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Market StrategyDiwali Special

October 2011 Please refer to important disclosures at the end of this report. 27

Table of ContentsStrategy .............................................................................................................. 1

Agri-Chemicals ............................................................................................. 7United Phosphorous ......................................................................... 10Rallis India ............................................................................................ 12

Automobile .................................................................................................... 15Four-WheelerM&M ....................................................................................................... 22Tata Motors .......................................................................................... 24Maruti Suzuki ...................................................................................... 26Ashok Leyland .................................................................................... 28

Two-WheelerBajaj Auto ............................................................................................. 30Hero MotoCorp .................................................................................. 32TVS Motor ............................................................................................ 34

Auto AncillaryBosch .................................................................................................... 36Exide Industries .................................................................................. 38Amara Raja Batteries ....................................................................... 40Apollo Tyres ......................................................................................... 42Ceat ........................................................................................................ 44JK Tyre and Industries ..................................................................... 46Motherson Sumi ................................................................................. 48Bharat Forge ....................................................................................... 50FAG Bearings ..................................................................................... 52Automotive Axles ............................................................................... 54Subros ................................................................................................... 56

Banking ........................................................................................................... 59Private Sector BanksICICI Bank ........................................................................................... 66HDFC Bank ......................................................................................... 68Axis Bank .............................................................................................. 70Yes Bank ............................................................................................... 72Federal Bank ....................................................................................... 74South Indian Bank ............................................................................. 76

Public Sector BanksState Bank of India ........................................................................... 78Punjab National Bank ...................................................................... 80Bank of Baroda .................................................................................. 82Bank of India ....................................................................................... 84Canara Bank ....................................................................................... 86IDBI Bank ............................................................................................ 88Union Bank of India .......................................................................... 90Central Bank of India ....................................................................... 92Syndicate Bank .................................................................................. 94Allahabad Bank .................................................................................. 96Corporation Bank .............................................................................. 98Indian Bank ....................................................................................... 100Andhra Bank .................................................................................... 102United Bank of India ..................................................................... 104Vijaya Bank ....................................................................................... 106Bank of Maharashtra ..................................................................... 108J&K Bank ........................................................................................... 110

NBFCsHDFC ................................................................................................. 112LIC Housing Finance .................................................................... 114

Capital Goods .......................................................................................... 117BTGBHEL .................................................................................................. 122BGR Energy ..................................................................................... 124

T&D/IndustrialsABB INDIA ....................................................................................... 126Crompton Greaves ........................................................................ 128Thermax .............................................................................................. 130KEC International ........................................................................... 132Jyoti Structures ............................................................................... 134

Cement ......................................................................................................... 137UltraTech ............................................................................................ 144ACC .................................................................................................... 146Ambuja Cements ............................................................................ 148Shree Cement ................................................................................. 150India Cements ................................................................................. 152Madras Cements ............................................................................ 154JK Lakshmi Cement ....................................................................... 156

FMCG ............................................................................................................. 159ITC ....................................................................................................... 162HUL ..................................................................................................... 164Nestlé ................................................................................................. 166Asian Paints ...................................................................................... 168Dabur ................................................................................................... 170Colgate ................................................................................................ 172GCPL .................................................................................................. 174GSKCHL ............................................................................................ 176Marico .................................................................................................. 178TGBL .................................................................................................. 180Britannia ............................................................................................ 182

Infrastructure ........................................................................................... 185E&C CompaniesL&T ...................................................................................................... 190JP Associates .................................................................................. 192Sadbhav Eng. .................................................................................. 194Punj Lloyd ......................................................................................... 196HCC .................................................................................................... 198NCC .................................................................................................... 200IVRCL ................................................................................................. 202Simplex Infra ..................................................................................... 204Patel Engineering ........................................................................... 206Madhucon Projects ........................................................................ 208CCCL ................................................................................................. 210

Road DevelopersIRB Infra ............................................................................................ 212ITNL ..................................................................................................... 214Ashoka Buildcon ............................................................................. 216

Media ............................................................................................................. 219DB Corp ............................................................................................ 222HT Media ........................................................................................... 224Jagran Prakashan ........................................................................... 226PVR ..................................................................................................... 228SUN TV Networks .......................................................................... 230

Metals ............................................................................................................ 233FerrousTata Steel .......................................................................................... 236SAIL .................................................................................................... 238JSW Steel ......................................................................................... 240Bhushan Steel ................................................................................. 242Monnet Ispat .................................................................................... 244

MiningNMDC ................................................................................................ 246Sesa Goa .......................................................................................... 248Coal India .......................................................................................... 250MOIL ................................................................................................... 252

Non-FerrousHindustan Zinc ................................................................................ 254Sterlite Industries ........................................................................... 256Hindalco ............................................................................................. 258Nalco ................................................................................................... 260

Oil & Gas ..................................................................................................... 263Reliance Inds. .................................................................................. 266ONGC ................................................................................................ 268GAIL ..................................................................................................... 270Cairn India .......................................................................................... 272

Pharmaceuticals .................................................................................... 275Sun Pharma ...................................................................................... 280Dr. Reddy's Lab. ............................................................................. 282Cipla .................................................................................................... 284Lupin ................................................................................................... 286Ranbaxy .............................................................................................. 288Glaxo Pharma .................................................................................. 290Cadila Healthcare ........................................................................... 292Aventis ................................................................................................ 294IPCA Labs ......................................................................................... 296Aurobindo Pharm. ........................................................................... 298Alembic Pharm. ............................................................................... 300Indoco Remedies ............................................................................ 302

Power ............................................................................................................. 305NTPC .................................................................................................. 308CESC ................................................................................................. 310GIPCL ................................................................................................ 312

Real Estate ................................................................................................ 315DLF ...................................................................................................... 318HDIL .................................................................................................... 320Anant Raj ........................................................................................... 322

Software ...................................................................................................... 325Large CapTCS ..................................................................................................... 330Infosys ................................................................................................ 332Wipro .................................................................................................. 334HCL Technologies .......................................................................... 336

Mid CapTech Mahindra ................................................................................. 338Mahindra Satyam ............................................................................ 340MphasiS ............................................................................................. 342MindTree ............................................................................................ 344Infotech Entreprises ...................................................................... 346Hexaware ........................................................................................... 348KPIT Cummins ................................................................................. 350Persistent .......................................................................................... 352

Telecom ........................................................................................................ 355Bharti Airtel ....................................................................................... 360Idea Cellular ..................................................................................... 362Reliance Comm. .............................................................................. 364

Mid CapAbbott India ...................................................................................... 368Bajaj Electricals ............................................................................... 370Blue Star ............................................................................................ 372CRISIL ................................................................................................ 374Finolex Cables .................................................................................. 376Goodyear India ................................................................................. 378Graphite ............................................................................................. 380Greenply ............................................................................................ 382HAIL .................................................................................................... 384HEG .................................................................................................... 386Hitachi Home & Life ...................................................................... 388INEOS ABS ..................................................................................... 390ITD Cementation ............................................................................. 392Lakshmi Machine Works .............................................................. 394MRF..................................................................................................... 396NIIT ...................................................................................................... 398Page Industries ............................................................................... 400Relaxo Footwear ............................................................................. 402Sintex .................................................................................................. 404Siyaram Silk Mills ........................................................................... 406SpiceJet ............................................................................................. 408Taj GVK .............................................................................................. 410Tata Sponge Iron ............................................................................ 412TVS Srichakra .................................................................................. 414Vesuvius India .................................................................................. 416

1January 2012 Please refer to important disclosures at the end of this report

Dawn of a new cycle

TOP PICKSCompanies CMP (`̀̀̀̀) Target (`̀̀̀̀)

Large Caps

Ashok Leyland 27 32

Axis Bank 952 1,361

ICICI Bank 796 1,061

Infosys 2,592 3,047

L&T 1,274 1,608

Lupin 442 593

NMDC 175 231

RIL 785 923

TCS 1,076 1,262

United Phosphorus 142 182

Mid Caps

Abbott India 1,490 1,852

Bajaj Electricals 171 201

CEAT 84 125

Goodyear India 305 401

Greenply Inds. 181 286

Hitachi Home 112 157

Jagran Prakashan 98 137

Relaxo Footwear 281 420

Siyaram Silk Mills 267 426

Tata Sponge Iron 253 382Note: Prices as of January 19, 2012

Self-correcting mechanisms in placeLooking back at 2011, Indian equity markets were struck by a multitude ofissues, ranging from persistently high inflation, monetary tightening, stallingmining activity to sinking capital formation. The Eurozone crisis made mattersworse, causing global financial markets to become all the more risk-averse.But self-correcting mechanisms are already at play, which should make 2012a better year for Indian equities.

Most importantly, cooling of inflation and consequently interest rates shouldend the spell of margin compression, which has afflicted corporate earningsin the past several quarters. Also, India's widening current account deficithas been another macro overhang. But, here again, even at 49-50 levels, the10-12% INR depreciation, in our view, should provide the requisite boost toIndia's exports to gradually self-correct the deficit.

Expect 19,300 Sensex by December 2012

Sensex FY2012 earnings growth is likely to be modest as high inflation andinterest rates have battered margins. But with this scenario on its way tochanging in FY2013, we expect the earnings growth rate to improve from9.5% in FY2012 to 16.2% in FY2013. Also, in our view, risks that the governmentinertia continues and GDP growth remains at ~7% have already been largelyfactored in valuations by the market. We believe this offers a favorablerisk-return trade-off, considering that several domestic negatives can be reversedby quick, simple and rational policy actions. For instance, quick approval ofFDI reforms in aviation and insurance, among others, as well as pick-up ininfrastructure ordering activity are low-hanging fruits. Already, ordering activityby NHAI and Power Grid is reasonably robust, and it is a matter of time beforeothers would follow suit. The financial troubles of SEBs is another unnecessarycrisis that is finally changing with recent tariff hikes. Amongst more difficult topush-through are measures to end the mining logjam, but in our view thegovernment will soon have to balance environmental concerns and expeditemining and land acquisition to step up GDP growth.

In fact, we do not expect domestic factors alone to have the capacity to triggernew lows for the markets. It is only the Eurozone crisis that may still lead tovolatility in the near term, but policymakers there as well are taking steps toavert any crisis event - accordingly, as of now we are basing our market viewon a likely orderly outcome in the Eurozone. Considering that valuations are alsoreasonable, with domestic macro indicators improving and with earnings trajectorylikely to follow suit, we have a target of 19,300 for the Sensex by December 2012.

Select stocks to give better returns

Looking beyond the Sensex, there are a host of good investment opportunitiesin our view in companies across several sectors, such as banking, IT andpharma. On the other hand, there are sectors such as capital goods and cementwhere we still remain cautious. In this compendium, we have therefore givenan overview of our entire coverage universe of 160+ stocks, having a combinedmarket capitalization of ~`40lakh cr. Currently, we have a Buy recommendationon 82 of these, broadly preferring companies having high-quality cyclical businessesrather than high-quality defensives. Also, we have covered several mid caps,which in our view offer enormous potential - either because they are leadingbrands within their sectors trading cheaply or belong to high-growth sectorsbenefitting from rural, export or consumption themes.

January 2012 Please refer to important disclosures at the end of this report2

Source: MOSPI, Angel Research

Exhibit 1: Inflationary pressures moderating

0.0

5.0

10.0

15.0

20.0

25.0

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

WPI Inflation (%) Food Inflation (%, RHS)

Dec

-08

Feb

-09

Apr-

09

Jun-0

9

Aug-0

9

Oct

-09

Dec

-09

Feb

-10

Apr-

10

Jun-1

0

Aug-1

0

Oct

-10

Dec

-10

Feb

-11

Apr-

11

Jun-1

1

Aug-1

1

Oct

-11

Dec

-11

past 4-5 months due to concerns of slower global growth prospects.However, crude oil prices have remained sticky at elevated levels,with Brent averaging ~US$113/barrel in FY2012YTD as comparedto FY2011 average of US$87/barrel. But looking at earlier trendsin peak crude oil expenditure as a percentage of global GDPover the past decade, we believe crude prices are close totheir peak levels and expect crude to moderate going forward,thereby increasing headroom for monetary easing and loweringthe current account deficit.

Reversal of rate cycle expected to boost corporate earningsgrowth in FY2013: Cooling of inflation and consequently interestrates should end the spell of margin compression, which hasafflicted corporate earnings in the past several quarters.We expect the scenario to improve in FY2013E with the peakingof inflation and interest rate cycle. Hence, while FY2012 earningsgrowth is likely to be modest, cooling inflation and interest ratesshould underpin healthier growth in FY2013. Hence, we expectSensex EPS growth to improve from 9.5% in FY2012 to 16.2%in FY2013.

Source: RBI, Angel Research

Exhibit 2: Expect at least 100bp cut in repo rate in CY2012

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Repo rate (%) Reverse Repo rate (%)

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

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11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Self-correcting mechanisms in placeLooking back at 2011, Indian equity markets were struck by amultitude of issues, ranging from persistently high inflation,sledgehammer monetary policy, surging subsidies, plunging INRto falling domestic gas production, stalling mining activity andsinking capital formation. The Eurozone crisis made mattersworse, causing global financial markets to become all the morerisk-averse. But self-correcting mechanisms are already at play,which should make 2012 a better year for Indian equities.

Multiple benefits out of reversal of inflation and interestrate cycle: In spite of slowing domestic growth, inflation hasstubbornly remained above the RBI's indicated comfort levelof 5-5.5% for two years now and above the 9% mark for 14consecutive months. However, finally the WPI inflation trajectoryhas moderated, as evident from the 7.5% reading in December2011, after hitting the double-digit mark in September 2011.Most importantly, primary inflation is on retreat and it is only amatter of time before manufacturing inflation also cools off inthe backdrop of the policy-induced growth slowdown.

Source: Angel Research

Exhibit 3: Sensex EPS estimates

834

1,0141,110

1,290

350

550

750

950

1,150

1,350

FY2010 FY2011 FY2012E FY2013E

(`)

21.6% growth9.5% growth 16.2% growth

Oil too may soften in-line with the fall in other commodities:Almost all commodities (be it metals, iron ore or coal) havecorrected by a considerable 20-25% in USD terms over the

With inflation declining, the RBI has signalled a softening ofits monetary policy stance to stimulate the slowing domesticgrowth momentum. The Central Bank has started with infusing`70,000cr of liquidity through Open Market Operations (OMO)and `30,000cr through a CRR cut. In the months to come, thisis likely to be followed up with more liquidity infusion and eventuallyrate cuts as well, provided inflation keeps cooling on expectedlines. Capital-intensive sectors have been battered with elevatedinterest burden for quite a while now; hence, relief on this frontis likely to be a major catalyst in pushing up overall growth.

INR depreciation to boost export growth: India's wideningcurrent account deficit has been another macro overhang oflate, ballooning from the already high 3% levels, but this wasbeing masked by capital flows earlier. But with this kind of ahigh current account deficit, we had maintained the view thatthe INR was likely to depreciate, and this finally got accentuatedonce capital flows diminished recently. Now, even after retracingsome of the losses, at 49-50 levels the 10-12% INR depreciation(not just against the USD but also the Chinese Yuan) in ourview should provide the requisite boost to India's exports to graduallyself-correct the deficit. Within our coverage universe, the majorbeneficiaries of INR depreciation are not surprisingly expectedto be the IT, pharma and export-oriented auto ancillary companies.Amongst these, in our view, while valuations do not leave muchupsides in IT, we still have a positive outlook on pharma.

Policy reforms could add further boost: The risk that governmentinertia continues and GDP growth remains at ~7% is, in ourview, already largely factored in valuations by the market.We believe this offers a favorable risk-return trade-off, consideringthat several of the policy issues can be reversed by quick, simpleand rational policy actions that can have an immediate positiveimpact and minimal negative fallout for all stakeholders.

Infrastructure spending: Pick-up in infrastructure ordering activityby government bodies in roads, ports and power transmission,among others, is one of the low-hanging fruits that would onlyhave beneficiaries. Already, ordering activity by NHAI and Power

Strategy

January 2012 Please refer to important disclosures at the end of this report 3

Indian equities have already got de-rated and are now tradingat a substantial discount to their long-term trading range, factoringin the negatives. Based on one-year forward earnings, the Sensexis trading at 13.4x, which translates into a considerable 20%discount to its five-year trading average.

Grid is reasonably robust and it is a matter of time before othergovernment bodies would follow suit.

Quickly pushing non-contentious FDI reforms: The balanceof payments concerns can be addressed further by potentialFDI reforms in aviation, education and insurance to begin with,which are not contentious like retail FDI.

Resolving SEB woes: The financial troubles of SEBs is anotherexample of irrational policies that can and should be quicklyset straight. So far, reported losses have been as high as ̀ 63,550cr,owing to inadequate/nil tariff hikes, power theft and high AT&Closses. This unnecessary crisis is finally changing with muchrequired tariff revisions recently - 22 states have hiked tariffs -and we continue to hold the view that SEBs are unlikely tobecome NPAs for banks or the main culprits for low PLFs ofpower companies (in our view, fuel availability is the key issuefor the power sector).

Addressing the fuel crisis: Fuel shortage due to the mininglogjam is one of the more serious issues that the governmentneeds to addres sooner rather than later. It does not make sensethat a developing country like India, with a demographic dividendto take advantage of, is importing increasing quantities of eventhose resources that are abundantly available to it (read coal).Even in case of steel, we are a net importer; while, on the otherhand, we have been exporting 50% of our annual iron ore production(now mired in mining bans).

In fact, despite being the fifth largest in reserve size, India'sexpensive coal imports continue to rise alarmingly on accountof domestic shortage. Considering growth in user industries(power, cement and metals), India's coal demand is expectedto grow from 625mn tonnes in FY2011 to 855mn tonnes inFY2015. While production has been constrained, India's coalimports are likely to surge from 89mn tonnes in FY2011 to175mn tonnes in FY2015. Production from newer mines hasbeen lower on account of time-consuming clearance processes(mainly environment clearance and forest clearance). Further,land acquisition issues have been a big bottleneck.

Hence, we hold the view that considering the small land requirementand deforestation implications for mining coal and iron ore ascompared to the economic benefits, eventually in the near-to-medium term the government will have to balance environmentalconcerns and expedite mining and land acquisition bills as wellas the actual auctioning and regulatory clearance of coal andiron ore blocks in order to step up GDP growth.

Expect 19,300 Sensex by December 2012Valuations are cheap; Earnings downgrades behind us: Indianmarkets fell sharply in CY2011 and were one of the worstperformers across the globe. This was mainly due to high inflationand interest rates taking a toll, reflected in GDP growth fallingto 7%. Consequently, earnings growth trajectory for India Inc.also weakened considerably, as evident from poor 2QFY2012earnings and similar expectations in the immediate short termas well.

All this has resulted in the most important ingredient for healthystock returns to fall in place - cheap valuations. Valuations of

Source: Bloomberg, Angel Research

Exhibit 4: Sensex one-year forward P/E

6.0

9.0

12.0

15.0

18.0

21.0

24.0

27.0

Sensex 1 year forward P/E 15 year Avg 5 year Avg

Apr-

96

Jan-9

7

Oct

-97

Jul-

98

Apr-

99

Jan-0

0

Oct

-00

Jul-

01

Apr-

02

Jan-0

3

Oct

-03

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Jan-1

2

(x)

Earnings likely to get a fillip from reversal of inflation andinterest rate cycle: Sensex FY2012 earnings growth is likelyto be modest as high inflation and interests have battered margins.But with this scenario on its way to changing in FY2013, weexpect the earnings growth rate to improve from 9.5% in FY2012to 16.2% in FY2013. Also, the risk that the government inertiacontinues and GDP growth remains at ~7% is, in our view,already being largely factored in valuations by the market.We believe this offers a favorable risk-return trade-off, consideringthat several of the domestic negatives can be reversed by quick,simple and rational policy actions.

In fact, we do not expect domestic factors alone to have thecapacity to trigger new lows for the markets. It is only the Eurozonecrisis that may still lead to continued volatility in the near term,but policymakers there as well are taking steps to avert anycrisis event. While fiscal discipline and resultant deflation inthe weaker countries could improve economic competitiveness,this would be a more painful solution for their respective citizens.We believe an orderly exit by some of the weaker countriesfrom the Euro and subsequent currency devaluation by themto boost exports and employment would be a more long-lastingsolution. But in either of the two scenarios, as of now we arebasing our market view on a likely orderly outcome in the Eurozone.

Considering that valuations are also reasonable and several ofthe domestic macro indicators such as inflation, interest ratesand current account are either already improving or set to improvein the coming quarters with earnings trajectory likely to followsuit, we have a positive outlook on markets. We have a targetof 19,300 for the Sensex by December 2012, assigning a multipleof 15x FY2013E earnings, in-line with the long-term average.Our target implies an upside of ~15% from current levels.

Select stocks to give better returns: Looking beyond the Sensex,there are a host of good investment opportunities in our viewin companies across several sectors such as banking, IT andpharma. For instance, we remain positive on Axis Bank andL&T, which we believe are strong structural stories available atcyclically low valuations. On the other hand, there are sectorssuch as capital goods and cement where we still remain cautious.

Strategy


Source: Angel Research; Note; No. represents no. of companies

Exhibit 5: Angel Universe Recommendation SummarySector Neutral/

Sector (No of Companies) view Buy Accum. Reduce

Auto & Auto Anc. (18) Positive 9 7 2

Capital Goods (7) Neutral 2 0 5

Cement (7) Neutral 1 0 6

Financials (25) Positive 13 5 7

FMCG (11) Neutral 0 5 6

Infrastructure (14) Positive 10 0 4

Media (5) Positive 3 0 2

Metals & Mining (13) Positive 4 4 5

Oil & Gas (4) Positive 3 0 1

Real Estate (3) Neutral 2 0 1

Pharma/

Agri-Chemicals (14) Positive 7 3 4

Power (3) Neutral 3 0 0

Software (12) Positive 4 6 2

Telecom (3) Neutral 0 0 3

Mid Cap (25) Positive 21 0 4

Angel Universe (164) 82 30 52

Source: Company, Angel Research

Exhibit 6: Top 5 buys - cheapest on P/BV basisCompany Sector Upside (%) P/BV (x)

FY13E/CY12E

JK Tyre Auto Ancillary 27 0.30

CEAT Auto Ancillary 48 0.44

IVRCL Infrastructure 40 0.49

Syndicate Bank Financials 26 0.55

Finolex Cables Mid Cap 51 0.58


Exhibit 7: Top 5 buys - cheapest on P/E basisCompany Sector Upside (%) P/E (x)

FY13E/CY12E

Siyaram Silk Mills Mid Cap 60 3.8

TVS Srichakra Mid Cap 51 4.0

Tata Sponge Iron Mid Cap 51 4.2

Greenply Inds. Mid Cap 58 5.1

Relaxo Footwear Mid Cap 50 6.0

In this compendium, we have therefore given an overview ofour entire coverage universe of 160+ stocks, spanning all majorsectors of the economy and having a combined market capitalizationof ~`40lakh cr. Currently, we have a Buy recommendation on82 of these, broadly preferring companies having high-qualitycyclical businesses rather than high-quality defensives.

Our Buys range from high-ROE businesses like TCS, Lupinand Jagran Prakashan to deep-value stocks like Ceat, IVRCLand Finolex Cables. There are several Buys from the mid capspace too, which in our view offer enormous potential - eitherbecause they are leading brands within their sectors tradingcheaply or belong to high-growth sectors benefitting from rural,export or consumption themes. These include stocks like Siyaram,Greenply and Relaxo.

Overall, with the environment begining to turn positive and ahost of stocks to pick from, we firmly believe that 2012 is setto be a much better year for Indian equities!


Exhibit 8: Top 5 buys - highest on RoE basisCompany Sector Upside (%) RoE (%)

FY13E/CY12E

Bajaj Auto Automobile 20 44.7

Jagran Prakashan Media 40 33.8

TCS Software 17 33.3

NMDC Metals & Mining 32 31.1

Lupin Pharma 34 28.6

Exhibit 9: Companies with highest earning growthCompany Sector Reco Upside Adj PAT Gr.

(%) FY13E /CY12E (%)

Hitachi Home Mid Cap Buy 40 170.2

ITD Cementation Mid Cap Buy 28 135.9

HEG Mid Cap Buy 16 111.6

ABB Capital Goods Sell (41) 100.3

JK Tyre Auto Ancillary Buy 27 96.4

Blue Star Mid Cap Neutral - 91.8

Ranbaxy Pharma Neutral - 79.3

Shree Cement Cement Neutral - 75.9

JSW Steel Metals & Mining Accumulate 5 71.5

Relaxo Footwear Mid Cap Buy 50 66.6Source: Company, Angel Research

Exhibit 10: Companies with lowest earning growthCompany Sector Reco Upside Adj PAT Gr.

(%) FY13E/CY12E (%)

Jyoti Str. Capital Goods Buy 22 (14.1)

BHEL Capital Goods Neutral - (9.3)

Andhra Bank Financials Neutral - (8.6)

BGR Capital Goods Neutral - (6.8)

Thermax Capital Goods Neutral - (5.6)Source: Company, Angel Research

Strategy



Exhibit 12: Companies trading at cyclically lower valuationsCompany Sector Reco CMP( `̀̀̀̀) Target ( `̀̀̀̀) Upside (%)

United Phos. Agri -Chemicals Buy 142 182 28

RIL Oil & Gas Buy 785 923 18

L&T Infrastructure Buy 1,274 1,608 26

Axis Bank Financials Buy 952 1,361 43

NMDC Metals & Mining Buy 175 231 32


Exhibit 11: Companies trading at cyclically higher valuationsCompany Sector Reco CMP ( `̀̀̀̀) Target ( `̀̀̀̀) Upside (%)

Aventis Pharma Reduce 2,230 1,937 (13)

Marico FMCG Neutral 152 - -

Page Inds. Mid Cap Neutral 2,505 - -

CRISIL Mid Cap Neutral 914 - -

Ambuja Cement Neutral 160 - -

Strategy

Source: BSE, Company, Angel Research

Exhibit 15: Angel Universe Estimate SummaryMarket

CAGR CAGR CAGR

Sector FY12E FY13E FY13E FY12-13E FY12E FY13E FY13E FY12-13E FY12E FY13E FY13E FY12-13E Cap ( `̀̀̀̀ Cr)

Auto & Auto Anc. 328,375 373,706 13.8 14.7 38,282 43,822 14.5 10.7 22,817 25,725 12.7 7.3 276,043

Capital Goods 88,364 91,912 4.0 10.1 13,505 13,462 (0.3) 6.6 8,685 8,479 (2.4) 2.6 100,497

Cement 48,521 54,356 12.0 17.8 10,729 12,196 13.7 19.7 5,253 6,122 16.6 19.2 91,845

Financials 234,600 271,719 15.8 15.0 135,042 154,968 14.8 15.9 63,568 71,687 12.8 13.3 655,260

FMCG 93,457 108,439 16.0 16.3 18,412 22,049 19.8 19.0 23,887 28,223 18.2 18.0 386,809

Infrastructure 117,029 133,370 14.0 13.9 17,836 20,373 14.2 11.5 5,926 7,111 20.0 7.6 111,179

Media 7,356 8,186 11.3 10.5 2,840 3,179 11.9 8.0 1,485 1,666 12.2 8.0 21,626

Metals & Mining 430,082 485,414 12.9 12.2 85,136 100,744 18.3 10.3 53,431 61,206 14.6 9.4 550,253

Oil & Gas 487,316 522,917 7.3 10.8 105,744 114,243 8.0 6.3 57,854 63,251 9.3 9.5 602,600

Real Estate 13,238 15,247 15.2 13.4 5,973 7,001 17.2 17.0 2,583 3,222 24.7 10.6 40,926

Pharma/Agri-Chemicals 65,996 76,892 16.5 17.4 14,184 17,692 24.7 23.9 10,105 13,174 30.4 22.2 200,997

Power 69,888 78,187 11.9 11.8 17,260 19,552 13.3 16.4 10,250 11,213 9.4 5.9 145,429

Software 167,428 194,749 16.3 21.1 41,517 47,756 15.0 20.6 30,763 35,612 15.8 18.5 519,465

Telecom 109,927 126,253 14.9 13.9 34,829 41,953 20.5 14.1 6,730 10,655 58.3 13.6 176,407

Mid Cap 51,018 58,901 15.5 16.2 5,061 6,501 28.5 13.8 2,485 3,473 39.7 10.7 33,680

Angel Universe 2,312,595 2,600,248 12.4 13.7 546,348 625,493 14.5 12.8 305,822 350,819 14.7 11.9 3,913,015

Sales ( `̀̀̀̀ cr) Sales Gr. (%) Op. Profit( `̀̀̀̀ cr) Op. Profit Gr. (%) Adj. PAT( `̀̀̀̀ cr) Adj. PAT Gr. (%)

Exhibit 14: Contrarian Avoids


BloombergCompany Sector Angel Reco. Buy Hold/Sell

KEC Capital Goods Neutral 24 7

Bharti Airtel Telecom Neutral 41 16

PVR Media Neutral 9 -

Shree Cement Cement Neutral 25 17

India Cements Cement Neutral 27 16Source: Bloomberg, Angel Research

Exhibit 13: Contrarian Buys Bloomberg

Company Sector Angel Reco. Buy Hold/Sell

Britannia FMCG Accumulate 7 8

TGBL FMCG Accumulate 3 9

Ashok Leyland Automobile Buy 25 26

Mahindra Satyam Software Accumulate 11 12

Mphasis Software Accumulate 12 29


SECTORS


Agri-Chemicals POSITIVE

COVERAGECompanies CMP (`̀̀̀̀) Target (`̀̀̀̀) Reco

United Phosphorous 142 182 Buy

Rallis India 131 - Neutral

Industry argumentsIndian domestic market to post steady growth: The Indian organized agrichemicalindustry is estimated at ~US$1bn (`5,000cr, as of FY2009) i.e., 0.1% of thecountry's total GDP and 0.6% of agriculture GDP. Currently, the industry is mostlydominated by unorganized players. This provides a scope for organized playersto grow higher than the industry's growth of 13-14%. We believe organized playersare well placed to seize this high-growth opportunity on account of theirwell-spread distribution network, strong brands and robust new product pipeline.

