTM revenue. We believe the current order book should drive revenue and EPS CAGR of 22% and 38% over FY10-12. Order announcements in 1QFY11 so far are worth Rs13b, including (1) Sainj Hydroelectric Project (100MW), and (2) Rajasthan Atomic Power Plants, Unit 7 and 8 (2 X 700MW). The company was L1 in projects, totaling Rs44b at the end of 4QFY10 of which hydro power projects were Rs28b, nuclear power was Rs9b, and transport was Rs8b. In 1QFY11, HCC completed acquisition of 66% stake in Karl Steiner AG (KSAG), the second largest operator in the Swiss property market. The stake acquisition will be through the issuance of new shares for CHF35m (US$33m) cash investment in KSAG by HCC. Also, the company has approved the sale of 74% stake in 247 Park at an enterprise value of Rs7.8b (for the entire project), resulting in net cash inflow of Rs2.9b to HCC after project debt repayment. The J&K High Court upheld the award of Sawalkote hydro power project to the HCC consortium (HCC's share of Rs19.4b). The project has been part of HCC's order book for the past 3.5-4 years. We understand that construction activity will take ~1 year to commence as the state government will have to tie up funding for the project.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

FY11E 3Q*

4Q

1Q

2Q

FY10 3Q

FY11E

4Q

Sales (Excl JV) 8,725 7,825 9,026 10,867 9,770 8,495 10,619 13,592 36,442 42,476 Change (%) 0.8 20.6 10.2 10.9 12.0 8.6 17.7 25.1 10.0 16.6 Gross Sales 9,641 8,622 9,450 10,883 10,220 9,005 11,219 14,493 38,630 44,937 Change (%) 7.7 23.6 7.9 5.7 6.0 4.4 18.7 33.2 10.4 16.3 EBITDA 1,151 881 1,017 1,230 1,172 1,028 1,359 1,839 4,279 5,399 Change (%) 26.3 5.0 -4.1 -22.7 1.9 16.7 33.7 49.5 -2.8 26.2 As of % Sales 13.0 12.5 12.2 11.3 11.5 13.6 13.3 12.7 12.2 13.0 Depreciation 301 315 322 201 325 330 340 348 1,139 1,343 Interest 613 499 496 443 460 515 540 648 2,052 2,163 Other Income 19 28 41 42 15 12 10 19 130 56 PBT 256 95 240 628 402 195 489 862 1,218 1,949 Tax 74 40 92 198 133 64 161 285 404 643 Effective Tax Rate (%) 28.8 42.0 38.5 31.6 33.0 33.0 33.0 33.0 33.2 33.0 Reported PAT 182 55 147 430 270 131 328 578 814 1,306 Adj PAT 268 280 218 342 270 131 328 578 1,108 1,306 Change (%) 37.2 NA 32.8 -42.9 0.5 -53.3 50.3 69.0 21.5 17.9 E: MOSL Estimates; 1QFY10 adustments of Rs50m towards political donation and Rs53m towards Bandra Worli Sealink Inauguration Satyam Agarwal ([email protected])

July 2010

139

Results Preview SECTOR: INFRASTRUCTURE

IVRCL Infrastructure STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 IVRC IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

269.7 212/143 17/ 1/-17

Mcap (Rs b) Mcap (USD b)

Rs183

Previous Recommendation: Neutral

IVRC.BO

49.5 1.1

NET SALES

PAT

EPS

EPS GR.

P/E

P/BV

ROE

ROCE

END

(RS M)

(RS M)

(RS)

(%)

(X)

(X)

(%)

(%)

EV/

EV/

3/09A

48,819

2,290

8.5

10.5

12.1

1.5

13.4

13.7

0.8

9.7

3/10A

54,923

2,109

7.8

-7.9

20.8

2.4

11.5

13.8

1.1

11.5

3/11E

67,154

2,571

9.5

21.9

19.2

2.4

13.2

14.8

1.0

10.3

3/12E

81,493

3,380

12.5

31.5

14.6

2.1

15.4

17.2

0.8

8.3

SALES EBITDA

„

Order book as at 4QFY10 was Rs212b representing a BTB ratio of 3.9x TTM revenue. Including L1, order book is Rs234b. A large part of intake in 4QFY10 pertains to in-house road BOT projects. For FY11, the management has guided for closing the order book at Rs320b and revenue of ~Rs70b. Thus implied BTB is 4.6x. This will be a meaningful increase. „ In-house BOT projects, including a recent Goa-Maharashtra project award of Rs31b contributes Rs60b to the order book. Equity commitment on these projects is ~Rs15b, of which 25-35% has to be invested upfront at the time of financial closure. Thus the pick up in execution to some extent is contingent on fund raising, as these projects are expected to contribute ~15% of revenue in FY11. „ In 4QFY10, margins expanded 157bp due to a decline in commodity prices. For IVCRL, road projects account for 13% of revenue. As these projects are largely fixed price contracts, lower cost of commodities helped margin expansion. We believe 1QFY11 revenue and margins will be robust, largely given the base effect. However, interest costs will be an important number to watch out for, given that interest cost in 4QFY10 was Rs525m (up from Rs368m in 3QFY10). This was despite a cut in debt from Rs19.4b in December 2009 to Rs16b in March 2010. The management stated that a large part of this increase was due to non-fund charges given a higher quantum of project bids and increased mobilization advances. „ Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

10,860 17.0 996 21.5 9.2 129 389 39 516 165 32.0 351 351 -19.3

12,178 7.1 1,145 25.4 9.4 133 354 57 715 227 31.8 488 488 -18.9

11,840 -0.5 1,156 6.5 9.8 139 368 39 688 229 33.4 458 458 -1.5

18,904 16.2 1,982 36.7 10.5 141 525 20 1,335 486 36.4 850 850 6.4

13,095 20.6 1,244 24.9 9.5 144 465 38 673 236 35.0 437 437 24.6

14,102 15.8 1,312 14.6 9.3 146 440 40 766 268 35.0 498 498 2.0

15,445 30.4 1,514 31.0 9.8 152 530 30 862 302 35.0 560 560 22.2

24,511 29.7 2,446 23.4 10.0 218 621 48 1,655 579 35.0 1,076 1,076 26.6

FY10

FY11E

53,783 10.2 5,278 23.7 9.8 542 1,637 155 3,254 1,108 34.0 2,147 2,147 -7.9

67,154 24.9 6,515 23.4 9.7 660 2,056 156 3,955 1,384 35.0 2,571 2,571 19.8

Satyam Agarwal ([email protected])

July 2010

140

Results Preview SECTOR: INFRASTRUCTURE

Jaiprakash Associates STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 JPA IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs129

REUTERS CODE

S&P CNX: 5,269

JAIA.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

1,911.8 180/110 2/ -12/-34

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

EPS*

EPS GR.*

P/E*

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS)

(%)

(X)

(X)

(%)

(%)

END

247.0 5.3

EV/

EV/

SALES EBITDA

3/09A

57,642

8,970

4.7

47.1

27.5

2.3

15.9

10.3

6.1

20.8

3/10A

96,402

9,255

4.8

3.2

26.7

3.0

12.4

17.0

3.7

14.0

3/11E

116,896

10,275

5.4

11.0

24.0

2.7

11.9

11.4

3.1

12.4

3/12E

117,130

12,006

6.3

16.8

20.6

2.5

12.6

11.2

2.9

11.1

* Not Fully Diluted; FCCB outstanding of Rs14b at conversion price of Rs166/sh (dilution of ~5%)

„

In 1QFY11 we expect Jaiprakash to post revenue of Rs22.8b, up 10% YoY, EBITDA of Rs6b (up 4% YoY) and net profit of Rs1.6b, down 25% YoY.

„

JPA plans to enter the fertilizer industry and contribute Rs2b towards an initial equity contribution in the venture, through its subsidiary, Jaypee Fertilizers & Industries.

„

Jaypee Infratech (83% stake by JPA) raised Rs22.5b through an IPO to part finance the equity funding requirement for the Yamuna Expressway project development. Project cost for development of the six-lane expressway connecting Greater Noida to Agra is Rs97b, which will be funded by debt (Rs67b), equity (Rs29b) and RE deposit (Rs1b).

„

Jaiprakash Power Ventures (JPVL), an 88% subsidiary of JPA, raised US$200m through an FCCB issue to part fund its equity contribution towards power projects under construction in 4QFY10.

„

We expect Jaiprakash to post standalone net profit of Rs7.3b in FY11 (down 22% YoY) and Rs12b in FY12 (up 65% YoY). The stock trades at a reported PER of 34x FY11E and 20x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income Extra-ordinary income PBT Tax Effective Tax Rate (%) Reported PAT Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

20,671 79.9 5,417 73.5 26.2 1,017 2,219 3,229 0 5,410 498 9.2 4,912 2,181 71.4

18,243 54.3 4,558 31.1 25.0 1,100 2,588 10,298 0 11,168 2,466 22.1 8,702 1,161 -42.8

28,524 115.8 7,739 213.0 27.1 1,109 2,762 1,153 -2,110 2,911 1,879 64.6 1,032 3,141 49.2

33,452 60.5 8,535 21.1 25.5 1,334 2,989 126 -10 4,327 1,890 43.7 2,438 2,447 -22.4

24,918 20.5 6,477 19.6 26.0 1,350 3,000 900 0 3,027 999 33.0 2,028 2,028 -7.0

23,046 26.3 5,940 30.3 25.8 1,400 3,100 950 0 2,390 789 33.0 1,601 1,601 37.9

30,136 5.7 8,276 6.9 27.5 1,450 3,150 1,200 0 4,876 1,609 33.0 3,267 3,267 4.0

38,796 16.0 8,505 -0.3 21.9 1,517 3,203 1,315 0 5,100 1,721 33.7 3,379 3,379 38.1

FY10

FY11E

100,889 74.7 26,248 62.8 26.0 4,561 10,558 14,805 -2,119 23,816 6,733 28.3 17,083 8,931 4.3

116,896 15.9 29,198 11.2 25.0 5,717 12,453 4,365 0 15,393 5,118 33.2 10,275 10,275 15.1

Satyam Agarwal ([email protected]) / Nalin Bhatt ([email protected])

July 2010

141

Results Preview SECTOR: INFRASTRUCTURE

Nagarjuna Construction STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 NJCC IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs188

REUTERS CODE

S&P CNX: 5,269

NGCN.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

256.6 197/114 12/ 12/24

Mcap (Rs b) Mcap (USD b)

NET SALES*

PAT*

(RS M)

(RS M)

END

48.3 1.0

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

47,002

1,788

7.0

-1.4

27.0

1.3

9.4

10.2

0.9

10.1

3/10A

57,120

2,370

9.2

32.5

20.4

1.6

9.8

12.7

1.1

11.2

3/11E

69,987

3,003

11.7

26.7

16.1

2.0

10.4

11.5

1.2

12.1

3/12E

86,667

3,678

14.3

22.5

13.1

1.8

12.1

12.8

1.0

10.1

* For construction segment (consolidated, including international business)

„

„

„

„ „

„ „

NCC's order book in 4QFY10 was Rs154b (up 26% YoY). Order intake was Rs88b in FY10 (after a Rs9b cancellation of a Dubai real estate project). This is encouraging as large part of the intake was driven by projects to be executed over the next 2 -2.5 years. Order announcements in 1QFY11 were worth Rs8b, largely comprising buildings. For FY11, the management has guided for order intake of Rs150b, including Rs50b EPC from an in-house power project of 1,320MW. The business plan indicates intake from: buildings worth Rs32b, water/irrigation Rs21b and transport Rs20b. We are expecting improved execution in 1QFY11 with revenue of Rs12b, up 21% YoY and because of a base effect. In FY10 revenue growth was 15%, and execution was impacted given the election period and subdued order intake in FY09 (~Rs46b v/s Rs76b in FY08). NCC's orders from Andhra Pradesh account for 10% of the order book and hence receivables from the state are manageable at just Rs500m-600m. NCC was recently awarded a Rs15b NHAI road project in West Bengal. This win comes after 3-4 years. 1,320MW thermal power plant in Andhra Pradesh is expected to achieve financial closure soon. For the EPC contract, EBITDA margins are expected at 11-12% and PBT margin at 7-8%. The company participated in a Case1 bid and signed a PPA with Karnataka to supply 400MW at Rs3.89/unit for 25 years. Successful fund raising in the project SPV will be an important trigger. Interest costs in 4QFY10 were Rs348m, debt as at March 2010 was Rs15.3b against Rs12.4b in March 2009. The increase in debt is despite raising US$75m through a QIP (in September 2009). Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income Extra-ordinary income PBT Tax Effective Tax Rate (%) Reported PAT Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

10,004 3.0 1,032 12.7 10.3 127 346 20 0 579 196 33.9 382 382 3.1

10,670 1.1 1,089 0.4 10.2 129 322 8 0 646 206 32.0 439 439 3.8

11,870 15.6 1,181 31.4 9.9 133 306 14 0 756 277 36.7 479 479 31.8

15,227 38.7 1,527 82.3 10.0 136 348 12 496 1,551 525 33.8 1,026 622 62.7

12,074 20.7 1,232 19.4 10.2 143 365 12 0 736 243 33.0 493 493 28.9

12,633 18.4 1,251 14.9 9.9 152 390 14 0 723 238 33.0 484 484 10.2

14,755 24.3 1,535 30.0 10.4 160 475 19 0 919 303 33.0 615 615 28.6

19,323 26.9 2,023 32.5 10.5 214 584 21 0 1,247 412 33.1 834 834 34.2

FY10

FY11E

47,778 15.1 4,834 29.4 10.1 525 1,322 48 496 3,530 1,204 34.1 2,326 1,922 24.9

58,785 23.0 6,040 24.9 10.3 669 1,814 66 0 3,624 1,197 33.0 2,427 2,427 26.3

Satyam Agarwal ([email protected])

July 2010

142

Results Preview SECTOR: INFRASTRUCTURE

Simplex Infrastructure STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 SINF IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs481

REUTERS CODE

S&P CNX: 5,269

SINF.BO

Equity Shares (m) 52 Week Range (Rs)

563/310

1,6,12 Rel Perf (%)

-4/ -14/4

Mcap (Rs b) Mcap (USD b)

„ „

„

„

„ „

YEAR

49.5

23.8 0.5

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

3/09A

46,627

1,318

26.6

29.1

11.2

1.6

15.9

16.7

0.6

6.6

3/10A

44,538

1,226

24.8

-7.0

17.9

2.2

12.8

13.4

0.7

7.0

3/11E

53,675

1,698

34.3

38.5

14.0

2.0

15.6

15.6

0.6

6.4

3/12E

67,764

2,251

45.5

32.6

10.6

1.7

17.7

18.2

0.5

5.4

SALES EBITDA

For 1QFY11, we expect Simplex to post revenue of Rs11.9b, up 7% YoY and net profit of Rs395m, up 54% YoY. The increase in profit will be driven largely by lower interest costs and stable depreciation, resulting in earnings leverage. The order book for Simplex is Rs115b (up 14% YoY and 8% QoQ), and compares with a largely stagnant order book of Rs100b-105b from 1QFY09 to 3QFY10. Order intake in 4QFY10 was Rs21.4b (up 86% YoY, up 76% QoQ), driven by improved intake in the domestic market. In FY10, thermal power contributed 37% of the intake and buildings (largely residential), 25%. This is also positive for margins and the working capital cycle, given that a large part of private sector projects are on a negotiated basis (and not on L1). In FY10, the working capital cycle improved by 6-7 days on improved inventory management. In FY09, Simplex incurred capex of Rs4b, and in FY10 capex declined to Rs880m. Debt as at the end of March 2010 was Rs13b, similar to that in December 2009 (Rs13b), September 2009 (Rs12.9b) and March 2009 (Rs12.2b). The management said revenue growth would be up 15-20% in FY11. This compares with revenue de-growth of 5% in FY10. Also, EBITDA margins in FY11 are expected to sustain. FY10 margins were up 80bp and were a reflection of increased focus in selecting orders. Improved revenue growth in FY11 will also lead to better fixed cost absorption. Over FY10-12 we expect Simplex to post revenue of 21% CAGR and net profit of 35%. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Net Income Change (%) EBITDA Change (%) As % of Sales Other Income Interest Depreciation PBT Tax Tax / PBT (%) PAT Adjusted PAT As % of Sales Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

11,097 9.0 1,118 0.2 10.2 14 348 381 404 147 36.4 257 257 2.3 (39.0)

10,252 2.0 1,065 7.8 10.7 30 289 383 423 144 34.0 279 279 2.7 (7.7)

10,668 (16.0) 969 (16.2) 9.5 44 262 391 359 129 35.8 231 231 2.2 (23.7)

12,521 (9.8) 1,287 14.6 10.5 30 214 379 724 265 36.6 459 459 3.7 53.8

11,862 6.9 1,198 7.2 10.3 25 235 390 598 203 34.0 395 395 3.3 53.8

11,540 12.6 1,119 5.1 10.0 30 265 405 479 163 34.0 316 316 2.7 13.3

13,419 25.8 1,342 38.5 10.4 55 320 415 662 225 34.0 437 437 3.3 89.3

16,854 34.6 1,654 28.5 10.2 72 415 478 833 283 34.0 550 550 3.3 19.7

FY10

FY11E

44,538 (5.0) 4,440 3.8 10.2 116 1,112 1,534 1,911 685 35.8 1,226 1,226 2.8 (7.4)

53,675 20.5 5,314 308.2 10.2 182 1,235 1,688 2,572 875 34.0 1,698 1,698 3.2 38.5

Satyam Agarwal ([email protected])

July 2010

143

Results Preview QUARTER ENDING JUNE 2010

Media BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

Broadcasting to exhibit strong growth; print stable We expect broadcasting companies grow strongly in 1QFY11 led by 1) higher ad rates, 2) increased inventory utilization, and 3) higher DTH revenue. Including the impact of consolidation of Regional GEC and Taj TV into Zee Entertainment, aggregate revenue and PAT growth would be ~40%. Our print media universe is expected to post revenue and EBITDA growth of 10-12% YoY, though aggregate profit growth is likely to be flat YoY due to higher taxes and lower other income.

COMPANY NAME

Deccan Chronicle

H T Media

Jagran Prakashan

Sun TV Network

Star Plus regains no. 1 position by a wide margin in Hindi GEC Star Plus has regained its number one slot and consolidated its leadership position in the Hindi GEC space. During the week ended 19 June 2010, Star Plus clocked GRP of 443 v/s 276 for Colors and 231 for Zee TV. During 1QFY11, Star Plus had an average channel share of 24.6% in Hindi GEC v/s 20.7% for Colors and 19.3% for Zee TV. We note that the rating and channel share differential has started widening over the past seven weeks. If the ratings differential v/s Star Plus sustains, there could be pressure on ad rates as well as programming costs for Zee/Color going forward.

Zee Entertainment

HINDI GEC CHANNEL SHARE (COMPRISES ~30% OF OVERALL GENRE)

Star Plus

Colors

Zee TV

Imagine

Sony

35 31 27 19 16

19 11 Week 21 2010

Week 17 2010

Week 13 2010

Week 09 2010

Week 5 2010

Week 1 2010

Week 49 2009

Week 45 2009

Week 41 2009

Week 37 2009

Week 33 2009

Week 29 2009

Week 25 2009

Week 21 2009

Week 17 2009

Week 13 2009

Week 9 2009

Week 5 2009

Week 1 2009

Week 25 2010

9 7

3

Source: Exchange4 Media/MOSL

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Media Deccan Chronicle HT Media Jagran Prakashan Sun TV Zee Entertainment Sector Aggregate

122 151 121 412 291

(RS MILLION)

RECO

SALES JUN.10

Buy Neutral Neutral Neutral Buy

2,305 3,774 2,573 4,065 6,631 19,348

EBITDA

VAR.

VAR.

% YOY

% QOQ

6.4 12.6 11.0 41.3 39.3 25.1

20.3 -2.0 8.9 3.7 2.1 4.3

JUN.10

1,159 755 846 3,278 2,081 8,119

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

9.4 9.3 20.0 46.6 77.8 38.5

42.6 -18.7 33.8 -0.9 13.3 8.0

JUN.10

707 430 518 1,676 1,488 4,820

VAR.

VAR.

% YOY

% QOQ

-8.1 16.4 4.6 39.9 46.1 25.1

988.4 -13.2 42.3 1.6 16.9 25.2

Amnish Aggarwal ([email protected])/Shobhit Khare ([email protected])

July 2010

144

July 2010

4QFY10

26

13

0 Week 25 2010

Week 25 2010

Week 21 2010

39

Week 21 2010

Zee Kannada

Week 17 2010

KANNADA GEC CHANNEL SHARE (COMPRISES ~3% OF OVERALL GENRE)

Week 17 2010

Week 13 2010

Week 09 2010

Week 25 2010

Week 21 2010

Week 17 2010

Week 13 2010

Week 09 2010

Week 5 2010

Week 1 2010

Week 49 2009

Week 45 2009

Week 41 2009

Week 37 2009

Week 33 2009

Week 29 2009

Kalaignar TV

3QFY10

Week 13 2010

Week 09 2010

Week 5 2010

Week 1 2010

Week 49 2009

Zee Telugu

2QFY10

1QFY10

Week 5 2010

Week 1 2010

ETV Kannada

4QFY09

Commissioned programming hrs (LHS)

3QFY09

Week 49 2009

Week 45 2009

Week 41 2009

Eenadu TV(ETV Telugu)

2QFY09

Week 45 2009

Week 41 2009

Week 37 2009

Week 33 2009

Week 29 2009

Week 25 2009

Week 21 2009

Vijay TV

1QFY09

4QFY08

Week 37 2009

Week 33 2009

Suvarna

3QFY08

2QFY08

1QFY08

Udaya TV

Week 29 2009

Week 25 2009

Week 21 2009

Week 17 2009

Week 13 2009

Week 9 2009

Week 5 2009

Week 1 2009

Sun TV

4QFY07

Week 25 2009

Week 21 2009

Week 17 2009

Week 13 2009

Week 9 2009

Week 5 2009

Week 1 2009

Gemini TV

3QFY07

2QFY07

Week 17 2009

52

1QFY07

Week 13 2009

Week 9 2009

Week 5 2009

Week 1 2009

80

4QFY06

3QFY06

2QFY06

1QFY06

Media

TAMIL GEC CHANNEL SHARE (COMPRISES ~6% OF OVERALL GENRE)

Zee Tamizh

60

40

20

0

TELEGU GEC CHANNEL SHARE (COMPRISES ~5% OF OVERALL GENRE)

48 Maa Telugu

36

24

12

0

BALAJI TELEFILMS: TREND IN PROGRAMMING RATES - CONTENT COST LIKELY BOTTOMED OUT

360

Rate per hr (RHS - Rs m)

4.0

270

3.0

180

2.0

90

1.0

0

0.0

Source: Exchange4 Media/MOSL

145

Media

Reliance ADAG may enter broadcasting space in partnership with CBS R-ADAG group company Reliance Broadcast Network is proposing to enter a 50:50 JV with CBS of the US for owning/operating a portfolio of TV channels. While the JV will initially focus on the English GEC space, which constitutes just ~0.1% share of the overall market, the parties will also explore owning/operating Hindi/regional general entertainment channels. The Hindi GEC genre is estimated to have an overall share of ~30% and the regional GEC is estimated to have a share of ~20% of viewership. Entry of Reliance broadcast network in Hindi and the regional space can increase the competitive intensity significantly. The CBS group is the largest television network in the US and was earlier part of Viacom, which has 50% in Colors. Advertising growth gaining traction The ad revenue outlook for the industry is getting better driven by increased inventory utilization. New deals are taking place at higher rates given higher inventory utilization across the broadcasting industry. Zee has hiked rates by 8-15% in its annual contracts and we believe rate hikes for the quarterly contracts could be higher given already high utilization of 90-95% for main channel inventory. We expect hardening in ad rates, going forward, which will fully reflect in FY12. Robust GDP growth and buoyant consumer sentiment should support growth in advertising revenue. DTH continues to drive growth for broadcasters DTH subscriber base additions could surprise positively in FY11 driven by the higher number of sports events in FY11. The entry of new players in the market (Reliance Big TV in 2QFY09, Bharti Digital TV in 3QFY09 and Videocon D2H in 1QFY10) has played a key role in expanding the DTH subscriber market. While the DTH industry added ~8m subscribers in FY10, the additions could accelerate to more than 10m in FY11 due to the higher number of sports events. INDUSTRY DTH SUBSRIBER BASE, ADDITION TREND

DTH subscribers (m) 3.1

Quarterly subscriber adds (m) 2.1

2.0

2.2

1.8

1.6

1.2

1.0 7

8

11

13

15

17

19

21

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

DTH REVENUE TREND FOR ZEEL, SUN TV (RS B)

Zee

Sun

4.8 3.6

2.3 1.2

4.4

3.3

1.8

0.8

FY09

FY10

FY11E

FY12E Source:www.Indiatimes.com

July 2010

146

Media

Print media to witness heightened competition; newsprint prices rise Print media companies are expected to see increased competition. Regional media is expected to grow at a faster pace and print is no exception. This is prompting Hindi print companies to enter new geographies to increase their share of consumers, which would form a base to provide a wider footprint to advertisers. Prabhat Khabar has reduced it cover price in Jharkhand from Rs4 to Rs2, triggering a price war even before the launch of Dainik Bhaskar in the state. We believe such aggressive moves will impair the profitability of not only the incumbents but also new entrants in the near term. Newsprint prices have firmed up by ~30% from their bottom in August 2009 and are quoting at ~US$625/mt. But the strengthening rupee has helped print companies to neutralize the impact of rising newsprint prices, though depreciation of the rupee can increase costs and impact profit margins in the coming quarters. We believe the best margins of the print media companies are behind us given increased competition and firming newsprint prices. NEWSPRINT PRICES FIRMING UP (US$/MT)

880 760 640 520

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

Feb-08

Dec-07

Oct-07

Aug-07

Jun-07

Apr-07

400

TREND IN QOQ GROWTH (%)

New sprint Price (US$) RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt M edia Index

INR/US$

New sprint Price (Rs)

20 10

110

0

105

-10

100 90

-30

Jun-10

Apr-10

May-10

-20 Mar-10

95

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

Source:Bloomberg RELATIVE PERFORMANCE - 1YR (%)

M OSt M edia Index Sensex

215 180

July 2010

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

145 110 75

Sector outlook We believe the media industry's growth rates will perk up significantly in the coming quarters as higher ad inventory utilization and ad rates will translate into higher revenue. We believe print media companies have seen the best of their margins and could see growth rates coming down as players enter new territories and cut cover prices. The broadcasting space looks attractive due to rising subscription revenues from DTH, the digitization drive from cable companies and improving outlook on advertising. Zee Entertainment and Sun TV are the best stocks to play the broadcasting space. 147

Media

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

Media Deccan Chronicle HT Media Jagran Prakashan Sun TV Zee Entertainment Sector Aggregate

July 2010

122 151 121 412 291

Buy Neutral Neutral Neutral Buy

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

10.8 5.7 5.8 14.4 10.5

13.4 7.6 6.5 18.0 12.6

15.9 9.2 6.9 22.1 16.1

11.3 24.6 20.8 28.6 27.7 24.8

9.1 19.4 18.7 22.9 23.1 20.1

7.7 16.7 17.6 18.6 18.0 16.4

5.9 12.4 12.2 14.2 22.2 14.3

4.8 10.2 11.1 11.1 15.7 11.2

3.9 8.6 10.4 9.0 12.0 9.1

20.9 14.5 28.7 28.2 12.9 18.7

23.1 15.1 30.0 28.1 15.1 20.5

24.3 15.6 31.8 27.8 17.7 21.9

148

Results Preview SECTOR: MEDIA

Deccan Chronicle STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 DECH IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs122

REUTERS CODE

S&P CNX: 5,269

DCHL.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

245.0 180/55 -6/ -30/30

Mcap (Rs b) Mcap (USD b)

29.9 0.6

NET SALES

PAT

END

(RS M)

(RS M)

EPS

03/09A

8,149

1,401

5.7

03/10A

8,925

2,608

10.8

03/11E

9,850

3,241

03/12E 10,944

3,848

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

-48.5

21.3

2.6

12.2

17.6

3.7

11.2

88.3

11.3

2.7

20.9

26.7

3.0

5.9

13.4

24.3

9.1

2.4

23.1

29.5

2.5

4.8

15.9

18.7

7.7

2.1

24.3

32.7

2.1

3.9

(RS) GROWTH (%)

EV/

EV/

SALES EBITDA

„

We expect Deccan Chronicle to post 6.4% YoY growth in revenue to Rs2.3b in 1QFY11. Growth will be led mainly by an increase in ad revenue.

„

DCHL will continue to benefit from lower newsprint prices. However the prices are sequentially higher by ~6%. We estimate an EBITDA of Rs1.16b and PAT of Rs707m. We assume 33.5% tax rate in 1QFY11 against 25% a year earlier.

„

DCHL continues to be a pure English print media play in the south Indian markets of Hyderabad, Chennai and Bangalore. We expect ad markets in these cities to remain robust due to steady recovery in the IT industry (these cities are IT hubs).

„

The stock trades at a P/E of 9.1x FY11E and 7.7x FY12E. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2,166 11.9 1,059 12.4 48.9 99 111 71 920 150 25.0 770 770 26.3

2,509 10.8 1,387 79.3 55.3 102 111 75 1,249 250 20.0 999 999 120.7

2,334 8.7 1,266 132.8 54.3 102 113 75 1,127 350 31.1 777 777 202.6

1,917 6.3 813 92.6 42.4 126 116 73 644 579 89.9 65 65 -20.2

2,305 6.4 1,159 9.4 50.3 102 95 102 1,064 356 33.5 707 707 -8.1

2,694 7.4 1,504 8.4 55.8 108 95 119 1,420 476 33.5 944 944 -5.5

2,624 12.5 1,459 15.2 55.6 109 95 116 1,372 460 33.5 912 912 17.5

2,227 16.2 1,127 38.7 50.6 112 95 99 1,019 341 33.5 677 677 942.2

FY10

FY11E

8,925 9.5 4,525 68.7 50.7 429 452 292 3,937 1,329 33.8 2,608 2,608 86.2

9,850 10.4 5,250 16.0 53.3 432 380 436 4,874 1,633 33.5 3,241 3,241 24.3

Amnish Aggarwal ([email protected])/Shobhit Khare ([email protected])

July 2010

149

Results Preview SECTOR: MEDIA

H T Media STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 HTML IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs151

Previous Recommendation: Neutral

HTML.BO

YEAR

234.2

NET SALES

PAT

(RS M)

(RS M)

END

174/81

03/09A 13,591

-4/ 5/36 35.3 0.8

CON. EPS

200

EPS

(RS) GROWTH (%)

0.9

-28.2

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

176.4

3.9

9.4

9.9

EV/

EV/

SALES EBITDA

2.6

18.6

03/10E 14,379

1,435

5.7

50.3

24.6

3.6

14.5

16.3

2.4

12.4

03/11E

15,376

1,823

7.6

16.6

19.4

3.2

15.1

18.4

2.1

10.2

03/12E 17,036

2,123

9.2

16.5

16.7

2.8

15.6

19.3

1.8

8.6

„

We expect HT Media to post revenue of Rs3.8b up 12.6% YoY. Strong traction in Hindustan will be a key driver of ad revenue.

„

The company will benefit from lower newsprint prices though the prices have increased sequentially by ~6%. Cost rationalization and some benefit of lower newsprint prices will boost consolidated EBITDA to Rs755m. We estimate adjusted PAT of Rs430m.

„

Its Hindi daily Hindustan continues to do well due to strong traction in the regional advertising market. HT Media continues to be impacted by strong competition in Mumbai and Delhi. Hindustan Media Ventures has filed for DRHP and an IPO would unlock value in the company.

„

We believe HT Media will be impacted by reduced cover prices in Jharkhand and the entry of DB Corp in Bihar and Jharkhand.

„

The stock trades at a P/E of 19.4x FY11E and 16.7x FY12E. Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

Sales 3,351 3,471 Change (%) 3.2 3.9 EBITDA 691 646 Change (%) 4.2 62.1 As of % Sales 20.6 18.6 Depreciation 163 175 Interest 78 75 Other Income 65 39 Extra-ordinary Expense 45 40 PBT 470 396 Tax 146 82 Effective Tax Rate (%) 31.1 20.6 PAT 324 314 Exceptional Items 45 40 Minority Interest 0 0 Reported PAT 324 314 Adj PAT 369 354 Change (%) -14.1 92.8 E: MOSL Estimates; Consolidated Nos from 3QFY10

FY11E 3Q

4Q

1Q

2Q

3Q

4Q

3,661 5.9 746 241.8 20.4 165 72 19 14 514 160 31.2 354 14 5 359 373 LP

3,851 12.5 929 270.1 24.1 180 71 45 15 708 223 31.5 485 15 -5 480 495 531.6

3,774 12.6 755 9.3 20.0 175 50 73 45 557 173 31.0 385 45

3,831 10.4 770 19.2 20.1 189 50 74 46 559 173 31.0 386 46

3,984 8.8 809 8.5 20.3 190 49 77 47 599 186 31.0 413 47

3,788 -1.6 874 -5.9 23.1 194 49 73 50 654 203 31.0 451 50

385 430 16.4

386 432 22.0

413 460 23.5

451 501 1.2

FY10

FY11E

14,379 5.8 2,804 179.6 19.5 707 295 159 76 1,885 537 NA 1,348 76 11 1,359 1,435 617.5

15,376 6.9 3,208 14.4 20.9 749 198 296 188 2,369 734 31.0 1,635 188 1,635 1,823 27.0

Amnish Aggarwal ([email protected])/Shobhit Khare ([email protected])

July 2010

150

Results Preview SECTOR: MEDIA

Jagran Prakashan STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 JAGP IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs121

Previous Recommendation: Neutral

JAGP.BO

YEAR

301.2 142/66 3/ -8/36 36.5 0.8

NET SALES

PAT

END

(RS M)

(RS M)

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A

8,234

916

3.0

-6.7

39.9

6.5

16.4

18.7

4.1

21.8

03/10E

9,419

1,759

5.8

92.0

20.8

6.0

28.7

33.4

3.6

12.2

03/11E

10,705

1,949

6.5

10.8

18.7

5.8

30.0

34.2

3.3

11.1

03/12E 12,475

2,182

6.9

6.6

17.6

5.8

31.8

35.7

3.0

10.4

„

Jagran Prakashan is expected to post 1QFY11 revenue of Rs2.6b, up 11% YoY, driven by higher ad rates and volume growth.

„

We estimate a 250bp increase in EBITDA margins on a high base of newsprint prices. Besides, increasing pricing pressure in the UP market will impact the company's circulation revenue.

„

We estimate a 5% increase in adjusted PAT to Rs518m due to lower other income.

„

We note circulation prices are coming under pressure in UP, the largest market for Jagran Prakashan. Besides, cover prices in Jharkhand have also been cut. Entry of DB Corp in Bihar and Jharkhand can impair profit growth in the coming quarters.

„

The stock trades at a P/E of 18.7x FY11E and 17.6x FY12E. Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Revenue Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2,319 12.3 705 42.0 30.4 124 14 157 724 229 31.7 495 56.4

2,468 18.3 832 119.1 33.7 130 15 50 738 235 31.9 503 121.5

2,269 9.6 653 117.1 28.8 119 13 70 590 193 32.7 397 156.9

2,363 17.4 633 62.2 26.8 135 24 66 540 176 32.6 364 66.8

2,573 11.0 846 20.0 32.9 143 15 75 763 245 32.1 518 4.6

2,758 11.7 940 13.0 34.1 151 12 78 855 275 32.1 580 15.5

2,717 19.7 804 23.2 29.6 159 12 83 716 230 32.1 486 22.4

2,656 12.4 629 -0.5 23.7 166 16 88 536 172 32.1 364 0.0

FY10

FY11E

9,419 14.4 2,823 80.1 30.0 507 66 343 2,592 833 32.1 1,759 92.0

10,705 13.7 3,221 14.1 30.1 619 55 325 2,872 923 32.1 1,949 10.8

Amnish Aggarwal ([email protected])/Shobhit Khare ([email protected])

July 2010

151

Results Preview SECTOR: MEDIA

Sun TV Network STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 SUNTV IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs412

Previous Recommendation: Neutral

SUTV.BO

YEAR

394.1

NET SALES

PAT

(RS M)

(RS M)

END

453/210 -7/ 21/53 162.3 3.5

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

10,364

4,164

10.6

13.5

39.0

9.1

24.4

44.2

15.3

19.8

3/10A

13,950

5,674

14.4

36.3

28.6

8.1

28.2

52.8

11.3

14.2

3/11E

17,160

7,076

18.0

24.7

22.9

6.4

28.1

52.6

8.9

11.1

3/12E

20,147

8,712

22.1

23.1

18.6

5.2

27.8

51.5

7.3

9.0

„

We expect the company to post 1QFY11 revenue of Rs4.1b, up 41% YoY, EBITDA of Rs3.3b, up 47% YoY, and PAT of Rs1.67b, up 40% YoY.

„

We expect advertising revenue to grow 50% YoY and stay flat sequentially at Rs2.6b.

„

We expect DTH subscription revenue to increase 96% YoY and 12% QoQ to Rs706m.

„

We believe Sun TV continues to be one of the best broadcasting plays due to its strong presence in south India (part of a faster growth regional advertising pie).

„

The stock trades at a P/E of 22.9x FY11E and 18.6x FY12E. Neutral.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Revenue Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2,877 28.7 2,236 32.9 77.7 550 6 142 1,822 624 34.3 1,198 1,198 16.8

3,204 34.7 2,436 38.1 76.0 571 2 115 1,978 672 34.0 1,306 1,306 37.3

3,951 45.9 3,125 55.3 79.1 885 2 84 2,322 803 34.3 1,519 1,519 35.4

3,919 42.0 3,308 46.6 84.4 848 2 85 2,542 892 35.3 1,651 1,651 44.7

4,065 41.3 3,278 46.6 80.6 868 3 121 2,528 852 33.7 1,676 1,676 39.9

4,256 32.9 3,390 39.2 79.6 909 3 127 2,605 878 33.7 1,727 1,727 32.3

4,438 12.3 3,534 13.1 79.6 921 3 132 2,743 924 33.7 1,819 1,819 19.7

4,401 12.3 3,602 8.9 81.8 934 3 131 2,796 942 33.7 1,854 1,854 12.3

FY10

FY11E

13,950 38.4 11,105 43.9 79.6 2,854 12 425 8,664 2,990 34.5 5,674 5,674 36.2

17,160 23.0 13,803 24.3 80.4 3,632 10 512 10,672 3,597 33.7 7,076 7,076 24.7

Amnish Aggarwal ([email protected])/Shobhit Khare ([email protected])

July 2010

152

Results Preview SECTOR: MEDIA

Zee Entertainment Enterprises STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 Z IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs291

REUTERS CODE

S&P CNX: 5,269

ZEE.BO

Equity Shares (m)

YEAR

484.1

52 Week Range (Rs)

315/160

1,6,12 Rel Perf (%)

-4/ 8/52

Mcap (Rs b) Mcap (USD b)

140.6 3.0

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

3/09A

21,773

4,365

10.1

3/10A

21,966

4,686

3/11E

28,456

6,093

3/12E

33,127

7,822

EV/

EV/

14.8

28.9

3.8

13.9

18.2

6.0

23.7

10.5

4.3

27.7

3.7

12.9

17.8

6.2

22.3

12.6

19.9

23.1

3.4

15.1

22.0

4.7

15.7

16.1

28.4

18.0

3.1

17.7

25.8

3.9

12.0

SALES EBITDA

„

We expect Zee Entertainment (ZEEL) to post 39.3% YoY growth in 1QFY11 revenue due to an 84.8% increase in advertising revenue and 8.1% YoY increase in subscription revenue. Ad revenue growth will be driven by higher inventory utilization and ad rates in the Hindi GEC and consolidation of regional GECs of ZNL.

„

DTH revenue will continue to drive growth in subscription revenue. We expect subscription revenue to comprise 39% of total 1QFY11 revenue.

„

We estimate 78% increase in EBIDTA due to a 680bp expansion in margins. Adjusted PAT is estimated at Rs1.5b, up 46% YoY.

„

Zee TV will clock an average channel share of 19.3% in Hindi GEC in 1QFY11 with a GRP of ~250. However channel share and GRP for Star Plus has increased sharply in the past few weeks.

„

The stock trades at a P/E of 23.1x FY11E and 18x FY12E. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

Advertsing Revenue Subscription Revenue Other Sales and Services Net Sales Change (%) Prog, Transmission & Direct Exp Staff Cost Selling and Other Exp EBITDA Change (%) As of % Sales Depreciation Interest Other Income Extraordinary Items PBT Tax Effective Tax Rate (%) Reported PAT Minority Interest Adj PAT after Minority Int. Change (%) E: MOSL Estimates

FY11E

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2,707 2,467 135 5,309 -2.7 2,306 372 1,059 1,573 31.0 29.6 76 65 323 313 2,067 603 32.0 1,464 -100 1,251 22.5

3,517 2,513 463 6,493 26.4 2,609 689 1,358 1,836 52.8 28.3 56 110 291 -11 1,950 662 33.9 1,288 25 1,274 37.4

3,658 2,604 369 6,631 39.3 2,792 585 1,174 2,081 77.8 31.4 85 11 204

3,877 2,747 373 6,998 29.5 3,015 588 1,238 2,156 43.0 30.8 86 11 215

4,147 2,891 377 7,414 39.6 3,256 591 1,307 2,261 43.8 30.5 89 11 228

3,940 3,093 379 7,412 14.2 3,461 598 1,369 1,985 8.1 26.8 92 11 228

2,189 700 32.0 1,488

2,274 728 32.0 1,546

2,388 764 32.0 1,624

2,108 675 32.0 1,434

1,488 46.1

1,546 35.5

1,624 29.8

1,434 12.6

1,980

2,476

2,410 370 4,759 -12.2 2,392 390 808 1,170 -18.9 24.6 75 91 325

2,435 494 5,405 -5.5 2,229 442 1,226 1,508 1.3 27.9 77 84 291

1,329 416 31.3 913 -105.8 1,019 -17.8

1,638 529 32.3 1,109 -32 1,141 -6.7

FY10

FY11E

10,680 9,824 1,462 21,966 1.1 9,536 1,893 4,451 6,087 14.2 27.7 284 350 1,230 302 6,985 2,210 31.6 4,775 -212.2 4,685 6.2

15,622 11,335 1,498 28,455 29.5 12,523 2,362 5,088 8,482 39.4 29.8 353 44 875 0 8,959 2,867 32.0 6,092 0.0 6,092 30.0

Amnish Aggarwal ([email protected])/Shobhit Khare ([email protected])

July 2010

153

Results Preview QUARTER ENDING JUNE 2010

Metals BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

Steel volumes to shrink sequentially, cost increases to put pressure on margins Mounting inventories with producers have dashed hopes of an early recovery in steel prices. Steel producers, who held on to prices in April and May in the hope that prices would recover due to rising costs, have lost market share to traders, who cut prices in line with the changing market reality. With diminishing hope of an early recovery in prices, and continued production growth in China, steel producers around the world began to cut prices since the start of June. But cost increases are more certain due to recently negotiated quarterly prices of iron ore and coking coal. Squeezed by price cuts and cost pressure, margin contraction for steel producers is likely. In 1QFY11, margins will be hit hardest for SAIL, followed by JSW Steel and Tata Steel India.

COMPANY NAME

Hindalco

Hindustan Zinc

JSW Steel

Nalco

Sesa Goa

SAIL

Falling steel prices have impacted volumes in 1QFY11. We expect total steel volumes by the three key Indian producers to decline 5% YoY to 5.3mt (down 20% QoQ). SAIL sold just 1.35mt in April and May, making it virtually impossible for the company to achieve even YoY flat sales of 2.7mt in 1QFY11.

Sterlite Industries

Tata Steel

JSW Steel also accumulated inventories in April and May. We expect 1QFY11 sales of 1.45mt (up 9.8% YoY) for JSW. Tata Steel's sales were flattish YoY at 450,000 tons in April and 462,000 tons in May. We expect sales of 1.42mt in 1QFY11 (flat YoY). Price cuts in June should induce sales. Indian steel demand is robust due to strong growth in end-user segments excluding seasonality.

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Metals Hindalco Hindustan Zinc JSW Steel Nalco Sesa Goa Sterlite Inds. SAIL Tata Steel Sector Aggregate

149 966 1,043 425 367 168 196 490

(RS MILLION)

RECO

SALES JUN.10

Buy Buy Buy Sell Buy Buy Neutral Neutral

164,331 17,851 50,776 13,772 23,819 65,379 86,642 290,891 713,461

EBITDA

VAR.

VAR.

% YOY

% QOQ

36.6 18.0 29.6 47.2 135.5 42.8 -5.3 24.9 26.4

JUN.10

-6.8 18,396 -29.9 10,068 -2.4 11,420 -15.3 4,548 -1.5 14,735 -9.5 16,382 -30.1 14,205 5.8 50,076 -6.8 139,830

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

13.1 31.1 52.9 171.7 225.2 60.5 -24.3 LP 110.9

-2.0 -35.0 -14.2 -15.9 -2.0 -25.0 -54.1 8.9 -16.2

JUN.10

6,816 8,338 4,806 2,976 11,396 10,724 9,444 27,529 82,030

VAR.

VAR.

