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Market Outlook India Research

July 15, 2011

Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

Dealer’s Diary The market edged lower in early trade reacting to three serial bomb blasts in Mumbai on Wednesday evening. A bout of volatility was witnessed as the key benchmark indices trimmed losses after hitting fresh intraday lows in morning trade. The market further trimmed intraday losses in mid-morning trade. The market moved into the positive zone in early afternoon trade before surging in the afternoon trade. The indices trimmed gains after hitting fresh intraday high in mid-afternoon trade. High volatility was witnessed in late trade as the key benchmark indices gave up strong intraday gains. The Sensex and Nifty closed with gains of 0.1% and 0.3%, respectively. The mid-cap and small-cap indices closed with gains of 0.4% and 0.2%, respectively. Among the front runners, DLF, Tata Motors, Cipla, ICICI and SBI gained 1–3%, while TCS, Infosys, RCOM, Bajaj Auto and ONGC lost 1–2%. Among mid caps, SpiceJet, PTC India, Supreme Inds, Cholamandalam Investment and Finance, and IRB Infra gained 5–8%, while SKS Microfinance, GSPL, Godfrey Philips, Himadri Chemical and KGN Industries lost 3–10%.

Markets Today

The trend deciding level for the day is 18,596/5,584 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,866–19,114/5,670–5,741 levels. However, if NIFTY trades below 18,596/5,584 levels for the first half-an-hour of trade then it may correct up to 18,348–18,079/5,513–5,427 levels.

Indices S2 S1 R1 R2

SENSEX 18,079 18,348 18,866 19,114

NIFTY 5,427 5,513 5,670 5,741

News Analysis

WPI inflation rises to 9.44% in June 2011 Power sector reforms to keep PFC’s NPA concerns at bay 1QFY2012 Result Review – TCS, Bajaj Auto, South Indian Bank

Refer detailed news analysis on the following page

Net Inflows (July 13, 2011) ` cr Purch Sales Net MTD YTD

FII 2,559 2,408 151 6,138 7,460

MFs 464 523 (59) (145) 2,980

FII Derivatives (July 14, 2011)

` cr Purch Sales Net Open

Interest

Index Futures 2,564 2,670 (106) 12,406

Stock Futures 1,628 1,458 169 32,047

Gainers / Losers Gainers Losers

Company Price (`) chg (%) Company Price (`) chg (%)

Power Finance 213 9.7 GSPL 96 (5.4)

REC 220 7.4 United Phosph. 154 (2.3)

PTC India 82 6.0 TCS 1,125 (2.2)

Sun TV Network 332 5.8 Marico 161 (2.1)

IRB Infra 187 5.2 Gail India 456 (1.9)

Domestic Indices Chg (%) (Pts) (Close)

BSE Sensex 0.1% 22.2 18,618

Nifty 0.3% 14.4 5,600

MID CAP 0.4% 26.3 7,015

SMALL CAP 0.2% 14.7 8,356

BSE HC 0.8% 52.1 6,533

BSE PSU 0.2% 15.8 8,587

BANKEX 1.0% 133.0 12,879

AUTO 0.2% 13.4 9,047

METAL 0.7% 101.6 14,735

OIL & GAS -0.2% (22.0) 9,130

BSE IT -1.5% (87.1) 5,835

Global Indices Chg (%) (Pts) (Close)

Dow Jones -0.4% (54.5) 12,437

NASDAQ -1.2% (34.3) 2,763

FTSE -1.0% (59.5) 5,847

Nikkei -0.3% (27.0) 9,936

Hang Seng 0.1% 13.3 21,940

Straits Times 0.0% 0.3 3,089

Shanghai Com 0.5% 15.0 2,810

Indian ADRs Chg (%) (Pts) (Close)

Infosys -0.2% (0.1) $61.2

Wipro -0.6% (0.1) $12.8

ICICI Bank -0.2% (0.1) $47.2

HDFC Bank -0.4% (0.7) $177.4

Advances / Declines BSE NSE

Advances 1,590 838

Declines 1,219 582

Unchanged 156 60

Volumes (` cr)