Agro-generic markets can at least expect a 6-8% CAGR, in-line with historicalperformance: Apart from domestic opportunities, the global agrichemical industryalso offers opportunities in the form of generics. Agrichemical companies havebeen reducing their manufacturing capacity of low-value off-patent proprietaryproducts, thus paving way for the growth of generic players.

Consequently, generic firms, especially in the Indian space, are in a sweetspot, given their cost advantage. The global agrichemical industry, valued atUS$40bn (CY2008), is dominated by the top six innovators, who enjoy alarge market share of the patented (28%) and off-patent (32%) market. Pertinently,the top six innovators also enjoy a large share of the off-patent market due tohigh entry barriers for pure generic players. Thus, one-third of the total pieworth US$13bn (controlled by the top six innovators through proprietaryoff-patent products) provides a high-growth opportunity for larger integratedgeneric Indian players such as United Phosphorus (UPL).

Generic players have been garnering a high market share, increasing from32% levels in 1998 to 40% by 2006-end. The industry registered a 3% CAGRover 1998-2006, while generic players outpaced the industry with a 6% CAGR.Going ahead, assuming this trend plays out in terms of growth for the agrichemicalindustry and the same rate of genericisation occurs, the agrichemical genericindustry could log in 6-8% yoy growth during the period.

CRAMS - An opportunity on the anvil: Global agrichemical companies havebeen reducing the manufacturing capacity of low-value products to concentrateon higher-value products. Conversely, they are maintaining their strong holdon off-patent active ingredients (AI) through outsourcing the same. For instance,Bayer CropScience reduced its portfolio by 29 actives during 2000-06.

Sales of patented products constituted approximately one-third of the totaland another one-third is proprietary off-patent (patent of the molecule hasexpired but no credible generic brand has been able to garner significantmarket share from the patented brand). China has come to be known as theworld's factory and this fact remains the same for agrichemicals as well. However,to diversify risks arising from a single location manufacturing base, many MNCshave been looking at other countries. Here, Indian agrichemical manufacturerscan position themselves as suitable alternatives to their Chinese counterparts.

Many players, including Rallis India (RAIL), plan to selectively target this opportunityby supplying AI to top industry players. As an illustration, RAIL is targetingcumulative revenue of ̀ 1,000cr over the next five years from this segment alone.

Outlook and valuation: The outlook for the Indian agrichemical industry, giventhe growth opportunities, is likely to remain strong. However, currently giventhe low breadth of our coverage, our top pick is UPL, given its attractivevaluations, which discount most of the negatives.


The Indian organized agrichemical industry is estimated at~US$1bn (`5,000cr, as of FY2009) i.e., 0.1% of the country'stotal GDP and 0.6% of agriculture GDP. Currently, the industryis mostly dominated by unorganized players (50% of the industry).This provides a scope for organized players to grow higherthan the industry's growth of 13-14%. We believe organizedplayers are well placed to seize this high-growth opportunityon account of having a well-spread distribution network, strongbrands and robust new product pipeline.

Source: Industry, Angel Research

Exhibit 1: Low consumption and penetration of the Indian agrichemical

17.0

10.7 10.5

6.65.8

4.5

0.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Taiwan Japan Holland S. Korea France USA India

(Kg/ha)

Agro-generic markets can at least expect a 6-8% CAGR,in-line with historical performance: Apart from domesticopportunities, the global agrichemical industry also offersopportunities in the form of generics. Agrichemical companieshave been reducing their manufacturing capacity of low-valueoff-patent proprietary products, thus paving way for the growthof generic players.

Innovators dominant in the off-patent space; Generic playersin a sweet spot

The global agrichemical industry is dominated by the top sixinnovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont andDow, which enjoy a large market share of patented (28%) andoff-patent (32%) markets. Pertinently, the top six innovatorsalso enjoy a large share of the off-patent market due to thehigh entry barriers for pure generic players. Thus, one-third ofthe total pie worth US$13bn (controlled by the top six innovatorsthrough proprietary off-patent products) provides a high growthopportunity for larger integrated generic players like UPL.


Exhibit 2: Global agrichemical market (US$40bn)

Proprietary Patent(Top -6)

28%

Proprietary OffPatent (Top -6)

32%

GenericTop -561%

GenericOthers39%

Genericoff patent

40%

Generic segment’s market share to increaseGeneric players have been garnering a high market share, increasingfrom 32% levels in 1998 to 40% by 2006. Over 1998-2006,while the industry registered a CAGR of 3%, generic playersoutpaced the industry by posting a 6% CAGR during the period.Going ahead, given the opportunities and drop in rate of newmolecule introduction by innovators, we expect generic playersto continue to outpace the industry's growth and increase theirmarket share in the overall pie. Historically, the global agrichemicalindustry has been logging in-line growth with global GDP. Goingahead, over CY2009-11E, the global economy is expected togrow by 3-4%. Assuming this trend plays out in terms of growthfor the agrichemical industry and the same rate of genericisationoccurs, the agrichemical generic industry can log in growth of6-8% during the period and garner a market share of 44-45%.


Exhibit 3: Market share trend of generic players45

40

35

30

25

201998 1999 2000 2001 2002 2003 2004 2005 2006

High investments - Formidable entry barrierThe global agrichemical industry is highly consolidated, primarilydue to high entry barriers of significant and upfront investmentsrequired for product registration and to set up manufacturingfacilities. As a result, price competition is limited due to thesubstantial investments involved. Moreover, unlike thepharmaceutical sector, where bioequivalence of molecule canhelp a company get the permission to sell medicines, companiesin the agrichemical sector have to compulsorily undergo fieldtrials for each molecule and in each geography where the productswould be marketed. Field trials are carried out by independentagencies across crops and seasons, which could take anywherebetween 2-5 years, depending on the market (U.S. and EU)and government regulations. Thus, the process requires highinvestments both monetary and time, thereby restrictingcompetition.

Additional products going off-patent to boost growth

As per NuFarm and MAI, patents worth US$3bn-4bn (sales asof 2007) would expire during 2009-14, further widening theopportunity for generic players. Source: Company, Angel Research

Exhibit 4: Timeline for the development of agrichemical products

Approvaland Product

Launch

Prove Bio-Equivalence

No Short cutNew

Agrichemicals

New

Generic

Pharma

Generic

Discovery Development Field Trials (2-5 years)I II III

Agri-Chemicals


The trend is already well established - Top generic companiesgetting stronger

New entrants are also faced with another challenge of gainingentry into the existing distribution network. In most markets,agrichemical sales and distribution have evolved to becomeorganized businesses and are controlled by few players. Forinstance, Tenkoz, Inc. is the largest agrichemical distributor inthe U.S., with combined purchases representing 25% of theU.S. agrichemical market. Hence, to enter this market, a newplayer needs to have a basket of products to gain shelf space.But, a large product offering entails substantial investments interms of time and money. This is evident from the fact that 53%of the generic market (one-third of the agrichemical industry)is controlled by the four largest generic players, including UPL.In all, around 81% of the industry is controlled by few players,making agrichemicals a highly consolidated sector.


39 4043

53

0

10

20

30

40

50

60

CY2005 CY2006 CY2007 CY2008

(%)

Exhibit 5: Trend in the market share of the top four generic players

CRAMS - An opportunity on the anvilGlobal agrichemical companies have been reducing themanufacturing capacity of low-value products to concentrateon higher-value products. Conversely, they are maintaining theirstrong hold on off-patent AI through outsourcing the same. Forinstance, Bayer CropScience reduced its portfolio by 29 activesduring 2000-06.

Sales of patented products constituted approximately one-thirdof the total and another one-third is proprietary off-patent (patentof the molecule has expired but no credible generic brand hasbeen able to garner a significant market share from the patentedbrand). China has come to be known as the world's factoryand this fact remains the same for agrichemicals as well. However,to diversify risks arising from a single location manufacturingbase, many MNCs have been looking at other countries. Here,Indian agrichemical manufacturers can position themselves assuitable alternatives to their Chinese counterparts.

Many players, including RAIL, plan to selectively target thisopportunity by supplying AI to the top industry players. As anillustration, RAIL is targeting cumulative revenue of `1,000crover the next five years from this segment alone.

Outlook and valuation: The outlook for the Indian agrichemicalindustry, given the growth opportunities, is likely to remain strong.However, currently given the low breadth of our coverage,our top pick is UPL, given its attractive valuations, whichdiscount most of the negatives.

Agri-Chemicals


Exhibit 6: Recommendation summaryCompany Reco CMP Tgt Price Upside FY2013E FY11-13E FY2013E

( `̀̀̀̀) ( `̀̀̀̀) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) ROE (%)

United Phosphorous Buy 142 182 28.0 10.4 1.3 6.7 13.8 16.0 16.1

Rallis Neutral 131 - - 13.8 1.5 8.6 21.4 30.3 25.4


Company BackgroundUnited Phosphorus Ltd. (UPL) is a global generic crop-protection, chemicalsand seeds company. The company is fully integrated, which enables it totake advantage of the consolidated opportunities within the agrichemicalindustry. UPL is the largest Indian agrichemical company, reporting revenueof ~US$1.3mn as of March 2011.

Structural SnapshotGrowth opportunity: The Indian agrichemical industry, estimated at ~US$1bn(`5,000cr) at the end of FY2009, contributed 0.1% to India's total GDPand 0.6% to its agriculture GDP. The pesticides industry can easily grow at13-14%, in-line with GDP growth, with organized players, such as RAIL,likely to grow at a higher rate because of greater share of unorganized players.

Apart from domestic opportunities, the global agrichemical industry alsooffers opportunities in the form of generics and contract manufacturing.Agrichemical companies have been reducing the manufacturing capacity oflow-value off-patent proprietary products. Approximately, one-third of totalagrichemical sales are estimated to be that of proprietary off-patent. Assumingthis trend plays out in terms of growth for the agrichemical industry and thesame rate of genericisation occurs, the agrichemical generic industry couldlog in 6-8% yoy growth during the period. With drugs going off-patent eachyear, generics represent a major outsourcing opportunity for agrichemicalproducers in India.

Competitive position: UPL figures among the top five global generic agrichemicalplayers, with presence across major markets, including the U.S., EU,Latin America and India.

Nature of business: Highly dependent on monsoons; Highly competitivedomestic industry, while exports possess high legal barriers.

Current Investment ArgumentsInnovators dominant in the off-patent space: The global agrichemical industry,valued at US$40bn (CY2008), is dominated by the top six innovators, whoenjoy a large market share of the patented (28%) and off-patent (32%) market.Pertinently, the top six innovators also enjoy a large share of the off-patentmarket due to high entry barriers for pure generic players. Thus, one-third ofthe total pie provides a high-growth opportunity for larger integrated genericplayers such as UPL.

Generic segment's market share to increase: Generic players have beengarnering a high market share, increasing from 32% in 1998 to 40% by2006-end. The industry registered a 3% CAGR over 1998-2006, while genericplayers outpaced the industry with a 6% CAGR. Given the opportunitiesand a drop in the rate of new molecule introduction by innovators, we expectgeneric players to continue to outpace the industry's growth and increasetheir market share in the overall pie garnering a market share of 44-45%.

Valuation: Generics are expected to register healthy growth due to increasingpenetration and wresting market share from innovators and patent expiriesduring 2009-14. We maintain our Buy rating with a target price of `̀̀̀̀182.

Agriculture CMP/TP/Upside: `142 / `182 / 28%

SHAREHOLDING PATTERN (%)

PROMOTERS 27.3

FII 35.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

UPL (2.7) (8.2) 11.6 (2.9) 82.9

SENSEX (2.6) (12.3) 21.3 3.3 17.3NOTE: ABOVE 1 YEAR ON CAGR BASIS

FINANCIAL PERFORMANCE OVERVIEW

(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 40.5 7.3 17.1 27.6 42.8

PAT GROWTH* (40.7) 4.1 16.7 20.2 -

OPM# 15.7 19.7 16.0 15.1 17.0

ROE# - 17.0 18.1 18.4 19.9NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES

PARTICULARS FY2012E FY2013E

PAT GROWTH (%) 20.3 7.7

ROE (%) 17.1 16.1

P/E 11.2 10.4

P/BV 1.8 1.6

BLOOMBERG CONSENSUS RECOMMENDATION

BUY / HOLD / SELL 20 / 0 / 2

RATING BUY

52 WEEK HIGH / LOW 172 / 121

MARKET CAP (`̀̀̀̀ CR) 6,560

LIQUIDITY MEDIUM

TOPPICKUnited Phosphorous


BALANCE SHEET

SOURCES OF FUNDS

EQUITY SHARE CAPITAL 88 92 92 92

RESERVES & SURPLUS 2,904 3,359 3,939 4,544

SHAREHOLDERS FUNDS 2,992 3,753 4,305 4,897

MINORITY INTEREST 14 14 14 14

TOTAL LOANS 2,382 2,500 2,459 2,483

DEFERRED TAX LIABILITY 116 116 116 116

TOTAL LIABILITIES 5,503 6,383 6,894 7,510

APPLICATION OF FUNDS

GROSS BLOCK 2,519 3,690 3,939 4,096

LESS: ACC. DEPRECIATION 1,229 1,442 1,706 1,983

NET BLOCK 1,290 2,247 2,233 2,113

CAPITAL WORK-IN-PROGRESS 41 74 79 82

GOODWILL / INTANGILBLES 482 1,135 1,540 1,540

INVESTMENTS 761 761 761 761

CURRENT ASSETS 4,324 4,368 5,013 5,872

CURRENT LIABILITIES 1,462 2,269 2,259 2,396

NET CURRENT ASSETS 2,863 2,099 2,281 3,013

OTHERS 67 66 41 17

TOTAL ASSETS 5,503 6,383 6,894 7,510

Y/E MARCH (`̀̀̀̀ CR) FY2010 FY2011 FY2012E FY2013E

PROFIT & LOSS STATEMENT

TOTAL OPERATING INCOME 5,408 5,805 6,935 7,424

% CHG 9.7 7.3 19.5 7.0

TOTAL EXPENDITURE 4,461 4,694 5,604 5,991

EBITDA 947 1,111 1,332 1,433

(% OF NET SALES) 17.9 19.7 19.7 19.7

DEPRECIATION & AMORTISATION 215 214 263 277

EBIT 732 897 1,068 1,156

INTEREST & OTHER CHARGES 145 312 250 250

OTHER INCOME 34 94 20 51

RECURRING PBT 621 678 838 956

% CHG 23.8 9.2 23.5 14.1

EXTRAORDINARY EXPENSE/(INC.) (23) (14) - -

PBT (REPORTED) 598 664 838 956

TAX 81 73 126 191

PAT (REPORTED) 517 591 712 765

ADD: SHARE OF EARNINGS OF ASSO. 19 (14) (14) (14)

LESS: MINORITY INTEREST (MI) 6 10 10 10

PAT AFTER MI (REPORTED) 526 558 688 740

ADJ. PAT 549 572 688 740

% CHG 24.7 4.1 20.3 7.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 13.3 13.4 11.2 10.4

P/BV 2.4 2.0 1.8 1.6

EV/EBITDA 8.3 8.1 6.9 6.7

PER SHARE DATA (`̀̀̀̀)

EPS (BASIC) 12.5 12.4 14.9 16.0

EPS (FULLY DILUTED) 12.5 12.4 14.9 16.0

CASH EPS 17.4 17.0 20.6 22.0

BOOK VALUE 68.1 81.2 93.1 105.9

RETURNS (%)

ROCE (PRE-TAX) 14.1 15.1 16.1 16.0

ANGEL ROIC (PRE-TAX) 23.4 19.2 19.7 18.2

ROE 19.4 17.0 17.1 16.1

TURNOVER RATIOS (X)

RECEIVABLES (DAYS) 81 87 81 85

PAYABLES (DAYS) 90 105 120 105

WC CYCLE (EX-CASH) (DAYS) 139 105 101 128

Y/E MARCH FY2010 FY2011 FY2012E FY2013E

CASH FLOW STATEMENT

PROFIT BEFORE TAX 598 664 838 956

DEPRECIATION 215 214 263 277

CHANGE IN WORKING CAPITAL 653 51 (362) (265)

LESS: OTHER INCOME - - - -

DIRECT TAXES PAID (81) (73) (126) (191)

CASH FLOW FROM OPERATIONS 1,384 857 613 777

(INC.)/ DEC. IN FIXED ASSETS 52 (1,204) (254) (161)

(INC.)/ DEC. IN INVESTMENTS (328) - - -

INC./ (DEC.) IN LOANS AND ADV. - - - -

OTHER INCOME - - - -

CASH FLOW FROM INVESTING (276) (1,204) (254) (161)

ISSUE OF EQUITY - 312 - -

INC./(DEC.) IN LOANS (315) (118) 41 (24)

DIVIDEND PAID (INCL. TAX) (77) (103) (108) (135)

OTHERS 308 (455) - -

CASH FLOW FROM FINANCING (84) (364) (67) (159)

INC./(DEC.) IN CASH 1,024 (712) 292 457

OPENING CASH BALANCES 554 1,578 866 1,158

CLOSING CASH BALANCES 1,578 866 1,158 1,615


Note: Financials on Consolidated basis


Company BackgroundRallis India (RAIL), part of the Tata Group, is one of the oldest and secondlargest pesticide agrichemical companies in the country. The company hasa credible presence in the international market. Pesticide accounts for 97%of the company's total revenue, while plant nutrients, seeds and leatherchemicals constitute the balance. Historically, contribution from the domesticbusiness has stood at ~77%, while exports accounted for the balance.

Structural SnapshotGrowth opportunity: The Indian agrichemical industry, estimated at ~US$1bn(`5,000cr) at the end of FY2009, contributed 0.1% to India's total GDPand 0.6% to its agriculture GDP. The pesticides industry can easily grow at13-14%, in-line with GDP growth, with organized players, such as RAIL,expected to grow at a higher rate on account of greater share of unorganizedplayers.

Apart from domestic opportunities, the global agrichemical industry alsooffers opportunities in the form of generics and contract manufacturing.Agrichemical companies have been reducing the manufacturing capacity oflow-value off-patent proprietary products. Approximately, one-third of totalagrichemical sales are estimated to be that of proprietary off-patent. Assumingthis trend plays out in terms of growth for the agrichemical industry and thesame rate of genericisation occurs, the agrichemical generic industry couldlog in 6-8% yoy growth during the period. With drugs going off-patent eachyear, generics represent a major outsourcing opportunity for agrichemicalproducers in India.

Competitive position: RAIL is the second largest pesticide agrichemicalcompanies in the country with a market share of ~13%.

Nature of business: Highly dependent on monsoons; Highly competitivedomestic industry, while exports possess high legal barriers.

Current Investment ArgumentsSet to seize rising opportunities in the domestic pesticides market: India'soverall pesticide consumption is one of the lowest in the world, and webelieve RAIL is well placed to seize this opportunity on the back of its widedistribution network, strong brands and robust new product pipeline.

Contract manufacturing to be the next growth driver: RAIL plans to focuson contract manufacturing for exports and selectively target and supply totop players. To facilitate the same, the company is setting up a new plant atDahej. Overall, RAIL targets to achieve cumulative revenue of `1,000cr overthe next five years from this segment alone.

Valuation: Management is confident of the prospects for key crops (cotton andpaddy) due to generally normal monsoons, which should aid continued healthygrowth in the agrichemical industry. RAIL expects to outperform the industry,given its product pipeline. At current levels, the stock is trading at fair valuationsof 13.8x FY2013E EPS. Hence, we remain Neutral on the stock.

Agriculture CMP/TP/Upside: `131 / - / -Rallis India


PROMOTERS (TATA GROUP) 51.0

FII 8.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

RAIL (23.8) (0.6) 73.1 45.7 47.9



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 18.6 21.4 16.5 12.5 0.6

PAT GROWTH* (22.2) 27.7 36.6 34.2 -

EBITDA MARGIN# 7.3 18.2 14.9 11.0 4.4


ANGEL ESTIMATES


PAT GROWTH (%) 27.9 15.3

ROE (%) 27.7 25.4

P/E 15.9 13.8

P/BV 3.9 3.2


BUY / HOLD / SELL 11 / 3 / 0

RATING NEUTRAL

52 WEEK HIGH / LOW 186 / 114


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS


RESERVES & SURPLUS 405 485 622 774

SHAREHOLDERS FUNDS 424 505 659 807

MINORITY INTEREST - 2 - -

TOTAL LOANS 8 117 121 120

DEFERRED TAX LIABILITY - 3 - 8

TOTAL LIABILITIES 433 628 780 824


GROSS BLOCK 309 404 504 604

LESS: ACC. DEPRECIATION 156 174 208 247

NET BLOCK 153 229 348 370


GOODWILL - 125 125 125


CURRENT ASSETS 326 467 627 731

CURRENT LIABILITIES 304 389 478 559

NET CURRENT ASSETS 22 77 150 172

MIS. EXP. NOT WRITTEN OFF 5 1 - -

TOTAL ASSETS 433 628 780 824



TOTAL OPERATING INCOME 901 1,093 1,342 1,570

% CHG 5.2 21.4 22.7 17.0

TOTAL EXPENDITURE 726 894 1,095 1,289

NET RAW MATERIALS 506 634 785 926

OTHER MFG COSTS 137 188 170 199

PERSONNEL 67 73 113 132

OTHER 15 - 27 31

EBITDA 175 199 247 281

(% OF NET SALES) 19.4 18.2 18.4 17.9

DEPRECIATION& AMORTISATION 18 17 34 38




% CHG 49.5 16.6 16.5 15.3

EXTRAORDINARY EXPENSE/(INC.) (8) - - -

PBT (REPORTED) 150 185 215 248

TAX 51 58 54 62

(% OF PBT) 32.3 31.4 25.0 25.0

PAT (REPORTED) 99 127 161 186

ADJ. PAT 99 126 161 186

% CHG 53.8 27.7 27.9 15.3


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 25.9 20.3 15.9 13.8

P/CEPS 21.9 17.8 13.1 11.4

P/BV 6.0 4.8 3.9 3.2

EV/SALES 2.7 2.3 1.8 1.5

EV/EBITDA 14.0 12.9 10.0 8.6


EPS (BASIC) 5.1 6.5 8.3 9.5


CASH EPS 6.0 7.4 10.0 11.5

DPS 1.2 1.1 1.5 1.7

BOOK VALUE 21.8 27.3 33.8 41.4

RETURNS (%)

ROCE (PRE-TAX) 36.2 34.3 30.2 30.3


ROE 25.5 27.2 27.7 25.4

TURNOVER RATIOS (X)

INVENTORY / SALES (DAYS) 60 65 68 64




CASH FLOW STATEMENT



INC/DEC IN WORKING CAPITAL 110 88 97 86

DIRECT TAXES PAID (67) 58 (47) (55)

CASH FLOW FROM OPERATIONS 61 114 152 200

(INC.)/ DEC. IN FIXED ASSETS (95) (152) (60) (100)

(INC.)/ DEC. IN INVESTMENTS (4) 115 (2) -

INC./ (DEC.) IN LOANS AND ADVANCES

CASH FLOW FROM INVESTING (99) (37) (61) (100)

ISSUE OF EQUITY - - - -

INC./(DEC.) IN LOANS (74) 109 4 (1)


OTHERS 153 (154) (52) (60)

CASH FLOW FROM FINANCING 35 (81) (73) (95)

INC./(DEC.) IN CASH (3) 4 18 5

OPENING CASH BALANCES 7 10 5 23

CLOSING CASH BALANCES 10 15 23 28




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Automobile POSITIVE


Four-Wheeler

Mahindra and Mahindra 674 801 Buy

Tata Motors 219 242 Accum.

Maruti Suzuki 1,129 1,195 Accum.

Ashok Leyland 27 32 Buy

Two-Wheeler

Bajaj Auto 1,467 1,755 Buy

Hero Motocorp 1,901 2,025 Accum.

TVS Motor 50 66 Buy

Auto Ancillary

Bosch India 7,160 7,514 Accum.

Exide Industries 120 137 Accum.

Amara Raja Batteries 206 250 Buy

Apollo Tyres 65 74 Buy

CEAT 84 125 Buy

JK Tyre 70 89 Buy

Motherson Sumi 150 169 Accum.

Bharat Forge 277 299 Accum.

FAG Bearings 1,141 1,359 Buy

Automotive Axles 428 - Neutral

Subros 24 - Neutral

Structural growth potential intactThe Indian automotive industry has been one of the biggest beneficiaries ofthe consistent economic growth in the country over the past decade. WhileIndia's GDP expanded at an 8.6% CAGR over FY2002-11, overall auto salesgrew by 14.2%. This can be attributed to structural growth drivers such asGDP growth (leading to increasing affluence of rural and urban consumers),favorable demographics, low penetration levels, entry of global players andeasy availability of finance. Given our expectations of healthy medium-termeconomic growth of 8%, we believe long-term structural growth drivers areintact, which should support a 12-13% CAGR in auto volumes.

India's automotive industry, though one of the fastest growing, is still dominatedby two-wheelers (2W), which account for 76% of the total industry, whilepassenger vehicles (PV) and commercial vehicles (CV) make up for 16% and4%, respectively. We estimate the growth opportunity to be significantly higherin the PV and CV segments than the 2W segment on account of low penetrationlevels when compared to other emerging economies such as China and Brazil.

Near-term environment to improve: We expect the near-term environment toturn positive for the PV and CV industry, with the likely easing of interest rates.Our volume growth estimates for FY2013 across segments are enumerated below.

Passenger vehicles: We forecast PV volume growth to rebound and growover 13% in FY2013 (vs. 2% in FY2012), led by revival in demand for passengercars (PC) with likely easing of interest rates. We believe India's PC industryis at an inflexion point, with GDP per capita (PPP basis) crossing US$3,000levels, considered to be a tipping point for motorization to take off.

Commercial vehicles: While freight rates continue to hold up well, industrialactivity is expected to pick up on the likely easing of interest rates, which isexpected to revive medium and heavy commercial vehicle (MHCV) demandgoing ahead. We forecast MHCV demand to register 12-13% growth in FY2013from moderate 6-7% growth expected in FY2012. We expect the light commercialvehicle (LCV) segment to grow at a faster rate (18% CAGR over FY2011-13E)than the overall CV segment (14.5% CAGR), as we expect penetration of thehub and spoke models to increase to more cities and towns going ahead.

Two-wheelers: We expect 2W volume growth to moderate and post a 13.3%CAGR over FY2011-13E, after reporting a strong 26% CAGR over FY2009-11. Motorcycle sales are expected to post a 13.2% CAGR, while scooterssales are expected to outperform with an 18.5% CAGR over FY2011-13E.

Competition to intensify: We expect competition to remain intense across allthe automotive segments; however, it is likely to be tougher in the 2W segment asHonda Motorcycle and Scooters India (HMSI) has announced its plans to launchnew models at aggressive price points in FY2013. Also, the PV segment is likelyto witness heightened competition, led by new model launches, which are expectedto keep Maruti Suzuki's (MSIL) market share under threat. Further, competition inthe MHCV space is expected to be higher, marked by the entry of Mahindra andMahindra (M&M) and Daimler. Despite higher competitive intensity affecting pricingpower, softening of commodity prices recently is expected to provide margin stability.

Outlook and valuation: Against the backdrop of likely easing of interest rates, weexpect demand revival in the four-wheeler (4W) segment. Hence, we remain positiveon Ashok Leyland (AL) and M&M. We also prefer Bajaj Auto (BJAUT) in the 2Wspace due to its strong growth traction in exports markets and superior margin profile.


Source: Bloomberg, Industry, Angel Research

Exhibit 3: GDP per capita (PPP basis) growth trend

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

(US$)

India China

Automobile

Passenger vehicles

Low penetration levels offer a long-term growth opportunity

The Indian passenger vehicle (PV) industry, which comprisespassenger cars (~80%, of which ~78% is dominated by thesmall car segment), utility vehicles (~13%) and vans (~7%) isamongst the largest PV markets in the world. However, thisbelies the fact that as compared to developed markets andmost developing markets, India's PV penetration remains relativelylow at 12 per 1,000 people compared to 451, 158 and 27 per1,000 for U.S., Brazil and China, respectively. With India's GDPexpected to grow at a sustainable rate of ~8% in the mediumterm, we expect GDP per capita (PPP basis, currently atUS$3,586) to also grow at a healthy rate. Noticeably, as seenthrough cross-country analysis, motorization rates tend to acceleratewhen GDP per capita (PPP basis) crosses ~US$3,000.Accordingly, we believe the domestic PV industry is at an inflexionpoint and likely to witness sustainable long-term growth,driven by strong per capita income levels and a favorabledemographic profile.