% YOY

% QOQ

782.8 16.0 396.6 135.3 169.9 59.4 -29.4 LP 461.4

57.6 -32.7 -21.7 -24.0 -6.0 -22.3 -53.8 19.3 -14.8

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

154

Metals

SALEABLE STEEL ('000 TONS) Y/E MARCH

FY09 1Q

Tata Steel India Production 1,187 Change (YoY %) 11.5 Sales 1,159 Change (YoY %) 11.4 SAIL Production 2,947 Change (YoY %) -1.4 Sales 2,650 Change (YoY %) 4.7 JSW Steel Production 976 Change (YoY %) 21.7 Sales 817 Change (YoY %) 13.2 3 Key Producers Total Production 5,110 Change (YoY %) 5.2 Sales 4,626 Change (YoY %) 7.8

FY10

FY11

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1QE

1,330 3.9 1,220 0.1

1,235 -0.9 1,072 -13.8

1,624 28.1 1,791 40.0

1,542 30.0 1,418 22.3

1,519 14.2 1,457 19.4

1,688 36.7 1,596 49.0

1,732 6.7 1,698 -5.2

1,542

3,180 -2.2 2,650 -11.7

3,000 -10.7 2,400 -20.3

3,258 -5.3 3,600 -5.3

3,060 3.8 2,790 5.3

3,140 -1.3 3,030 14.3

3,100 3.3 2,900 20.8

3,300 1.3 3,400 -5.6

2,400 -21.6 2,400 -14.0

1,001 14.3 837 3.7

782 -18.2 711 -18.0

966 -2.7 928 -8.1

1,376 41.0 1,321 61.7

1,540 53.8 1,454 73.7

1,469 87.9 1,425 100.4

1,615 67.2 1,520 63.8

1,450 5.4 1,450 9.8

5,511 1.9 4,707 -6.3

5,017 -9.8 4,183 -18.3

5,848 2.6 6,319 3.8

5,978 17.0 5,529 19.5

6,199 12.5 5,941 26.2

6,257 24.7 5,921 41.6

6,647 5,392 13.7 -9.8 6,618 5,268 4.7 -4.7 Source: WSA

1,418

Steel mills cut prices due to inventory pile-up; imports continue „ According to SteelPrices-India, HRC (CR-grade) prices dropped 9% MoM to Rs32,250/ ton (during the week ended 28 June, 2010), and they were down 3% YoY. We hear from mills that HRC is being sold to bulk buyers at a further 5% discount. SAIL has cut HRC prices (via discounts) by a total of Rs2,800/ton in two tranches since 1 June 2010. Other players have offered similar or bigger price cuts. „ Traders are reported to be selling imported HRC at about Rs29,000/ton to liquidate stocks; 150,000 tons of imports were expected to arrive in June. „ Despite price cuts, dispatches have not recovered, as the price outlook remains weak due to over-production and demand weakness in Europe and China. Key Indian producers are contemplating further price/production cuts to deal with mounting inventories. „ In May, Chinese crude steel production grew by 1.3% MoM (up 21% YoY) to 56.14mt. The growth in China's HRC production was sharper by 7.6% MoM (up 36% YoY) to 13mt in May.

4.2

25

3.8

20

3.4

15

3.0

10 Jun-10

30

Apr-10

35

4.6

Feb-10

40

5.0

Dec-09

5.4

Oct-09

45

Aug-09

5.8

Jun-09

Iron ore for DRI - Barbil

INDIAN STEEL PRICES (RS/KG): LONG PRODUCTS & INPUTS

MoM Sponge iron QoQ Raipur YoY HMS 80:20 MoM QoQ Mandi YoY Pencil Ingot MoM QoQ Mandi YoY MoM Rebar 12mm Mandi QoQ YoY Iron ore for MoM DRI - Barbil QoQ YoY

-1% -16% 34% 2% -4% 23% 0% -9% 11% 1% -6% 13% 0% 16% 62% Source: WSA

July 2010

155

Metals

INDIAN STEEL PRICES (RS/KG): FLAT PRODUCTS

48 44 40 36 32

-5% -1% 17%

MoM HRC CR-grade QoQ Delhi YoY

-7% -9% -3%

CRC 0.63 MoM DSK Delhi QoQ YoY

-5% -3% 6%

MoM QoQ YoY

-6% -5% 11%

GP 0.63 Delhi

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

Dec-09

Nov-09

Oct-09

Sep-09

Aug-09

Jul-09

Jun-09

Apr-09

May-09

28

HRC tube MoM grade QoQ Mum YoY

INDIA: MONTHLY CRUDE STEEL PRODUCTION

35

May-10

Feb-10

Nov-09

Aug-09

May-09

Feb-09

Nov-08

Aug-08

May-08

Feb-08

Nov-07

Aug-07

Feb-07

-13 May-07

2.0 Nov-06

-1

Aug-06

3.0

May-06

11

Feb-06

4.0

Nov-05

23

Aug-05

5.0

May-05

(m tons)

YoY(%)

YoY (%)

India

6.0

Source: WSA

Iron Ore prices stabilizing at US$150/ton Spot iron ore prices corrected in 1QFY11 from a peak of US$189/dmt (cfr China basis for 63.5% grade) in early April to US$150 over a few weeks. The fall in prices has been sharp due to weakening steel prices in China and debt problems in Europe. We understand from industry sources that spot purchases of iron ore has reduced and Chinese mills have resorted to buying iron ore largely on quarterly contract terms, leaving spot prices to fall freely. Since current quarterly contracts are priced at US$110-120/dmt, which translates into cfr of US$135-145/dmt, there is very little room for spot prices to fall further. If spot prices fall below contract prices, spot purchases will pick up and support prices. Chinese traders have already started showing some interest with enquiries. China is overtly dependent on iron ore imports. Of the global trade of ~900mt in 2009, China imported 628mt or 70% market share. Imports meet nearly two-thirds of China's annual iron ore requirements. Over Jan-May 2010, Chinese iron ore imports increased 8.3% YoY to 262mt. Therefore, we believe iron ore prices are close to bottoming out in the near term. Sea freight from India to China has remained low on a YoY basis at US$15-16/dmt. Thus, iron ore export realization of mining companies in India is likely to be higher because of the dual benefit of weakening sea freight and hardening prices.

July 2010

156

Metals

INDIAN IRON ORE (63% FE) PRICES FOR SHIPMENT TO CHINA (US$/TON)

CIF

FOB

200 160 120 80

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

Dec-09

Nov-09

Oct-09

Sep-09

Aug-09

Jul-09

Jun-09

May-09

Apr-09

Mar-09

Feb-09

Jan-09

40

Source: WSA RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt M etals Index

Non-Ferrous Metals

110

Margins to decline QoQ due to lower prices, higher costs Margins of non-ferrous metals companies are likely to decline 200-300bp sequentially as base metals have also declined sequentially. Average zinc and lead LME prices are down 11% QoQ at US$2,062/ton. Hindustan Zinc's margins will also decline and the benefits of expanded capacity will flow in the subsequent quarters. Sale of surplus concentrate will add to the bottom line.

100 90 Jun-10

May-10

Apr-10

Mar-10

80

RELATIVE PERFORMANCE - 1YR (%)

M OSt M etals Index Sensex

200 160 120 Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

80

Average aluminum LME prices are down 3% QoQ at US$2,128/ton. Energy costs for aluminum smelters will remain a concern going forward. Aluminum players reported improvement in margins in the past two quarters due to higher LME prices and the rise of product premiums. But going forward, costs will continue to be high. Volume growth is expected to remain muted for Nalco and Hindalco in FY11, as the next capacity expansion (for Hindalco) will kick-in in 2HFY12. From 2QFY11, Nalco will benefit from expanded alumina capacity.

QUARTERLY AVERAGE BASE METAL PRICES ON LME (USD/TON) QUARTER

1QFY11 4QFY10 3QFY10 2QFY10 1QFY10 4QFY09 3QFY09 2QFY09 1QFY09

July 2010

ZINC

ALUMINIUM

COPPER

LEAD

ALUMINA

AVG.

QOQ %

YOY %

AVG.

QOQ %

YOY %

AVG.

QOQ %

YOY %

AVG.

QOQ %

YOY %

AVG.

2,056 2,307 2,241 1,780 1,509 1,208 1,219 1,798 2,150

-11 3 26 18 25 -1 -32 -16 -13

36 91 84 -1 -30 -51 -54 -44 -42

2,125 2,199 2,037 1,836 1,530 1,401 1,885 2,839 2,995

-3 8 11 20 9 -26 -34 -5 8

39 57 8 -35 -49 -50 -25 9 7

7,051 7,274 6,677 5,856 4,708 3,494 3,948 7,571 8,323

-3 9 14 24 35 -11 -48 -9 8

50 108 69 -23 -43 -55 -46 -1 10

1,976 2,235 2,313 1,942 1,520 1,173 1,265 1,915 2,330

-12 -3 19 28 30 -7 -34 -18 -20

30 91 83 1 -35 -60 -61 -38 7

335 327 306 270 209 190 279 408 411

QOQ %

YOY %

3 7 13 29 10 -32 -32 -1 5 Source:

61 72 10 -34 -49 -51 -19 17 14 LME

157

Metals

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

Metals Hindalco Hindustan Zinc JSW Steel Nalco Prakash Inds SAIL Sesa Goa Sterlite Inds. Tata Steel Sector Aggregate

149 966 1,043 425 166 196 367 168 490

Buy Buy Buy Sell Buy Neutral Buy Buy Neutral

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

4.2 95.6 59.4 12.9 21.6 16.4 31.6 24.0 -9.3

12.7 111.2 79.8 18.2 23.6 12.8 61.2 17.0 63.7

17.0 126.3 145.4 20.9 39.6 15.9 67.3 22.8 67.6

35.5 10.1 17.5 32.9 7.7 11.9 11.6 7.0 -52.7 16.9

11.7 8.7 13.1 23.4 7.0 15.3 6.0 9.9 7.7 10.5

8.7 7.6 7.2 20.4 4.2 12.3 5.5 7.4 7.3 8.4

7.0 6.0 9.8 20.9 7.4 7.6 8.4 7.4 11.2 8.5

7.0 4.4 9.5 13.3 5.4 10.1 3.3 5.2 7.0 6.8

6.0 3.2 4.1 10.9 3.6 8.5 2.3 3.2 6.5 5.2

6.2 22.2 12.3 8.0 21.9 20.0 33.8 10.9 -9.7 12.1

18.9 20.7 13.7 10.4 21.7 14.0 40.5 13.7 35.2 16.6

20.5 19.2 19.0 11.0 29.0 15.2 31.3 15.7 28.5 17.2

Tata Steel and Sterlite numbers are consolidated

July 2010

158

Results Preview SECTOR: METALS

Hindalco STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 HNDL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs149

REUTERS CODE

S&P CNX: 5,269

HALC.BO

Equity Shares (m)

1,962.8

52 Week Range (Rs)

188/68

1,6,12 Rel Perf (%)

YEAR

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

4,853

2.8

END

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

-81.8

53.6

3.4

6.4

-0.1

0.7

EV/

SALES EBITDA

3/09A

656,252

-2/ -7/53

3/10A

607,221

8,293

4.2

50.7

35.5

2.2

6.2

8.1

0.8

7.0

291.6

3/11E

642,319

24,984

12.7

204.6

11.7

2.2

18.9

8.2

0.8

7.0

6.3

3/12E

657,142

33,341

17.0

33.4

8.7

1.8

20.5

8.7

0.8

6.0

Mcap (Rs b) Mcap (USD b)

16.1

Consolidated

„

Net sales to grow 39% YoY: 1QFY11 net sales are expected to grow 39% YoY to Rs54b (flat QoQ) due to higher metals prices. Production of copper and aluminum is expected to remain flat YoY at 79ktons and 134ktons respectively. „ EBITDA to grow 44% YoY: EBITDA is expected to grow 44% YoY (3% QoQ) due to higher metal prices, rise of product premiums and up-tick in by-product prices. „ Adjusted PAT to grow 77% YoY: Profit after tax will grow 77% YoY to Rs5.9b (down 14% QoQ) on higher aluminum metal prices and sturdy copper business performance. „ Utkal Alumina visibility improves; maintain Buy: The visibility of Utkal Alumina refinery project is improving. Hindalco achieved financial closure for the project with capex of Rs56b. We believe the volatility of Hindalco's earnings eased due to Novelis' turnaround. We expect the stock to outperform due to reduced volatility in earnings and rising visibility of green-field projects and bauxite mines. QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Net Sales Change (YoY %) Total Expenditure EBITDA Change (YoY %) As % of Net Sales EBITDA - Aluminium EBITDA-Copper Interest Depreciation Other Income PBT (before EO item) Extra-ordinary Income PBT (after EO Item) Total Tax % Tax Reported PAT Adjusted PAT Change (YoY %) Consolidated Financials Net Sales EBITDA Adjusted PAT Avg LME Aluminium (USD/T) E: MOSL Estimates

FY10

FY11E

FY10

FY11E

207,294 5.1 174,118 33,176 14.2 16.0 26,240 7,568 2,822 6,605 2,650 26,399

642,319 71,296 24,985 2,038

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

38,905 -16.3 32,757 6,148 -35.2 15.8 5,542 606 682 1,653 753 4,566 1,430 5,996 1,190 26.1 4,806 3,376 -51.6

49,124 -13.6 42,912 6,213 -37.5 12.6 3452 2,761 663 1,659 573 4,464 -121 4,343 903 20.2 3,441 3,562 -50.5

54,743 33.0 46,697 8,046 3.3 14.7 5420 2,626 729 1,676 496 6,136 -570 5,566 1,295 21.1 4,271 4,841 -11.1

54,434 44.3 45,790 8,644 175.1 15.9 6622 2,022 705 1,684 777 7,031 -290 6,741 102 1.4 6,639 6,929 157.8

54,027 38.9 45,161 8,866 44.2 16.4 7197 1,827 705 1,637 768 7,292

52,947 7.8 44,759 8,189 31.8 15.5 6316 2,031 705 1,642 584 6,426

53,161 -2.9 44,846 8,315 3.3 15.6 6455 2,018 705 1,659 506 6,456

47,159 -13.4 39,353 7,806 -9.7 16.6 6272 1,692 705 1,667 792 6,225

7,292 1,313 18.0 5,980 5,980 77.1

6,426 1,157 18.0 5,269 5,269 47.9

6,456 1,162 18.0 5,294 5,294 9.4

6,225 1,121 18.0 5,105 5,105 -26.3

197,206 8.2 168,156 29,050 -4.3 14.7 21,035 8,015 2,780 6,672 2,599 22,197 449 22,646 3,489 15.4 19,156 18,707 -16.1

120,330 16,271 772 1,505

151,793 16,335 958 1,827

158,845 18,168 2,238 2,037

176,254 18,766 4,326 2,189

164,331 18,396 6,816 2,150

161,638 17,719 6,105 2,000

155,696 17,845 6,127 2,000

160,654 17,336 5,937 2,000

607,221 69,541 8,293 1,904

26,399 4,752 18.0 21,647 21,647 15.7

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

159

Results Preview SECTOR: METALS

Hindustan Zinc STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 HZ IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs966

REUTERS CODE

S&P CNX: 5,269

HZNC.BO

Equity Shares (m) 52 Week Range (Rs)

1,325/533

1,6,12 Rel Perf (%)

-6/ -21/42

Mcap (Rs b) Mcap (USD b)

YEAR

422.5

408.1 8.8

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

3/09A

56,803

27,276

64.6

3/10A

81,245

40,414

3/11E

95,075

46,966

3/12E

103,959

53,355

126.3

EV/

EV/

-38.0

15.0

2.8

19.0

16.4

95.6

48.2

10.1

2.2

22.2

23.5

3.5

6.0

111.2

16.2

8.7

1.8

20.7

22.0

2.6

4.4

13.6

7.6

1.5

19.2

19.8

1.9

3.2

SALES EBITDA

5.5

11.4

Consolidated

„

Volume growth, metal price appreciation to drive top line: 1QFY11 net sales are expected to increase by 18% YoY to Rs17.8b (down 30% QoQ) due to a 2% volume growth and 36% rise in metal prices. Refined zinc and lead production is expected to be 3% higher at 158k tons. Average zinc and lead prices are ~35% higher YoY (down 11% QoQ) on the LME.

„

EBITDA to grow 31% YoY: EBITDA is expected to grow 31% YoY to Rs10b (down 35% QoQ) and margins are expected to improve by 5.6pp YoY due to higher price realizations and increased sales volumes.

„

Expansion on track, PAT to grow 16% YoY: HZL commissioned a 210ktpa zinc smelter at Dariba in 4QFY10 and a 100ktpa lead smelter, along with a 160MW CPP at Dariba is expected to be complete in 2QFY11. We expect the bottom line to grow by 16% YoY to Rs8.3b.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Zn & Pb ('000 tons) Change (YoY %) Net Sales Change (YoY %) EBITDA Change (YoY %) As % of Net Sales Interest Depreciation Other Income PBT (after EO Item) Total Tax % Tax Reported PAT Adjusted PAT Change (YoY %) Avg LME Zinc (USD/T) Avg LME Lead (USD/T) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

155 6.4 15,122 -8.0 7,679 -21.5 50.8 32 748 1,946 8,845 1,657 18.7 7,188 7,188 -15.2 1,509 1,520

152 13.5 18,183 1.6 10,755 9.5 59.1 54 771 1,537 11,467 2,118 18.5 9,349 9,349 -2.6 1,780 1,942

167 0.5 22,491 110.4 13,861 354.4 61.6 77 817 1,319 14,286 2,799 19.6 11,487 11,487 211.4 2,241 2,313

169 1.5 25,449 101.5 15,482 178.9 60.8 277 1,006 1,345 15,543 3,153 20.3 12,390 12,390 124.7 2,311 2,254

158 2.1 17,851 18.0 10,068 31.1 56.4 49 1,102 1,505 10,422 2,084 20.0 8,338 8,338 16.0 2,050 2,007

195 28.1 23,752 30.6 14,179 31.8 59.7 49 1,102 1,684 14,712 2,942 20.0 11,769 11,769 25.9 2,200 2,200

205 22.5 26,332 17.1 15,792 13.9 60.0 49 1,102 1,839 16,480 3,296 20.0 13,184 13,184 14.8 2,200 2,200

220 30.4 27,140 6.6 16,221 4.8 59.8 49 1,102 2,023 17,093 3,419 20.0 13,675 13,675 10.4 2,200 2,200

FY10

FY11E

643 5.0 81,245 43.0 47,776 74.7 58.8 439 3,343 6,146 50,141 9,727 19.4 40,414 40,414 48.2 1,960 2,007

778 21.0 95,075 17.0 56,260 17.8 59.2 196 4,407 7,050 58,707 11,741 20.0 46,966 46,966 16.2 2,163 2,152

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

160

Results Preview SECTOR: METALS

JSW Steel STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 JSTL IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs1,043

Previous Recommendation: Buy

JSTL.BO

YEAR

216.1

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

3/09A

159,348

10,174

54.4

3/10A

189,572

11,117

59.4

3/11E

232,526

14,931

3/12E

316,490

31,436

END

1,350/475 -5/ 1/53 225.4 4.9

EPS

EPS

P/E

P/BV

ROE

ROCE

EV/

(X)

(X)

(%)

(%)

EV/

-31.8

19.2

2.6

13.5

7.7

2.2

12.0

9.3

17.5

2.2

12.3

9.6

1.9

9.1

79.8

34.3

13.1

1.8

13.7

8.8

1.7

8.8

145.4

82.2

7.2

1.4

19.0

17.3

1.0

4.1

SALES EBITDA

Consolidated

„

Expect 10% YoY volume growth: Average steel price realization is expected to increase 2% QoQ to Rs35,018/ton in 1QFY11 due to higher prices in April and May despite cuts in June. Realizations will also rise because of an improved product mix due to the commissioning of new HRC mills. Net sales are expected to grow 29.6% YoY to Rs50.7b due to a 10% growth in volumes (at 1.45mt).

„

EBITDA to grow 53% YoY: Coking coal costs will rise in 1QFY11 due to an increase in contract prices, though the impact of carry over tonnage will be minimal due to large volume growth. Margins are expected to decline sequentially by 3pp to 22.5% due to higher costs and flat growth in realizations.

„

Product mix improvement, strong volume growth: JSW has superior volume growth than its peers, increasing raw material integration, strategic location advantage of its iron ore belt and superior project execution skills. Although new hot strip mills will improve the product mix in the near term, raw material cost increases will put pressure on margins. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Sales ('000 tons) Change (YoY %) Realization (Rs per ton) Net Sales Change (YoY %) EBITDA As % of Net Sales EBITDA (Rs per ton) Interest Depreciation Other Income PBT (before EO Item) EO Items PBT (after EO Item) Total Tax % Tax Reported PAT Preference Dividend Adjusted PAT Change (YoY %) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1,321 61.7 29,650 39,168 6.7 7,467 19.1 5,652 2,206 2,718 54 2,597 2,360 4,957 1,556 31.4 3,400 72 968 -77.9

1,454 73.7 31,080 45,190 5.9 11,070 24.5 7,613 2,298 2,805 615 6,582 0 6,582 2,066 31.4 4,515 72 4,443 -23.2

1,425 100.4 32,372 46,130 65.6 11,180 24.2 7,846 2,178 2,860 16 6,157 1,026 7,183 2,041 28.4 5,142 72 4,044 861.0

1,520 63.8 34,243 52,050 56.4 13,308 25.6 8,755 1,944 2,851 0 8,513 962 9,475 2,306 24.3 7,169 72 6,135 2,443.1

1,450 9.8 35,018 50,776 29.6 11,420 22.5 7,876 2,369 3,008 55 6,098 0 6,098 1,220 20.0 4,879 72 4,806 396.6

1,600 10.0 31,817 50,907 12.6 7,096 13.9 4,435 2,417 3,095 627 2,211 0 2,211 442 20.0 1,769 72 1,697 -61.8

1,600 12.3 32,803 52,485 13.8 9,996 19.0 6,248 2,465 3,150 16 4,397 0 4,397 879 20.0 3,518 72 3,445 -14.8

1,750 15.1 34,627 60,597 16.4 14,150 23.4 8,086 2,514 3,141 0 8,496 0 8,496 1,699 20.0 6,796 72 6,724 9.6

FY10

FY11E

5,720 73.7 31,912 182,538 29.9 43,024 23.6 7,522 8,627 11,234 685 23,849 4,348 28,197 7,969 28.3 20,227 290 15,590 43.9

6,400 11.9 33,557 214,765 17.7 42,662 19.9 6,666 9,765 12,394 699 21,202 0 21,202 4,240 20.0 16,962 290 16,672 6.9

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

161

Results Preview SECTOR: METALS

Nalco STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 NACL IN

25 June 2010

Sell

Previous Recommendation: Sell

Rs425

REUTERS CODE

S&P CNX: 5,269

NALU.BO

Equity Shares (m) 52 Week Range (Rs)

526/246

1,6,12 Rel Perf (%)

-1/ 7/17

Mcap (Rs b)

YEAR

644.3

274.1

Mcap (USD b)

5.9

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

3/09A

50,945

12,610

19.6

3/10A

51,580

8,326

3/11E

56,114

11,729

3/12E

62,091

13,463

EV/

EV/

-23.5

21.7

2.8

12.9

13.6

4.6

14.0

12.9

-34.0

32.9

2.6

8.0

7.5

4.6

20.9

18.2

40.9

23.4

2.4

10.4

11.7

4.2

13.3

20.9

14.8

20.4

2.2

11.0

12.8

3.5

10.9

SALES EBITDA

Consolidated

„

Revenue to grow 47% YoY: 1QFY11 net sales are expected to grow 47% YoY to Rs13.7b due to higher metal volumes and better alumina and metal realizations. We expect metal sales volumes to increase by 19% YoY to 111,000 tons. LME aluminum prices are hovering 43% higher YoY (flat QoQ) at US$2,150 and alumina is up 77% at US$330. „ EBITDA to grow 172% YoY: EBITDA is expected to increase 172% YoY to Rs4.5b (down 16% QoQ) due to higher alumina and aluminum prices. Surplus alumina is sold in the ratio of 60:40 (contract to spot). FY11 contracted alumina realization is at 15% of the LME aluminum price. Margins are expected to remain flat sequentially at ~33% for 1QFY11 and come under pressure in subsequent quarters. „ Refinery expansion benefits in 2HFY11, slow execution on green-field projects: The benefit of alumina expansion is likely to materialize in 2HFY11, metal production is expected to improve by 4% to 450,000 tons for FY11. Nalco is working on several green-field projects in India and abroad, but it will take significant time for these projects to contribute to earnings. QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Alumina Production ('000 tons) Aluminium Prod. ('000 tons) Aluminium Sales ('000 tons) Avg LME Aluminium (USD/ton) Alumina Exports (USD/ton) Net Sales Change (YoY %) Total Expenditure EBITDA Change (YoY %) As % of Net Sales Interest Depreciation Other Income PBT Total Tax % Tax Reported PAT Adjusted PAT Change (YoY %) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

352 105 93 1,505 208 9,353 -36.3 7,679 1,674 -77.3 17.9 11 756 1,012 1,918 654 34.1 1,265 1,265 -75.9

380 103 106 1,827 250 11,791 -23.3 10,374 1,417 -77.9 12.0 8 764 1,402 2,046 451 22.1 1,595 1,595 -64.1

405 111 118 2,037 266 14,176 36.8 11,215 2,961 11.5 20.9 1 789 617 2,787 1,236 44.3 1,552 1,552 -29.3

455 113 119 2,189 339 16,260 44.4 10,849 5,411 466.2 33.3 1 878 658 5,189 1,275 24.6 3,915 3,915 371.5

356 111 111 2,150 330 13,772 47.2 9,223 4,548 171.7 33.0 0 896 723 4,376 1,400 32.0 2,976 2,976 135.3

383 112 112 2,000 321 13,536 14.8 9,473 4,063 186.7 30.0 0 914 796 3,945 1,262 32.0 2,683 2,683 68.2

409 113 113 2,000 321 13,994 -1.3 9,721 4,273 44.3 30.5 0 932 875 4,216 1,349 32.0 2,867 2,867 84.8

459 114 114 2,000 321 14,813 -8.9 10,114 4,699 -13.2 31.7 0 950 963 4,711 1,508 32.0 3,203 3,203 -18.2

FY10

FY11E

1,592 431 436 1,890 270 51,580 -0.1 40,118 11,462 -34.1 22.2 22 3,188 3,689 11,941 3,615 30.3 8,326 8,326 -34.9

1,607 450 450 2,038 323 56,114 8.8 38,532 17,583 53.4 31.3 0 3,692 3,357 17,248 5,519 32.0 11,729 11,729 40.9

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

162

Results Preview SECTOR: METALS

Sesa Goa STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 SESA IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs367

REUTERS CODE

S&P CNX: 5,269

SESA.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

831.0 494/175 9/ -10/74

Mcap (Rs b) Mcap (USD b)

304.9 6.6

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

3/09A

49,591

19,880

25.3

3/10A

58,583

26,291

3/11E

107,248

50,885

3/12E

128,733

55,902

EV/

EV/

29.0

14.5

6.1

42.2

51.6

5.2

10.2

31.6

25.3

11.6

3.9

33.8

30.9

4.5

8.4

61.2

93.5

6.0

2.4

40.5

44.3

2.0

3.3

67.3

9.9

5.5

1.7

31.3

34.9

1.3

2.3

SALES EBITDA

Consolidated

„

Realization to grow 24% QoQ: Sesa Goa's realization per ton is expected to increase 112% YoY to US$84/ton (up 24% QoQ) due to higher iron ore prices. Average spot prices of iron ore in China CIF for 1QFY11 are expected to be ~US$167/ton. We expect sales volumes to grow 22% YoY to 5.8mt. Thus, we expect 1QFY11 net sales grow 135% YoY (flat QoQ) to Rs23.8b.

„

Robust EBITDA growth: 1QFY11 EBITDA is expected to increase 225% YoY to Rs14.7b (flat QoQ) due to higher volumes and better realizations. Weakening sea freight and higher ore prices will boost Sesa Goa's export realizations.

„

Strong growth in earnings due to higher volumes, prices: We expect PAT to grow 170% YoY to Rs11.4b due to higher ore prices and volumes. We believe Sesa Goa will be able to achieve strong earnings growth in the next few years due to well planned volume growth and a competitive cost structure. A strong balance sheet will help the company to grow inorganically. Besides, current quarterly contracts are priced at US$110-120/dmt, which translates into CFR prices of US$135-145/dmt. Hence there is very little room for spot ore prices to fall further. We believe iron ore prices are close to bottoming out in the near term. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Net Sales Change (YoY %) Total Expenditure EBITDA Change (YoY %) As % of Net Sales Interest Depreciation Other Income PBT (after XO Item) Total Tax % Tax Reported PAT before MI Minority Interest Reported PAT Change (YoY %) E: MOSt Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

10,115 -21.7 5,584 4,531 -44.5 44.8 20 152 752 5,110 869 17.0 4,241 18 4,223 -34.5

5,387 -37.6 3,860 1,527 -62.6 28.3 20 202 893 2,198 503 22.9 1,694 30 1,665 -48.7

18,892 38.9 8,531 10,360 85.1 54.8 251 225 1,325 11,210 2,906 25.9 8,304 29 8,275 75.8

24,189 67.6 9,159 15,030 99.5 62.1 227 166 1,291 15,928 3,777 23.7 12,151 22 12,129 121.5

23,819 135.5 9,085 14,735 225.2 61.9 224 178 1,279 15,612 4,184 26.8 11,428 31 11,396 169.9

9,264 72.0 5,116 4,148 171.6 44.8 222 239 1,292 4,979 1,334 26.8 3,645 28 3,616 117.2

35,157 86.1 13,476 21,682 109.3 61.7 220 266 1,305 22,501 6,030 26.8 16,471 30 16,441 98.7

39,007 61.3 13,324 25,683 70.9 65.8 218 196 1,318 26,588 7,126 26.8 19,462 30 19,432 60.2

FY10

FY11E

58,583 18.1 27,135 31,448 23.9 53.7 517 745 4,260 34,446 8,056 23.4 26,390 99 26,291 32.2

107,248 83.1 41,001 66,247 110.7 61.8 884 879 5,195 69,680 18,674 26.8 51,006 120 50,885 93.5

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

163

Results Preview SECTOR: METALS

Steel Authority of India STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 SAIL IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

4,130.4

52 Week Range (Rs)

259/139

1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs196

Previous Recommendation: Neutral

SAIL.BO

YEAR

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

3/09A

437,545

62,369

15.1

3/10A

413,565

67,796

16.4

8.7

11.9

2.4

20.0

20.5

1.8

7.6

3/11E

439,645

52,789

12.8

-22.1

15.3

2.1

14.0

14.7

1.8

10.1

3/12E

491,365

65,717

15.9

24.5

12.3

1.9

15.2

16.9

1.8

8.5

END

-5/ -19/10 808.7 17.4

EPS

EPS

-26.3

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

13.0

2.9

22.0

25.5

EV/

EV/

SALES EBITDA

1.6

8.2

Consolidated

„

Volumes to decline by 22%: 1QFY11 net sales are expected to decline 5% YoY to Rs86.6b due to lower sales volumes. SAIL sold only 1.35mt in April and May 2010, which almost makes it impossible for the company to achieve even YoY flat sales in 1QFY11. We expect sales volumes to decline 27% sequentially to 2.4mt. SAIL has undertaken price cuts via discounts by Rs2,800/ton in two tranches since 1 June 2010 to align steel prices with global prices and mitigate rising cheaper imports.

„

Margins to come under pressure due to rising costs: We expect EBITDA per ton to decline 12% YoY to Rs5,919 due to rising raw material prices. Although average realization for 1QFY11 per ton is expected to be 10% higher YoY at Rs36,101, expenditure per ton is expected to increase 16% YoY because of higher input costs.

„

No volume growth in saleable steel capacity in FY11, maintain Neutral: SAIL is one of the few virtual debtfree companies in the Indian metals space and has full integration of iron ore. However in the absence of significant near term volume growth, steel prices are the sole trigger for earnings growth. We expect steel prices to remain flattish QoQ in 1QFY11 and costs will go up due to higher raw material costs. Realizations will fall sharply in 2QFY11 due to a price cut undertaken in June, and costs of coking coal will rise further. Hence, margins will come under severe pressure. Maintain Neutral.

QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Sales (m tons) Change (YoY %) Realization (Rs per ton) Change (YoY %) Net Sales Change (%) EBITDA As % of Net Sales EBITDA per ton Interest Depreciation Other Income PBT (after EO Inc.) Total Tax % Tax Reported PAT Adjusted PAT Change (YoY %) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2.79 5.3 32,806 -21.2 91,528 -17.0 18,756 20.5 6,723 828 3,269 5,400 20,059 6,798 33.9 13,261 13,369 -36.4

3.03 14.3 33,132 -28.3 100,391 -18.0 23,884 23.8 7,882 735 3,322 5,362 25,189 8,554 34.0 16,635 16,788 -18.2

2.90 20.8 34,621 -6.9 100,400 12.5 25,784 25.7 8,891 1,101 3,390 4,068 25,361 8,605 33.9 16,756 16,903 101.1

3.40 -5.6 36,465 8.9 123,983 2.8 30,971 25.0 9,109 1,347 3,384 4,429 30,668 9,819 32.0 20,849 20,440 34.5

2.40 -14.0 36,101 10.0 86,642 -5.3 14,205 16.4 5,919 1,015 3,228 4,208 14,170 4,676 33.0 9,494 9,444 -29.4

3.00 -1.0 33,101 -0.1 99,302 -1.1 12,117 12.2 4,039 1,081 3,438 4,391 11,989 3,956 33.0 8,033 7,991 -52.4

3.30 13.8 34,101 -1.5 112,533 12.1 18,008 16.0 5,457 1,125 3,579 4,757 18,061 5,960 33.0 12,101 12,038 -28.8

3.90 14.7 36,101 -1.0 140,793 13.6 33,482 23.8 8,585 1,191 3,789 4,940 33,442 11,036 33.0 22,406 22,289 9.0

FY10

FY11E

12.12 7.3 34,348 -12.3 416,301 -5.9 99,394 23.9 8,201 4,011 13,366 19,259 101,277 33,777 33.4 67,500 67,500 3.6

12.60 4.0 34,863 1.5 439,270 5.5 77,813 17.7 6,176 4,412 14,034 18,296 77,663 25,629 33.0 52,034 52,034 -22.9

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

164

Results Preview SECTOR: METALS

Sterlite Industries STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 STLT IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs168

REUTERS CODE

S&P CNX: 5,269

STRL.BO

Equity Shares (m)

3,360.7

52 Week Range (Rs)

232/134

1,6,12 Rel Perf (%)

1/ -23/-6

Mcap (Rs b) Mcap (USD b)

565.4 12.2

YEAR

NET SALES

PAT

P/E

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS) GROWTH (%)

(X)

(X)

(%)

(%)

3/09A

211,442

34,847

24.6

-19.9

6.8

0.9

13.7

9.9

3/10A

246,825

40,407

24.0

-2.2

7.0

0.8

10.9

3/11E

309,368

56,870

17.0

-29.1

9.9

1.3

13.7

3/12E

331,382

76,089

22.8

33.5

7.4

1.2

15.7

14.2

END

EPS

EPS

EV/

EV/

SALES EBITDA

2.0

12.3

9.3

1.9

10.1

11.0

1.5

7.3

1.2

4.2

Consolidated

„

Higher metal prices to boost top line: 1QFY11 net sales are expected to grow 43% YoY to Rs65.4b due to higher metal prices and volumes. Copper cathode production is expected to increase 10% YoY to 85ktons and refined zinc is expected to increase 5% to 146ktons. „ EBITDA to grow 60% YoY: EBITDA is expected to grow 60% YoY due to strong copper, aluminum and zinc prices. We expect EBIT of the zinc business to grow 28% YoY to Rs8.9b and aluminum (Balco) EBIT is expected to grow 70% YoY to Rs1.3b. „ Bottom line to grow 59%: Profit after tax is expected to increase 59% YoY to Rs10.7b helped by better performance from zinc, surplus power at Balco and a stable copper business. „ Awaiting triggers, outlook positive: Although commissioning of the first unit (600MW) of Sterlite Energy has been delayed by two months, our outlook on this new stream of business is positive as the project has received full coal linkages, which are expected to keep the cost of power generation low. Volumes and earnings of the metals businesses are also expected to grow. Profitability of VAL remains low due to pending clearance of bauxite mines, which is expected to get environmental clearance in the near term. We value the stock at Rs273 based on a sum of the parts valuation. It trades at a P/E of 7.4x FY12E and EV/EBITDA of 4.2x FY12E. Re-iterate Buy. QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Net Sales Change (YoY %) Total Expenditure EBITDA Change (YoY %) As % of Net Sales Interest Depreciation Other Income PBT (before XO Item) Extra-ordinary Exp. PBT (after XO Item) Total Tax % Tax Reported PAT Minority interest Loss/(profit) of Associates Adjusted PAT Change (YoY %) Avg LME Aluminium (USD/T) Avg LME Copper (USD/T) Avg LME Zinc (USD/T) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

45,789 -20.6 35,580 10,209 -44.1 22.3 712 1,736 3,783 11,544 0 11,544 2,305 20.0 9,239 3,219 -707 6,727 -41.6 1,530 4,640 1,509

61,291 -10.0 47,637 13,654 -26.3 22.3 576 1,734 3,887 15,231 -234 14,997 2,593 17.3 12,403 3,677 -863 9,823 -23.7 1,836 5,856 1,780

67,467 48.7 49,746 17,722 213.5 26.3 929 1,782 3,715 18,726 -2,735 15,991 2,903 18.2 13,087 4,803 971 10,049 107.0 2,037 6,637 2,241

72,278 64.0 50,423 21,855 160.4 30.2 1,206 2,246 5,486 23,890 0 23,890 4,528 19.0 19,361 5,541 11 13,809 253.4 2,199 7,274 2,307

65,379 42.8 48,997 16,382 60.5 25.1 1,156 2,735 4,971 17,462 0 17,462 3,268 18.7 14,194 3,727 -258 10,724 59.4 2,150 7,075 2,050

70,293 14.7 50,621 19,672 44.1 28.0 1,077 2,735 5,583 21,443 0 21,443 4,197 19.6 17,246 4,605 -644 13,285 35.2 2,000 7,075 2,200

81,887 21.4 57,404 24,483 38.2 29.9 2,138 3,511 5,670 24,505 0 24,505 4,511 18.4 19,994 5,129 -773 15,638 55.6 2,000 7,075 2,200

91,809 27.0 63,452 28,356 29.7 30.9 2,640 3,898 5,539 27,357 0 27,357 5,540 20.3 21,817 5,494 -901 17,224 24.7 2,000 7,075 2,200

FY10

FY11E

246,825 14.7 183,386 63,439 24.8 25.7 3,424 7,498 16,872 69,390 -2,970 66,420 12,330 18.6 54,091 17,241 -588 40,407 21.9 1,901 6,102 1,959

309,368 25.3 220,475 88,893 40.1 28.7 7,011 12,879 21,763 90,766 0 90,766 17,516 19.3 73,250 18,955 -2,575 56,870 40.7 2,038 7,075 2,163

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

165

Results Preview SECTOR: METALS

Tata Steel STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 TATA IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

887.4

52 Week Range (Rs)

737/331

1,6,12 Rel Perf (%)

-7/ -22/1

Mcap (Rs b) Mcap (USD b)

Rs490

Previous Recommendation: Neutral

TISC.BO

434.9 9.4

YEAR END

NET SALES

PAT

(RS M)

(RS M)

3/09A 1,473,293

90,454

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

3.7

76.7

15.3

101.9

16.9

4.8

EV/

EV/

SALES EBITDA

0.6

5.2

3/10A 1,023,931

-8,255

-9.3

-n/a-

-52.7

5.1

-9.7

4.5

0.9

11.2

3/11E

1,145,399

56,569

63.7

-n/a-

7.7

2.7

35.2

9.5

0.8

7.0

3/12E

1,143,679

59,965

67.6

6.0

7.3

2.1

28.5

9.4

0.8

6.5

Consolidated

„

Standalone: 1QFY11 net revenue is expected to increase 7% YoY to Rs59.8b due to similar growth in average realization with flat volumes. We expect sales of 1.42mt in 1QFY11 (flat YoY). Average 1QFY11 steel price realization is expected to increase 7% YoY to Rs39,253/ton due to higher prices in April and May despite cuts in June. Iron ore and coking coal costs are unlikely to increase in 1QFY11 due to old inventories and contracts. We expect EBITDA per ton to increase by Rs2,954 YoY to Rs15,089 (a sequential drop of Rs1,599/ton).

„

Corus: For Corus and other foreign subsidiaries, we expect EBITDA per ton to expand from US$75/ton in 4QFY10 to US$130/ton in 1QFY11 due to nearly US$160/ton increase in realizations. There will, however, be raw material cost increases. The depreciation of the euro and GBP will reduce fixed costs to small extent.

„

Maintain Neutral: We expect a sharp drop in margins in subsequent quarters as steel prices have come off their highs of May 2010 and raw material prices have increased. Maintain Neutral.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

FY10

FY10

FY11E

6,406 3.9 38,013 264,483 5.7 86,555 32.7 12,746 13,638 13,421 3,892 63,388

1,145,399 132,846 55,326 56,569

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Sales ('000 tons) 1,418 1,457 Change (YoY %) 22.3 19.4 Avg Realization (Rs/tss) 36,717 35,652 Net Sales 56,156 56,921 Change (YoY %) -8.9 -16.9 EBITDA 17,422 19,222 (% of Net Sales) 31.0 33.8 EBITDA(Rs/tss) 12,135 12,664 Interest 3,422 3,920 Depreciation 2,532 2,564 Other Income 463 761 PBT (before EO Inc.) 11,932 13,499 EO Income(exp) PBT (after EO Inc.) 11,932 13,499 Total Tax 4,034 4,470 Reported PAT 7,898 9,029 Adjusted PAT 7,898 9,029 Change (YoY %) -55.9 -57.7 Consolidated Financials Net Sales 232,923 253,950 EBITDA -299 3,718 Reported PAT -22,385 -27,198 Adjusted PAT -19,899 -17,959 E: MOSL Estimates; tss=ton of steel sales

1,596 49.0 36,534 63,749 32.8 23,106 36.2 13,725 4,157 2,622 936 17,263 163 17,426 5,508 11,918 11,755 98.2

1,698 -5.2 39,649 73,394 12.9 29,770 40.6 16,688 3,585 3,115 1,378 24,449 4,837 29,286 7,663 21,623 16,786 145.5

1,418 39,253 59,853 6.6 22,219 37.1 15,089 3,513 3,208 510 16,008

1,530 5.0 36,253 60,558 6.4 17,501 28.9 10,794 3,443 3,304 837 11,590

1,676 5.0 37,253 67,937 6.6 20,151 29.7 11,322 3,374 3,403 1,029 14,402

1,782 5.0 39,253 76,135 3.7 26,684 35.0 14,291 3,307 3,506 1,516 21,388

16,008 4,189 11,819 11,819 49.6

11,590 3,033 8,557 8,557 -5.2

14,402 3,769 10,634 10,634 -9.5

21,388 5,596 15,791 15,791 -5.9

6,169 17.7 37,225 250,220 2.9 89,521 35.8 13,993 15,084 10,832 3,538 67,143 5,000 72,143 21,675 50,468 45,468 -12.6

262,020 31,043 4,323 6,521

275,038 45,964 24,052 23,083

290,891 50,076 27,344 27,529

268,749 17,200 9 414

278,629 25,056 8,000 8,355

307,130 40,514 19,973 20,271

1,023,931 80,427 -21,208 -8,255

Standalone Financials

1Q

FY11E

63,388 16,587 46,801 46,801 2.9

Sanjay Jain ([email protected])/Tushar Chaudhari ([email protected])

July 2010

166

Results Preview QUARTER ENDING JUNE 2010

Oil & Gas BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

Definite steps towards price deregulation; subsidy sharing still unclear: The government took two important decisions during 1QFY11, making it a historic quarter for the Oil and Gas sector. In May 2010, the government increased APM gas price by 100% to US$4.2/mmbtu in a single step, indicating its desire to move towards uniform pricing. Then it announced major reforms - full deregulation of petrol prices, phased deregulation of diesel prices, and steep price hikes for kerosene (33%) and LPG (11%). Consequently, greater clarity is expected on the sharing of under-recoveries.

BPCL

Cairn India

Chennai Petroleum

GAIL

GRMs suppressed due to oversupply in middle distillates: After averaging at the 8-year low in 3QFY10 at US$1.9/bbl, Reuters' Singapore GRM rebounded in 4QFY10 to US$5/bbl. However, with increase in refinery utilization rates (currently 89%), gasoline and naphtha cracks came under pressure, bringing 1QFY11 GRMs below US$4/bbl. Unless there are major refinery closures and the global economy remains strong, we expect refining margins to remain subdued.

Gujarat State Petronet

HPCL

IOC

Petchem margins strong, but oversupply to pressurize margins in 2HFY11: Polymer prices declined 2-4% QoQ while polyester prices were flat to marginally positive. Petchem margins were under pressure vis-à-vis 4QFY10, owing to just 1% reduction in naphtha prices. Also, with start-up of new capacities in China and the Middle East, petchem markets are expected to be in oversupply by 2HFY11.

Indraprastha Gas

MRPL

ONGC

Valuation and view: Subsidy sharing is still the overhang on upstream and OMCs, though the market expects the government to announce an underwriting policy to decide the mechanism. Despite the subsidy concern, we remain positive on ONGC, GAIL and the OMCs. Our near-term view on the refining and petrochemical cycle is bearish and we believe this could adversely impact margins of RIL and other refiners.

Reliance Industries

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Oil & Gas BPCL Cairn India Chennai Petroleum GAIL Gujarat State Petronet HPCL Indraprastha Gas IOC MRPL ONGC Reliance Inds. Sector Aggregate

621 312 251 483 100 401 257 377 73 1,264 1,063

(RS MILLION)

RECO

SALES JUN.10

Buy Buy Buy Buy Buy Buy Neutral Buy Sell Buy Buy

323,334 10,143 52,959 76,433 2,684 273,611 3,216 671,498 88,436 146,098 564,709 2,209,843

EBITDA

VAR.

VAR.

% YOY

% QOQ

26.8 395.0 -6.4 26.9 27.3 13.1 38.3 14.5 49.6 -1.8 81.1 28.0

JUN.10

-13.9 6,208 46.0 8,261 -3.1 472 17.2 13,672 4.1 2,523 -12.6 4,048 11.7 1,091 -13.1 25,195 1.7 1,696 -0.7 79,573 -1.9 94,037 -8.0 233,808

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

-16.7 525.0 -89.9 28.3 29.5 -62.8 28.5 -39.2 -71.5 -16.2 47.3 -4.2

JUN.10

-44.9 2,707 125.0 4,372 LP -526 3.8 7,942 6.4 1,040 -69.2 1,582 18.0 609 -65.5 12,537 -37.3 652 -2.8 34,862 2.9 47,710 -20.2 110,802

VAR.

VAR.

