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1QFY2011 Results P1QFY2011 Results P1QFY2011 Results P1QFY2011 Results P1QFY2011 Results Preview |review |review |review |review |July 2, 2010

Refer to important Disclosures at the end of the report

Note: Stock Prices as on July 2, 2010.

Table of Contents

Strategy 2

Angel Research Model Portfolio 12

1QFY2011 Sectoral Outlook 19

Automobile 28

Banking 31

Capital Goods 34

Cement 37

FMCG 40

Infrastructure 43

Logistics 46

Metals 49

Oil & Gas 52

Pharmaceutical 55

Power 58

Real Estate 61

Retail 64

Software 67

Telecom 70


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Refer to important Disclosures at the end of the report 2

1QFY2011 Results P1QFY2011 Results P1QFY2011 Results P1QFY2011 Results P1QFY2011 Results Preview |review |review |review |review | July 2, 2010

Indian markets resilient

1QFY2011 listless

The Indian bourses continued to record a listless performance

for the third consecutive quarter, with the Sensex ending

1QFY2011 on a flat note. The markets have been confined to

a tight range in the last couple of quarters, which is evident

from the fact that the Sensex has recorded gains of a mere

1.4% since 3QFY2010. However, the performance should be

viewed against the backdrop of the global headwinds emanating

from the crisis in the euro zone, which has increased the risk

aversion of the investors during the period.

Strategy

but outperforms most peers

During the quarter, like few of the other countries such as

Indonesia and Korea, the Indian markets also remained flat

and did not witness any significant declines as compared to

some other global markets, which, on an average, posted

declines of 8% on a qoq basis. The fall was more severe in the

developed markets, which fell by 12.7% qoq, while the emerging

markets witnessed a downtrend of 5.7% qoq basis. Among the

emerging markets, China witnessed a significant fall of 23%

qoq on the back of the concerns of softening of the growthmomentum in the region and its high exposure to the global

economy, which got accentuated after the rumblings from the

Source: C-line, Angel Research

Exhibit 1: Quaterly performance of Sensex

Source: Bloomberg, Angel Research

Exhibit 2: Performance of key indices

(30)

(20)

(10)

0

10

20

30

40

50

60

Ru

ssia

Ind

on

esia

B

raz

il

In

dia

Chin

a

Taiwan

Sin

gapore

HongK

ong

Korea

Mala

ys

ia

US

Nas

daq

UKFTSE

Ja

pan

US

Dow

yoy qoq

(%)

euro zone. With this, overall on a yoy basis, the Indian markets

were up 22.1% though was outpaced by Russia and Indonesia,

which gained 50.2% and 43.7% yoy, respectively.

Fund inflows remain healthy despite global headwinds

Despite the global headwinds, fund inflows towards the Indian

markets remained robust during the quarter. India, which is

well on the path of reverting back on high growth orbit driven

by its resilient domestic economy unlike its peers, in the current

uncertain global environment continues to attract fund inflows.

Notably, during the quarter, the FIIs invested Rs10,893cr

(US $2.4bn), while the domestic institutional investors (DIIs)

poured in Rs7,520cr (US $1.6bn) into the Indian markets. Infact, the DIIs have become an equal force in the markets as

they account for almost 53% of the cumulative net inflows into

the markets since FY2008. As far as the domestic mutual funds

industry is concerned, they were once again in the profit-booking

mode throughout the quarter with net sales of Rs1,753cr.

EU crisis behind us

PIGS countries at the centre of the crisis; Other EU

countries in better frame

The economic slowdown post the credit crisis in 2008 saw its

ramifications in 2010 in the form of sovereign credit crisis that

hit the countries of Portugal, Italy, Greece and Spain (PIGS) in

the European Union (EU), with Greece being at the core of the

problem. The country's fiscal deficit, which had risen to almost

14% in 2009, public debt stood as high as 115% (US $400bn,

with around 80% of it being external debt) and domestic savings

were abysmal at about 5.5% necessitated a bailout. Post this,

the EU and IMF have now agreed to set up an almost

US $1trillion line of credit for troubled EU nations, which should

have a similar effect as the US Federal Reserve's TARP package

in restoring confidence in the financial markets. This significant


Exhibit 3: Net fund flows

FII DII

(20,000)

(10,000)

0

10,000

20,000

30,000

40,000

1QFY2008

2QFY2008

3QFY2008

4QFY2008

1QFY2009

2QFY2009

3QFY2009

4QFY2009

1QFY2010

2QFY2010

3QFY2010

4QFY2010

1QFY2011

(Rs

cr)

(30)

(20)

(10)

0

10

20

30

40

50

60

4QFY2006

3QFY2007

4QFY2007

1QFY2008

4QFY2008

1QFY2009

2QFY2009

1QFY2010

2QFY2010

3QFY2010

1QFY2007

2QFY2007

3QFY2008

2QFY2008

3QFY2009

4QFY2009

4QFY2010

1QFY2011

%(qoq

)


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Strategy

Given the country's small size (less than 3% of EU GDP and

0.6% of global GDP), the burden on EU to support its fiscal

imbalances appears manageable. Portugal faces a similarsituation, with a GDP less than 2% of EU GDP and 0.4% of

global GDP. As far as Spain and Italy are concerned, they have

better fundamentals (savings rate of 22% and 16% and current

account deficit of 5% and 3% respectively), and with confidence

restoring in the financial markets, they are unlikely to utilise the

bailout funds.

Moreover, the US $1trillion bailout package that was announced

for troubled EU nations - like the US Fed's bailout packages - is

expected to resolve the crisis and restore confidence in the

financial markets. To draw a parallel, the US bailout was an

estimated US $1.5trillion for a US $14trillion economy, which

tantamounts to 11% of the GDP. In comparison, the US $1trillion

European package (for PIGS economies) works out to around

24% of GDP (with the combined GDP of the PIGS countries

being around US $4.2trillion).

Notably, the PIGS countries apart, the other prominent

economies in the EU like Germany and Netherlands have better

fundamentals, with current account surpluses and high savings

rates of 24%.

Global economy on the mend

The global activity is recovering at varying speed - tepidly in

many of the advanced economies but more strongly in most

emerging and developing economies. Further, the stimulus

packages offered has put the economies back on growth path.

Policy intervention on an unprecedented scale has helped

improve financial conditions and real activity, aiding the global

recovery process. Thus, the global economy is all set for a

stronger rebound in 2010, with both the advanced as well as

developing markets moving onto a strong wicket as compared

to 2009 when the global GDP posted its first dip of 0.6% in thelast many decades. Overall, as per an IMF estimate the real

global GDP is set to rise by 4.2% during 2010.

step follows the US $147bn bailout package for Greece on

May 2, 2010 to prevent it from defaulting on its public debt. In

return, Greece had to agree to reduce its fiscal deficit drastically.

Source: Growth and Stability programme

Exhibit 4: Fiscal deficit of Greece (as a % of GDP)

7.5

10.7

8.7

5.6

2.82

0

2

4

6

8

10

12

2008 2009 2010E 2011E 2012E 2013E

Severe Fiscal Reduction

Targeted

(%o

fG

DP)

Greece's problems are symptomatic of its high median age of

42 and the resulting low savings rate of 5.5%. In our view, a

country with a high median age has two options to improve

growth - if it is a net exporter of capital then on the back of its

strong currency it can run a higher fiscal deficit to support growth.

The other option is to devalue its currency to increase exports

as a driver for GDP growth. In case of Greece, till it is a part of

the EU, currency devaluation is not an option. In such a situation,

even though it does not have its own strong currency, having ahigher fiscal deficit on the strength of the euro would have been

a viable option, had it been acceptable to other EU nations. But

in its current form and unlike the US bailout packages last year,

this bailout comes with substantial strings attached, requiring

stringent belt-tightening like public sector wage cuts, sharp

increase in tax rates, cut in pension payments and raising of

retirement ages, which we believe would have a detrimental

impact on the demand in the country.