Exhibit 1: PV penetration levels

US

UKJapanGermany

Brazil

ChinaMexico

India0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

0.0 100.0 200.0 300.0 400.0 500.0 600.0

GD

P pe

r cap

ita (U

S$, P

PP b

ased

)

Penetration (per 1,000 people)

Drawing parallels to China

In 2002, China's PV market was 1.2x the size of India's PVmarket. However, over FY2002-11, PV demand in China hasrisen at a meteoric rate, reporting a 38.4% CAGR, driven bystrong sustainable economic growth, rising per capita incomelevels and structural changes. This is extremely high comparedto a 17% CAGR witnessed in India's PV demand over the sameperiod. Consequently, China's PV market is now ~6x the IndianPV market. However, importantly, India's GDP per capita inFY2008 was similar to that of China in 2002, the year when itsmotorization started to gain momentum. Therefore, we believeIndian markets also offer similar opportunities, led by improvingroad infrastructure, urbanization, larger segment of populationentering the affordability zone and rising aspiration levels ofIndian consumers.


Exhibit 4: Passenger vehicle sales volume trend

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

(units)

India China

Being a cyclical industry, demand has witnessed a sharp slowdownsince the beginning of FY2012 on account of rising inflation,interest rates and fuel prices. Nonetheless, we expect volumegrowth to recover in FY2013, backed by the likely easing ofinterest rates coupled with structural growth drivers. Thus, weexpect the domestic passenger vehicle industry to register a8-10% CAGR over FY2011-13E.

Source: Bloomberg, SIAM, Angel Research

Exhibit 5: PV growth story

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500(%)('000 units)

PV sales yoy growth (RHS)

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11


Exhibit 2: Growth opportunity on offerGDP per capita (PPP based) PV's

(US$) (per 1'000)

India 3,586 12

U.S. 47,184 451

Growth opportunity (x) 13.2 37.6

The PV industry in India registered strong volume growth of17% over FY2002-11, driven largely by buoyant economic growth,rising income levels and favorable demographics. Further, newmodel launches, easy availability of finance and growth in tierII and II I cities and semi urban areas maintained the stronggrowth momentum.


Automobile


Exhibit 6: PV sales and GDP growth

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0(%)(%)

Domestic PV sales Real GDP (RHS)

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11Semi urban India holds a strong potential

According to industry sources, ~40% of PV sales in India arederived from the top 10 cities, suggesting that demand in otherparts of the country remains untapped. Further, while 70% oftotal households in India reside in rural and semi-urban areas,automobile penetration levels there are still very low (just 3%for PV as per NCAER). However, government initiatives suchas higher MSP for agricultural commodities and implementationof the Sixth Pay Commission coupled with increasing land pricesacross the country are putting more disposable income in thehands of semi-urban consumers, thereby fuelling growth.Additionally, with OEMs now actively focussing on semi-urbanmarkets and tier I I and I I I cities by increasing their reach,we expect demand to remain strong and, hence, drive overallindustry demand.

Competitive intensity expected to remain high

Growth potential of the Indian car market and strong performancereported by the industry in the last decade have attracted manyglobal OEMs to India. To gain a foothold in the domestic market,most OEMs have launched new models (especially in the compactsegment) designed specifically for the Indian consumers, therebyincreasing competition in the market. However, among the newlaunches in FY2012, we believe Eon from Hyundai, Liva from Toyotaand Brio from Honda will be key threats to market leader MarutiSuzuki. We expect the competitive intensity in the industry to remainhigh, with 10 to 12 new product launches planned in 2013.

Source: Crisil, Angel Research

Exhibit 7: New vehicle launches trendFY2008 FY2009 FY2010 FY2011 YTD FY2012

Maruti Suzuki SX4, Dzire A-star Ritz, Eeco, new Wagon R, new Swift

SX4 upgrade, Alto K10,

new Zen Estilo Kizashi

Hyundai i10 i20 new i20 Eon

Tata Motors Indigo CS Indica Vista, Indigo Aria new Indica

Nano Manza

M&M Xylo new Bolero,

XUV5OO

Toyota Fortunner Etios Liva

GM Cruz, Beat

Ford Figo new Fiesta

Volkswagen Passat Jetta Polo Vento

Honda Jazz Brio

Nissan Teanna Micra

Source: Bloomberg, Crisil, SIAM, Angel Research

Exhibit 8: Market share trendFY2008 FY2009 FY2010 FY2011 YTD FY2012

Maruti Suzuki 45.9 47.0 45.2 45.9 38.0

Hyundai 14.0 15.9 16.4 14.6 15.6

Tata Motors 14.8 13.9 13.5 12.1 13.3

M&M 8.4 7.8 8.1 7.3 9.6

Toyota 3.6 3.1 3.3 3.4 5.8

GM 4.3 4.0 4.5 4.3 4.6

Ford 2.2 1.8 1.9 4.0 3.8

Volkswagen 0.0 0.1 0.3 2.3 3.5

Honda 4.0 3.4 3.2 2.4 2.0

Others 2.8 3.0 3.6 3.7 3.8

Commercial vehiclesDemand for the commercial vehicle (CV) industry in India isdriven by GDP growth in general and IIP growth in particular.Over FY2002-11, India's GDP and IIP grew at CAGRs of 8.6%and 8.9%, respectively, driving domestic CV volumes, whichregistered a 18.9% CAGR over the same period. Further, ithas been observed that whenever MHCV sales fall, LCV salesfollow suit and tend to decline. However, the trend has beendivergent since FY2006, with LCV sales growing faster thanMHCV sales, thereby shielding overall CV growth to a certainextent from the cyclical downturn. During April-November 2011,while the domestic CV industry posted strong growth of 20.0%yoy, riding on robust 29.3% growth in LCVs, MHCV sales postedmodest 9.4% yoy growth.


Exhibit 9: Domestic CV sales trend

Domestic CV sales Real GDP (RHS)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000.

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

(%)(units)

MHCV demand to follow IIP growth

Demand for MHCV is cyclical and correlates with the level ofindustrial activity in the economy. MHCV volumes fell sharplyin FY2009 due to slowdown in industrial production and contractionin liquidity. However, volumes recovered over FY2009-11(~33% CAGR), driven by strong economic activity and improvementin the operating environment for fleet operators, which benefitedfrom higher freight availability, firm freight rates and relativelylower financing rates.

With the expected easing of interest rates from 1QFY2013and GDP to register a 8% CAGR over FY2011-13, we expectthe demand scenario for MHCV to improve, leading to a10-12% CAGR over the same period. Further, government initiativessuch as improving road connectivity, infrastructure development


Automobile


Exhibit 10: MHCV-IIP – Co-relation

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

(40.0)

(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

MHCV sales IIP growth (RHS)

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

FY20

02

and significant capacity addition in steel, power, cement andautomobile sectors also augur well for MHCV demand.

LCV to outperform MHCV

LCV's, which are used primarily for last mile transport applications,have posted a strong 22.6% CAGR between FY2002 and FY2011,playing a vital role in the overall growth of the CV industry. Thisstrong growth, in part, is primarily due to the creation of a newsegment of small CVs (SCV), with a payload of less than onetonne (initiated by Tata Motors with the launch of the Ace in2005). Over the past few years, the number of SCV applicationshas expanded significantly, not only within cities but also insmaller towns and rural markets. As a result, LCV sales as aproportion of total CV volume increased from 35% in FY2001to 53% in FY2011.

Despite headwinds building up, the LCV segment continues togrow steadily and has so far managed to buck the overall slowdownwitnessed in other segments. The SCV segment, which accountsfor over 75% of the LCV market, is driving growth on the backof strong demand for transportation of consumer goods withincities and replacement demand from upper-end three wheelers.Thus, we expect the LCV segment to grow at a 15% overFY2011-13E, driven by increasing structural factors such aspreference for low payload vehicles, proliferation of the huband spoke model and new launches.

Competition: New entrants to join in

The Indian CV industry is currently operating as a duopoly, withthe top two players accounting for over 85% market share inthe MHCV and LCV segments each.

The MHCV segment is dominated by Tata Motors and AshokLeyland with a market share of 60% and 26%, respectively.However, several international OEMs, including Daimler, Man,Navistar (through JV with MM) and Volvo (through JV with EicherMotors), have entered the MHCV space and have either launchedor are in the process of introducing their vehicles in the domesticmarket, thereby increasing competition. We believe MM couldemerge as a formidable competitor, given its strong brand equityin the pick-up and UV segments, knowledge of the domesticmarket and established vendor and distribution network. Also,Daimler has invested EUR700mn for its new product BharatBenz and is likely to compete aggressively in the market.


Exhibit 11: MHCV market share trend

Tata Motors Ashok Leyland Eicher Motors Others

62.0 62.9 60.5 61.9 63.360.1

27.0 27.9 27.5 25.7 23.3 25.5

7.4 6.8 8.2 7.4 8.6 9.3

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011

(%)

While Tata Motors continues to dominate the LCV space witha 56% market share, led by the success of Tata Ace, it hasbeen losing market share to MM post the launch of Maxximo in2010. Strong growth witnessed in the SCV segment and itsgrowing market size have prompted several players to enterthe segment. Piaggio, Force Motors and Ashok Leyland (JVwith Nissan) have already rolled out new products in the markets,leading to higher competition. As such, we expect Tata Motorsto continue to lose its market share going ahead.


Exhibit 12: LCV market share trend

60.165.4

62.1 59.9 58.5 56.0

26.1 24.3 25.6 27.8 30.032.7

5.0 3.8 5.0 3.9 4.0 4.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011

(%)

Tata Motors MM Force Motors Others

Two wheelersThe Indian 2W industry posted a strong 13.4% CAGR overFY2002-11, led by various fundamental factors such as sustainableeconomic growth, low penetration levels, new launches, swellingreplacement demand, inadequate public transport system andrising income levels, particularly in rural India. While demand islikely to sustain going ahead supported by rising income levels,young population, increasing demand from rural India and hugepotential for exports, we expect growth in 2W volumes to moderate


Exhibit 13: Industry growth trend

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000(%)(units)

2W sales yoy growth (RHS)

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11


Automobile

and increase in-line with the historical CAGR of 13.3%over FY2011-13E, after witnessing a strong 26% CAGR overFY2009-11 and increasing dependence on replacement demand.


Exhibit 14: 2W - Segmental trend

18 17 16 15 13 12 14 15 16 18

76 77 78 80 82 83 80 78 78 76

0102030405060708090

100

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

(%)

Scooters Motorcycles Mopeds

Penetration levels to improve on rising income levels

Despite rapid growth in the 2W industry over the last decade,2W penetration level in India remains low at ~7% compared to~9% and ~14% in emerging countries like China and Indonesia,respectively. Penetration in terms of total households is alsolower at ~36% as compared to other emerging markets suchas Indonesia, China and Thailand. However, it appears higherat ~74%, considering households with income levels above`90,000 (assuming that households having annual income lessthan `90,000 do not have the ability to own a 2W). This suggeststhat strong growth, driven primarily by increasedpenetration levels, will be difficult to sustain over an extendedperiod. Therefore, we expect domestic 2W sales growth todecelerate in the longer run.

Source: World Road Statistics-2008, Yamaha investor presentation, Angel Research

Exhibit 15: Penetration levels (Population wise)

0

5

10

15

20

25

30

35

0 10,000 20,000 30,000 40,000 50,000

Penetr

atio

n(%

)

GDP per capita (US$ PPP basis)

Thailand

IndiaBrazil

China

Indonesia

Vietnam

Japan

US


Exhibit 16: Penetration levels (Number of households)

3642

9398

38

0

20

40

60

80

100

120

India China Thailand Indonesia Brazil

(%)

Rural demand - The key growth driver

Demand for 2Ws is expected to have grown faster in rural areascompared to urban markets over the last few years, as reflectedby the fact that Hero MotoCorp's (industry leader) contributionto sales from rural India has increased from ~38% in FY2009to ~46% in 2QFY2012.

2Ws are the cheapest and efficient medium of commuting; thus,we expect 2W growth buoyancy in rural markets to continue,led by increasing government spending and rising income levelson the back of increased MSP for crops and other non-agrariansources of income for rural consumers.


Exhibit 17: MSP for key crops

0

1,000

2,000

3,000

4,000

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

( per quintal)`

Paddy (common) Cereals WheatGram Arhar Moong


Exhibit 18: Trend in agri GDP growth

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

30.0(%)

Nominal agri GDP growth

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

Huge export potential

India's motorcycle exports have registered a substantial 25%CAGR over FY2006-11, backed by India's low-cost manufacturingcapabilities, reliance on offering quality products and exploringnewer geographies. Key export markets for Indian players includeAfrica (Nigeria, Kenya and Uganda), Middle East, South Asia,Latin America (Colombia and Peru) and Southeast Asia(Sri Lanka and Bangladesh). Though Indian players competewith recognized global majors like Honda and Yamaha and cost-efficient Chinese manufacturers, they have been successful inincreasing their market share in existing geographies and ventureinto newer ones. BJAUT and TVSL are the two largest motorcycleexporters in the country, accounting for ~64% and ~14% ofthe total motorcycles exported from India, respectively.


Source: Bloomberg, ICRA, Angel Research

Exhibit 19: Exports growth

BJAUT TVSL HMCLOthers Total exports (LHS)

0

500,000

1,000,000

1,500,000

2,000,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

FY2007 FY2008 FY2009 FY2010 FY2011

(units)(units)


Exhibit 20: Share of Indian players in global markets on the rise

FY2008 FY2010

8.0

82.0

67.0

33.0

0.0 0.0 0.0

23.0

80.0

93.0

29.0

74.0

40.0 38.0

0.010.020.030.040.050.060.070.080.090.0

100.0

Nig

eria

Ban

glad

esh

Sril

anka

Col

ombi

a

Uga

nda

Ang

ola

Keny

a

(%)

With a sizeable market size and rising per capita income indeveloping nations, which have demographic profiles similarto India, we believe Indian players are favorably placed to leverageupon their domestic experience and enter newer geographies(Brazil and few African countries). As a result, we expect motorcycleexports to continue to grow at a faster rate than domestic growthand register a CAGR of 14-15% over FY2011-13E.

Competition to get tougher

The overall 2W industry in India is dominated by HMCL, BJAUTand TVS Motor (TVSL), with a market share of 40.5%, 25.4%and 15.1%, respectively. The motorcycle segment (~78% ofthe total 2W market) is expected to witness intense competitionin the wake of the termination of the joint venture between theHero Group and Honda Motors and Scooters India (HMSI).Post the split with HMCL, HMSI has turned aggressive and

has announced significant capacity expansion plans (4mn unitsby 1HCY2013 from 1.6mn in March 2011) coupled with newmodel launches, importantly in the <125cc motorcycle segment.Currently, HMCL leads the <125cc motorcycle segment (71%share), led by Splendor and Passion; whereas, BJAUT commandsa leadership position in the >125cc motorcycle segment (51.4%)on the back of the strength of Pulsar. However, with the impendinglaunch of new motorcycles by HMSI, HMCL's market share seemsmore vulnerable to rising competition as compared to BJAUT.


Exhibit 21: Motorcycle market share trend

HMCL BJAUT TVSL HMSI Yamaha Others

45.849.4

52.4 51.948 47.5

33.5 32.728 29.7

32.3 33.3

139.4 9.3 7.6 8 7.5

2.4 4.3 5.9 6.2 7.1 6.6

0

10

20

30

40

50

60

FY2007 FY2008 FY2009 FY2010 FY2011 YTDFY12

(%)


Exhibit 22: HMSI leads scooter market

50.356 58.5 56.9

50.3

42.7

24.7 26.5 24.221.2 20.7 21.9

1.5

9.5 9.7 13.3 14.4 17

2.37.1 9.5 10.9

0

10

20

30

40

50

60

70

FY2007 FY2008 FY2009 FY2010 FY2011 YTDFY12

(%)

HMSI TVSL HMCL Suzuki Others

Automobile

Outlook and valuation: Against the backdrop of likely easingof interest rates, we expect demand revival in the four-wheeler(4W) segment. Hence, we remain positive on Ashok Leyland(AL) and M&M. We also prefer Bajaj Auto (BJAUT) in the 2Wspace due to its strong growth traction in exports markets andsuperior margin profile.


Automobile

Source: Company, Angel Research; Note: * December year end, ^ September year end, # Consolidated basis

Exhibit 23: Recommendation summaryReco CM P TP Upside EPS CAGR (%)

( `̀̀̀̀) ( `̀̀̀̀) (%) FY12E FY13E FY12E FY13E FY12E FY13E FY2011-13E

Four-Wheeler

Mahindra and Mahindra Buy 674 801 18.8 14.7 12.9 8.9 7.6 23.3 21.4 10.0

Tata Motors# Accumulate 219 242 10.7 7.7 7.5 5.2 4.8 39.8 31.1 1.0

Maruti Suzuki Accumulate 1,129 1,195 5.9 22.1 14.2 14.1 8.3 10.2 14.3 1.1

Ashok Leyland Buy 27 32 19.0 12.5 10.2 6.8 5.9 13.9 15.6 5.4

Two-Wheeler

Bajaj Auto Buy 1,467 1,755 19.6 13.4 12.5 8.8 7.6 55.0 44.7 11.0

Hero Motocorp Accumulate 1,901 2,025 6.5 16.2 14.1 9.3 7.7 66.2 55.0 21.0

TVS Motor Buy 50 66 31.6 9.2 8.4 4.5 3.9 23.7 21.8 17.4

Auto-Ancillary

Bosch India* Accumulate 7,160 7,514 5.0 21.0 19.1 12.9 11.2 21.3 19.5 17.2

Exide Industries Accumulate 120 137 13.9 22.7 15.4 12.8 8.8 15.6 20.3 2.4

Amara Raja Batteries Buy 206 250 21.5 9.8 8.6 5.6 4.8 24.7 22.9 17.3

Apollo Tyres# Buy 65 74 15.0 9.0 7.0 5.4 4.5 12.4 15.0 3.0

CEAT Buy 84 125 47.8 - 4.1 10.5 6.1 (3.1) 11.2 60.8

JK Tyre# Buy 70 89 26.9 114.2 3.2 6.9 5.5 5.3 9.8 17.7

Motherson Sumi# Accumulate 150 169 11.8 16.6 12.5 8.0 6.7 20.2 22.7 10.0

Bharat Forge# Accumulate 277 299 7.8 15.3 13.8 7.6 6.4 19.9 18.7 27.1

FAG Bearings* Buy 1,141 1,359 19.2 11.0 10.1 5.9 4.8 26.3 22.9 24.5

Automotive Axles^ Neutral 428 - - 8.8 7.7 4.9 4.0 27.6 26.2 29.4

Subros Neutral 24 - - 7.4 6.0 4.5 3.8 8.3 10.0 (7.5)

P/E (x) EV/EBITDA (x) RoE (%)


Company BackgroundMahindra and Mahindra (M&M), a flagship company of Mahindra Group, isthe largest manufacturer of UV and tractors in India with a 52% and 42%market share, respectively. The company is also the second largest playerin the LCV space, with a 33% market share. M&M is also the only companyin India that is present across all the automotive segments. M&M has aninstalled capacity of 6lakh and 2.3lakh units/year in the automotive and farmequipment segments, respectively. In FY2011, M&M acquired a 70% stakein Ssangyong Motor Co. (SYMC), transforming itself into a global UV player.Apart from the core auto business, the company has subsidiaries/associatesin various businesses such as IT, NBFC, auto ancillaries, hospitality andinfrastructure.

Structural SnapshotGrowth opportunity: We expect the Indian tractor industry to maintain itshealthy growth rate (12-13% CAGR over FY2011-13E) backed by structuraldrivers such as rising rural income, labor shortage, improving credit availabilityand diversifying usage of tractors. The UV industry is also likely to continueits growth momentum (11-12%), given the commercial usage (people carrier)of vehicles in rural and urban India as well as increasing acceptance inpersonal usage. M&M, with its strengths in the UV and tractor segments, isexpected to leverage upon the growth opportunity and register a strong16.9% volume growth over FY2011-13E.

Competitive position: M&M enjoys a strong competitive advantage in thetractor industry, given its dominant brands (Yuvraj, Swaraj and Arjun), widedistribution and service network, presence of a financing arm, and high resalevalue. In the UV space as well, M&M has a commanding position on accountof a strong and proven product development capability and popular brandslike Bolero, Scorpio and Xylo.

Nature of business: Failure of monsoon and a significant increase in interestrate impacts demand; Branding and R&D create entry barriers.

Current Investment ArgumentsNew launches to help sustain the automotive segment's growth momentum:M&M's strong focus on product development has led to several new productlaunches (Maxximo, Gio and XUV 500) in the automotive segment sinceFY2010. Further, with its pipeline of new products, introduction of SYMC'sproducts in India and a strong diesel portfolio, we expect M&M's automotivesegment to sustain its growth momentum and witness strong growth of18.3% over FY2011-13E.

Investments constitute 71% of the balance sheet: M&M has majority stakesin various listed companies in sectors like technology, hospitality, real estateand finance. The high-growth potential of M&M's subsidiaries has supportedM&M's valuation in the past and may continue to do so in the long term as well.We value M&M's investments at `174/share.

Attractive valuations: We maintain our Buy rating as we expect M&M to leverageupon its dominant position in the UV and tractor segments, given its strongrural-centric product portfolio. Our SOTP target price for M&M works out to ̀ 801.

Automobile CMP/TP/Upside: `674 / `801 / 19%M&M


PROMOTERS (MAHINDRA GROUP) 25.3

FII 32.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

M&M (16.8) (10.1) 63.5 7.7 37.3

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 35.4 25.5 26.9 23.2 20.7

PAT GROWTH* 1.4 25.0 38.9 30.0 35.5

OPM# 12.3 13.0 11.6 11.0 10.1


ANGEL ESTIMATES


PAT GROWTH (%) 6.2 13.9

ROE (%) 23.3 21.4

P/E 14.7 12.9

P/BV 3.0 2.6


BUY / HOLD / SELL 40 / 9 / 4

RATING BUY

52 WEEK HIGH / LOW 875 / 585

MARKET CAP (`̀̀̀̀ CR) 41,406

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,880 2,405 2,705 2,405




GROSS BLOCK 5,276 6,228 7,986 8,947


NET BLOCK 2,739 3,386 4,617 4,988


GOODWILL - - - -

INVESTMENTS 6,398 9,325 11,158 12,101

CURRENT ASSETS 6,047 6,143 8,184 9,359


NET CURRENT ASSETS 847 (624) 492 1,103

MIS. EXP. NOT WRITTEN OFF - - - -

TOTAL ASSETS 10,947 13,073 16,906 18,907



NET SALES 18,363 23,044 29,108 33,641

% CHG 42.1 25.5 26.3 15.6


EBITDA 2,716 3,006 3,617 4,245

% CHG 204.5 10.7 20.3 17.4

(% OF NET SALES) 14.8 13.0 12.4 12.6

DEPRECIATION & AMORTIZATION 371 414 527 590


OTHER INCOME 658 998 771 781

EXTRAORDINARY ITEMS (59) (125) - -

PBT (ADJUSTED) 2,788 3,394 3,780 4,364

TAX 759 858 964 1,156

(% OF PBT) 27.2 25.3 25.5 26.5

PAT (REPORTED) 2,088 2,662 2,816 3,207

PAT (ADJUSTED) 2,029 2,537 2,816 3,207

% CHG 158.1 25.0 11.0 13.9

(% OF NET SALES) 11.0 11.0 9.7 9.5

BASIC EPS ( `̀̀̀̀) 36.9 45.3 45.9 52.2

ADJUSTED EPS (`̀̀̀̀) 35.9 43.2 45.9 52.2

% CHG 148.7 20.5 6.2 13.9


KEY RATIOS

VALUATION RATIO (X)

P/E 18.8 15.6 14.7 12.9

P/CEPS 15.9 13.4 12.4 10.9

P/BV 4.9 3.8 3.0 2.6

EV/SALES 1.7 1.3 1.0 0.9

EV/EBITDA 12.6 10.7 8.9 7.6


EPS (BASIC) 36.9 45.3 45.9 52.2

EPS (ADJUSTED) 35.9 43.2 45.9 52.2

CASH EPS 42.4 50.2 54.5 61.9

DPS 9.7 12.0 12.5 12.5

BOOK VALUE 138.1 175.4 225.3 262.8

RETURNS (%)

ROCE (PRE-TAX) 23.2 21.6 20.6 20.4


ROE 31.0 28.0 23.3 21.4

TURNOVER RATIOS (X)

ASSET TURNOVER (GROSS BLOCK) 3.6 4.0 4.1 4.0





CASH FLOW STATEMENT

PROFIT BEFORE TAX 2,788 3,394 3,780 4,364


CHANGE IN WORKING CAPITAL (394) 342 (195) (474)

OTHERS 990 685 - -

OTHER INCOME (658) (998) (771) (781)

DIRECT TAXES PAID (759) (858) (964) (1,156)

CASH FLOW FROM OPERATIONS 2,337 2,980 2,377 2,543

(INC.)/DEC. IN FIXED ASSETS (700) (973) (1,411) (1,038)

(INC.)/DEC. IN INVESTMENTS (612) (2,927) (1,832) (943)

OTHER INCOME 658 998 771 781

CASH FLOW FROM INVESTING (653) (2,903) (2,472) (1,201)

ISSUE OF EQUITY 719 1,006 1,613 -

INC./(DEC.) IN LOANS (1,173) (475) 300 (300)

DIVIDEND PAID (INCL. TAX) 312 624 898 898

OTHERS 1,353 2,373 - -

CASH FLOW FROM FINANCING (1,494) (1,219) 1,015 (1,198)

INC./(DEC.) IN CASH 189 (1,141) 921 144

OPENING CASH BALANCE 1,567 1,756 615 1,535

CLOSING CASH BALANCE 1,756 615 1,535 1,680


Note: Financials on Standalone basis


Company BackgroundTata Motors (TTMT) is the largest CV manufacturer in India with a domesticmarket share of 60% and 63% in the MHCV and LCV segments, respectively.The company is also India's third largest PV manufacturer, with a domesticmarket share of 12%. The company operates from its plants in Jamshedpur,Pune, Lucknow, Sanand, Pantnagar and Dharwad. TTMT acquired U.K. basedluxury car manufacturer Jaguar Land Rover (JLR) in June 2008; it now accountsfor ~57% of its consolidated revenue.

Structural SnapshotGrowth opportunity: The global luxury car market has managed to weather economicuncertainty and has grown at a healthy rate, led by robust growth in China. Withan eye on increasing the current 5% market share of China's luxury car market,JLR intends to start assembly operations and expand its dealership network inChina. On the domestic front, while the LCV industry is expected to maintain itsstrong growth momentum, led by structural factors, we expect MHCV volumesto continue to grow at 1.5x GDP growth rate in the long term.

Competitive position: Land Rover is competitively positioned currently, withpresence across the premium SUV segments and series of new productsthat are lined up. Jaguar, however, is not present in the lower end of theluxury segment (~40% of luxury car market), which makes it vulnerable tocompetition. In spite of increasing competition in the domestic CV space,TTMT continues to enjoy its leadership position, led by innovative products,superior technology and a widespread distribution network.

Nature of business: Cyclical and rate sensitive sector; Branding and R&Dcreate entry barriers.

Current Investment ArgumentsJLR growth momentum to continue on new launches: We expect JLRvolumes to remain strong, driven by robust growth in China (sales up 94%in 1HFY2012), recent launch of Evoque and new XF 2.2 coupled with theintroduction of new Range Rover and Jaguar XE in FY2013. Further, favorablemarket mix (China's contribution increased from 11% in FY2011 to 15.7%in 1HFY2012) and sourcing from low-cost countries are likely to partiallyoffset the impact of higher cost pressures at JLR.

Domestic business to thrive on the strength of the CV segment: Whilewe expect the CV segment to maintain its healthy growth rate (13% CAGRover FY2011-13E) on the back of the strong volume momentum in LCVsales, the PV segment is likely to remain under pressure and register amoderate 8% volume CAGR led by sluggish domestic demand and weakproduct offerings. Further, led by cost pressures and higher discounts inthe PV segment, we expect standalone margins to remain under pressure.

Valuations: At ̀ 219, the stock is trading at 7.5x and 4.8x FY2013E earningsand EV/EBITDA, respectively. We recommend Accumulate on the stockwith an SOTP target price of `̀̀̀̀242 - assigning a value/share of `68(10x FY2013E EPS) to domestic business, `153 (6.5x FY2013E EPS) toJLR and `21 to other subsidiaries.