% YOY

% QOQ

-55.9 109.0 PL 21.1 29.1 -75.6 26.2 -66.0 -80.6 -28.1 30.1 -26.3

-61.5 78.0 -12.8 -3.6 -79.1 18.4 -77.4 -45.5 -7.7 1.3 -34.2

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

167

Oil & Gas

GRM continues to remain subdued led by Gasoline, Naphtha and Fuel oil cracks Singapore complex GRM at ~US$3.6/bbl; Petchem margins down QoQ; Oil averaged US78.5$/bbl; YoY comparison (v/s 1QFY10) „ Average Brent price was up 33% at US$78.5/bbl v/s US$59.2/bbl; Dubai crude was also up 33% at US$77.9/bbl v/s US$59.8/bbl. „ Benchmark Singapore complex average refining margin was down 7% at ~US$3.8/ bbl v/s US$4.1/bbl. „ Polymer and polyester prices up, polymer margins down and polyester margins up. Polymer margins: PE margins down 1.7%; PP margins flat. Polyester intermediate margins: PTA margins down 11%; MEG margins up 80%. Integrated polyester margins: POY margins up 6%; PSF margins up 11%. QoQ comparison (v/s 4QFY10) „ Average Brent price was up 2.7% at US$78.5/bbl v/s US$76.7/bbl; Dubai crude was up 2.8% at US$77.9/bbl v/s US$75.9/bbl. „ Singapore complex margins averaged US$3.8/bbl, down 27% from US$4.9/bbl. „ Polymer and petchem margins were lower. Polymer margins: PE margins down 5%; PP margins down 2%. Polyester intermediate margins: PTA margins down 2.3%; MEG margins down 16%. Integrated polyester margins: POY margins up 1%; PSF margins up 5%. Government moves towards deregulation; increases APM gas price The Empowered Group of Ministers (EGoM) concluded their meeting on fuel price deregulation on a positive note. Key announcements with respect to all controlled products were as follows: „ Petrol: Retail prices to be market-determined; as per the latest fortnight data, price hike is ~Rs3.5/liter. „ Diesel: Though EGoM has decided to eventually deregulate diesel prices, currently it has decided to increase price by just Rs2/liter. „ LPG: Domestic LPG cylinder price to be hiked by Rs35/cylinder (current loss is Rs262/cylinder). „ Kerosene: PDS kerosene price to be hiked by Rs3/liter from Rs9/liter to Rs12/liter (current loss is Rs17.9/liter). Clarity yet to emerge on subsidy sharing „ Post the EGoM decisions, there would still be under-recovery in the system and no clarity has been provided on subsidy sharing. The government press release states, "Even after the above measures, the government and the public sector oil companies are expected to bear an estimated under-recovery burden of about Rs530b on the four sensitive petroleum products during FY11". This implies that the state-owned oil marketing companies (OMCs) will continue to bear a part of the under-recoveries. July 2010

168

Oil & Gas

„

In FY10, upstream companies (ONGC, GAIL and Oil India) shared 100% of auto fuel losses while kerosene and LPG losses were borne by the government (83%) and downstream companies (17%). „ For FY11, we change our assumption for upstream sharing from 100% of auto fuel under-recoveries to 1/3rd of gross under-recoveries. We assume that downstream companies will bear 11% of total under-recoveries; the government will bear the rest. We expect under-recoveries of Rs458b in FY11. Our estimates factor in Brent crude price of US$75/bbl and an exchange rate of Rs46/US$. PETROL DE-REGULATED; DIESEL TO FOLLOW PRODUCT

DECISION

REMARKS

Petrol

PDS Kerosene

Prices to be de-regulated; immediate price hike of Rs3/ltr Prices will be de-regulated over time; immediate price hike of Rs2/ltr Price hiked by Rs3/ltr

Dom. LPG

Price hiked by Rs35/cylinder

Under recovery becomes nil; petrol constituted 10-12% of gross under recoveries Rs2/ltr hike reduces diesel under recovery by ~114b for FY11 Rs3/ltr hike reduces kerosene under recovery by ~27b for FY11 Rs35/cyl hike reduces LPG under recovery by ~23b for FY11 Source: Company/MOSL

Diesel

* Impact will be only for the rest 9 months HISTORICAL AD-HOC SUBSIDY SHARING FY06

Gross Under Recoveries (Rs b) Petrol 27 Diesel 126 PDS Kerosene 144 Domestic LPG 102 Total 400 Sharing (Rsb) Oil Bonds/Cash 115 Upstream 140 OMC's Sharing 138 Total 400 Sharing (%) Oil Bonds 29 Upstream 35 OMC's sharing 35 Total 100

FY07

FY08

FY09

FY10

FY11E

20 188 179 107 494

73 353 191 156 773

52 523 282 176 1,033

52 93 174 143 461

22 84 177 176 459

241 205 48 494

353 257 163 773

713 329 (9) 1,033

260 145 56 461

256 153 50 459

49 42 10 100

46 33 21 100

69 32 (1) 100

56 56 31 33 12 11 100 100 Source: Company/MOSL

1QFY11 GRM at ~US$3.6/bbl; strong economic growth, refinery closures key for sustainability Refining margins worldwide had reached historical lows in 2HCY09 (~US$1/bbl in October 2009), resulting in many refineries becoming unviable. In response to the lower refining margins, many refiners worldwide either reduced their operating rates or shut down their facilities. Hence, there was a steep recovery in GRMs in 4QFY10. However, due to similar lack of demand growth, GRMs were suppressed in 1QFY11 and remained at ~US3.6/bbl (v/s US$4.9/bbl in 4QFY10).

July 2010

169

Oil & Gas

As US refiners increased utilization levels in 1QFY11 (from 77% in January 2010 to ~89% in April 2010), gasoline and fuel oil cracks fell, because increased supply was not matched by commensurate growth in demand. Naphtha cracks fell in 1QFY11, as demand from petchem declined due to large maintenance shutdown in Asia (~1mmtpa) coupled with higher supply (led by increased refinery utilization rates). Sequential decline in Singapore GRMs Refinery shutdowns worldwide have been to the tune of ~2mmbbl/d during the last year (~2.2% of the global refining capacity of ~90mmbbl/d). Global refinery utilization rates have increased from 77% to 89% in the last few months, causing GRMs to decline. GRM recovery in 4QFY10 and decline in 1QFY11 was primarily led by gasoline, naphtha and fuel oil (which together constitute 62% of Reuters Singapore product slate). GRM decline in 1QFY11 was arrested to some extent due to improvement in diesel cracks (US$11.2/bbl in 1QFY11 v/s US$8.7/bbl in 4QFY10). Since most of the closures were temporary, few plants came online to gain from the improved GRMs. Also, demand did not increase in line with the supply of gasoline and fuel oil; hence their cracks were suppressed. STRONG QOQ JUMP IN SINGAPORE GRM

Singapore Refining Margins (US$/bbl)

Monthly

Quarterly

12 10 8

US$5.6/bbl US$5.0/bbl

6 4 2 0 Dec-07 Mar-08

Jun-08

Sep-08

Dec-08 Mar-09

Jun-09

Sep-09 Dec-09

Mar-10

Source: Bloomberg/Reuters/MOSL

Further, new refining capacity of 5mmbbl/d is expected to commence operations in the next three years (1.6mmbbl/year). Notwithstanding the margin scenario, we expect majority of the planned capacity to come up in FY11/12, as (1) they are in the final stags of completion, and (2) new refiners have higher complexity and would have a better chance to sustain in the low GRM regime. Improving light-heavy differentials After remaining subdued for last few months, light-heavy differentials have once again started to widen. In 1QFY11, Arab light-heavy differential averaged US$2.7/bbl (v/s US$1.7/ bbl in 4QFY10 and US$1.9/bbl in 1QFY10) while WTI-Maya differential stood at US$9.8/ bbl (v/s US$8.8/bbl in 4QFY10 and US$4/bbl in 1QFY10). Improving light-heavy spreads augur well for complex refiners like RIL.

July 2010

170

Oil & Gas

UPTICK IN LIGHT-HEAVY SPREADS

12.5

25 Arab L-H

WTI - Maya (RHS)

0 May-10

0.0 May-09

5

May-08

2.5

May-07

10

May-06

5.0

May-05

15

May-04

7.5

May-03

20

May-02

10.0

Source: IEA

Expect margin pressure on petchem in 2HFY11 Petchem margins are likely to be under pressure due to the new capacities in the Middle East (ME) and China. It is expected that global nameplate ethylene capacity will increase by 7.2% in CY10 and 5.3% in CY11, whereas demand is expected to increase by 4.5% in CY10. Propylene capacity is expected to grow by 5.4% in CY10 and 3.4% CY11 against expected demand growth of 3.3% in CY10. Though domestic players are protected to some extent due to (1) freight cost advantage, and (2) India's duty structure, we believe the ME supplies will eventually impact their margins in 2HFY11. KEY PRODUCT SPREADS SIMPLE SPREADS

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt Oil & Gas Index

110 105 100

Jun-10

May-10

Apr-10

Mar-10

95 90

RELATIVE PERFORMANCE - 1YR (%)

M OSt Oil & Gas Index Sensex

130

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11E QoQ (%) YoY (%)

INTEGRATED SPREADS

PE

PP

PVC

PTA

MEG

42.2 41.9 38.1 43.6 41.5 -4.8 -1.7

40.0 37.2 32.8 40.9 40.1 -1.9 0.4

21.2 20.5 16.7 20.5 20.7 1.1 -2.3

28.3 26.6 22.8 25.8 25.2 -2.3 -10.7

12.1 15.6 17.1 25.9 21.7 -16.2 80.2

POY

PSF

45.3 41.4 45.6 41.9 42.3 39.0 47.6 43.6 48.0 45.9 0.9 5.2 6.1 10.9 Source: Company/MOSL

Valuation and view Subsidy sharing is still the overhang on upstream and OMCs, though the market expects the government to announce an underwriting policy to decide the mechanism. Despite the subsidy concern, we remain positive on ONGC, GAIL and the OMCs. Our near-term view on the refining and petrochemical cycle is bearish and we believe this could adversely impact margins of RIL and other refiners.

120 110 100

July 2010

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

90

Key assumptions „ Our crude price assumption for FY11 and onwards is US$75/bbl. „ We believe Benchmark Singapore Reuters GRM will remain subdued. We model US$4/ bbl in FY11 and US$4.5/bbl in FY12. „ We have considered 15-20% drop in petchem margins in 2HFY11 for RIL and GAIL. 171

Oil & Gas

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

Oil & Gas BPCL 621 Cairn India 312 Chennai Petroleum 251 GAIL 483 Gujarat State Petronet 100 HPCL 401 Indraprastha Gas 257 IOC 377 MRPL 73 ONGC 1,264 Reliance Inds. 1,063 Sector Aggregate

July 2010

Buy Buy Buy Buy Buy Buy Neutral Buy Sell Buy Buy

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

45.2 5.5 32.7 24.8 7.4 38.4 15.4 44.5 6.0 90.7 54.8

60.6 25.4 25.9 30.6 7.8 34.6 19.1 34.3 1.7 122.5 69.0

64.6 43.9 27.4 34.5 13.9 37.1 20.0 43.1 4.4 141.2 83.4

13.8 56.2 7.7 19.5 13.5 10.4 16.7 8.5 12.1 13.9 19.4 16.0

10.3 12.2 9.7 15.8 12.8 11.6 13.4 11.0 43.5 10.3 15.4 13.1

9.6 7.1 9.2 14.0 7.2 10.8 12.8 8.8 16.6 9.0 12.7 10.6

14.9 61.2 7.5 13.1 6.9 8.5 9.5 9.7 10.2 5.5 13.0 9.6

9.0 8.0 6.9 10.2 6.1 8.5 7.6 7.2 20.5 4.4 9.8 7.2

7.4 4.7 7.0 9.3 4.0 7.1 6.9 5.7 12.4 3.7 8.2 5.9

11.8 3.2 18.5 18.7 29.4 11.7 28.6 21.8 20.6 20.0 13.4 14.9

14.4 13.5 10.9 20.1 24.8 9.8 29.4 15.0 5.3 23.5 14.9 16.2

13.9 20.4 10.9 19.7 33.8 9.9 25.9 17.1 13.2 23.0 15.6 17.4

172

Results Preview SECTOR: OIL & GAS

BPCL STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 BPCL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs621

REUTERS CODE

S&P CNX: 5,269

BPCL.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

361.5

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

-58.1

35.4

1.7

4.8

5.9

45.2

157.6

13.7

1.6

11.8

60.6

34.2

10.2

1.4

14.4

64.6

6.7

9.6

1.3

13.9

9.5

03/09A

1,366

6.3

17.5

03/10A

1,238

16.3

03/11E

1,340

21.9

03/12E 1,328 * Consolidated

23.4

224.6 4.8

EPS

(RS B)

4/ 0/27

Mcap (USD b)

EPS

(RS B)

658/407

Mcap (Rs b)

NET SALES ADJ. PAT

END *

(RS) GROWTH (%)

EV/

EV/

SALES EBITDA

0.3

13.9

3.9

0.4

14.9

7.9

0.3

9.0

0.3

7.4

„

We expect BPCL to report net profit of Rs2.7b as against Rs7b in 4QFY10 and Rs6b in 1QFY11. We estimate EBITDA at Rs6.2b (v/s Rs11.2b in 4QFY10 and Rs7.5b in 1QFY11).

„

We assume that OMCs will bear 11% of the total under-recoveries - Rs5b in 1QFY11 (v/s Rs9.2b in 1QFY10). Further, we assume that the upstream segment will bear 1/3 of the total under-recoveries while the government will compensate for the rest.

„

As in previous quarters, BPCL's profitability will depend more on the subsidy sharing than on business fundamentals. Post its meeting on 25 June 2010, the EGoM deregulated petrol prices and increased prices of diesel, kerosene and LPG.

„

On the operational front, we expect throughput at 5.5mmt (down 3% QoQ and up 32% YoY).

„

The stock is trading at 9.6x FY12E consolidated EPS of Rs64.6 and 1.3x FY10E BV. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Net Sales Change (%) EBITDA Change (%) % of Sales Depreciation Interest Other Income PBT Tax Rate (%) PAT Change (%) Adj. PAT Key Assumption (Rs b) Gross Under Recovery Upstream Sharing Oil Bonds Net Under/(Over) Recovery As a % of Gross E: MOSL Estimates

FY10

FY11E

FY10

1Q

2Q

3Q

4Q

1Q

2Q

3Q

254,928 -34.7 7,454 nm 2.9 2,311 2,866 7,028 9,306 3,165 34.0 6,141 nm 6,141

270,710 -28.4 -1,163 -94.6 -0.4 3,088 2,673 4,424 -2,500 -912 36.5 -1,588 -94.0 -1,588

321,612 0.9 6,228 -59.1 1.9 3,816 2,513 4,873 4,771 980 20.5 3,791 -52.6 3,791

375,513 41.7 11,275 -72.9 3.0 3,208 2,059 6,078 12,087 5,052 41.8 7,035 -80.6 7,035

323,334 26.8 6,208 -16.7 1.9 3,250 2,419 3,514 4,053 1,346 33.2 2,707 -55.9 2,707

327,411 20.9 9,881 nm 3.0 3,275 2,306 4,023 8,323 2,765 33.2 5,559 nm 5,559

327,540 1.8 9,690 55.6 3.0 3,295 2,250 3,742 7,887 2,620 33.2 5,267 38.9 5,267

11 2 0 9 85.5

22 9 0 14 61.8

30 12 15 3 11.0

38 15 38 -14 -36.5

46 15 25 5 11.0

18 6 10 2 10.6

18 6 10 2 10.5

FY11E

4Q

331,004 1,222,763 1,309,290 -11.9 -9.6 7.1 10,628 23,794 36,408 -5.7 -13.1 53.0 3.2 1.9 2.8 3,305 12,423 13,125 2,025 10,110 9,000 2,901 22,402 14,179 8,199 23,664 28,462 2,723 8,284 9,454 33.2 35.0 33.2 5,475 15,379 19,008 -22.2 118.6 23.6 5,475 15,379 19,008 17 6 9 2 10.4

101 36 53 12 12.2

98 33 55 10 11

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

173

Results Preview SECTOR: OIL & GAS

Cairn India STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 CAIR IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs312

REUTERS CODE

S&P CNX: 5,269

CAIL.BO

Equity Shares (m) 52 Week Range (Rs)

321/201

1,6,12 Rel Perf (%)

5/ 10/16

Mcap (Rs b) Mcap (USD b)

YEAR

1,894.4

590.3 12.7

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

03/09A

14,326

8,082

4.3

EV/

EV/

N.M.

73.0

1.8

2.6

2.5

40.0

61.7

SALES EBITDA

03/10A

16,230

10,511

5.5

30.1

56.1

1.7

3.2

2.5

36.9

61.1

03/11E

84,706

48,172

25.4

358.3

12.2

1.6

13.5

15.3

7.0

8.0

03/12E

133,587

83,263

43.9

72.8

7.1

1.3

20.4

23.2

4.1

4.6

Consolidated

„

„

„

„ „

We estimate Cairn India to report net sales of Rs10.1 (v/s Rs6.9b in 4QFY10), led by additional revenues from Rajasthan crude sales. Rajasthan crude sales commenced from 3QFY10 and hence YoY numbers would not be comparable. We estimate EBITDA at Rs8.3b v/s Rs3.7b in 4QFY10. We expect the EBITDA margin to improve once crude transportation pipeline is completely operational, (currently ~60000 bpd) as it would replace the current trucking cost of ~US$8/bbl by US$1/bbl. We estimate net oil and gas sales of 26kbpd (v/s 13.4kbpd in 4QFY10) from Rajasthan field and total net sales of 40kboepd (v/s 27.4kboepd in 4QFY10). We build gross oil sales from Rajasthan block at 94.1kbpd (net 65.9kbpd) in our estimates for FY11. We model long term Brent crude price of US$75/bbl in our estimates and take a discount of 12.5% (~US$9.4/bbl) for quality and customs duty on crude at 2.5%. Cairn's earnings will see a substantial jump over sequential quarters as the production from Rajasthan block ramps up. Our current FY12 EPS of Rs44 is based on Brent price of US$75/bbl and at Brent price of US$85/bbl EPS would stand increased to Rs51.5. The stock currently trades at 7.1x FY12E EPS of Rs43.9. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

FY10 1Q

FY11E

FY10

FY11E

84,706 421.9 0 1,212 9,980 73,514 86.8 12,611 3,269 2,528 0 0 60,163 11,991 19.9 48,172 48,172 14.0 66.0

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Net Sales 2,050 2,298 Change (%) -35.1 -43.1 Inc/Dec in Stock -155 -259 Staff Cost 215 211 Operating Expenses 668 1,013 1,333 EBITDA 1,321 % of Net Sales 64.5 58.0 D,D & A (inc. w/off) 722 508 Interest 7 9 Other Income (Net) 572 1,056 Forex Fluctuations 718 0 Exceptional Items -1,637 1,637 PBT 244 3,510 Tax -210 -1,185 Rate* (%) nm -33.8 PAT 454 4,695 Adj. PAT 2,092 1,873 Sales - Cairn's Share (kboepd) Ravva and Cambay 15.9 14.4 Rajasthan 0.0 4.2 E: MOSL Estimates; * Excluding forex fluctuations

4,955 54.5 -652 407 1,727 3,473 70.1 740 260 999 0

6,928 228.6 700 268 2,282 3,678 53.1 1,601 19 879 0

30,921 524.1 0 310 3,269 27,342 88.4 3,591 1,088 662 0

2,938 486 16.5 2,452 2,452

18,146 785.4 0 300 2,262 15,584 85.9 3,050 726 635 0 0 12,443 2,489 20.0 9,954 9,954

25,497 1,009.6 0 305 2,865 22,327 87.6 3,170 919 691 0

3,472 562 16.2 2,910 2,910

10,143 -29.2 0 297 1,584 8,261 81.5 2,800 536 540 0 0 5,465 1,093 nm 4,372 4,372

18,929 3,786 20.0 15,143 15,143

23,326 4,623 19.8 18,702 18,702

16,230 13.3 -366 1,102 5,689 9,805 60.4 3,570 295 3,505 718 0 10,164 -348 -3.4 10,511 10,511

13.8 10.8

14.1 12.3

14.0 26.0

14.0 54.8

14.0 80.5

14.0 102.7

14.6 6.8

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

174

Results Preview SECTOR: OIL & GAS

Chennai Petroleum Corporation STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 MRL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs251

REUTERS CODE

S&P CNX: 5,269

CHPC.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

149.0 299/152 -9/ 13/20

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

03/09A

319,639

-431

03/10A

246,251

4,879

32.7

NM

7.7

03/11E

285,956

3,856

25.9

-21.0

9.7

03/12E

308,862

4,082

27.4

5.9

9.1

1.0

END

37.4 0.8

EPS

EPS

(RS) GROWTH (%)

-2.9

-104.0

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

-86.9

1.2

-12.2

-6.4

1.1

18.5

14.4

0.3

7.5

1.0

10.9

11.6

0.3

6.9

10.9

11.0

0.3

7.0

SALES EBITDA

0.2

-34.2

„

We expect CPCL to report net loss of Rs526m (v/s adj. net loss of Rs951m in 4QFY10 and profit of Rs2.5b in 1QFY10).

„

The significant YoY decline in profit would be led by lower refining margins (46%) and lower throughput (25%). Regional benchmark Singapore GRM is down 12% from US$4.1/bbl in 1QFY10 to US$3.6/bbl. On the operational front, we expect refinery throughput 2mmt (up 7% QoQ and down 25% YoY) due to plant shutdown.

„

Oil prices have been lower by US$7/bbl and hence we may see inventory losses. We expect CPCL to report GRM of US$3.7/bbl v/s reported GRM of US$6.88/bbl in 1QFY10 and US$4.3/bbl in 4QFY10.

„

We expect refining margin to remain subdued in the short-term, as 1.2-1.6mmbbl new refining capacity is likely to come online in the next few months. For CPCL, we have built GRM of US$4.4/bbl for FY11 and US$4.7/bbl for FY12. The stock trades at 9.2x FY12E EPS of Rs27.4 and an EV of 7x FY12E EBITDA. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

FY11E

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Net Sales 56,604 69,971 Change (%) -49.7 -32.0 EBITDA 4,677 3,218 % of Sales 8.3 4.6 Change (%) -60.0 -702.6 Depreciation 665 679 Interest 279 316 Other Income 884 -115 PBT 4,617 2,109 Tax 1,570 717 Rate (%) 34.0 34.0 PAT 3,047 1,392 Change (%) -56.7 nm Adj PAT* 2,515 1,545 GRM (US$/bbl) 6.9 4.2 Throughput (mmt) 2.7 2.7 E: MOSL Estimates; * Adjusted for forex gain/loss

68,498 21.9 1,204 1.8 -106.7 683 354 891 1,059 -1,145 nm 2,204 nm 1,769 3.4 2.7

54,653 13.6 -568 -1.0 -110.9 644 425 690 -947 -336 35.5 -611 -122.5 -951 4.3 1.9

52,959 -6.4 472 0.9 -89.9 700 458 160 -526 0 0.0 -526 -117.3 -526 3.7 2.0

77,996 11.5 3,173 4.1 -1.4 740 520 162 2,075 689 33.2 1,386 nm 1,386 4.5 3.0

77,702 13.4 3,356 4.3 178.7 740 535 169 2,250 747 33.2 1,503 nm 1,503 4.7 3.0

77,300 41.4 3,356 4.3 nm 756 543 179 2,236 743 33.2 1,493 -344.5 1,493 4.7 3.0

FY10

FY11E

249,726 -21.9 8,532 3.4 -59.6 2,671 1,374 2,351 6,838 805 11.8 6,032 -46.3 4,879 6.1 10.0

285,956 14.5 10,358 3.6 21.4 2,936 2,056 670 6,035 2,180 36.1 3,856 -36.1 3,856 4.7 11.0

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

175

Results Preview SECTOR: OIL & GAS

GAIL (India) STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 GAIL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs483

REUTERS CODE

S&P CNX: 5,269

GAIL.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

1,268.5 517/275

03/09A

-1/ 14/50

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

237,760

38,824

30.6

END

612.4 13.2

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

*EV/

EV/

52.6

13.4

3.5

19.0

24.8

2.2

10.6

SALES EBITDA

03/10A

249,337

31,398

24.8

-19.1

16.6

3.1

18.7

23.9

2.1

10.3

03/11E

325,019

38,824

30.6

23.7

13.4

2.7

20.1

23.2

1.8

8.5

03/12E

374,827

43,769

34.5

12.7

11.9

2.4

19.7

18.5

1.5

8.0

*Adjustment for investments

„

We expect GAIL to report net profit of Rs7.9b (down 13% QoQ; up 20% YoY). The significant QoQ drop in PAT would be due to lower petchem margins (down 12%) and higher subsidy (up191%). YoY improvement in performance despite higher subsidy is led by higher LPG prices (up 47%), improved petchem margins (up 38%) and higher gas transmission volumes (up 19%). „ GAIL's transportation volumes for 1QFY11 are likely to be an average 115mmscmd as compared to 114.8mmscmd in 4QFY10 and 96.7mmscmd in 1QFY10. Volume growth over the last 12 months is driven by KG-D6 gas (commenced production in April 2009). „ We have built in subsidy sharing of Rs6.4b in 1QFY11 (v/s Rs3.4b in 4QFY10 and Rs747m in 1QFY10). LPG business EBIT (pre-subsidy) would be down 8% QoQ and up 52% YoY primarily due to higher realizations YoY. We expect petchem sales volumes to decline 4% QoQ (but grow 14% YoY); petchem EBIT would be down 12.5% QoQ, but up 48% YoY due to higher realizations. „ Adjusted for investments, the stock trades at 11.9x FY12E EPS of Rs34.5. We have a Buy rating on the stock.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Net Sales Change (%) EBITDA % of Net Sales Change (%) Depreciation Interest Other Income PBT Tax Rate (%) PAT Change (%) Adj PAT Subsidy Sharing (Rs b) EPS (Rs) Key Assumptions Gas Trans.Volume (mmsmd) Petchem Sales ('000MT) E: MOSL Estimates

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

60,214 5.1 10,655 17.7 -23.9 1,404 179 798 9,870 3,312 33.6 6,558 -26.9 6,558 0.7 5.2

62,022 1.2 10,173 16.4 -28.9 1,416 179 1,689 10,268 3,135 30.5 7,132 -30.3 7,132 4.6 5.6

61,880 6.5 12,696 20.5 377.3 1,409 142 1,438 12,582 3,983 31.7 8,599 239.3 8,599 4.6 6.8

65,221 6.8 13,168 20.2 37.5 1,389 200 1,486 13,064 3,956 30.3 9,108 44.6 9,108 3.4 7.2

76,433 26.9 13,672 17.9 28.3 1,900 440 560 11,892 3,950 33.2 7,942 21.1 7,942 6.4 6.3

81,832 31.9 16,484 20.1 62.0 1,925 450 1,060 15,169 5,039 33.2 10,130 42.0 10,130 2.6 8.0

83,033 34.2 16,512 19.9 30.1 1,950 470 1,060 15,153 5,033 33.2 10,119 17.7 10,119 2.5 8.0

83,721 28.4 16,714 20.0 26.9 1,986 480 1,672 15,921 5,288 33.2 10,632 16.7 10,632 2.3 8.4

249,337 4.9 46,691 18.7 15.2 5,618 700 5,411 45,784 14,386 126.0 31,398 12.0 38,824 13.8 30.6

325,019 30.4 63,382 19.5 35.7 7,761 1,840 4,353 58,134 19,311 33.2 38,824 23.7 38,824 13.3 30.6

97 92

107 88

109 120

115 109

115 105

115 105

124 120

130 125

107 409

121 455

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

176

Results Preview SECTOR: OIL & GAS

Gujarat State Petronet STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 GUJS IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs100

REUTERS CODE

S&P CNX: 5,269

GSPT.BO

Equity Shares (m) 52 Week Range (Rs)

104/47

1,6,12 Rel Perf (%)

3/ 1/80

Mcap (Rs b) Mcap (USD b)

YEAR

562.0

56.0 1.2

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

03/09A

4,875

1,234

2.2

23.5

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

45.4

2.2

4.6

10.4

EV/

EV/

SALES EBITDA

11.5

16.1

03/10A

9,920

4,138

7.4

235.5

13.5

7.4

3.5

29.4

25.6

7.0

03/11E

11,162

4,387

7.8

6.0

12.8

7.8

2.9

24.8

24.7

6.1

03/12E

16,195

7,786

13.9

77.5

7.2

13.9

2.1

33.8

32.7

4.0

*Our EPS numbers consider No provision towards "Social Contribution Fund"

„

We expect GSPL to report a topline of Rs2.7b and net profit of Rs1b (down 3% QoQ and up 29% YoY).

„

GSPL is likely to deliver volumes of 37.4mmscmd for 1QFY11 as against 36.4mmscmd in 4QFY10 and 25.3mmscmd in 1QFY10.

„

PNGRB regulations require application from GSPL for authorization, post which the Board shall approve tariff. We believe it will take at least one year from here for final tariff approval. Also, we believe there would be a 10-20% reduction in GSPL's network tariff, with the PNGRB reducing its EBITDA margin from 92% to <85%.

„

GSPL has raised an EOI for four major cross-country pipelines. PNGRB has being postponing / delaying the bidding process for the last six months; it has now decided to open the bids in July. If GSPL wins any of the pipeline bids, it will need to raise additional funds considering that each pipeline would cost over Rs50b.

„

GSPL trades at 7.2x FY12E EPS of Rs13.9. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Net Sales Change (%) EBITDA % of Net Sales

2,108 76.4 1,948 92.4

2,548 114.8 2,443 95.9

2,685 128.6 2,531 94.3

2,579 95.4 2,371 91.9

2,684 27.3 2,523 94.0

2,713 6.5 2,550 94.0

2,833 5.5 2,663 94.0

2,931 13.7 2,754 93.9

9,920 103.5 9,293 93.7

11,162 12.5 10,490 94.0

Change (%) Depreciation Interest Other Income PBT Tax Rate (%) PAT Change (%) EPS (Rs) Transmission Volumes (mmscmd) Implied Tariff (Rs/mscm) E: MOSL Estimates

81.1 550 245 68 1,221 415 34.0 806 146.8 1.4 25.3 914.9

138.5 587 250 59 1,665 564 33.9 1,101 287.8 2.0 31.1 891.2

149.0 596 218 33 1,750 597 34.1 1,154 317.4 2.1 35.1 830.8

110.1 632 225 121 1,634 555 34.0 1,079 210.9 1.9 36.4 786.8

29.5 716 340 90 1,557 517 33.2 1,040 29.1 1.9 37.4 789.3

4.4 750 360 150 1,590 528 33.2 1,062 -3.5 1.9 37.4 789.3

5.2 775 380 160 1,668 554 33.2 1,114 -3.4 2.0 38.8 793.0

16.2 800 388 187 1,754 582 33.2 1,171 8.6 2.1 40.8 797.6

118.9 2,365 938 280 6,270 2,131 34.0 4,138 235.5 7.4 32.0 855.9

12.9 3,041 1,468 587 6,569 2,182 33.2 4,387 6.0 7.8 38.6 792.3

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

177

Results Preview SECTOR: OIL & GAS

HPCL STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 HPCL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs401

REUTERS CODE

S&P CNX: 5,269

HPCL.BO

Equity Shares (m)

YEAR

339.0

52 Week Range (Rs)

425/293

1,6,12 Rel Perf (%)

10/ 1/13

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

03/09A

1,246,943

4,355

12.8

03/10A

1,076,375 13,014

03/11E

1,152,707 11,718

03/12E

1,143,682 12,594

END

136.0 2.9

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

-40.0

31.2

1.3

4.1

8.8

38.4

198.8

10.4

1.2

11.7

8.7

0.2

8.5

34.6

-10.0

11.6

1.1

9.8

7.6

0.2

8.5

37.1

7.5

10.8

1.0

9.9

8.3

0.2

7.1

SALES EBITDA

0.2

8.0

„

We expect HPCL to report net profit of Rs1.6b as against Rs7.6b in 4QFY10 and Rs6.5b in 1QFY10.

„

We assume that OMCs will bear 11% of the total under-recoveries - Rs5b in 1QFY11 (v/s Rs9.2b in 1QFY10). Further, we assume that the upstream segment will bear 1/3 of the total under-recoveries while the government will compensate for the rest.

„

As in previous quarters, HPCL's profitability will depend more on the subsidy sharing than on business fundamentals. Post its meeting on 25 June 2010, the EGoM deregulated petrol prices and increased prices of diesel, kerosene and LPG. However, there is no clarity on sharing of net under-recoveries.

„

On the operational front, we expect throughput of 3.95mmt (up 1% QoQ and down 3.7% YoY).

„

The stock is trading at 10.8x FY12E EPS of Rs37.1 and 1x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Net Sales Change (%) EBITDA % of Net Sales Change (%) Depreciation Interest OI (incl. Oper. other inc) PBT Tax Rate (%) PAT Change (%) Adj. PAT Key Assumptions (Rs b) Gross Under Recovery Upstream Sharing Oil Bonds/Cash Subsidy Net Under Recovery Net Sharing (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

241,976 -30.3 10,876 4.5 -364.6 2,629 2,702 4,403 9,948 3,457 34.8 6,491 nm 6,491

244,566 -31.0 -4 0.0 -100.0 2,833 2,493 3,237 -2,094 -727 34.7 -1,367 -95.8 -1,367

276,620 -5.9 1,421 0.5 -69.9 3,007 2,202 4,373 585 271 46.3 314 nm 314

313,213 24.5 13,139 4.2 -75.8 3,175 1,640 4,450 12,774 5,236 41.0 7,538 -85.2 7,575

273,611 13.1 4,048 1.5 -62.8 3,200 1,851 3,372 2,369 787 33.2 1,582 -75.6 1,582

291,166 19.1 7,420 2.5 nm 3,400 2,050 3,492 5,462 1,814 33.2 3,648 nm 3,648

286,528 3.6 7,576 2.6 433.1 3,550 1,950 3,278 5,354 1,778 33.2 3,575 1,037.4 3,575

12 2 0 10 85

22 8 0 15 66

29 10 19 1 3

37 14 37 -13 nm

45 15 25 5 11

19 6 11 2 11

19 6 11 2 11

FY10

FY11E

301,403 1,076,375 -3.8 -13.7 6,922 25,432 2.3 2.4 -47.3 -12.1 3,610 11,644 1,809 9,038 2,859 16,463 4,361 21,213 1,449 8,237 33.2 38.8 2,912 12,977 -61.4 126.0 2,912 13,014

1,152,707 7.1 25,966 2.3 2.1 13,760 7,660 12,999 17,546 5,828 33.2 11,718 -9.7 11,718

4Q

18 6 10 2 11

100 33 56 12 12

100 34 56 11 11

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

178

Results Preview SECTOR: OIL & GAS

Indian Oil Corporation STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 IOC IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs377

REUTERS CODE

S&P CNX: 5,269

IOC.BO

Equity Shares (m)

YEAR

2,406.3

52 Week Range (Rs)

395/257

1,6,12 Rel Perf (%)

7/ 21/19

Mcap (Rs b) Mcap (USD b)

907.9 19.6

NET SALES ADJ. PATADJ. EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

34.6

2.0

5.8

8.2

0.5

18.3

21.8

16.1

0.5

9.7

15.0

13.6

0.5

7.3

17.3

0.4

5.7

END

(RS B)

(RS B)

03/09A

2,861

26.0

10.9

-67.1

03/10A

2,501

107.1

44.5

308.4

8.5

1.6

03/11E

2,572

82.5

34.3

-23.0

11.0

1.6

03/12E

2,347

103.6

43.1

25.6

8.8

1.4

17.1

EV/

EV/

SALES EBITDA

*Consolidated

„

We expect IOC to report net profit of Rs12.5b as against Rs55.6b in 4QFY10 and Rs36.8b in 1QFY10.

„

We assume that OMCs will bear 11% of the total under-recoveries - Rs5b in 1QFY11 (v/s Rs9.2b in 1QFY10). Further, we assume that the upstream segment will bear 1/3 of the total under-recoveries while the government will compensate for the rest.

„

As in previous quarters, IOC's profitability will depend more on the subsidy sharing than on business fundamentals. Post its meeting on 25 June 2010, the EGoM deregulated petrol prices and increased prices of diesel, kerosene and LPG. However, there is no clarity on sharing of net under-recoveries.

„

On the operational front, we expect throughout of 13.2mmt (down 1% QoQ but up 6% YoY).

„

The stock is trading at 8.8x FY12E consolidated EPS of Rs43.1 and 1.4x FY12E BV. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Net Sales Change (%) EBITDA % of Net Sales Change (%) Depreciation Interest Other Income PBT Tax Rate (%) PAT Change (%) Key Assumptions (Rs b) Gross Under Recovery Upstream Sharing Oil Bonds Net Under Recovery As a % of Gross E: MOSL Estimates

FY10

FY11E

FY10

FY11E

695,613 2,663,094 -9.9 -12.6 38,875 122,166 5.6 4.6 -46.7 195.0 9,344 32,271 4,665 15,265

2,737,343 2.8 134,930 4.9 10.4 36,644 16,900

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

586,252 -33.7 41,409 7.1 331.2 7,598 3,340

607,461 -29.6 4,314 0.7 nm 7,805 3,477

697,082 -0.9 3,457 0.5 -89.3 7,996 4,091

772,299 29.6 72,986 9.5 -15.3 8,872 4,357

671,498 14.5 25,195 3.8 -39.2 8,900 4,425

686,569 13.0 35,439 5.2 721.5 9,100 3,850

683,662 -1.9 35,421 5.2 924.6 9,300 3,960

23,625 54,096 17,267 31.9 36,828 787.2

10,306 3,337 493 14.8 2,844 nm

13,798 5,168 -1,798 -34.8 6,966 -76.5

18,703 78,460 22,893 29.2 55,568 -16.1

6,903 18,773 6,236 33.2 12,537 -66.0

11,594 34,083 11,322 33.2 22,762 700.4

10,857 33,018 10,968 33.2 22,050 216.5

9,105 33,971 11,284 33.2 22,687 -59.2

66,432 141,061 38,855 27.5 102,206 177.5

38,458 119,845 39,809 33.2 80,035 -21.7

32 2 0 30 93

60 18 0 42 70

76 23 45 8 11

92 32 107 -48 -52

122 41 68 14 11

49 16 27 6 11

46 15 26 5 11

44 14 24 5 11

586 182 404 0 0

259 75 152 32 12

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

179

Results Preview SECTOR: OIL & GAS

Indraprastha Gas STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 IGL IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

140.0

52 Week Range (Rs)

270/126

1,6,12 Rel Perf (%)

4/ 29/68

Mcap (Rs b) Mcap (USD b)

Rs257

Previous Recommendation: Neutral

IGAS.BO

NET SALES

PAT

(RS M)

(RS M)

END

35.9 0.8

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A

8,528

1,726

12.3

-1.1

20.8

5.3

27.4

38.7

4.1

11.6

03/10A

10,781

2,155

15.4

24.9

16.7

4.4

28.6

40.3

3.4

9.5

03/11E

15,921

2,672

19.1

24.0

13.5

3.6

29.4

41.2

2.3

7.6

03/12E

17,938

2,806

20.0

5.0

12.8

3.1

25.9

36.3

2.0

6.9

„

We expect IGL to deliver volumes of 2.24mmscmd in 1QFY11, reporting a PAT of Rs609m (v/s Rs515m in 4QFY10 and Rs483m in 1QFY10).

„

IGL is getting 0.25mmscmd gas from KG-D6, which will ramp up to 0.5mmscmd in the coming quarters.

„

We expect CNG volumes to grow by 16% YoY to 2.01mmscmd and PNG volumes to grow by 16% YoY to 0.22mmscmd.

„

IGL raised CNG price by Rs5.6/kg and thereby passed on the entire APM gas price hike (US$2/mmbtu to US$4.2/ mmbtu). The company has consistently proven its ability to pass on increases in APM gas price to its customers, thus protecting its EBITDA margins.

„

IGL currently operates 193 CNG stations, which it intends to increase to 250 in FY11.

„

The new PNGRB regulations entitle IGL to earn 14% post-tax (21% pre-tax) RoCE on its network tariff. However, final commodity price is not controlled. We do not expect any cut in IGL's gas selling prices.

„

The stock trades at 12.8x FY12E EPS of Rs20. Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Net Sales Change (%) Raw Material Consumed Staff Cost Other Exp (incl Stock Adj) EBITDA % of Net Sales Change (%) Depreciation Other Income PBT Tax Rate (%) PAT Change (%) Gas Volumes (mmscmd) CNG PNG Total E: MOSL Estimates

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2,326 21.9 1,041 62

2,731 26.9 1,242 70

2,846 29.7 1,283 79

2,878 26.5 1,382 96

3,216 38.3 1,527 83

4,078 49.3 2,137 85

4,228 48.6 2,239 88

4,398 52.8 2,380 98

10,781 26.4 4,949 308

15,921 47.7 8,283 354

373 849 36.5 12.4 186 64 727 244 33.6 483 10.5

419 1,000 36.6 17.5 194 50 856 288 33.7 568 13.1

450 1,034 36.3 52.6 197 53 890 301 33.8 589 53.9

475 925 32.1 28.9 198 45 771 256 33.2 515 27.6

515 1,091 33.9 28.5 250 69 912 303 33.2 609 26.2

653 1,204 29.5 20.4 260 70 1,015 337 33.2 678 19.4

672 1,229 29.1 18.8 265 72 1,035 344 33.2 692 17.3

695 1,225 27.9 32.5 260 73 1,037 344 33.2 693 34.5

1,717 3,808 35.3 26.9 775 211 3,244 1,089 33.6 2,155 24.9

2,534 4,749 29.8 24.7 1,035 286 4,000 1,329 33.2 2,672 24.0

1.74 0.19 1.93

1.91 0.18 2.10

1.94 0.18 2.12

1.98 0.21 2.18

2.01 0.22 2.24

2.14 0.24 2.38

2.23 0.24 2.47

2.37 0.26 2.63

1.89 0.19 2.08

2.19 0.24 2.43

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

180

Results Preview SECTOR: OIL & GAS

MRPL STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 MRPL IN

25 June 2010

Sell

Previous Recommendation: Sell

Rs73

REUTERS CODE

S&P CNX: 5,269

MRPL.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

1,752.6 94/64

Mcap (USD b)

PAT

P/E

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS) GROWTH (%)

(X)

(X)

(%)

(%)

382,438

11,926

8.3

8.8

2.7

28.0

25.3

03/09A

3/ -7/-36

Mcap (Rs b)

NET SALES

END

128.6 2.8

EPS

EPS

23.2

EV/

EV/

SALES EBITDA

0.3

6.2

03/10A

315,210

10,585

6.0

-27.3

12.1

2.3

20.6

11.9

0.5

10.2

03/11E

352,860

2,955

1.7

-72.1

43.5

2.3

5.3

3.5

0.5

20.5

03/12E

359,381

7,738

4.4

161.8

16.6

2.1

13.2

7.7

0.6

12.4

„

We expect MRPL to report net profit of Rs652m (v/s adjusted net profit of Rs1.2b in 4QFY10 and profit of Rs3.4b in 1QFY10). Lower YoY decline is due to large drop in operating GRMs.

„

We estimate GRM of US$3.9/bbl v/s reported GRM of US$5.25/bbl in 4QFY10 and US$7.98/bbl in 1QFY10.

„

On the operational front, we expect refinery throughput at 3.1mmtpa (up 1% QoQ and 9% YoY). MRPL has upgraded its facilities to make Euro-IV compliant fuels and is planning to revamp capacity to 15mmtpa in FY12.

„

For MRPL, we have built in GRM of US$4.3/bbl for FY11 and US$5/bbl for FY12. The stock trades at 16.6x FY12E EPS of Rs4.4 and EV of 12.4x FY12E EBITDA. Sell.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Net Sales Change (%) Raw Material (incl. inv chg) Staff Cost Other Expenditure EBITDA % of Net Sales Change (%) Depreciation Interest Other Income PBT Tax Prior Year Tax Adjustment Rate (%) PAT Change (%) Adj. PAT* EPS GRM (US$/bbl) Throughut (mmt) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

59,114 -45 52,144 287 728 5,955 10.1 -57 963 302 1,291 5,981 2,095 0 35.0 3,885 -54.0 3,365 1.9 8.0 2.85

78,495 -42 74,035 214 1,035 3,210 4.1 128 975 302 737 2,671 1,033 9 38.7 1,630 553.7 1,586 0.9 3.6 3.19

90,605 20 86,674 273 824 2,834 3.1 nm 990 289 2,293 3,848 1,308 0 34.0 2,539 nm 1,314 0.7 4.5 3.40

86,996 33 83,298 185 808 2,705 3.1 -71 966 262 2,402 3,880 1,350 0 34.8 2,531 -58.4 1,197 0.7 5.3 3.06

88,436 50 85,528 220 992 1,696 1.9 -72 950 300 530 976 324 0 33.2 652 -83.2 652 0.4 3.9 3.10

86,710 10 83,257 240 1,084 2,130 2.5 -34 975 490 540 1,205 400 0 33.2 804 -50.6 804 0.5 4.3 3.15

89,130 -2 85,344 270 1,146 2,370 2.7 -16 1,050 510 580 1,390 462 0 33.2 929 -63.4 929 0.5 4.5 3.25

88,584 2 84,798 325 1,294 2,167 2.4 -20 1,176 702 566 855 284 0 33.2 571 -77.4 571 0.3 4.5 3.25

FY10

FY11E

315,210 -17.6 296,151 959 3,395 14,704 4.7 -30.4 3,893 1,155 6,723 16,380 5,786 9 35.3 10,585 -11.2 7,462 4.3 5.3 12.5

352,860 11.9 338,926 1,055 4,515 8,363 2.4 -43.1 4,151 2,002 2,216 4,426 1,470 0 33.2 2,956 -72.1 2,956 1.7 4.3 12.8

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

181

Results Preview SECTOR: OIL & GAS

ONGC STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 ONGC IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs1,264

Previous Recommendation: Buy

ONGC.BO

YEAR

2,138.9 1,291/965 8/ 4/1 2,703.6 58.3

NET SALES

PAT

END

(RS B)

(RS B)

EPS

03/09A

1,046

198

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

-0.4

13.7

3.0

23.4

22.7

2.4

5.8

(RS) GROWTH (%)

92.5

EV/

EV/

SALES EBITDA

03/10A

1,018

194

90.7

-2.0

13.9

2.6

20.0

19.4

2.4

5.5

03/11E

1,182

262

122.5

35.0

10.3

2.2

23.5

22.8

2.0

4.5

03/12E

1,263

302

141.2

15.3

9.0

1.9

23.0

22.3

1.7

3.8

Consolidated

„

We expect ONGC to report net profit of Rs34.9b (v/s adjusted net profit of Rs37.8b in 4QFY10 and Rs48.5b in 1QFY10). We estimate EBITDA at Rs79.6b (down 3% QoQ and 16% YoY).

„

We estimate gross realization at US$80.5/bbl v/s US$79.2/bbl in 4QFY10 and US$60.6/bbl in 1QFY10 and net realization at US$50.5/bbl v/s US$51.4/bbl in 4QFY10 and US$58.3/bbl in 1QFY10.

„

In FY10, upstream (ONGC, GAIL and OIL) shared 100% subsidy towards auto fuel under-recoveries. Of this, ONGC shared 80%, while the rest was shared by OIL and GAIL. Post government initiatives towards fuel price deregulation, we build 1/3rd of total under-recoveries to be borne by upstream companies, of which 80% would be shared by ONGC. We assume that ONGC will share Rs56.5b (US$10.6/bbl) in 1QFY11.

„

The government has increased APM gas price from US$1.9/mmbtu to US$4.2/mmbtu in 4QFY10, applicable from June 2010. This has a positive impact of 12% on FY11E EPS.