Current A/cCurrent A/cCurrent A/cCurrent A/cCurrent A/c FFFFFiscal Deficitiscal Deficitiscal Deficitiscal Deficitiscal Deficit SavingsSavingsSavingsSavingsSavings Public DebtPublic DebtPublic DebtPublic DebtPublic Debt

Greece (10.1) 10.7 5.5 113.4

Ireland (2.3) 13.0 13.1 63.7

Italy (2.6) 5.1 16.6 115.2

Portugal (8.4) 6.7 11.3 75.2

Spain (4.7) 7.9 21.9 50.0

France (2.0) 8.1 13.6 79.7

Germany 3.9 4.3 24.1 77.2

Netherland 5.1 4.6 24.2 62.2

UK (1.5) 14.0 13.5 68.5

Exhibit 5: Key economic data for 2009 (as a % of GDP)

Source: CIA World Factbook, Angel Research

Source:IMF

Exhibit 6: Global GDP growth trend

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E

Advanced Economies (LHS) Developing Economies (LHS) World (RHS)

(%

yoy

growth)

(%

yoy

growth)


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Advanced economies to grow after the trough

After hitting a trough in 2009, where real output of the advanced

economies declined by 3.2%, they are set for a rebound in

2010. Ironically, amongst the advanced economies the recovery

would be more pronounced in the US, the epicenter of the credit

crisis in 2008. Initiatives taken by the US government both fiscal

and monetary, have aided the recovery which has been on an

uptrend since 3QCY2009 onwards. This recovery is broad based

with consumption, investments and trades all posting good

growth. For 1QCY2010, the US posted economic output of 3%

qoq. With the trend expected to continue, the US economy would

be back to the pre-crisis levels. The EU, in spite of the concerns

on the sovereign debt crisis is unlikely to witness a contractionin the economic activity, as most of the PIGS countries, barring

Greece, are not in very bad shape. Howover, Greece with 2%

contribution to the EU GDP is too small to make a significant

impact on the EU recovery. Moreover, any incremental weakness

would result in a lower euro, providing further boost to exports

from the region and boost growth. Overall, IMF pegs the 2010

growth in the advanced economies at 2.3%.

Developing economies to remain at the forefront

The developing economies have posted sharp recovery, post

the downtrend in 2008. Moreover, the recovery has also beenmore balanced in these economies than elsewhere, with output

growth supported by both external and domestic demand. And

even though macroeconomic stimulus was substantial, private

demand also gained traction and is expected to drive growth in

the developing countries going forward. Further, the public

finances in these countries are strong, which provides a leg for

these governments to provide further stimulus if required. While

the dependence of these economies on external funding is lower

on the back of high savings rate (~30% of GDP), they would

continue to attract liquidity, which would provide further fillip to

the growth in those countries. Hence, the developing economies

are structurally well placed to grow at a higher pace and would

Strategy

Source: IMF

Exhibit 7: Contribution of economies to global GDP growth

remain at the forefront of the global economic growth. The IMF

estimates the developing economies to post real GDP growth

of 6.3% in 2010, accounting for ~ 50% of the global growth.Indian economy on strong footing

FY2010 - Growth returns back to averages, but for

agriculture

The Indian economy, which has been resilient amidst the global

meltdown, ended FY2010 with 7.4% GDP growth. The growth

would have been higher but for the flat agriculture output, which

was impacted by bad monsoons, as indicated by the

ex-agriculture GDP growth. The ex-agriculture GDP growth for

FY2010 came in at 8.8%, in line with the the 5-year average

GDP growth of 8.5%. The recovery has been aided by the fiscal

and monetary stimuli provided by the government. However,

unlike FY2009, where the dependence on the government to

prop the overall GDP growth was higher, as reflected in the

ex-government GDP growth, which came down to 3.8% ( overall

GDP growth during the period was 6.7%), after averaging

around 9.7% during the last three years, FY2010 witnessed a

rebound with ex-government GDP posting 6.6% growth.

37.0%47.9%

63.0%52.1%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

Developing Economies Advanced Economies


Exhibit 8: Ex-agriculture GDP growth trend

10.5

11.0

10.2

7.78.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY2006 FY2007 FY2008 FY2009 FY2010

5-Year Average

(%y

oy

)

FY2011- Set for high growth

After the drought in FY2010, the monsoons are expected to be

normal in FY2011. Hence, agriculture which was a drag on

FY2010 GDP growth is expected to bounce back and post

growth higher than its 5-year average of 3.1%, albeit on a low

base.

The manufacturing sector is already on an uptrend as witnessed

by the strong IIP numbers, which came in at 17.6% for April

2010. Even after adjusting the IIP numbers for the base impact

and taking a CAGR over a 2-year period, the IIP growth was

around 9.0%, well above the 15-year average of 7.0%. This isalso reflected in the manufacturing sector GDP growth, which

at 9.3% was at the higher end of the last 5-year average growth


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of 8.9%. Though growth of the capital goods, consumer durables

and intermediaries sectors, which contribute around 40% of

the IIP, might moderate on a high base, the rest 60%-i.e basicgoods and consumer non-durables sectors, the laggards in

FY2010, would witness acceleration as growth becomes more

broad-based and exports pick up. Further, moderation in these

segments would not be reflective of the demand destruction,

but indicate of the supply constrains. Thus, the recovery in the

manufacturing sector is well entrenched.


Exhibit 9: IIP growth trend (2 Year Rolling CAGR)

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1-Aug-9

6

1-Fe

b-9

7

1-Aug-9

7

1-Fe

b-9

8

1-Aug-9

8

1-Fe

b-9

9

1-Aug-9

9

1-Fe

b-0

0

1-Aug-0

0

1-Fe

b-0

1

1-Aug-0

1

1-Fe

b-0

2

1-Aug-0

2

1-Fe

b-0

3

1-Aug-0

3

1-Fe

b-0

4

1-Aug-0

4

1-Fe

b-0

5

1-Aug-0

5

1-Fe

b-0

6

1-Aug-0

6

1-Fe

b-0

7

1-Aug-0

7

1-Fe

b-0

8

1-Aug-0

8

1-Fe

b-0

9

1-Aug-0

9

1-Fe

b-1

0

15- Year Average

(%)

On the services front, which contributed around 57% of FY2010

GDP, growth is expected to remain robust in spite of the

moderation in the government-linked community and socialservices. This would mainly be driven by the improvement in

the hotels, transport and communication sectors as well as

finance and real estate, which contributes ~70% of the services,

would expand at a faster pace as compared to 2009-10 on the

back of revival in household demand and global economy. As

an illustration, the Indian software industry, which accounts for

~6% of the GDP, will witness a strong uptrend in manpower

addition after two years. The rise in manpower addition, which

was around 10% during FY2008-10, is expected to increase to

20% during FY2010-12E, indicating strong traction in the IT

sector going forward.

Thus, as we enter FY2011, agriculture, services and

manufacturing are likely to fire the growth of the economy.

Further, the current European crisis would not have any impactas far India is concerned, as a large part of the country's growth

hinges on domestic consumption and investments. Further, with

a high savings rate of 32.5% of GDP (FY2009), India can grow

at 8-9% with little dependence on external funding. The same

was reflected in the way the economy grew in FY2009 (India's

GDP grew by around 6.7%) amidst the challenging

macro-economic environment. Thus, as we enter FY2011E, with

normal monsoons expected, the Indian economy is expected to

revert to delivering 8-9% GDP growth on the back of domestic

consumption and investments.

Inflation to moderate in FY2011

Food inflation continued to be the main cause for the runaway

increase in overall WPI inflation to 10.16% yoy in May 2010,

apart from the base effect price increase in primary food articles

at elevated levels of 16.6% yoy. The manufactured product

inflation, another key contributor to the inflationary number,

registered 6.4% yoy growth in May 2010. Thus, food inflation

continued to influence overall inflation.

Going forward, food inflation which was exacerbated by thebad monsoons last year is likely to moderate. At the same time,

due to the base effect, over the next 6-9 months overall inflation

is likely to once again come down to the manageable 4-5%

range. Even after assuming the recent hikes in the petroleum

products - the direct and indirect impact of which on inflation is

expected to be an increase of around 1.0% - inflation can be

expected to range between 5-6% during FY2011. Moreover,

while crude is up 2.4x from the bottom, it is 50% away from its

pre-crisis peak and from a fundamental perspective, we do not

expect crude to increase materially from these levels.

Source: Nasscom

Exhibit 10: Recruitments in IT sector set for a rise

1.11.3

1.6

2.02.2

2.4

2.9

3.5

0

5

10

15

20

25

30

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

Manpower Growth (yoy)

(in

mn

)

(%)


Exhibit 11: India's GDP trend

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

9.5 9.7 9.2

6.7

7.4

8.59.0

0

2

4

6

8

10

12

0

10,00,000

20,00,000

30,00,000

40,00,000

50,00,000

60,00,000

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

(R

scr

)


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Exhibit 12: Inflationary pressures to decline

11

6

(3)

0

3

6

9

12

15

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

(

yoy

)

%

Food inflation set to soften

A significant portion of the overall inflationary pressure duringFY2010 was on account of food, which directly and indirectly

contributed to the overall rise in inflationary pressures. The year

saw food inflation touching multi-year highs in December 2009

at 20.0%. This was primarily driven by supply-side factors as

agriculture was severely affected by the monsoon failure in

several parts of the country that led to a drought situation (severe

in the last couple of years) in more than half the country.

At the advent of FY2011, food inflation has already started to

moderate from its highs. In May 2010, food inflation moderated

to 16.5% levels. Going forward, monsoons are expected to benormal with the Indian Meteorological Department (IMD)

forecasting FY2011 rainfall for the country as whole to be near

normal at around 102% of the long period average (LPA). The

LPA for the last year was 77%, 23% below normal. While

according to IMD, on an all-India area-weighted basis,

cumulative rainfall was 11% below normal up to June 23, 2010.