Automobile CMP/TP/Upside: `219 / `242 / 11%Tata Motors



FII 41.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TATA MOTORS 17.1 (8.4) 93.8 3.5 24.6

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 25.8 33.1 51.5 39.1 33.9

PAT GROWTH* 10.5 494.0 67.3 40.7 -

OPM# 12.4 13.7 8.1 9.4 10.3


ANGEL ESTIMATES


PAT GROWTH (%) (0.3) 2.3

ROE (%) 39.8 31.1

P/E 7.7 7.5

P/BV 2.7 2.1


BUY / HOLD / SELL 39 / 10 / 3

RATING ACCUMULATE

52 WEEK HIGH / LOW 261 / 138

MARKET CAP (`̀̀̀̀ CR) 58,824

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 35,108 32,791 35,791 34,291

DEFERRED TAX LIABILITY 1,154 1,464 1,464 1,464



GROSS BLOCK 63,823 71,463 86,138 99,664


NET BLOCK 29,590 31,764 41,271 48,817

CAPITAL WORK-IN-PROGRESS 8,916 11,729 11,198 11,960

GOODWILL 3,423 3,585 3,585 3,585

INVESTMENTS 2,219 2,544 3,030 3,289

CURRENT ASSETS 42,446 51,035 57,792 60,044


NET CURRENT ASSETS 725 4,051 4,715 1,592


TOTAL ASSETS 44,873 53,673 63,799 69,243



NET SALES 92,519 123,133 144,712 162,452

% CHG 30.5 33.1 17.5 12.3


EBITDA 7,772 16,817 17,378 18,844

% CHG 414.9 116.4 3.3 8.4

(% OF NET SALES) 8.4 13.7 12.0 11.6

DEPRECIATION & AMORTIZATION 3,887 4,656 5,168 5,980

INTEREST & OTHER CHARGES 2,465 2,385 2,505 2,400

OTHER INCOME 1,058 452 926 454

EXTRAORDINARY ITEMS (1,045) (209) - -

PBT (ADJUSTED) 3,523 10,437 10,630 10,918

TAX 1,006 1,216 1,648 1,747

(% OF PBT) 28.6 11.7 15.5 16.0

PAT (REPORTED) 2,517 9,221 8,983 9,171

ADD: SHARE OF EARNINGS OF ASSOC. 85 101 122 146


PAT AFTER MI (ADJUSTED) 1,526 9,065 9,037 9,244

% CHG - 494.0 (0.3) 2.3

(% OF NET SALES) 1.6 7.4 6.2 5.7

BASIC EPS ( `̀̀̀̀) 9.0 29.2 28.5 29.1

ADJUSTED EPS (`̀̀̀̀) 5.3 28.6 28.5 29.1

% CHG - 434.1 (0.3) 2.3


KEY RATIOS

VALUATION RATIO (X)

P/E 40.9 7.7 7.7 7.5

P/CEPS 11.5 5.1 4.9 4.6

P/BV 7.6 3.6 2.7 2.1

EV/SALES 1.0 0.7 0.6 0.5

EV/EBITDA 12.0 5.3 5.2 4.8

PER SHARE DATA (`)`)`)`)`)

EPS (BASIC) 5.3 28.6 28.5 29.1

EPS (ADJUSTED) 5.3 31.8 31.7 29.1

CASH EPS 19.0 43.2 44.8 48.0

DPS 3.0 4.0 5.0 6.0

BOOK VALUE 25.9 60.0 82.4 104.3

RETURNS (%)

ROCE (PRE-TAX) 8.9 24.7 20.8 19.3


ROE 21.3 65.8 39.8 31.1

TURNOVER RATIOS (X)




PAYABLES (DAYS) 134 110 109 108


CASH FLOW STATEMENT


DEPRECIATION 3,887 4,656 5,168 5,980

CHANGE IN WORKING CAPITAL 5,099 (1,122) 821 (186)

OTHERS (1,448) (1,063) - -

OTHER INCOME (1,058) (452) (926) (454)

DIRECT TAXES PAID (1,006) (1,216) (1,648) (1,747)


(INC.)/DEC. IN FIXED ASSETS (3,736) (10,453) (14,145) (14,287)

(INC.)/DEC. IN INVESTMENTS (962) (325) (486) (259)

OTHER INCOME 1,058 452 926 454

CASH FLOW FROM INVESTING (3,640) (10,327) (13,704) (14,092)

ISSUE OF EQUITY 1,405 4,700 - -

INC./(DEC.) IN LOANS 135 (2,317) 3,000 (1,500)

DIVIDEND PAID (INCL. TAX) 365 1,002 1,856 2,228

OTHERS 3,113 2,094 - -

CASH FLOW FROM FINANCING (1,209) 1,291 1,144 (3,728)

INC./(DEC.) IN CASH 4,148 2,205 1,484 (3,308)

OPENING CASH BALANCE 3,984 8,743 10,948 12,432

CLOSING CASH BALANCE 8,743 10,948 12,432 9,124




Company BackgroundMaruti Suzuki (MSIL), a subsidiary of Suzuki Motor Corporation, Japan (witha 54.2% stake), is the largest passenger car (PC) company in India, accountingfor 48.7% of the domestic PC market. MSIL derives ~77% of its overallsales from the compact car segment and has a dominant position in thesegment with a market share of ~50%, led by popular models like Alto,Wagon R and Swift. The company operates from two facilities in India (Gurgaonand Manesar) and is in the process of expanding its manufacturing capacityto 1.9mn units (currently 1.65mn) by FY2013. MSIL has also steadily increasedits presence internationally and exports now account for ~11% of itsoverall sales volume.

Structural SnapshotGrowth opportunity: We expect the domestic PV industry to report a healthyrate in the long term, as we believe the Indian PV industry is at an inflectionpoint with GDP per capita (PPP basis) crossing US$3,000 levels - a tippingpoint for motorization to take off. MSIL, with its strong product offering,new launches in the pipeline and strong competitive advantage over foreignentrants due to its widespread distribution network (nearly 3,006 and 968service and sales outlets, respectively), is likely to emerge as the key beneficiaryof the long-term growth potential.

Competitive position: Growth potential of the Indian PC market and compactcar segment in particular (~78% of the total PC market) has attracted manyglobal OEMs, leading to 6-8 new small car launches over the past two years.Thus, MSIL's domestic market share has declined to 48.7% (down 350bp)in FY2011. While MSIL's market share is expected to remain under pressurein purview of increasing competition, its strengths include dominance in thecompact car segment suited for Indian conditions and wide distribution reach.

Nature of business: Cyclical and rate-sensitive sector; Branding and R&Dcreate entry barriers.

Current Investment ArgumentsOperating margins to improve in FY2013: We expect EBITDA margins toimprove by ~200bp in FY2013 on account of operating leverage benefitsdue to volume improvement, softening of commodity prices and a 2-3%decline in imported raw-material content, led by localization initiative (importsin JPY forms ~26% of net sales).

Suzuki focusing to make MSIL a small car manufacturing hub: SuzukiMotor Corp., Japan, intends to make MSIL a manufacturing hub to leverageupon India's low-cost manufacturing capability and tap the increasing globaldemand for small cars due to rising fuel prices and stricter emission standards.Thus, we believe there is a huge potential for MSIL to increase its presencein the exports market.

Valuation: At ̀ 1,129, MSIL is trading at 14.2x FY2013E earnings. We maintainour Accumulate rating on the stock with a target price of `̀̀̀̀1,195, valuingit at 15x FY2013E earnings (in-line with our Sensex target multiple of 15x).

Automobile CMP/TP/Upside: `1,129 / `1,195 / 6%Maruti Suzuki


PROMOTERS (MNC) 54.2

FII 19.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MARUTI SUZUKI 5.9 (11.3) 25.0 4.4 -

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (14.4) 24.7 26.6 24.7 18.4

PAT GROWTH* (59.8) (6.9) 10.5 13.5 -

OPM# 6.3 8.1 8.9 10.6 9.8


ANGEL ESTIMATES


PAT GROWTH (%) (34.4) 55.9

ROE (%) 10.2 14.3

P/E 22.1 14.2

P/BV 2.2 1.9


BUY / HOLD / SELL 27 / 21 / 14

RATING ACCUMULATE

52 WEEK HIGH / LOW 1,345 / 906

MARKET CAP (`̀̀̀̀ CR) 32,609

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 821 309 459 459




GROSS BLOCK 10,407 11,738 14,263 17,313


NET BLOCK 5,025 5,529 6,985 8,780

CAPITAL WORK-IN-PROGRESS 388 1,429 1,141 693

GOODWILL - - - -

INVESTMENTS 7,177 5,107 5,500 6,202

CURRENT ASSETS 3,772 6,356 6,077 6,642




TOTAL ASSETS 12,794 14,341 15,714 17,720



NET SALES 29,099 36,300 33,517 39,474

% CHG 42.3 24.7 (7.7) 17.8


EBITDA 3,427 2,924 1,776 2,961

% CHG 139.1 (14.7) (39.2) 66.7

(% OF NET SALES) 11.8 8.1 5.3 7.5

DEPRECIATION & AMORTIZATION 825 1,014 1,070 1,255


OTHER INCOME 1,024 1,223 1,339 1,465


PBT (ADJUSTED) 3,514 3,073 2,009 3,133

TAX 1,095 820 532 830

(% OF PBT) 31.2 26.7 26.5 26.5

PAT (REPORTED) 2,498 2,289 1,477 2,303

PAT (ADJUSTED) 2,419 2,252 1,477 2,303

% CHG 125.5 (6.9) (34.4) 55.9

(% OF NET SALES) 8.3 6.2 4.4 5.8

BASIC EPS ( `̀̀̀̀) 86.4 79.2 51.1 79.7

ADJUSTED EPS (`̀̀̀̀) 83.7 77.9 51.1 79.7

% CHG 125.5 (6.9) (34.4) 55.9


KEY RATIOS

VALUATION RATIO (X)

P/E 13.5 14.5 22.1 14.2

P/CEPS 10.1 10.0 12.8 9.2

P/BV 2.8 2.4 2.2 1.9

EV/SALES 0.8 0.6 0.7 0.6

EV/EBITDA 7.6 8.7 14.1 8.3


EPS (BASIC) 86.4 79.2 51.1 79.7

EPS (ADJUSTED) 83.7 77.9 51.1 79.7

CASH EPS 112.2 113.0 88.1 123.1

DPS 6.0 7.5 7.5 8.8

BOOK VALUE 409.5 479.8 522.2 591.6

RETURNS (%)

ROCE (PRE-TAX) 22.6 14.1 4.7 10.2


ROE 22.8 17.5 10.2 14.3

TURNOVER RATIOS (X)






CASH FLOW STATEMENT


DEPRECIATION 825 1,014 1,070 1,255

CHANGE IN WORKING CAPITAL 48 338 177 (16)

OTHERS 764 669 - -

OTHER INCOME (1,024) (1,223) (1,339) (1,465)

DIRECT TAXES PAID (1,095) (820) (532) (830)


(INC.)/DEC. IN FIXED ASSETS (1,212) (2,372) (2,237) (2,602)

(INC.)/DEC. IN INVESTMENTS (4,003) 2,070 (393) (702)

(INC.)/DEC. IN LOANS AND ADVANCES 75 116 - -

OTHER INCOME 1,024 1,223 1,339 1,465

CASH FLOW FROM INVESTING (4,116) 1,037 (1,291) (1,840)


INC./(DEC.) IN LOANS 123 (512) 150 -


OTHERS (1,081) (1,416) - -

CASH FLOW FROM FINANCING (757) (1,677) (104) (296)

INC./(DEC.) IN CASH (1,841) 2,410 (11) (59)

OPENING CASH BALANCE 1,939 98 2,509 2,498

CLOSING CASH BALANCE 98 2,509 2,498 2,439




Company BackgroundAshok Leyland (AL) is the country's second largest CV manufacturer. Thecompany has a strong presence in the MHCV segment, with a domesticmarket share of ~23%. AL enjoys a dominant position in southern India,with a ~48% market share, and is currently focusing on expanding its presencein northern India by increasing its touch points in the region. The company,through its JV with Nissan Motor and John Deere, intends to expand itsproduct portfolio and has recently launched new vehicles Dost (to tap thegrowing LCV demand) and Backhoe Loader (construction equipment segment),respectively.

Structural SnapshotGrowth opportunity: Given the healthy GDP growth expectation over thelong run, government's thrust on infrastructure development and normalmonsoons, we expect MHCV volumes to continue to grow at 1.5x GDPgrowth rate in the long term. AL being a core CV player is expected tobenefit from the upswing in MHCV demand.

Competitive position: Increased competitive activity due to the emergenceof new players in the MHCV segment (Eicher Motors, Mahindra Navistarand Daimler) and slowdown in demand in southern India (AL's stronghold)have weakened AL's domestic MHCV market share to 23.7% in 2QFY2012from 27.6% in 2QFY2011.

Nature of business: Cyclical and rate-sensitive sector; Branding (to a lesserextent than passenger vehicle segment) and R&D create entry barriers.

Current Investment ArgumentsDemand scenario to improve with easing interest rates: MHCV demand,which has moderated recently due to high interest rates and slowdown inindustrial activity, is expected to pick up with the likely easing of interestrates from 1QFY2013. Therefore, we expect AL's volume growth to reboundto ~12% in FY2013E from near flat levels in FY2012.

Pantnagar plant ramp-up to mitigate raw-material cost pressures: ALplans to ramp-up production at its Pantnagar facility (relatively more profitablewith cost savings of ~`35,000/vehicle) to ~35,000 vehicles in FY2012 from12,800 in FY2011. We expect these benefits to partially offset the impactof raw-material cost pressures, enabling AL to maintain its operating marginsat 10-11% over FY2011-13.

Attractively valued: At `27, AL is trading at attractive valuations of 10.2x itsFY2013E earnings. We maintain our Buy rating on the stock with a targetprice of `̀̀̀̀32, valuing the stock at 12x its FY2013E earnings.

Automobile CMP/TP/Upside: `27 / `32 / 19%


PROMOTERS (HINDUJA GROUP) 38.6

FII 16.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ASHOK LEYLAND 8.7 (7.7) 52.5 2.7 22.5

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 14.0 53.4 12.7 16.4 17.2

PAT GROWTH* (7.8) 64.2 11.8 15.8 21.4

OPM# 10.7 10.7 9.5 9.6 10.2


ANGEL ESTIMATES


PAT GROWTH (%) (9.0) 22.0

ROE (%) 13.9 15.6

P/E 12.5 10.2

P/BV 2.4 2.1


BUY / HOLD / SELL 25 / 12 / 14

RATING BUY

52 WEEK HIGH / LOW 31 / 21


LIQUIDITY MEDIUM

TOPPICKAshok Leyland


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,280 2,658 2,958 2,958




GROSS BLOCK 6,019 6,692 7,425 8,180


NET BLOCK 4,250 4,634 5,025 5,404


GOODWILL - - - -

INVESTMENTS 326 1,230 1,348 1,400

CURRENT ASSETS 4,152 4,367 4,441 4,955


NET CURRENT ASSETS 1,191 839 956 876

MIS. EXP. NOT WRITTEN OFF 5 4 4 4

TOTAL ASSETS 6,334 7,065 7,705 8,093



NET SALES 7,407 11,366 12,474 14,315

% CHG 21.5 53.4 9.7 14.8


EBITDA 760 1,218 1,266 1,466

% CHG 66.6 60.3 4.0 15.8

(% OF NET SALES) 10.3 10.7 10.2 10.2




EXTRAORDINARY ITEMS 40 2 - -

PBT (ADJUSTED) 505 800 726 897

TAX 121 171 152 197

(% OF PBT) 24.0 21.3 21.0 22.0

PAT (REPORTED) 424 631 573 700

PAT (ADJUSTED) 384 630 573 700

% CHG 114.6 64.2 (9.0) 22.0

(% OF NET SALES) 5.2 5.5 4.6 4.9

BASIC EPS ( `̀̀̀̀) 1.6 2.4 2.2 2.6

ADJUSTED EPS (`̀̀̀̀) 1.4 2.4 2.2 2.6

% CHG 114.6 64.2 (9.0) 22.0


KEY RATIOS

VALUATION RATIO (X)

P/E 18.7 11.4 12.5 10.2

P/CEPS 12.2 8.0 7.8 6.7

P/BV 3.1 2.7 2.4 2.1

EV/SALES 1.1 0.7 0.6 0.6

EV/EBITDA 11.3 6.9 6.8 5.9


EPS (BASIC) 1.4 2.4 2.2 2.6

EPS (ADJUSTED) 1.4 2.4 2.2 2.6

CASH EPS 2.2 3.4 3.4 4.0

DPS 0.8 1.0 0.8 1.0

BOOK VALUE 8.8 10.0 11.3 12.7

RETURNS (%)

ROCE (PRE-TAX) 9.2 14.2 12.5 13.8


ROE 10.7 16.5 13.9 15.6

TURNOVER RATIOS (X)






CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 366 (185) (96) (11)

OTHERS 227 (80) - -

OTHER INCOME (91) (41) (32) (38)


CASH FLOW FROM OPERATIONS 1,090 591 787 1,027

(INC.)/DEC. IN FIXED ASSETS (643) (470) (746) (793)





INC./(DEC.) IN LOANS 322 378 300 -


OTHERS (523) (209) - -

CASH FLOW FROM FINANCING (45) 402 67 (311)

INC./(DEC.) IN CASH 430 (340) 21 (91)

OPENING CASH BALANCE 85 515 175 196

CLOSING CASH BALANCE 515 175 196 105




Company BackgroundBajaj Auto (BJAUT) is the second largest 2W manufacturer in the country(~26% market share) and a market leader in the 3W segment (~55% marketshare). BJAUT has three manufacturing facilities in India, located at Waluj,Chakan and Pantnagar, with a total installed capacity (2W - 4.5mn and 3W- 0.5mn) of 5mn units. BJAUT also happens to be one of India's largest autoexporters, with exports forming ~28% of revenue (~32% of total volumes) inFY2011. Led by two dominant brands, Discover and Pulsar (~65% of motorcyclevolumes), BJAUT reported a strong 32% volume CAGR over FY2009-11.

Structural SnapshotGrowth opportunity: While the Indian 2W industry is expected to report aCAGR of 13.3% over FY2011-13E, we also expect competition in the marketsto intensify. However, given BJAUT's strong focus in the premium motorcyclesegment and significant exposure to the 3W and exports markets, we expectBJAUT to sustain its healthy growth momentum and register a 13-14% volumeCAGR over the same period.

Competitive position: Although HMCL dominates the overall 2W industry,it has limited presence in the higher-end motorcycle segment (>125cc),where BJAUT commands a ~51.4% market share. While we expect BJAUTto be impacted by increasing competition in the domestic motorcycles space,strong focus on the premium motorcycle segment and exposure to exportsoffer a strong competitive advantage to the company.

Nature of business: The 2W business is relatively stable, less dependenton interest rates and has moderate entry barriers. The 3W business, however,is subject to new permits and licenses issued by various state authorities.

Current Investment ArgumentsContinued focus on Discover and Pulsar brands to aid market sharegains: BJAUT revamped its strategy in FY2010 and focused on its dominantbrands Discover and Pulsar, which enabled it to strengthen its competitiveposition in the motorcycle segment, leading to an increase in market sharefrom 28% in FY2009 to 32.3% in FY2011. With the launch of Discover125cc (May 2011) and likely new launches of Pulsar and Discover byFY2012-end, we expect BJAUT to further strengthen its position and improveupon its market share.

Exports to remain the key growth driver: BJAUT has registered a strongCAGR of ~35% in export volumes over FY2006-11, aided by ~43% and~25% volume CAGR in the 2W and 3W segments, respectively. With astrong focus and expansion in Africa, Latin America and Asia, we estimateBJAUT to sustain its sales momentum and register a ~24% volume CAGRover FY2011-13E.

Attractive valuations: We prefer BJAUT over HMCL in the 2W space, owingto its diversified business model and healthy revenue and earnings visibility.The stock is currently trading at attractive valuations of 12.5x FY2013E earnings.We recommend Buy on the stock with a target price of `̀̀̀̀1,755, valuing itat 15x FY2013E earnings.

Automobile CMP/TP/Upside: `1,467 / `1,755 / 20%Bajaj Auto


PROMOTERS (BAJAJ GROUP) 50.0

FII 16.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BAJAJ AUTO (10.4) 11.2 80.5 - -

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 21.2 39.3 22.6 16.7 18.1

PAT GROWTH* 19.2 54.1 50.4 21.4 24.7

OPM# 21.0 19.7 17.0 15.7 16.5


ANGEL ESTIMATES


PAT GROWTH (%) 15.6 6.5

ROE (%) 55.0 44.7

P/E 13.4 12.5

P/BV 6.4 5.0


BUY / HOLD / SELL 41 / 15 / 8

RATING BUY

52 WEEK HIGH / LOW 1,823 / 1,190

MARKET CAP (`̀̀̀̀ CR) 42,453

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,339 325 175 175




GROSS BLOCK 3,379 3,395 3,688 3,921


NET BLOCK 1,480 1,483 1,639 1,723


GOODWILL - - - -

INVESTMENTS 4,022 4,795 6,169 7,845

CURRENT ASSETS 1,584 2,873 5,255 6,261


NET CURRENT ASSETS (1,274) (1,083) (991) (891)


TOTAL ASSETS 4,269 5,265 6,855 8,716




% CHG 35.3 39.3 20.4 14.1


EBITDA 2,406 3,280 4,047 4,418

% CHG 145.0 36.3 23.4 9.2

(% OF TOTAL OP. INCOME) 20.2 19.7 20.2 19.4



OTHER INCOME 144 1,193 321 357

EXTRAORDINARY ITEMS (82) 590 - -

PBT (ADJUSTED) 2,489 3,758 4,210 4,624

TAX 705 1,008 1,032 1,239

(% OF PBT) 28.3 26.8 24.5 26.8

PAT (REPORTED) 1,703 3,340 3,179 3,385

PAT (ADJUSTED) 1,784 2,750 3,179 3,385

% CHG 132.0 54.1 15.6 6.5

(% OF NET SALES) 15.5 17.2 16.6 15.3

BASIC EPS ( `̀̀̀̀) 58.8 115.4 109.9 117.0

ADJUSTED EPS (`̀̀̀̀) 61.7 95.0 109.9 117.0

% CHG 132.0 54.1 15.6 6.5


KEY RATIOS

VALUATION RATIO (X)

P/E 24.9 15.4 13.4 12.5

P/CEPS 23.1 12.3 12.8 12.0

P/BV 14.5 8.6 6.4 5.0

EV/SALES 3.3 2.2 1.8 1.4

EV/EBITDA 16.5 11.4 8.8 7.6


EPS (BASIC) 58.8 115.4 109.9 117.0

EPS (ADJUSTED) 61.7 95.0 109.9 117.0

CASH EPS 63.6 119.7 114.6 122.1

DPS 20.0 40.0 42.5 45.0

BOOK VALUE 101.2 169.7 229.8 294.1

RETURNS (%)

ROCE (PRE-TAX) 58.8 66.2 64.5 54.8


ROE 74.4 70.2 55.0 44.7

TURNOVER RATIOS (X)






CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 790 815 171 212

OTHERS 171 (481) - -

OTHER INCOME (144) (1,193) (321) (357)

DIRECT TAXES PAID (705) (1,008) (1,032) (1,239)



(INC.)/DEC. IN INVESTMENTS (2,213) (774) (1,374) (1,675)

OTHER INCOME 144 1,193 321 357

CASH FLOW FROM INVESTING (2,117) 375 (1,314) (1,554)


INC./(DEC.) IN LOANS (231) (1,013) (150) -

DIVIDEND PAID (INCL. TAX) 372 1,345 1,439 1,524

OTHERS (796) (2,810) - -

CASH FLOW FROM FINANCING (655) (2,333) (1,589) (1,524)

INC./(DEC.) IN CASH (35) 55 262 312






Company BackgroundHero MotoCorp (HMCL) is a leading 2W manufacturer in the world and themarket leader in the domestic motorcycle segment with a 54.6% marketshare (48% market share including exports). HMCL has three manufacturingfacilities in India, located at Gurgaon (1.95mn), Dharuhera (1.95mn) andHaridwar (2.25mn), with a total capacity of 6.15mn units/year. Over 2006-11, HMCL recorded a healthy volume CAGR of 12.5% (in-line with industryCAGR of ~12%), backed by its strong brands (Passion and Splendor) anda well-entrenched dealership network, which has a good presence acrossrural areas (~45% of total volumes).

Structural SnapshotGrowth opportunity: We expect the Indian 2W industry to post a 13.3%CAGR over FY2011-13E, driven by rising income levels, strong sustainablerural demand and huge exports potential. HMCL is well equipped to capitalizeon this opportunity backed by its strong brands, new product launches andwider reach. Therefore, we expect HMCL to post a 12.7% volume CAGRover FY2011-13E.

Competitive position: While HMCL continues to dominate the domesticmotorcycle industry, competitive pressures primarily from Bajaj Auto, Honda(post the split from Hero) and Yamaha have led to loss of market share(domestic motorcycle market share of 54.6% in FY2011 compared to 58.5%in FY2010) and lower pricing power.

Nature of business: Relatively stable as it is less dependent on interestrates; Moderate entry barriers.

Current Investment ArgumentsIncrease in competitive activity to restrict volume growth: We believecompetition in the domestic motorcycle segment is set to intensify furtheras HMSI is planning to launch a new 100cc motorcycle in 4QFY2012. With~93% of HMCL’s total motorcycle volumes being derived from the <125ccsegment, we expect HMCL to slightly underperform the industry and reporta 12.7% volume CAGR during the period.

Limited room for margin expansion on higher advertisement and R&Dspends: While HMCL managed to maintain its margins in 1HFY2012, ledby operating leverage benefits and softening of raw-material prices, we expectthe company's EBITDA margin to remain under pressure due to rising competition,leading to higher advertisement spends. Further, increased R&D spends todevelop indigenous technology will also impact margins.

Valuation: At `1,901, HMCL is trading at 14.1x FY2013E earnings. Werecommend Accumulate rating on the stock with a target price of `̀̀̀̀2,025,valuing it at 15x (in-line with historical multiple) FY2013E earnings.

Automobile CMP/TP/Upside: `1,901 / `2,025 / 7%Hero MotoCorp


PROMOTERS (MUNJAL GROUP) 52.2

FII 33.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HERO MOTOCORP (8.0) 7.8 33.1 22.1 20.9

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 16.9 22.1 23.0 17.2 19.8

PAT GROWTH* 20.5 (11.5) 28.0 15.5 22.2

OPM# 15.6 12.4 14.3 13.5 14.7


ANGEL ESTIMATES


PAT GROWTH (%) 27.4 14.9

ROE (%) 66.2 55.0

P/E 16.2 14.1

P/BV 9.2 6.7


BUY / HOLD / SELL 23 / 17 / 25

RATING ACCUMULATE

52 WEEK HIGH / LOW 2,248 / 1,378

MARKET CAP (`̀̀̀̀ CR) 37,956

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS


RESERVES AND SURPLUS 3,425 2,916 4,094 5,622


TOTAL LOANS 66 1,491 1,491 1,491




GROSS BLOCK 2,519 5,308 6,046 6,861


NET BLOCK 1,427 3,850 3,469 3,221


GOODWILL 232 231 231 231

INVESTMENTS 3,926 5,129 6,459 8,510

CURRENT ASSETS 2,883 1,505 2,759 3,268


NET CURRENT ASSETS (1,949) (4,640) (4,408) (4,699)


TOTAL ASSETS 3,684 4,694 5,872 7,400



NET SALES 15,758 19,245 23,276 26,345

% CHG 27.9 22.1 20.9 13.2


EBITDA 2,662 2,380 3,431 3,833

% CHG 58.0 (10.6) 44.1 11.7

(% OF NET SALES) 16.9 12.4 14.7 14.6

DEPRECIATION & AMORTIZATION 191 402 1,118 1,063


OTHER INCOME 363 443 509 539


PBT (ADJUSTED) 2,982 2,491 2,810 3,288

TAX 600 477 464 592

(% OF PBT) 20.1 19.1 16.5 18.0

PAT (REPORTED) 2,232 1,928 2,346 2,696

PAT (ADJUSTED) 2,082 1,842 2,346 2,696

% CHG 76.3 (11.5) 27.4 14.9

(% OF NET SALES) 13.2 9.6 10.1 10.2

BASIC EPS ( `̀̀̀̀) 111.8 96.5 117.5 135.0

ADJUSTED EPS (`̀̀̀̀) 104.2 92.2 117.5 135.0

% CHG 76.3 (11.5) 27.4 14.9


KEY RATIOS

VALUATION RATIO (X)

P/E 18.2 20.6 16.2 14.1

P/CEPS 16.7 16.9 11.0 10.1

P/BV 11.0 12.8 9.2 6.7

EV/SALES 1.9 1.7 1.3 1.0

EV/EBITDA 12.1 14.4 9.3 7.7


EPS (BASIC) 111.8 96.5 117.5 135.0

EPS (ADJUSTED) 104.2 92.2 117.5 135.0

CASH EPS 113.8 112.4 173.5 188.3

DPS 110.0 105.0 50.0 50.0

BOOK VALUE 173.5 148.0 207.0 283.5

RETURNS (%)

ROCE (PRE-TAX) 64.1 47.2 43.8 41.7


ROE 57.3 57.4 66.2 55.0

TURNOVER RATIOS (X)






CASH FLOW STATEMENT


DEPRECIATION 191 402 1,118 1,063

CHANGE IN WORKING CAPITAL 2,581 807 830 585

OTHERS (2,104) (492) - -

OTHER INCOME (363) (443) (509) (539)



(INC.)/DEC. IN FIXED ASSETS (137) (2,865) (734) (831)

(INC.)/DEC. IN INVESTMENTS (557) (1,203) (1,330) (2,051)

OTHER INCOME 363 443 509 539



INC./(DEC.) IN LOANS 12 (1,425) - -

DIVIDEND PAID (INCL. TAX) 2,568 2,437 1,168 1,168

OTHERS (4,887) 303 - -

CASH FLOW FROM FINANCING (2,307) 1,315 (1,168) (1,168)

INC./(DEC.) IN CASH 49 (23) 1,062 294

OPENING CASH BALANCES 13 62 39 1,101

CLOSING CASH BALANCES 62 39 1,101 1,395




Company BackgroundTVS Motor (TVSL), a flagship company of TVS Group, is the third largest2W manufacturer in India. The company is present across the motorcycles,scooters and mopeds segments, having a market share of 8%, ~22% and100%, respectively. The company successfully ventured into the 3W segmentin FY2009 and garnered a 5% market share as of FY2011. The companyhas three manufacturing facilities in India, located at Hosur (Tamil Nadu),Mysore (Karnataka) and Solan (Himachal Pradesh) with 2W and 3W capacityof 2.75mn and 75,000 units, respectively. TVSL is also the second largestexporter of two-wheelers in the country. Exports accounted for ~14% of itstotal revenue in FY2011.