„

Our Brent price assumption is US$75/bbl in FY11 and US$75/bbl over the long term. The stock trades at 9x FY12E consolidated EPS of Rs141.2. Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS BILLION)

Y/E MARCH

Net Sales Change (%) EBITDA % of Net Sales Change (%) D,D & A Interest Other Income PBT Tax Rate (%) PAT Change (%) Adjusted PAT Key Assumptions (US$/bbl) Fx Rate (Rs/US$) Gross Oil Realization Subsidy Net Oil Realization Subsidy (Rs b) E: MOSL Estimates

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

148.8 -25.8 95.0 63.9 -19.2 31.8 0.1 10.4 73.6 25.1 34.1 48.5 -26.5 48.5

150.8 -13.4 86.8 57.6 3.2 23.6 0.0 12.5 75.7 25.2 33.3 50.5 4.9 50.9

153.1 23.1 91.3 59.6 82.7 46.8 0.0 1.6 46.2 15.7 34.0 30.5 39.1 30.5

147.1 7.4 81.8 55.6 41.6 44.5 0.6 17.6 54.4 16.1 29.6 38.3 73.5 37.8

146.1 -1.8 79.6 54.5 -16.2 37.6 0.0 10.3 52.2 17.3 33.2 34.9 -28.1 34.9

190.8 26.5 115.4 60.5 32.9 36.6 0.0 10.5 89.3 29.7 33.2 59.6 18.1 59.6

190.7 24.5 114.7 60.1 25.5 35.6 0.0 11.7 90.7 30.1 33.2 60.6 99.0 60.6

191.0 29.8 125.4 65.6 53.2 38.4 0.0 12.1 99.0 32.9 33.2 66.1 72.6 66.1

599.9 -5.7 355.0 59.2 14.7 146.6 0.7 42.1 249.9 82.2 32.9 167.7 6.1 161.3

718.6 19.8 435.0 60.5 22.5 148.2 0.2 44.5 331.2 110.0 33.2 221.2 31.9 221.2

48.8 60.6 2.3 58.3 4.3

48.5 70.5 14.1 56.4 26.3

46.6 76.7 19.0 57.7 35.0

46.0 79.2 27.7 51.4 50.0

45.7 80.5 30.0 50.5 56.5

46.3 76.1 12.0 64.1 22.9

46.0 76.2 11.6 64.6 22.0

46.0 75.8 11.0 64.8 20.9

47.5 71.7 15.8 55.9 28.9

46.0 77.1 16.1 61.0 30.6

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

182

Results Preview SECTOR: OIL & GAS

Reliance Industries STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 RIL IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

1,185/841

1,6,12 Rel Perf (%)

-2/ -2/-14

Mcap (USD b)

YEAR

3,286.2

52 Week Range (Rs)

Mcap (Rs b)

Rs1,063

Previous Recommendation: Buy

RELI.BO

3,494.1 75.4

NET SALES

PAT

EPS

P/E

ADJ. EPS

ADJ.P/E

P/BV

ROE

ROCE

EV/

END

(RS B)

(RS B)

(RS)

(X)

(RS)

(X)

(X)

(%)

(%)

EBITDA

03/09A

1,418

153

52.6

20.2

57.6

18.5

2.2

15.7

12.5

15.7

03/10A

1,925

162

49.6

21.4

54.8

19.4

2.3

13.4

11.3

13.0

03/11E

2,172

205

62.5

17.0

69.0

15.4

2.0

14.9

13.4

9.8

03/12E

2,186

249

75.6

14.1

83.4

12.7

1.9

15.6

14.3

8.2

All adjusted per share info and valuation ratios are adjusted for treasury shares held by company

„ „ „

„

„

We expect RIL to report net profit of Rs47.7b (v/s Rs47.1b in 4QFY10 and Rs36.7b in 1QFY10). Strong YoY and QoQ performance would be led by ramp-up of KG-D6 volumes (63mmscmd v/s 19mmscmd). KG-D6 volumes are steady at 63mmscmd since December 2009. The Supreme Court gave a judgment favoring RIL in the RIL-RNRL trial, enabling RIL to retain gas selling price of US$4.2/mmbtu. RIL has planned large investments in setting up offgas cracker, IGCC and petrochemical capacity at Jamnagar. Also, RIL has committed significant investments in acquiring strategic partnership in Shale gas assets in USA (US$3b) and broadband wireless access business (~US$2.9b). We build GRM of US$7.6/bbl for FY11 and US$8.5/bbl for FY12 (includes upside of US$0.8/bbl on account of KGD6 gas use). We expect polymer and fiber spreads (over naphtha) to decline in 2HFY11 as the new capacities in the Middle East and China get commissioned. RIL trades at 12.7x FY12E EPS of Rs83.4. We remain positive on RIL, given its large E&P potential and new initiatives in organic business as well as inorganic (telecom, shale gas assets, etc) business. Maintain Buy.

QUARTERLY PERFORMANCE (STANDALONE)

(RS BILLION)

Y/E MARCH

Net Sales Change (%) EBITDA % of Net Sales Change (%) Depreciation Interest Other Income PBT Tax

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

311.9 -25.0 63.8 20.5 4.3 18.8 4.6 7.1 47.6 10.9

468.5 4.6 72.2 15.4 11.5 24.3 4.6 6.3 49.5 11.0

568.6 80.1 78.4 13.8 46.3 28.0 5.5 5.1 50.1 10.0

575.7 103.0 91.4 15.9 68.0 33.9 5.3 6.2 58.3 11.2

564.7 81.1 94.0 16.7 47.3 34.0 5.2 5.9 60.8 13.1

538.1 14.9 103.1 19.2 42.8 34.8 5.8 5.4 67.9 14.7

538.1 -5.4 100.2 18.6 27.7 35.0 6.0 5.5 64.7 14.0

531.2 -7.7 104.3 19.6 14.1 35.4 6.2 5.6 68.3 14.9

1,924.6 31.6 305.8 15.9 30.7 105.0 20.0 24.6 205.5 43.1

2,172.0 12.9 401.6 18.5 31.3 139.2 23.1 22.4 261.7 56.6

20.0 40.1 14.5

19.3 47.1 20.3

21.5 47.7 30.1

21.6 53.2 38.1

21.6 50.7 26.6

21.8 53.4 13.4

21.0 162.4 3.8

21.6 205.1 26.3

5.9 1.9 4.0 48.0 4.2

7.5 5.0 2.5 59.7 4.2

7.0 3.6 3.4 63.0 4.2

7.8 4.0 3.8 70.0 4.2

7.8 4.0 3.8 70.0 4.2

8.0 4.2 3.8 77.0 4.2

6.7 3.6 3.2 39.8 4.2

7.7 4.0 3.7 70.0 4.2

13.8 20.6 14.9 49.2

19.9 22.2 17.1 59.2

18.5 21.8 19.8 60.0

20.7 21.5 26.0 68.3

20.7 18.4 26.0 65.2

21.4 17.8 29.7 68.9

60.1 85.8 54.6 200.5

81.4 79.5 101.5 262.4

Rate (%) 22.9 22.2 Adj. PAT 36.7 38.5 Change (%) -10.8 -6.6 Key Assumptions (US$/bbl) GRM 7.5 6.0 Singapore GRM 4.1 3.2 Premium/(disc) to Singapore 3.4 2.8 KG-D6 Gas Prodn (mmscmd) 19.3 32.0 KG-D6 Gas Price (US$/mmbtu) 4.2 4.2 Segmental EBIT Breakup (Rs b) Refining 13.0 13.5 Petrochemicals 21.1 22.0 E&P, others 10.2 12.4 Total 44.3 47.8 E: MOSL Estimates; *RPL numbers are included in FY10

Harshad Borawake ([email protected]) / Milind Bafna ([email protected])

July 2010

183

Results Preview QUARTER ENDING JUNE 2010

Pharmaceuticals BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

Topline to grow 12.8%, EBITDA by 20.5% led by Sun Pharma, Divis, Lupin For 1QFY11, we expect topline growth of 12.8% for our pharmaceuticals universe with EBITDA growth at 20.5%. Adjusted PAT is expected to grow by 30.1% YoY. The strong EBITDA growth will be led mainly by a strong performance by Sun Pharma, Divis Lab and Lupin primarily due to a low base. Excluding the impact of these three companies, core EBITDA for our universe is likely to grow by 8.4%.

COMPANY NAME

Aventis Pharma Biocon Cadila Healthcare Cipla Dishman Pharma

AGGREGATES 1QFY11 - EXCLUDING ONE-OFFS

Divi’s Laboratories

PHARMA UNIVERSE

Dr Reddy’s Labs.

AGGREGATES

GSK Pharma

YOY GROWTH (%) SALES

EBITDA

EBITDA MARGINS

ADJ PAT

JUNE'10

JUNE'09

CHG (BP)

30.5 15.3 20.3 20.5 18.6

-113 222 150 -29 127

MNC Pharma 12.6 8.4 8.7 29.4 Big 4 Generics 8.1 23.8 49.8 17.5 CRAMS 14.9 23.4 5.0 21.8 Second Tier generics 19.9 18.3 32.9 20.2 Sector Aggregate 12.8 20.5 30.1 19.8 Note – the numbers exclude one-offs to facilitate comparison of core operations

Glenmark Pharma Jubilant Organosys Lupin Piramal Healthcare Ranbaxy Labs.

AGGREGATES 1QFY11 – INCLUDING ONE-OFFS

Sun Pharmaceuticals

PHARMA UNIVERSE AGGREGATES

YOY GROWTH (%)

EBITDA MARGINS

SALES

EBITDA

ADJ PAT

JUNE'10

12.6 14.3 14.9 23.0 16.6

8.4 40.5 23.4 33.1 32.2

8.7 71.7 5.0 32.9 41.4

29.4 21.6 21.8 22.2 22.3

MNC Pharma Big 4 Generics CRAMS Second Tier generics Sector Aggregate

JUNE'09

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS)

Pharmaceuticals Aventis Pharma Biocon Cadila Health Cipla Divis Labs Dishman Pharma Dr Reddy’ s Labs Glenmark Pharma GSK Pharma Jubiliant Organosys Lupin Piramal Healthcare Ranbaxy Labs Sun Pharma Sector Aggregate

1,870 321 640 347 767 217 1,484 273 2,169 339 1,918 494 453 1,793

(RS MILLION)

RECO

25.06.10

SALES JUN.10

Neutral Buy Buy Buy Buy Neutral UR Neutral Buy Neutral Buy Neutral Neutral Buy

CHG (BP)

30.5 -113 17.6 403 20.3 150 20.5 168 19.6 264 Source: Industry/MOSL

2,785 5,918 10,542 15,083 2,881 2,328 17,556 7,343 5,179 10,367 13,446 9,141 18,103 9,375 130,049

EBITDA

VAR.

VAR.

% YOY

% QOQ

11.5 19.3 16.7 9.6 40.0 2.3 -3.5 35.1 13.2 15.7 23.9 11.3 -4.5 19.0 10.5

10.8 -9.9 24.5 9.7 -8.3 -6.1 6.9 3.6 -4.3 4.7 4.7 -2.9 11.0 -15.5 3.7

JUN.10

483 1,145 2,342 3,830 1,131 508 2,721 2,316 1,857 1,988 2,456 1,774 1,204 2,771 26,526

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

-8.7 13.1 15.0 3.9 69.6 -4.6 -27.8 90.8 14.0 22.6 26.5 14.0 -0.9 64.5 14.9

32.7 -12.1 23.7 36.8 -25.3 2.5 26.9 29.9 -7.2 -8.1 -1.4 -18.0 -27.9 -19.1 1.2

JUN.10

480 698 1,502 2,710 899 229 2,064 949 1,463 1,058 1,852 1,064 399 2,785 18,153

VAR.

VAR.

% YOY

% QOQ

1.9 22.3 19.6 12.1 51.4 -41.5 20.7 77.5 11.1 -15.9 32.2 25.1 99.7 182.6 30.1

33.0 -13.4 26.5 26.1 -31.1 14.9 23.8 -7.5 -9.3 -22.9 -16.0 -33.5 -25.2 -11.7 -5.4

Note: Historic numbers include one-offs and hence YoY comparison may not give the correct picture Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

184

Pharmaceuticals

Key highlights for core 1QFY10 performance will include: 1. Low base leading to strong operating performance for Sun Pharma and Divis Lab at the EBITDA level compared with 1QFY10 when these companies posted low EBITDA due to factors such as lower domestic formulation sales for Sun Pharma and inventory de-stocking impact for Divis Lab. 2. Lackluster performance by large companies including Cipla, Dr Reddy’s and Ranbaxy owing to muted revenue growth and significant YoY appreciation of the rupee against the US dollar and the Euro. Piramal deal commands attractive valuation The recent deal between Abbott and Piramal Healthcare (PIHC) came as a positive surprise not because of the sell-off per se but the kind of valuation the business fetched. This is one of the most expensive valuations that any Indian pharmaceutical business would have got in the recent past. PIHC sold its domestic formulations business (excluding the OTC and ophthalmic portfolio) to Abbott for US$3.72b. In FY10 this business generated revenue of Rs18.2b. We estimate EBITDA of this business at Rs5b. The deal values PIHC’s domestic formulations business at ~8x sales and ~29x EV/EBITDA based on FY10 numbers. Domestic formulations: MNC interest to continue We expect many such deals between MNCs and Indian companies in future as MNCs are focusing on emerging markets to grow their businesses as regulated markets are stagnating. India, with a vast population, rising incomes, growing healthcare infrastructure and low penetration, offers an attractive proposition for MNCs looking to expand in emerging markets. Besides, most large MNCs have a presence/market share in the Rs400b domestic formulations market, which is growing at ~15%. MNCS HAVE MARKET SHARE OF LESS THAN 25% IN INDIAN FORMULATION INDUSTRY COMPANY

REVENUE (RS M)

MARKET SHARE (%)

Abbott* 27,481 6.86 GSK Pharma 17,431 4.35 Pfizer 9,033 2.26 Sanofi Aventis 8,073 2.02 Novartis 6,845 1.71 Wyeth 3,097 0.77 AstraZeneca 2,397 0.6 Note: Based on revenues of 12 months ending Dec’09; * Including the recent acquisition of Piramal Helathcare’s domestic business Source: Company/MOSL

July 2010

185

Pharmaceuticals

INCREASING MNC ENGAGEMENT IN INDIA COMPANY

INDIA

SALES

PRESENCE

FORCE

Pfizer

Yes

GSK India

Yes

Novartis Sanofi -Aventis Merck (USA)

Yes Yes

Added 550 MRs in 2009, plans to add an equal number in 2010 Plans to add 150-200 MRs a year NA Yes

Yes, recent entry Yes Yes

Rapid addition to MR strength in the past two years NA NA

Through Ranbaxy No

Plans to hire 1500 MRs in CY10 NA

Yes

Plans to double MR strength by CY10

Eli Lilly Abbott

Daiichi Takeda Astra Zeneca

HAS ENGAGEMENT IN INDIA INCREASED RECENTLY

Yes, made an open offer to minority shareholders. Plans a ramp-up in its global generic business by 2012

Yes, looking for inorganic growth opportunities/ partnerships Yes, made an open offer to minority shareholders Acquired majority stake in Shantha Biotech, valuing it at US$780m; increased stake in listed entity by 10% Yes, has aggressive ramp-up plans for India

Acquired Piramal Healthcare’s domestic formulations business and Solvay, making it the number one player in the market with ~7% share. Plans to have Indian revenue of US$2.5b in 10 years. Acquired majority stake in Ranbaxy in 2008 valuing it at US$8b Plans India entry. May look at acquisitions/tie-ups with Indian companies Yes, significant addition to sales force Source: Companies/MOSL

Mixed news-flow for generics relating to Para IV/low competition products Para IV/low competition products are becoming increasingly regular for large Indian generic companies. In the past few years Indian companies launched and filed several Para IV/ low competition products and generated strong one time profits out of them. In 1QFY11, Sun Pharma and Dr Reddy’s faced negative news on this front, which impacted potential profits. But Glenmark and Cipla saw some positive developments. US jury rules against Sun’s generic Protonix; Sun stops sales in the US A US jury determined that Nycomed’s US Patent No. 4,758,579 for Protonix, Wyeth/ Nycomed’s US$2.5b anti-ulcer brand, is valid. The verdict on the double-patenting alleged by Sun Pharma and Teva will be delivered by the US District Court judge in the near future (timelines not known but expected in the next few weeks). In case the judge rules in favour of Sun and Teva, it will be sufficient to invalidate the patent and overrule the jury ruling. The jury’s verdict is a negative development for Sun and Teva as it has raised the possibility of potential patent infringement damages. We estimate Sun’s damages at US$179m if the District Court and Federal Circuit Court rulings are unfavorable. After this ruling, Sun stopped selling generic Protonix in the US as a risk mitigation measure. Teva also withdrew from the market. Sun had earned revenue of ~US$140m and PAT of US$84m in FY10 from the drug.

July 2010

186

Pharmaceuticals

Eloxatin: Sun will have to stop selling the product from 30 June 2010 Sun will have to stop selling generic Eloxatin from 30 June 2010 after a district court verdict. Sun appealed in a higher court against the verdict, but, until a verdict comes, Sun will have to suspend sales of the product in the US. The district court verdict came after three generic companies, Teva, Sandoz and Fresenius, entered into an out-of-court settlement with Sanofi for their US patent litigation related to Eloxatin. The settlement mandated that generic companies would withdraw their generic versions of Eloxatin from the US on 30 June 2010 and re-enter the market in August 2012 under license from Sanofi. Dr Reddy’s receives a setback on Allegra D-24; launch delayed Dr Reddy’s Lab (DRRD) received a setback related to its Para IV pipeline as the US district court of New Jersey granted Sanofi’s and Albany Molecular Research’s motion for a preliminary injunction for Allegra D-24 (Sanofi’s US$180m anti-allergy brand). While DRRD plans to appeal this order, it will be restrained from launching generic Allegra D-24 until it wins the appeal. Earlier, a US court judge restrained DRRD from launching generic Allegra D-24 until 25 June 2010 and asked Sanofi (the innovator) to deposit US$20m (US$5m per week for four weeks) as security. We believe that after DRRD’s appeal against the district court verdict, it will take five to six months for a decision, implying that the potential launch will be delayed by at least six months. DRRD will be able to undertake an “at-risk” launch only if it wins the appeal. We had estimated one time PAT of Rs1.4b for FY11 and Rs841m for FY12 from this opportunity for DRRD. Hence we have reduced the NPV value by Rs13/share from our estimates related to this opportunity. DRRD’s pipeline of Para IV/low competition product opportunities has grown stronger over the period as in past few months, three more such opportunities have been added to the existing pipeline for FY11, taking the total number of products to five (excluding Allegra D-24) with potential PAT upside of Rs2.7b for FY11 and Rs2.2b for FY12. We believe a few more such opportunities will become visible over 12 months given the company’s intention to ramp-up its US generic business to US$1b by FY13 compared with FY10 revenue of ~US$355m. DRRD - ONE-TIME PAT CONTRIBUTION (RS M)

July 2010

PRODUCT

LAUNCH STATUS

FY11E

Omeprazole OTC Generic Arixtra Generic Allegra D-24 Generic Lotrel Generic Prograf Generic Accolate Total

Launched Awaiting US FDA approval NA Launched Launched Potential at-risk launch in December 2010

652 683 485 768 75 2,663

FY12E

1,051 881 289 2,222 Source: Company/MOSL

187

Pharmaceuticals

Glenmark might undertake “at-risk” launch of Tarka in US; settles Zetia litigation We believe Glenmark is likely to undertake an “at-risk” launch of generic Tarka (Abbott/ Sanofis’ US$64m anti-hypertensive brand) in the US shortly. Abbott and Sanofi-Aventis had requested the US court to block the launch of Glenmark’s generic version until August 2010. The US court has not complied, implying that Glenmark has the option to undertake an “at-risk” launch since the 30-month stay period has expired, resulting in Glenmark receiving final US FDA approval. The actual patent trial is expected to commence from August 2010. Glenmark had challenged the innovator’s patent on Tarka expiring in 2015 through its Para-IV FTF filing. A small size of the product with US$64m of annual revenue will also help Glenmark to undertake an “at-risk” launch since the potential damages (if Glenmark loses the patent litigation) will not be very high. As of now, Glenmark is the only generic company that has filed for the product and is ready to enter the market and is eligible for a 180-day exclusivity in the market. Assuming no further competition over 12 months and an authorized generic from Sanofi/Abbott, we expect Glenmark to generate one-time PAT of ~US$9m from this opportunity. Glenmark Pharma also settled out-of-court with Merck (US) for its patent litigation on generic Zetia (Merck’s US$1.4b anti-cholesterol drug). Glenmark had challenged Merck’s patents expiring in 2017 through it Para-IV FTF filing. The court case for the litigation was to commence in June 2010 in the US. Under the settlement agreement, Glenmark will be able to launch its generic version of Zetia on 12 December 2016 or earlier under certain circumstances, ahead of the 25 April 2017 expiration of Merck’s patent exclusivity. While the settlement ensures a confirmed launch for Glenmark, it also delays its entry to 2016. Hence, while the monetization of this opportunity is confirmed, the time-line for it gets stretched to 2016. Cipla’s generic partners win patent litigation on Advair (Seretide) in Germany A few generic companies, Mylan, Neolab, Hexal and Ivax, have won a court ruling against GSK related to patent litigation on Advair (also known as Seretide) in Germany (US$250m market). GSK indicated it would appeal the ruling in the German higher court. We believe some of these generic companies are likely to be Cipla’s partners for the launch of inhalers in Europe, including the generic version of Advair/Seretide. While this is a positive development for Cipla, we believe that the launch of generic Advair in Germany is some time away as the final regulatory approval is still awaited by Cipla’s partners. Unlike a normal generic, getting regulatory approval for inhalers is a time-consuming and difficult process given the technical challenges for the product and the inhaler device. For example, despite positive patent verdicts in both the UK and Ireland for the same drug, generic launches are yet to take place pending final regulatory approvals. Cipla will supply this product in the UK through its partner after it receives regulatory approval. We expect approval for generic Advair/Seretide to come through for some European countries in 2HFY11/FY12.

July 2010

188

Pharmaceuticals

CRAMS: Companies have guided for strong performance in FY11 Over the past four to five quarters, the performance of the global CRAMS industry has suffered due to: 1. A severe round of inventory de-stocking undertaken by large innovator companies, leading to lower contract manufacturing revenue for CRAMS companies. 2. After the credit crises of 2008, mid-sized and small-sized research companies faced a liquidity crunch, resulting in a cut-down in many of their research projects. This has partly impacted custom synthesis contracts for CRAMS players. In line with the global industry trend, the CRAMS business of Indian companies was also adversely impacted. However, we believe this is likely to reverse in FY11 due to: 1. Growing pharmaceutical demand: The overall end-consumer demand for pharmaceutical products continues to grow steadily. Hence, inventory de-stocking will ultimately get aligned with demand, after which the innovators will have to commence outsourcing again. We believe this reversal is likely to be visible partly in FY11 and fully by FY12. 2. Improving credit situation: While the mid and small-sized research companies continue to face funding issues, we note that over the past few quarters the global credit situation is gradually improving. This will eventually open up funding channels for these companies. While the custom synthesis business from such companies is under pressure, we expect a gradual improvement over two years. Companies guide for strong top-line growth in FY11 All the major CRAMS companies have guided for strong double digit growth in revenue for FY11 though on a lower base of FY10. STRONG GROWTH GUIDANCE COMPNAY

FY10 REVENUES (RS M)

Divi’s Lab Piramal Healthcare Dishman Pharma Jubilant Organosys* *Only CRAMs segment revenue is included

9,416 8,850 9,154 21,320

REVENUE GROWTH GUIDANCE (%)

25-30 10-15 20 Source: Company/MOSL

Currency appreciation to partly temper top-line growth The rupee has appreciated by 6.4% YoY against the US dollar and ~12% against the euro. This is likely to temper top-line growth partly for larger Indian players with higher exposure to the US dollar. Among larger Indian companies, DRL (hedges of US$414m) and Cipla are inadequately hedged given their significant net US-dollar exposure. Ranbaxy with US$1b of hedges is adequately hedged (though some of the hedges are at unfavorable rates) and Sun Pharma’s net US dollar exposure is not very high.

July 2010

189

Pharmaceuticals

Jun-10

Apr-10 May-10

Feb-10 Mar-10

Jan-10

Oct-09

Nov-09 Dec-09

Sep-09

Aug-09

Jun-09 Jul-09

Apr-09 May-09

Jun-10

Apr-10

May-10

Jan-10

50 Feb-10 Mar-10

40 Nov-09 Dec-09

56

Oct-09

44

Sep-09

62

Aug-09

48

Jun-09 Jul-09

68

Apr-09 May-09

52

Jan-09

74

Feb-09 Mar-09

56

Jan-09

INR V/S EURO (RS/EURO)

Feb-09 Mar-09

INR V/S US$ (RS/US$)

Source: Bloomberg

Sun Pharma, Lupin, Divi's, Jubilant to post operational improvement From our coverage universe, we expect Sun Pharma, Divi's Lab, Lupin and Glenmark to record strong EBITDA growth in 1QFY11 and Ranbaxy and Dr Reddy’s Lab are expected to post flat EBITDA excluding Para IV/low competition products. We attribute the following company-specific reasons for this performance: 1. Cipla: muted operational performance due lower export growth, higher staff cost and appreciation of the rupee against the US dollar. 2. Sun Pharma: strong growth in EBITDA will be due to robust growth in revenue on a low base and expansion in EBITDA margins due to a favorable product mix. 3. Lupin: higher topline growth, better product-mix and low base will lead to higher EBITDA. 4. Glenmark: strong operational performance led by higher topline growth due to outlicensing income. 5. Divi's Labs: strong operational performance led by top-line growth reflects an end to inventory de-stocking, an improved product mix and higher operating leverage. 6. Dr. Reddy’s Labs: flat EBITDA will be due to muted topline growth, which will be impacted by de-growth in regulated markets’ generic business and rupee appreciation versus the euro and the US dollar. 7. Ranbaxy Labs: core business is likely to be under pressure due to the severe impact of the US FDA action on the company’s US business. However, earnings from generic Valtrex and licensing income for Flomax will boost reported PAT. MNC Pharma: GSK to continue with double-digit topline growth We expect our MNC pharmaceutical universe (Aventis and GSK) to record 12.6% YoY topline growth for the quarter, mainly led by 13.2% YoY growth by GSK Pharma. GSK’s EBITDA is likely to grow in line with topline growth and we expect adjusted PAT growth of 11.1% mainly due to lower other income.

July 2010

190

Pharmaceuticals

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt P harmaceuticals Index

111 104 97 Jun-10

May-10

Apr-10

Mar-10

90

Sector view Generics „ Emerging markets to help to improve profitability gradually from 2010 onwards „ New launches imperative for driving growth in core US business „ Differentiation becoming imperative – low competition/patent challenge products, brands, NCE research will be key differentiators „ Increasing MNC interest in the generics space may lead to large acquisitions/supply arrangements with Indian companies „ Top picks – Cipla and Lupin.

RELATIVE PERFORMANCE - 1YR (%)

M OSt P harmaceuticals Index Sensex

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

200 170 140 110 80

CRAMS (Contract Research & Manufacturing Services) „ Favorable macro trends – India is on the threshold of significant contract manufacturing opportunity to grow ~3.7x over 2007-12 „ Inventory de-stocking impacted performance over the past four to five quarters. Expect recovery from FY11 „ Top picks – Divi's Lab. MNC Pharma „ Portfolio realignment in favor of lifestyle products to drive growth in the short to medium term „ Branded generics, patented products and in-licensing to drive long-term growth „ Parents’ commitment to listed entity is imperative „ Top pick – GSK Pharma.

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

Pharmaceuticals Aventis Pharma Biocon Cadila Health Cipla Divis Labs Dishman Pharma Dr Reddy’ s Labs GSK Pharma Glenmark Pharma Jubiliant Organosys Lupin Piramal Healthcare Ranbaxy Labs Sun Pharma Sector Aggregate

July 2010

1,870 321 640 347 767 217 1,484 2,169 273 339 1,918 494 453 1,793

Neutral Buy Buy Buy Buy Neutral UR Buy Neutral Neutral Buy Neutral Neutral Buy

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

68.4 14.7 24.9 12.7 25.8 14.2 6.3 59.6 11.6 28.6 76.6 23.4 3.6 65.5

75.9 16.9 29.6 14.6 31.1 15.6 54.6 69.8 14.6 32.5 94.4 25.6 6.6 61.3

88.8 20.1 35.8 17.4 38.5 19.2 61.6 80.3 18.6 33.7 110.5 30.3 8.7 74.8

27.4 21.9 25.7 27.3 29.8 15.2 234.0 36.4 23.4 11.9 25.0 21.1 125.5 27.4 33.4

24.6 19.0 21.6 23.8 24.7 13.9 27.2 31.1 18.6 10.4 20.3 19.3 68.8 29.3 23.0

21.1 16.0 17.8 19.9 19.9 11.3 24.1 27.0 14.7 10.0 17.3 16.3 52.1 24.0 20.9

25.2 13.5 17.3 19.4 25.1 12.2 22.3 25.2 15.3 10.7 21.1 15.9 36.7 24.1 20.4

21.7 11.7 14.6 16.8 20.2 10.0 21.2 21.9 11.4 8.6 17.2 13.5 13.6 25.1 16.6

17.7 10.3 12.3 14.8 15.7 8.2 19.1 18.7 10.7 7.6 14.5 11.2 24.7 20.3 15.1

17.1 16.7 36.6 17.3 22.4 15.3 2.5 28.7 14.1 29.5 40.1 32.5 3.5 12.6 16.3

17.1 16.8 33.2 17.3 22.6 14.9 20.7 30.2 14.7 25.8 37.0 28.4 17.0 14.7 20.2

18.0 17.3 31.2 17.9 23.2 16.0 20.1 31.4 15.8 21.4 33.7 27.7 6.2 15.9 19.1

191

Results Preview SECTOR: PHARMACEUTICALS

Aventis Pharma STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 HOEC IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

23.0

52 Week Range (Rs) 1,980/1,040 1,6,12 Rel Perf (%)

-8/ 19/43

Mcap (Rs b) Mcap (USD b)

Rs1,870

Previous Recommendation: Neutral

HOEC.BO

43.1 0.9

NET SALES

PAT

END

(RS M)

(RS M)

12/08A

9,833

1,662

72.2

15.1

12/09A

9,744

1,574

68.4

-5.3

12/10E 10,788

1,748

75.9

11.0

24.6

4.2

17.1

25.6

3.4

21.7

12/11E

2,046

88.8

17.1

21.1

3.8

18.0

27.0

2.9

17.7

12,036

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

25.9

5.3

20.4

31.9

3.9

20.5

27.4

4.7

17.1

26.3

3.8

25.2

SALES EBITDA

„

We expect topline to grow 11.5% YoY in 2QCY10 to Rs2.8b, led by 14.8% YoY growth in the domestic formulations business. „ EBITDA is likely to de-grow 8.7% YoY to Rs483m; EBITDA margin would contract by 380bp YoY mainly due to increase in other expenditure. „ We estimate PAT growth of 1.9% YoY for the quarter at Rs480m due to muted growth in topline and pressure on operating margins. We believe Aventis Pharma (APL) will be one of the key beneficiaries of the patent regime in the long-term. The parent has a strong R&D pipeline, with 49 products undergoing clinical trials, of which 17 are in Phase-III or pending approvals. Some of these are likely to be launched in India. However, APL's profitability has declined significantly in the last three years, with EBITDA margin declining from 25% for CY06 to 15.2% for CY09, mainly impacted by lower topline growth and higher staff & promotional expenses. RoE has declined from 28.6% to 17.1% in the same period. We expect APL to post EPS of Rs75.9 for CY10 (up 11%) and Rs88.8 for CY11 (up 17%), leading to 14% EPS CAGR for CY09-11. The stock currently trades at 24.6x CY10E and 21.1x CY11E EPS. We believe the stock price performance will be muted in the short-term until clarity emerges on growth drivers for exports. We maintain our Neutral recommendation, with a target price of Rs1,780 (20x CY11E EPS). QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E DECEMBER

Net Sales YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest Other Income PBT after EO Items Tax Effective Tax Rate (%) Reported PAT Adj PAT YoY Change (%) Margins (%) E: MOSL Estimates

CY09

CY10

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

2,289 5.5 1,899 390 17.0 42 0 320 668 263 39.4 405 405 17.4 17.7

2,499 0.5 1,970 529 21.2 43 0 249 735 264 35.9 471 471 12.7 18.8

2,585 4.3 2,189 396 15.3 44 0 289 641 203 31.7 438 438 -1.8 16.9

2,371 -12.2 2,209 162 6.9 44 1 253 371 103 27.8 268 268 -37.7 11.3

2,514 9.8 2,150 364 14.5 43 0 226 547 186 34.0 361 361 -10.9 14.4

2,785 11.5 2,302 483 17.3 49 0 285 719 239 33.2 480 480 1.9 17.2

2,867 10.9 2,389 477 16.7 50 0 307 735 244 33.2 491 491 12.0 17.1

2,622 10.6 2,270 352 13.4 56 0 321 616 200 32.5 416 416 55.5 15.9

CY09

CY10E

9,744 -0.9 8,267 1,477 15.2 173 1 1,111 2,415 833 34.5 1,582 1,582 -3.3 16.2

10,788 10.7 9,111 1,676 15.5 198 0 1,139 2,617 869 33.2 1,748 1,748 10.5 16.2

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

192

Results Preview SECTOR: PHARMACEUTICALS

Biocon STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 BIOS IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs321

REUTERS CODE

S&P CNX: 5,269

BION.BO

Equity Shares (m) 52 Week Range (Rs)

329/194

1,6,12 Rel Perf (%)

5/ 12/19

Mcap (Rs b) Mcap (USD b)

YEAR

200.0

NET SALES

PAT

(RS M)

(RS M)

END

64.2 1.4

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 16,087

930

4.7

-79.3

69.0

4.3

6.2

6.2

4.1

20.3

03/10A 23,678

2,933

14.7

215.2

21.9

3.7

16.7

15.7

2.7

13.5

03/11E

27,363

3,387

16.9

15.5

19.0

3.2

16.8

16.2

2.3

11.7

03/12E 31,489

4,024

20.1

18.8

16.0

2.8

17.3

17.1

1.9

10.3

„

We expect Biocon's 1QFY11 topline to grow 19.3% YoY to Rs5.9b, led by all the three segments. German subsidiary, AxiCorp's revenues are likely to grow 21.4% YoY to Rs2.3b due to strong base business and supply of Metformin under AOK contract. Contract research revenues are likely to grow 16.9% YoY on the back of gradual scale-up of the BMS contract. Biopharma revenues should record 18.4% YoY growth. „ Despite strong topline growth, we expect EBITDA margin to contract by 100bp YoY, led by 32% YoY increase in other expenditure due to scale-up of domestic formulations business, increase in R&D expenses and rupee appreciation. „ We expect adjusted PAT to grow 22.3% YoY to Rs698m, primarily led by strong topline growth, increase in other income and lower tax rate. Key growth drivers for FY11 will be: (1) traction in the company's Insulin initiative, (2) ramp-up in contract research business, and (3) incremental contribution from immunosuppressant API supplies. However, higher R&D costs, increased depreciation and higher expenses linked to the scale-up of the domestic formulations business will continue to temper earnings growth. Option values include separate listing of Syngene and potential out-licensing of the oral insulin NCE. We estimate EPS of Rs16.9 for FY11 (up 15.5%) and Rs20.1 for FY12 (up 18.8%) - 17% earnings CAGR for FY10-12. Growth will be led by 20% CAGR for contract research revenues and 23% CAGR for the insulin & immunosuppressant business. The stock currently trades at 19x FY11E and 16x FY12E earnings. We maintain Buy with a target price of Rs340 (17x FY12E EPS). QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Net Sales YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest Other Income PBT Tax Rate (%) Minority Interest PAT YoY Change (%) Margins (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

4,959 87.9 3,946 1,013 20.4 324 56 94 727 142 19.5 14 571 283.5 11.5

5,800 31.0 4,668 1,132 19.5 351 52 124 853 94 11.0 17 742 194.4 12.8

6,351 45.6 5,084 1,267 19.9 360 27 64 944 107 11.3 24 813 191.3 12.8

6,568 40.9 5,265 1,303 19.8 366 34 88 991 144 14.5 41 807 219.3 12.3

5,918 19.3 4,772 1,145 19.4 386 47 119 831 133 16.0 0 698 22.3 11.8

6,841 17.9 5,507 1,334 19.5 394 48 156 1,047 168 16.0 0 880 18.5 12.9

7,185 13.1 5,782 1,403 19.5 403 49 119 1,071 182 17.0 0 889 9.4 12.4

7,419 13.0 5,958 1,461 19.7 427 52 124 1,107 187 16.9 0 920 14.1 12.4

FY10

FY11E

23,678 47.2 18,963 4,715 19.9 1,401 169 370 3,515 487 13.8 96 2,933 215.2 12.4

27,363 15.6 22,019 5,343 19.5 1,610 195 519 4,057 669 16.5 0 3,387 15.5 12.4

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

193

Results Preview SECTOR: PHARMACEUTICALS

Cadila Healthcare STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 CDH IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs640

REUTERS CODE

S&P CNX: 5,269

CADI.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

YEAR

204.7

NET SALES

PAT

(RS M)

(RS M)

END

679/223 -4/ 44/137 131.0 2.8

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 29,275

3,229

15.8

12.9

40.6

11.0

26.9

23.6

4.8

23.3

03/10A 36,869

5,092

24.9

57.7

25.7

8.2

36.3

26.4

3.8

17.3

03/11E

43,093

6,067

29.6

19.1

21.6

6.3

33.2

27.8

3.2

14.6

03/12E 50,147

7,340

35.8

21.0

17.9

5.0

31.2

28.9

2.7

12.2

„

Cadila's 1QFY11 topline is likely to record 16.7% YoY growth to Rs10.5b, led by 21.4% YoY growth in exports (contributing 47.6% of revenues). We expect the company's consumer business in India to record 15.3% YoY growth and the domestic formulations business to grow 11% YoY to Rs4.1b. „ EBITDA margin is likely to decline by 30bp YoY to 22.2% due to adverse revenue mix, rupee appreciation and higher staff costs. „ PAT is likely to record 19.6% YoY growth to Rs1.5b, led by strong topline growth and higher other income. Cadila's future performance will be led by increased traction in its international businesses, ramp-up in supplies to Hospira and recovery in the domestic formulations business. Besides, a de-risked business model should ensure good long-term potential. We expect RoE of more than 30% over the next two years. Based on our revised estimates, we expect Cadila to post EPS of Rs29.6 in FY11 (up 19.1%) and Rs35.8 in FY12 (up 21%) - 20% CAGR over FY10-12. The stock trades at 21.6x FY11E and 17.9x FY12E consolidated earnings. We reiterate Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Net Revenues YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

9,036 29.4 6,998 2,037 22.5 296 229

9,458 25.0 7,401 2,057 21.7 311 206

9,910 32.3 7,810 2,100 21.2 334 217

8,465 17.0 6,572 1,893 22.4 398 170

10,542 16.7 8,199 2,342 22.2 377 192

11,034 16.7 8,607 2,427 22.0 385 196

11,149 12.5 8,773 2,375 21.3 393 200

10,368 22.5 8,067 2,301 22.2 417 212

36,869 25.9 28,782 8,087 21.9 1,339 821

43,093 16.9 33,646 9,447 21.9 1,573 800

16 1,556 26 1,530 176 11.5 35 1,319 1,342 39.0 14.2 add up to

63 52 81 81 1,612 1,378 1,854 1,927 11 0 0 0 1,601 1,378 1,854 1,927 255 68 278 289 15.9 4.9 15.0 15.0 49 123 74 74 1,297 1,187 1,502 1,564 1,307 1,187 1,502 1,564 115.8 18.5 19.6 16.6 13.2 14.0 14.2 14.2 full year numbers due to restatement

81 1,864 0 1,864 261 14.0 74 1,529 1,529 17.0 13.7

81 1,754 0 1,754 208 11.8 74 1,472 1,472 24.0 14.2

159 6,086 46 6,039 741 12.3 247 5,052 5,092 57.7 13.8

325 7,399 0 7,399 1,036 14.0 296 6,067 6,067 19.1 14.1

Other Income 28 PBT before EO Income 1,540 EO Exp/(Inc) 9 PBT after EO Income 1,531 Tax 242 Rate (%) 15.8 Minority Int/Adj on Consol 40 Reported PAT 1,248 Adj PAT 1,256 YoY Change (%) 40.0 Margins (%) 13.9 E: MOSL Estimates; Quarterly numbers don’t

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

194

Results Preview SECTOR: PHARMACEUTICALS

Cipla STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 CIPLA IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs347

REUTERS CODE

S&P CNX: 5,269

CIPL.BO

Equity Shares (m)

YEAR

802.9

52 Week Range (Rs)

363/240

1,6,12 Rel Perf (%)

1/ -1/12

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

278.5

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 52,343

7,768

10.0

10.6

34.7

6.2

17.9

17.1

5.5

23.5

03/10A 56,300

10,193

12.7

26.8

27.3

4.7

17.3

20.8

4.9

19.4

62,898

11,705

14.6

14.7

23.8

4.1

17.3

21.1

4.4

16.8

03/12E 71,459

14,003

17.4

19.4

19.9

3.6

17.9

20.2

3.8

14.8

03/11E

6.0

EPS

„

Cipla's 1QFY11 topline is likely to grow 9.6% YoY to Rs15b, led by 11.8% YoY growth in the domestic formulations business. Exports are likely to report muted growth of 6.4% YoY due to conscious reduction in the low-margin ARV business. Further, a ~6% YoY appreciation of the INR v/s the USD will temper topline growth. „ EBITDA margin is likely to contract by 140bp YoY primarily due to increase in staff cost and rupee appreciation. „ While EBITDA is likely to grow 4% YoY, we expect PAT to record 12% YoY growth to Rs2.7b due to higher depreciation charges, lower interest cost and higher other income. We believe that Cipla has one of the strongest generics pipelines among Indian companies. After a long delay, we believe Cipla's CFC-free inhaler pipeline will gradually get commercialized in Europe and upsides from high-margin opportunities like Seretide could come through over the next two years (our estimates do not include these upsides). Its large manufacturing infrastructure, strong chemistry skills and huge inhaler capacity make it a partner of choice for global MNCs that are ramping up their generics and emerging market presence. This coupled with its low-risk strategy and one of the strongest capex in the company's history should ensure good long-term potential. Temporary slowdown in overall growth, US-FDA compliance and increasing working capital requirements remain our key concerns. We expect Cipla to record EPS of Rs14.6 for FY11 and Rs17.4 for FY12, translating into 17% CAGR for FY10-12. The stock quotes at 23.8x FY11E and 19.9x FY12E earnings. We maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Net Revenues YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest Other Income Profit before Tax Extra-Ord Expense PBT after EO Expense Tax Rate (%) Reported PAT Adj PAT YoY Change (%) Margins (%) E: MOSL Estimates

FY10

FY11E

FY10

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

13,760 14.0 10,075 3,685 26.8 458 105 -150 2,972

14,408 6.4 10,695 3,713 25.8 478 84 203 3,354

14,385 7.2 10,346 4,039 28.1 457 44 -62 3,477

15,083 9.6 11,252 3,830 25.4 557 0.4 158 3,431

15,984 10.9 11,850 4,134 25.9 580 0.4 164 3,718

15,800 9.8 11,477 4,323 27.4 604 0.4 171 3,890

16,031 16.6 11,988 4,043 25.2 628 0.4 178 3,593

2,972 555 18.7 2,417 2,417 72.6 17.6

3,354 618 18.4 2,737 2,737 80.7 19.0

3,477 587 16.9 2,890 2,890 29.4 20.1

13,747 3.3 10,946 2,801 20.4 495 5 251 2,552 -950 3,502 726 28.4 2,776 2,149 -17.9 15.6

3,431 720 21.0 2,710 2,710 12.1 18.0

3,718 669 18.0 3,049 3,049 11.4 19.1

3,890 778 20.0 3,112 3,112 7.7 19.7

3,593 759 21.1 2,834 2,834 31.9 17.7

56,300 7.6 42,063 14,237 25.3 1,888 237 242 12,355 -950 13,305 2,485 20.1 10,820 10,193 31.2 18.1

FY11E

62,898 11.7 46,568 16,330 26.0 2,368 2 671 14,631 0 14,631 2,926 20.0 11,705 11,705 14.8 18.6

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

195

Results Preview SECTOR: PHARMACEUTICALS

Dishman Pharma STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 DISH IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs217

Previous Recommendation: Neutral

DISH.BO

YEAR

81.3

NET SALES

PAT

(RS M)

(RS M)

END

275/162 -5/ -10/-12 17.6 0.4

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 10,624

1,463

18.0

20.4

12.1

2.5

22.7

15.2

2.3

9.3

03/10A

9,154

1,157

14.2

-21.0

15.2

2.2

15.3

11.4

2.7

12.2

03/11E

10,564

1,271

15.6

9.9

13.9

1.9

14.9

11.6

2.3

10.0

03/12E 12,684

1,565

19.2

23.1

11.3

1.7

16.0

13.0

2.0

8.2

„

We expect a muted 2.3% YoY topline growth for Dishman in 1QFY11 to Rs2.3b due to decline in the revenue of CarbogenAMCIS (CA), adverse impact of the ongoing inventory corrections undertaken by customers, pricing pressure in QUATs segment and ~12% appreciation of the INR v/s the EUR. CRAMS business from Indian facilities is likely to report strong growth of 69% YoY to Rs906m on a low base while CarbogenAMCIS revenues are likely to decline 27%YoY to Rs838m due to reduced early phase R&D activity by customers. Marketable Molecule business is likely to report a decline of 2%YoY to Rs585m due to ongoing pricing pressure in QUATs segment and adverse impact of inventory de-stocking. „ EBITDA margins are likely to decline by 160bp YoY to 21.8% due to reduction in high margin contract research business at CarbogenAMCIS and appreciation of the INR v/s the EUR and USD. „ We expect the bottomline to decline 41.5% YoY to Rs229m, reflecting muted topline growth, EBITDA margin contraction and lower other income. The macro environment for the CRAMS business remains favorable, given India's inherent cost advantages and chemistry skills. We believe that Dishman will benefit from increased outsourcing from India, given its strengthening MNC relations. However, the adverse business environment for CA and EUR depreciation will continue to impact earnings growth in FY11. We expect Dishman to record a CAGR of 18% in revenues, 22% in EBITDA and 16% in EPS over FY10-12, led mainly by its Indian CRAMS operations. The stock currently trades at 13.9x FY11E and 11.3x FY12E earnings. RoE will continue to be at 15% till new facilities and CRAMS contracts ramp up. We maintain our Neutral rating, with a price target of Rs231 (12x FY12E earnings). QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