However, as a major part of the rainfall happens in July (around

40%), which is also the sowing season, this deviation would not

impact the overall outlook. Moreover, history suggests that India

never had back-to-back drought seasons. Thus, as we go into

FY2011, food inflation should inch downwards, with themoderation in food prices and high base effect.

21.9 20.0

(5.0)May-9

5

Nov-9

5

May-9

6

Nov-9

6

May-9

7

Nov-9

7

May-9

8

Nov-9

8

May-9

9

Nov-9

9

May-0

0

Nov-0

0

May-0

1

Nov-0

1

May-0

2

Nov-0

2

May-0

3

Nov-0

3

May-0

4

Nov-0

4

May-0

5

Nov-0

5

May-0

6

Nov-0

6

May-0

7

Nov-0

7

May-0

8

Nov-0

8

May-0

9

Nov-0

9

May-1

0

Food Inflation Moderating after touching

Year highs

0.0

5.0

10.0

15.0

20.0

25.0

(%

yoy)

15 - Year Average

Source: IMD

Exhibit 14: Rainfall trend (as a % of LPA) in India

80.8

86.2

77

102

60

65

70

75

80

85

90

95100

105

110

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

Oil to remain range bound

Crude prices remained volatile in the range of US $66-87/bblduring the quarter. Volatility stemmed from concerns about

global recovery following the euro zone crisis. However, on an

average, crude prices fell by 0.7% qoq during 1QFY2011.Going

forward, we expect crude to consolidate at current levels

especially on account of the inventory overhang in the OECD

countries and increasing NGL output by the OPEC. The factors,

which are likely to impact the direction of crude will be the

macro environment in the OECD countries particularly in the

western European region. Thus, we expect crude prices to hover

at around US $75-85/bbl in the visible future.

Source: IMD

Exhibit 15: Crude price trend

While crude is up 2.4x from the bottom, it is almost50% away from its pre-crisis peak. From afundamental perspective, we do not expect crude torise up materially from these levels

0

20

40

60

80

100

120

140

160

Jan-0

0

Fe

b-0

8

Mar-

08

Apr-

08

May-0

8

Jul-08

Aug-0

8

Sep-0

8

Oc

t-08

Nov-

08

Dec-0

8

Fe

b-0

9

Mar-

09

Apr-

09

May-0

9

Jun-0

9

Aug-0

9

Sep-0

9

Oc

t-09

Nov-

09

Dec-0

9

Fe

b-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

($/b

arre

l)

Metal prices to remain stable

Internationally, during the quarter both ferrous and non-ferrous

metals remained softer. However, relatively the steel prices

exhibited strength on the back of firm iron ore prices.

Domestically, during the quarter, the average domestic HRC

price increased by ~24% yoy and 6.6% qoq to

~Rs37,700/tonne as steel prices last year were at their lows.On

the non-ferrous front, base metal prices on the LME declined

during the quarter due to concerns over sustainability of Chinese

consumption and fears that the euro zone's debt problems couldlower demand for the metals. Average LME prices for base

metals declined on a sequential basis, but remained high on aSource: Bloomberg, Angel Research

Exhibit 13: Food inflation softening from its highs


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yearly comparison as prices had bottomed out in the

corresponding period last year.

Going forward, we expect steel prices for the next one year toremain stable primarily on account of the raw material cost

push, removal of export rebate by the Chinese Government

and possible revaluation of the yuan, which would to provide a

floor to steel prices. On base metals, we expect prices to remain

range bound, but significant upsides would be limited due to

high inventory levels at the LME warehouse. However, the

downside for some metals like aluminum and zinc seems limited

as prices are near their marginal cost of production.

SpotSpotSpotSpotSpot June 30,June 30,June 30,June 30,June 30, March 31,March 31,March 31,March 31,March 31, June 30,June 30,June 30,June 30,June 30, % chg% chg% chg% chg% chg %chg%chg%chg%chg%chg

US$/tonneUS$/tonneUS$/tonneUS$/tonneUS$/tonne 20092009200920092009 20102010201020102010 20102010201020102010 qoqqoqqoqqoqqoq yoyyoyyoyyoyyoy

Tin 14,232 18,379 17,380 (5.4) 22.1

Lead 1,671 2,119 1,726 (18.6) 3.3

Iron Ore 81 150 147 (2.3) 82.0

Copper 4,949 7,759 6,484 (16.4) 31.0

Alumina 220 335 335 0.0 52.3

Zinc 1,523 2,344 1,760 (24.9) 15.6

Aluminium 1,597 2,294 1,951 (14.9) 22.2

Steel HR 483 665 685 3.0 41.8

Exhibit 16: Global metal price performance

Source: Bloomberg

Fiscal deficit on path of moderation

FY2010 was a difficult year for the Indian economy, which was

reflected in terms of the fiscal deficit which ballooned to 9.9%

of GDP on the back of increased government spending to

counter the negative repercussions of the global slowdown and

a drought. With the economy now back on growth path, the

government in its Union Budget FY2011 has laid a roadmap to

gradually reduce the central fiscal deficit from the estimated

5.5% of GDP in FY2011 to 4.1% of GDP in FY2013E. The

reduction in fiscal deficit is based on the introduction of reformslike disinvestment, goods and services tax (GST) and direct tax

code (DTC), which are expected to improve the government's

revenue collection.

For FY2011 YTD the government has succeeded in garnering

around Rs 1,06,543cr, much higher than the estimated

Rs35,000cr from the 3G and WBA auctions. From the 3G

auctions, the government raked in Rs68,000cr (Rs50,968cr

excluding the proceeds received from the PSU's), while the

wireless broadband access (WBA) garnered Rs38,543cr.This

would improve the overall fiscal deficit position by around 1.0%of GDP, thereby reducing overall government borrowings. Thus,

overall for FY2011, the government is all set to beat its own

estimates of fiscal deficit of 5.5% of GDP in FY2011.

Further, while the exact nature of sharing of the residual

petroleum subsidies after the recent price hike has not been

announced, the recent de-regulation of petroleum product priceswould reduce the strain on the government's financials.

According to our estimates, the overall subsidy burden in the

sector would come down by 29% to Rs54,516cr (Rs77,213cr)

for FY2011. With the exact subsidy sharing mechanism not

evolved during FY2010, the government bore around

Rs26,000cr by way of the subsidy burden out of the total

Rs46,051cr for the industry, ie around 56% of the overall burden.

Thus, as we go forward, we expect overall improvement in the

fiscal position, with the total fiscal deficit (state and centre)

expected to improve from 9.9% of GDP in FY2010 to 8.0% by

FY2012E.

Interest rates on uptrend, but unlikely to hurt

growth momentum

During FY2010, the RBI had a moderate stance on interest rates

with inflation primarily being driven by supply-side pressures,

and to facilitate broad-based recovery in the economy. However,

with rising inflation (10.2%) and strong traction in the growth

momentum (as indicated by the strength in the IIP numbers,

which stood at 17.6% yoy in April 2010), the increasing pressure

for an upward bias in the interest rates are mounting. Further,

in line with the upward trajectory in the GDP and IIP numbers,

the credit demand has also picked up. By June 18, 2010, the

yoy growth rate in credit increased to 19.2% yoy compared to

10% levels in October 2009. Banks have incrementally lent

Rs70,000cr YTD in FY2011 (compared to a meagre Rs8,280cr

during the same period last year). At the same time, deposit

growth has come down to 13.4% yoy compared to 22.1% yoy

in 1QFY2010. Going forward, credit demand is expected to

sustain at least above 19% levels in FY2011, necessitating banksto raise their lending and deposit rates.

Source: RBI, Angel Research; Note: Excludes disinvestment proceeds, doesnot include off-balance sheet items

Exhibit 17: Fiscal deficit to decline

7.26.5

5.1

4.0

8.5

9.9

8.2 8.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

(as

%to

GDP)


9/75


10/75

9



Strategy

Exports growth well placed for strong rebound

Improvement in world economy to support trade

In sync with the improvement in the global recovery, Indian

exports have been posting an improvement on a qoq basis

since 2QCY2009. Going forward, with enhancement in the

global recovery the rate of improvement in exports is expected

to continue, which should on a quarterly basis soon surpass the

pre-crisis levels. With global economies expected to rebound

in 2010, the global trade which has already witnessed signs of

improvement, would accelerate in 2010. Thus, Indian exports,

which had been languishing in FY2010, would witness an

improvement in FY2011.