Structural SnapshotGrowth opportunity: We expect the Indian 2W industry to report a 13.3%CAGR over FY2011-13E, driven by rising income levels, strong sustainablerural demand and huge exports potential. While TVSL's motorcycle segmentis likely to remain vulnerable to competition, scooters, mopeds and exportsare expected to register healthy performance going ahead.

Competitive position: TVSL has seen a decline in its two-wheeler marketshare to ~15% from ~19% in FY2006 mainly due to weakness in the motorcyclesegment, led by intense competition from market leaders. However, withthe successful launch of Wego, TVSL has been able to claw-back its marketshare in the scooters segment and retain its number two position in thesegment.

Nature of business: Relatively stable as it is less dependent on interestrates; Moderate entry barriers.

Current Investment ArgumentsNew product launches to drive volume growth: TVSL recorded robustvolume growth of 33.2% yoy in FY2011, led by recovery in the 2W industry'svolumes and new product launches like Jive, Wego and Max4R. With theexpected launch of new models like Victor 125cc and variants of Apache,we expect TVSL to ramp up its production and post a healthy volume CAGRof 11% over FY2011-13E.

Better product mix to sustain operating margins: With growing proportionof higher-margin 3W in the total volume mix (3W expected to post a 14%CAGR vs. 11% for 2W over FY2011-13E) and successful launch ofhigher priced Wego, we expect TVSM's overall realization to improve, therebyhelping it to sustain its operating margins at ~6.5% in FY2012 and FY2013.

Attractive valuations: Due to the recent correction in the stock price,TVSL is trading at attractive valuations of 8.4x FY2013e earnings. We maintainour Buy recommendation on the stock with a target price of ̀̀̀̀̀ 66, valuingit at 11x FY2013E earnings.

Automobile CMP/TP/Upside: `50 / `66 / 32%TVS Motor


Promoters (TVS GROUP) 59.3

FII 4.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TVS MOTOR (23.2) (18.6) 82.6 4.8 14.9

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 23.2 42.0 24.3 13.9 13.1

PAT GROWTH* 39.7 71.8 308.1 14.7 12.6

OPM# 6.9 6.2 5.2 4.6 6.8


ANGEL ESTIMATES


PAT GROWTH (%) 25.8 9.6

ROE (%) 23.7 21.8

P/E 9.2 8.4

P/BV 2.0 1.7


BUY / HOLD / SELL 26 / 12 / 4

RATING BUY



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS


RESERVES & SURPLUS 842 952 1,144 1,362

SHAREHOLDERS FUNDS 865 999 1,192 1,409

TOTAL LOANS 1,003 785 760 760

DEFERRED TAX LIABILITY 115 - - -



GROSS BLOCK 1,909 1,972 2,102 2,222

LESS: ACC. DEPRECIATION 953 1,035 1,150 1,273

NET BLOCK 956 938 952 949


GOODWILL - - - -


CURRENT ASSETS 965 1,202 1,455 1,773

CURRENT LIABILITIES 734 1,073 1,211 1,368


MIS. EXP. NOT WRITTEN OFF 30 - - -

TOTAL ASSETS 1,983 1,785 1,952 2,170




% CHG 18.5 42.0 17.4 14.1


EBITDA 187 393 504 546

% CHG 0.4 109.6 28.4 8.2





EXTRAORDINARY ITEMS 32 (11) - -

PBT (ADJUSTED) 44 259 346 379

TAX (12) 54 86 95

(% OF PBT) (26.7) 20.6 25.0 25.0

PAT (REPORTED) 88 195 259 284

PAT (ADJUSTED) 120 206 259 284

% CHG 306.6 71.8 25.8 9.6

(% OF NET SALES) 2.7 3.3 3.6 3.4

BASIC EPS ( `̀̀̀̀) 1.9 4.1 5.5 6.0

ADJUSTED EPS (`̀̀̀̀) 2.5 4.3 5.5 6.0

% CHG 306.6 71.8 25.8 9.6


KEY RATIOS

VALUATION RATIO (X)

P/E 19.8 11.5 9.2 8.4

P/CEPS 10.7 7.6 6.3 5.8

P/BV 2.7 2.4 2.0 1.7

EV/SALES 0.6 0.4 0.3 0.3

EV/EBITDA 13.5 6.3 4.5 3.9


EPS (BASIC) 1.9 4.1 5.5 6.0

EPS (ADJ.) 2.5 4.3 5.5 6.0

CASH EPS 4.7 6.6 7.9 8.5

DPS 0.6 1.1 1.2 1.2

BOOK VALUE 18.2 21.0 25.1 29.7

RETURNS (%)

ROCE (PRE-TAX) 4.4 15.2 20.8 20.6


ROE 14.3 22.1 23.7 21.8

TURNOVER RATIOS (X)






CASH FLOW STATEMENT




OTHERS 144 (85) - -

OTHER INCOME (67) (33) (10) (12)

DIRECT TAXES PAID 12 (54) (86) (95)



(INC.)/DEC. IN INVESTMENTS (262) 78 (42) (57)


CASH FLOW FROM INVESTING (225) 18 (157) (167)


INC./(DEC.) IN LOANS 97 (218) (25) -


OTHERS (102) (260) - -


INC./(DEC.) IN CASH 142 (174) 135 131


NET CASH CREDIT ADJUSTMENT 83 (79) - -





Company BackgroundBosch (BOS), promoted by Robert Bosch GmbH is the largest auto ancillarycompany in India and a dominant player in the fuel injection segment with~75% market share. The company has a diverse product portfolio of dieseland gasoline fuel injection systems, automotive aftermarket products, autoelectricals, special purpose machines, packaging machines, electric powertools and security systems. The automotive segment contributes 90% toBOS's total revenue. The company also has one of the largest distributionnetworks of spare parts in the country, with after-market component salesaccounting for ~20% of revenue. BOS has five manufacturing facilities locatedat Bangalore, Nashik, Naganathpura, Jaipur and Goa.

Structural SnapshotGrowth opportunity: We expect the Indian auto industry to grow at a12-13% CAGR over FY2011-13E, led by sustainable growth in the economy;and rising consumer confidence and income levels, which we believe areprime drivers of the demand in the auto industry, particularly in segmentssuch as passenger vehicles, commercial vehicles and tractors. Further, increasingdieselization levels in the domestic passenger vehicle segment are likely toaugur well for BOS in the long run.

Competitive position: BOS is a market leader in the fuel injection equipmentsegment with ~75% market share and has a track record of industry-shapinginnovations, leading to higher pricing power.

Nature of business: Cyclical as automotive sales are dependent on interestrate; Access to technology creates entry barriers; Sensitive to exchangerates (EUR/INR), since the company has net imports of ~20% of net sales.

Current Investment ArgumentsDependent on favorable CV/tractor sales for growth: BOS's prospectsare largely derived from demand arising in the CV and tractor segments,which are estimated to register a 12-14% CAGR each over FY2011-13E.Further, greater visibility on newer growth opportunities is emerging for thecompany, following its investments in new and innovative technologies suchas common rail systems and gasoline systems. As such, we estimate BOSto record a strong ~17% CAGR in its top line over CY2010-12E.

Technology leadership lends bargaining power: BOS commands a ~75%market share in the domestic fuel injection equipment segment, which isextremely technology intensive. Also, the company has a proven track recordof industry-shaping innovations. Being a technology leader in the industry,the company enjoys strong pricing power and, hence, higher margins, whichare expected to remain stable going ahead.

Valuations: At `7,160, BOS is trading at 19.1x CY2012E earnings. Webelieve BOS will continue to enjoy premium valuations due to its technologicalleadership and strong and diversified product portfolio. We maintain ourAccumulate rating on the stock with a target price of `̀̀̀̀7,514, valuing it at20x CY2012E earnings (in-line with average historical multiple).

Automobile CMP/TP/Upside: `7,160 / `7,514 / 5%Bosch



FII 5.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BOSCH 2.4 15.9 33.7 15.8 41.3

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 16.4 37.4 15.5 17.2 16.7

PAT GROWTH* 22.0 59.1 15.1 20.5 25.4

OPM# 19.3 18.2 17.6 18.8 18.5


ANGEL ESTIMATES

PARTICULARS CY2011E CY2012E

PAT GROWTH (%) 24.6 10.3

ROE (%) 21.3 19.5

P/E 21.0 19.1

P/BV 4.5 3.7


BUY / HOLD / SELL 9 / 2 / 0

RATING ACCUMULATE

52 WEEK HIGH / LOW 7,480 / 5,783

MARKET CAP (`̀̀̀̀ CR) 22,482

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 284 276 276 276

DEFERRED TAX LIABILITY (201) (218) (218) (218)



GROSS BLOCK 2,865 3,017 3,697 4,188


NET BLOCK 507 430 843 1,033


GOODWILL 6 6 6 6

INVESTMENTS 1,418 1,607 1,778 2,138

CURRENT ASSETS 2,758 3,752 4,003 4,689




TOTAL ASSETS 3,468 4,156 5,079 6,108

Y/E DEC. (`̀̀̀̀ CR) CY2009 CY2010 CY2011E CY2012E



% CHG 5.6 37.4 19.0 14.8


EBITDA 826 1,253 1,527 1,695

% CHG (3.6) 51.7 21.8 11.0




OTHER INCOME 285 207 248 268

EXTRAORDINARY ITEMS 64 - - -

PBT (ADJUSTED) 742 1,202 1,507 1,662

TAX 203 344 437 482

(% OF PBT) 27.3 28.6 29.0 29.0

PAT (REPORTED) 604 859 1,070 1,180

PAT (ADJUSTED) 540 858 1,070 1,180

% CHG (2.4) 59.1 24.6 10.3

(% OF NET SALES) 11.2 12.8 13.4 12.9

BASIC EPS ( `̀̀̀̀) 192.2 273.5 340.8 375.7

ADJUSTED EPS (`̀̀̀̀) 171.8 273.4 340.8 375.7

% CHG (0.5) 59.1 24.6 10.3


KEY RATIOS

VALUATION RATIO (X)

P/E 41.7 26.2 21.0 19.1

P/CEPS 26.7 20.2 16.8 15.2

P/BV 6.6 5.5 4.5 3.7

EV/SALES 4.0 2.8 2.3 1.9

EV/EBITDA 31.7 18.8 12.9 11.2


EPS (BASIC) 171.8 273.4 340.8 375.7

EPS (ADJUSTED) 171.8 273.4 340.8 375.7

CASH EPS 268.5 354.3 425.7 471.2

DPS 30.0 40.0 40.0 40.0

BOOK VALUE 1,078 1,305 1,599 1,927

RETURNS (%)

ROCE (PRE-TAX) 15.7 26.2 27.3 24.9


ROE 15.9 20.9 21.3 19.5

TURNOVER RATIOS (X)





Y/E DEC. CY2009 CY2010 CY2011E CY2012E

CASH FLOW STATEMENT

PROFIT BEFORE TAX 742 1,202 1,507 1,662



OTHERS 209 159 - -

OTHER INCOME (285) (207) (248) (268)


CASH FLOW FROM OPERATIONS 897 886 694 1,031



OTHER INCOME 285 207 248 268


ISSUE OF EQUITY (1) - - -

INC./(DEC.) IN LOANS 20 (8) - -


OTHERS (672) (471) - -


INC./(DEC.) IN CASH (3) 258 (16) 277

OPENING CASH BALANCE 1,071 1,068 1,326 1,310

CLOSING CASH BALANCE 1,068 1,326 1,310 1,588




Company BackgroundExide Industries (Exide) is a leading automobile and industrial battery manufacturerin India. The company commands a ~70% and ~65% market share in theOEM and organized replacement battery segment and a 40-45% share inthe industrial battery segment. Exide has technological tie-ups withmajors such as Shin Kobe and Furukawa Battery. The automotive and industrialbattery segments accounted for ~65% and ~35% of the company's totalrevenue in FY2011, respectively. Exide also has a 50% stake in ING VysyaInsurance Ltd., a JV with ING Group, Netherlands.

Structural SnapshotGrowth opportunity: We expect growth traction in the automotive batterysegment to continue, driven by OEM sales and a steady increase of10-12% in the auto replacement segment, given that average battery life is3-4 years. Further, revival in demand for telecom and UPS batteries is likelyto sustain industrial battery demand going ahead. Additionally, strong relationshipwith OEMs (creating brand awareness amongst consumers) presents a significantgrowth opportunity in the replacement market, which still has presence oflarge unorganized players. We believe Exide is well placed to capitalize onthis growth opportunity as it has unparalleled distribution network, excellentcustomer relationships and strong brand loyalty.

Competitive position: Exide continues to dominate the organized automotiveand industrial battery segments, led by its strong brands (Exide and SFSonic) and a wide distribution network. However, recently Exide has lost6-7% market share in the organized replacement 4W segment, led by aggressivestrategy adopted by Amara Raja Batteries. Consequently, Exide reducedits auto battery prices by 8-10% in September 2011, leading to significantmargin erosion.

Nature of business: While OEM demand is dependent on new vehicle sales,replacement demand is relatively stable; branding, quality/technology andstrong OEM presence create entry barriers.

Current Investment ArgumentsDemand scenario for auto and industrial batteries to remain positive:We expect the auto and industrial battery segments to post revenue CAGRsof 15% and 12%, respectively, over FY2011-13E, driven by strong batterydemand. As such, we expect Exide to register revenue CAGRs of 14% and10% in the auto and industrial battery segments, respectively.

Captive sourcing to reduce the impact of lead price volatility: While Exide'sprofitability in 1HFY2012 was impacted by poor inventory management andmounting competitive pressures, we believe increased lead sourcing fromcaptive smelters to ~70% in FY2013 (~55% in FY2011) will help reducethe impact of lead price volatility and enhance margins. We believe captivesourcing of lead reduces the company's raw-material costs by 10-15%.

Valuations: At `120, the stock is trading at 13.8x FY2013E earnings, adjustedfor its stake in the insurance business. We maintain our Accumulate viewon the stock with an SOTP target price of `̀̀̀̀137. We assign a value/share of`125 to its core operations and `12 to its stake in ING Vysya Life Insurance.

Automobile CMP/TP/Upside: `120 / `137 / 14%Exide Industries


PROMOTERS 46.0

FII 18.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

EXIDE IND. (1.1) (11.9) 42.2 24.5 45.1

BSE AUTO INDEX (0.5) (5.2) 52.7 9.4 25.7



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 19.0 20.0 17.0 27.0 19.4

PAT GROWTH* (16.2) 17.8 37.4 44.4 30.3

OPM# 13.2 19.4 19.7 18.4 17.5


ANGEL ESTIMATES


PAT GROWTH (%) (28.9) 47.4

ROE (%) 15.6 20.3

P/E 22.7 15.4

P/BV 3.4 2.9


BUY / HOLD / SELL 18 / 11 / 7

RATING ACCUMULATE


MARKET CAP (`̀̀̀̀ CR) 10,221

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS








GROSS BLOCK 1,336 1,561 1,842 2,027


NET BLOCK 677 836 1,019 1,096


GOODWILL - - - -

INVESTMENTS 1,335 1,378 1,619 1,968

CURRENT ASSETS 912 1,329 1,347 1,611

CURRENT LIABILITIES 593 796 927 1,158



TOTAL ASSETS 2,369 2,812 3,113 3,578



NET SALES 3,794 4,554 5,002 5,796

% CHG 11.8 20.0 9.8 15.9


EBITDA 892 881 671 938

% CHG 62.8 (1.2) (23.9) 39.9

(% OF NET SALES) 23.5 19.4 13.4 16.2





PBT (ADJUSTED) 811 907 634 935

TAX 273 274 184 271

(% OF PBT) 33.7 30.2 29.0 29.0

PAT (REPORTED) 537 666 450 664

PAT (ADJUSTED) 537 633 450 664

% CHG 89.7 17.8 (28.9) 47.4

(% OF NET SALES) 14.2 13.9 9.0 11.4

BASIC EPS ( `̀̀̀̀) 6.3 7.8 5.3 7.8

ADJUSTED EPS (`̀̀̀̀) 6.3 7.4 5.3 7.8

% CHG 78.5 17.8 (28.9) 47.4


KEY RATIOS

VALUATION RATIO (X)

P/E 19.0 15.3 22.7 15.4

P/CEPS 16.5 14.3 18.7 13.3

P/BV 4.7 3.8 3.4 2.9

EV/SALES 2.4 1.9 1.7 1.4

EV/EBITDA 10.1 10.0 12.8 8.8


EPS (BASIC) 6.3 7.8 5.3 7.8

EPS (ADJUSTED) 6.3 7.4 5.3 7.8

CASH EPS 7.3 8.4 6.4 9.1

DPS 1.0 1.5 1.5 2.0

BOOK VALUE 25.8 31.9 35.5 41.0

RETURNS (%)

ROCE (PRE-TAX) 40.8 30.8 19.3 24.8


ROE 31.0 25.5 15.6 20.3

TURNOVER RATIOS (X)






CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (59) (214) 144 (45)

OTHERS (23) 13 - -

OTHER INCOME (12) (151) (71) (114)







ISSUE OF EQUITY 530 - - -

INC./(DEC.) IN LOANS (227) (88) - -


OTHERS (159) (249) - -


INC./(DEC.) IN CASH (31) 12 32 (13)






Company BackgroundAmara Raja Batteries (AMRJ), a JV between Galla family and Johnson Controls,U.S., is India's second largest manufacturer in the organized VRLA batteriesmarket finding applications in the automotive (~55% of total revenue) andindustrial (~45% of total revenue) segments. AMRJ has a market share of25% in 4W OEM, 30% in 4W replacement and 25% in 2W replacementbattery markets. The company also commands dominant market shares of42% and 32% in the telecom and UPS battery segments, respectively. AMRJderives ~45% and ~35% of its industrial segment's revenue from the telecomand UPS battery segments, respectively.

Structural SnapshotGrowth opportunity: We expect growth traction in the automotive batterysegment to continue, driven by OEM sales and a steady increase of10-12% in the auto replacement segment, given that average battery life is3-4 years. Further, demand revival for telecom and UPS batteries is alsolikely to sustain industrial battery demand going ahead. Additionally, strongrelationship with OEMs (creating brand awareness amongst consumers)presents a significant growth opportunity in the replacement market, whichstill has presence of large unorganized players. On the back of these opportunities,capacity expansion and increasing reach, we expect AMRJ to benefit goingahead.

Competitive position: While Exide is the market leader in the organizedautomotive battery segment, AMRJ has consistently increased its marketshare by 1) aggressively positioning its products (Amaron batteries), 2) offeringhigher warranty and 3) strengthening its distribution network. AMRJ is adominant player in the industrial battery segment due to its strong ties withcustomers.

Nature of business: While OEM demand is dependent on new vehicle sales,replacement demand is relatively stable; branding, quality/technology andstrong OEM presence create entry barriers.

Current Investment ArgumentsGrowth in the auto battery segment to drive top-line performance: Weexpect AMRJ's automotive battery segment to post a robust ~22% revenueCAGR over FY2011-13E, led by better positioning of its products, availabilityof additional capacity and increasing distribution reach.

Telecom and UPS battery segments to sustain industrial battery demand:AMRJ pioneered the use of maintenance-free batteries, which have applicationsin the railway signaling, telecom and power supply solutions segments.We expect the telecom and power backup (UPS/inverter) segments to drivedemand for industrial batteries, leading to a ~16% revenue CAGR in AMRJ'sindustrial battery segment over FY2011-13E.

Valuations: At `206, AMRJ is trading attractively at 8.6x FY2013E earnings.We mainatin our Buy rating on the stock. We assign a multiple of 10.5x(~35% discount to Exide's multiple of 16x) FY2013E earnings to arrive at atarget price of `250.

Automobile CMP/TP/Upside: `206 / `250 / 22%Amara Raja Batteries


PROMOTERS 52.1

FII 4.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

AMRJ (0.6) 20.3 69.2 26.6 35.8

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 42.8 20.3 17.6 37.1 29.3

PAT GROWTH* 64.1 (7.1) 16.1 43.9 21.8

OPM# 15.7 14.5 15.7 15.5 13.4


ANGEL ESTIMATES


PAT GROWTH (%) 21.0 13.8

ROE (%) 24.7 22.9

P/E 9.8 8.6

P/BV 2.2 1.8


BUY / HOLD / SELL 15 / 2 / 0

RATING BUY

52 WEEK HIGH / LOW 263 / 158


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS






TOTAL LIABILITIES 656 761 935 1,079


GROSS BLOCK 491 539 629 686


NET BLOCK 306 315 356 360


GOODWILL - - - -


CURRENT ASSETS 631 742 926 1,098




TOTAL ASSETS 656 761 935 1,079



NET SALES 1,464 1,761 2,179 2,514

% CHG 11.5 20.3 23.7 15.4


EBITDA 288 256 311 348

% CHG 70.4 (11.4) 21.8 11.6

(% OF NET SALES) 19.7 14.5 14.3 13.8




EXTRAORDINARY ITEMS 8 - - -

PBT (ADJUSTED) 255 221 267 304

TAX 88 73 88 100

(% OF PBT) 34.4 33.0 33.0 33.0

PAT (REPORTED) 167 148 179 203

PAT (ADJUSTED) 159 148 179 203

% CHG 97.7 (7.1) 21.0 13.8

(% OF NET SALES) 10.9 8.4 8.2 8.1

BASIC EPS ( `̀̀̀̀) 19.6 17.3 20.9 23.8

ADJUSTED EPS (`̀̀̀̀) 18.6 17.3 20.9 23.8

% CHG 97.7 (7.1) 21.0 13.8


KEY RATIOS

VALUATION RATIO (X)

P/E 10.5 11.9 9.8 8.6

P/CEPS 8.7 9.3 7.7 6.9

P/BV 3.2 2.7 2.2 1.8

EV/SALES 1.2 1.0 0.8 0.7

EV/EBITDA 6.1 7.0 5.6 4.8


EPS (BASIC) 19.6 17.3 20.9 23.8

EPS (ADJUSTED) 18.6 17.3 20.9 23.8

CASH EPS 23.7 22.2 26.7 30.0

DPS 2.9 4.6 2.5 2.5

BOOK VALUE 63.7 75.6 93.7 114.6

RETURNS (%)

ROCE (PRE-TAX) 35.9 30.2 30.9 29.3


ROE 33.5 24.8 24.7 22.9

TURNOVER RATIOS (X)






CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (66) (97) (66) (77)

OTHERS 87 2 - -

OTHER INCOME (17) (10) (8) (11)




(INC.)/DEC. IN INVESTMENTS 31 - (12) (15)


CASH FLOW FROM INVESTING 1 (53) (94) (64)


INC./(DEC.) IN LOANS (195) 4 20 (35)


OTHERS (36) (88) - -


INC./(DEC.) IN CASH (8) (22) 55 44






Company BackgroundApollo Tyres (APTY) is India's second largest tyre manufacturer with an overalltyre market share of ~18%. The company has a leadership position in theheavy and LCV tyre segments, with 23% and 26% market share, respectively.APTY acquired Dunlop's South African operations in 2006 and VredesteinBranden BV (Netherlands) in May 2009. These acquisitions now accountfor 38% of APTY's consolidated revenue. The company has eightmanufacturing plants located across India (1,125TPD), South Africa (175TPD)and Europe (170TPD), with a total installed capacity of 1,470TPD. APTY'smain brands include Apollo (India); Dunlop (South Africa); and Maloya, Regaland Vredestein (Europe).

Structural SnapshotGrowth opportunity: We believe the Indian tyre industry is going through astructural shift as radialization levels in the truck and bus radial (TBR) segmentare expected to reach 40% over the next two-three years from 16% in FY2011.Further, expected steady growth of 8-10% in replacement demand (~65%of total demand) should lend a greater degree of stability to overall tyredemand in our view. We expect APTY to be the key beneficiary of the structuralshift that the Indian tyre industry is going through, given its dominant positionin the TBR as well as replacement segment coupled with leading brandsand a strong distribution reach.

Competitive position: APTY is a market leader in the CV segment, with a~27% market share. However, increasing radialization in the TBR segmentis expected to lead to higher earnings growth and margin improvement forthe tyre industry, including players like APTY.

Nature of business: Cyclical as demand for CV tyres is linked to themacroeconomic environment; low entry barriers, sensitive to exchange ratessince the company has net imports of ~25% of net sales at standalonelevel, global rubber prices impact profitability.

Current Investment ArgumentsSteady performance in domestic and overseas business to aid growth:Structural growth factors in combination with timely ramp-up at the Chennaifacility (incremental capacity of 450TPD by 1QFY2013) is likely to result ina 25% revenue CAGR in domestic operations. Further, overseas subsidiariesare expected to maintain a healthy growth momentum and register a 13%revenue CAGR.

Lower raw-material prices to boost margins: Domestic and internationalnatural rubber prices have declined by 21% and 33%, respectively, fromtheir peak levels. With rubber prices expected to rule steady and price hikescarried out in 1HFY2012, we expect APTY's operating margins to improveby 70bp in FY2013 to 9.4%.

Valuations: At `65, APTY is trading at 7x FY2013E earnings. We maintainour Buy rating on the stock with a target price of `̀̀̀̀74, valuing it at 8.0xFY2013E earnings.

Automobile CMP/TP/Upside: `65 / `74 / 15%Apollo Tyres


PROMOTERS 46.4

FII 22.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

APOLLO TYRES 19.0 15.6 50.7 12.8 24.2

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 47.3 9.2 23.6 27.7 22.7

PAT GROWTH* 46.0 (32.5) 16.7 40.0 31.9

OPM# 8.0 11.1 11.4 11.2 10.2

RoE# - 17.1 22.1 21.4 19.0NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) (17.6) 28.8

ROE (%) 12.4 15.0

P/E 9.0 7.0

P/BV 1.2 1.1


BUY / HOLD / SELL 24 / 2 / 3

RATING BUY



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,707 2,480 3,030 2,930




GROSS BLOCK 5,563 6,903 7,625 7,962


NET BLOCK 2,443 3,403 3,819 3,810


GOODWILL 118 117 117 117


CURRENT ASSETS 2,439 3,290 4,185 4,663




TOTAL ASSETS 3,926 5,210 6,079 6,358



NET SALES 8,121 8,868 11,819 13,296

% CHG 62.6 9.2 33.3 12.5


EBITDA 1,185 988 1,046 1,248

% CHG 180.7 (16.6) 5.9 19.3

(% OF NET SALES) 14.6 11.1 8.9 9.4





PBT (ADJUSTED) 855 536 498 668

TAX 261 106 134 200

(% OF PBT) 30.5 19.8 27.0 30.0

PAT (REPORTED) 594 430 363 468

PAT (ADJUSTED) 653 441 363 468

% CHG 369.5 (32.5) (17.6) 28.8

(% OF NET SALES) 8.0 5.0 3.1 3.5

BASIC EPS ( `̀̀̀̀) 13.0 8.7 7.2 9.3

ADJUSTED EPS (`̀̀̀̀) 13.0 8.7 7.2 9.3

% CHG 369.5 (32.5) (17.6) 28.8


KEY RATIOS

VALUATION RATIO (X)

P/E 5.0 7.4 9.0 7.0

P/CEPS 3.9 4.7 4.9 4.0

P/BV 1.7 1.4 1.2 1.1

EV/SALES 0.6 0.6 0.5 0.4

EV/EBITDA 3.9 5.6 5.4 4.5


EPS (BASIC) 13.0 8.7 7.2 9.3

EPS (ADJUSTED) 13.0 8.7 7.2 9.3

CASH EPS 16.8 13.9 13.3 16.2

DPS 0.7 0.5 0.8 1.5

BOOK VALUE 39.0 47.9 54.2 61.7

RETURNS (%)

ROCE (PRE-TAX) 29.3 15.7 13.1 14.5


ROE 29.8 17.1 12.4 15.0

TURNOVER RATIOS (X)






CASH FLOW STATEMENT




OTHERS 789 139 - -

OTHER INCOME (117) (29) (29) (31)



(INC.)/DEC. IN FIXED ASSETS (3,533) (1,307) (753) (360)



CASH FLOW FROM INVESTING (3,417) (1,284) (729) (334)


INC./(DEC.) IN LOANS 816 773 550 (100)


OTHERS 1,231 (93) - -

CASH FLOW FROM FINANCING 2,091 709 506 (188)

INC./(DEC.) IN CASH (13) (158) 405 29






Company BackgroundCeat, part of the RPG Group, is amongst the leading tyre manufacturers inthe country with an overall market share of ~12%. The company’s manufacturingfacilities are located in Bhandup, Nashik and Halol. The company has anoverall production capacity of 615TPD (including outsourced). The companyexports to countries across Asia, Africa, Europe and America. Exports constitute~20% of Ceat's total volumes. The company has recently acquired the globalrights of the CEAT brand from Italian tyre maker Pirelli - this will enable thecompany to expand its global presence. Ceat also operates in Sri Lankathrough a JV and has a 60% share in Sri Lanka's tyre market.