FY10 1Q

3Q

4Q

1Q

FY10

2Q

3Q

4Q

Net Sales 2,277 2,174 2,223 2,479 2,328 2,466 YoY Change (%) -3.5 -13.7 -21.2 -15.2 2.3 13.4 Total Expenditure 1,745 1,677 1,710 1,984 1,821 1,887 EBITDA 532 498 513 495 508 579 Margins (%) 23.4 22.9 23.1 20.0 21.8 23.5 Depreciation 145 174 141 135 158 165 Interest 104 99 85 100 112 108 Other Income 155 59 32 25 26 28 PBT after EO Income 438 284 319 285 263 334 Tax 9 25 30 -10 34 43 Deferred Tax 37 14 -32 96 0 0 Rate (%) 10.5 14.0 -0.6 29.9 13.0 13.0 Prior Period Adjustment 1 5 -10 -12 0 0 Reported PAT 391 240 331 212 229 290 Adj PAT 392 244 321 200 229 290 YoY Change (%) 41.5 725.7 -19.3 -73.7 -41.5 18.8 Margins (%) 17.2 11.2 14.4 8.0 9.8 11.8 E: MOSL Estimates Nimish Desai ([email protected]) / Amit Shah ([email protected])

2,744 23.4 2,081 663 24.2 179 108 30 406 53 0 13.0 0 353 353 10.2 12.9

3,025 22.0 2,309 716 23.7 186 104 31 458 59 0 13.0 0 398 398 99.6 13.2

July 2010

2Q

FY11E

9,154 -13.8 7,116 2,038 22.3 594 388 270 1,326 54 115 12.8 -17 1,174 1,157 -21.0 12.6

FY11E

10,564 15.4 8,098 2,466 23.3 688 432 115 1,461 190 0 13.0 0 1,271 1,271 9.9 12.0

196

Results Preview SECTOR: PHARMACEUTICALS

Divi's Laboratories STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 DIVI IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs767

REUTERS CODE

S&P CNX: 5,269

DIVI.BO

Equity Shares (m)

YEAR

132.2

52 Week Range (Rs)

784/452

1,6,12 Rel Perf (%)

0/ 15/15

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

101.4 2.2

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 11,803

4,166

32.2

19.5

23.8

8.0

39.6

40.6

8.6

19.6

03/10A

9,416

3,403

25.8

-19.9

29.8

6.7

24.7

27.3

10.8

25.1

03/11E

12,005

4,107

31.1

20.7

24.7

5.6

24.6

27.6

8.4

20.2

03/12E 15,095

5,093

38.5

24.0

19.9

4.6

25.4

29.9

6.7

15.6

„

We expect revenue growth of 40% YoY for Divi's in 1QFY11 to Rs2.9b on a very low base. 1QFY10 revenues were impacted by inventory de-stocking undertaken by customers and lack of funding to small and biotech companies. We expect a strong recovery in CRAMS and API revenues in FY11. The company commissioned its carotenoids facility in June 2009 and we expect a gradual scale-up in revenues from this initiative over the next two years. „ While EBITDA is likely to grow 70% YoY to Rs1.1b, EBITDA margin is likely to expand by 680bp to 39.2%, reflecting the improved product mix and benefit of operating leverage. „ We expect adjusted PAT to grow by 51.4% YoY to Rs899m, reflecting strong revenue growth and margin expansion. Divi's will be a key beneficiary of increased outsourcing from India, leading to 22% earnings CAGR for FY10-12. We estimate RoCE and RoE of 20%+ for the next few years, led by traction in the high-margin CRAMS business and incremental contribution from the carotenoids business. We expect the company to report EPS of Rs31.1 in FY11 and Rs38.5 in FY12. The stock trades at 24.7x FY11E and 19.9x FY12E earnings. We reiterate Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Net Op Revenue YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest Other Income PBT before EO Income EO Income PBT after EO Income Tax Deferred Tax Rate (%) Reported PAT Adj PAT YoY Change (%) Margins (%) E: MOSL Estimates

FY10

FY11E

FY10

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2,058 -22.6 1,392 667 32.4 129 8 143 673 -540 132 87 2 67.5 43 594 -38.4 28.9

2,253 -31.8 1,200 1,053 46.7 131 30 55 947 0 947 83 17 10.5 848 848 -37.8 37.6

1,963 -25.9 1,304 659 33.6 133 18 262 771 0 771 104 -11 12.0 678 678 -14.7 34.6

3,141 -1.5 1,628 1,513 48.2 123 7 43 1,427 540 1,967 135 34 8.5 1,799 1,305 25.2 41.5

2,881 40.0 1,750 1,131 39.2 150 7 71 1,046 0 1,046 146 0 14.0 899 899 51.4 31.2

2,941 30.5 1,691 1,250 42.5 156 7 75 1,162 0 1,162 139 0 12.0 1,022 1,022 20.6 34.8

2,941 49.8 1,764 1,177 40.0 162 7 78 1,085 0 1,085 174 0 16.0 912 912 34.4 31.0

3,241 3.2 1,772 1,469 45.3 169 7 81 1,374 0 1,374 101 0 7.3 1,274 1,274 -2.4 39.3

9,416 -20.2 5,364 4,052 43.0 515 28 343 3,853 0 3,853 408 42 11.7 3,403 3,403 -18.3 36.1

FY11E

12,005 27.5 6,978 5,027 41.9 637 28 304 4,667 0 4,667 560 0 12.0 4,107 4,107 20.7 34.2

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

197

Results Preview SECTOR: PHARMACEUTICALS

Dr Reddy's Laboratories STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 DR IN

Under Review

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs1,484

Previous Recommendation: Buy

REDY.BO

YEAR

168.4

NET SALES

PAT

(RS M)

(RS M)

END

1,515/696

03/10A 03/11E 03/11E* 03/12E 03/12E*

8/ 24/73 249.9 5.4

68,179 75,047 80,498 85,213 91,154

334 9,187 11,850 10,377 12,599

EPS

EPS

(RS) GROWTH (%)

2.0 54.6 70.4 61.6 74.8

13.0 6.3

ADJ. P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

721.7 26.2 20.7 23.2 19.5

5.8 5.6

2.5 20.7

2.5 17.7

3.7 3.5

22.3 21.2

4.8

20.1

19.0

3.1

19.1

SALES EBITDA

* Includes one-off upsides. Adj P/E for core estimate is adjusted for DCF value of FTFs & bonus debentures

„

We expect DRL’s topline (excluding Para IV products) to grow by 9% YoY to Rs17.6b in 1QFY11, led by 21.1% YoY growth in the branded formulation business to Rs5.9b. The growth will be impacted by a 6.8% YoY decline in regulated markets generic business (excluding Para IV products). Global API and custom pharma business is estimated to grow by 14.8% YoY. Including the Para IV products, topline is expected to grow 4.6% YoY. „ Excluding the contribution from Para IV/low competition products, EBITDA is likely to remain flat at Rs2.7b and EBITDA margins are expected to decline by 140bp YoY to 15.5%, partly due to the appreciation of the rupee against the euro and the US dollar. „ Adjusted PAT is expected to grow by 21% YoY to Rs Rs2.1b. Reported PAT (including the contribution from Para IV/low competition products) is expected to grow 6.3% YoY to Rs2.6b. Traction in the branded formulations and US businesses and focus on improving profitability will be key growth drivers for DRRD over the next two years. We estimate core EPS of Rs54.6 for FY11 and Rs61.6 for FY12 adjusting for the impact of proposed bonus debentures. We expect core EPS CAGR of 22% over FY08-12 (FY09/10 EPS suffered due to Betapharm write-offs). Including upsides from visible Para-IV/low-competition opportunities, we expect EPS of Rs70.4 for FY11 and Rs74.8 for FY12. Our core estimates exclude the upsides from patent challenges/low-competition opportunities in the US (current DCF value of Rs27/share for visible opportunities). The DCF value for issuance of bonus debentures is Rs26.5/share. DRRD trades at 26.2x FY11E and 23.2x FY12E core earnings adjusted for DCF value of FTFs and the proposed bonus debentures. GLOBAL QUARTERLY PERFORMANCE (US GAAP)

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

Gross Sales 18,189 18,368 YoY Change (%) 21.0 13.7 EBITDA 3,767 2,749 Margins (%) 20.7 15.0 Depreciation & Amortization 507 329 Other Income -89 348 Profit before Tax 3,171 2,768 Tax 726 595 Rate (%) 22.9 21.5 Reported PAT 2,445 2,173 Net Profit 2,445 2,173 One Time & EO (Exp)/Inc 734 0 Adjusted PAT 1,711 2,173 YoY Change (%) 26.9 79.1 Margins (%) 9.4 11.8 E: MOSL Estimates; DRL commcenced IFRS reporting upsides.

FY11E 3Q

4Q

1Q

2Q

FY10 3Q

FY11E

4Q

17,296 16,424 17,556 19,024 19,595 18,872 -6.0 -17.3 -3.5 3.6 13.3 14.9 2,860 2,145 2,721 3,234 3,429 2,998 16.5 13.1 15.5 17.0 17.5 15.9 8,977 269 259 270 275 297 123 232 24 18 15 2 -5,994 2,108 2,487 2,983 3,169 2,703 -777 441 423 597 665 470 13.0 20.9 17.0 20.0 21.0 17.4 -5,217 1,667 2,064 2,386 2,503 2,233 -5,217 1,667 2,600 3,306 3,093 2,852 0 0 536 920 590 618 -5,217 1,667 2,064 2,386 2,503 2,233 -681.6 -115.1 20.7 9.8 34.0 -30.2 10.1 11.8 12.5 12.8 11.8 wef 2QFY09. Past financials are as per US GAAP. Estimates do

70,277 75,047 1.2 6.8 11,521 12,383 16.4 16.5 10,082 1,100 614 59 2,052 11,341 985 2,155 48.0 19.0 1,067 9,186 1,067 11,849 734 2,663 333 9,186 -104.5 2,661.0 0.5 12.2 not include one-off

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

198

Results Preview SECTOR: PHARMACEUTICALS

GlaxoSmithKline Pharmaceuticals STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 GLXO IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

84.7

-2/ 31/55

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

52 Week Range (Rs) 2,271/1,150 1,6,12 Rel Perf (%)

Rs2,169

Previous Recommendation: Buy

GLAX.BO

183.7 4.0

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

12/08A 16,604

4,484

52.9

12.2

41.0

11.9

29.1

44.0

10.1

28.9

12/09A 18,708

5,049

59.6

12.6

36.4

10.4

28.7

43.0

8.8

25.2

12/10E 21,140

5,909

69.8

17.0

31.1

9.4

30.2

44.6

7.7

21.9

12/11E

6,802

80.3

15.1

27.0

8.5

31.4

46.5

6.7

18.7

24,099

„

We expect GSK's 2QCY10 topline to grow 13.2% YoY to Rs5.2b, led by double-digit growth in priority products (6070% of sales). DPCO products (~27% of sales) are likely to record single-digit revenue growth. „ EBITDA is likely to grow 14% YoY to Rs1.9b while EBITDA margin is likely to expand 30bp YoY to 35.9%. „ We expect PAT to grow 11% YoY, lower than the growth in topline mainly due to lower other income on high base. We believe GSK is one of the best plays on the IPR regime in India, with plans to launch nine patented/low-competition products during CY08-10, of which seven have already been launched. The parent is fully committed to the listed entity, which is evident from the fact that it is proposing to launch most of the patented products through the listed entity. GSK's topline growth is improving gradually and we expect the company to record 13-14% growth for the next two years. We believe that this growth trajectory will improve further in the long term, and post CY13, GSK will outperform the average industry growth of 12-13%. Given the high profitability of operations, we expect sustainable double-digit earnings growth and RoE of ~30%. This growth is likely to be funded through miniscule capex (Rs400m/year). GSK deserves premium valuations due to strong parentage (giving access to large product pipeline), brand-building ability and likely positioning in the post patent era. We expect GSK to record EPS of Rs69.8 (up 17%) in CY10 and Rs80.3 (up 15.1%) in CY11. The stock trades at 31.1x CY10E and 27x CY11E earnings. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E DECEMBER

Net Sales YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Other Income PBT before EO Expense Tax Deferred Tax Rate (%) Adjusted PAT YoY Change (%) Margins (%) Extra-Ord Expense Reported PAT E: MOSL Estimates

CY09

CY10

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

4,572 8.5 2,926 1,645 36.0 37 300 1,908 644 11 34.3 1,253 3.5 27.4 -178 1,432

4,574 9.9 2,945 1,629 35.6 40 419 2,009 696 -4 34.5 1,317 14.8 28.8 73 1,243

5,118 11.8 3,230 1,888 36.9 40 233 2,081 684 -14 32.2 1,411 6.9 27.6 0 1,411

4,444 21.9 3,060 1,384 31.1 48 253 1,587 737 -219 32.7 1,068 19.4 24.0 31 1,037

5,411 18.4 3,410 2,001 37.0 38 438 2,402 790 0 32.9 1,612 28.6 29.8 0 1,612

5,179 13.2 3,322 1,857 35.9 44 352 2,165 702 0 32.4 1,463 11.1 28.2 0 1,463

5,708 11.5 3,614 2,094 36.7 48 366 2,413 782 0 32.4 1,630 15.6 28.6 0 1,630

4,842 9.0 3,333 1,508 31.2 52 310 1,766 562 0 31.8 1,204 12.7 24.9 0 1,204

CY09

CY10E

18,708 12.7 12,162 6,546 35.0 164 1,206 7,585 2,762 -226 33.4 5,049 12.6 27.0 -74 5,123

21,140 13.0 13,679 7,461 35.3 182 1,466 8,744 2,836 0 32.4 5,909 17.0 28.0 0 5,909

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

199

Results Preview SECTOR: PHARMACEUTICALS

Glenmark Pharmaceuticals STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 GNP IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

304/202

1,6,12 Rel Perf (%)

-6/ -5/-4

Mcap (USD b)

YEAR

269.8

52 Week Range (Rs)

Mcap (Rs b)

Rs273

Previous Recommendation: Neutral

GLEN.BO

NET SALES

PAT

(RS M)

(RS M)

END

73.7

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 20,865

1,125

4.2

-64.3

64.4

4.3

7.0

8.0

4.5

27.8

03/10A 24,616

3,310

11.6

174.9

23.4

3.1

14.1

12.7

3.7

15.3

29,791

4,162

14.6

25.7

18.6

2.6

14.7

13.6

3.0

11.4

03/12E 33,507

5,274

18.6

26.7

14.7

2.2

15.8

15.3

2.6

10.7

03/11E

1.6

EPS

„

We expect Glenmark's 1QFY11 topline to grow 35.1% YoY, primarily led by Rs920m of NCE outlicensing income. Excluding this, revenues would grow by 18% YoY to Rs6.4b, led by strong double-digit growth in the domestic formulations business and semi-regulated markets. US business is likely to report 8% YoY growth. „ EBITDA is likely to grow 91% YoY to Rs2.3b, primarily due to outlicensing income while EBITDA margin is likely to expand by 920bp to 31.5%. Excluding the outlicensing income, we estimate EBITDA margin at 21.7%. „ We expect Glenmark to report adjusted PAT of Rs949m, a growth of 77.5% YoY, largely due to low base. Glenmark has differentiated itself among Indian pharmaceuticals companies through its significant success in NCE research (resulting in licensing income of US$137m till date). It has been aggressively adding new NCEs to its pipeline, which will put pressure on its operations in the short-to-medium term - it will have to fund the R&D expenses for these NCEs on its own. We expect core EPS of Rs14.6 for FY11 (up 25.7%) and Rs18.6 for FY12 (up 26.7%). The stock currently trades at 18.6x FY11E and 14.7x FY12E earnings, with 14-16% RoE. High debt of Rs18b implies that fundraising for the generics subsidiary is imperative for de-leveraging the balance sheet. We maintain Neutral, with a target price of Rs278 (15x FY12E EPS).

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

Net Income YoY Change (%) EBITDA Margins (%) Depreciation Interest Other Income PBT before EO Expense Tax Deferred Tax Rate (%) Reported PAT Adj PAT YoY Change (%) Margins (%) E: MOSL Estimates; Adj PAT incl. statement of pre. quarters

2Q

5,437 5,903 18.0 5.2 1,214 1,563 22.3 26.5 312 362 438 456 76 262 540 1,007 85 198 -80 0 0.9 19.6 535 809 535 809 -42.1 -14.2 9.8 13.7 capitalized R&D exp

FY11E 3Q

4Q

1Q

2Q

6,184 7,091 7,343 7,024 6.4 51.3 35.1 19.0 1,404 1,783 2,316 1,712 22.7 25.1 31.5 24.4 363 169 351 366 368 378 370 356 312 72 450 98 985 1,308 2,046 1,089 44 202 297 174 0 80 0 0 4.5 21.5 14.5 16.0 941 1,026 1,749 914 941 1,026 949 914 61.2 77.5 13.0 15.2 14.5 12.9 13.0 & excl. NCE upsides. Financials for 4Q

FY10 3Q

FY11E

4Q

7,198 8,227 24,616 29,791 16.4 16.0 19.3 21.0 1,808 2,071 5,963 7,906 25.1 25.2 24.2 26.5 381 395 1,206 1,492 342 328 1,640 1,395 123 147 722 819 1,208 1,495 3,839 5,838 181 224 529 876 0 0 0 0 15.0 15.0 13.8 15.0 1,027 1,271 3,310 4,962 1,027 1,271 3,310 4,162 9.2 23.9 194.3 25.7 14.3 15.5 13.4 14.0 will not tally with reported nos due to re-

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

200

Results Preview SECTOR: PHARMACEUTICALS

Jubilant Organosys STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 JOL IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

158.8

52 Week Range (Rs)

413/155

1,6,12 Rel Perf (%)

-7/ -3/80

Mcap (Rs b) Mcap (USD b)

Rs339

Previous Recommendation: Neutral

JUBO.BO

NET SALES

PAT

(RS M)

(RS M)

END

53.8 1.2

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 35,180

2,832

19.2

-29.3

17.7

3.9

22.5

8.2

2.5

13.1

03/10A 37,813

4,215

28.6

48.8

11.9

3.1

29.5

13.6

2.2

10.7

03/11E

43,389

5,153

32.5

13.6

10.4

2.2

25.8

14.3

1.8

8.6

03/12E 48,963

5,354

33.7

3.9

10.1

2.1

21.4

14.8

1.7

7.6

„

We expect Jubilant's 1QFY11 topline to grow 15.7% YoY, led by contract manufacturing of sterile injectables segment and API business. However, growth would be partly tempered due to 12% YoY decline in agri and performance polymer business. „ EBITDA is likely to grow by 22.5% YoY to Rs2b while EBITDA margin is likely to expand by 110bp YoY to 19.2% due to favorable product mix. „ We expect PAT to decline by 16% YoY to Rs1.1b on account of high depreciation cost (low base due to change in accounting policy) and lower other income (absence of forex gains). We believe Jubilant is well positioned to exploit the expected increase in outsourcing from India. Customer inventory destocking for CRAMS companies is coming to an end and we expect growth to rebound. Over the past few years, Jubilant has made two large acquisitions in North America. While this has strengthened its presence in the sterile segment, it has also resulted in a highly leveraged balance sheet. We believe that some of the past acquisitions (like Draxis) have been made at expensive valuations, resulting in extended payback periods. We believe Jubilant needs to focus on its core business of CRAMS (management has indicated that it is in the process of hiving off some of the non-core businesses into a separate subsidiary). High debt, large FCCB redemption (US$271m over next 12 months including YTM) and lower return ratios remain an overhang. We expect the company to record EPS of Rs32.5 for FY11 (growth of 13.6%) and Rs33.7 for FY12 (up 3.9%), translating into 12.7% CAGR over FY10-12. The stock quotes at 10.4x FY11E EPS and 10.1x FY12E EPS. Maintain Neutral. QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

Net Sales 8,964 YoY Change (%) 8.4 Total Expenditure 7,342 EBITDA 1,622 Margins (%) 18.1 Depreciation 308 Interest 407 Other Income 562 PBT 1,469 Tax 223 Rate (%) 15.2 PAT 1,245 Minority Interest -13 Adjusted PAT 1,258 YoY Change (%) 886.1 Margins (%) 14.0 E: MOSL Estimates; Numbers for 4QFY09 &

2Q

FY11E 3Q

9,331 9,615 -0.8 5.7 7,480 7,364 1,851 2,251 19.8 23.4 308 313 363 390 -362 -280 818 1,268 240 225 29.3 17.8 578 1,043 1 35 577 1,008 6.2 10.5 full-year FY09 will be

4Q

1Q

2Q

FY10 3Q

FY11E

4Q

9,903 10,367 10,786 11,030 11,205 17.7 15.7 15.6 14.7 13.1 7,740 8,379 8,588 8,422 8,694 2,163 1,988 2,199 2,608 2,511 21.8 19.2 20.4 23.6 22.4 318 495 517 538 559 345 324 312 299 287 125 94 98 102 106 1,624 1,263 1,468 1,873 1,771 271 202 323 356 330 16.7 16.0 22.0 19.0 18.7 1,353 1,061 1,145 1,517 1,441 -19 3 3 3 3 1,372 1,058 1,143 1,514 1,438 -61.1 -15.9 98.1 50.2 4.9 13.8 10.2 10.6 13.7 12.8 different from reported nos due to re-statement

37,813 7.5 29,926 7,887 20.9 1,247 1,505 44 5,179 959 18.5 4,220 5 4,215 79.6 11.1

43,389 14.7 34,083 9,306 21.4 2,108 1,222 399 6,375 1,211 19.0 5,163 10 5,153 22.3 11.9

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

201

Results Preview SECTOR: PHARMACEUTICALS

Lupin STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 LPC IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs1,918

Previous Recommendation: Buy

LUPN.BO

YEAR

88.9

NET SALES

PAT

(RS M)

(RS M)

END

1,938/755 -3/ 30/92 170.6

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 37,759

5,015

56.9

50.5

33.7

11.1

37.1

25.6

4.8

28.1

03/10A 47,405

6,816

76.6

34.8

25.0

8.6

40.1

30.2

3.8

21.1

03/11E

3.7

EPS

55,939

8,393

94.4

23.1

20.3

6.6

37.0

29.9

3.2

17.2

03/12E 63,636

9,832

110.5

17.2

17.3

5.2

33.7

29.3

2.8

14.5

„

We expect Lupin's 1QFY11 topline to grow 23.9% YoY, driven primarily by 43% YoY growth in formulations revenues from advanced markets (excluding Japan) to Rs5.1b. Growth in formulations revenues would be led by generic Lotrel and 67% YoY growth in branded formulations exports on a low base. „ EBITDA is likely to grow by 32% YoY while EBITDA margin is likely to expand by 40bp YoY due to low base and better product mix. „ We expect PAT to grow by 32.2% YoY to Rs1.9b, reflecting the robust growth in topline and expansion of EBITDA margins. Lupin's underlying fundamentals are likely to improve gradually, led by an expanding US generics pipeline, niche/Para-IV opportunities in the US, strong performance from Suprax, ramp-up in Antara revenues (branded products in US) and traction in formulation revenues from its European initiative. We expect Lupin's core operations (excluding one-off upsides) to post 16% revenue CAGR over FY10-12, led by 17% CAGR for the US business and 18% CAGR for the domestic formulations business. We believe Lupin is gaining critical mass in the US, and its European revenues should gradually ramp up from FY11. It has 86 ANDAs pending approval in the US, including filings for low-competition products in the oral contraceptives segment. The stock trades at 20.3x FY11E and 17.3x FY12E EPS with a sustained 30%+ RoE. We maintain Buy with a target price of Rs1,990 (18x FY12E EPS). Our estimates do not include one-time upsides for the company's FTF pipeline in the US. QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Net Sales YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest Other Income PBT Tax Rate (%) Reported PAT Minority Interest Recurring PAT YoY Change (%) Margins (%) E: MOSL Estimates

FY10

FY11E

FY10

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

10,856 25.9 8,914 1,942 17.9 231 107 211 1,815 364 20.0 1,451 50 1,401 25.0 12.9

11,147 22.7 9,506 1,641 14.7 242 91 541 1,848 200 10.8 1,647 43 1,604 38.8 14.4

12,554 30.5 10,090 2,464 19.6 358 109 155 2,152 504 23.4 1,648 42 1,606 37.9 12.8

12,848 23.1 10,359 2,490 19.4 408 78 539 2,542 293 11.5 2,250 45 2,205 40.1 17.2

13,446 23.9 10,991 2,456 18.3 339 102 260 2,274 409 18.0 1,865 13 1,852 32.2 13.8

13,744 23.3 11,279 2,465 17.9 339 98 312 2,340 374 16.0 1,965 13 1,953 21.7 14.2

14,325 14.1 11,686 2,638 18.4 368 95 338 2,514 375 14.9 2,140 13 2,127 32.4 14.8

14,424 12.3 11,570 2,854 19.8 368 83 390 2,793 320 11.5 2,473 13 2,461 11.6 17.1

47,405 25.5 38,869 8,536 18.0 1,239 385 1,445 8,357 1,360 16.3 6,997 180 6,816 35.9 14.4

FY11E

55,939 18.0 45,526 10,413 18.6 1,414 378 1,300 9,921 1,478 14.9 8,443 50 8,393 23.1 15.0

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

202

Results Preview SECTOR: PHARMACEUTICALS

Piramal Healthcare STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 PIHC IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

Rs494

Previous Recommendation: Neutral

NICH.BO

YEAR

209.0

NET SALES

PAT

(RS M)

(RS M)

END

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

600/293 -11/ 25/41

Mcap (Rs b) Mcap (USD b)

103.2

03/09A 32,811

3,580

17.1

-1.7

28.8

7.8

29.7

21.0

3.5

17.4

03/10A 36,711

4,886

23.4

36.5

21.1

6.1

32.5

21.2

3.1

15.9

03/11E

2.2

41,994

5,343

25.6

9.4

19.3

5.0

28.4

21.8

2.8

13.5

03/12E 48,015

6,341

30.3

18.7

16.3

4.1

27.7

23.5

2.4

11.2

„

We expect PHL's 1QFY11 topline to grow by 11.3% YoY to Rs9.1b. Domestic formulations business is likely to report 11.5% YoY growth to Rs4.9b. CRAMs business is likely to grow by 10% YoY, led by 50% YoY growth in revenues from Indian facilities. Minrad is likely to report strong 24% YoY growth. „ While EBITDA is likely to grow 14% YoY to Rs1.8b, EBITDA margin would improve by 40bp YoY, reflecting improved revenue mix and improving profitability of Minrad operations in the US. „ We expect PAT to grow by 25% YoY to Rs1.1b due to lower depreciation and interest expense. CRAMS, critical care, pathological laboratories and other businesses will form the residual business for PHL after the sale of its domestic formulations business. It will focus on: (1) ramp-up of the CRAMS business, (2) improving the profitability of its Minrad (US) operations, and (3) deployment of the proceeds from the sale. While our fair value estimate for PHC is Rs572/share, we believe the stock will quote at a discount to fair price, given the prevailing uncertainties. We maintain our Neutral recommendation.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Net Sales YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

8,215 16.0 6,658 1,557 19.0 385 254

10,000 12.5 8,226 1,774 17.7 375 254

9,077 9.6 7,303 1,774 19.5 434 217

9,418 10.7 7,255 2,163 23.0 233 192

9,141 11.3 7,367 1,774 19.4 369 196

10,499 5.0 8,407 2,092 19.9 421 233

10,948 20.6 8,652 2,296 21.0 456 242

11,407 21.1 8,931 2,476 21.7 509 261

36,711 11.9 29,443 7,268 19.8 1,427 916

41,994 14.4 33,356 8,639 20.6 1,756 931

33 49 0 0 1,157 1,787 1,210 1,438 0 66 0 4 1,157 1,721 1,210 1,434 -204 178 121 143 0 0 25 30 -17.7 10.3 12.1 12.1 1,361 1,543 1,064 1,261 -1 0 0 0 1,362 1,543 1,064 1,261 1,362 1,602 1,064 1,264 127.5 48.7 25.1 18.6 full year numbers due to restatement

0 1,598 0 1,598 160 30 11.9 1,408 -1 1,409 1,409 3.4

120 1,827 -4 1,830 183 36 12.0 1,611 2 1,609 1,606 0.2

142 5,067 69 4,998 180 0 3.6 4,818 -2 4,819 4,886 36.5

120 6,072 0 6,072 607 121 12.0 5,343 0 5,343 5,343 9.4

Other Income 45 PBT before EO Expense 963 Extra-Ord Expense 0 PBT after EO Expense 963 Tax 113 Deferred Tax 0 Rate (%) 11.7 PAT 851 Less: Minority Interest 0 Reported PAT 851 Adj PAT 851 YoY Change (%) 18.7 E: MOSL Estimates; Quarterly numbers don’t

15 1,160 4 1,157 94 0 8.1 1,063 0 1,063 1,066 30.6 add up to

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

203

Results Preview SECTOR: PHARMACEUTICALS

Ranbaxy Laboratories STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 RBXY IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

420.4 538/236 2/ -14/47

Mcap (Rs b) Mcap (USD b)

Rs453

Previous Recommendation: Neutral

RANB.BO

190.3

YEAR

NET SALES

PAT

EPS

END*

(RS M)

(RS M)

(RS)

12/09A 74,688

1,517

3.6

-50.9

93.7

3.3

3.5

8.1

2.9

36.7

12/10E 84,601

9,053

6.6

82.3

51.4

2.7

17.0

15.3

2.4

13.6

12/11E

4.1

EPS GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

84,575

3,649

8.7

32.0

39.0

2.4

6.2

6.8

2.4

24.7

12/12E 93,741

5,610

13.3

53.7

25.3

2.2

8.6

9.3

2.1

19.0

* All valuation ratios adjusted for Rs123/sh DCF value of FTFs

„

We expect Ranbaxy's 2QCY10 topline to decline 4.5% YoY (excluding generic Valtrex contribution) mainly due to 13% YoY decline in branded formulation markets like Asia Pacific and Middle East. While the US FDA issues are yet to be resolved, revenues from US are likely to decline by 8.8% YoY. We expect generic Valtrex to contribute Rs3.5b to Ranbaxy's 2QCY10 revenues, taking the overall topline to Rs21.6b. „ EBITDA margin is likely to be 6.6%, reflecting the positive impact of the ongoing restructuring and cost-cutting measures over the past few quarters. However, it would be tempered by increased manpower cost and appreciating rupee. „ Adjusted PAT is likely to double to Rs399m on a very low base. PAT including contribution from generic Valtrex exclusivity (Rs1.7b) and settlement income related to generic Flomax (Rs460m) is likely to be Rs2.5b. Ranbaxy's para-IV upsides are attracting P/E based valuations. We believe that these are one-off upsides and continue to value them on DCF basis. Our current DCF value of all potential para-IV upsides is Rs115/share. We expect core EPS of Rs8.7 in CY11 (assuming some normalization of the core US business) and Rs13.3 for CY12 (assuming full recovery in the US). Our estimates exclude MTM forex gains and one-off upsides from para-IV opportunities. The stock currently trades at 39x CY11E core EPS and 25.3x CY12E core EPS. We believe that current valuations are discounting the best case scenario for both the core business as well as for the para-IV upsides. We maintain Neutral. QUARTERLY PERFORMANCE

(RS MILLION)

Y/E DECEMBER

Net Income YoY Change (%) EBITDA Margins (%) Depreciation Interest Other Income PBT before EO Expense Extra-Ord Expense PBT after EO Expense Tax Rate (%) Reported PAT Minority Interest Adj PAT YoY Change (%) Margins (%) Adj PAT incl one-offs E: MOSL Estimates

CY09

CY10

1Q

2Q

3Q

4Q

1Q

2QE

3QE

4QE

14,926 -12.1 -822 -5.5 639 246 -816 -2,523 9,188 -11,711 -4,101 35.0 -7,610 0 -385 -137.8 -2.6 -385

18,958 -1.7 1,215 6.4 644 197 2,308 2,682 -8,137 10,819 3,888 35.9 6,931 38 200 -85.6 1.1 200

18,858 1.8 2,427 12.9 654 121 -51 1,601 0 1,601 435 27.2 1,166 35 523 235.6 2.8 523

21,946 34.1 3,022 13.8 739 146 2,988 5,124 -4,265 9,389 6,769 72.1 2,620 68 -1,545 45.7 -7.0 1,178

26,993 80.8 9,839 36.5 1,005 248 1,697 10,283 -3,872 14,155 4,524 32.0 9,631 26 533 -238.7 2.0 6,822

18,103 -4.5 1,204 6.6 704 230 -748 -478 3,190 -3,668 -1,467 40.0 -2,201 0 399 99.7 2.2 2,527

19,060 1.1 1,567 8.2 736 212 396 1,015 0 1,015 101 10.0 913 0 913 74.6 4.8 913

20,444 -6.8 2,101 10.3 756 194 632 1,784 -68 1,852 151 8.1 1,701 -26 1,444 -193.4 7.1 2,973

CY09

CY10E

74,688 4.9 5,842 7.8 2,676 710 4,429 6,884 -3,214 10,098 6,991 69.2 3,107 142 -1,207 -181.0 -1.6 1,517

84,601 13.3 14,712 17.4 3,202 883 1,977 12,603 -750 13,353 3,309 24.8 10,045 0 3,289 -372.6 3.9 13,236

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

204

Results Preview SECTOR: PHARMACEUTICALS

Sun Pharmaceuticals Industries STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 SUNP IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

207.1

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

52 Week Range (Rs) 1,846/1,070 1,6,12 Rel Perf (%)

Rs1,793

Previous Recommendation: Buy

SUN.BO

03/10A* 03/10A 03/11E 03/11E* 03/12E

3/ 13/16 371.4 8.0

41,028 34,344 41,750 46,169 49,788

13,567 9,557 12,696 14,321 15,495

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

-25.4

27.4

4.6

12.6

18.4

8.0

24.1

32.8 5.6 22.0

29.3

4.1

14.7

15.7

7.7

25.1

24.0

3.6

15.9

17.1

6.3

20.3

(RS) GROWTH (%)

65.5 46.1 61.3 69.1 74.8

EV/

EV/

SALES EBITDA

* Includes Para-IV upsides

„

We expect Sun Pharma's 1QFY11 topline to grow 19% YoY to Rs9.4b due to low base in the domestic formulations segment owing to the change in distribution set-up and the impact of the US-FDA issues on Caraco. Domestic formulations business is likely to grow by 73.2% YoY while the export formulations business (except US) is likely to report 53% YoY growth. „ EBITDA margin is likely to expand 820bp YoY to 29.6% due to favorable revenue mix, with contribution from the domestic formulations business at 56% v/s 39% in 1QFY10. „ Adjusted PAT is likely to grow ~3x YoY to Rs2.8b, albeit on low base and higher other income. Reported PAT (including contribution of generic Protonix and Eloxatin) is likely to grow by 124% YoY to Rs3.6b. An expanding generics portfolio and a change in the product mix in favor of high-margin exports are likely to bring in long-term benefits for Sun Pharma. Key drivers for the future include: (1) a ramp-up in the US business and resolution of Caraco's cGMP issues, (2) monetization of the para-IV pipeline in the US, and (3) launch of controlled substances in the US. Based on our revised estimates, we expect core EPS of Rs61.3 for FY11 and Rs74.8 (up 22%) for FY12. Including para-IV upsides, we expect EPS of Rs69.1 for FY11. The stock trades at 29.3x FY11E and 24x FY12E earnings. We maintain Buy. QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

FY11E

FY10

3Q

4Q

1Q

2Q

3Q

4Q

Net Revenues 7,876 11,852 10,209 YoY Change (%) -23.1 0.6 11.2 EBITDA 1,684 4,833 3,684 Margins (%) 21.4 40.8 36.1 Depreciation 376 379 359 Net Other Income 190 613 325 PBT 1,498 5,067 3,650 Tax 31 400 261 Rate (%) 2.1 7.9 7.1 Profit after Tax 1,467 4,667 3,389 Share of Minority Partner -156 145 0 Reported PAT 1,623 4,522 3,390 One-off Upsides 638 1,300 1,251 Adj Net Profit 985 3,222 2,138 YoY Change (%) -70.2 7.8 -38.8 Margins (%) 12.5 27.2 20.9 E: MOSL Estimates; Reported PAT includes one-off upsides

11,092 4.3 3,427 30.9 419 926 3,934 -13 -0.3 3,946 -29 3,975 821 3,155 0.9 28.4

9,375 19.0 2,771 29.6 382 610 2,999 210 7.0 2,789 5 3,644 860 2,785 182.6 29.7

9,994 -15.7 3,013 30.2 398 652 3,267 327 10.0 2,940 5 3,150 215 2,935 -8.9 29.4

10,648 4.3 3,264 30.7 415 693 3,542 283 8.0 3,259 5 3,493 239 3,254 52.2 30.6

11,733 5.8 3,657 31.2 431 734 3,960 233 5.9 3,727 5 4,033 311 3,722 18.0 31.7

41,028 -1.9 13,628 33.2 1,533 2,053 14,148 679 4.8 13,470 -41 13,511 4,010 9,501 -26.4 23.2

FY11E

41,750 1.8 12,706 30.4 1,626 2,689 13,769 1,053 7.7 12,715 19 14,321 1,624 12,696 33.6 30.4

Nimish Desai ([email protected]) / Amit Shah ([email protected])

July 2010

205

Results Preview QUARTER ENDING JUNE 2010

Real Estate BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

RE recovery continues to gain strength The real estate market continues to gain strength in 1QFY11. Residential sales are healthy across most key India markets, though sharp RE price increases in Mumbai and NCR have moderated demand growth. There has been a steady de-freezing of leasing in the commercial offices vertical across key markets. During 1QFY11, we expect our RE universe to post revenue increase of ~32% YoY and 7.5% QoQ, and net profit is likely to increase by ~3.1% YoY and ~5.6% QoQ.

COMPANY NAME

Anant Raj Industries DLF HDIL Mahindra Lifespaces Phoenix Mills Unitech

Recovery in commercial, retail vertical to gain momentum in 2HFY11 Since October 2009, there have been visible signs of recovery in the commercial and retail verticals, with rentals in the commercial vertical stabilizing and leasing picking up in key cities. In 1QFY11, leasing activity picked up across markets such as the NCR, Bangalore, Chennai and Mumbai particularly in the office segment, and demand for IT offices remains weak. Industry experts expect the commercial and retail verticals to gain further momentum in 2HFY11. This should be a key positive for players, like DLF, which have a significant presence in these segments. High valuation discount provides margin of safety The RE stock index has under-performed the benchmark indices by ~34%, since October 2009. We continue to value RE stocks on a premium/discount to NAV basis. Key RE stocks are available at a significant discount to NAV. While the average discount to NAV for our universe of RE stocks is ~29%, large companies such as DLF, Unitech and HDIL are available at 25%, 24% and 35% discount to their NAV respectively. Our top picks in the RE sector are DLF and Unitech among large caps and Anant Raj, Mahindra Lifespaces and Phoenix Mills among mid caps.

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Real Estate Anant Raj Inds DLF HDIL Mahindra Lifespace Phoenix Mills Unitech Sector Aggregate

118 286 244 459 209 74

(RS MILLION)

RECO

SALES JUN.10

Buy Buy Buy Buy Buy Buy

660 20,562 3,506 1,145 395 8,257 34,526

EBITDA

VAR.

VAR.

% YOY

% QOQ

-20.0 24.6 18.7 142.3 59.4 60.4 32.0

93.6 3.1 -19.2 13.4 14.6 -27.1 -7.5

JUN.10

401 9,964 1,580 384 276 2,073 14,679

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

-47.3 33.9 36.1 269.8 46.3 -34.2 14.6

52.9 -0.4 -30.4 29.5 39.5 -24.0 -6.8

JUN.10

364 4,023 1,157 279 177 1,384 7,383

VAR.

VAR.

% YOY

% QOQ

-47.2 1.6 7.6 167.6 15.4 17.4 3.1

22.3 -5.6 -34.9 17.7 12.6 -31.1 -15.6

Siddharth Bothra ([email protected])

July 2010

206

Real Estate

Divergence between physical RE market, stock performance seems unsustainable „ The RE stock index has declined by ~32% since October 2009 and underperformed the Sensex by ~34%, since October 2009. This underperformance has been driven by 1) macroeconomic concerns about interest rates and liquidity, 2) technical factors such as a withdrawal of capital-raising plans, 3) concerns regarding execution scale up, and 4) slower-than-expected recovery in the commercial and retail vertical. Going forward, we expect this under-performance to be corrected because of (i) abating macro concerns, (ii) continued strengthening and broad basing of the physical RE market, and (iii) visible progress on execution. „ The RE market has continued to gain strength in 1QFY11 across RE verticals. Residential sales continued to stay healthy across most key markets in India, though sharp RE price increases in Mumbai and NCR markets moderated demand growth. There has been a steady de-freezing of leasing in the commercial offices vertical across key markets. „ Since October 2009, recovery in the residential vertical has gained strength and has been encompassing RE verticals such as commercial and retail. „ We believe the divergence between the physical RE market and RE stock performance seems unsustainable, going forward. REAL ESTATE HAS UNDERPERFORMED THE SEXSEX BY ~34% SINCE OCTOBER 2009

Realty Index

Sensex Index

120

100

80

Jun-10

May-10

May-10

Apr-10

Apr-10

Apr-10

Mar-10

Mar-10

Feb-10

Feb-10

Jan-10

Jan-10

Dec-09

Dec-09

Nov-09

Nov-09

Oct-09

Oct-09

Oct-09

60

RATES IN THE RESIDENTIAL VERTCIAL

24 21

21

19

10

1QFY08

2QFY08

3QFY08

15

14

13

4QFY08

9

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

Source: Company/MOSL

July 2010

207

Real Estate

Macroeconomic concerns recede Macroeconomic concerns such as a sharp increase in interest rates and poor liquidity outlook, contributed strongly to the under-performance of RE stocks, since October 2009. While some of these concerns have already played out, their magnitude also seems to be shrinking. Our view on interest rates and liquidity is that the stress is purely a temporary phenomenon, not expected to last beyond June 2010. We expect an improving macroeconomic outlook to successfully address RE stocks' under-performance. Liquidity outlook of key listed companies comfortable The liquidity outlook for most key listed RE stocks looks comfortable with an average debt/equity (DER) of ~0.5x. DLF's DER spiked sharply in 4QFY10 (from ~0.5x to 0.7x), it plans to address the issue through asset sales and REIT listing. Successful implementation of these plans will be a key positive for DLF. Valuation discount provide margin of safety „ The RE stock index has under-performed the benchmark indices by ~34%, since October 2009. This under-performance has been largely driven by (1) macroeconomic concerns about interest rates and liquidity, (2) technical factors such withdrawal of capital raising plans, (3) concerns regarding execution scale up, and (4) slower-thanexpected recovery in the commercial and retail vertical. „ Given the nascent history of the RE sector in the equity market, the valuation benchmark is still evolving. We continue to value RE stocks on premium/discount to NAV basis. Key RE stocks are available at significant discount to NAV. While the average discount to NAV for our universe of RE stocks is ~29%, large companies such as DLF, Unitech and HDIL are available at 25%, 24% and 35% discount to NAV respectively. Limited trading data on RE stocks, indicate high discount to NAV as good entry points for investors for long term gains. „ Our top picks in the RE sector are DLF and Unitech among large caps and Anant Raj, Mahindra Lifespaces and Phoenix Mills among mid caps.

Phoenix

Mah Life

Unitech

DLF

Puravankara

Brigade

Peninsula

HDIL

IBREL

Anant Raj

DISCOUNT TO NAV

-17

-15

-22 -26

-37 -42

-26

-25

-35

-41 Source: Company/MOSL

July 2010

208

Real Estate

Land deals: momentum picking up Successful recapitalization of balance sheets and encouraging responses to recent launches has improved the financial outlook of key RE companies. This, in turn has encouraged developers to consider land acquisitions at attractive prices. In FY10, the realty market witnessed positive responses to the recent land auctions. This signals a revival of risk appetite by real estate developers due to broad-based improvement in the sector outlook. DETAILS OF KEY LAND TRANSACTIONS IN THE PAST YEAR

DEVELOPER

DATE

LAND

DEAL

DEAL

RESERVE

BID

PRE-

AREA

SIZE

SIZE

PRICE

PRICE

MIUM

(ACRES)

(USD M)

(RS B)

(RS M)

(RS M)

(%)

Lodha-Wadala Seth Developer

May-10 Feb-10

7 14

40.5 5.9

1,980

4,050

105%

Wadhwa Group

Jan-10

18.2

5.7

NA

NA

NA

NAPC Godrej Properties

Sep-09 Sep-09

0.5 100

0.2 Na

NA NA

NA NA

NA NA

Piramal Sunteck

Aug-09

Na

0.3

NA

NA

DB realty-Crown Mill IBREL-Nariman Point DLF-Gurgaon Hiranandani-Banglore

Sep-09 Aug-09 Aug-09 Jul-09

7 4 350 135

125 290 360 167

6.0 13.8 17.5 8.0

6,000 13,760 17,500 NA

NA 10,950 17,000 NA

Lodha-Finlay Anant Raj-Noida

Jul-09 Jul-09

10 39

145

7.1 1.7

7,100 NA

7,080 NA

54.6

-

-

Total

646

LOCATION

WTT central Mumbai Golden Tobaco Mill in Vile Parle (west) Hindustan Composite Mills in Ghatkopar Acquisition for Godrej Garden City township to be

spread over 250acres Two plots with sizes ranging from 1,500-3,500 sq mtrs acquired Crown Mill, Prabhadevi, Mumbai -2042% Nariman Point, Mumbai -286% Sec42, 53 and 53, Gurgaon, NCR Bangalore (80acres), Chennai (35acres), Hyderabad (20acres) -28% Finlay Mill, Lower Parel, Mumbai Noida (1.8msf), Manesar (1.4msf) and Gurgaon (0.2msf) Source: Company/MOSL NA

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt Real Estate Index

108 101 94 87 Jun-10

May-10

Apr-10

Mar-10

80

RELATIVE PERFORMANCE - 1YR (%)

M OSt Real Estate Index Sensex

July 2010

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

160 130 100 70 40

DETAILS OF KEY PRIVATE EQUITY DEALS IN CY10 DATE

INVESTOR(S)

TARGET

7-Jan-10 14-Jan-10 22-Jan-10 27-Jan-10

JP Morgan Kotak Mahindra PE IL&FS Investment Manager IL&FS Trust Co. IIRF India Realty X, Moltana Holdings Red Fort Capital Temasek Holdings ICICI Prudential, India Opportunity Realty Fund IL&FS Investment Manager Clearwater Capital Kotak Mahindra PE Milestone Capital IL&FS Milestone Realty Infinite India Investment

Viceroy Hotels Sunteck Realty Emerald Lands Orbit HighCity

4-Feb-10 8-Feb-10 10-Feb-10 5-Apr-10 11-May-10 30-Apr-10 6-May-10 10-Jun-10 18-Jun-10

STAKE (%)

AMOUNT (US$M)

49 NA 27 21.6

15.2 23.1 14.5 35.5

3C Company Sobha Development Shriram Properties

NA 4 49

NA NA 8.5

GK Industrial Park Sayaji Hotels Dheeraj Insignia GM Infra Ventures 247 HCC Park Windshield Dev.