Source: IMF

Exhibit 21: World trade (yoy annualised growth)

(80)

(60)

(40)

(20)

0

20

40

60

Q12005

Q22005

Q32005

Q42005

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009(

%)

Structurally India has headroom to increase exports

Over the last decade, increased globalisation has led to

widening export opportunities. However, India's dependence

on exports (contributed around 23% of GDP in 2008) is relatively

lesser than its peers in the emerging markets like China and

South Korea whose exports contributed almost 37% and 53%

of GDP in 2008, respectively. Given the disparity between the

per capita income of the developed markets vis--vis developing

countries, exports would continue to increase. A case in point is

Germany, a developed country which has witnessed a significant

jump in its per capita income on the back of exports, which

improved from 25% of GDP in 1990 to 47% of GDP in 2008.

Similarly, among the emerging markets like China, a part of its

overall growth has been on the back of increased exports. As a

matter of fact, in the 1970's India and China were enjoying

equal market share in exports. Thereon, China's thrust on exports

aided the country's high growth and emerge a main player in

the exports market.

Source: World Bank

Exhibit 22: Exports trend (as a % of GDP)

In perspective, for an economy like India (among the top-15

largest economies), which is well below its major exporting peers

in terms of per capita income, has a lot of potential to increase

its exports. Though India's trade has accelerated post

liberalisation leading to increased market share (gain of 0.7%

during 1990-2009), India's share in total global exports

continues to be a minuscule 1.2% (2009). Thus, Indian exporters

and export-oriented industries have the potential to increase

market share and scale up operations and post higher growth

than the domestic economy. Historically too, during FY2004-

10 Indian exports (excluding software exports) posted CAGR of

19.1% vis--vis 12.2% GDP growth during the period.

Source: Angel Research

Exhibit 23: India v/s other key economies

13.6

26.9

32.1 32

38.6

54

2.64.6

10.6 9.9

23.3

32.3

3.65.7 6.2 5.3

13.2

19.5

0

10

20

30

40

50

60

1970 1975 1980 1985 2000 2008

Kor ea Rep . Chi na Ind ia

(%)

0

5,000

10,000

15,000

20,000

25,000

30,000

Unite

dStates

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

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

35,000

40,000

45,000

50,000

Cana

da

Unite

d

King

dom

Germany

France

Japan

Ita

ly

SouthKorea

Russia

Mexico

Brazi

l

China

India

(in $)

Capital flows expected to remain strong

A significant part of the overall current account deficit gets

financed through foreign inflows in the form of FII inflows and

FDI. During FY2006-10, the foreign inflows to India increased

by a CAGR of 35.4%. In fact, even during the crisis-ridden year

of FY2010, the country ended up receiving around US $19.7bn

and US $32.3bn vis--vis US $17.5bn and outflows of US $14bn

in FDI and FII respectively, during the last corresponding period.

Going forward, given that the emerging markets, especially

India, would be at the forefront of global growth, we expectIndia to continue to attract strong foreign inflows.


11/75



Strategy

Source: RBI

Exhibit 24: FII inflows to IndiaPhenomenal FII inflowseven in a low globalgrowth year

(60,000)

(30,000)

0

30,000

60,000

90,000

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

(Rs

cr)

Exhibit 25: Global FDI trend

FDI Inflows (% of WFDI Inflows (% of WFDI Inflows (% of WFDI Inflows (% of WFDI Inflows (% of World)orld)orld)orld)orld)

CountryCountryCountryCountryCountry 19801980198019801980 19901990199019901990 20002000200020002000 20062006200620062006 20072007200720072007 20082008200820082008

WWWWWorldorldorldorldorld 100100100100100 100100100100100 100100100100100 100100100100100 100100100100100 100100100100100

- Developed Economies- Developed Economies- Developed Economies- Developed Economies- Developed Economies 86.286.286.286.286.2 82.982.982.982.982.9 81.481.481.481.481.4 70.370.370.370.370.3 73.273.273.273.273.2 63.463.463.463.463.4

- US 31.3 23.3 22.7 16.2 13.7 18.6

- UK 18.7 14.7 8.6 10.7 9.3 5.7

- Developing Economies- Developing Economies- Developing Economies- Developing Economies- Developing Economies 13.813.813.813.813.8 17.117.117.117.117.1 18.618.618.618.618.6 29.729.729.729.729.7 26.826.826.826.826.8 36.636.636.636.636.6

- Brazil 3.5 0.5 2.4 1.3 1.7 2.7

- Russian Federation 0.0 0.0 0.2 2.0 2.8 4.1

- China 1.8 4.2 8.4 9.0 7.6 11.0

- India 0.1 0.1 0.3 1.4 1.3 2.4

Source: UNCTAD, Angel Research

Global equities in value zone

After the rumblings in the euro zone, the global equity markets

have been in correction mode on the back of concerns of

unsustainable global economic recovery. Given that the EU

bailout package should be effective in curtailing the problem,

we believe that the EU crisis is behind us and economic recovery,

Emerging markets would continue to outshine - India

to remain a favoured destination

While the global recovery is underway the emerging markets

as an asset class would continue to outperform as these

economies would be at the forefront of the global growth in the

years to come. Further, after the correction, valuations of theemerging markets have again become attractive, given their

growth prospects. Moreover, global liquidity is expected to

remain robust on the back of the low interest regime in the

developed world, which would chase high growth destinations.

In perspective, as per the Emerging Portfolio Fund Research

(EPFR) Global, emerging equity fund inflows were at over

US $80bn in 2009 (a tough year for global economies), which

is the highest since EPFR started tracking the data in 1997.

Notably, the world's four biggest emerging market economies,

Brazil, Russia, India and China (collectively known as BRIC)accounted for a bulk of around US $60bn of the investments,

with India accounting for almost US $18bn of the same.

Thus, going forward, we expect the funds to continue to flow

towards the high growth emerging markets of China and India.

Meanwhile India, the second fastest growing economy in the

region and which has not corrected significantly as compared

to its peers, will continue to exhibit strength on the back of its

low linkages to the global economy and high RoE's.

Sensex Earnings Outlook

1QFY2011 earnings to be impacted by margin pressures

For 1QFY2011, performance of India Inc. is expected to be

robust on the sales front. However, net profit growth during the

quarter would be under pressure on account of higher input

costs on a yoy basis. For 1QFY2011, while we have estimated

net sales of the Sensex companies to increase by around 19.7%

yoy, net profit is expected to remain flat. This is primarily because

of the pressure on the operating front on account of higher

input costs resulting in operating profit registering a growth of

8.8% during the period. Thus, OPMs would decline by 285bpto end the period at 28.4%.

Country P/E P/B RoE (%) Mcap/Country P/E P/B RoE (%) Mcap/Country P/E P/B RoE (%) Mcap/Country P/E P/B RoE (%) Mcap/Country P/E P/B RoE (%) Mcap/

20102010201020102010 20112011201120112011 20102010201020102010 20112011201120112011 20102010201020102010 20112011201120112011 GDP (x)GDP (x)GDP (x)GDP (x)GDP (x)

Developing MarketsDeveloping MarketsDeveloping MarketsDeveloping MarketsDeveloping Markets

India* 16.7 14.3 3.3 2.8 19.7 19.9 1.0

South Africa 10.9 8.6 1.9 1.7 17.8 19.7 1.3

Russia 3.8 5.4 0.7 0.7 19.6 12.2 0.4

China 13.2 11.2 1.7 1.5 12.7 13.7 0.5

Mexico 14.7 12.8 2.4 2.2 16.1 17.0 0.4

Brazil 10.7 9.0 1.5 1.4 14.3 15.7 0.9

Developed MarketsDeveloped MarketsDeveloped MarketsDeveloped MarketsDeveloped Markets

USA 11.4 10.5 2.2 2.0 19.7 19.2 0.9

UK 9.8 8.3 1.5 1.4 15.3 16.2 1.2

Germany 10.9 10.0 1.4 1.3 12.6 12.9 0.3France 10.4 8.9 1.1 1.1 11.0 12.1 0.6

Japan 15.4 15.4 1.2 1.1 7.6 7.2 0.7

Exhibit 26: Global equity valuation

Source: Bloomberg, Note- Prices as on June 30, 2010, *FY2011, FY2012

which has bottomed out should gather pace in CY2010.

Consequently, valuation of majority global equity markets has

become attractive on most of the preferred valuationparameters such as P/E, P/BV and market cap/GDP. Thus, we

believe that the downsides are limited from hereon and the

equity markets, which have witnessed a downtrend owing to

increased risk aversion, should rebound.


12/75

11



1.1

(0.1)

1.2

4.7

0.71.3

5.2

2.4

0.1

0.7

(0.2) 0.40.5

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Au

to

Cemen

t

Engg

.

Fin

ance

FMCG IT

Me

tals

Oil

&G

as

Ph

arma

Power

Tele

com

Rea

lE

st.

Construct

ion

(%CA

GR

FY201

0-1

2E)

which has been battered down due to the intense competition,

is expected to bounce back in FY2012 and post yoy growth of

9.3%. Thus, with the expected robust growth in EPS in FY2012E,the Sensex earnings are expected to register CAGR of 18.0%

over FY2010-12E.