Structural SnapshotGrowth opportunity: We believe the Indian tyre industry is going through astructural shift as radialization levels in the truck and bus radial (TBR) segmentare expected to reach 40% over the next two-three years from 16% in FY2011.Further, expected steady growth of 8-10% in replacement demand (~65%of total demand) should lend a greater degree of stability to overall tyredemand in our view. Availability of radial tyres from the new facility in Haloland increasing focus on replacement demand is expected to help Ceat registera strong 21.4% revenue CAGR over FY2011-13E.

Competitive position: The Indian tyre industry is extremely competitive andis dominated by MRF and Apollo Tyres. However, increasing radialization inthe TBR segment is expected to lead to higher earnings growth and marginimprovement for the tyre industry, including players like Ceat.

Nature of business: Cyclical as demand for CV tyres is linked to themacroeconomic environment; low entry barriers; Sensitive to exchange ratessince the company has net imports of ~12% of net sales: Global rubberprices impact profitability.

Current Investment ArgumentsImproving product mix and stable raw-material prices to aid marginexpansion: Ceat is ramping up its radial capacity at the Halol plant to 150TPD,which is likely to be fully operational by 1QFY2013. With the completion ofthe proposed expansion, the product mix of truck:non-truck is likely to improveto 60:40 (currently 67:33), resulting in better product mix, thereby fetchingbetter margins. Additionally, pricing action (~10% in 1HFY2012) and stableraw-material prices going ahead (declined 21% from the peak in domesticmarkets) are expected to result in a ~150bp margin expansion in FY2013.

Valuations: At `84, CEAT is trading at attractive valuations of 4.1x FY2013Eearnings. We believe recent action of hiking stake by promoters in the companyfrom 48.47% in March 2010 to 50.2% as of September 2011 in combinationwith recent announcement of issue of warrants to the promoters is likely toboost investor sentiments. In addition, we believe monetization of surplusland at Bhandup (23.6acre should fetch over `440cr, on a conservativebasis) will further act as a positive trigger for the stock (not completelyfactored in our valuation). We maintain our Buy view on the stock with atarget price of `̀̀̀̀125, valuing it at 6.0x FY2013E earnings.

Automobile CMP/TP/Upside: `84 / `125 / 48%


PROMOTERS (RPG GROUP) 50.2

FII 2.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CEAT 13.4 (30.8) 32.1 (14.2) 11.6

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 32.7 23.6 14.2 14.7 13.4

PAT GROWTH* (63.3) (83.3) (32.2) 108.4 -

OPM# 5.5 3.1 4.9 5.9 5.1


ANGEL ESTIMATES


PAT GROWTH (%) - -

ROE (%) (3.1) 11.2

P/E - 4.1

P/BV 0.5 0.4



RATING BUY


MARKET CAP (`̀̀̀̀ CR) 289

LIQUIDITY LOW

TOPPICKCEAT


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 654 1,019 1,319 1,369




GROSS BLOCK 1,256 1,882 2,196 2,381


NET BLOCK 769 1,361 1,604 1,715



CURRENT ASSETS 1,032 1,216 1,399 1,629




TOTAL ASSETS 1,303 1,692 1,952 2,054



NET SALES 2,807 3,469 4,392 5,119

% CHG 18.6 23.6 26.6 16.6


EBITDA 296 107 141 249

% CHG 1,178.1 (63.7) 31.1 76.4

(% OF NET SALES) 10.5 3.1 3.2 4.9





PBT (ADJUSTED) 239 39 (27) 90

TAX 74 11 (7) 19

(% OF PBT) 31.0 28.5 28.0 21.0

PAT (REPORTED) 165 22 (19) 71

PAT (ADJUSTED) 165 28 (19) 71

% CHG - (83.3) - -

(% OF NET SALES) 5.9 0.8 (0.4) 1.4

BASIC EPS ( `̀̀̀̀) 48.2 6.5 (5.6) 20.8

ADJUSTED EPS (`̀̀̀̀) 48.3 8.0 (5.6) 20.8

% CHG - (83.3) - -


KEY RATIOS

VALUATION RATIO (X)

P/E 1.8 13.0 - 4.1

P/CEPS 1.5 4.7 5.5 2.0

P/BV 0.5 0.4 0.5 0.4

EV/SALES 0.3 0.3 0.3 0.3

EV/EBITDA 2.5 10.9 10.5 6.1


EPS (BASIC) 48.2 6.5 (5.6) 20.8

EPS (ADJUSTED) 48.3 8.0 (5.6) 20.8

CASH EPS 55.0 18.0 15.2 42.4

DPS 4.0 2.0 5.0 5.0

BOOK VALUE 183.6 189.6 178.0 192.9

RETURNS (%)

ROCE (PRE-TAX) 21.9 4.9 3.8 8.7


ROE 29.6 4.3 (3.1) 11.2

TURNOVER RATIOS (X)






CASH FLOW STATEMENT

PROFIT BEFORE TAX 239 39 (27) 90



OTHERS 343 (232) - -

OTHER INCOME (42) (60) (53) (66)

DIRECT TAXES PAID (74) (11) 7 (19)

CASH FLOW FROM OPERATIONS 233 139 (41) 71


(INC.)/DEC. IN INVESTMENTS (16) (28) 8 (14)




INC./(DEC.) IN LOANS 9 365 300 50


OTHERS (93) (129) - -

CASH FLOW FROM FINANCING (84) 252 280 30

INC./(DEC.) IN CASH (61) (92) (0) 6






Company BackgroundJK Tyre and Industries (JKI) is the third largest tyre manufacturer in the countrywith an overall market share of 15.7%. The company operates from fourplants in India, with a current installed capacity of 9.9mn tyres annually andis in the process of increasing it to 12.7mn tyres annually by FY2013. While80% of JKI's tonnage volume is contributed by the CV segment, the PCsegment accounts for ~10% of the volumes. JKI acquired Tornel in Mexicoin FY2009.

Structural SnapshotGrowth opportunity: We believe the Indian tyre industry is going through astructural shift, as radialization levels in the truck and bus radial (TBR) segmentare expected to reach 40% over next two-three years from 16% in FY2011.Further, expected steady growth of 8-10% in replacement demand (~65%of total demand) should lend a greater degree of stability to overall tyredemand in our view. Being a first mover in the TBR space, we expect JKI tobenefit from the incremental demand for radial tyres.

Competitive position: The Indian tyre industry is extremely competitive andis dominated by MRF and Apollo Tyres. However, increasing radialization inthe TBR segment is expected to lead to higher earnings growth and marginimprovement for the tyre industry, including players like JKI.

Nature of business: Cyclical as demand for CV tyres is linked to themacroeconomic environment; Low entry barriers; Sensitive to exchange ratessince the company’s net imports constitute ~10% of its net sales at a standalonelevel; Global rubber prices impact profitability.

Current Investment ArgumentsFavorable product mix: We expect JKI to benefit from the structural shiftthat the Indian tyre industry is going through, given that currently there is ashortage of radial tyres. Thus, we believe JKI will be able to fully utilize itsexisting TBR capacity (highly profitable) of 1mn units. Further, commissioningof additional capacities at existing plants and gradual ramp-up at the Chennaiplant are likely to lead to operating leverage benefits. This coupled with astable raw-material pricing scenario (declined 21% from the peak in domesticmarkets) is expected to improve operating margins by 90bp in FY2013 to5.1%.

Tornel turnaround to improve consolidated performance: Tornel, whichturned profitable in FY2010 – reporting net profit of ̀ 56cr (net loss of ̀ 40crin FY2009), registered a sharp drop in profitability in FY2011 to `2cr dueto cost pressures. We expect profitability to improve in FY2012, led by stableraw-material prices, thereby improving overall consolidated performance.

Valuations: At `70, JKI is trading at attractive valuations of 3.2x FY2013Eearnings. We maintain our Buy rating on the stock with a target price of`̀̀̀̀89, valuing it at 4.0x FY2013E earnings.

Automobile CMP/TP/Upside: `70 / `89 / 27%JK Tyre and Industries


PROMOTERS 47.0

FII 6.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

JK TYRE 1.7 (41.9) 21.4 (14.3) 13.7

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M** 1Y 3Y 5Y 10Y

SALES GROWTH* 13.2 30.1 - 18.1 18.5

PAT GROWTH* - (70.6) - 40.6 14.7

OPM# 2.1 4.8 6.2 7.0 7.3

RoE# - 7.7 6.3 7.6 4.4NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS,**STANDALONE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) (29.4) 96.4

ROE (%) 5.3 9.8

P/E 114.2 3.2

P/BV 0.3 0.3



RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,159 1,614 1,914 2,214




GROSS BLOCK 3,133 3,377 4,006 4,391


NET BLOCK 1,764 1,855 2,356 2,600


GOODWILL - - - -


CURRENT ASSETS 1,520 2,066 2,016 2,402




TOTAL ASSETS 2,148 2,617 2,896 3,274



NET SALES 4,571 5,945 7,011 8,167

% CHG (17.2) 30.1 17.9 16.5


EBITDA 502 284 294 417

% CHG - (43.4) 3.6 41.5

(% OF NET SALES) 11.0 4.8 4.2 5.1




EXTRAORDINARY ITEMS (0) (0) 44 -

PBT (ADJUSTED) 313 112 7 135

TAX 93 49 5 44

(% OF PBT) 29.8 44.1 76.9 33.0

PAT (REPORTED) 220 63 2 90

PAT (ADJUSTED) 224 66 47 91

% CHG - (70.6) (29.4) 96.4

(% OF NET SALES) 4.9 1.1 0.7 1.1

BASIC EPS ( `̀̀̀̀) 54.5 16.1 0.6 22.2

ADJUSTED EPS (`̀̀̀̀) 54.5 16.1 11.3 22.2

% CHG - (70.6) (29.4) 96.4


KEY RATIOS

VALUATION RATIO (X)

P/E 1.3 4.4 114.2 3.2

P/CEPS 0.9 1.6 2.2 1.2

P/BV 0.3 0.3 0.3 0.3

EV/SALES 0.3 0.3 0.3 0.3

EV/EBITDA 2.5 6.0 6.9 5.5


EPS (BASIC) 54.5 16.1 0.6 22.2

EPS (ADJUSTED) 54.5 16.1 11.3 22.2

CASH EPS 77.8 42.7 31.8 56.5

DPS 3.5 3.0 3.0 3.0

BOOK VALUE 207.0 209.0 216.6 234.9

RETURNS (%)

ROCE (PRE-TAX) 18.6 7.3 6.0 8.8


ROE 29.0 7.7 5.3 9.8

TURNOVER RATIOS (X)






CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 114 (230) 124 (70)

OTHERS (209) 119 - -

OTHER INCOME (30) (53) (47) (47)




(INC.)/ DEC. IN INVESTMENTS (5) (7) 28 (7)




INC./(DEC.) IN LOANS (224) 455 300 300


OTHERS 221 (150) - -

CASH FLOW FROM FINANCING 9 322 286 286

INC./(DEC.) IN CASH 40 24 (2) 27






Company BackgroundMotherson Sumi Systems (MSS), a JV between Samvardhana MothersonGroup (SMG, 36.3% stake) and Sumitomo Wiring Systems, Japan (25%stake), is the world’s largest supplier of rear view mirrors and India’s biggestsupplier of wiring harness. MSS is considered to be a JV specialist (24 JVs)and has a successful history of acquisitions, which have helped it expandits product portfolio, gain access to technology and evolve into a leadingglobal OEM supplier. MSS’s most notable acquisitions include Visiocorp(now referred as Samvardhana Motherson Reflectec, SMR) in FY2009, aglobal leader in automotive rear view mirrors; and Peguform in FY2012, aleading supplier of door and instrument panels and cockpit assemblies. Thecompany is present across 23 countries and has over 90 manufacturingfacilities worldwide.

Structural SnapshotGrowth opportunity: While the near-term demand scenario of thedomestic PV industry remains subdued due to increasing fuel prices and interestrates, we expect the domestic PV industry to post a 10-11% CAGR overFY2011-14E, led by structural growth drivers and the likely easing of interest rates.Further, buoyancy in global PV markets amid an uncertain environment indicates thatglobal PV growth is likely to be healthy going ahead. MSS, being a preferredsupplier to OEMs globally with a presence across the value chain, is expectedto be the key beneficiary of the rising demand for passenger cars globally.

Competitive position: MSS is a market leader with a domestic market shareof 65% and 53% in the wiring harness and rear view mirror segments, respectively.MSS also commands a 22% global market share in the rear view mirrorsegment for passenger cars. MSS enjoys strong pricing power, given itsleading position and diversified customer base.

Nature of business: Cyclical and sensitive to interest rates; Technologyand strong OEM presence create entry barriers.

Current Investment ArgumentsFocus on increasing content per car to sustain leadership position: MSS'swide product portfolio, global manufacturing presence, good relationshipswith OEMs and ability to provide end-to-end solutions have enabled it toincrease the content per car that it supplies to its customers. Further, Peguform'sacquisition will enhance MSS's product offerings significantly and strengthenits position as a key tier-I supplier globally.

SMR turnaround to boost performance: SMR has shown a substantialimprovement in its performance since its acquisition by MSS and has baggedorders worth EUR800mn to be supplied over the life of the new models.We believe scale-up of SMR operations along with a gradual improvementin operating margins through cost rationalization and in-house sourcing willboost the overall performance of MSS.

Valuations: At `150, MSS is trading at 12.5x its FY2013E earnings. Wemaintain Accumulate on the stock with a target price of `̀̀̀̀169, valuing at14x FY2013E earnings.

Automobile CMP/TP/Upside: `150 / `169 / 12%Motherson Sumi


PROMOTERS 65.2

FII 10.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MOTHERSON (18.3) (13.1) 37.7 15.4 42.8

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 19.5 20.9 59.8 52.5 43.2

PAT GROWTH* (71.8) 55.0 34.2 29.0 36.0

OPM# 8.7 10.6 10.0 12.0 14.5


ANGEL ESTIMATES


PAT GROWTH (%) (8.6) 32.3

ROE (%) 20.2 22.7

P/E 16.6 12.5

P/BV 3.1 2.6


BUY / HOLD / SELL 14 / 2 / 2

RATING ACCUMULATE

52 WEEK HIGH / LOW 256 / 129


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 818 1,263 1,513 1,513




GROSS BLOCK 3,182 3,821 4,571 5,118


NET BLOCK 1,455 1,766 2,241 2,481


GOODWILL - - - -


CURRENT ASSETS 2,097 2,793 3,140 3,457


NET CURRENT ASSETS 505 830 945 1,013


TOTAL ASSETS 2,190 3,101 3,606 3,963



NET SALES 6,924 8,371 9,800 11,119

% CHG 162.3 20.9 17.1 13.5


EBITDA 549 888 835 1,024

% CHG 93.6 61.9 (6.0) 22.7

(% OF NET SALES) 7.9 10.6 8.5 9.2





PBT (ADJUSTED) 348 624 526 688

TAX 109 188 158 206

(% OF PBT) 31.4 30.1 30.0 30.0

PAT (REPORTED) 234 443 368 482

PAT (ADJUSTED) 248 384 351 464

% CHG 41.4 55.0 (8.6) 32.3

(% OF NET SALES) 3.7 4.7 3.7 4.3

BASIC EPS ( `̀̀̀̀) 6.6 9.9 9.1 12.0

ADJUSTED EPS (`̀̀̀̀) 6.4 9.9 9.1 12.0

% CHG 41.4 55.0 (8.6) 32.3


KEY RATIOS

VALUATION RATIO (X)

P/E 22.7 15.1 16.6 12.5

P/CEPS 11.1 9.2 9.3 7.5

P/BV 4.8 3.6 3.1 2.6

EV/SALES 1.0 0.8 0.7 0.6

EV/EBITDA 12.2 7.5 8.0 6.7


EPS (BASIC) 6.6 9.9 9.1 12.0

EPS (ADJUSTED) 6.4 9.9 9.1 12.0

CASH EPS 13.6 16.3 16.1 19.9

DPS 1.8 2.8 2.5 2.8

BOOK VALUE 31.0 41.3 47.8 57.1

RETURNS (%)

ROCE (PRE-TAX) 14.1 24.3 16.7 18.9


ROE 25.4 27.7 20.2 22.7

TURNOVER RATIOS (X)






CASH FLOW STATEMENT




OTHERS 184 49 - -

OTHER INCOME (118) (47) (56) (62)




(INC.)/DEC. IN INVESTMENTS 8 2 (9) (5)



ISSUE OF EQUITY 2 1 - -

INC./(DEC.) IN LOANS (77) 446 250 -


OTHERS (209) (62) - -


INC./(DEC.) IN CASH 67 15 169 (164)






Company BackgroundBharat Forge (BHFC), a global forging conglomerate, is the largest exporterof automotive components from India and a leading chassis componentmanufacturer in the world. The company manufactures a wide range of safetyand critical components for passenger cars, SUVs, LCVs, MHCVs and tractorsthrough its facilities spread across 11 locations globally - India (4), Germany(3), China (2), U.S. (1) and Sweden (1). BHFC also produces forged andmachined components for non-automotive industries, such as power generation,marine, oil and gas, railways and construction. The automotive industry currentlycontributes ~75% to the company's consolidated revenue, although throughdiversification BHFC expects the share of the automotive industry's revenueto fall to 55% by FY2013.

Structural SnapshotGrowth opportunity: We expect the domestic CV industry to witness a14.5% CAGR over FY2011-13E, which augurs well for BHFC as it is aleading player in the domestic CV forging industry and nearly 55% of domesticrevenue is derived from the segment. Further, the expected pick-up in CVdemand in the U.S. and European markets will boost the performance ofoverseas subsidiaries going ahead.

Competitive position: BHFC is a market leader in the domestic automotiveforging market and enjoys ~90% market share in the domestic CV forgingspace.

Nature of business: Cyclical and sensitive to interest rates; Low entry barriers.

Current Investment ArgumentsThrust on non-auto business to diversify product portfolio:BHFC intends to increase its non-automotive revenue to 40% (25% ofconsolidated revenue in FY2011) by FY2012E. To achieve this goal, BHFChas set up an 80MT hammer (40,000 TPA capacity) and a ring rolling (25,000TPA capacity) facility in Baramati in addition to the existing 60,000 TPAnon-auto facility in Mundhwa. We expect BHFC to benefit from new investmentsby various players in the power, oil and gas and capital goods sectors, leadingto strong demand for non-automotive forgings.

Improvement in overseas subsidiaries and JVs to boost consolidatedperformance: BHFC's international operations posted losses (pre-tax) inFY2010 due to a decline in demand and high operational costs. However,strong turnaround in Chinese JV (FAW-BF) and other subsidiaries due torestructuring and operational efficiencies led to improved performance andreturned to profitability in FY2011. We expect international subsidiaries tosustain their growth momentum due to buoyant truck demand in the U.S.and Europe and increasing contribution from industrial forgings and improvingutilization levels (currently 50-55%).

Valuations: At `277, the stock is trading at 13.8x FY2013E earnings.We maintain our Accumulate rating on the stock with a target price of`̀̀̀̀299, valuing it at 15x FY2013E earnings.

Automobile CMP/TP/Upside: `277 / `299 / 8%Bharat Forge


PROMOTERS 42.1

FII 8.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BHARAT FORGE (3.9) (19.7) 49.7 (5.5) 28.0

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M** 1Y 3Y 5Y 10Y

SALES GROWTH* 26.6 52.2 2.8 11.0 26.7

PAT GROWTH* 56.1 - (1.2) 3.2 24.5

OPM# 23.7 13.8 9.2 11.3 16.5

ROE# - 17.0 5.3 10.6 24.5NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS,**STANDALONE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 46.0 10.6

ROE (%) 19.9 18.7

P/E 15.3 13.8

P/BV 2.8 2.4


BUY / HOLD / SELL 16 / 2 / 6

RATING ACCUMULATE

52 WEEK HIGH / LOW 371 / 231


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,253 1,895 1,595 1,595




GROSS BLOCK 4,135 4,501 4,818 5,050


NET BLOCK 2,408 2,463 2,490 2,410


GOODWILL - - - -


CURRENT ASSETS 2,417 2,764 3,234 3,895


NET CURRENT ASSETS 998 957 1,019 1,442

MIS. EXP. NOT WRITTEN OFF - 41 41 41

TOTAL ASSETS 3,878 4,134 4,189 4,590



NET SALES 3,286 4,999 6,022 6,793

% CHG (30.3) 52.2 20.5 12.8


EBITDA 204 689 951 1,053

% CHG (43.2) 237.2 38.1 10.7

(% OF NET SALES) 6.2 13.8 15.8 15.5



OTHER INCOME 106 155 116 116


PBT (ADJUSTED) (48) 438 651 720

TAX 12 140 215 238

(% OF PBT) (24.5) 31.9 33.0 33.0

PAT (REPORTED) (59) 298 436 483

PAT (ADJUSTED) (63) 290 423 468

% CHG - - 46.0 10.6

(% OF NET SALES) (1.9) 5.8 7.0 6.9

BASIC EPS ( `̀̀̀̀) (2.1) 12.5 18.2 20.1

ADJUSTED EPS (`̀̀̀̀) (2.8) 12.5 18.2 20.1

% CHG - - 46.0 10.6


KEY RATIOS

VALUATION RATIO (X)

P/E (97.6) 22.2 15.3 13.8

P/CEPS 31.1 11.8 9.1 8.3

P/BV 4.2 3.3 2.8 2.4

EV/SALES 2.3 1.5 1.2 1.0

EV/EBITDA 38.4 11.1 7.6 6.4


EPS (BASIC) (2.8) 12.5 18.2 20.1

EPS (ADJUSTED) (2.8) 12.5 18.2 20.1

CASH EPS 8.9 23.5 30.6 33.5

DPS 1.0 3.5 3.0 3.0

BOOK VALUE 65.7 83.9 99.1 116.3

RETURNS (%)

ROCE (PRE-TAX) (1.0) 10.8 15.9 16.9

ANGEL ROIC (PRE-TAX) (1.2) 11.4 17.8 19.7

ROE (4.1) 17.0 19.9 18.7

TURNOVER RATIOS (X)






CASH FLOW STATEMENT

PROFIT BEFORE TAX (48) 438 651 720


CHANGE IN WORKING CAPITAL 274 (1,148) 98 (67)

OTHERS 189 1,091 - -

OTHER INCOME (106) (155) (116) (116)



(INC.)/DEC. IN FIXED ASSETS 16 (475) (251) (244)


OTHER INCOME 106 155 116 116


ISSUE OF EQUITY 100 (267) - -

INC./(DEC.) IN LOANS 62 (358) (300) -


OTHERS (470) 382 - -


INC./(DEC.) IN CASH 109 (287) 160 357






Company BackgroundFAG Bearings (FAG), a group company of Germany-based Schaeffler Group,is one of the leading suppliers of ball bearings with ~14% domestic marketshare. FAG manufactures ball bearings, cylindrical bearings, spherical bearingsand tapered roller bearings through its plant located in Vadodra, Gujarat.The company is a market leader in the spherical bearing space, with a ~55%market share. FAG also imports specialized and heavy-size bearings fromits global associates to meet the requirements of the domestic industrialsegment. As a result, trading portfolio constitutes 34% to its net sales. FAGcaters to leading domestic OEM players as well as the replacement market.In the industrial segment, the company supplies to the automotive, constructionmachinery, steelworks, power transmission engineering, material handlingengineering, wind power plants and railways segments.

Structural SnapshotGrowth opportunity: We expect the primary drivers of the bearings industryi.e., auto and industrial segment to post a steady performance going ahead.While the auto sector is expected to grow at a healthy rate, driven by structuralgrowth drivers, expectations of ~8% growth in the Indian economy over themedium term will lead to healthy demand from the industrial sector, drivenby demand from capital goods and infrastructure companies. As such, demandfor bearings is expected to grow at a steady rate, aiding FAG to register aCAGR of 18.8% in net sales over CY2010-12E.

Competitive position: Although 8-10 players operate in the domestic bearingsindustry, competitive intensity is slightly muted as each player dominatesdifferent segments of the bearing industry. FAG has a strong presence witha ~55% market share in the spherical bearings space.

Nature of business: Cyclical as demand for bearings is correlated with IIPdata and PV sales; access to high-end technology creates entry barriers.Cheaper imports from China and counterfeit products pose a threat in theafter-market segment. Sensitive to exchange rates (EUR/INR), since thecompany’s net imports constitute ~21% of its net sales.

Current Investment ArgumentsStrong fundamentals: FAG's net asset turnover remains high (~7x in CY2010)due to largely depreciated assets. Additionally, sound business model,debt-free status and low capital expenditure enable FAG to generate strongcash flows and record consistent RoCE of ~30%.

Attractive valuations: We have a positive view on FAG, considering its strongparentage, debt-free status and cash balance worth `180/share on books.At `1,141, the stock is trading at attractive valuations of 10.1x CY2012Eearnings. We maintain our Buy view on the stock with atarget price of `̀̀̀̀1,359.

Automobile CMP/TP/Upside: `1,141 / `1,359 / 19%FAG Bearings



FII 13.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

FAG BEARINGS (8.8) 38.3 68.7 11.0 36.2

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 22.5 27.7 17.1 20.7 17.7

PAT GROWTH* 44.4 85.5 15.2 20.5 25.2

OPM# 19.8 17.8 17.6 19.3 18.3


ANGEL ESTIMATES


PAT GROWTH (%) 41.6 9.4

ROE (%) 26.3 22.9

P/E 11.0 10.1

P/BV 2.6 2.1



RATING BUY

52 WEEK HIGH / LOW 1,435 / 752


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - - -




GROSS BLOCK 413 419 451 475


NET BLOCK 142 141 152 153


GOODWILL - - - -

INVESTMENTS 0.3 0.3 0.5 0.6





TOTAL ASSETS 466 576 737 913

Y/E DEC (`̀̀̀̀ CR) CY2009 CY2010 CY2011E CY2012E


NET SALES 820 1,047 1,272 1,478

% CHG 7.6 27.7 21.5 16.2


EBITDA 111 186 253 278

% CHG (31.4) 67.0 36.1 9.7

(% OF NET SALES) 13.6 17.8 19.9 18.8





PBT (ADJUSTED) 107 183 257 281

TAX 34 60 85 93

(% OF PBT) 31.8 32.9 33.0 33.0

PAT (REPORTED) 73 123 172 188

PAT (ADJUSTED) 66 122 172 188

% CHG (31.6) 85.5 41.6 9.4

(% OF NET SALES) 8.0 11.6 13.5 12.7

BASIC EPS ( `̀̀̀̀) 39.4 73.1 103.5 113.3

ADJUSTED EPS (`̀̀̀̀) 39.4 73.1 103.5 113.3

% CHG (31.6) 85.5 41.6 9.4


KEY RATIOS

VALUATION RATIO (X)

P/E 28.9 15.6 11.0 10.1

P/CEPS 20.4 13.2 9.8 9.0

P/BV 4.1 3.3 2.6 2.1

EV/SALES 2.0 1.4 1.1 0.9

EV/EBITDA 15.5 8.6 5.9 4.8


EPS (BASIC) 39.4 73.1 103.5 113.3

EPS (ADJUSTED) 39.4 73.1 103.5 113.3

CASH EPS 56.0 86.1 116.5 127.0

DPS 4.5 5.0 6.0 6.0

BOOK VALUE 276.4 343.7 440.2 546.4

RETURNS (%)

ROCE (PRE-TAX) 20.8 31.8 35.3 30.9


ROE 15.1 23.5 26.3 22.9

TURNOVER RATIOS (X)





Y/E DEC CY2009 CY2010 CY2011E CY2012E

CASH FLOW STATEMENT




OTHERS 36 30 - -

OTHER INCOME (9) (17) (27) (28)




(INC.)/DEC. IN INVESTMENTS 0 0 (0) (0)


CASH FLOW FROM INVESTING 4 9 (6) 3


INC./(DEC.) IN LOANS - - - -


OTHERS (67) (36) - -


INC./(DEC.) IN CASH 109 115 115 147






Company BackgroundAutomotive Axles (ATXL), a JV between Kalyani Group and Meritor HeavyVehicle Systems, USA (35.5% stake each), is one of India's largest independentmanufacturers of rear drive axle assemblies. ATXL's product portfolio includesa wide range of rear drive axles and air brakes, which are used in commercialvehicles. In SY2011, ATXL also forayed into the automotive brakes businessby acquiring a brake manufacturing facility from Kalyani Global Engineeringfor `14.6cr; it currently forms ~17% of ATXL's total revenue. The companyexports to the U.S., France, Italy, China, Australia and Brazil. Exports accountfor 6% of the company's total revenue. ATXL's domestic clients includeAshok Leyland (~55% of revenue), Tata Motors (~25% of revenue), EicherMotors, Asia Motor Works and Indian army, amongst others.