82 15.6 NA NA NA 33.7 26 4.5 74 122.4 100 6 Source: Four-S Database

209

Real Estate

Comparative snapshot for 1QFY11 REVENUE GROWTH

PAT GROWTH

93.6

YoY 60.4

QoQ

YoY

22.3

17.4

59.4

24.6

QoQ

15.4

1.6

18.7

14.6

7.6 0.1

(5.6)

3.1 (31.1)

-20.0

-19.2

-27.1

Anant Raj

DLF

Unitech

Phoenix Mills

HDIL

EBITDA GROWTH

(34.9)

-47.2 Anant Raj

DLF

Unitech

Phoenix Mills

HDIL

EBITDA MARGINS

YoY

52.9

QoQ

76.9

46.3 39.5

33.9

1QFY11

4QFY10

36.1

69.9 60.8 48.5

(0.4)

57.4

50.1

52.3 45.1

25.1 24.1

(24.0) (34.2)

(30.4)

-47.3 Anant Raj

DLF

Unitech

Phoenix Mills

STOCK PRICE IN COMPARISON TO 52-WEEK HIGH/LOW

Up from 52w Low

Anant Raj

HDIL

DLF

Unitech

Phoenix Mills

HDIL

QUARTERLY STOCK RETURNS

1QFY11

141

Dow n from 52w High

3%

4QFY10

11% 6%

5%

2% -2%

-4%

44

42 28

36 41

38 20

14

-12%

11 Sensex

Anant Raj

DLF

Unitech

-15%

-19%

Phoenix Mills

DLF

-14%

-21% Unitech

HDIL

Anantraj

HDIL

Phoenx Mill

Source: MOSL COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

Real Estate Anant Raj Inds Brigade Enterpr. DLF HDIL Indiabulls Real Estate Mahindra Lifespace Peninsula Land Phoenix Mills Puravankara Projects Unitech Sector Aggregate

July 2010

118 135 286 244 153 459 71 209 105 74

Buy Buy Buy Buy Neutral Buy Neutral Buy Neutral Buy

EPS (RS) FY10

FY11E

8.1 4.2 10.0 15.8 -0.6 19.3 10.0 4.1 6.8 2.8

7.8 11.9 11.9 15.7 5.4 26.9 12.0 5.7 8.2 3.2

P/E (X) FY12E

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

13.2 14.6 17.6 32.0 16.0 28.5 18.9 15.5 12.8 -246.5 30.3 23.8 13.2 7.1 9.6 51.6 9.8 15.4 4.3 26.5 25.3

15.2 11.3 24.1 15.6 28.2 17.1 6.0 36.6 12.8 23.2 20.8

9.0 7.7 17.9 12.9 11.9 15.1 5.4 21.8 10.6 17.2 15.3

12.9 33.0 19.9 15.5 -60.2 18.0 5.7 48.7 17.9 21.1 20.3

11.4 8.5 14.8 14.3 35.7 11.4 4.4 26.2 13.1 18.7 14.9

6.1 5.6 12.1 11.9 12.7 9.5 4.0 18.9 8.5 11.8 11.1

6.7 4.8 5.6 8.1 -0.2 7.9 24.3 3.8 9.8 6.3 5.6

6.1 12.4 6.9 7.6 1.4 9.9 24.8 5.1 10.8 6.7 6.7

9.4 16.4 9.0 8.7 3.3 10.0 23.5 8.0 11.8 8.3 8.6

210

Results Preview SECTOR: REAL ESTATE

Anant Raj Industries STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 ARCP IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs118

REUTERS CODE

S&P CNX: 5,269

ANRA.BO

Equity Shares (m)

YEAR

294.6

52 Week Range (Rs)

164/82

1,6,12 Rel Perf (%)

6/ -11/3

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

EPS

END

(RS M)

(RS M)

(RS)

3/09A

2,508

2,073

7.0

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

SALES EBITDA

-52.5

16.8

1.0

6.2

8.6

12.2

13.9

GROWTH (%)

EV/

EV/

3/10A

2,863

2,381

8.1

14.9

14.6

1.0

6.7

8.2

11.7

12.9

34.8

3/11E

5,485

2,293

7.8

-3.7

15.2

0.9

6.1

8.2

6.0

11.4

0.8

3/12E

10,630

3,880

13.2

69.2

9.0

0.8

9.4

13.0

3.1

6.1

„

We expect ARIL’s revenue to decline by 20% YoY to Rs660m and net profit to drop by 47.2% YoY to Rs364m.

„

ARIL’s planned launch of its key premium residential project at Hauz Khas in 1QFY11, has been delayed due to legal issues, however, the management is hopeful of launching the project in 2QFY11.

„

During 1QFY10, ARIL launched a ~0.2msf project at Kapasera, Delhi and the project was sold within a month.

„

ARIL plans to launch a mid-income housing project in Manesar in FY11, comprising ~1,000 apartments at average realizations of Rs2,500/sf.

„

ARIL has a robust business model, with multiple revenue streams and high monetization visibility. We expect revenue to increase at 54% CAGR and net profit to increase by 19% over FY09-12. Our FY12 NAV for ARIL is Rs205/ share. The stock trades at 0.8x FY12E BV of Rs139/share and 42.4% discount to its FY12E NAV of Rs205/share, which is attractive compared with its industry peers. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10

FY11E

FY10

FY11E

194 920 4,372 5,485 91.6 2,589

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Net Sales - Ceramic Rental Income RE Sales/Investments (Net) Total Sales Change (%) Total Expenditure EBITDA

20 92 713 825 687.2 65 760

26 113 732 871 -44.4 73 799

13 135 678 826 17.0 62 764

19 150 298 341 52.4 79 262

39 184 437 660 -20.0 259 401

46 230 743 1,020 17.0 388 631

50 239 1,224 1,514 83.2 647 866

58 267 1,967 2,292 572.5 1,294 998

80 490 2,294 2,863 7.3 278 2,585

Change (%) As of % Sales Depreciation Interest Other Income Extra-ordinary PBT Tax Effective Tax Rate (%) Reported PAT Change (%) Adj PAT Change (%) E: MOSL Estimates

92 35 0 155 11 880 180 20 700 777.8 689 788.2

-46.6 92 45 0 137 2 890 176 20 714 -43.9 713 -44.0

17.1 92 43 0 117 0 837 166 20 671 1.3 671 1.4

83.4 77 -16 48 126 -12 369 59 16 309 92.5 297 95.3

-47.3 61 43 7 141 0 492 129 26 364 -48.1 364 -47.2

-21.0 62 52 7 131 0 704 163 23 541 -24.3 541 -24.1

13.4 57 54 9 111 0 915 244 27 671 0.0 671 0.0

280.5 44 67 13 121 0 1,039 321 31 718 132.0 718 141.4

9 90 107 49 535 1 2,964 581 20 2,383 6 2,382 7

2,896 12 53 215 36 505 0 3,150 857 27 2,293 -4 2,293 -4

Siddharth Bothra ([email protected])

July 2010

211

Results Preview SECTOR: REAL ESTATE

DLF STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 DLFU IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs286

REUTERS CODE

S&P CNX: 5,269

DLF.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

2/ -24/-32

Mcap (USD b)

„ „

„

„ „

NET SALES

PAT

EPS

(RS M)

(RS M)

(RS)

END

491/252

Mcap (Rs b)

„

YEAR

1,714.4

EPS GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A 100,448

44,696

26.0

-43.4

11.0

2.3

18.5

15.6

6.4

11.4

3/10A

74,209

17,300

10.0

-61.3

28.5

1.7

5.6

7.6

9.4

19.9

490.4

3/11E

93,465

20,470

11.9

18.3

24.1

1.7

6.9

8.4

7.1

14.7

10.6

3/12E

119,851

27,544

16.0

34.6

17.9

1.7

9.0

10.5

5.4

12.0

We expect revenue to grow 24.6% YoY to Rs20.1b and net profit to increase ~2% to Rs4b mainly due to an increase in residential sales volumes. In 1QFY11, DLF started pre-sales of its key ~4msf project in Lower Parel, Mumbai. We expect DLF to launch 50% of this project in FY11. The management has issued strong operational guidance for sales and leases across verticals for FY11. It hopes to sell residential property of 15-18msf and lease 3-4msf of commercial offices in FY11. The management has also guided for asset sales of ~Rs27b over 12-18 months (primarily expectation of refunds from the government). After 4QFY10 results, we cut our NAV estimate by 9% from Rs428/share to Rs388/share to model (1) higher debt of ~Rs45b v/s our earlier estimates, (2) delay in residential and commercial launches, and (3) lower stake of DLF in key projects such as NTC Mills and Mall of India after the merger with a promoter-held entity. We also cut our FY11 PAT estimate by 22.2% to Rs20.4b and FY12 PAT estimate by 10.8% to Rs27.5b to model (1) significantly higher interest costs, and (2) delay in new launches. Our FY12 expected NAV is Rs388/share. The stock trades at 1.7x FY12E adjusted BV of Rs170/share and 26.3% discount to its NAV. Progress on debt leveraging and subsequent revival in the commercial and retail verticals could lead to higher valuation multiples for DLF. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) Total Expenditure EBITDA Change (%) As % of Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Change (%) P/L of Associat./ Minority Int. Adj. PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

16,499 -56.7 9,058 7,441 -68.3 45.1 734 2,874 961 4,794 993 20.7 3,801 -79.9 -159 3,960 (78.8)

17,509 -53.2 8,371 9,138 -58.8 52.2 766 2,486 594 6,481 1,918 17.5 4,563 -76.4 166 4,397 (77.3)

20,258 48.2 11,825 8,433 9.2 41.6 800 2,568 1,260 6,325 1,684 26.6 4,641 (31.9) -38 4,679 (30.2)

19,944 77.7 9,944 10,000 546.9 50.1 947 3,147 1,518 7,424 2,362 31.8 5,062 798 4,264 168.1

20,562 24.6 10,598 9,964 33.9 48.5 946 3,737 430 5,711 1,688 29.6 4,023 5.8 0 4,023 1.6

23,366 33.4 12,043 11,323 23.9 48.5 950 3,665 458 7,166 2,026 28.3 5,140 12.6 0 5,140 16.9

24,301 20.0 13,006 11,294 33.9 46.5 970 3,593 468 7,199 2,111 29.3 5,089 9.6 0 5,089 8.8

25,236 26.5 12,525 12,711 27.1 50.4 1,012 3,378 515 8,835 2,617 29.6 6,218 0 6,218 45.8

FY10

FY11E

74,210 -26.1 39,198 35,012 -37.5 47.2 3,246 11,075 4,334 25,024 6,957 27.8 18,067 -60.0 767 17,300 -61.3

93,465 25.9 48,172 45,293 29.4 48.5 3,878 14,374 1,871 28,912 8,442 29.2 20,470 13.3 0 20,470 18.3

Siddharth Bothra ([email protected])

July 2010

212

Results Preview SECTOR: REAL ESTATE

HDIL STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 HDIL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs244

REUTERS CODE

S&P CNX: 5,269

HDIL.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

366.8 411/179

Mcap (USD b)

PAT

EPS

(RS M)

(RS M)

(RS)

EPS GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

17,284

7,871

28.6

-62.6

8.5

1.5

15.3

8.6

5.4

12.0

3/10A

15,021

5,666

15.8

-35.8

15.5

1.2

8.1

5.5

5.7

10.8

89.6

3/11E

19,225

5,758

15.7

-0.6

15.6

1.2

7.6

5.6

4.2

9.8

1.9

3/12E

36,412

6,921

18.9

20.2

12.9

1.1

8.7

6.6

2.3

8.2

9/ -34/-15

Mcap (Rs b)

NET SALES

END

„

We expect revenue to grow 18.7% YoY to Rs3.5b and net profit to increase by 7.6% YoY to Rs1.2b. EBITDA margins will expand to 45.1% v/s 39.3% in 1QFY10.

„

During 1QFY11 HDIL launched its 1.2msf residential project christened Meadows in Goregaon, Mumbai. The project elicited good response.

„

The Bombay High Court ruling in June 2010, setting aside the Maharashtra State Government’s decision in July 2008 to allow developers to buy 0.33x of floor space index (FSI) directly from the government in Mumbai’s suburbs, was a major boon for HDIL. TDR prices jumped up from Rs2,600-2,700/sf to ~Rs3,250/sf within a week. HDIL is one of the key TDR players in Mumbai, with a possible inventory of ~35msf from its MIAL project.

„

HDIL is well placed to benefit from a strong recovery in the Mumbai real estate market (87% of HDIL’s land bank is in MMR). Our FY12E NAV for HDIL is Rs385/share. The stock trades at 3.8x FY12E adjusted BV of Rs65/share and at 36.5% discount to its FY12E NAV of Rs385/share. We expect the stock to trade at a 10% discount to its NAV. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

Sales 2,954 Change (%) -48.2 Total Expenditure 1,792 EBITDA 1,161 Change (%) -75.1 As % of Sales 39.3 Depreciation 9 Interest 169 Other Income 233 PBT 1,217 Tax 142 Effective Tax Rate (%) 11.6 Reported PAT 1,075 Change (%) -66.2 Adjusted PAT 1,075 Change (%) -66.2 E: MOSL Estimates; * Consolidated Results

FY11E

2Q

3Q

4Q

1Q

2Q

3Q

4Q

3,537 -38.0 1,740 1,797 -33.6 50.8 9 185 274 1,876 390 20.8 1,486 -53.3 1,486 -53.3

4,089 30.3 2,201 1,888 98.7 46.2 12 190 266 1,952 324 16.6 1,628 115.1 1,628 -12.0

4,341 21.3 2,070 2,271 135.3 52.3 22 245 304 2,309 474 20.5 1,835 196.3 1,778 187.2

3,506 18.7 1,925 1,580 36.1 45.1 84 192 108 1,412 255 18.1 1,157 7.6 1,157 7.6

3,836 29.9 2,256 1,579 -12.1 41.2 88 196 113 1,407 273 19.4 1,134 5.5 1,134 5.5

5,917 44.7 3,395 2,522 33.6 42.6 96 200 123 2,348 619 26.4 1,729 6.3 1,729 6.3

5,967 37.5 3,350 2,617 15.2 43.9 132 246 169 2,408 674 28.0 1,734 -5.5 1,678 -5.7

FY10*

FY11E

15,021 -13.1 7,129 7,893 1.4 52.5 724 462 345 7,052 1,386 19.7 5,666 -16.4 5,666 -28.0

19,225 28.0 10,924 8,302 5.2 43.2 401 835 512 7,578 1,820 24.0 5,758 1.6 5,758 1.6

Siddharth Bothra ([email protected])

July 2010

213

Results Preview SECTOR: REAL ESTATE

Mahindra Lifespaces STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 MLIFE IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs459

REUTERS CODE

S&P CNX: 5,269

MALD.BO

Equity Shares (m) 52 Week Range (Rs)

543/225

1,6,12 Rel Perf (%)

5/ 33/48

Mcap (Rs b) Mcap (USD b)

YEAR

40.8

NET SALES

PAT

EPS

(RS M)

(RS M)

(RS)

END

EPS GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

3,418

641

15.7

-3.5

29.2

2.0

6.9

7.8

6.0

28.4

3/10A

4,179

785

19.3

22.7

23.8

1.9

7.9

9.2

5.0

18.0

18.7

3/11E

5,454

1,098

26.9

39.8

17.1

1.7

9.9

12.7

4.0

11.4

0.4

3/12E

6,928

1,238

30.3

12.7

15.1

1.5

10.0

13.6

3.0

9.5

„

We expect consolidated revenue to increase to Rs3.5b and net profit to increase by 2.4x YoY to Rs464m, led by robust sales volumes. We expect EBITDA margins to expand to 55% in 4QFY10.

„

During 4QFY10, MLL launched phase-II of its residential project at Bhandup, Mahindra Splendor, at Rs6,500/sf, ~8% higher than its phase-I rate of Rs6,000/sf. MLL plans to launch the second phase of its residential development at the Chennai SEZ of ~0.8msf in FY11. The management had earlier guided for the launch of this project in 4QFY10. This project would consist of mid-income homes priced at Rs2.5m-3.5m/unit. For 9MFY10, its residential sales amounted to ~Rs3.8b.

„

MLL plans to increase the processing area at the Chennai SEZ by ~100 acres. Of this, it has acquired ~70 acres and is in the advanced stages of acquiring the remaining ~30 acres. After this acquisition, the area under the Chennai SEZ would increase to ~1,700 acres (v/s 1,550 acres, currently).

„

Our FY12 SOTP value is Rs552/share: (1) Chennai SEZ at Rs180/share, (2) Jaipur SEZ at Rs174/share, (3) residential vertical at Rs179/share, and (4) other rental assets at Rs50/share. Our valuations do not include value for: (1) its 52acre Thane project, (2) 50-acre commercial land at Chennai SEZ, and (3) two planned new SEZs/industrial parks in Tamil Nadu and near the Mumbai-Pune Expressway. The stock trades at 1.33x FY12E BV of Rs366/share and at ~17% discount to its SOTP value of Rs552/share. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) Total Expenditure EBITDA As % of Sales Depreciation Interest Other Income Extra-ordinary PBT Tax Effective Tax Rate (%) Adj. PAT Change (%) E: MOSL Estimates

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

CONS.

CONS.

473 -2.0 369 104 22.0 6 0 43

635 109.5 488 147 23.2 5 0 131 44 229 56 24.2 203 81.3

1,089 95.7 784 305 28.0 5 0 66

1,010 223.4 713 296 29.4 7 0 51 340 103 30.3 237 74.6

1,145 142.3 761 384 33.5 18 28 58 0 396 117 29.6 279 167.6

1,309 106.1 832 477 36.4 22 30 64 0 488 141 28.8 376 85.8

1,363 25.2 868 496 36.4 23 33 66 0 506 149 29.5 357 27.5

1,636 62.1 1,080 556 34.0 28 41 77 563 179 31.7 385 62.4

4,179 22.3 3,008 1,171 28.0 66 93 221 44 1,189 383 32.3 785 22.5

5,454 30.5 3,542 1,912 35.1 91 133 265 0 1,953 586 30.0 1,098 40.0

140 36 25.8 104 6.9

366 86 23.5 280 147.7

Siddharth Bothra ([email protected])

July 2010

214

Results Preview SECTOR: REAL ESTATE

Phoenix Mills STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 PHNX IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs209

REUTERS CODE

S&P CNX: 5,269

PHOE.BO

Equity Shares (m) 52 Week Range (Rs)

YEAR

144.8

NET SALES

PAT

EPS

(RS M)

(RS M)

(RS)

END

236/87

3/09A 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

EPS GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

SALES EBITDA

EV/

EV/

996

768

5.3

68.1

39.5

2.0

5.1

5.1

34.0

56.2

3/10A*

1,158

588

4.1

-23.4

51.6

1.9

3.8

3.4

31.3

48.7

30.3

3/11E

1,961

827

5.7

40.8

36.6

1.9

5.1

5.1

18.8

26.2

0.7

3/12E

3,235

1,387

9.6

67.7

21.8

1.7

8.0

6.6

12.7

18.9

-4/ 8/90

„

We expect revenue to grow 59.4% YoY to Rs395m and net profit to increase 15.4% YoY to Rs177m, led by increased contribution from Palladium, phase-III of High Street Phoenix (HSP), its retail project in Mumbai.

„

HSP is likely to grow well over FY10-12, driven by (1) re-pricing of old rental contracts of ~150,000sf by ~100% over FY11-12, (2) start of operations of the 400-room Shangri-La hotel by 3QFY11, (3) leasing of 35,000sf of incremental commercial space by FY11-12, and (4) addition of phase-4 retail area of ~300,000sf by FY12.

„

In 1QFY11, PML’s market city projects witnessed significant traction in leasing, with (i) Kurla, Mumbai ~50% leased (was ~22% as on 4QFY10) at average lease rentals of Rs90/sf/mth, (ii) Pune mall 75% leased (was ~55% as on 4QFY10) at average rentals of Rs62/sf/mth, and (iii) Bangalore mall ~60% leased (was ~20% as on 4QFY10) at average rentals of Rs55/sf/mth. After the completion of these malls, PML will own the largest malls in almost all tier1 cities in India, except the NCR.

„

We believe PML is a unique play on the booming domestic consumption story, without retail-specific risks. We have rolled our NAV one year forward to FY12, which is Rs251/share. The retail vertical forms ~73% of GAV and the commercial and hotel verticals form ~9% each of GAV. The stock trades at 1.7x its FY12E adjusted book value of Rs120.1/share and 16.7% discount to our NAV of Rs251/share. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) Total Expenditure EBITDA Change (%) As % of Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Change (%) Adj. PAT Change (%) E: MOSL Estimates

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

CONS.

CONS.

248 19.7 59 189 21.3 76.2 24 10 53 208 55 26.3 153 38.9 153 38.9

264 12.6 82 182 1.5 68.9 27 10 83 228 53 17.5 175 -54.6 175 (54.6)

302 36.7 125 177 14.2 58.7 53 31 47 140 39 19.5 102 (30.9) 102 (30.9)

345 61.0 147 198 51.7 57.4 59 35 58 162 4 2.8 157 11.8 157 11.8

395 59.4 119 276 46.3 69.9 55 39 50 231 55 23.6 177 15.4 177 15.4

412 56.0 122 290 59.4 70.4 57 48 50 235 57 24.4 178 1.5 178 1.5

538 78.3 138 400 125.8 74.3 60 54 46 332 79 23.9 253 147.9 253 147.9

616 78.7 174 442 123.2 71.7 59 76 32 339 82 24.2 257 63.7 257 63.7

1,158 16.3 412 746 23.9 64.4 163 86 240 738 150 20.4 588 -23.4 588 -23.4

1,961 69.3 553 1,408 88.8 71.8 231 218 178 1,138 273 24.0 865 47.1 865 47.1

Siddharth Bothra ([email protected])

July 2010

215

Results Preview SECTOR: REAL ESTATE

Unitech STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 UT IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

1,6,12 Rel Perf (%)

YEAR

2,435.6

52 Week Range (Rs)

PAT

EPS

(RS M)

(RS M)

(RS)

EPS GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

28,945

9,689

6.0

-41.7

12.3

3.0

18.7

13.2

9.2

16.8

3/10A

29,568

6,751

2.8

-53.6

26.5

1.9

6.3

6.5

8.0

21.5

179.0

3/11E

37,393

7,891

3.2

14.1

23.2

1.7

6.7

6.5

6.0

19.1

3.9

3/12E

50,971

10,634

4.3

34.8

17.2

1.6

8.3

9.3

4.2

12.1

2/ -12/-33

Mcap (USD b)

NET SALES

END

118/61

Mcap (Rs b)

Rs74

Previous Recommendation: Buy

UNTE.BO

„

We expect revenue to increase by 60.4% YoY to Rs8.3b and net profit to increase by 17.4% YoY to Rs1.4b. EBITDA margins are likely to contract by 23.4pp YoY to 25.1%, due to cost revision for old projects.

„

Unitech has guided for FY11 residential sales of 12msf or ~Rs60b. Unitech’s 1QFY11 residential sales run rate was ~0.7msf/month, which is lower than the FY10 average run rate of ~1.3/msf.

„

It has significantly scaled up execution across projects and hopes to deliver ~26msf (22msf of old projects and ~10msf of recent projects) over FY11-13.

„

In 1QFY11, Unitech called off its 50:50 JV with Omkar, its Mumbai partner. The JV had ongoing projects of ~1.2msf. The management indicated that in future it would adopt the SPV route.

„

Our FY12 NAV for Unitech is Rs95/share. The stock trades at 17.2x FY12E EPS of Rs4.3 and 1.6x FY12E BV of Rs47/share. Among large-cap RE stocks, Unitech has one of the most comfortable balance sheets, with a low leverage of ~0.5x and strong earnings visibility of 30% CAGR over FY10-12. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) Total Expenditure EBITDA Change (%) As of % Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Change (%) Minority Adj PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

5,149 -50.1 1,998 3,151 -48.2 48.5 42 926 333 2,516 539 21.4 1,578 -62.7 399 1,178 -72.2

5,095 -48.2 2,117 2,978 -51.1 58.4 114 603 172 2,432 654 18.5 1,779 -50.5 -2 1,777 -50.5

7,745 58.3 5,888 1,857 -24.0 24.0 79 148 139 1,769 373 21.1 1,395 1.1 -365 1,760 29.4

11,325 190.2 8,599 2,726 107.1 24.1 106 323 196 2,493 835 33.5 2,035 -26.1 3 2,010 313.2

8,257 60.4 6,185 2,073 -34.2 25.1 108 360 232 1,837 453 24.7 1,384 -12.3 0 1,384 17.4

8,235 61.6 5,912 2,322 -22.0 28.2 129 396 235 2,032 492 24.2 1,540 -13.4 0 1,540 -13.3

9,113 17.7 6,060 3,053 64.4 33.5 137 450 239 2,704 661 24.4 2,044 46.5 0 2,044 16.1

11,788 4.1 7,475 4,313 58.2 36.6 164 594 354 3,908 985 25.2 2,924 43.7 0 2,924 45.5

FY10

FY11E

29,313 1.3 18,602 10,712 -32.8 36.5 341 2,000 840 9,188 2,402 26.1 6,787 -43.3 36 6,751 -30.3

37,393 27.6 25,633 11,760 9.8 31.5 538 1,800 1,060 10,483 2,591 24.7 7,891 16.3 0 7,891 16.9

Siddharth Bothra ([email protected])

July 2010

216

Results Preview QUARTER ENDING JUNE 2010

Retailing BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

Estimate 29% increase in sales, 81% increase in adjusted PAT: We estimate our retail universe will post 29% YoY increase in sales in the three months to June 2010. EBITDA will increase 34% led by a 40bp margin expansion. PBT is expected to increase 80% due to lower interest burden and PAT will increase 81% YoY. We estimate Titan Industries will post 139% growth in adjusted PAT and Pantaloon Retail PAT will grow 45% YoY.

Pantaloon Retail

Titan Industries

Consumption sentiment buoyant, store openings pick up: Strong consumption sentiment has been sustained over the past two quarters due to economic stability and improved job outlook. There is sustained impulse buying in categories like apparel, accessories, jewelry and watches. The home retailing segment, helped by a low base and pent-up demand has picked up well. We note that several global brands have entered specialty retail, and the brands will expand the retail market in the coming years. Store openings are picking up across verticals and we expect that the retail space will increase by more than 30% in 18-24 months. Gold on an uptrend; low base supports jewelry volumes: The sharp increase in gold prices during the quarter (up 22% YoY and 7% QoQ) has had virtually no impact on jewelry volume growth due to low offtake in the base quarter. Sales during Akshaya Tritiya have been encouraging despite high gold prices. Offtake of studded jewelry was higher due to its relatively lower price increase than gold jewelry. Sales traction strong; structural bottlenecks a key impediment: We believe there is likely to be strong sales traction in the retail sector due to strong same store sales and faster store openings. However issues such as service tax on lease rentals, funding, FDI in multi-brand retail and guidelines for cash and carry stores remain a key drag. We believe the long term outlook looks encouraging despite hiccups. We believe Pantaloon Retail will emerge stronger after group restructuring with increased focus on its core business. We maintain Pantaloon as the best theme play.

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Retailing Pantaloon Retail Titan Industries Sector Aggregate

420 2,258

(RS MILLION)

RECO

SALES JUN.10

Buy Neutral

20,279 12,580 32,859

EBITDA

VAR.

VAR.

% YOY

% QOQ

22.0 42.5 29.1

-1.4 -4.1 -2.5

JUN.10

2,239 893 3,132

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

22.2 81.4 34.7

3.9 -23.6 -5.8

JUN.10

529 541 1,070

VAR.

VAR.

% YOY

% QOQ

44.9 139.1 81.0

-5.4 -34.8 -23.0

Amnish Aggarwal ([email protected])/Nikhil Kumar([email protected])

July 2010

217

Retailing

Estimate 29% increase in sales and 81% increase in adjusted PAT We estimate our retail universe will post 29% YoY increase in sales in the three months to June 2010. EBIDTA will increase 34% due to a 40bp margin expansion. PBT is expected to increase 80% due to lower interest burden and PAT will increase 81% YoY. We estimate Titan Industries will post 139% growth in adjusted PAT and Pantaloon Retail PAT will grow 45% YoY. Consumption sentiment buoyant, boosts impulse buying Economic stability and improved job opportunities have helped a strong consumption sentiment to gather momentum over the past two quarters Demand is robust in the top eight cities and new store launches in Tier II and Tier III cities are being well received. Our channel check suggests sustained impulse buying in categories such as apparel, accessories, jewelry and watches. The home retailing segment, helped by a low base and pent up demand, is likely to grow by over 20%. SAME STORE SALES GROWTH IS INCHING UP ACROSS VERTICALS PANTALOON SSS GROWTH

Value Retailing

SHOPPERS’ STOP LTL SALES GROWTH

Lifestyle Retailing

LTL sales grow th (%)

21.0

13.9 13.2 12.0 10.5 10.6 8.8 6.9

7.7

7.5

4.9

11.0

14.0

6.9 6.0 7.0

3.0 3.7

5.0

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

1.0 FY07

FY08

FY09

FY10 FY11E FY12E Source: Company/MOSL

…leading to faster, bigger store openings Favorable consumption sentiment and lower lease rentals have instilled confidence of faster breakeven, resulting in faster and bigger store launches by retail companies. We expect Pantaloon (year ending June) to add ~0.6m square feet in the three months to June, closing the financial year with 11.5m square feet (excluding home retailing). Its management guided for 2.5m-3m square feet of area addition in FY11 (2m square feet in FY10). Shoppers’ Stop is optimistic about faster store launches in two years, in the department store format (management guidance of 18 stores in 30 months) and Hypermarts (five stores over FY10-12). Unlisted players like Lifestyle, Globus and Fab India also have aggressive store launch plans to ride the demand revival. Specialty stores like World of Titan, Tanishq, Bata and Jubilant Foodworks (Dominos) continue to look at tier-II and tier-III cities as they explore new growth avenues.

July 2010

218

Retailing

PANTALOON RETAIL’S STORE LAUNCHES HAVE BEEN ON AN UPTREND

Area Addition (mn sqft)

0.6

0.6

3QFY08

8.4

7.9

7.3

Total Area (mn sqft)

4QFY08

9.2

8.4

0.8

0.5

0.5

0.0

1QFY09

9.7

2QFY09

3QFY09

0.7

-0.1

4QFY09

10.9

10.3

9.6

1QFY10

0.6

2QFY10

3QFY10

Source: Company/MOSL STORE EXPANSION PLANS INDICATES PRICING OPTIMISM STORE FORMAT/GROUP

STORES OPENING

Big Bazaar Shoppers Stop

60 18

Hypercity Globus Dominos World of Titan Tanishq

5 6 ~60 40 15

CURRENT STORES

PERIOD

132 30

18 months 30 months

25 24 months 21 12 months ~300 12 months 290 12 months 115 12 months Source: Media Reports/Company

Gold on an uptrend; impulse buying, low base support jewelry volumes The sharp increase in gold prices during the three months to June (up 22% YoY and 7% QoQ) has had virtually no impact on jewelry volume growth due to low offtake in the base quarter. Sale during Akshaya Tritiya was encouraging considering the high gold prices. We believe traditional consumers are getting used to high gold prices. Sales of studded jewelry have grown due to relatively stable prices as most studded jewelry have only 2530% gold of 18-20 carat. Thus, rising gold prices have not impacted the price of studded jewelry much. GOLD PRICES ARE MOVING UP STEADILY (INR/10G)

20,000 17,500 15,000 12,500

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

Jun-08

10,000

Source: Company/MOSL

July 2010

219

Retailing

Sales traction strong; structural bottlenecks a key impediment We believe there is likely to be strong sales traction in the retail sector due to strong same store sales and faster store openings. Improving consumption sentiment and lower rentals have encouraged companies to ramp-up expansion plans. However, we are cautious about near term margins due to mix deterioration (Pantaloon) and initial store launch expenses. We prefer Pantaloon as a theme play on retail because of its pan-India presence, first mover advantage and deep understanding of the Indian consumer psyche. RELATIVE PERFORMANCE - 1YR (%)

RELATIVE PERFORMANCE - 3M (%)

Sensex

MOSt Retail Index

MOSt Retail Index

122

Sensex

80

90

40 Sep-09

Jun-10

Apr-10

Jun-10

98

Dec-09

120

Jun-09

106

May-10

160

Mar-10

114

Mar-10

200

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

Retailing Pantaloon Retail 420 Titan Industries 2,258 Sector Aggregate

July 2010

Buy Neutral

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

9.9 58.9

14.5 76.2

19.0 96.0

42.6 38.3 40.6

29.0 29.7 29.3

22.1 23.5 22.8

12.7 26.3 17.0

10.4 19.8 13.5

8.8 15.8 11.2

6.8 34.9 12.4

9.1 34.5 14.8

10.7 33.5 16.5

220

Results Preview SECTOR: RETAILING

Pantaloon Retail STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 PF IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs420

REUTERS CODE

S&P CNX: 5,269

PART.BO

Equity Shares (m)

YEAR

211.1

52 Week Range (Rs)

455/252

1,6,12 Rel Perf (%)

7/ 12/12

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

06/09A 63,417

1,406

7.4

06/10E 77,754

2,033

9.9

33.5

42.6

2.8

6.8

10.6

1.3

12.4

06/11E

96,398

3,058

14.5

46.9

29.0

2.5

9.1

12.1

1.1

10.1

06/12E 114,761

4,020

19.0

31.4

22.1

2.3

10.7

13.4

0.9

8.5

END

88.6 1.9

EPS

EPS

-6.6

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

56.8

3.3

6.1

10.1

EV/

EV/

SALES EBITDA

1.6

15.5

„

We expect Pantaloon’s revenue to grow 22% YoY to Rs20.3b, with double digit SSS growth in value and lifestyle retailing.

„

We expect marginal deterioration in gross margins (faster growth in value retailing) largely offset by operating leverage due to economies of scale. We expect EBITDA margins to stay flat at 11%.

„

A 10% decline in interest outgo will enable a 45% increase in PAT to Rs529m.

„

We highlight strong revival in demand in the top eight cities and consumer response to new launches in tier-II and tierIII cities are encouraging.

„

We expect the company to add 0.6msf in 4QFY10, taking the total area under operation to 11.5msf.

„

We expect the company to finalize the group restructuring in the coming quarter, which would pave the way for Pantaloon to emerge as a pure retail play.

„

The stock trades at 29x FY11E EPS and 22.1x FY12E EPS. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E JUNE

Net Sales YoY Change (%) Total Exp EBITDA Growth (%) Margins (%) Depreciation Interest Other Income PBT Tax Rate (%) Adjusted PAT YoY Change (%) E: MOSL Estimates

FY09

FY10

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4QE

15,112 39.1 13,563 1,549 62 10.2 319 684 12 557 196 33.5 362 21.8

15,257 24.4 13,684 1,573 44 10.3 325 742 15 522 187 35.8 335 6.0

16,421 21.2 14,691 1,730 51.6 10.5 369 847 16 530 186 35.0 344 7.1

16,627 20.4 14,795 1,832 29.8 11.0 388 910 18 553 188 34.0 365 12.2

17,770 17.6 15,869 1,901 22.8 10.7 433 869 47 647 209 32.3 438 21.2

19,128 25.4 17,094 2,034 29.3 10.6 452 835 20 768 261 34.0 507 51.1

20,576 25.3 18,420 2,156 24.6 10.5 465 859 14 847 288 34.0 559 62.7

20,279 22.0 18,040 2,239 22.2 11.0 579 818 23 866 337 38.9 529 44.9

FY09

FY10E

63,417 25.6 56,733 6,684 45.1 10.5 1,401 3,182 61 2,162 757 35.0 1,406 11.6

77,754 22.6 69,424 8,331 24.6 10.7 1,928 3,380 105 3,128 1,095 35.0 2,033 44.6

Amnish Aggarwal ([email protected])/Nikhil Kumar([email protected])

July 2010

221

Results Preview SECTOR: RETAILING

Titan Industries STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 TTAN IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

44.4

-5/ 58/79

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

52 Week Range (Rs) 2,325/1,071 1,6,12 Rel Perf (%)

Rs2,258

Previous Recommendation: Neutral

TITN.BO

100.3 2.2

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 38,034

2,055

46.3

36.8

48.8

17.1

37.3

38.8

2.5

29.4

03/10A 46,744

2,615

58.9

27.2

38.3

12.6

34.9

39.4

2.0

24.8

03/11E

60,029

3,381

76.2

29.3

29.7

9.7

34.5

41.9

1.6

18.7

03/12E 72,368

4,262

96.0

26.1

23.5

7.4

33.5

43.8

1.3

14.9

„

We expect Titan to post sales of Rs12.6b, up 42.5% YoY, led by strong growth in the jewelry segment.

„

We expect the watch division to post 15% sales growth. An improved sales mix is likely to boost margins by 40bp to 14%.

„

The jewelry division is likely to post strong volume growth (~30%) and 280bp margin expansion due to a low base and strong demand during the Akshaya Tritiya festival. We estimate jewelry EBIT at Rs593m, up 181% YoY (base adjusted for gain in inventory value due to change in method of inventory valuation).

„

Titan Eye+ continued with its store openings in June. The division launched a promotional campaign offering a 25% flat discount on exchange of old eyewear for new ones.

„

Titan has aggressive growth plans for the current year. The company plans to add 15 Tanishq stores (no addition in FY10), and 40 stores each of World of Titan and Titan Eye+ which will boost growth beyond FY11. We estimate PAT CAGR of 27.7% over FY10-12. We believe Titan is one of the best plays on urban consumption and specialty retail segment; however valuations at 29.7x FY11E and 23.5x FY12E are expensive. Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

FY11E 3Q

Jewelry Volume Gr (%) -15 -7 5 Gold Price Chg YoY (%) 20 22 31 Net Sales 8,828 11,468 13,336 YoY Change (%) 8.9 5.4 30.3 Total Exp 8,336 10,387 12,264 EBITDA 493 1,081 1,073 Margins (%) 5.6 9.4 8.0 Depreciation 90 89 91 Interest 76 50 29 Other Income 10 32 30 PBT 337 974 983 Tax 111 198 199 Rate (%) 32.9 20.3 20.3 Adjusted PAT 226 776 784 YoY Change (%) -31.2 -11.0 86.0 Extraordinary Income 234 0 -29 Reported PAT 460 776 754 E: MOSL Estimates; Gold Price change (Average quarterly) post

4Q

1Q

2Q

3Q

4Q

49 30 23 18 14 23 24 14 13,112 12,580 15,482 16,270 48.9 42.5 35.0 22.0 11,943 11,687 14,088 14,952 1,169 893 1,393 1,318 8.9 7.1 9.0 8.1 91 96 100 102 99 65 70 45 47 19 22 26 1,026 751 1,245 1,197 196 210 286 287 19.2 28.0 23.0 24.0 829 541 959 910 88.2 139.1 23.6 16.1 -317 0 0 0 512 541 959 910 1QFY11 based on current prices

15 12 15,697 19.7 14,292 1,405 9.0 104 52 35 1,284 313 24.4 971 17.1 0 971

FY10

FY11E

8 22 46,744 22.9 42,929 3,815 8.2 360 254 119 3,319 704 21.2 2,615 27.2 -112 2,503

21 18 60,029 28.4 55,019 5,010 8.3 402 232 102 4,478 1,097 24.5 3,381 29.3 0 3,381

Amnish Aggarwal ([email protected])/Nikhil Kumar([email protected])

July 2010

222

Results Preview QUARTER ENDING JUNE 2010

Telecom BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

Signs of stability: While 1QFY11 has been marked by several structural changes (3G/ BWA auctions, (re)entry of RIL in telecom sector, adverse TRAI recommendations and Bharti's Zain acquisition), the financial performance for the quarter is likely to be uneventful. After significant tariff cuts in 3QFY10, tariff environment has been relatively stable. With most subscriber migrations to lower tariff plans already through in 4QFY10, RPM pressure has likely abated. Continued momentum on traffic growth and stable RPM should result in a steady performance for most operators.

Bharti Airtel

Idea Cellular

Reliance Communication

Tulip Telecom

No significant tariff cuts; traffic growth strong: We expect a blended RPM decline of 3-4% QoQ v/s an average decline of 7-8% QoQ in the preceding three quarters. We expect Bharti (ex-African operations) to report revenue growth of 3.3% QoQ driven by ~7% mobile traffic growth. Idea is expected to post 9.5% consolidated QoQ revenue growth including the full quarter impact of Spice consolidation (~5% QoQ growth exSpice). Stable industry environment should result in flat QoQ revenue for RCom v/s a 17% decline in the quarterly revenue run rate in FY10. Margin pressure likely to ease: We expect EBITDA margin to remain largely stable at ~38% for Bharti and ~32% for RCom. Idea's reported EBITDA margin is expected to decline ~200bp QoQ to 25.5% due to full quarter consolidation of Spice and one-time write-backs in 4QFY10. Reported PAT expected to decline YoY, QoQ: We expect reported PAT to decline on a YoY and QoQ basis. QoQ PAT decline would be largely driven by higher depreciation and finance costs. We expect YoY PAT decline of 21-24% for Bharti/Idea and ~80% for RCom. We have modeled a net finance cost of Rs2.9b for RCom (~5% annualized finance cost) v/s finance income in comparable quarters. YoY comparisons have a high base as tariff pressure and competitive intensity had spiked after the Tata Docomo launch in 2QFY10.

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Telecom Bharti Airtel Idea Cellular Reliance Comm Tulip Telecom Sector Aggregate

263 57 193 853

(RS MILLION)

RECO

SALES JUN.10

Buy Buy UR Buy

103,852 36,665 50,899 5,366 196,781

EBITDA

VAR.

VAR.

% YOY

% QOQ

4.5 23.2 -17.2 21.1 0.9

3.3 9.5 -0.1 1.1 3.4

JUN.10

39,110 9,331 16,151 1,491 66,083

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

-5.8 8.5 -34.1 37.3 -12.7

2.3 1.0 0.8 -3.5 1.6

JUN.10

19,787 2,243 3,206 726 25,963

VAR.

VAR.

% YOY

% QOQ

-21.4 -24.5 -81.5 -3.2 -43.8

-3.7 -15.9 -71.8 -8.6 -26.7

UR = Under Review

Shobhit Khare ([email protected])

July 2010

223

Telecom

Bharti consolidates African operations (Zain) from 8 June 2010: Bharti consolidated its African operations (Zain Africa) from 8 June 2010. We have not incorporated the impact of the Zain Africa acquisition into Bharti estimates due to limited availability of historical financials. Including acquisition, Bharti could report revenue of ~Rs116b (up ~15.8% QoQ), EBITDA of ~Rs42.6b (up ~11.4% QoQ), and PAT of ~Rs19.1b (down ~7% QoQ). Incremental 3G revenue to constitute 3-4% of wireless by FY12: The 3G auction concluded with a pan-India 3G winning price at Rs167.5b. Contrary to expectations, Bharti and Vodafone desisted from bidding for all circles, probably due to a significant increase in aggregate winning price. Bharti and RCom won 3G spectrum in 13/22 circles and Idea won spectrum in 11 circles. Among listed companies, Idea's 3G footprint would have the highest revenue coverage (~83%) followed by Bharti (~70%) and RCom (~53%). We have incorporated the 3G/BWA payments into our estimates and expect the commercial launch in 4QFY11. We expect incremental 3G revenue to contribute 3-4% of wireless revenue in FY12. Infotel (Reliance Industries) surprise winner in BWA spectrum auction: Infotel emerged a surprise winner in the BWA auction across 22 circles with a winning price of Rs128.5b. Reliance will invest ~Rs200b to set up a pan-India network with flexible technology deployment based on 4G technologies (Wi-Max/LTE). The company believes data is the next big opportunity in India given low (<1%) broadband penetration. We believe Reliance's strategy will be disruptive and is based on leading a technology leapfrog to 4G. Tapering subscriber additions likely reflect lower competition/churn recognition by new entrants: Industry subscriber additions during April-May 2010 averaged 16.5m/ month v/s 19.6m in 4QFY10. Our channel checks indicate that addressing subscriber churn has gained prominence for operators given low tariff differentiation in the pay-persecond regime. Higher focus on subscriber quality is likely leading to lower net adds for the industry on a reported basis but would reflect lower competitive intensity rather than a slowdown, in our view. While Bharti and RCom have largely maintained their subscriber addition run rate, BSNL, Tata Tele and Idea have added only 70% of their average additions during 2HFY10 while Aircel and Vodafone are adding ~90% of second half average additions. We highlight that new entrant Uninor reported negative subscriber net additions in May 2010 on churn recognition (only ~50% of the subscribers added are active). MNP, adverse licensing/2G spectrum policy, higher leverage remain overhangs: Mobile Number Portability (MNP) implementation has been postponed to October 2010; likely pressure on post-paid RPM and subscriber retention costs remain an overhang. Concerns about implementation of adverse TRAI recommendations (for most operators) will also drag, pending a final policy decision by the government. We believe that TRAI recommendations are unlikely to be implemented in their current form. Leverage levels have increased due to 3G/BWA spectrum pay-outs (for all operators) and the Zain acquisition (for Bharti). We estimate FY11 net debt/EBITDA at 2.5x for Bharti (including Zain), 3.1x for Idea, and 4.5x for RCom. However net debt/equity will remain reasonable at 1.2x for Bharti (including Zain), 1x for Idea, and 0.8x for RCom.

July 2010

224

Telecom

Growth outlook improves; regulatory/competitive environment challenging; valuations attractive: While strong voice traffic growth, incremental 3G revenue opportunity and potential stabilization in tariffs will drive sector revenue growth, a potential increase in competitive intensity and adverse regulatory developments (like adverse TRAI recommendations) remain key risks. Bharti and Idea are trading at attractive valuations of ~5.5x FY12 EV/EBITDA, RCom trades at ~50% premium led by expectations of corporate action (tower business value-unlocking; stake sale to strategic/financial investors). TRAI recommendations on spectrum management, licensing framework Telecom regulator, TRAI, released its recommendations on spectrum management and licensing framework. The recommendations propose significant changes including: (1) One-time pay-out for spectrum allocation beyond 6.2MHz for GSM operators, (2) Hike in annual spectrum charges (linked to revenue), (3) Significant pay-outs for spectrum (linked to 3G auction winning price) and return of spectrum allocated in 800MHz (CDMA) and 900 MHz (GSM) on license renewal, (4) Phased decline in license fee (charged as a percentage of AGR), (5) Tightening of roll-out obligations, (6) Linking of spectrum allocation beyond the start-up spectrum (4.4MHz for GSM and 6.2MHz for CDMA) to roll-out obligations (v/s subscriber base currently), and (7) De-linking of future licenses with spectrum. The recommendations, except the proposed decline in license fee and incentive for rural coverage, are negative for incumbents. The recommendations are subject to approval by the department of telecom (DOT).