Exhibit 27: Sensex EPS estimates

Sector-wise key features of 1QFY2011 earnings season

Sectorally, metals, financials and IT are expected to deliver

robust numbers for 1QFY2011. The metal pack is expected to

significantly contribute to the overall earnings growth of the

Sensex. In fact, ex-metals net profit of the Sensex companies is

expected to decline by 6.6%. Higher realisations during the

quarter would aid significant improvement in OPM's and

consequently higher rise in net profit for the metal sector. The

financial sector, on the other hand, is expected to post 11% yoy

growth in net profit during the period. IT is expected to post a

2.7% qoq growth on the sales front, while margins are expected

to remain flat.

Amongst others, FMCG is also expected to deliver good set ofnumbers. The FMCG heavyweights will deliver 14% yoy growth

mainly led by ITC.

Oil & Gas, telecom, power and engineering, on the other

hand, are expected to be key underperformers during

1QFY2011, which will keep a check on the Sensex earnings'

growth. Oil & Gas, one of largest components of the Sensex, is

expected to register de-growth of 35% during the quarter. OPM

of the sector would be impacted by the high subsidy burden

expected for ONGC, which will suppress net realisations and

impact margins. The other heavyweight in the pack, RelianceIndustries, is expected to post robust performance and register

34% yoy growth in net profit.

Telecom, which has been reeling under competitive pressures,

would continue to post subdued performance mainly on the

back of pressures on the operating front. However, on a

sequential basis, the telcos are expected to post flat performance.

Among the engineering players, L&T is expected to report a yoy

18.5% decline in net profit.

India Inc. earnings momentum to accelerate

The earnings momentum, which gathered pace in FY2010

(registering a growth of 13% after a dip in FY2009) is expected

to accelerate as we move into FY2011E. For FY2011E, we expect

Sensex EPS of Rs1,052, up 17.4% yoy mainly on account of

robust earnings in the metals pack, which is expected to post a

154% yoy growth, contributing 15% of the overall Sensex

earnings.

For FY2012E, we expect Sensex EPS of Rs1,246, up 18.5% yoy.

Further, these estimates build in ex-commodities to post net profit

yoy growth of 20.8%. The key driver for the FY2012E earnings

would be financials and oil & gas, which are expected to post

28.6% and 20.5% yoy growth, respectively. The cap goods sector

is expected to post 22.1% yoy growth during the period. Telecom,


Exhibit 28: Sectoral v/s Sensex net profit growth


Exhibit 29: Sectoral contribution to net profit growth of Sensex

790

896

1,052

1,246

500

600

700

800

900

1,000

1,100

1,200

1,300

FY2009 FY2010 FY2011E FY2012E

13%gro

wth17% g

rowth

19%

growth

(Rs)

14

(8)

1922

12 12

64

1013 12

(3)

53

65

(20)

(10)

0

10

20

30

40

50

60

70

Au

to

Cemen

t

Engg

.

Fin

ance

FMC G IT

Me

tals

Oil

&G

as

Ph

arma

Power

Tele

com

Rea

lE

st.

Construct

ion

Sectoral net profit growth (FY2010-12E CAGR) Sensex net profit growth (FY2010-12E CAGR)

(%)

Strategy


13/75



Valuations - Trading near fair zone; Earnings

growth to drive upsides

At current levels of 17,461, the Sensex is trading at 16.6x and

14.0x our FY2011E and FY2012E EPS v/s the 5-year average

of 16.2x 1-year forward earnings. With India set for an 8%+

GDP growth, India Inc. is entering a strong earnings growth

momentum over FY2011-12E, which would drive the upsides

in the markets. We expect the Sensex to touch 21,000 levels

(an upside of 20%) by March 2011, based on a target P/E of

17x FY2012E EPS. Source: Angel Research

Exhibit 31: 1-year forward Sensex P/E

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

CompanyCompanyCompanyCompanyCompany 1QFY2011E1QFY2011E1QFY2011E1QFY2011E1QFY2011E 1QFY20101QFY20101QFY20101QFY20101QFY2010 % chg% chg% chg% chg% chg 1QFY2011E1QFY2011E1QFY2011E1QFY2011E1QFY2011E 1QFY20101QFY20101QFY20101QFY20101QFY2010 % chg% chg% chg% chg% chg (%)(%)(%)(%)(%) to Sensex growthto Sensex growthto Sensex growthto Sensex growthto Sensex growth

RIL 60,126 32,055 87.6 4,872 3,636 34.0 14.1 43.8

Tata Steel 6,906 5,554 24.3 1,866 790 136.3 2.2 48.6

Sterlite 6,987 4,537 54.0 1,259 673 87.2 1.8 17.0

Tata Motors 11,092 6,350 74.7 382 514 (25.7) 1.9 (5.6)

ONGC 11,145 14,879 (25.1) 2,255 4,848 (53.5) 4.1 (33.4)

ICICIBK 3,798 4,075 (6.8) 1,035 878 17.9 6.9 10.1

BHEL 6,816 5,596 21.8 645 471 37.2 3.0 3.9

ITC 4,840 4,083 18.5 1,042 879 18.6 5.9 7.4

JP Associates 2,722 2,067 31.7 229 249 (8.1) 1.1 (0.7)

HDFCBK 3,230 2,899 11.4 803 606 32.5 5.2 10.2

Maruti Suzuki 8,274 6,340 30.5 642 584 10.0 1.5 1.9TCS 7,890 7,207 9.5 1,809 1,520 19.0 3.2 5.6

Hindalco 4,986 3,871 28.8 556 481 15.7 1.4 3.4

DLF 2,030 1,650 23.1 445 396 12.4 0.9 0.8

M&M 5,127 4,229 21.2 475 401 18.4 1.9 3.6

ACC 2,068 2,081 (0.7) 375 467 (19.7) 0.7 (3.3)

Hero Honda 4,287 3,811 12.5 596 500 19.2 1.5 3.1

Wipro 7,134 6,415 11.2 1,213 1,016 19.4 1.4 2.5

Cipla 1,412 1,325 6.6 225 242 (7.0) 1.3 (0.7)

Reliance Infra 2,262 2,407 (6.0) 273 317 (13.8) 1.3 (1.7)

L&T 8,437 7,431 13.5 592 727 (18.6) 7.1 (7.8)

Infosys 6,129 5,472 12.0 1,550 1,527 1.5 9.8 1.3

Bharti Airtel 10,450 9,942 5.1 1,962 2,517 (22.0) 2.6 (12.5)

HUL 4,733 4,476 5.7 563 537 4.9 2.2 0.8

HDFC 1,180 900 31.1 716 569 25.8 5.6 8.5

Jindal Steel 3,125 2,748 13.7 1,025 963 6.4 1.9 1.8

SBI 10,344 8,594 20.4 2,372 2,330 1.8 4.8 1.2

NTPC 13,110 12,003 9.2 2,279 2,194 3.9 2.5 1.1

Tata Power 2,179 2,016 8.1 318 377 (15.7) 1.6 (2.7)

RCOM 5,289 5,843 (9.5) 1,192 1,637 (27.1) 1.0 (10.0)

TTTTTotalotalotalotalotal 228,109228,109228,109228,109228,109 180,854180,854180,854180,854180,854 26.126.126.126.126.1 33,60733,60733,60733,60733,607 32,84232,84232,84232,84232,842 2.32.32.32.32.3 100100100100100 100100100100100

Sensex # 19.7 0.6

Exhibit 30: Sensex - 1QFY2011 Earnings Estimate

Source: Company, Angel Research; Note # Sensex Sales and Earnings growth based on free-float weightages

5

10

15

20

25

30

Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10

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

Strategy


14/75

13



Angel Research Model Portfolio

Banking, infrastructure, metals key theme calls

At current valuations and given the demand-supply and

competitive dynamics coupled with company-specific

developments, we have a conviction overweight stance on

banking, infrastructure and metals.

Maintain overweight on banking

In line with the improving GDP and IIP performance, credit

demand is on an upward trajectory and is likely to further

accelerate to 20%+ levels in FY2011E. Accordingly, we expect

the banking sector to outperform, with increasing core earnings

growth from credit and fee income, while NPA losses decline.

Moreover, relatively in a rising interest rate environment, large

banks with strong CASA are better placed. We prefer SBI, ICICI

Bank, Axis Bank and HDFC Bank due to expected market share

gains in credit on the back of strong capital adequacy and inCASA deposits and fee income on the back of stronger customer

proposition and faster branch expansion.

followed by infrastructure

We have given a strong weightage of 16% to the infra sector in

our model portfolio (above the BSE-100 weightage of 11.5%),

given our positive outlook on the sector combined with attractive

valuations. With execution expected to accelerate to 17%+ yoy,

aided by increasing availability of risk capital, evident political

will and strong pipeline reflected in increasing order-book-

to-sales, the sector is well set to outperform the markets.