BSE 2,782

NSE 11,735

July 15, 2011 2

Market Outlook | India Research

WPI inflation rises to 9.44% in June 2011 Wholesale price-based inflation for June 2011 rose to 9.44% from 9.06% in May 2011. In spite of the high base effect (10.3% in June 2010), headline inflation continued to remain above 9%. The latest headline inflation print was below the median (9.68%) of Bloomberg’s survey of economists. Core (non-food manufacturing) inflation was flat at 7.3%. Inflation for April 2011 was revised upwards from 8.66% to 9.74%; with this revision the headline inflation has persisted above the 9% mark for the last seven consequent months. Primary articles inflation rose after declining for the last four months. Driven by a sharp rise in minerals (up 27.0% yoy vs. 11.9% yoy in May 2011), primary articles inflation increased to 12.2% from 11.3% in May 2011. Fuel and power inflation rose from 12.3% in May 2011 to 12.8% on the back of higher mineral oil prices. The full impact of the recent diesel price hike is yet to be reflected in the numbers and will be felt in the July 2011 inflation print. Electricity inflation continued to show a negative tick for the second straight month, hinting probably at a possibility of pending revision, in our view. Manufactured products, which have a weightage of ~65% in the overall WPI inflation, continued to rise at an accelerated pace (of 7.4%). Manufacturing articles inflation was driven by food products (8.5%), chemicals (7.4%) and metals (8.9%). The street is expecting the RBI to carry out one or two more hikes in its repo rate, considering the elevated inflation numbers. However, we see cooling global commodity prices, moderating food inflation, weakening domestic demand, slowing credit and higher deposit mobilisation as signals that the economy is very close to the peak levels for both inflation and broader interest rates. Accordingly, although the RBI may still deem it necessary to hike the repo rate by another 25bp or so to anchor inflation expectations decisively; however, in our view, there is now an increasingly distinct possibility that there may not be any more rate hikes from the Central Bank. In case the RBI uses the relatively mild repo tool (as against the harsher CRR hike), we do not expect banks to further increase broader deposit or lending rates. Power sector reforms to keep PFC’s NPA concerns at bay In a resolution passed in the State Power Minister’s meet on July 13, 2011, the states have agreed to take various initiatives to improve the financial health of their electricity distribution companies as part of the power sector reform agenda. The pass-through of production costs though higher tariffs to bridge the gap between revenue and power purchase costs and clearance of all outstanding subsidies to state power utilities by the respective states were the focal outcomes of the meet. With 87% of the loans to public sector utilities, PFC’s loan book is heavily exposed to the ailing health of state electricity boards. While we had regarded the probability of default by SEBs as very remote considering the serious negative systemic implications, yet the possibility of any restructuring or rescheduling of their repayments was creating headwinds for the otherwise cheaply valued PFC stock. However, with the power sector reforms underway and improving outlook on SEBs’ liquidity position, PFC along with other power lending firms stand to be the biggest beneficiary of the impending improvement in the health of state electricity boards, removing a key overhang on the stock. PFC’s loan growth visibility remains high (expected 20–25% CAGR in loan growth over FY2011–13), underpinned by its huge outstanding loan sanctions of `1.7lakh crore (as of December 31, 2010). Moreover, with banks having seen a 47% CAGR in power sector lending in the past two years, their exposures in most cases have reached close to board-mandated limits, creating even more space for specialised lenders such as PFC to grow.