Structural SnapshotGrowth opportunity: We expect MHCV volumes to witness a healthy CAGRof 10% over FY2011-13E, with the likely easing of interest rates coupledwith a stable freight rate environment, increasing infrastructure spending bythe government and easy availability of finance. As ATXL derives ~95% ofits revenue from the MHCV segment, it is likely to be one of the major beneficiaries.We expect the company to report a 12-13% volume CAGR, leading to a15-16% revenue CAGR over the same period.

Competitive position: The independent rear axle assembly market is dominatedby three players - ATXL, Axles India (JV between Wheels India and DanaCorp., USA) and HV Axles (subsidiary of Tata Motors). ATXL is the marketleader in this segment.

Nature of business: Cyclical in nature, as demand for CV is linked to economicgrowth.

Current Investment ArgumentsImprovement in utilization levels to help maintain operating margins:The increase in volume off-take will aid in higher utilization levels, which willhelp ATXL offset the impact of increased raw-material prices to a certainextent. We expect operating margins to remain at 11-12% over SY2012Eand SY2013E, leading to a 17.3% CAGR in its bottom line.

Valuations: At `428, ATXL is fairly valued at 7.7x SY2013E earnings.We recommend a Neutral rating on the stock.

Automobile CMP/TP/Upside: `428 / - / -Automotive Axles


PROMOTERS 71.0

FII 0.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ATXL 9.5 9.8 65.4 (6.9) 20.6

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 63.0 51.2 10.6 17.1 21.7

PAT GROWTH* 102.1 30.6 1.1 5.9 18.4

OPM# 12.7 11.3 12.1 13.3 15.1


ANGEL ESTIMATES

PARTICULARS SY2012E SY2013E

PAT GROWTH (%) 28.2 13.7

ROE (%) 27.6 26.2

P/E 8.8 7.7

P/BV 2.2 1.9



RATING NEUTRAL

52 WEEK HIGH / LOW 471 / 320


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS








GROSS BLOCK 281 317 354 384


NET BLOCK 133 146 156 158


GOODWILL - - - -

INVESTMENTS - - - -





TOTAL ASSETS 288 318 375 424

Y/E SEPT. (`̀̀̀̀ CR) SY2010 SY2011 SY2012E SY2013E


NET SALES 668 1,010 1,203 1,374

% CHG 150.8 51.2 19.2 14.2


EBITDA 87 114 144 161

% CHG 171.1 31.8 26.6 11.3

(% OF NET SALES) 13.0 11.3 12.0 11.7




EXTRAORDINARY ITEMS - - - -

PBT (ADJUSTED) 66 87 111 126

TAX 22 30 37 42

(% OF PBT) 33.1 33.9 33.3 33.3



% CHG 356.2 30.6 28.2 13.7

(% OF NET SALES) 6.6 5.7 6.1 6.1

BASIC EPS ( `̀̀̀̀) 29.1 38.1 48.8 55.5

ADJUSTED EPS (`̀̀̀̀) 29.2 38.1 48.8 55.5

% CHG 356.2 30.6 28.2 13.7


KEY RATIOS

VALUATION RATIO (X)

P/E 14.7 11.2 8.8 7.7

P/CEPS 10.0 8.0 6.5 5.8

P/BV 3.2 2.7 2.2 1.9

EV/SALES 1.1 0.7 0.6 0.5

EV/EBITDA 8.2 6.1 4.9 4.0


EPS (BASIC) 29.1 38.1 48.8 55.5

EPS (ADJUSTED) 29.2 38.1 48.8 55.5

CASH EPS 43.0 53.6 66.2 74.3

DPS 8.5 10.0 15.0 15.0

BOOK VALUE 134.9 161.4 192.7 230.6

RETURNS (%)

ROCE (PRE-TAX) 25.1 29.9 34.1 33.1


ROE 23.3 25.7 27.6 26.2

TURNOVER RATIOS (X)





Y/E SEPT. SY2010 SY2011 SY2012E SY2013E

CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (70) (11) (40) 7

OTHERS - 5 - -

OTHER INCOME (4) (3) (1) (1)


CASH FLOW FROM OPERATIONS (8) 72 59 119


(INC.)/DEC. IN INVESTMENTS - - - -

OTHERS 4 3 1 1



INC./(DEC.) IN LOANS 25 (9) 10 (8)


OTHERS (29) (43) - -


INC./(DEC.) IN CASH 0 2 7 54






Company BackgroundSubros (SUBR) was established in 1985 as a JV between Suri Group (40%stake), Denso Corporation (technology partner, 13% stake) and Suzuki MotorCorporation (13% stake). The company is India's leading manufacturer ofAC systems, with a market share of ~40%. SUBR operates from fourmanufacturing facilities in India (Noida, Manesar, Pune and Sanand) andhas an annual capacity of 1.2mn AC kits. MSIL, TTMT and M&M are themajor customers of the company, accounting for ~70%, ~16% and ~8% ofits total revenue, respectively.

Structural SnapshotGrowth opportunity: While the near-term demand scenario of the domesticPV industry remains subdued due to higher fuel prices and interest rates,we expect the PV industry to register an 8-10% CAGR over FY2011-13E,led by structural growth drivers and the likely easing of interest rates. Withan eye on future growth opportunity, SUBR is expanding its capacity andexpects to leverage upon its dominant position in the industry.

Competitive position: SUBR has been able to maintain its formidable positionin the automotive AC systems segment (~40% share), led by upgradingtechnology and strong customer focus.

Nature of business: Cyclical, as demand for PV is dependent upon thelevel of interest rates; Sensitive to exchange rates (JPY/INR), since the company’snet imports constitute ~45% of its net sales; Technology and OEM presencecreate entry barriers.

Current Investment ArgumentsVolume growth dependent upon growth in the PV industry: The PV industryis witnessing a slowdown in volume growth, as consumer sentiment remainsweak due to macroeconomic concerns such as rising interest rates, highinflation and fuel price hikes. Given the company's dependence on the PVsegment, we expect volume growth to remain under pressure and report flatgrowth in FY2012 and FY2013.

Sustain leadership position with capacity expansion: SUBR plans to expandits capacity to 1.5mn units per year in the first phase (FY2012E) and furtherto ~2mn units per year in the next two-three years. The company is alsosetting up a new 50,000/year capacity in Chennai, targeting CV makers.We expect the capacity expansion initiative to assure supply to the increasingneeds of its OE customers, thereby helping SUBR to maintain its marketshare.

Valuations: At `24, SUBR is trading at 6x FY2013E earnings. We maintainour Neutral rating on the stock.

Automobile CMP/TP/Upside: `24 / - / -Subros


PROMOTERS 40.0

FII 0.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SUBROS (10.2) (38.7) 12.6 (14.0) 26.5

BSE AUTO INDEX (2.7) (5.9) 51.0 9.3 25.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (24.0) 20.3 18.0 14.0 10.9

PAT GROWTH* (35.9) 1.6 1.1 4.0 26.4

OPM# 7.9 8.1 9.1 10.3 9.4


ANGEL ESTIMATES


PAT GROWTH (%) (31.0) 24.0

ROE (%) 8.3 10.0

P/E 7.4 6.0

P/BV 0.6 0.6



RATING NEUTRAL



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 154 218 292 292




GROSS BLOCK 483 548 667 721


NET BLOCK 227 267 343 348


GOODWILL - - - -

INVESTMENTS 0 2 3 3





TOTAL ASSETS 372 463 548 554



NET SALES 905 1,089 1,016 1,166

% CHG 30.4 20.3 (6.7) 14.7

TOTAL EXPENDITURE 813 1,001 928 1,067

EBITDA 93 88 88 99

% CHG 46.9 (5.3) 0.5 12.1

(% OF NET SALES) 10.3 8.1 8.7 8.5




EXTRAORDINARY ITEMS - (1) - -

PBT (ADJUSTED) 40 33 23 29

TAX 11 3 3 4

(% OF PBT) 28.9 10.5 15.0 15.0



% CHG 109.5 1.6 (31.0) 24.0

(% OF NET SALES) 3.1 2.6 1.9 2.1

BASIC EPS ( `̀̀̀̀) 4.7 4.9 3.3 4.1

ADJUSTED EPS (`̀̀̀̀) 4.7 4.8 3.3 4.1

% CHG 109.5 1.6 (31.0) 24.0


KEY RATIOS

VALUATION RATIO (X)

P/E 5.2 4.9 7.4 6.0

P/CEPS 2.2 2.1 2.3 2.0

P/BV 0.7 0.6 0.6 0.6

EV/SALES 0.3 0.3 0.4 0.3

EV/EBITDA 3.1 3.9 4.5 3.8


EPS (BASIC) 4.7 4.9 3.3 4.1

EPS (ADJUSTED) 4.7 4.8 3.3 4.1

CASH EPS 11.1 11.7 10.5 12.2

DPS 0.7 0.8 1.0 2.5

BOOK VALUE 34.5 38.4 40.3 41.3

RETURNS (%)

ROCE (PRE-TAX) 15.5 11.4 8.9 9.1


ROE 14.4 13.1 8.3 10.0

TURNOVER RATIOS (X)






CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 3 (28) (50) 22

OTHERS 10 5 - -

OTHER INCOME (1) (2) (3) (4)



(INC.)/ DEC. IN FIXED ASSETS 77 111 (58) (59)

(INC.)/ DEC. IN INVESTMENTS 0 2 (1) (0)




INC./(DEC.) IN LOANS 19 64 74 -


OTHERS (0) 2 - -

CASH FLOW FROM FINANCING 16 56 67 (18)







POSITIVE

CoverageCompanies CMP (`̀̀̀̀) TP (`̀̀̀̀) Reco

Private Sector Banks

ICICI Bank 796 1,061 Buy

HDFC Bank 485 520 Accum.

AXIS Bank 952 1,361 Buy

YES Bank 287 361 Buy

Federal Bank 364 - Neutral

South Indian Bank 23 - Neutral

Public Sector Banks

State Bank of India 1,884 2,359 Buy

Punj. Natl. Bank 911 1,059 Buy

Bank of Baroda 743 906 Buy

Bank of India 306 - Neutral

Canara Bank 421 510 Buy

IDBI Bank 93 107 Buy

Union Bank 188 222 Buy

Central Bank 76 - Neutral

Syndicate Bank 84 106 Buy

Allahabad Bank 142 158 Accum.

Corporation Bank 387 450 Buy

Indian Bank 204 223 Accum.

Andhra Bank 97 - Neutral

United Bank 60 70 Buy

Vijaya Bank 53 - Neutral

Bank of Maha. 45 53 Buy

J&K Bank 742 820 Accum.

NBFCs

HDFC 691 - Neutral

LIC Housing 237 262 Accum.

Monetary softening a key positiveThe persistently high inflation was until recently a key headwind for the sector,leading to declining savings, high interest rates and growth concerns. Therecent decline in inflation rates is consequently a key positive that has alreadyallowed the RBI to soften its monetary stance, with more likely to follow. Providedinflation continues to decline on expected lines, easing interest rates are likelyto revive growth and with a lag, asset quality concerns are also likely to graduallyrecede.

Capital shortage leading to better margin focus: The banking industry hasdelivered healthy net interest margins (NIMs) off late, which are expected tosustain in the coming quarters because: a) nominal GDP growth of 12-14%should sustain 15%+ credit growth over FY2012-13 i.e., above the bankingsector's internal capital generation through retained earnings; and b) PSUbanks are facing capital shortage, leading to focus on NIMs rather than aggressivebalance sheet expansion. Stricter Basel 3 draft guidelines by the RBI areexpected to add to capital shortage woes. In fact, with major banks like SBI,ICICI Bank and HDFC Bank (~30% combined market share) focusing onprofitable growth rather than just market share gains, other smaller bankshave also got a leeway to price their loans.

Earnings downside due to higher NPAs restricted due to countercyclicalbuffer: Economic slowdown and high interest rates have already negativelyimpacted the asset quality of banks, in particular PSU banks and until economicrevival is well underway, for some more quarters asset quality may remainvolatile. However, at the sector level, at worst we expect flat earnings growthin FY2013, leaving book values largely intact. This is on account of not just ahealthy NIM outlook, but also due to provision buffers created in the past twoyears. Firstly, we expect peak credit costs (provisioning for NPAs) in this cycleto be 5-10bp lower than the earlier 1.0% peak experienced by PSU banks inFY2004, considering improvements in recovery mechanisms since then. Further,in this cycle (FY2007-1HFY2012), credit costs have already increased from0.3% to 0.65%. Moreover, current credit costs of 0.65% include a 10-15bpbuffer due to (a) RBI's prudent counter-cyclical provisioning norm; and (b)temporary technical NPAs in PSU banks due to the recent adoption of computerizedNPA recognition. Hence, we do not expect more than a 10-15bp net increasein credit costs from here on at worst and even that may not materialize if theeconomy revives faster than expected.

Margin of safety in valuations: We believe the sector's valuations, close totheir lowest levels since FY2003, over discount asset-quality concerns, thusproviding a margin of safety for investors. We continue to prefer large privatebanks with better asset-quality outlook and a strong structural investmentcase - within which we prefer Axis Bank and ICICI Bank from a valuationperspective. We also like risk-return trade-off at current valuations for YesBank, but we are now Neutral on old private banks such as Federal Bank dueto relatively expensive valuations. Even after the recent bounce-back, PSUbanks are currently trading at 0.8x, a level below which they have not tradedfor more than 8% of the time since FY2003 (well below the average of 1.1x).We believe this offers cyclical valuation upsides as the macro-environmentturns more positive. Within the PSU segment as well, we prefer banks withstructural strengths and a more conservative asset-quality profile (for instance,relatively low yield on advances and moderate credit growth in the past twoyears) - this includes banks such as State Bank of India and Bank of Baroda.

Banking



Exhibit 3: Credit deposit trends

-

7.0

14.0

21.0

28.0

35.0

Jul-0

6

Dec

-06

May

-07

Oct

-07

Mar

-08

Aug

-08

Jan-

09

Jun-

09

Nov

-09

Apr

-10

Sep

-10

Feb

-11

Jul-1

1

Dec

-11

Credit growth Deposit growthCredit growth Deposit growth

(%)

Banking

Monetary softening a key positiveThe persistently high inflation was until recently a key headwindfor the sector, leading to declining savings, high interest ratesand growth concerns. The recent decline in inflation rates isconsequently a key positive that has already allowed the RBIto soften its monetary stance, with more likely to follow. Withinflation cooling off (especially food inflation, which we believewill soon start getting mirrored in manufacturing inflation aswell, appropriately the RBI has stepped in to infuse liquiditythrough a substantial `70,000cr of Open Market Operationsand in the latest policy, `30,000cr through a 50bps CRR cut.Provided inflation continues to decline on expected lines, easinginterest rates are likely to revive growth and with a lag, assetquality concerns are also likely to gradually recede.


Exhibit 1: Primary articles inflation has plummeted


Exhibit 2: Expect at least 100bp cut in repo rate in CY2012

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Repo rate (%) Reverse Repo rate (%)

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Capital shortage leading to focus on marginsThe banking industry has delivered healthy net interest margins(NIMs) off late, which are expected to sustain in the comingquarters because of two factors, viz.:

a) Credit growth above 15% i.e., above the rate of internalgeneration of capital through retained earnings

While we expect significant credit under-penetration (0.7x ofGDP vs. 2-3x for developed countries) to sustain credit demandin the longer term, there are a number of factors, which in ourview should aid in credit growth over the shorter term too.

Nominal GDP, which is still expected to grow by 12-14% overthe next couple of years, in our view, should lead to sustainablecredit demand of at least ~15% levels over FY2012-13. Highprevailing inflation is expected to keep working capital requirementsfor businesses elevated, leading to a marginal push in credit demand.Also, with almost all European banks looking to cut their balance

sheet size, refinancing of some of the foreign debt through Indianbanks is also likely to support credit demand in the short term.

Moreover, while deposit accretion has already been healthy duringthe quarter, it is expected to increase further, considering the additionalinflow of funds through NRE deposits (sharp rate hikes on NREdeposits recently by almost all banks), giving banks extra room tolend even after meeting higher government demand and regulatoryrequirements, while keeping lending rates from rising.

b) Capital shortage in PSU banks and conservative stanceof large private banks leading to focus on margins ratherthan aggressive balance sheet expansion

During 2QFY2012, earnings growth for the banking sector wasaided by sequential margin expansion for almost all banks, whichoffsetted asset-quality pressures. The banking industry has beenswift in passing on the rate hikes by the RBI though hikes inlending rates over the past six months.

Further, with SBI (which is facing capital adequacy issues) aswell as ICICI Bank and HDFC Bank (having combined marketshare of ~30%) focusing on profitable growth rather than justmarket share gains, other smaller banks have also got a leewayto price their loans.

SBI's capital adequacy dropped significantly post the pensionadjustments from its reserves during 4QFY2011 (tier-I of 7.5%in 2QFY2012 compared to 9.6% in 3QFY2011). Further, withthe government being strapped for cash due to its own fiscalwoes coupled with distressed market conditions, capital infusionhas been delayed by the government and its eventual size hasalso reduced from more than `15,000cr to about `6,000cr-7,000cr. This has all the more made SBI more focused on preservingcapital and generating more capital internally through higherNIMs. Moreover, its loan book has witnessed continued asset-quality stress over the past six months, further reducing theheadroom for the bank's management (which changed post3QFY2011 results) to adopt aggressive market share strategies.

ICICI Bank has continued with its strategy for improvement inprofitability rather than growth, exiting unattractive retail-loansegments and generally de-growing its balance sheet. With allthese three large banks looking to maintain or improve theirmargins rather than chasing market share gains, borrowers hadto settle for higher rates, leading to higher margin expansionfor most other banks as well, creating a cushion to absorb NPAprovisioning expenses. Reflecting this, even though easing liquidityhas kept deposit rates in check in the past six months, bankshave been able to increase their lending rates by 50bp-100bp,leading to a ~15bp qoq increase in reported NIMs in 2QFY2012.


Banking

Source: Company, Angel Research; Note: Domestic NIMs for SBI, BOB and BOI

Exhibit 4: Margin expansion* qoq (2QFY2012) for banks under our coverage

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

50.0

60.0

AXS

B

VIJA

YAU

CO

BK

BO

IC

RP

BK

IND

BK

DE

NA

BK

ALL

BK

BO

BS

YN

BK

CA

NB

KS

IB

SB

IU

TDB

KP

NB

UN

BK

YE

SB

K

AN

DB

KB

OM

CE

NTB

K

IOB

ICIC

IBK

IDB

IFE

DB

K

HD

FCB

KJ&

KB

KO

BC

(bp)

Going forward, stricter Basel III draft guidelines by the RBI areexpected to further add to capital shortage woes, leading tofurther focus of banks on NIMs rather than balance sheet growth.Under the proposed norms, banks will need to increase the equitycapital component of their capital structure over FY2013-17E -currently the minimum equity capital requirement stands at 3.6%,which will need to be increased to a much higher level of 8% byFY2017E. Several PSU banks are likely to face capital shortageon account of these draft norms (which have a high probabilityof getting implemented in our view). On a relative basis, bankswith a larger equity capital base (most prominently including largeprivate banks) will be in an advantageous position to grow fasterthan the sector average with healthy profitability.

Macro slowdown to impact asset quality; Earningsdownside restricted due to countercyclical buffer

Macroeconomic headwinds in the form of high interest ratesand slowing growth have led to higher cost of borrowings aswell as lower earnings for most businesses. While the baserates for most banks have increased by 250-300bp over thepast 12-18 months, GDP growth has slowed down to 7% (averageof 8.1% over FY2010-11), indicating a slowing growth scenario.

Economic slowdown and high interest rates have already negativelyimpacted the asset quality of banks, in particular PSU banksand until economic revival is well underway, for some morequarters asset quality may remain volatile. However, at the sectorlevel, at worst, we expect flat earnings leaving book values largelyintact. This is on account of not just a healthy NIM outlook, butalso due to provision buffers created in the past two years.

Firstly, we expect peak credit costs (provisioning for NPAs) inthis cycle to be 5-10bp lower than the earlier 1.0% peakexperienced by PSU banks in FY2004, considering improvementsin recovery mechanisms since then. Further, in the last cycle(FY1999-07), SBI's slippages (incremental NPAs) were 3x higherin the worst year compared to the best. In this cycle (FY2007-1HFY2012), credit costs were as low as 0.3%, but have alreadyincreased to 0.65%. Moreover, current credit costs of 0.65%also include 10-15bp buffer due to (a) RBI's prudent counter-cyclical provisioning norm; and (b) temporary technical NPAsin PSU banks due to the recent adoption of computerized NPArecognition. This buffer should partially offset higher NPAs inFY2013E.

Hence, we do not expect more than a 10-15bp net increase incredit costs from here on, leading to flat sectoral earnings atworst. On a relative basis, within the sector, large private banksand few PSU banks with better asset quality are expected tooutperform.

We view relatively lower yield on advances and moderate creditgrowth in the last two years as some of the indicators of amore conservative asset-quality profile. On that basis, we findfew of the private banks including Axis Bank as well as somePSU banks such as State Bank of India and Bank of Barodaamongst large caps as well as Syndicate Bank and Bank ofMaharashtra amongst mid caps to have a relatively moreconservative profile than what the markets seem to be factoringin. On the other hand, for some of the mid-size PSU bankssuch as Andhra Bank and Central Bank of India, we remaincautious about asset-quality concerns.

Source: Company, Angel Research; Note: * Core Tier-I capital equals Net Worth

Exhibit 5: Core tier-I* ratio (%) for the banking industry (1HFY2012)Bank Tier I (%) Core Bank Tier I (%) Core

Tier I (%) Tier I (%)

Kotak Mah. Bank 15.9 15.9 Canara Bank 9.1 8.4

Federal Bank 14.0 14.0 Yes Bank 9.4 8.3

Karur Vysya Bank 12.8 12.8 Axis Bank 8.5 8.3

City Union Bank 12.4 12.4 Bank of Baroda 8.8 8.0

ICICI Bank 13.1 12.4 Union Bank 8.5 7.7

IndusInd Bank 11.4 11.4 Syndicate Bank 8.6 7.7

J&K Bank 11.3 11.3 Corporation Bank 8.4 7.6

HDFC Bank 11.4 11.3 Punjab Natl.Bank 8.4 7.6

Dev.Credit Bank 11.2 11.2 United Bank 8.9 7.3

Karnataka Bank 10.8 10.8 Bank of India 8.3 7.3

South Ind.Bank 10.8 10.8 St Bk of India 7.5 6.9

Indian Bank 9.9 9.4 Vijaya Bank 9.2 6.7

Oriental Bank 9.9 9.2 IOB 7.0 6.4

Dhanlaxmi Bank 8.7 8.7 Central Bank 7.9 6.1

Dena Bank 9.3 8.6 IDBI Bank 7.8 5.9

Allahabad Bank 8.9 8.6 UCO Bank 8.6 5.9

Andhra Bank 8.8 8.5 BOM 7.1 5.3



Exhibit 7: Savings account deposits market share

-

10.0

20.030.0

40.0

50.0

60.070.0

80.0

FY20

00

FY20

01

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

1HFY

12

SBI group Public ex -SBI group Private

(%)


Exhibit 8: Current account deposits market share

-

10.0

20.0

30.0

40.0

50.0

60.0

FY2

00

0

FY2

00

1

FY2

00

2

FY2

00

3

FY2

00

4

FY2

00

5

FY2

00

6

FY2

007

FY2

00

8

FY2

00

9

FY2

01

0

FY2

01

1

1H

FY1

2

SBI group Public ex -SBI group Private

(%)Source: Company, Angel Research

Exhibit 6: Movement in yields - 1HFY2012Bank Yield on Prov. cost as a % Risk-adjusted Slippages PCR (%)

Assets (%) of overall assets yields as % annualised (%)of assets

HDFCBK 8.6 0.5 8.0 1.3 81.3

AXSB 8.2 0.5 7.8 1.4 77.7

ICICIBK 7.5 0.4 7.1 1.5 78.2

SIB 9.5 0.3 9.2 0.5 74.7

FEDBK 9.6 0.8 8.8 3.3 84.3

PNB 8.8 0.8 8.0 1.6 75.1

CANBK 8.5 0.5 8.1 2.3 68.6

INDBK 9.1 0.6 8.6 2.0 79.4

J&KBK 8.5 0.3 8.3 0.8 92.0

UNBK 8.6 0.9 7.9 4.8 60.5

VIJAYA 8.9 0.8 8.3 3.7 66.1

ANDHBK 9.8 0.8 9.2 1.4 61.7

CRPBK 8.5 0.5 8.2 2.4 64.7

BOM 8.9 1.3 7.6 0.8 86.0

UCOBK 8.7 1.0 7.9 2.1 52.0

CENTBK 8.8 0.8 8.2 3.8 56.8

ALLBK 9.4 0.9 8.6 2.2 79.6

OBC 8.9 1.0 8.0 6.3 63.8

IDBI 9.1 0.6 8.5 2.4 70.1

IOB 8.9 1.2 7.6 3.6 71.8

SYNBK 8.9 1.0 8.0 3.6 78.5

UBI 8.4 1.1 7.5 4.6 65.0

DENABK 8.9 0.4 8.5 1.4 77.1

CASA market share and fee income underpinstructural outlookThe sector's valuations have corrected significantly over thelast year on account of cyclical concerns. While we remaincautious on asset quality in the near-term, we believe at currentvaluations there is enough margin of safety to pick banks thathave a relatively more conservative asset-quality outlook andhave structural strengths to take advantage of the medium tolong-term growth opportunity in the banking sector. In evaluatingthe structural outlook, in our view, CASA market share and feeincome remain the key factors.

Private banks to continue garnering CASA market share

Large private sector banks have increased their CASA marketshare multifold over the last decade (FY2000-FY2010) at theexpense of public sector banks, including SBI. Riding on rapidbranch and ATM expansion with urban-centric outlook, enhancedefficiency through technological upgradations and increasedemployee productivity and superior customer service orientedtowards expanding the retail customer base, large private bankswere able to increase their CASA market share from as low as2.6% in FY2000 to 16.0% as of 1HFY2012.

In case of current accounts, large and small private banks haveconsistently (right through the U.S. sub-prime crisis also) increasedtheir market share (29.4% as of 1HFY2012 vs. 8.5% in FY2000).

However, in case of saving account growth, the sharp increasein saving account market share for these banks was halted inFY2008 with the onset of the global recession, due to whichcustomers once again started reverting back to public sectorbanks to park their savings. The major benefactor of this shiftin customer mindset was SBI, which had witnessed a significantdecline in CASA market share until FY2007. SBI, by leveragingits tremendous trust factor in the country and driven by relativelyfaster branch expansion (9.1% CAGR vs. 2-5% for most PSBs),was able to increase its market share of saving deposits substantiallyby 360bp to 25.9% during FY2007-11 (one of the few PSBsto do so).

Post FY2008, large private banks have still managed toincrementally gain CASA market share albeit at a lower rate.On the other hand, public sector banks excluding SBI havecontinued to lose market share, though at a slower pace comparedto pre-recession levels. However, in our view, from here on, weexpect large private banks to once again start gaining momentumin expanding their CASA base, driven by relatively stronger capitaladequacy and easier capital access, robust branch expansionover FY2007-FY2011 and further network expansion expectedover the next couple of years. While all public sector banks areexpected to see further downslide in saving account marketshares as private banks continue to make inroads into theirhinterlands, SBI with its pan-India presence, robust branch networkof more than 13,500 branches and stronger core competitivenessis expected to see further traction in its saving account deposits.

Banking


Banking


Exhibit 9: Fee income to assets (%) - FY2011

-

0.40

0.80

1.20

1.60

2.00

AXSB

HD

FC

BK

ICIC

IBK

YESBK

SBI

PN

B

IND

BK

ALL

BK

CRPBK

CA

NBK

IDBI

DEN

ABK

AN

DH

BK

BO

B

BO

I

UN

BK

IOB

BO

M

SYN

BK

OBC

J&K

BK

UC

OBK

VIJ

AYA

UTD

BK

CEN

TBK

(%)

Margin of safety in valuations

Valuations at significantly low levels: We believe the sector'svaluations, which are close to their lowest levels since FY2003,over discount asset-quality concerns, hence providing a marginof safety for investors. Even after the recent bounce-back, PSUbanks are currently trading at 0.8x, a level below which theyhave not traded for more than 8% of the time since FY2003(well below the average of 1.1x).

Pre-2003, valuations were structurally lower (median of 0.5xover FY2000-03) primarily because of asset-quality concerns(gross NPA ratios upwards of 10%), poorer recovery standards,and lower provisioning coverage ratios for the banking sector(limited provisioning to overall assets despite elevated NPAratios). Since the re-rating (post FY2003), valuations have slippedlower than the current 0.8x only in 35 weeks (i.e. less than 8%of the time) and that too during the Lehman crisis period, whenthe entire global financial system was reeling under a severeeconomic slump.

Earnings outlook cautious but not pessimistic: Although thecurrent macro headwinds faced by the banking sector due toEuro crisis and Indian domestic growth concerns are meaningful,current valuations near Lehman crisis lows suggest a high marginof safety, especially in case of select structurally strong banks.