Upgrade metals to overweight

We have upgraded metals to overweight, increasing the

weightage to 9.0% vis--vis the 7.8% weightage in theBSE-100, mainly on the back of attractive valuations. In the

pack, we find attractive investment opportunities in mid-cap

steel companies, such as Electrosteel Casting and Godawari

Power & Ispat that are expected to benefit significantly over the

next two years due to their captive mining assets. We also like

Bhushan Steel as it is expected to benefit from substantial volume

growth and increase in EBITDA/tonne due to technological

advantage. Overall, we expect these companies to significantly

improve their profitability, aiding re-rating of their stocks. Among

the large caps, we are positive on Hindalco as it is set to benefit

from enhanced capacity by 2-3x over the next 4 years, and

~ 60% of its earnings would be derived from Novelis, which is

neutral to aluminum price movement.

Rich valuations necessitate stock-specific approach in

capital goods space

Although we are optimistic about the demand for capital goods

going forward, we believe that there are few investment options.

We have a Neutral view on BHEL due to concerns regarding

market share loss and expensive valuations in the context of

the medium term business opportunity for the company.

Accordingly, we prefer a stock-specific approach, with CromptonGreaves and Jyoti Structures being among our preferred picks.

Interesting midcap ideas and bottom-up calls in

several sectors

Pharma: We have given a higher weightage to non-Sensex

pharma companies in our model portfolio due to

company-specific positive business prospects:

Lupin - One of the best plays in the generic space

Dishman - Stands to benefit from the uptick in the CRAMS

segment.

Auto: In our view, the auto sector is one of the strongestlong-term growth stories in India. However, from a near-term

perspective, the large-caps have already run up significantly

due to the huge surge in top-line and bottom-line in FY2010.

In the mid-cap space, there are some interesting stories to play

particularly in the auto ancillary sector such as FAG Bearings

and JK Tyre.

IT: In IT, we have introduced two smaller tier 1 players in our

model portfolio, viz. Mphasis and Tech Mahindra. Tier-I stocks

are trading at 20x-22x 1-year forward earnings that factors in

the expected 15% CAGR over FY2010E-12E leaving little roomfor upside in our view. Stocks like Tech Mahindra and Mphasis

offer strong upsides from current levels and remain our top

picks in the IT space.

SectorSectorSectorSectorSector BSEBSEBSEBSEBSE-100-100-100-100-100 Angel ModelAngel ModelAngel ModelAngel ModelAngel Model StanceStanceStanceStanceStance

WWWWWeightage (%)eightage (%)eightage (%)eightage (%)eightage (%) PPPPPortfolioortfolioortfolioortfolioortfolio

WWWWWeightage (%)eightage (%)eightage (%)eightage (%)eightage (%)

Auto & Ancilliaries 6.1 7.0 Overweight

Cement 1.4 - Underweight

Finance 22.8 28.0 Overweight

FMCG 7.1 3.0 Underweight

Hotels 0.3 3.0 Overweight

Infra & Cap goods 11.5 16.0 Overweight

IT 10.8 11.0 Overweight

Media 0.4 2.0 Overweight

Metals 7.8 9.0 Overweight

Oil & Gas 16.6 10.0 UnderweightPharma 4.0 4.0 Equalweight

Power 5.5 - Underweight

Real Estate 1.1 3.0 Overweight

Telecom 2.9 4.0 Overweight


Sectoral weightage


15/75




CommentsSector Top BuysRecommendedWeightage (%)

Continued...

Given India's low car penetration (12 per 1,000 v/s 21 per 1,000 inChina) and with the PPP-based per capita estimated to approach the

empirically observed inflection point for car demand of US $5,000

over the next 4-5 years, we expect 13% CAGR in the companys

domestic volumes over FY2010-12E. Moreover, with Suzuki Japan

making Maruti a manufacturing hub for small cars to cater to

increasing global demand caused by rising fuel prices and stricter

emission standards, we estimate a 15% CAGR in export volumes

over FY2010-12E. Maruti has a sizeable competitive advantage over

foreign entrants due to its widespread distribution network (2,767

service and 681 sales outlets). We believe attractive valuations provide

an entry point for investors looking to play the India consumer story.

Due to the greater focus on mechanisation of the manufacturing

process, the demand for bearings is expected to outperform industrial

growth in India. Hence, the industrial segment (accounts for 50% of

the Indian bearings market) offers high growth opportunity for the

industry. This is also supported by the fact that the bearings industry

has a direct correlation with the auto sectors growth, which is expected

to post around 10% growth per annum over the next 2-3 years. Further,

an increase in utilisation levels would result in higher OPM going

forward and it could act as a trigger for the stock.

Given the shortage of radial tyres in the trucks & buses segment, JK

Tyres is set to fully utilise its enhanced capacity, and that too at higher

realisations (70% of India's total truck/bus radial tyre production),

driving strong earnings growth and improving RoEs. Further, the Tornel

acquisition has already turned profitable in FY2010, aided by the

restructuring exercise implemented by the company. The stock is

available at attractive valuations.

Automobile Maruti Suzuki 3%

FAG Bearings 2%

JK Tyres 2%

We believe that rising interest rates consistent with the imminent

revival in GDP growth are not a negative for the banking sector as

it would be outweighed by acceleration in core earnings growth, ascredit growth and fee income picks up, while NPA losses trend

downwards. That said, in a rising interest rate environment, large

banks such as HDFC Bank and SBI, with a strong CASA ratio and

lower duration investment book, are relatively better placed followed

by Axis Bank and ICICI Bank that have strong CASA deposits. We

prefer the large private banks as well as SBI in the PSU space in

light of stronger core competitiveness and likelihood of market

share gains (including CASA and fee income market share) on the

back of strong capital adequacy and branch expansion.

Banking Axis Bank 8%

ICICI Bank 9%

HDFC Bank 4%

SBI 7%


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15




Factors like growth in foreign tourist arrivals and increased tourist

activity on the domestic front following the improving economic

outlook have enabled hoteliers in overcoming the tough phasewitnessed in the recent past. Signs of improving demand are visible

with occupancy rates staying above ~70% since 3QFY2010 and

average room rates rising in 1QFY2011. Considering TAJGVK's

dominant position in business destinations like Hyderabad and

Chennai, its diversification strategy and its on-track expansion plans,

we believe that it is poised to benefit from the uptrend in the industry.

Hotels TAJGVK 3%

Infrastructure

and

Cap Goods

Reliance 3%

Infrastructure

Continued...

CommentsTop BuysSectorRecommendedWeightage (%)

ITC's cigarette volumes have consistently exhibited impressiveresilience towards price hikes instilling confidence that cigarette

business is well poised to post double-digit revenue and EBIT growth

in FY2011E. Moreover, outlook for other SBUs is highly

promising non-cigarette FMCG business is exhibiting strong

revenue traction and reduction in losses, hotels is set to recover

driven by stronger economy and paperboards and agri-business

are expected to post steady growth in revenue.

FMCG ITC 3%

L&T 6% Investment in the infrastructure sector is expected to pick up

momentum going ahead particularly with improving procedural

issues and the governments relentless stress on infrastructure

development. Moreover L&T because of its diversified presence

across major segments (power, roads, railways and irrigation) of

the infrastructure sector would be a key beneficiary of the same.

We believe that Reliance Infra would be a force to reckon with in

the infra space owing to its strong parentage and huge net worth.

Also, given its growth prospects and inexpensive valuations, we

expect the stock to be an outperformer. It should be noted that we

have a long-term view on the company as we believe that the

earnings momentum would pick post FY2012E as invesments start

yielding returns.

We expect Madhucon Projects to outperform its mid-cap peers over

the next one year owing to attractive valuations and diversifiedportfolio of assets. We also believe that as its assets start reaching

important milestones, it would enhance visibility and markets would

start valuing these assets, which are currently not factored in.

IVRCL Infra boasts of a robust order book (order book/sales ratio

at 4.3x FY2010 revenues) with reduced dependence on the state of

Andhra Pradesh (mere 16% of total order book) through

diversification into other geographies. Strong revenue visibility,

receding concerns, attractive valuations and positive outlook on

the sector provides an opportune entry point for long-term investors.

Madhucon Projects 2%

IVRCL 2%


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Continued...

The government has envisaged investments of Rs1.4lakh crore in

the transmission sector in the eleventh plan (an increase of over

two times from the investments made in the tenth plan) and

Rs2.4lakh crore for the twelfth plan. We believe that Jyoti Structures

being among the top-three players in the space will continue to be

a key beneficiary of the same. Besides, the company has a healthy

order book of Rs4,030cr (2.0x FY2010E revenues), which provides

good revenue visibility and cushions it from short-term order

fluctuations.