July 15, 2011 3

Market Outlook | India Research At the CMP, the stock is trading at 1.2x FY2013 P/ABV. Historically, the stock has traded at 1.2–2.2x one-year forward ABV with a median of 1.7x. We have assigned an FY2013E P/ABV multiple of 1.4x, 20% lower than PFC’s median P/ABV multiple since listing, to factor in any potential asset quality concerns. We reiterate our Buy rating on the stock with a target price of `254, implying an upside of 20.1% from the CMP. 1QFY2012 Result Review TCS TCS reported strong set of 1QFY2012 numbers, outperforming our as well as street expectations. The company reported revenue of US$2,412mn, up 7.5% qoq, on the back of robust volume growth of 7.4% qoq. In rupee terms, revenue came in at `10,797cr, up 6.3% qoq. EBIT margin declined by 214bp qoq to 26.2% due to wage hikes given in 1QFY2012, effective from April 1, 2011 (12–14% for offshore employees and 2–4% for onsite employees). PAT came in at `2,380cr, almost flat qoq despite margin headwinds on the back of higher other income of `289cr as against `224cr in 4QFY2012. The company closed 10 large deals in 1QFY2012. Management indicated that it plans to hire 17,000–20,000 employees in 2QFY2012 as it is witnessing a strong deal pipeline. The company remains our top pick amongst tier-I IT companies because of its diversified portfolio on all fronts service wise, industry exposure wise as well as geography wise. We maintain our Buy rating on the stock. The target price is currently under review. Bajaj Auto Bajaj Auto (BAL) reported slightly lower-than-expected top-line growth of 22.8% yoy (13.7% qoq) to `4,777cr, driven by 17.7% yoy (15.3% qoq) jump in volumes. The variance in top-line growth from our expectation was due to lower average net realisations, which declined by 1.8% qoq despite price hikes of ~2% taken during the quarter. On a yoy basis, however, average net realisations grew by 4.3% to `41,973. Among the product mix, Pulsar and Discover contributed ~65% of motorcycle sales during 1QFY2012. BAL’s export revenue recorded strong ~40% yoy growth during the quarter to `1,688cr, owing to a 31.9% yoy increase in exports volumes. Other operating income also posted robust 24.6% yoy growth to `190cr, aiding the top-line performance. On the operating front, EBITDA margin for 1QFY2012 came in 71bp below our estimate at 19.1%, registering a fall of 91bp yoy (145bp qoq). This was a result of higher raw-material costs, which increased by 150bp yoy (210bp qoq). However, lower staff cost and other expenditure restricted further contraction in EBITDA margin to a certain extent. Overall, operating profit during the quarter witnessed 17.2% yoy (5.7% qoq) growth to `911cr. BAL reported marginally lower-than-expected net profit growth of 20.5% yoy (5.2% qoq) to `711cr against our estimate of `734cr, largely because of lower-than-expected operating performance. Further, the bottom-line performance was aided by lower-than-expected tax outgo. At current levels, the stock is trading at 12.9x FY2013E earnings of `110. The stock rating is currently under review.

July 15, 2011 4

Market Outlook | India Research

South Indian Bank South Indian Bank registered healthy 41.2% yoy net profit growth for 1QFY2012 to `82cr. The bottom line was marginally below our estimates due to considerably lower NII, which was compensated by higher other income and lower operating expenses. Reported NIM declined by ~30bp qoq to 2.77% on account of a sharp increase in cost of deposits of ~100bp qoq. The 85bp qoq rise in yield on advances could not completely compensate for the pressure on cost of deposits. Calculated NIMs were down by sharp 41bp qoq. Business growth continued to be strong with advances growing by 31.2% yoy (8.1% qoq) and deposits rising by 35.5% yoy (6.4% qoq). CASA deposits grew by relatively lower 16.0%, leading to compression in CASA ratio from 25.1% in 1QFY2011 to 21.5% in 1QFY2012. Asset quality was largely stable with gross and net NPA ratios remaining flat sequentially and provision coverage ratio stable at 73%. The bank made higher standard assets provisions of ~`14cr compared to `2cr in 1QFY2011 and `6cr in 4QFY2011, on account of the recent hike in provisioning requirements by the RBI. Currently, the stock is trading at 1.3x FY2013E ABV, close to the upper end of the bank’s five-year range, due to strong operating performance in the last few quarters, especially on the gold loan front, as well as relatively large book-accretive QIP on the cards to capitalise on the gold loan segment further. We have an Accumulate rating on the stock with a target price of `26. We may revisit our estimates and recommendation post interaction with the management. Economic and Political News

Gold surges to record on US, EU debt turmoil

Fertiliser department alerts MEA on Potash cartel

TRAI says cancel 74 licences, DoT insists on only 12

Corporate News

Bharti Airtel offers to list Hexacom

Bajaj Auto recasts four-wheeler project with Renault

GVK’s plan to ‘take over’ BIAL hits a bump

GTL heads for debt restructuring

Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

Events for the day Balaji Tele Results Essel Propack Results Gujarat NRE Coke Results Tata Sponge Results

July 15, 2011 5

Market Outlook | India Research Research Team Tel: 022-3935 7800 E-mail: research@angelbroking.com Website: www.angelbroking.com

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