20 17

May-10

16

Apr-10

Mar-10

19

Feb-10

20

Jan-10

Jun-09

17

Dec-09

May-09

15

19

Nov-09

12

15

18

Oct-09

12

14

Sep-09

12

Mar-09

Feb-09

Jan-09

14

Apr-09

15

Aug-09

15

Jul-09

WIRELESS SUBSCRIBER NET ADDITIONS (M)

MONTHLY SUBSCRIBER ADDITIONS FOR MAJOR OPERATORS (M)

Bharti

6.0

Idea (incl. Spice)

Vodafone

RCOM

Tata Teleservices

4.5 3.0 1.5

May-10

Apr-10

Mar-10

Jan-10 Feb-10

Dec-09

Nov-09

Sep-09 Oct-09

Jul-09

Aug-09

Apr-09

May-09 Jun-09

Mar-09

Feb-09

Dec-08 Jan-09

Nov-08

Oct-08

Jul-08

Aug-08 Sep-08

Jun-08

Apr-08 May-08

Mar-08

Feb-08

Jan-08

0.0

Source: Company/MOSL

July 2010

225

Telecom

RELATIVE PERFORMANCE - 3M (%)

AVERAGE MONTHLY SUBSCRIBER ADDITIONS IN APRIL-MAY 2010 V/S 2HFY10 AVERAGE ADDITIONS (%)

Sensex M OSt Telecom Index

105

102

91

106 100

87

85 70

68

67

94 88 82

Uninor

35

S Tel

Tata Teleservices

Industry

Idea (incl. Spice)

BSNL (GSM)

MOSt Telecom Index Sensex

Aircel

RELATIVE PERFORMANCE - 1YR (%)

Vodafone Essar

Bharti

RCom

Jun-10

May-10

Apr-10

Mar-10

45

140 QOQ WIRELESS TRAFFIC GROWTH (%)

115 90

18

65

19

Bharti

Idea

RCOM

Vodafone-India

40 Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

15 12 10

10 10 10

11

10

9

8 7

11 10

13 10

4 2

1QFY 09

2QFY 09

3QFY 09

4QFY 09

7

6

6

6

1QFY 10

13

9

8

7

14

5

5

3 1

2QFY 10

3QFY 10

4QFY 10

TREND IN WIRELESS RPM (RS)

Bharti

Idea

RCOM

Vodafone-India

0.70 0.65 0.60 0.55 0.50 0.45 0.40 1QFY 09

2QFY 09

3QFY 09

4QFY 09

1QFY 10

2QFY 10

3QFY 10

4QFY 10

Source: Company/MOSL NET DEBT/EBITDA (FY11)

NET DEBT/EQUITY (FY11)

4.5

1.2 1.0 3.1

0.8

2.5

RCom

Idea

Bharti (incl Zain)

Bharti (incl Zain)

Idea

RCom Source: Company/MOSL

July 2010

226

Telecom

1QFY11: Summary expectations WIRELESS KPIS 1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

EOP Wireless Subs (m) Bharti 69 77 86 94 102 Idea* 27 30 34 39 43 RCOM 51 56 61 73 80 Avg. Wireless Subs (m) Bharti 66 73 82 90 98 Idea* 26 29 32 37 41 RCOM 48 53 59 67 76 ARPU (Rs/Month) Bharti 350 331 324 305 278 Idea* 278 261 266 254 232 RCOM 282 271 251 224 210 MOU Per Sub. Bharti 534 526 505 485 478 Idea* 431 421 416 402 399 RCOM 424 423 410 372 365 Revenue Per Minute (Rs) Bharti 0.66 0.63 0.64 0.63 0.58 Idea* 0.65 0.62 0.64 0.63 0.58 RCOM 0.67 0.64 0.61 0.60 0.58 Wireless Traffic (B Min) Bharti 105 116 124 131 141 Idea* 33 36 40 44 49 RCOM 61 68 72 75 83 * Idea 4QFY10 numbers include one month consolidation with Spice; full merger for

3QFY10

4QFY10

1QFY11E

YOY (%) QOQ (%)

111 47 86

119 52 94

128 64 102

137 68 111

33 60 39

7.1 6.9 7.9

106 45 83

115 50 90

123 58 98

132 66 106

35 62 40

7.2 13.7 8.5

252 209 161

230 200 149

220 185 139

213 179 131

-23 -23 -38

-3.0 -3.4 -5.9

450 375 340

446 389 330

468 398 318

468 396 308

-2 -1 -15

0.0 -0.4 -3.0

0.56 0.56 0.47

0.52 0.51 0.45

0.47 0.46 0.44

0.46 0.45 0.42

-22 -22 -26

-3.0 -3.0 -3.6

144 50 85 1QFY11

153 58 89

173 68 94

185 79 99

32 61 18

7.2 15.0 5.4

3QFY10

4QFY10

1QFY11E

98.5 29.7 57.0

97.7 31.5 53.1

100.6 33.5 50.9

103.9 36.7 50.9

4 23 -17

3.3 9.5 -0.1

41.4 8.1 20.2

39.1 8.1 18.1

38.2 9.2 16.0

39.1 9.3 16.2

-6 9 -34

2.3 1.0 0.8

42.1 27.2 35.4

40.0 25.8 34.1

38.0 27.6 31.5

37.7 25.5 31.7

23.2 2.2 8.2 1QFY11

22.1 1.7 11.9

20.6 2.7 11.4

19.8 2.2 3.2 Source:

QUARTERLY FINANCIALS (CONSOLIDATED) 1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

Revenue (Rs b) Bharti 84.8 90.2 96.3 98.2 99.4 Idea* 21.8 23.0 27.3 29.4 29.8 RCOM 53.2 56.4 58.5 61.2 61.5 EBITDA (Rs b) Bharti 35.2 37.0 39.5 40.0 41.5 Idea* 7.2 6.0 6.9 8.1 8.6 RCOM 22.5 23.0 23.5 23.8 24.5 EBITDA Margin (%) Bharti 41.5 41.0 41.0 40.7 41.8 Idea* 32.9 26.2 25.5 27.6 28.9 RCOM 42.3 40.8 40.2 38.9 39.9 PAT (Rs b) Bharti 20.3 20.5 21.6 22.4 25.2 Idea* 2.6 1.4 2.2 2.7 3.0 RCOM 16.4 16.8 14.8 13.6 17.3 * Idea 4QFY10 numbers include one month consolidation with Spice; full merger for

YOY (%) QOQ (%)

-410bp -35bp -344bp -214bp -818bp 28bp -21 -3.7 -24 -15.9 -81 -71.8 Company/MOSL

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

Telecommunication Bharti Airtel 263 Idea Cellular 57 Reliance Comm 193 Tulip Telecom 853 Sector Aggregate

Buy Buy UR Buy

EPS (RS)

P/E (X)

EV/EBITDA

ROE (%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

24.0 3.1 23.7 84.8

21.0 1.7 6.2 107.6

22.8 2.3 7.7 145.8

11.0 18.4 8.1 10.1 10.6

12.5 32.6 30.9 7.9 15.8

11.5 24.3 25.2 5.9 14.0

6.1 7.0 7.5 6.3 6.7

6.6 7.9 10.3 4.8 7.6

5.3 5.7 8.4 2.8 6.1

24.1 7.6 12.6 34.6 16.5

17.0 4.9 3.2 32.6 10.2

16.2 6.2 3.8 32.6 10.5

UR = Under Review

July 2010

227

Results Preview SECTOR: TELECOM

Bharti Airtel STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 BHARTI IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs263

REUTERS CODE

S&P CNX: 5,269

BRTI.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

3,793.9 467/230 -10/ -19/-57 997.6 21.5

YEAR

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

3/09A

369,615

84,699

22.3

26.4

11.8

3.2

31.4

23.8

2.9

7.0

3/10A

396,150

91,026

24.0

7.4

11.0

2.3

24.1

18.5

2.5

6.1

3/11E

436,624

79,788

21.0

-12.3

12.5

2.0

17.0

14.5

2.5

6.6

3/12E

500,239

86,532

22.8

8.5

11.5

1.7

16.2

14.5

2.0

5.3

END

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

„

We expect revenue to increase 4.5% YoY and 3.3% QoQ to Rs103.8b excluding the Zain acquisition.

„

EBITDA margin is expected to decline ~30bp QoQ to 37.7%.

„

Mobility revenues are expected to increase 4% YoY and QoQ driven by ~7% traffic growth, partially offset by ~3% RPM decline. We expect mobile ARPU to decline 23% YoY and 3% QoQ to Rs213. EBITDA margin for the mobile business is expected at 29%, and flat sequentially.

„

Net profit is expected to decline ~21% YoY and 3.7% QoQ to Rs19.8b. We have not factored in forex losses from the rupee's depreciation. Bharti had reported a forex gain of Rs1.57b in 4QFY10 due to the rupee's appreciation.

„

Bharti trades at an EV/EBITDA of 6.6x FY11E and 5.3x FY12E (ex-Zain). Maintain Buy.

QUARTERLY PERFORMANCE - (EX-ZAIN, CONSOLIDATED) Y/E MARCH

(RS MILLION) FY10

1Q

FY11E

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Gross Revenue 99,416 98,455 YoY Growth (%) 17.2 9.1 QoQ Growth (%) 1.2 -1.0 Total Operating Expenses 57,898 57,039 EBITDA 41,518 41,416 YoY Growth (%) 17.9 12.0 QoQ Growth (%) 3.8 -0.2 Margin (%) 41.8 42.1 Net Finance Costs -2,605 428 Non-Operating Income 295 396 Depreciation & Amortization 14,330 14,796 Profit before Tax 30,088 26,589 Income Tax Expense / (Income) 4,442 2,873 Profit/(Loss) to Min. Shareholders 479 506 Reported Net Profit / (Loss) 25,167 23,210 YoY Growth (%) 24.3 13.4 QoQ Growth (%) 12.4 -7.8 Mobile ARPU (Rs/month) 278 252 QoQ Growth (%) -8.9 -9.4 Mobile MOU/sub/month 478 450 QoQ Growth (%) -1.4 -5.9 E: MOSL Estimates; Financials as per US GAAP

97,722 1.4 -0.7 58,610 39,112 -0.9 -5.6 40.0 -1,769 239 15,403 25,717 3,192 426 22,099 2.3 -4.8 230 -8.7 446 -0.9

100,557 2.4 2.9 62,336 38,222 -4.5 -2.3 38.0 -1,837 456 15,928 24,587 3,452 583 20,552 -8.2 -7.0 220 -4.3 468 4.9

103,852 4.5 3.3 64,743 39,110 -5.8 2.3 37.7 -1,479 410 16,775 24,224 3,876 561 19,787 -21.4 -3.7 213 -3.0 468 0.0

107,013 8.7 3.0 66,546 40,467 -2.3 3.5 37.8 -437 419 17,481 23,842 3,815 552 19,475 -16.1 -1.6 205 -4.0 459 -2.0

110,394 13.0 3.2 68,718 41,676 6.6 3.0 37.8 -1,098 427 16,814 26,386 4,222 611 21,553 -2.5 10.7 203 -1.1 472 3.0

115,365 14.7 4.5 70,515 44,850 17.3 7.6 38.9 985 436 19,425 24,875 3,980 576 20,319 -1.1 -5.7 203 0.0 477 1.0

FY10

FY11E

396,150 7.2

436,624 10.2

235,881 160,268 5.7

270,521 166,103 3.6

40.5 -5,783 1,386 60,457 106,978 13,958 1,994 91,026 7.5

38.0 -2,029 1,692 70,496 99,326 15,892 2,302 81,132 -10.9

244

209

460

472

Shobhit Khare ([email protected])

July 2010

228

Results Preview SECTOR: TELECOM

Idea Cellular STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 IDEA IN

Buy

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs57

Previous Recommendation: Buy

IDEA.BO

3,299.8 85/47 0/ -4/-52 186.6 4.0

YEAR

NET SALES

PAT

(RS M)

(RS M)

(RS) GROWTH (%)

3/09A

101,485

9,008

3.0

3/10A

124,476

9,540

3.1

3/11E

153,889

5,728

3/12E

175,831

7,676

END

EPS

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

-23.7

18.7

1.2

10.4

7.4

2.1

7.5

2.0

18.4

1.5

7.6

5.5

1.9

7.0

1.7

-43.6

32.6

1.6

4.9

4.5

2.0

7.9

2.3

34.0

24.3

1.5

6.2

5.7

1.6

5.7

SALES EBITDA

„

Idea is expected to post 9.5% consolidated QoQ revenue growth including the full quarter impact of Spice consolidation (~5% QoQ growth ex-Spice). We expect Idea to post mobile traffic growth of ~15% and RPM decline of ~3%.

„

ARPU is expected to decline by 3.4% QoQ, impacted by the RPM decline.

„

Idea's reported EBITDA margin is expected to decline ~200bp QoQ to 25.5% due to full quarter consolidation of Spice and one-time write-backs in 4QFY10. We expect margins in established circles of 31%. EBITDA loss in new circles is estimated to decline from ~Rs1.4b in 4QFY10 to ~Rs1.25b in 1QFY11.

„

Net profit is expected to decline ~25% YoY and ~16% QoQ to Rs2.2b.

„

Idea trades at an EV/EBITDA of 7.9x FY11E and 5.7x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Gross Revenue YoY Growth (%) QoQ Growth (%) EBITDA YoY Growth (%) QoQ Growth (%) Margin (%) Net Finance Costs Depreciation & Amortization Profit before Tax Income Tax Expense / (Income) Net Profit / (Loss) YoY Growth (%) QoQ Growth (%) Margin (%) Mobile ARPU (Rs/month) QoQ Growth (%) Mobile MOU/sub/month QoQ Growth (%) E: MOSL Estimates

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

29,759 36.6 1.4 8,599 19.4 6.1

29,739 29.1 -0.1 8,095 33.4 -5.9

31,501 15.3 5.9 8,141 16.7 0.6

33,477 14.0 6.3 9,235 13.9 13.4

36,665 23.2 9.5 9,331 8.5 1.0

37,521 26.2 2.3 9,213 13.8 -1.3

39,043 23.9 4.1 10,075 23.8 9.4

40,659 21.5 4.1 10,604 14.8 5.2

124,476 22.7

153,889 23.6

34,070 20.2

39,223 15.1

28.9 869 4,555 3,175 204 2,971 12.9 8.3 10.0 232 -8.7 399 -0.7

27.2 740 4,796 2,559 357 2,202 52.8 -25.9 7.4 209 -9.9 375 -6.0

25.8 938 5,130 2,073 372 1,701 -22.5 -22.8 5.4 200 -4.3 389 3.7

27.6 621 5,667 2,947 281 2,666 -2.8 56.7 8.0 185 -7.5 398 2.3

25.5 872 6,021 2,438 195 2,243 -24.5 -15.9 6.1 179 -3.4 396 -0.4

24.6 1,538 6,185 1,491 119 1,372 -37.7 -38.9 3.7 171 -4.2 388 -2.2

25.8 1,574 6,486 2,015 161 1,854 9.0 35.2 4.7 167 -2.3 398 2.7

26.1 2,990 7,332 282 23 259 -90.3 -86.0 0.6 164 -2.3 401 0.7

27.4 3,168 20,148 10,754 1,214 9,540 5.9

25.5 6,974 26,023 6,226 498 5,728 -40.0

7.7 207

3.7 169

383

391

Shobhit Khare ([email protected])

July 2010

229

Results Preview SECTOR: TELECOM

Reliance Communication STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 RCOM IN

Under Review

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

Rs193

Previous Recommendation: Buy

RLCM.BO

YEAR

2,063.0

NET SALES

PAT

P/E

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS) GROWTH (%)

(X)

(X)

(%)

(%)

3/09A

229,410

61,552

29.8

6.5

1.0

18.7

8.9

2.7

3/10A

222,457

48,812

23.7

-20.7

8.1

1.0

12.6

5.8

2.7

7.5

3/11E

211,587

12,842

6.2

-73.7

30.9

1.0

3.2

3.0

3.3

10.3

3/12E

239,785

15,788

7.7

22.9

25.2

0.9

3.8

3.4

2.8

8.4

END

320/132 29/ 9/-58 397.1 8.6

EPS

EPS

11.7

EV/

EV/

SALES EBITDA

6.7

„

We expect revenue to decline 17% YoY but stay sequentially flat at Rs50.9b.

„

We expect wireless ARPU to decline by ~6% QoQ to Rs131. We expect RPM to decline by ~4% QoQ to Rs0.42 and MOU to decline by 3% QoQ to 308.

„

EBITDA margin is expected to stay sequentially stable at 31.7%.

„

Pre-minority interest net profit is expected to decline by 82% YoY and 72% QoQ, led mainly by assumption of no treasury gains.

„

RCom trades at an EV/EBITDA of 10.3x FY11E and 8.4x FY12E. Under review.

QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

FY10

FY11E

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

61,452 15.5 0.4 24,525 9.0 2.9 39.9 -6,205

57,026 1.0 -7.2 20,199 -12.2 -17.6 35.4 6,551

53,052 -9.3 -7.0 18,126 -22.9 -10.3 34.2 -4,075

50,928 -16.8 -4.0 16,020 -32.8 -11.6 31.5 -8,134

50,899 -17.2 -0.1 16,151 -34.1 0.8 31.7 2,947

52,363 -8.2 2.9 16,828 -16.7 4.2 32.1 3,535

53,606 1.0 2.4 17,249 -4.8 2.5 32.2 3,588

54,720 7.4 2.1 17,597 9.8 2.0 32.2 3,632

222,457 -3.0

211,587 -4.9

78,869 -15.1

67,825 -14.0

35.5 -11,863

32.1 13,702

Depreciation & Amortization 11,144 Profit before Tax 19,586 Income Tax Expense / (Income) 2,267 Adjusted Net Profit / (Loss) 17,319 YoY Growth (%) 5.6 QoQ Growth (%) 27.4 Extraordinary Exp/Minority Interest 953 Reported Net Profit / (Loss) 16,366 Wireless ARPU (Rs/month) 210 QoQ Growth (%) -6.3 Wireless MOU/sub/month 365 QoQ Growth (%) -1.9 E: MOSL Estimates

7,144 6,504 -1,739 8,243 -50.8 -52.4 840 7,403 161 -23.3 340 -6.8

8,331 13,870 2,003 11,867 -19.8 44.0 790 11,077 149 -7.5 330 -2.9

10,847 13,307 1,923 11,384 -16.3 -4.1 -811 12,195 139 -6.7 318 -3.6

9,476 3,728 522 3,206 -81.5 -71.8 300 2,906 131 -5.9 308 -3.0

9,646 3,647 511 3,136 -62.0 -2.2 310 2,827 126 -4.0 302 -2.0

9,910 3,751 525 3,226 -72.8 2.9 329 2,898 121 -4.0 302 0.0

10,159 3,806 533 3,273 -71.2 1.5 348 2,925 116 -4.0 296 -2.0

37,466 53,266 4,454 48,812 -20.7

39,190 14,932 2,091 12,842 -73.7

1,772 47,040 161

1,286 11,556 124

334

305

Gross Revenue YoY Growth (%) QoQ Growth (%) EBITDA YoY Growth (%) QoQ Growth (%) Margin (%) Net Finance Costs

Shobhit Khare ([email protected])

July 2010

230

Results Preview SECTOR: TELECOM

Tulip Telecom STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 TTSL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs853

REUTERS CODE

S&P CNX: 5,269

TULP.BO

Equity Shares (m) 52 Week Range (Rs)

1,250/716

1,6,12 Rel Perf (%)

-3/ -14/-6

Mcap (Rs b) Mcap (USD b)

YEAR

29.0

24.8 0.5

NET SALES

PAT

END

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

3/09A

16,144

2,505

73.7

3/10A

19,664

2,755

3/11E

24,246

3,495

3/12E

30,138

4,738

145.8

EV/

EV/

35.3

11.6

4.3

44.5

17.8

84.8

15.0

10.1

3.0

34.6

16.4

1.7

6.3

107.6

26.9

7.9

2.2

32.6

18.4

1.4

4.8

35.6

5.9

1.7

32.6

21.5

0.8

2.8

SALES EBITDA

2.0

9.7

„

We expect consolidated revenue to grow 21.1% YoY and 1.1% QoQ to Rs5.37b. The first quarter is a seasonally weak quarter for Tulip due to a change in contracted rates and lower momentum in connect additions.

„

We expect EBITDA margin to decline ~130bp QoQ to 27.8%. EBITDA is expected to grow 37.3% YoY but decline 3.5% QoQ to Rs1.49b.

„

Reported PAT is expected to decline 3.2% YoY and 8.6% QoQ to Rs726m.

„

Tulip trades at an EV/EBITDA of 4.8x FY11E and 2.8x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Gross Revenue YoY Growth (%) QoQ Growth (%) Total Operating Expenses EBITDA YoY Growth (%) QoQ Growth (%) Margin (%) Net Finance Costs Non-Operating Income Depreciation & Amortization Profit before Tax Income Tax Expense / (Income) Reported Net Profit / (Loss) YoY Growth (%) QoQ Growth (%) Margin (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

4,429 33.2 -4.0 3,343 1,086 66.0 9.6 24.5 158 271 353 846 96 750 63.2 -29.0 16.9

4,910 27.7 10.9 3,642 1,268 56.5 16.8 25.8 187 37 436 682 164 518 3.2 -31.0 10.5

5,009 15.0 2.0 3,659 1,350 48.0 6.5 27.0 186 104 409 858 172 686 41.0 32.6 13.7

5,307 15.0 5.9 3,762 1,545 56.0 14.4 29.1 185 57 155 1,262 467 795 -24.8 15.9 15.0

5,366 21.1 1.1 3,875 1,491 37.3 -3.5 27.8 198 36 360 968 242 726 -3.2 -8.6 13.5

5,867 19.5 9.4 4,208 1,659 30.8 11.3 28.3 200 39 387 1,111 278 834 61.1 14.8 14.2

6,268 25.1 6.8 4,462 1,806 33.8 8.8 28.8 201 42 415 1,232 308 924 34.6 10.8 14.7

6,746 27.1 7.6 4,797 1,948 26.1 7.9 28.9 202 45 443 1,348 337 1,011 27.2 9.5 15.0

FY10

FY11E

19,664 21.8

24,246 23.3

14,409 5,255 56.1

17,342 6,905 31.4

26.7 716 468 1,353 3,654 899 2,755 10.0

28.5 801 161 1,605 4,660 1,165 3,495 26.9

14.0

14.4

Shobhit Khare ([email protected])

July 2010

231

Results Preview QUARTER ENDING JUNE 2010

Textiles BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

Record margins for upstream companies In 1QFY11, the profitability of cotton spinners will continue to stay at record highs. This is largely due to an advantageous raw material scenario. As a result, even though domestic cotton prices have increased ~30% across varieties, yarn prices have increased more sharply across various categories, thereby improving spreads for most cotton yarn spinners.

Alok Industries

Arvind Mills

Bombay Rayon

Raymond

Margins for fabric players under stress Downstream players such as fabric makers, unable to pass on the sharp increase in yarn prices entirely, have been facing pressure on their margins. Typically it takes about six months’ time for fabric makers to pass on the price increases to end users entirely and it takes another three to four months for garment makers to pass on the raw material price increases.

Vardhman Textiles

Indian exporters favorably placed Recent events in China, with regard to labor cost inflation and the appreciation of the yuan are a key positive for Indian exporters. Chinese dominance of the global textile industry is declining. We believe Indian exporters are well placed to benefit going forward.

EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Textiles Alok Ind Arvind Mills Bombay Rayon Raymond Vardhman Textiles Sector Aggregate

20 33 253 217 271

(RS MILLION)

RECO

SALES JUN.10

Neutral Neutral Buy Buy Buy

12,617 6,189 5,120 3,366 8,091 35,382

EBITDA

VAR.

VAR.

% YOY

% QOQ

60.5 -8.6 52.2 43.4 30.5 33.3

-14.2 7.5 8.0 0.0 7.0 -2.1

JUN.10

3,496 720 1,280 441 1,751 7,688

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

62.6 -18.1 60.8 LP 59.8 58.3

-18.3 8.5 11.8 -1.4 3.6 -6.5

JUN.10

487 64 564 70 619 1,805

VAR.

VAR.

% YOY

% QOQ

52.3 -24.8 51.3 LP 115.6 125.8

-48.9 -58.1 12.0 96.7 53.6 -11.9

Siddharth Bothra ([email protected])

July 2010

232

Textiles

Record spreads for spinners In 1QFY11, the profitability of cotton spinners will continue to stay at record highs. This is largely due to an advantageous raw material scenario. As a result, even though domestic cotton prices have increased ~30% across varieties, yarn prices have increased more sharply across various categories, thereby improving spreads for most cotton yarn spinners. FY09 was one of the worst years for the Indian textile industry. It was impacted by negative factors such as: (1) an appreciating rupee, (2) demand slowdown in the export market, (3) inventory de-stocking by domestic retailers, and (4) higher depreciation and interest costs. Most of the factors were reversed in FY10. We expect the fortunes of the textile industry to improve in FY11. While the overall textile industry has been in a recovery phase, the cotton spinning industry is posting record profits. This is largely due to an advantageous raw material scenario – while the global cotton crop has been poor, there has been a bumper domestic cotton harvest. As a result, even though domestic cotton prices have increased ~30% across varieties, yarn prices have increased more sharply across various categories, thereby improving spreads for most cotton yarn spinners. The profitability of select cotton spinners that have been carrying a low cotton inventory improved even more sharply. We believe VTL, the largest domestic cotton spinning company, is the best proxy to play this trend. INDIAN COTTON YARN MARGINS HIGHEST

2.0

1.6

1.2

0.8

May-10

Mar-10

Jan-10

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-10

Sep-10

Jul-10

0.4

Source: Industry/MOSL

July 2010

233

Textiles

India’s competitive advantage in the yarn segment is likely to sustain in the medium term COTTON DEMAND/SUPPLY OUTLOOK

Producers China India United States Pakistan Brazil Uzbekistan African Franc Zone Turkey Australia Others World Production Consumers China Indian subcontinent Turkey Brazil United States Others World Consumption Net Change in Stock

2009-10

2010-11

% CHG.

6,850 5,100 2,654 2,032 1,250 850 479 380 363 2,080 22,038

7,100 5,375 3,656 2,120 1,450 1,000 590 475 511 2,319 24,596

3.6 5.4 37.8 4.3 16.0 17.6 23.2 25.0 40.8 11.5 11.6

9,650 7,541 1,200 960 740 4,114 24,205 -2,167

9,988 3.5 7,832 3.9 1,200 0.0 985 2.6 718 -3.0 4,231 2.8 24,954 3.1 -358 83.5 Source: Cotton Outlook

COTTON PRICES CONTINUE TO BE HIGH

100 85 70 55

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

40

Source: Cotton Outlook

Fabric players’ margins under stress Downstream players such as fabric makers, unable to pass on the sharp increase in yarn prices entirely, have been facing pressure on their margins. Typically it takes about six months’ time for fabric makers to pass on the price increases to end users entirely and it takes another three to four months for garment makers to pass on the raw material price increases.

July 2010

234

Textiles

Indian exporters favorably placed Recent events in China, with regard to labor cost inflation and the appreciation of the yuan are key positives for Indian exporters. Chinese dominance of the global textile industry is declining. We believe Indian exporters are well placed to benefit from this in future. „ Recent studies on the Chinese textile industry indicate that China’s comparative advantage in the textile industry is declining. „ China’s share of the global market jumped from 38.8% in 2001 to 47.1% in 2005 but did not increase since then. „ This is because China’s share of textile and clothing markets other than the US and the EU declined from 71.3% in 2006 to 66.8% in 2008. „ Threats of renewed sanctions on Chinese textile exports to the US have resurfaced after an introduction of statistical monitoring of Chinese shipments through the “appropriations bill”, passed by the US Congress. While imposing textile quotas is now against WTO rules, the agreement on China’s accession to the WTO includes a “product specific safeguard”, which allows taking sanctions on imports from China until 11 December 2013. The related US legislation is known as “section 421”. „ Any shift of the global textile trade away from China is likely to benefit its key competitors such as India, Bangladesh and Sri Lanka. CHINA'S MARKET SHARE OF GLOBAL TEXTILE & APPAREL MARKET (%) YEAR

WORLD

US + EU

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

36.3 38.6 38.8 39.7 40.9 42.4 47.1 48.2 49.5 47.4

18.1 19.2 19.5 21.2 23.1 25.3 32.3 34.1 37.1 39.5

OTHERS

67.0 68.9 69.4 70.0 70.7 70.4 70.9 71.3 69.7 66.8 Source: Company/MOSL

CHINA'S TEXTILE AND APPAREL GROWTH RATE TO THE US (%)

Grow th Rate

50 40

Grow th Rate 35

47

35 27

30 20

32 12

10 0

15 15

15 19

4

17

20 15

9

3 10

2

4

2 0

-10

-15 2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

-20

Source: Company/MOSL

July 2010

235

Textiles

RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt Textiles Index

106 101 96 91 Jun-10

May-10

Apr-10

Mar-10

86

RELATIVE PERFORMANCE - 1YR (%)

M OSt Textiles Index Sensex

175 145 115

Valuation and view ? Key Indian textile companies have over FY06-09 undertaken capacity expansion plans, which allowed them to achieve critical scale. ? FY09 was one of the worst years for the Indian textile industry, which was affected by negative factors such as (1) an appreciating rupee, (2) demand slowdown in the export market and inventory de-stocking by domestic retailers, (3) higher depreciation and interest costs due to the commencement of new capacities along with initial startup costs. ? Most of these capacities are slated to reach full utilization from FY11. ? Emerging trends of consolidation are good for the industry ? Key textile companies are now in a sweet spot, as they do not have major capital expenditure plans in the near term and are likely to enjoy significant free cash flows over the next few years. ? Our top pick in the sector is VTL.

85 Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

55

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

EPS (RS) FY10

FY11E

P/E (X) FY12E

FY10

EV/EBITDA

ROE (%)

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

14.1

Textiles Alok Ind

20

Neutral

3.4

3.9

6.7

5.8

5.1

3.0

6.8

5.6

5.0

9.8

9.2

Arvind Mills

33

Neutral

2.4

3.0

4.0

13.8

11.1

8.4

6.1

4.9

4.3

2.7

3.3

4.2

14.4

26.4

39.7

17.5

9.6

6.4

14.6

8.2

5.8

10.5

14.5

18.2

Bombay Rayon

253

Buy

Raymond

217

Buy

1.3

5.6

15.7

163.5

38.9

13.8

26.0

8.6

6.3

-2.0

1.3

3.7

Vardhman Textiles

271

Buy

42.5

40.4

45.9

6.4

6.7

5.9

5.1

4.6

3.8

14.8

12.5

12.6

11.1

8.6

5.7

7.9

6.0

5.0

7.7

8.7

11.9

Sector Aggregate

July 2010

236

Results Preview SECTOR: TEXTILES

Alok Industries STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 ALOK IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

1,6,12 Rel Perf (%)

YEAR

705.8

52 Week Range (Rs)

2/ -11/-31

Mcap (USD b)

NET SALES

PAT

P/E

P/BV

ROE

ROCE

(RS M)

(RS M)

(RS) GROWTH (%)

(X)

(X)

(%)

(%)

END

28/16

Mcap (Rs b)

Rs20

Previous Recommendation: Neutral

ALOK.BO

14.0 0.3

EPS*

EPS

EV/

EV/

SALES EBITDA

3/09A

29,664

1,879

2.7

-25.4

7.5

0.2

10.3

6.0

2.3

8.9

3/10A

43,147

2,425

3.4

29.0

5.9

0.6

9.8

8.2

2.0

6.8

3/11E

54,149

2,764

3.9

14.0

5.1

0.5

9.2

9.0

1.5

5.6

3/12E

62,813

4,738

6.7

71.4

3.0

0.4

14.1

10.3

1.4

5.0

*Fully Diluted EPS

„

We expect 1QFY11 revenue to grow 60.5% YoY to Rs12.6b helped by higher capacities across all textile segments. EBITDA margins are likely to expand to 27.7% from 27.3% in 1QFY10.

„

High yarn prices are likely to negatively impact its fabric business.

„

The management has drawn up restructuring plans, which include creating dedicated verticals for the textile and retail businesses. The management has been working on early monetization of its real estate portfolio, which could be a key positive for the stock.

„

The company has ambitious expansion plans for its domestic retail business, which entail introducing international brands in India and opening 500 H&A retail outlets over three years. After restructuring we expect Alok to emerge as a large retail play.

„

The stock trades at 5.1x FY11E EPS of Rs3.9 and 3x FY12E EPS of Rs6.7. Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) Total Expenditure EBITDA Change (%) As % of Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Repoted PAT Change (%) Adj. PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

7,863 44.7 5,713 2,150 61.3 27.3 784 886 3 483 164 33.1 319 6.9 320 7.3

9,748 39.6 6,840 2,908 69.3 29.8 846 1,222 10 851 280 33.2 571 35.5 570 25.9

10,825 32.6 7,596 3,228 50.6 29.8 904 1,455 16 885 304 34.3 581 22.8 581 16.6

14,711 61.9 10,430 4,281 78.0 29.1 1,028 1,816 17 1,454 501 34.4 953 33.9 953 36.0

12,617 60.5 9,120 3,496 62.6 27.7 1,039 1,667 16 806 320 33.1 486 52.5 487 52.3

13,267 36.1 9,671 3,596 23.7 27.1 1,105 1,622 17 886 272 33.2 614 7.5 613 7.6

14,079 30.1 10,260 3,818 18 27.1 1,127 1,590 18 1,118 354 31.7 764 31.6 764 31.6

14,187 -3.6 10,260 3,926.6 -8.3 27.7 1,149 1,482 21 1,316 415 31.6 900 -5.6 900 -5.6

FY10

FY11E

43,147 45.5 30,579 12,568 65.4 29.1 3,562 5,379 45 3,673 1,248 34.0 2,425 29.0 2,425 23.6

54,149 25.5 39,312 14,837 18.0 27.4 4,421 6,362 71 4,126 1,361 33.0 2,764 14.0 2,764 14.0

Siddharth Bothra ([email protected])

July 2010

237

Results Preview SECTOR: TEXTILES

Arvind Mills STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 ARVND IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

Rs33

Previous Recommendation: Neutral

ARMI.BO

YEAR

218.9 44/21 0/ -16/3

Mcap (Rs b)

7.3

Mcap (USD b)

0.2

NET SALES

PAT

(RS M)

(RS M)

END

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

27,211

-994

-4.5

-463.2

-7.3

0.4

-5.0

4.7

0.9

8.8

3/10A

32,795

531

2.4

-153.4

13.6

0.4

2.7

6.8

0.8

6.0

3/11E

34,107

658

3.0

23.9

11.0

0.4

3.3

7.9

0.7

4.8

3/12E

38,200

872

4.0

32.6

8.3

0.3

4.2

8.3

0.5

4.2

„

We expect Arvind Mills 1QFY11 revenue to decline 8.6% YoY to Rs6.2b.

„

EBITDA margins are likely to decline by 136bp YoY to 11.6%, due to 35-40% increase in cotton yarn prices.

„

We expect the company to report net profit of Rs64m in 1QFY11 against

„

In 1QFY11 Arvind started to move forward on monetization of its surplus land in Ahmedabad, where it has about ~800 acres of surplus land.

„

Arvind has restructuring plans, which could include relocating part of its commodity grade denim capacity to other countries and sharpening focus on branded apparel and garment manufacturing.

„

The stock trades at 11x FY11E book value. Maintain Neutral.

Rs86m in 1QFY10.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

FY11E

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Sales 6,768 5,977 Change (%) 24.1 2.9 Total Expenditure 5,888 5,162 EBITDA 880 816 Change (%) 60.2 75.5 As % of Sales 13.0 13.6 Depreciation 326 283 Interest 473 463 Other Income 5 82 Non Recurring Expense 0 PBT 86 152 Tax 0 0 Effective Tax Rate (%) 0.0 0.0 Reported PAT 86 152 Change (%) 107.5 826.8 Adj. PAT 86 152 Change (%) 3,328.0 310.8 E: MOSL Estimates, Restated Quarterly Numbers

5,439 -9.3 4,881 559 -31.6 10.3 292 381 237 0 123 0 0.0 123 -136.9 123 -139.8

5,757 -1.9 5,094 663 17.8 11.5 272 267 28

6,189 -8.6 5,469 720 -18.1 11.6 303 401 66

6,584 10.1 5,790 794 -2.7 12.1 329 437 75

6,847 25.9 5,974 873 56.2 12.8 335 464 79

6,716 16.6 5,745 971 46.4 14.5 322 519 79

154 0 0.0 154 -175.3 154 -202.8

82 18 21.8 64 -94.6 64 -24.8

103 22 21.9 80 -6.5 80 -47.3

153 23 15.3 129 -14.8 129 5.7

209 26 12.5 183 49.5 183 19.0

FY10

FY11E

23,942 3.2 21,024 2,917 13.6 12.2 1,172 1,584 352 0 514 0 0.0 514 -207.4 514 -188.0

26,336 10.0 22,978 3,358 15.1 12.8 1,289 1,821 299 1 749 90 12.0 659 28.1 658 27.9

Siddharth Bothra ([email protected])

July 2010

238

Results Preview SECTOR: TEXTILES

Bombay Rayon STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 BRFL IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs253

REUTERS CODE

S&P CNX: 5,269

BRFL.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%) Mcap (Rs b) Mcap (USD b)

YEAR

111.9 261/140

PAT

(RS M)

(RS M)

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A

15,145

1,367

19.8

3.8

0.0

0.0

15.2

11.5

0.0

0.0

03/10E

18,015

1,616

14.4

-27.0

17.5

1.5

10.5

7.8

2.7

13.2

03/11E

27,413

3,064

26.4

82.7

9.6

1.3

14.5

11.6

1.8

7.2

03/12E 37,665 Consolidated

4,606

39.7

50.3

6.4

1.1

18.2

15.7

1.3

5.1

23/ 35/13 28.3 0.6

NET SALES

END

„

Expect steady QoQ growth in F11; YoY growth to be robust due to base effect: FY11 revenue and profit numbers for Bombay Rayon should reflect ramp-up of its mega capacity expansion at Maharashtra, both for garments (30m per annum or 0.1m per day) and fabric (~180m meters per annum). Thus, we expect steady QoQ growth through FY11. YoY growth will be robust as the Maharashtra expansion was commissioned in a phased manner beginning 2HFY10. For 1QFY10, we estimate revenue of Rs5.1b, up 52% YoY, and PAT of Rs564m, up 51% YoY.

„

Further expansion of weaving and fabric processing capacity: Bombay Rayon is adding additional weaving capacity of ~55m meters at Islampur (380 looms for Rs4b), and additional 35m meters of fabric processing capacity at Tarapur. Both projects are expected to be commissioned in 3QFY11. As Bombay Rayon's garment capacity is perennially booked, the higher fabric capacity will reduce dependence on external fabric, both grey and yarn-dyed.

„

FY10-12E EPS CAGR of 66%; attractive valuation; maintain Buy: We expect FY10-12E EPS CAGR of 66% on the back of robust sales growth and margin expansion due to incremental revenue coming from low-cost Maharashtra facility. Valuation is attractive at less than 9.6x FY11E EPS and 6.4x FY12E EPS. Our target price is Rs264 (10x FY11E EPS of Rs26.4). Though upside from current levels is low, we maintain our positive stance due to the strong earnings momentum, which could drive up valuations.

QUARTERLY PERFORMANCE - STANDALONE (INCLUDING ERSTWHILE LEELA LACE FROM 3QFY09) Y/E MARCH

(RS MILLION)

FY10 1Q

2Q

FY11E 3Q

4Q

1Q

2Q

3Q

Net Sales 3,363 3,864 4,179 4,740 5,120 5,734 6,422 Change (%) N.A. N.A. 21.2 42.3 52.2 48.4 53.7 Total Expenses 2,567 2,946 3,163 3,596 3,840 4,272 4,720 EBITDA 796 919 1,016 1,145 1,280 1,462 1,702 Change (%) N.A. N.A. 20.5 37.1 N.A. N.A. 67.5 EBITDA Margin (%) 23.7 23.8 24.3 24.1 25.0 25.5 26.5 Depreciation 147 149 165 220 260 300 375 Interest 210 225 230 270 300 300 300 Other Income 51 16 13 77 60 60 55 PBT 490 561 633 731 780 922 1,082 Tax 117 151 161 227 216 255 299 Tax/PBT (%) 23.9 26.9 25.4 31.1 27.7 27.7 27.7 PAT 373 410 472 504 564 667 783 Adj PAT after Min. Int. 373 410 472 504 564 667 783 Change (%) N.A. N.A. 13.3 100.7 51.3 62.6 65.7 PAT Margin (%) 11.1 10.6 11.3 10.6 11.0 11.6 12.2 E: MOSL Estimates; Note: The company has included Leela Lace numbers from 3QFY09, though the merger 1QFY09. So, 1Q and 2Q are not strictly comparable. Consolidated figures include operations of GURU.

4Q

FY10

FY11E

CONS.

CONS.

7,537 18,015 27,413 59.0 18.9 52.2 5,530 14,294 20,702 2,007 3,720 6,711 75.4 19.3 80.4 26.6 20.7 24.5 420 823 1,515 286 950 1,216 62 196 287 1,364 2,143 4,268 377 519 1,195 27.7 24.2 28.0 987 1,625 3,073 987 1,616 3,064 95.9 18.2 89.6 13.1 9.0 11.2 is with retrospective effect from

Shrinath Mithanthaya ([email protected])

July 2010

239

Results Preview SECTOR: TEXTILES

Raymond STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 RW IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs217

REUTERS CODE

S&P CNX: 5,269

RYMD.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

61.4 272/147 -2/ 13/18

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT*

(RS M)

(RS M)

END

13.3 0.3

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

25,980

-1,274

-20.7

1,135.3

-10.5

1.1

-8.6

-3.9

1.1

-34.2

3/10A

25,288

82

1.3

-106.4

163.2

1.1

-2.0

2.9

1.1

28.0

3/11E

29,795

343

5.6

320.4

38.8

1.1

1.3

5.6

0.9

9.2

3/12E

32,775

965

15.7

181.3

13.8

1.0

3.7

8.3

0.8

6.8

* Consolidated

„

We expect Raymond to post standalone 1QFY11 revenue of Rs3.3b against Rs2.4b a year earlier.

„

EBITDA for 1QFY11 is likely to be Rs441m against Rs66m a year earlier. EBITDA margins are expected to be 13.1% in 1QFY11. The management says Raymond is incurring excess operating costs of ~Rs400m due to nonclosure of its Thane plant.

„

Raymond plans to focus only on the cost competitive Romanian and Indian denim operations.

„

Raymond's decision to close down its loss-making denim operations in the US and Belgium will lower losses it was incurring in its denim operations. Besides, with the commissioning of Raymond's new 7m meter worsted fabric plant at Vapi, the chances of faster monetization of its real estate (120 acres in Thane) have increased significantly.

„

The stock trades at 1.1x FY11E book value. We value Raymond's Thane land at a minimum of Rs107/share. Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Net Sales Change (%) Total Expenditure EBITDA Change (%) As % of Sales Depreciation Interest Other Income Extra-ordinary Items PBT Tax Effective Tax Rate (%) Reported PAT Adj. PAT after MI Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

2,348 -0.4 2,413 -66 -83.2 -2.8 270 232 215 50 -401 -85 21.2 -316 -266 87.6

3,985 -8.1 3,411 575 14.4 14.4 281 228 155 152 69 -6 -8.5 74 181 6.0

3,723 3.7 3,184 539 101.5 14.0 281 211 164 -169 380 -45 -11.9 426 307 316.5

3,365 -7.3 2,917 447 174.7 13.3 282 174 104 -44 140 73 52.3 67 36 -97.3

3,366 -74.6 2,925 441 -77.8 13.1 285 195 120 45 36 10 29.3 25 70 -126.4

3,595 -72.0 3,124 471 -72.4 13.1 310 217 125 45 24 13 53.8 11 43 -76.4

3,901 66.2 3,390 511 -879.1 14.0 323 222 133 45 55 14 25.5 41 72 127.1

4,437 11.3 3,856 581 1.2 13.1 323 253 123 45 84 15 18.2 69 100 180.0

FY10

FY11E

13,421 -2.7 11,926 1,495 404.5 11.1 1,113 844 637 -12 187 -63 25.5 251 257 -178.6

15,300 14.0 13,295 2,004 34.0 13.1 1,241 886 501 180 198 52 26.5 146 326 26.5

Siddharth Bothra ([email protected])

July 2010

240

Results Preview SECTOR: TEXTILES

Vardhman Textiles STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 VTEX IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs271

REUTERS CODE

S&P CNX: 5,269

MHSP.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

56.6 300/100 0/ 25/101

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

15.3 0.3

EPS

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

29,654

919

16.2

-32.0

16.7

1.1

6.6

5.0

1.2

8.2

3/10A

33,777

2,407

42.5

52.7

6.4

0.9

14.8

10.6

1.1

5.1

3/11E

35,763

2,289

40.4

-4.9

6.7

0.8

12.5

10.8

0.9

4.6

3/12E

37,902

2,598

45.9

13.5

5.9

0.7

12.6

11.9

0.8

3.9

Consolidated

„

Vardhman's 1QFY11 revenue is likely to grow 30.5% YoY at Rs8.1b. We expect EBITDA margins to increase 397bp YoY to 21.6%. Adjusted PAT is likely increase 115% YoY to Rs619m, boosted by high cotton yarn margins.

„

Despite a higher domestic cotton crop, cotton yarn margins continue to remain strong due to strong demand for yarn particularly from China.

„

Vardhman's Rs26b capex plans were largely completed in FY09, while utilization improved only towards the FY10 end. We expect FY11 to the first year of full capacity utilization for VTL.

„

After capacity expansion, Vardhman's spinning capacity increased from 0.5m to 0.75m spindles and its processing fabric plant capacity increased from 40m to 80m meters.