Joyti Structures 3%

Electrosteel Castings (ECL) is setting up a 2.2mn tonne steel plant

by FY2012E through its subsidiary Electrosteel Integrated (EIL). ECL's

backward integration initiatives (allocation of coking coal mines)are expected to expand OPM by 330bp over FY2010-12E. ECL is

also awaiting environmental clearance for its iron ore mine to further

lower costs (not been factored in our estimates). Further, listing of

EIL (ECL has 40% stake) could unlock value for ECL.

Electrosteel Castings 2%

Metal We remain positive on Hindalco as it is well placed to benefit from

aluminium expansion plans that will increase its capacity by nearly

two-three folds over the next 2-4 years coupled with low cost of

production. Moreover, Novelis is expected to benefit from the

expected price increase following expiry of the metal price ceiling

contracts and cost saving measures. Nearly 60% of Hindalcos

earnings are derived from Novelis, which is neutral to aluminium

price movement.

Hindalco 3%

Infrastructure

and

Cap Goods

Bhushan Steel 2% Bhushan Steel (BSL), India's leading value-added steel producer,

has extended its presence in the steel value chain with the

commissioning of its 1.9mn tonne HR steel capacity. We expect BSL

to register 26.2% CAGR in volumes over FY2010-15E, on completion

of phase-III expansion by October 2012. This would be sweetened

by EBITDA/tonne increasing to US $331 in FY2011E. Being one of

the first entrants in auto grade steel in India, BSL with its strategic

relationships with OEMs and growing investments by foreign OEMs

would witness lower demand risks and uncertainties.

CommentsSector Top BuysRecommendedWeightage (%)

Godawari Power 2% We believe the stock is at inflection point on account of: a) expected

increase in mining capacity at Ari Dongri mine, b) grant of Boria

Tibu iron ore mine, and c) commercial production of pellet to start

at Ardent Steel by August 2010E, which is likely to contribute EBITDA

of nearly Rs18cr and Rs52cr in FY2011E and FY2012E, respectively.

Moreover, the pellet plant at Raipur is expected to result in savingsof ~Rs125 in FY2011E.


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17





Continued...

Dishman has incurred organic capex of Rs300cr in the last three years

towards expansion of existing facilities at its Bavla unit and building the

China and HPAPI facilities. Post all these facilities coming onstream

FY2011E onwards, Dishman would strengthen its ties with the global

innovators leading to stable revenue flow over the long run. Dishmanhas also indicated receiving contract manufacturing enquires from the

global innovators of Euro200-250mn. Further, revenues from the Abbott-

Solvay contract, which constituted 13% of FY2010 sales, have also

started normalising with uptick in Eprosartan volumes.

Lupin is one of the best plays in the generic space given its strong

execution capabilities, improving financial performance and diversifying

business model. The high-margin branded generic business has been

the key differentiator for Lupin in the Indian pharma space. The company

has also cemented its position in this segment by acquiring rights for

two products, viz. Allernaze and Antara. Further, the company has been

among the few Indian players to have built a formidable presence inthe second largest pharmaceutical market in the world, Japan, with

Kyowa's acquisition.

Pharma Dishman Pharma 2%

Lupin 2%

Jagran will continue to derive steady advertisement revenues owing

to its strong presence in Hindi market, rising colour ad-inventory

and ad-rate hikes. Jagran's recent acquisition of Mid-Day is likely

to be earnings accretive. Moreover, with Blackstone's recent

investment of Rs225cr and a wider portfolio, we believe that Jagran

is well poised to benefit from steady growth in print media.

Media Jagran Prakashan 2%

RIL will benefit from expected improvement in fundamentals of extant

businesses coupled with increasing gas production. Recent acquisition

of the shale gas assets in the US opens up new growth vistas and

provides technological know-how to replicate the same elsewhere. The

entry in the broadband wireless segment is also likely to augur well.

Thus, these business initiatives along with the proposed foray in the

power segment are likely to address the issues associated with

redeployment of the cash-flows going ahead. Moreover, the companys

huge unexplored E&P acreage could result in significant valuation

upsides from current levels.

Oil & Gas Reliance Industries 10%


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Anant Raj Industries (ARIL) is a prominent and well-diversified real

estate player in the NCR region. Almost all of ARIL's land bank (872

acres) is exclusively located in the NCR within 50km of Delhi, with

approximately 525 acres in Delhi. This land bank has been acquired

at an historical average cost of Rs300/sq ft. ARIL recently launched

couple of mid-income residential projects in NCR, which will drive

near-term operational visibility. It also intends to launch its premium

residential project at Hauz Khas, Delhi, as it gets its environmental

clearance. Management has guided for Rs500cr of revenue in

FY2011E from the residential segment. Further, ARIL has 70%

pre-lease commitments at its Manesar IT Park (1.2mn sq. ft.) coupled

with five hotels getting operational by FY2011E, which will improverental visibility.

Real Estate Anant Raj 3%


We believe that tough times for the Indian IT sector are over with

major clients/outsourcers (BFSI players in developed economies)

clocking better earnings growth, in turn boosting the overall deal

scenario through revived IT budgets. Improving operating metrics

such as sustained client addition, high utilisation and strong hiring

are signaling the comeback of robust revenue growth in coming

quarters. Amidst the recent slowdown, the companies displayed

strong margin resilience by employing various margin levers such

as higher offshore effort mix, cut in SGA spends, no wage hikesand hiring deferment. We expect the companies to continue to

display their high level of efficiency/productivity going ahead as

well and maintain high profitability margins.

The high valuation discount of mid-tier companies of 30-50% over

tier-I players would narrow down in the ensuing quarters. Thus, we

expect mid-tier IT stocks such as Mphasis and Tech Mahindra to

outperform their larger peers on the back of robust business growth

and economical valuations.

Software Infosys 3%

TCS 3%

Tech Mahindra 3%

Mphasis 2%

We believe that the competitive intensity in the telecom sector is

likely to decrease as the current tariffs are not sustainable for anynew player. In case of Bharti, we believe that the risks associated

with the Zain acquisition are already priced in the stock valuation.

Hence, any positive news flow in terms of improved financial results

of the combined entity going ahead would act as a strong trigger

for the stock. Thus, owing to its market leadership position, strong

opportunities in the African market and improved business dynamics

for the tower segment, Bharti continues to be our top pick in the

Telecom Sector.

Telecom Bharti Airtel 4%


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19



1QFY2011 Sectoral Outlook


21/75



Sector Trend Outlook

Automobile

The auto component industry is expected

to be on the path of recovery. Outlook for the

industry is good on the domestic front, but

slightly cautious on the export front.

On the domestic front, the industry is back

on track aided by a better-than-expected

revival in domestic auto demand.

Companies with high exposure to exports

are expected to show marginal recovery owing

to volume recovery in some of the developed

markets. However, rupee appreciation wouldimpact export realisation to a certain extent.

Among the ancillary stocks, we maintain awe maintain awe maintain awe maintain awe maintain a

Buy on Automotive Axles and FBuy on Automotive Axles and FBuy on Automotive Axles and FBuy on Automotive Axles and FBuy on Automotive Axles and Fag Bearingsag Bearingsag Bearingsag Bearingsag Bearings,

which are available at attractive valuations and

Accumulate on Motherson Sumi and Exide Accumulate on Motherson Sumi and Exide Accumulate on Motherson Sumi and Exide Accumulate on Motherson Sumi and Exide Accumulate on Motherson Sumi and Exide

Industries.Industries.Industries.Industries.Industries. In tyres, we recommend a Buy onwe recommend a Buy onwe recommend a Buy onwe recommend a Buy onwe recommend a Buy on

Apollo T Apollo T Apollo T Apollo T Apollo Tyres and JK Tyres and JK Tyres and JK Tyres and JK Tyres and JK Tyre,yre,yre,yre,yre, owing to the

apparent structural shift the industry is going

through.

Auto ancillaries are expected to report healthy top-line

growth in 1QFY2011 on the back of better domestic

volume growth.

Margin pressure is expected to reduce marginally owing

to improving operating leverage. However, higher raw

material cost is expected to exert pressure on few ancillary

companies (tyres) and would result in higher margin

contraction.

Broadly, the sector is expected to deliver positive

earnings growth. Losses posted by few ancillaries (with

exposure in overseas market) during FY2010 are expectedto register profit aided by the cost restructuring exercise

implemented by them in their overseas operations during

1QFY2011.

Auto Ancillaries

The macro-economic scenario appeared optimistic in

FY2010 with most of the companies reporting sequentialspurt in volumes during the period. In 1QFY2011, most

auto companies continued healthy traction in volume

growth albeit on a low base. Fears of price increase due

to the increase in raw material costs and change in the

emission norms resulted in advanced buying and perked

up volumes in 1QFY2011. Thus, most companies are

expected to post good growth in 1QFY2011. However,

uptick in the commodity prices over the last six months

could exert pressure on margins in 1QFY2011

sequentially.