„

VTL trades at 6.7x FY11E EPS of Rs40.4 and 5.9x FY12E EPS of Rs45.9. Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) Total Expenditure EBITDA Change (%) As % of Sales Depreciation Interest Other Income Extra-ordinary Items PBT Tax Effective Tax Rate (%) Reported PAT Adj. PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

6,201 -4.7 5,105 1,096 27.7 17.7 539 220 156 112 492 93 18.8 399 287 -8.5

6,752 3.8 5,401 1,351 21.6 20.0 538 182 3 0 634 130 20.5 504 504 290.9

6,992 8.4 5,612 1,380 48.0 19.7 554 223 62 0 665 188 28.2 478 478 187.5

7,565 27.8 5,875 1,690 102.2 22.3 577 242 0 208 871 323 37.0 549 403 161.7

8,091 30.5 6,340 1,751 59.8 21.6 622 290 35 0 874 255 29.2 619 619 115.6

8,361 34.8 6,647 1,714 56.4 20.5 627 268 42 0 861 252 29.3 608 608 111.9

8,765 29.8 7,053 1,712 26.7 19.5 679 274 45 0 803 243 30.2 561 561 11.2

8,496 21.5 6,881 1,615 17.0 19.0 685 285 46 0 691 213 30.8 479 479 0.1

FY10

FY11E

27,510 12.1 21,992 5,517 47.6 20.1 2,209 867 221 320 2,662 733 27.5 1,930 1,610 154.5

33,713 22.5 26,921 6,792 23.1 20.1 2,613 1,117 168 0 3,230 963 29.8 2,267 2,267 40.8

Siddharth Bothra ([email protected])

July 2010

241

Results Preview QUARTER ENDING JUNE 2010

Utilities BSE Sensex: 17,575

25 June 2010

S&P CNX: 5,269

COMPANY NAME

In 1QFY11, we expect companies in our utilities universe to post revenue growth of 12% YoY, EBITDA growth of 16% YoY and net profit growth of 4% YoY. Growth in net profit is lower due to muted capacity addition in FY10 and growth in revenue and EBIDTA is driven by higher tax rates and depreciation (due to higher rates).

CESC

NTPC

FY11 to be a key year in terms of capacity addition: As FY11 begins, the key thing to monitor is capacity addition achievement as targets are high. CEA estimates the total capacity addition in FY11 will be 27.6GW, including 2.7GW of projects on “best effort basis”. This compares with capacity addition of 19.3GW over FY08-10, leading to a capacity addition target of 50GW over FY11-12 to meet the Eleventh Plan capacity addition target of 75GW (including projects on “best effort” basis). The achievement of planned capacity addition in FY11 will therefore be crucial to determine: 1) the demandsupply scenario over the short term, 2) prices in the near term, and 3) likely capacity addition in FY12 and the Eleventh Plan.

Power Grid

PTC India

Reliance Infrastructure

Tata Power

CPSUs are expected to add maximum capacity of 11,398MW, followed by state and private sectors at 7,313MW and 6,171MW respectively. NTPC is expected to add maximum capacity of 4,150MW in FY11 against addition of 1,560MW in FY10. April-May 2010 thermal generation up 7% YoY: In April-May 2010, all India generation from thermal projects grew ~7% YoY to 94.6BUs, driven largely by gasbased projects (gas-based generation up ~31% YoY). Players like GVK, Torrent Power (Sugen) are key beneficiaries of higher gas-based generation. Coal based generation was up by ~1%. Hydro power project generation was up by ~15% YoY at 18BUs. Due to improved gas availability, gas based projects recorded PLF of 77%, up by 16pp YoY in May 2010. However PLF of coal-based projects de-grew 2.6pp YoY in May 2010. Short term prices down YoY: Average ST prices in 1QFY11 are expected to be Rs5.1/ unit (down 33% YoY) against Rs3.5/unit in 4QFY10 and Rs7.7/unit in 1QFY10. Weaker than expected monsoons and higher prices in 1QFY10, boosted FY10 average ST prices, and 2HFY10 prices were Rs3.5/unit. Valuation and view: We are Neutral on the sector, given its rich valuations, which largely factor in the growth factor. EXPECTED QUARTERLY PERFORMANCE SUMMARY CMP (RS) 25.06.10

Utilities CESC NTPC PTC India Power Grid Corp. Reliance Infrastructure Tata Power Sector Aggregate

374 196 101 101 1,168 1,303

(RS MILLION)

RECO

SALES JUN.10

Neutral Neutral Neutral Buy Buy Neutral

8,939 134,430 24,215 20,694 30,824 18,745 237,847

EBITDA

VAR.

VAR.

% YOY

% QOQ

10.5 12.0 2.1 27.5 26.0 -7.0 11.8

18.6 8.8 94.8 -7.2 16.6 4.4 13.2

JUN.10

2,101 37,640 157 17,279 3,314 5,061 65,553

NET PROFIT

VAR.

VAR.

% YOY

% QOQ

10.6 18.5 6.9 29.9 10.6 -20.0 16.2

14.2 41.2 74.5 -5.1 26.8 12.7 21.6

JUN.10

1,092 23,349 274 5,823 3,466 2,173 36,177

VAR.

VAR.

% YOY

% QOQ

4.0 2.5 -24.8 15.8 9.5 7.6 5.1

9.2 -6.5 76.3 -23.1 38.0 -0.4 -5.8

Satyam Agarwal ([email protected])/Nalin Bhatt ([email protected])/Vishal Periwal ([email protected])

July 2010

242

Utilities

FY11 to be a key year in terms of capacity addition As FY11 begins, the key thing to monitor is capacity addition achievement as targets are high. The CEA estimates total FY11 capacity addition of 27.6GW, including 2.7GW of projects on “best effort basis”. This compares with capacity addition of 19.3GW over FY08-10, leading to a capacity addition target of 50GW over FY11-12 to meet the Eleventh Plan capacity addition target of 75GW (including projects on “best effort” basis). Achievement of planned capacity addition in FY11 will therefore be crucial to determine: 1) the demand-supply scenario over the short term, 2) prices in near term, and 3) likely capacity addition in FY12 and the Eleventh Plan. In FY10 the set target was 10,667MW and 9460MW was achieved, implying achievement of ~90% of the target. ALL INDIA CAPACITY ADDITION TARGET (FEBRUARY 2010 REVIEW)

21,411 18,661

9,585

9,263 3,454

FY08

FY09

FY10

FY11

FY12 Source: CEA

In FY11 CPSUs are expected to add maximum capacity of 11,398MW; followed by state and private companies, with 7,313MW and 6,171MW respectively. This tally is bifurcated into 23,798MW of thermal units, 1,565MW of hydro based units and 2,220MW of nuclear fuel based units. FY11 capacity addition According to CEA, NTPC is expected to add the highest capacity in FY11: 4,150MW in FY11 v/s addition of 1,560MW in FY10. If it meets the target, it will be the highest capacity addition NTPC has added to its portfolio so far. Adani and JSW are expected to add 1,320MW and 1,200MW to their existing portfolios of 660MW and 995MW respectively. PLAYER-WISE CAPACITY ADDITION TARGETS IN FY11 (MW)

4,150

2,400 1,818 1,320

NTPC

Sterlite Energy

Lanco Infratech

Adani Pow er

1,200

JSW Energy

603

540

525

NHPC

KSK

Tata Pow er

300

RPow er

Source: CEA

July 2010

243

Utilities

April-May 2010 all-India generation up ~7% YoY In April-May 2010, all India generation from thermal projects grew ~7% YoY to 94.6BUs, driven largely by gas-based projects (gas-based generation up ~31% YoY). Players like GVK, Torrent Power (Sugen) are key beneficiaries of higher gas-based generation. Coalbased generation was up by ~1%. Hydro power project generation was up by ~15% YoY at 18BUs. In May 2010 gas-based projects recorded PLF of 77%, up by 16pp YoY, due to improved gas availability. However PLF of coal-based projects de-grew ~2.6pp YoY in May 2010. GENERATION (BU) UP ~7% YOY IN APRIL-MAY 2010 MAY-10 ALL INDIA PLF

APRIL-MAY 2010

GENE-

PLF

GENE-

PLF

GENE-

PLF

RATION

(%)

RATION

(%)

RATION

(%)

RATION

(%)

Thermal Coal & Lignite Gas Nuclear Hydro Bhutan IMP

47.3 9.1 1.7 9.7 0.3

76.5 77.01 53.31 34.73 NA

46.1 7.1 1.4 8.5 0.3

79.19 60.79 50.11 31.56 NA

94.6 18.5 3.5 18.1 0.4

77.71 74.37 51.90 32.61 NA

93 14 3 16 1

80.82 63.13 48.55 29.33 NA

Total*

67.7

64.76

63.1

63.32

135

64.5

126

ALL INDIA MAY BASE DEFICIT UP 474BP (%)

16.0%

FY09

FY10

YOY (%)

1.37 30.8 18.3 14.7 (18.0)

63.8 6.7 Source: CEA

ALL INDIA MAY PEAK DEFICIT UP 106BP (%)

FY11

20%

12.0%

16%

8.0%

12%

FY09

FY10

FY11

Feb

Dec

Aug

Feb

Dec

Oct

Aug

Jun

Apr

Oct

8%

4.0%

Jun

The base deficit in India rose in April-May 2010 and peaking power deficit increased moderately due to higher gas based generation

APRIL-MAY 2009

PLF

Apr

In May 2010 gas-based projects recorded PLF of 77%, up by 16pp YoY, due to improved gas availability

MAY-09

GENE-

WESTERN REGION DEFICIT HIGHEST AT 18% IN MAY 2010

25%

Deficit for the western and southern regions went up from 14% and 5% in FY10 to 18% and 7% in May 2010, respectively

Northern Region

16%

16%

FY07

5% 3%

FY08

Southern Region

14% 12% 8% 5%

FY09

Eastern Region

17%

16% 11%

10% 7% 4%

Western Region

6% 5%

FY10

18% 14%

11% 7% 5%

Apr-10

9% 7%

May-10 Source: CEA

Short term prices down: Average short term prices in 1QFY11 were at Rs5.1/unit (down 33% YoY) against Rs3.5/unit in 4QFY10 and Rs7.7/unit in 1QFY10. Weaker than expected monsoons and higher prices in 1QFY10, boosted FY10 average short-term prices and 2HFY10 prices were ~Rs3.5/unit. July 2010

244

Utilities

2QFY10

5.1 3.5

1QFY10

3.6 4QFY09

5.4

6.2

7.7

ST PRICES: DOWN TO RS5.1/UNIT

3QFY10

4QFY10

1QFY11*

20.7

4QFY10

1QFY11*

14.5

9.8

12.9

18.6

21.2

ST VOLUME: UP TO 20.7M UNITS PER DAY

4QFY09

1QFY10

2QFY10

3QFY10

Source: IEX; * Till June29 GENERATION FOR KEY PLAYERS: GAS BASED PROJECTS RECORD HIGHER PLF CAPACITY

Adani Power - Mundra Phase 1 GVK - JP 1 & 2 - Gautami GMR - Barge Mounted - Chennai - Vemagiri JPL - Chattisgarh Rel Infra - Dahanu - Samalkot (AP) - Goa - Kochi Tata Power - Trombay - Karnataka IPP - TISCO (Jamshedpur) Torrent Power - Existing - Sugen JSW Energy - Rajwest Unit-I (RWPL JSW) - Karnataka

July 2010

GENERATION

CHG

(MW)*

APRIL-MAY-09

APRIL-MAY-10

(%)

660.0

0.0

608.2

NA

455.4

442.8

545.5

23.2

464.0

158.8

600.1

277.9

220.0 200.0 370.0

90.0 236.0 439.1

0.0 207.1 502.1

-12.2 14.4

1,000.0

1,410.0

1,503.5

6.6

500.0 220.0 48.0 174.0

769.3 234.5 32.8 196.3

762.2 287.8 26.3 130.3

-0.9 22.7 -19.9 -33.6

1,580.0 0.0 441.3

1,945.9 45.3 455.1

1,939.6 39.2 500.7

-0.3 -13.5 10.0

500.0 1,147.5

726.0 287.5

714.2 1,589.0

-1.6 452.6

135 860

0.0 292.2

90.4 1,150.2

NA NA Source: CEA

245

Adani posted PLF of 92% and 72% in April and May respectively In May 2010, Adani Power (APL) posted generation of 389MUs and PLF of 72% for Mundra Phase-I of 660MW. The second unit of 330MW was commissioned in March 2010 and thus, generation could have been lower due to the stabilization period. For YTD Adani power generated 746.9MUs. Unit-2 of Phase-I of its 330MW plant was commissioned in March 2010. ADANI POWER: PLANT IN STABILIZING, PLF DOWN MOM

Generation (MUs)

96

92 72

241 199

220

May-10

225

Apr-10

210

Mar-10

209

389 41

Feb-10

47

Jan-10

Oct-09

144

178

44

Dec-09

37

43

Nov-09

60

Sep-09

*PLF for March, April is as reported by CEA and for the remaining months PLF is calculated based on reported generation

PLF (%)

Source: CEA

JSW Energy: May PLF of 102% for Karnataka, 51% for Rajwest The 860MW Karnataka power project generated 652MUs at a PLF of 102%. Its Raj West Power 135MW (unit 1) reported PLF of 51% due to non-availability of water. The management indicated that water supply would be normalized from 1QFY11. JSW ENERGY: 860MW PLANT REPORTED PLF 100%+

Generation Rajw est135MW PLF Karnataka860MW

94.5 68.0

60.3

62.2

70.2

72.6

80.4

51.0

498

40.3 39

Apr-10

465

Mar-10

405 Feb-10

398 Jan-10

386 Dec-09

421 Nov-09

404 Oct-09

Sep-09

385

54.3

54

102.0

653

81.7

51

May-10

Generation Karnataka860MW PLF Rajw est 135MW

Source: CEA

NTPC: April-May 2010 generation up just 1% YoY The NTPC thermal plant operated at lower PLF in April-May 2010 compared with that a year earlier, with generation up just 1% YoY. Generation was up due to a higher gas base generation and capacity addition.

July 2010

246

95

97

97 96

99

FY 11

Mar

Dec

Jan

Feb

87 Nov

83 82 Sep

Oct

81 82 Aug

84 84 Jul

Jun

May

86 86

89

89

92

93 91

90

93 88

88 Apr

FY 10

96 96

FY 09

100

NTPC MAY 2010 PLF (%) DOWN 226BP YOY

Source: CEA RELATIVE PERFORMANCE - 3M (%)

Sensex M OSt Utilities Index

Jindal Power: April-May 2010 power generation up 4.4% YoY Jindal Power (JPL) generation grew by 4.4% YoY to 1,504MUs in April-May 2010 (v/s 1,440MUs in April-May 2009). This implies PLF of 103% in April-May 2010 v/s 99% for same period last year.

102 100 98 96 Jun-10

May-10

Apr-10

Mar-10

94 JINDAL POWER: MAY 2010 GENERATION UP 2.9%, PLF 103%

Generation (MUs) LHS

800

RELATIVE PERFORMANCE - 1YR (%)

PLF (%) RHS 103

97 99 95

600

M OSt Utilities Index Sensex

98 91 77

400

126

95

101 96 92

93

103

120 90 60

71

118

30

200

110 102

0 May-10

Apr-10

Mar-10

Feb-10

Jan-10

Dec-09

Nov-09

Oct-09

Sep-09

Aug-09

Jul-09

Jun-09

May-09

Apr-09

Mar-09

Feb-09

Jan-09

Dec-08

Oct-08

Sep-08

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Nov-08

0

94

Source: CEA

COMPARATIVE VALUATION CMP (RS)

RECO

25.06.10

EPS (RS) FY10

FY11E

P/E (X) FY12E

FY10

EV/EBITDA

ROE (%)

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

Utilities Adani Power

120

Not Rated

CESC

374

Neutral

JSW Energy

127

Not Rated

NTPC

196

Neutral

Power Grid Corp.

101

PTC India

101

Reliance Infra. Reliance Power Tata Power Sector Aggregate

July 2010

1,168 168 1,303

0.8

2.8

10.5

153.2

42.4

11.4

143.4

40.9

12.2

3.1

10.8

33.1

34.5

36.5

40.2

10.8

10.2

9.3

9.3

9.2

9.5

13.4

12.6

12.4

4.1

4.1

8.7

31.3

31.0

14.6

22.6

15.4

8.3

13.7

13.0

22.8

10.9

11.3

13.4

18.0

17.3

14.6

12.7

10.0

10.2

14.0

14.3

15.4

Buy

5.4

6.0

7.7

18.8

17.0

13.1

12.6

10.9

9.3

14.9

15.0

17.3

Neutral

3.2

4.2

4.3

31.5

23.7

23.2

37.2

37.7

34.9

5.2

5.9

5.9

43.1

56.7

67.3

27.1

20.6

17.4

23.7

17.1

14.4

9.1

9.7

10.1

Buy Not Rated Neutral

-

4.4

5.7

-

38.4

29.3

-

100.8

66.3

-

7.1

8.6

59.8

85.9

115.9

21.8

15.2

11.2

19.0

17.1

15.8

7.2

8.8

9.2

23.2

19.7

14.7

17.5

14.3

12.6

11.2

11.9

14.5

247

Results Preview SECTOR: UTILITIES

CESC STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 CESC IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs)

YEAR

125.6

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

452/261

1,6,12 Rel Perf (%)

Rs374

Previous Recommendation: Neutral

CESC.BO

-7/ -6/7 46.9

EPS*

(RS) GROWTH (%)

P/E*

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 30,313

3,682

29.3

23.9

12.8

1.7

13.0

11.0

1.9

9.5

03/10A 32,910

4,330

34.5

17.6

10.8

1.5

13.4

10.9

2.1

9.3

03/11E

1.0

EPS*

36,154

4,584

36.5

5.9

10.2

1.3

12.6

10.3

2.3

9.2

03/12E 40,813

5,052

40.2

10.2

9.3

1.2

12.4

9.4

2.4

9.5

* Excl Spencers; fully diluted

„

In 1QFY11, we expect CESC to post revenue of Rs8.9b (up 11% YoY) and net profit of Rs1.1b, up 4% YoY.

„

CESC completed 100% acquisition of Dhariwal Infrastructure in 1QFY11 (Rs3b for 100% stake). Chandrapur Project (600MW) has achieved financial closure and environment clearance. CoD for the project is expected by FY13.

„

CESC has invited bids for the construction of a 600MW Haldia unit, and in its project application submitted to the state regulatory body, CESC has proposed a revision of the capacity to 540MW.

„

In FY10 Spencer Retail posted revenue of Rs9.6b, translating into revenue of Rs795/sq foot/month (v/s Rs695/sq foot/month in FY09) and EBITDA loss of Rs2.4b. CESC invested Rs1.5b in Spencer in FY10.

„

We expect CESC to post standalone net profit of Rs4.6b in FY11 (up 6% YoY) and Rs5b in FY12 (up 10% YoY), excluding Spencer. The stock trades at reported PER of 10.2x FY11E and 9.3x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

FY11E 3Q

Sales 8,090 9,490 7,970 Change (%) 3.3 25.7 6.0 EBITDA 1,900 2,100 1,880 Change (%) 55.7 12.3 24.5 As of % Sales 23.5 22.1 23.6 Depreciation 480 490 490 Interest 430 460 420 Other Income 280 360 260 PBT 1,270 1,510 1,230 Tax 220 250 210 Effective Tax Rate (%) 17.3 16.6 17.1 Reported PAT 1,050 1,260 1,020 Adjusted PAT 1,050 1,260 1,020 Change (%) 27.3 34.0 4.1 E: MOSL Estimates, Standalone Numbers (excl Spencers Retail)

4Q

1Q

2Q

3Q

4Q

7,540 1.8 1,840 21.1 24.4 520 470 360 1,210 210 17.4 1,000 1,000 6.4

8,939 10.5 2,101 10.6 23.5 530 475 220 1,315 224 17.0 1,092 1,092 4.0

8,968 -5.5 2,152 2.5 24.0 600 525 300 1,327 212 16.0 1,115 1,115 -11.5

9,086 14.0 2,317 23.2 25.5 630 630 330 1,387 243 17.5 1,144 1,144 12.2

9,161 21.5 2,497 35.7 27.3 635 693 325 1,494 260 17.4 1,234 1,234 23.4

FY10

FY11E

32,910 8.6 7,540 23.2 22.9 1,980 1,780 1,440 5,220 890 17.0 4,330 4,330 17.5

36,154 9.9 9,067 20.2 25.1 2,395 2,323 1,175 5,523 939 17.0 4,584 4,584 5.9

Satyam Agarwal ([email protected])/Nalin Bhatt ([email protected])/Vishal Periwal ([email protected])

July 2010

248

Results Preview SECTOR: UTILITIES

National Thermal Power Corporation STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 NTPC IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

8,245.5 242/188 -8/ -16/-22

Mcap (Rs b)

1,617.3

Mcap (USD b)

Rs196

Previous Recommendation: Neutral

NTPC.BO

34.9

YEAR

NET SALES

PAT*

END*

(RS M)

(RS M)

EPS*

EPS

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A 419,238

80,720

9.8

8.9

20.0

2.8

14.7

12.9

4.0

15.8

03/10A 464,353

89,698

10.9

11.1

18.0

2.6

14.0

13.6

3.7

12.7

03/11E

583,293

93,512

11.3

4.3

17.3

2.4

14.3

16.1

2.9

10.0

03/12E

663,090 110,664

13.4

18.3

14.6

2.2

15.4

14.3

2.6

10.2

* Pre Exceptional Earnings

„

In 1QFY11 we expect NTPC to post revenue of Rs134.4b (up 12% YoY) and net profit of Rs23.3b, up 2%YoY.

„

NTPC is expected to add 4,150MW of capacity in FY11 and has budgeted for capex of Rs224b (up by 120% on FY10 revised estimates).

„

NTPC has 17,830MW of capacity under construction and as on FY10 it spent 33% of capex on the projects.

„

NTPC has invited re-tender for 11 sets of supercritical boilers after the disqualification of L&T.

„

NTPC was conferred Maharatna status by the government of India, enabling it to execute investments of lower than Rs50b or 15% net worth of NTPC.

„

We expect NTPC to post net profit of Rs93.5b in FY11 (up 4% YoY) and Rs110.6b in FY12 (up 18% YoY). The stock trades at reported PER of 17.3x FY11E and 14.6x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Adj. PAT (Pre Exceptional) Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

120,027 25.8 31,757 31.1 26.5 6,128 4,447 7,763 28,945 7,009 24.2 21,936 22,790 20.1

107,828 11.6 32,137 26.1 29.8 6,438 5,407 7,410 27,703 6,183 22.3 21,520 19,845 8.6

111,837 -0.8 33,653 4.9 30.1 6,614 3,418 7,791 31,412 8,862 28.2 22,550 22,104 8.5

123,534 7.9 26,657 20.1 21.6 7,322 4,818 6,277 20,794 618 3.0 20,177 24,960 4.5

134,430 12.0 37,640 18.5 28.0 7,300 5,500 6,500 31,340 7,992 25.5 23,349 23,349 2.5

121,306 12.5 35,785 11.4 29.5 7,300 6,000 6,750 29,235 7,455 25.5 21,780 21,780 9.8

128,613 15.0 38,584 14.7 30.0 7,450 6,300 6,800 31,634 8,304 26.3 23,330 23,330 5.5

198,943 61.0 67,786 154.3 34.1 7,598 6,713 7,301 60,775 15,721 25.9 45,054 25,053 0.4

FY10

FY11E

463,226 10.5 124,204 19.5 26.8 26,501 18,089 29,241 108,855 21,573 19.8 87,282 89,698 11.1

583,293 25.9 179,795 44.8 30.8 29,648 24,513 27,351 152,985 39,472 25.8 113,513 93,512 4.3

Satyam Agarwal ([email protected])/Nalin Bhatt ([email protected])/Vishal Periwal ([email protected])

July 2010

249

Results Preview SECTOR: UTILITIES

Power Grid Corporation of India STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 PWGR IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs101

REUTERS CODE

S&P CNX: 5,269

PGRD.BO

Equity Shares (m) 52 Week Range (Rs) 1,6,12 Rel Perf (%)

YEAR

4,208.8 121/95 -9/ -8/-28

Mcap (Rs b) Mcap (USD b)

426.6 9.2

NET SALES

PAT*

END

(RS M)

(RS M)

EPS*

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

3/09A

65,798

19,418

4.6

3/10A

71,275

22,746

5.4

3/11E

91,162

25,163

3/12E

114,960

32,481

EV/

EV/

23.3

22.0

2.9

13.8

11.6

10.4

12.4

17.1

18.8

2.7

14.9

8.6

10.4

12.6

6.0

10.6

17.0

2.4

15.0

9.6

9.2

10.9

7.7

29.1

13.1

2.1

17.3

10.3

8.0

9.3

SALES EBITDA

* Pre-exceptional

„

In 1QFY11, we expect PGCIL to post revenue of Rs20.7b (up 28% YoY) and net profit of Rs5.8b, up 7%YoY.

„

In FY10 the PGCIL board accorded investment approval of Rs133b of projects. For FY11 it plans capex of Rs129b (up 29% over FY10 revised estimates).

„

The PGCIL board has granted investment approval for projects with a total cost of Rs46.5b during 1QFY11, which includes a transmission system for development of Pooling Station in the northern part of West Bengal and transfer of power from Bhutan to NR/WR.

„

CERC accorded approval to PGCIL to proceed with execution of nine high capacity transmission corridors at an estimated expense of Rs580b for evacuation of power from various generation projects being developed by independent power producers (IPP).

„

PGCIL plans to offload 20% equity (including 10% of fresh equity) to raise Rs80b. The Cabinet note on a proposed FPO is to be initiated shortly.

„

We expect PGCIL to post net profit of Rs25.1b in FY11 (up 11% YoY) and Rs32.5b in FY12 (up 29% YoY). The stock trades at reported PER of 17x FY11E and 13x FY12E. Maintain Buy.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Sales Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income Extraordinary Income/(Expense) PBT Tax Effective Tax Rate (%) Reported PAT Adj. PAT (Pre Exceptional) Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

16,230 19.3 13,299 17.2 81.9 4,670 3,834 1,993 -14 6,802 1,336 19.6 5,466 5,027 31.1

17,486 10.1 14,723 8.5 84.2 5,819 4,162 751 8 5,485 885 16.1 4,600 4,881 11.1

15,254 3.2 12,467 2.0 81.7 5,360 4,119 2,246 -4 5,239 361 6.9 4,877 4,919 17.0

22,305 -0.9 18,205 -2.1 81.6 3,949 3,318 -1,229 973 8,737 3,271 37.4 5,466 7,577 8.1

20,694 27.5 17,279 29.9 83.5 5,500 5,250 750 7,279 1,456 20.0 5,823 5,823 15.8

21,857 25.0 18,524 25.8 84.8 6,250 6,000 900 7,174 1,363 19.0 5,811 5,811 19.0

22,118 45.0 18,856 51.2 85.3 6,500 6,250 1,250 7,356 1,423 19.4 5,933 5,933 20.6

26,493 18.8 22,665 24.5 85.5 7,203 7,502 1,434 9,393 1,797 19.1 7,596 7,596 0.3

FY10

FY11E

71,275 6.8 58,694 5.3 82.3 19,797 15,432 3,761 963 26,263 5,854 22.3 20,409 22,746 17.1

91,162 27.9 77,324 31.7 84.8 25,453 25,002 4,334 -11 31,202 6,039 19.4 25,163 25,163 10.6

Satyam Agarwal ([email protected])/Nalin Bhatt ([email protected])/Vishal Periwal ([email protected])

July 2010

250

Results Preview SECTOR: UTILITIES

PTC India STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 PWTC IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

1,6,12 Rel Perf (%)

YEAR

294.1

52 Week Range (Rs)

126/81 -7/ -15/-16

Mcap (Rs b) Mcap (USD b)

Rs101

Previous Recommendation: Neutral

PTCI.BO

29.6 0.6

NET SALES

PAT*

END

(RS M)

(RS M)

EPS*

EPS

03/09A

64,396

910

4.0

73.2

25.2

1.5

6.0

7.4

0.3

85.1

03/10A

77,703

939

3.2

-20.3

31.5

1.4

5.2

7.2

0.3

36.6

03/11E

97,179

1,247

4.2

32.8

23.7

1.4

5.9

7.3

0.3

35.9

03/12E

102,170

1,277

4.3

2.4

23.2

1.3

5.9

7.3

0.2

35.4

(RS) GROWTH (%)

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

* Pre-exceptional

„

In 1QFY11 we expect PTC to post revenue of Rs24.2b (up 2% YoY) and net profit of Rs274m, down by 25% YoY. For FY11 we expect PTC to sell 62% of volume on a long term PPA, leading to lower volatility in earnings.

„

PTC is expected to add 800MW and 4,000MW to its LT portfolio in FY11 and FY12 respectively.

„

PTC, in a JV with Ashmore, launched the US$750m Energy Infra Fund, to provide equity funding generation, transmission, distribution, fuel extraction and fuel transport infrastructure assets in India.

„

The PTC board approved in-principle PFS (77% PTC stake) IPO during the current financial year.

„

We expect PTC to post net profit of Rs1.24b in FY11 (up 33% YoY) and Rs1.27b in FY12 (up 2% YoY). The stock trades at reported PER of 23.7x FY11E and 23.2x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

Power Traded (MUs) Sales Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income Extraordinary Income/(Expense) PBT Tax Effective Tax Rate (%) Reported PAT Adjusted PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

4,204 23,717 97.1 147 151.0 0.6 14 1 280 0 413 79 19.1 334 364 92.7

6,388 24,582 21.0 297 111.0 1.2 14 0 175 1 459 149 32.5 310 309 -7.4

4,444 16,975 -19.8 103 280.0 0.6 16 2 142 0 229 72 31.3 158 158 -42.7

3,202 12,430 5.5 90 285.2 0.7 14 1 136 -3 216 77 35.7 139 155 -10.6

5,045 24,215 2.1 157 6.9 0.7 13 2 200

7,985 31,940 29.9 240 -19.3 0.8 13 5 225

4,888 20,776 22.4 145 40.6 0.7 13 6 250

4,480 20,248 62.9 140 55.2 0.7 13 7 274

342 68 20.0 274 274 -24.8

447 89 20.0 357 357 15.6

376 75 20.0 301 301 91.2

394 79 20.0 315 315 102.7

FY10

FY11E

18,236 77,703 19.0 627 150.8 0.8 55 4 735 0 1,302 377 28.9 926 939 3.1

22,399 97,179 25.1 682 8.9 0.7 52 20 949 1,559 312 20.0 1,247 1,247 32.8

Satyam Agarwal ([email protected])/Nalin Bhatt ([email protected])/Vishal Periwal ([email protected])

July 2010

251

Results Preview SECTOR: UTILITIES

Reliance Infrastructure STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 RELE IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m) 52 Week Range (Rs)

YEAR

267.2

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

1,404/951

1,6,12 Rel Perf (%)

Rs1,168

Previous Recommendation: Neutral

RLEN.BO

4/ 5/-28 312.1 6.7

EPS*

EPS

(RS) GROWTH (%)

P/E*

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

3/09A

96,965

9,081

34.0

22.0

34.4

2.5

10.2

9.0

2.6

29.0

3/10A

100,273

11,517

43.1

26.8

27.1

2.0

9.1

8.6

2.5

22.2

3/11E

129,211

15,147

56.7

31.5

20.6

1.6

9.7

10.7

1.7

16.2

3/12E

146,016

17,991

67.3

18.8

17.3

1.5

10.1

11.1

1.4

12.9

* Fully Diluted

„

In 1QFY11, we expect RELI to post revenue of Rs30.8b (up 26% YoY) and net profit of Rs3.5m, up 9%YoY.

„

RELI sold 433MW of power generation assets to Rpower for Rs10.9b. Power projects sold comprises of 220MW Samalkot in Andhra Pradesh, 165MW in Kerala and 48MW in Goa. Now after the de-merger, RELI will own the 500MW Dhanau project and distribution business in Mumbai and Delhi.

„

Reliance Infra has signed a concession agreement with MSRDC (Maharashtra State Road Development Corporation) to develop 3.4km Phase-II of the Mumbai Sea Link (Worli to Haji Ali) and this is expected to be commissioned by June 2014. Besides, RELI will get rights over the 5.6km Bandra Worli Sea link at an extra cost of Rs16.4b from MSRDC.

„

R-Infra also won Rs9.2b worth of road projects (Hosur-Krishnagiri in Tamil Nadu) from NHAI with a concession period of 24 years to be developed on DBFOT basis.

„

RELI has infrastructure assets (Rs400b under development) in roads, metro, transmission lines, sea links and airports) and its EPC order book was Rs193b as on FY10.

„

We expect RELI to post net profit of Rs1.24b in FY11 (up 33% YoY) and Rs1.27b in FY12 (up 2% YoY). The stock trades at reported PER of 20.6x FY11E and 17.3x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE

(RS MILLION)

Y/E MARCH

FY10 1Q

2Q

FY11E 3Q

4Q

1Q

2Q

3Q

4Q

Sales 24,463 26,496 22,875 Change (%) 6.8 7.1 -15.8 EBITDA 2,995 3,129 2,354 Change (%) 4.8 12.9 -24.6 As of % Sales 12.2 11.8 10.3 Depreciation 722 740 830 Interest 1,037 740 565 Other Income 2,442 1,633 2,156 PBT 3,678 3,283 3,114 Tax (incl contingencies) 513 214 333 Effective Tax Rate (%) 13.9 6.5 10.7 Reported PAT 3,166 3,069 2,781 PAT (Pre Exceptionals) 3,166 3,069 2,781 Change (%) 26.5 44.6 -1.5 E: MOSL Estimates; Quarterly nos. are on standalone basis

26,439 10.7 2,614 67.6 9.9 807 581 1,668 2,895 384 13.3 2,511 2,511 -33.0

30,824 26.0 3,314 10.6 10.8 775 726 2,350 4,163 697 16.8 3,466 3,466 9.5

32,855 24.0 3,368 7.6 10.3 790 850 2,700 4,428 753 17.0 3,675 3,675 19.7

32,025 40.0 3,459 46.9 10.8 800 950 3,000 4,709 812 17.3 3,896 3,896 40.1

33,508 26.7 3,611 38.2 10.8 805 1,039 3,183 4,950 840 17.0 4,110 4,110 63.7

FY10

FY11E

100,273 1.6 11,182 8.5 11.2 3,188 2,922 7,898 12,969 1,453 11.2 11,517 11,517 10.7

129,211 28.9 13,751 23.0 10.6 3,170 3,565 11,233 18,249 3,102 17.0 15,147 15,147 31.5

Satyam Agarwal ([email protected])/Nalin Bhatt ([email protected])/Vishal Periwal ([email protected])

July 2010

252

Results Preview SECTOR: UTILITIES

Tata Power STOCK INFO.

BLOOMBERG

25 June 2010

BSE Sensex: 17,575 TPWR IN

Neutral

REUTERS CODE

S&P CNX: 5,269

Equity Shares (m)

YEAR

247.3

52 Week Range (Rs)

1,519/995

1,6,12 Rel Perf (%)

-1/ -5/-10

Mcap (Rs b) Mcap (USD b)

Rs1,303

Previous Recommendation: Neutral

TTPW.BO

NET SALES

PAT*

(RS M)

(RS M)

END

322.3 7.0

EPS*

EPS

(RS) GROWTH (%)

P/E*

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

SALES EBITDA

03/09A

72,362

11,667

52.4

52.4

24.9

3.6

6.6

6.5

4.6

28.9

03/10A

70,983

14,799

59.8

14.1

21.8

2.7

7.2

8.9

5.1

19.5

03/11E

71,585

21,239

85.9

43.5

15.2

2.6

8.8

8.8

5.1

16.6

03/12E

72,790

28,653

115.9

34.9

11.2

2.4

9.2

8.9

5.3

15.4

* Consolidated including share of profit from Bumi Resources, Pre Exceptionals, Fully Diluted

„

In 1QFY11, we expect Tata Power to post revenue of Rs18.7b (down 7% YoY) and net profit of Rs2.1b, up 8% YoY.

„

Tata Power has challenged an order from MERC (Maharashtra Electricity Regulatory Commission) to sell power from July. Earlier, MERC had directed TPWR to sell 360MW until June 2010 and 200MW until the end of FY11 on regulated terms to Reliance Infrastructure. The matter is sub-judice and we have assumed merchant capacity for only six months in our FY11 estimates.

„

Under its Mumbai distribution circle Tata Power increased its customer base from 56k in March 2010 to 75k in June 2010.

„

Tata Power got state approval for land acquisition for 1,600MW Raigad project after five years of opposition and negotiation with local people.

„

We expect Tata Power to post net profit of Rs21.2b in FY11 (up 43.5% YoY) and Rs28.7b in FY12 (up 35% YoY). The stock trades at reported PER of 15.2x FY11E and 11.2x FY12E. Maintain Neutral.

QUARTERLY PERFORMANCE (STANDALONE)

(RS MILLION)

Y/E MARCH

Total Operating Income Change (%) EBITDA Change (%) As of % Sales Depreciation Interest Other Income PBT Tax Effective Tax Rate (%) Reported PAT Adjusted PAT Change (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

20,156 -0.5 6,323 107.4 31.4 1,118 1,177 1,076 5,104 1,333 26.1 3,771 2,020 27.5

17,211 -12.1 4,168 57.5 24.2 1,184 1,018 755 2,721 889 32.7 1,832 1,589 -19.3

15,665 -11.8 3,641 42.2 23.2 1,208 922 452 1,963 484 24.6 1,479 1,357 38.7

17,951 21.8 4,491 53.1 25.0 1,270 950 533 2,805 499 17.8 2,306 2,183 131.8

18,745 -7.0 5,061 -20.0 27.0 1,300 1,200 500 3,061 888 29.0 2,173 2,173 7.6

17,555 2.0 5,091 22.1 29.0 1,325 1,225 850 3,391 949 28.0 2,442 2,442 53.7

16,448 5.0 5,346 46.8 32.5 1,350 1,250 950 3,696 1,072 29.0 2,624 2,624 93.4

18,837 4.9 6,342 41.2 33.7 1,402 1,268 1,282 4,955 1,472 29.7 3,483 3,483 59.6

FY10

FY11E

70,983 -1.9 18,623 66.4 26.2 4,779 4,066 2,816 12,593 3,205 25.5 9,388 7,148 30.6

71,585 0.8 21,840 17.3 30.5 5,377 4,943 3,582 15,103 4,381 29.0 10,722 10,722 50.0

Satyam Agarwal ([email protected])/Nalin Bhatt ([email protected])/Vishal Periwal ([email protected])

July 2010

253

Results Preview SECTOR: DIVERSIFIED

Sintex Industries STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 BVML IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs313

REUTERS CODE

S&P CNX: 5,269

SNTX.BO

Equity Shares (m) 52 Week Range (Rs)

337/183

1,6,12 Rel Perf (%)

5/ 21/29

Mcap (Rs b) Mcap (USD b)

YEAR

135.5

PAT

(RS M)

(RS M)

EPS

(RS) GROWTH (%)

EPS

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

EV/

EV/

20.3

11.5

2.2

18.0

10.7

1.7

10.6

SALES EBITDA

03/09A

31,332

3,057

22.6

40.9

03/10A

33,192

3,045

22.5

-0.4

12.9

03/11E

40,672

4,041

29.8

32.7

10.1

1.8

18.9

13.4

1.2

7.1

03/12E 49,053 Consolidated

5,145

38.0

27.3

7.9

1.5

20.0

10.1

1.0

5.6

42.5 0.9

NET SALES

END

„

Expect robust growth on low base: FY10 was a muted year for Sintex that too with 33% of full year revenue and 40% of PAT coming in 4Q alone. Thus, on the low base of 1QFY10, we expect Sintex to record a strong1QFY11 with operating income up 23% YoY, EBITDA margin up 80bp YoY and PAT up 46% YoY. „ Robust growth in most standalone business segments …: We expect robust growth in almost all of Sintex's major business segments - monolithic is expected to do well on the back of order backlog of Rs22b, 3x FY10 revenue. Pre-fabricated structures business should revive with BTS (base telecom station) shelter segment having bottomed out in FY10. Custom molding segment should see healthy growth on the back of recovery in power and auto sectors. „ … subsidiaries also expected to perform better: Among subsidiaries, Bright Autoplast is expected to be a beneficiary of (1) revival in auto sector, and (2) its own expansion in FY10, both in auto and electric parts. Nief France and Wausaukee USA are expected to see improvement in margins due to procurement of semi-finished products from India and other integration benefits. „ Reasonable valuation, maintain Buy: On a muted base of FY10, our estimates indicate EPS CAGR of 30% through FY12. The stock currently trades at reasonable P/E of ~10x FY11E and less than 8x FY12E. During FY11, Sintex is likely to complete couple of acquisitions in monolithic and pre-fabricated businesses, which could provide upsides to our estimates. We value Sintex at 12x FY11E EPS of Rs29.8 to arrive at a target price of Rs358, ~14% upside from current levels. We maintain Buy. QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Operating Income YoY Growth (%) EBITDA EBITDA Margin (%) YoY Growth (%) Depreciation Interest Other Income Extraordinary Items Profit before Tax Tax Provisions Tax / PBT PAT before MI Minority Interest Consolidated PAT Adj. Consolidated PAT YoY Growth (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

6,624 -9.1 874 13.2 -5.3 366 142 159 200 725 114 15.7 611 5 606 406 -28.1

7,154 -2.5 1,305 18.2 -2.6 372 157 103 -123 757 174 23.0 583 10 572 695 -17.1

8,478 3.4 1,269 15.0 -0.3 355 175 249 0 988 260 26.3 728 3 724 724 2.3

10,936 28.6 1,932 17.7 16.6 351 257 122 168 1,613 224 13.9 1,390 2 1,387 1,220 28.9

8,134 22.8 1,139 14.0 30.3 360 170 150 0 759 159 21.0 599 7 592 592 46.0

10,168 42.1 1,881 18.5 44.1 400 200 150 0 1,431 301 21.0 1,131 8 1,123 1,123 61.5

10,575 24.7 1,851 17.5 45.8 430 240 150 0 1,331 279 21.0 1,051 10 1,041 1,041 43.7

11,795 7.9 2,221 18.8 14.9 458 270 140 0 1,633 343 21.0 1,290 5 1,285 1,285 5.3

FY10

FY11E

33,192 5.9 5,381 16.2 3.6 1,445 731 633 245 4,083 772 18.9 3,311 21 3,290 3,045 -0.4

40,672 22.5 7,092 17.4 31.8 1,648 880 590 0 5,153 1,082 21.0 4,071 30 4,041 4,041 32.7

Shrinath Mithanthaya ([email protected])

July 2010

254

Results Preview SECTOR: AGROCHEMICALS

United Phosphorus STOCK INFO.

BLOOMBERG

BSE Sensex: 17,575 UNTP IN

25 June 2010

Buy

Previous Recommendation: Buy

Rs192

REUTERS CODE

S&P CNX: 5,269

UNPO.BO

Equity Shares (m)

YEAR

439.6

52 Week Range (Rs)

198/133

1,6,12 Rel Perf (%)

11/ 14/6

Mcap (Rs b) Mcap (USD b)

NET SALES

PAT

(RS M)

(RS M)

END

03/09A 50,678

84.2 1.8

5,865

EPS

EPS

(RS) GROWTH (%)

12.7

48.3

P/E

P/BV

ROE

ROCE

(X)

(X)

(%)

(%)

15.1

3.2

23.9

20.6

EV/

EV/

SALES EBITDA

1.9

9.2

03/10A 54,945

5,527

12.0

-5.8

16.0

2.6

18.8

15.8

1.6

9.1

03/11E

62,775

7,317

15.8

32.4

12.1

2.2

21.0

18.7

1.5

7.3

03/12E 71,837

8,712

18.8

19.1

10.2

1.9

20.4

19.6

1.2

5.8

„

United Phosphorus (UPL) is expected to report 6% YoY de-growth in consolidated revenues to Rs15.4b, impacted by ~13% YoY INR appreciation against EUR and 6% appreciation against USD. Revenues benefited from acquisition of non-mixture Mancozeb business from DuPont (w.e.f June 3, 2010).

„

EBITDA margin is expected to improve by 100bp YoY 20.1%, benefiting from last leg of Cerexagri restructuring and Mancozeb acquisition. Higher tax provisioning would result in PAT de-growth to 10.7% YoY to Rs1.57b.

„

While operating environment in developed market is slowly improving, United Phoshporus’s financial performance would be impacted by Rupee appreciation against Euro (~28% of revenues from Europe).

„

We are upgrading our earnings estimates for FY11 by 1.8% to Rs15.8 and FY11 by 3% to Rs18.8, to factor in for acquisition of non-mixture Mancozeb business from DuPont. Valuations at 9.9x FY11E EPS (fully diluted) and 5.5x EV/EBITDA, do not reflect growth potential (both organic and inorganic) for the company. Maintain Buy.

QUARTERLY PERFORMANCE (CONSOLIDATED)

(RS MILLION)

Y/E MARCH

Gross Revenues YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest PBT before EO Expense Extra-Ord Expense PBT after EO Expense Tax Deferred Tax Rate (%) Reported PAT Income from Associate Co Adjusted PAT YoY Change (%) Margins (%) E: MOSL Estimates

FY10

FY11E

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

16,442 25.1 13,306 3,135 19.1 501 578 2,056 0 2,056 268 0 13.0 1,789 -26 1,763 19.4 10.7

11,610 -0.3 9,606 2,005 17.3 547 405 1,053 0 1,053 165 0 15.7 888 135 1,023 -16.2 8.8

11,580 5.8 9,545 2,035 17.6 541 596 898 0 898 247 0 27.5 651 -10 641 -0.8 5.5

15,314 9.4 12,155 3,159 20.6 558 360 2,241 0 2,241 134 0 6.0 2,107 89 2,196 36.0 14.3

15,692 -4.6 12,538 3,154 20.1 575 590 1,989 0 1,989 398 0 20.0 1,591 -16 1,575 -10.7 10.0

15,337 32.1 12,218 3,118 20.3 590 585 1,943 0 1,943 350 0 18.0 1,594 175 1,769 72.8 11.5

13,240 14.3 10,486 2,754 20.8 600 585 1,569 0 1,569 471 0 30.0 1,098 125 1,223 90.8 9.2

18,506 20.8 14,226 4,280 23.1 619 593 3,068 0 3,068 153 214 12.0 2,701 51 2,751 25.3 14.9

FY10

FY11E

54,946 10.5 44,612 10,334 18.8 2,147 1,938 6,249 267 5,982 814 0 13.6 5,168 188 5,586 12.9 10.2

62,775 14.2 49,469 13,306 21.2 2,384 2,353 8,568 0 8,568 1,371 214 18.5 6,983 334 7,317 31.0 11.7

Jinesh K Gandhi ([email protected])

July 2010

255

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N O T E S

July 2010

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July 2010

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N O T E S

July 2010

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For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: [email protected]

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