The substantial volume growth is expected to boost salesgrowth of our auto universe for 1QFY2011 to a high of

47% yoy. However, margins are expected to contract

sequentially by 44bp reflecting the higher input costs. All

these factors combined would result in about 23.5% yoy

growth in earnings.

Tata Motors, Ashok Leyland and Bajaj Auto are expected

to report strong earnings growth for 1QFY2011. Relative

change in product mix and low base would support the

higher earnings growth of these companies.

On the back of a positive economic scenario

and improving consumer sentiment, we retainour positive outlook on the auto sector. We

expect the ongoing economic recovery to help

the auto sector (passenger vehicles (PVs),

commercial vehicles (CVs) and two-wheelers)

register good growth in the domestic market,

and a decent growth in the export markets

over FY2010-12E.

We estimate overall auto volumes to register

a CAGR of around 11% over FY2010-12E

aided by the improved economic environment

for the sector. Over the longer term,comparatively low penetration levels, a healthy

economic environment and favourable

demographics supported by higher per capita

income levels are likely to help the auto

companies in sustaining their top-line growth.

Among the heavyweights, we prefer MarutiAmong the heavyweights, we prefer MarutiAmong the heavyweights, we prefer MarutiAmong the heavyweights, we prefer MarutiAmong the heavyweights, we prefer Maruti

Suzuki, TSuzuki, TSuzuki, TSuzuki, TSuzuki, Tata Motors and M&M.ata Motors and M&M.ata Motors and M&M.ata Motors and M&M.ata Motors and M&M.

Continued...


22/75

21



Sector Trend Outlook

Continued...

Banking We expect growth of 19% each in advances

(with an upward bias) and deposits during

FY2011E. We do not expect base rate to have

any impact on NIMs. Asset quality, however,

could be a concern in case of PSUs with high

proportion of restructured assets for couple

of quarters. Slippages from restructured assets

is a key parameter to watch closely in

1QFY2011 results.

We continue to prefer banks with a high

CASA ratio and lower-duration investment

book, given the rising interest rate scenario.

Among the large banks, our top picksinclude HDFC Bank, ICICI Bank, Axis Bank

and SBI due to expectations of credit and

CASA market share gains. We like Dena Bank

because of its structurally strong CASA ratio

relative to its peers.WWWWWe have an Accumulatee have an Accumulatee have an Accumulatee have an Accumulatee have an Accumulate

rating on Frating on Frating on Frating on Frating on Federal Bank and South Indianederal Bank and South Indianederal Bank and South Indianederal Bank and South Indianederal Bank and South Indian

BankBankBankBankBank as we believe they are the most efficient

and attractively valued old private banks.WWWWWeeeee

upgrade IOB to Accumulateupgrade IOB to Accumulateupgrade IOB to Accumulateupgrade IOB to Accumulateupgrade IOB to Accumulate, as we expect

asset quality to improve due to higher

recoveries.

Strong improvement in credit growth and falling deposits

growth was witnessed in 1QFY2011. This led to a short-

term liquidity squeeze, primarily driven by demand for

funds from the telecom sector and advance tax payments

by corporates.

G-sec yields remained volatile during 1QFY2011,

dropping by 29bp to 7.55%. Hence, we expect most of

the banks under our coverage to have moderate MTM

gains in 1QFY2011E.

We expect NIMs to decline on a sequential basis by

10-30bp in 1QFY2011E because of interest payment on

savings deposits on a daily basis. Banks that have a higher

proportion of savings deposits, such as SBI, PNB, HDFCBank, Axis Bank and Dena Bank, are expected to witness

a deeper fall in NIMs sequentially.

Capital Goods Visibility seems to be improving gradually, with foreign

investments in India continuing momentum, with relatively

smooth financial closure of several projects, and with quite

a few companies across sectors having successfully tapped

the financial markets

Cumulative IIP growth for the period of April-March

2009-10 stands at 10.4% (2.8%), while the cumulative

growth for Capital Goods components in the mentioned

period registered a growth of 19.2% (7.3%).

The top-line of the companies under our coverage

universe is expected to post around 19.8% yoy growth.

On the operating front, we expect our universe to register

an 84bp expansion in margins. Consequently, pet profit

would also increase at a higher pace of around 26.3%

yoy for our universe.

Macro indicators are increasingly exhibiting

strength.

However, we believe that several Capital

Goods stocks are already trading at premium

valuations, leaving little scope for

outperformance.

With the backdrop of the rich valuations,

we prefer a stock-specific approach.

Crompton Greaves and Jyoti Structures figureCrompton Greaves and Jyoti Structures figureCrompton Greaves and Jyoti Structures figureCrompton Greaves and Jyoti Structures figureCrompton Greaves and Jyoti Structures figure

among our preferred picks.among our preferred picks.among our preferred picks.among our preferred picks.among our preferred picks.


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Sector

FMCG We remain bullish on the FMCG sector due

to low penetration in most categories.

However, top-line is expected to moderate due

to lower value growth (price hikes to take

backseat, focus back on volume growth).

Higher input costs and intensifying competition

are likely to check margin expansion.

Most FMCG stocks are currently trading at

peak valuations. The long-term consumption

story for the FMCG industry remains intact,

but further re-rating from current levels seems

unlikely given near-term concerns over

1) strong competition, 2) possible rise in

inflation post fuel price hike and 3) spike in

input costs (low base in FY2010). Hence, weHence, weHence, weHence, weHence, we

change our stance from equal-weight tochange our stance from equal-weight tochange our stance from equal-weight tochange our stance from equal-weight tochange our stance from equal-weight to

underweight on the FMCG sectorunderweight on the FMCG sectorunderweight on the FMCG sectorunderweight on the FMCG sectorunderweight on the FMCG sector. GCPL and. GCPL and. GCPL and. GCPL and. GCPL and

Asian PAsian PAsian PAsian PAsian Paints are our top picks in the sectoraints are our top picks in the sectoraints are our top picks in the sectoraints are our top picks in the sectoraints are our top picks in the sector.....

For 1QFY2011, we expect our FMCG universe's revenue

growth to moderate to 14% (largely volume led) and

earnings growth to slip to 16% as we expect margins to

remain flat or dip except for Marico, GCPL and Dabur.

GCPL, Marico and Dabur are expected to report

strongest earnings growth during the quarter. HUL is

expected to report a muted 5.7% top-line growth, largely

volume driven, as price cuts in the S&D segment will

continue to drag overall growth and margins. Hence,

earnings is also expected to grow a muted 3.6%, largely

aided by higher other income (low base). ITC is expected

to witness a 1% volume decline during the quarter in

cigarettes impacted due to recent price hikes. We expect

ITC to register a robust 18.5% yoy growth in top line and

earnings, aided by recent price hikes in cigarettes, strong

performance of non-cigarette FMCG and rebound in its

hotels business.

Continued...

In ensuing quarters, we expect cementdemand to be hit by monsoons and register

low volumes. We expect total capacity additionof 10.5mn tonnes during 2QFY2011E and3QFY2011E by players such as ACC, Ambujaand JP Associates. Capacity utilisation isexpected to remain the lowest in the southernregion as bulk of the capacity addition inFY2010 was carried out in this region. Pricesare also expected to remain weak. We expectthe south-based players to turn in a poorperformance in terms of profitability, whilenorthern players would perform relativelybetter due to better demand-supply dynamics.

We are positive on India Cements, MadrasCements and JK Lakshmi Cement due to theirattractive valuations (based on EV/tonne andEV/EBITDA multiples).WWWWWe maintain a Buy one maintain a Buy one maintain a Buy one maintain a Buy one maintain a Buy onIndia Cements, Madras Cements, Grasim,India Cements, Madras Cements, Grasim,India Cements, Madras Cements, Grasim,India Cements, Madras Cements, Grasim,India Cements, Madras Cements, Grasim,Ultratech and JK LUltratech and JK LUltratech and JK LUltratech and JK LUltratech and JK Lakshmi.akshmi.akshmi.akshmi.akshmi. However, we areNeutral on ACC and Ambuja.

Cement prices witnessed correction across the country

during the quarter on account of excess supply and tepid

demand. While supply increased due to new capacity

additions, growth in demand was poor due to slowdown

in offtake from the irrigation and housing segments. The

southern region, which witnessed the highest capacity

addition over the last one year, witnessed the highest price

correction with the new plants stabilising. We expect our

universe of cement stocks to report marginal top-line

growth of 3.7% yoy during the quarter, purely on the back

of volume growth. However, operating profit is set to

decline by 18.2% yoy due to margin pressures.

Global coal prices were upby 50% yoy during the

quarter and stood at US $100/tonne. The increase in the

prices of coal and other raw materials is expected to result

in margin contraction during the quarter.

Cement

Trend Outlook


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23


Refer to important Disclosures at the

1qfy2011 result preview -02-07-10

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