Earnings for PSU banks are expected to modest in FY2013Eon account of higher estimated provisioning expenses. However,countercyclical buffers, which banks have created in the pastcouple of years, create additional buffer to absorb incrementalNPA provisioning expenses. Hence, with banks now shiftingfocus on sustaining margins and impending peak credit costsonly expected to be at worst 10-15bp away from the currentcosts, earnings growth for the sector as a whole is likely to beat worst flat in FY2013E. Inflation picking up again or creditgrowth slipping below 12% would pose downside risks to ourestimates, however in our base case we expect credit growthto sustain at 15% over FY2012-13E.

Prefer large private banks: From a stock-selection point ofview, we continue to prefer large private banks with a relativelybetter asset-quality outlook and a strong structural investmentcase - within which we prefer Axis Bank and ICICI Bank froma valuation perspective. We also like risk-return trade-off at currentvaluations for Yes Bank, but are now Neutral on old privatebanks like Federal Bank due to its relatively expensive valuations.

Within the PSU segment as well, we prefer banks with structuralstrengths and a more conservative asset-quality profile (for instance,relatively low yield on advances and moderate credit growth inthe past two years) - this includes banks such as State Bankof India and Bank of Baroda.


Exhibit 10: Public sector banks P/ABV trends

0.50

0.80

1.10

1.40

1.70

2.00

Mar

-05

Aug-

05

Jan-

06

Jun-

06

Nov

-06

Apr-

07

Sep-

07

Feb-

08

Jul-0

8

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug-

10

Jan-

11

Jun-

11

Nov

-11

P/ABV Median 15th percentile 85th percentile


Exhibit 11: Large private banks P/ABV trends

0.60

1.00

1.40

1.80

2.20

2.60

3.00

3.40

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

P/ABV Median 15th percentile 85th percentile

Fee income share higher for private banks

Large private banks (ICICI Bank, HDFC Bank and Axis Bank)and SBI have accounted for a lion's share of newer fee incomestreams that have originated due to the economic upsurgewitnessed over the last decade. Relatively high fee income intensityof private banks, driven by their dominant position, competitivenessand sustained traction in streams such as wealth management,transaction banking, cards, forex and capital markets has ledto higher fee income contribution in the overall profitability forthese banks. Also, riding on credit (1,110bp gains over FY2000-11) and CASA market share gains (1,450bp gain over FY2000-11), private banks have been able to increase their fee incomefrom 1.3% of total average assets in FY2000 to 1.6% as ofFY2011. Large private banks such as Axis Bank (2.0%), HDFCBank (1.8%) and ICICI Bank (1.7%) have a much highercontribution of fee income to average assets compared to publicsector banks (0.9%, 0.7% ex. SBI) as of FY2011. Only SBI,owing to its strong corporate and government businessrelationships, has been able to maintain its dominance amongpublic banks with fee income/assets at 1.3% as of FY2011.


Banking

Source: Company, Angel Research; Note:*Target multiples=SOTP Target Price/ABV (including subsidiaries), #Without adjusting for SASF

Exhibit 14: Recommendation SummaryCompany Reco. CMP Tgt. price Upside FY2013E FY2013E FY2013E FY2011-13E FY2013E FY2013E

( `̀̀̀̀) ( `̀̀̀̀) (%) P/ABV (x) Tgt P/ABV (x) P/E (x) EPS CAGR (%) RoA (%) RoE (%)

Private Sector Banks

ICICIBk* Buy 796 1,061 33.3 1.5 2.0 12.5 19.2 1.3 14.4

HDFCBk Accumulate 485 520 7.1 3.3 3.5 16.8 30.8 1.8 21.0

AxisBk Buy 952 1,361 43.0 1.5 2.2 8.3 18.2 1.5 20.2

YesBk Buy 287 361 26.0 1.8 2.3 9.9 17.7 1.3 20.1

FedBk Neutral 364 - - 1.0 - 8.3 13.0 1.1 12.5

SIB Neutral 23 - - 1.1 - 6.8 13.5 0.9 17.5

Public Sector Banks

SBI* Buy 1,884 2,359 25.2 1.5 1.9 9.1 26.0 0.8 17.9

PNB Buy 911 1,059 16.2 1.0 1.2 5.7 7.3 1.0 19.7

BOB Buy 743 906 21.9 1.0 1.3 5.8 9.3 1.1 19.1

BOI Neutral 306 - - 1.0 - 6.7 0.1 0.6 13.3

CanBk Buy 421 510 21.3 0.9 1.1 5.4 (7.0) 0.8 15.8

IDBI# Buy 93 107 15.2 0.6 0.7 4.6 9.9 0.7 13.4

UnionBk Buy 188 222 18.1 0.8 0.9 4.8 (0.3) 0.7 15.4

CentBk Neutral 76 - - 0.6 - 4.8 (24.3) 0.4 11.4

SynBk Buy 84 106 26.4 0.6 0.7 3.6 13.7 0.7 16.5

AllBk Accumulate 142 158 11.5 0.7 0.7 4.0 9.6 0.9 17.6

CorpBk Buy 387 450 16.1 0.6 0.7 4.2 (1.8) 0.8 15.5

IndBk Accumulate 204 223 9.7 0.8 0.9 4.9 3.8 1.2 18.4

AndhBk Neutral 97 - - 0.7 - 4.7 (4.8) 0.8 14.6

UtdBk Buy 60 70 16.6 0.6 0.7 4.2 4.3 0.6 12.1

VijBk Neutral 53 - - 0.7 - 5.5 4.1 0.5 11.6

BOM Buy 45 53 18.4 0.7 0.8 4.6 26.3 0.7 16.9

J&KBk Accumulate 742 820 10.6 0.8 0.9 4.4 14.9 1.4 18.6

NBFCs

HDFC Neutral 691 - - 4.4 - 22.4 13.2 2.6 34.0

LICHF Accumulate 237 262 10.2 1.8 2.0 9.1 12.7 1.7 21.7

Source: Company, Angel Research; Note*: For banks under our coverage

Exhibit 12: Aggregate P&L for Private and Public sector banksParameter Private* Public

( `̀̀̀̀ cr) FY2011 FY2012 FY2013 FY2011 FY2012 FY2013

NII 29,908 35,169 42,714 124,864 144,923 166,446

Other Income 16,952 19,477 23,492 44,378 46,602 51,513

Op. Income 46,860 54,646 66,205 169,242 191,525 217,958

Op. expenses 20,528 24,410 29,834 76,610 82,896 95,769

Pre prov. profit 26,332 30,236 36,371 92,633 108,629 122,189

Provisions 6,180 5,018 5,781 32,459 44,974 50,152

PBT 20,152 25,218 30,590 60,173 63,655 72,037

Tax expenses 6,078 7,620 9,533 18,782 18,683 23,114

Net Profit 14,073 17,598 21,058 41,391 44,972 48,923

Growth (%) 32.0 25.0 19.7 15.0 8.7 8.8

Source: Company, Angel Research; Note*: For banks under our coverage

Exhibit 13: Aggregate DuPont for Private and Public sector banksParameter Private* PSU

FY2011 FY2012 FY2013 FY2011 FY2012 FY2013

NII 3.1 3.0 3.0 2.8 2.8 2.8

(-) Prov. Exp. 0.6 0.4 0.4 0.7 0.9 0.8

Adj NII 2.5 2.6 2.6 2.1 1.9 1.9

Treasury 0.0 0.0 0.0 0.1 0.1 0.0

Int. Sens. Inc. 2.5 2.6 2.7 2.2 2.0 2.0

Other Inc. 1.7 1.6 1.6 0.9 0.8 0.8

Op. Inc. 4.2 4.2 4.3 3.1 2.8 2.8

Opex 2.1 2.1 2.1 1.7 1.6 1.6

PBT 2.1 2.1 2.1 1.3 1.2 1.2

Taxes 0.6 0.7 0.7 0.4 0.4 0.4

ROA 1.4 1.5 1.5 0.9 0.8 0.8

Leverage 10.5 11.3 12.0 21.0 20.5 20.6

ROE 15.0 16.7 17.6 18.9 17.2 16.4


Company BackgroundICICI Bank is India's largest private sector bank, with a 5.5% market sharein credit. The bank has a pan-India extensive network of 2,500+ branchesand ~7,000 ATMs as well as large overseas presence (overseas loans comprise25% of total loans). The bank also has market-leading subsidiaries in lifeinsurance, general insurance and asset management.

Structural SnapshotGrowth opportunity: Credit penetration in India remains fairly low (70% ofGDP) vs. not just developed economies (U.S. - 220% and Japan - 320%),but also emerging economies (China - 140%), indicating 17-18% averagecredit growth potential for several decades (2-2.5x our real GDP growth).ICICI Bank, with its strong capital adequacy and expanding branch network,has the potential to grow a few percentage points faster than this.

Competitive position: The bank is comparable to other private banks in itsretail customer proposition. Focused strategies post the Lehman-crisis havealso brought profitability on assets largely at par with peers.

Nature of business: Cyclical and rate-sensitive sector; Significant entrybarriers for new players.

Current Investment ArgumentsFocused strategy has improved return on assets; RoE to follow: Overthe past three years, the bank's management has firmly focused on reducingthe risk profile of its loans, de-growing its balance sheet to reduce riskierloans (such as unsecured personal loans) as well as wholesale deposits.CASA deposits have improved to 45% (as of FY2011) from 22% in FY2007,operating costs have declined from 2.2% to 1.8% of assets, and NPA provisioncosts have declined almost by two-thirds from peak levels. As a result, returnon assets have risen close to optimum levels, but return on equity still lagspeers, as the bank's huge equity capital raising prior to the downturn isleveraged much below its potential - something that is expected to improvegradually over the next few years.

Well positioned to garner strong market share gains in CASA deposits:While improving its profitability and risk profile, the bank also simultaneouslyincreased its branch network from ~950 in 3QFY2008 to 2,500+ by 2QFY2012.Coupled with strong capital adequacy at 19.0%, this has laid the platformfor strong credit growth and CASA market share gains.

Valuations attractive: We expect ICICI Bank to deliver a strong earningsCAGR of 19.2% over FY2011-13 and an RoE of 14.4% by FY2013. Thestock is trading at 1.5x FY2013E ABV (also 1.5x after adjusting value ofsubsidiaries), a substantial discount of 55% to H.DFC Bank. We have valuedsubsidiaries at `136 and the core bank at `925 (1.95x FY2013E ABV).We maintain our Buy view on the stock with a target price of `̀̀̀̀1,061.

CMP/TP/Upside: `796 / `1,061 / 33%

RATING BUY

52 WEEK HIGH / LOW 1138 / 641

MARKET CAP (`̀̀̀̀ CR) 91,785

LIQUIDITY HIGH


PROMOTERS -

FII 61.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ICICI BANK (12.0) (22.2) 24.5 (4.2) 24.0

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 12.3 0.5 (2.8) 11.2 38.0

PAT GROWTH* 21.6 28.0 7.4 15.2 41.4

NIM# 2.5 2.6 2.5 2.5 2.1


BankingTOPPICKICICI Bank

ANGEL ESTIMATES


PAT GROWTH (%) 20.3 18.0

ROE (%) 13.2 14.4

P/ABV 1.6 1.5


BUY / HOLD / SELL 52 / 8 / 2


KEY RATIOS

PROFITABILITY RATIOS (%)

NIMS 2.4 2.6 2.5 2.6

COST TO INCOME RATIO 37.6 42.2 43.6 42.6

ROA 1.0 1.3 1.4 1.3

ROE* 9.7 11.7 13.2 14.4

B/S RATIOS (%)

CASA RATIO 41.7 45.1 46.3 46.7

CREDIT/DEPOSIT RATIO 89.7 95.9 94.3 94.3

CAR 19.4 19.5 18.1 16.1

- TIER I 14.0 13.2 11.1 10.1

ASSET QUALITY (%)

GROSS NPAS 5.1 4.5 4.5 4.6

NET NPAS 2.1 1.1 1.1 1.2

SLIPPAGES 1.5 1.5 1.6 1.9

LOAN LOSS PROV. /AVG. ASSETS 1.2 0.5 0.3 0.4

PROVISION COVERAGE 59.5 76.0 77.0 75.0


EPS 36.1 44.7 53.8 63.5

ABVPS (75% COVERAGE FOR NPAS) 449.8 478.3 508.3 544.0

DPS 12.0 14.0 18.0 21.0


KEY RATIOS

VALUATION RATIOS

P/E 22.1 17.8 14.8 12.5

P/ABV 1.8 1.7 1.6 1.5

DIVIDEND YIELD (%) 1.5 1.8 2.3 2.6

DUPONT ANALYSIS*

NII 2.3 2.4 2.4 2.5

(-) PROV. EXP. 1.2 0.6 0.4 0.4

ADJ NII 1.0 1.8 2.1 2.0

TREASURY 0.2 (0.1) (0.0) 0.0

INT. SENS. INC. 1.2 1.7 2.0 2.1

OTHER INC. 1.8 1.7 1.6 1.7

OP. INC. 3.0 3.5 3.7 3.7

OPEX 1.6 1.8 1.8 1.8

PBT 1.4 1.7 1.9 1.9

TAXES 0.4 0.4 0.5 0.6

ROA 1.0 1.3 1.4 1.3

LEVERAGE 9.5 9.2 9.8 10.7

ROE 9.7 11.7 13.2 14.4


BALANCE SHEET

SHARE CAPITAL 1,465 1,502 1,502 1,502

- EQUITY 1,115 1,152 1,152 1,152

- PREFERENCE 350 350 350 350

RESERVE & SURPLUS 50,503 53,939 57,393 61,511

DEPOSITS 202,017 225,602 270,723 327,574

- GROWTH (%) (7.5) 11.7 20.0 21.0

BORROWINGS 60,947 72,813 90,516 113,196

TIER 2 CAPITAL 32,967 36,391 37,119 37,862

OTHER LIAB. & PROV. 15,501 15,987 19,531 23,067


CASH IN HAND AND WITH RBI 27,514 20,907 20,304 21,292

BAL.WITH BANKS & MONEY AT CALL 11,359 13,183 15,549 18,497

INVESTMENTS 120,893 134,686 160,910 186,795

ADVANCES 181,206 216,366 255,312 308,927

- GROWTH (%) (17.0) 19.4 18.0 21.0

FIXED ASSETS 3,213 4,744 5,428 6,263

OTHER ASSETS 19,215 16,347 19,281 22,937

TOTAL ASSETS 363,400 406,234 476,783 564,712

- GROWTH (%) (4.4) 12.1 17.9 19.0



NET INTEREST INCOME 8,114 9,017 10,324 12,539

- YOY GROWTH (%) (10.8) 11.1 14.5 21.5

OTHER INCOME 7,478 6,648 7,340 9,106

- YOY GROWTH (%) (3.9) (11.1) 10.4 24.1

OPERATING INCOME 15,592 15,665 17,664 21,645

- YOY GROWTH (%) (7.6) 0.5 12.8 22.5

OPERATING EXPENSES 5,860 6,617 7,708 9,215

- YOY GROWTH (%) (16.8) 12.9 16.5 19.6

PRE - PROVISION PROFIT 9,732 9,048 9,955 12,429

- YOY GROWTH (%) (1.0) (7.0) 10.0 24.9

PROVISION AND CONTINGENCIES 4,390 2,290 1,507 2,185

- YOY GROWTH (%) (13.0) (47.8) (34.2) 45.0


- YOY GROWTH (%) 11.7 26.5 25.0 21.3

PROVISION FOR TAXATION 1,317 1,606 2,250 2,932

- AS A % OF PBT 24.7 23.8 26.6 28.6

PAT 4,025 5,151 6,198 7,313

- YOY GROWTH (%) 17.6 28.0 20.3 18.0


Note: * Core ROEs excluding income and investment in subsidiaries


Company BackgroundHDFC Bank is the second-largest private sector bank in India with apan-India network of 2,150 branches and 6,500+ ATMs. The bank is promotedand 23% owned by HDFC, India's largest housing finance company.HDFC Bank has been at the forefront of modern retail banking in India. Thebank has pioneered the transaction banking model in India, which has enabledit to garner substantial CASA deposits as well as fee income, while thefocus on retail lending (which forms ~50% of total loans as against 20%industry average) has further helped the bank in maintaining above-industrymargins.

Structural SnapshotGrowth opportunity: Over the medium term, private banks such as HDFCBank have the potential to sustain an average growth rate of 22-23% everyyear (~5% faster than the sector's average) by expanding their branch networksby 15-20% p.a. vs. 5-8% by their PSU counterparts.

Competitive position: Amongst the most competitive banks in the sector,HDFC Bank has an A-list management and superior customer propositionin terms of service, technology and product bouquet - enabling consistentmarket share gains, especially in retail banking.


Current Investment ArgumentsStrong capital adequacy and expanding network to drive credit and CASAmarket share gains: HDFC Bank's strong growth over FY2005-11 wassupported by doubling of its CASA market share to ~6%. We expect thistraction in CASA market share to continue on the back of a 15-20% yoyincrease in branches. Strong capital adequacy of 16.3% will provide furthersupport for ~5% higher-than-industry average growth.

Sustained traction in fee income: Apart from traditional CEB and forexincome, the bank earns substantial fee income from transaction banking,cards and third-party distribution, among others. Overall, the bank's corefee income stood at ~1.7% of ATA in FY2011, one of the highest in thesector - offering another competitive advantage to the bank.

Premium valuations: HDFC Bank has always traded at a substantial 32%premium (5 year average) to Sensex, almost being viewed as a defensivestock due to a remarkably consistent ~30% earnings growth every year formore than a decade. In the near term, due its conservative risk management,the bank looks set to continue its 30% earnings growth trajectory. Thatsaid, we believe the stock's premium valuations (3.3x FY2013 ABV) arelikely to limit major outperformance as the markets enters a new upcycle vs.cheaper private sector peers that have a similar medium-term growth outlook.Hence, we recommend an Accumulate rating on the stock with a targetprice of `̀̀̀̀520.

CMP/TP/Upside: `485 / `520 / 7%HDFC Bank

RATING ACCUMULATE

52 WEEK HIGH / LOW 520 / 396

MARKET CAP (`̀̀̀̀ CR) 113,554

LIQUIDITY HIGH


PROMOTERS (HDFC) 23.2

FII 47.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HDFC BANK (1.2) 16.7 37.2 17.9 26.2

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 16.2 20.3 26.0 31.7 35.9

PAT GROWTH* 31.4 33.2 35.2 35.2 34.0

NIM# 4.2 4.4 4.5 4.7 4.2


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 31.5 30.0

ROE (%) 18.9 21.0

P/ABV 3.8 3.3


BUY / HOLD / SELL 38 / 24 / 3


KEY RATIOS


NIMS 4.3 4.4 4.2 4.3


ROA 1.5 1.6 1.7 1.8

ROE 16.1 16.7 18.9 21.0

B/S RATIOS (%)

CASA RATIO 52.0 52.7 53.1 51.4


CAR 17.4 16.2 14.5 13.6

- TIER I 13.3 12.2 11.0 10.4

ASSET QUALITY (%)

GROSS NPAS 1.4 1.0 1.1 1.2

NET NPAS 0.3 0.2 0.2 0.3

SLIPPAGES 2.6 1.1 1.1 1.1




EPS 12.9 16.9 22.2 28.9


DPS 2.4 3.3 4.4 5.7


KEY RATIOS

VALUATION RATIOS

P/E 37.6 28.7 21.8 16.8

P/ABV 5.2 4.4 3.8 3.3

DIVIDEND YIELD (%) 0.5 0.7 0.9 1.2

DUPONT ANALYSIS

NII 4.1 4.2 4.0 4.0

(-) PROV. EXP. 1.1 0.8 0.5 0.4

ADJ NII 3.1 3.5 3.5 3.6

TREASURY 0.2 (0.0) (0.0) 0.0

INT. SENS. INC. 3.3 3.4 3.4 3.6

OTHER INC. 1.8 1.8 1.7 1.7

OP. INC. 5.0 5.2 5.2 5.3

OPEX 2.9 2.9 2.7 2.7

PBT 2.1 2.3 2.4 2.6

TAXES 0.7 0.8 0.8 0.8

ROA 1.5 1.6 1.7 1.8

LEVERAGE 11.1 10.7 11.2 12.0

ROE 16.1 16.7 18.9 21.0


BALANCE SHEET

SHARE CAPITAL 458 465 465 465

RESERVE & SURPLUS 21,065 24,914 28,889 34,064

DEPOSITS 167,404 208,586 254,475 323,184

- GROWTH (%) 17.2 24.6 22.0 27.0

BORROWINGS 7,012 7,447 10,151 12,765

TIER 2 CAPITAL 5,904 6,947 7,920 9,108

OTHER LIAB. & PROV. 20,616 28,993 36,469 45,902




INVESTMENTS 58,608 70,929 86,989 110,723

ADVANCES 125,831 159,983 198,379 247,973

- GROWTH (%) 27.3 27.1 24.0 25.0

FIXED ASSETS 2,123 2,171 2,569 3,133

OTHER ASSETS 5,955 14,601 22,889 28,782

TOTAL ASSETS 222,459 277,353 338,370 425,487

- GROWTH (%) 21.4 24.7 22.0 25.7




- YOY GROWTH (%) 13.0 25.7 15.5 24.6

OTHER INCOME 3,983 4,335 5,200 6,434

- YOY GROWTH (%) 14.8 8.8 20.0 23.7


- YOY GROWTH (%) 13.6 20.3 16.8 24.3


- YOY GROWTH (%) 4.5 20.4 17.0 23.0


- YOY GROWTH (%) 23.5 20.2 16.6 25.6


- YOY GROWTH (%) 12.2 (10.9) (23.0) (6.2)


- YOY GROWTH (%) 30.0 35.7 29.6 31.8


- AS A % OF PBT 31.3 32.5 31.5 32.4

PAT 2,949 3,926 5,165 6,715

- YOY GROWTH (%) 31.3 33.2 31.5 30.0



Company BackgroundAxis Bank is India's third-largest private sector bank after ICICI Bank andHDFC Bank. The bank was promoted by government institutions, led by UTI(SUUTI holds 24% stake currently, which will eventually be divested). Thebank has an extensive network of 1,446 branches and 7,500 ATMs spreadacross 953 centers (~60% in metro and urban regions). The bank's stronggrowth has been backed by robust retail branch expansion, strong corporaterelationships and a wide range of fee income products.

Structural SnapshotGrowth opportunity: After years of reporting high growth, private bankssuch as Axis Bank put together still have only about 15% market share.Hence, there is still substantial headroom for them to gain market share(potentially averaging 22-23% growth over the medium term), especially inlow-cost retail deposits. Rapid branch expansion (15-20% p.a.) is the keyto such high growth.

Competitive position: Being a modern private bank with superior customerproposition in terms of service, technology and product bouquet, Axis Bankis positioned to gain market share in not just credit, but more importantly inCASA deposits and fee-based services.


Current Investment ArgumentsBranch expansion to support faster market share gains: Axis Bank hasexpanded its branch network at a robust 33% CAGR and increased thenumber of ATMs by eight-fold during FY2004-11, resulting in a multi-foldincrease in the market share of low-cost CASA deposits to 4%. In fact, inFY2011 alone, the bank opened 407 branches (41% yoy growth) and furtherexpansion plans remain strong (250+ additions p.a.), which are expected tosustain further market share gains and superior earnings growth.

Fee income continues to drive higher profitability: The bank's fee incomealso has been sector leading at 2.0% of assets (almost twice the level inPSU banks over FY2009-11). In 9MFY2012 as well, the bank witnessedhealthy growth in most fee segments, including corporate (44%), treasury(32%) and retail (35%); and moderate growth is expected to continue goingforward.

Valuations attractive: The stock is trading at attractive valuations of 1.5xFY2013E ABV - at a substantial ~54% discount to HDFC Bank, despitesimilar earnings quality, profitability and growth expectations in the mediumterm. In our view, markets have over-discounted asset-quality concerns forthe bank and current valuations provide a substantial margin of safety.In fact, despite the bank's healthy medium-term growth potential, competitivepositioning and profitability, its current P/E valuation at 8.3x FY2013Eearnings is at a substantial 35% P/E discount even to the Sensex.We recommend Buy, valuing the stock at 2.2x FY2013E ABV to arrive ata target price of `̀̀̀̀1,361.

CMP/TP/Upside: `952 / `1,361 / 43%

RATING BUY

52 WEEK HIGH / LOW 1461/785

MARKET CAP (`̀̀̀̀ CR) 39,271

LIQUIDITY HIGH


PROMOTERS (GOVT. INSTITUTIONS) 37.6

FII 40.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

AXIS BANK (15.9) (25.7) 29.5 12.2 41.9

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 23.9 25.1 36.7 44.0 45.5

PAT GROWTH* 23.7 34.8 46.8 47.5 44.4

NIM# 3.4 3.2 3.1 3.0 2.6


BankingTOPPICKAxis Bank

ANGEL ESTIMATES


PAT GROWTH (%) 23.2 17.2

ROE (%) 20.3 20.2

P/ABV 1.8 1.5


BUY / HOLD / SELL 57 / 9 / 1


KEY RATIOS


NIMS 3.1 3.2 3.1 3.1


ROA 1.5 1.6 1.5 1.5

ROE 19.2 19.3 20.3 20.2

B/S RATIOS (%)

CASA RATIO 46.7 41.1 40.6 40.9


CAR 15.8 12.7 12.3 12.1

- TIER I 11.2 9.4 9.0 8.8

ASSET QUALITY (%)

GROSS NPAS 1.3 1.1 1.4 1.2

NET NPAS 0.4 0.3 0.3 0.3

SLIPPAGES 2.2 1.4 1.7 1.8




EPS 62.1 82.5 101.7 115.4

ABVPS (75% COVER FOR NPAS) 393.8 462.5 540.7 618.8

DPS 12.0 14.0 20.5 23.0


KEY RATIOS

VALUATION RATIOS

P/E 15.3 11.5 9.4 8.3

P/ABV 2.4 2.1 1.8 1.5

DIVIDEND YIELD (%) 1.3 1.5 2.2 2.4

DUPONT ANALYSIS

NII 3.0 3.1 3.0 3.0

(-) PROV. EXP. 0.8 0.6 0.5 0.5

ADJ NII 2.2 2.5 2.5 2.6

TREASURY 0.4 0.2 0.1 0.1

INT. SENS. INC. 2.7 2.7 2.6 2.6

OTHER INC. 2.0 2.0 1.9 1.8

OP. INC. 4.6 4.7 4.5 4.4

OPEX 2.3 2.3 2.2 2.2

PBT 2.3 2.4 2.3 2.2

TAXES 0.8 0.8 0.7 0.7

ROA 1.5 1.6 1.5 1.5

LEVERAGE 12.5 12.1 13.1 13.6

ROE 19.2 19.3 20.3 20.2


BALANCE SHEET


RESERVE & SURPLUS 15,639 18,588 21,786 25,833

DEPOSITS 141,300 189,238 234,655 286,279

- GROWTH (%) 20.4 33.9 24.0 22.0

BORROWINGS 10,014 19,275 23,673 28,789

TIER 2 CAPITAL 7,156 6,993 8,392 10,238

OTHER LIAB. & PROV. 6,134 8,209 9,181 10,963




INVESTMENTS 55,975 71,992 97,795 118,323

ADVANCES 104,341 142,408 170,889 208,485

- GROWTH (%) 27.9 36.5 20.0 22.0

FIXED ASSETS 1,222 2,273 2,981 3,517

OTHER ASSETS 3,906 4,632 5,962 7,251

TOTAL ASSETS 180,648 242,713 298,097 362,527

- GROWTH (%) 22.3 34.4 22.8 21.6




- YOY GROWTH (%) 35.8 31.1 23.9 22.7

OTHER INCOME 3,946 4,632 5,416 6,205

- YOY GROWTH (%) 39.2 17.4 16.9 14.6


- YOY GROWTH (%) 37.3 25.1 21.0 19.5


- YOY GROWTH (%) 29.8 28.8 24.0 25.0


- YOY GROWTH (%) 43.1 22.4 18.8 15.1


- YOY GROWTH (%) 58.5 (7.9) 12.3 6.3


- YOY GROWTH (%) 38.3 33.3 20.4 17.2


- AS A % OF PBT 34.7 34.0 32.4 32.4

PAT 2,515 3,388 4,176 4,895

- YOY GROWTH (%) 38.5 34.8 23.2 17.2



Company BackgroundYes Bank is the youngest private sector bank in the country, promoted byprofessional bankers. The bank started its operations in CY2004 and hasbeen growing at a scorching pace, focusing on niche assets to maintainprofitable margins and asset quality. The bank's thrust so far has been primarilyon wholesale banking operations for mid-size corporates. Now aiming for ahigher share of retail deposits, the bank has recently doubled its network to305 branches (targeting the urban affluent segment) and is planning to expandits network to 750 branches by FY2015.

Structural SnapshotGrowth opportunity: Being a modern, new-generation private bank, on asmall base, Yes bank has grown its wholesale-oriented balance sheet at ascorching pace of 89.5% CAGR over FY2005-11. Subject to the conducivedomestic macro environment, a 30% CAGR in balance sheet is achievableover the next five years, but the key execution challenge for the bank is togrow its savings deposit base at an even faster pace.

Competitive position: The bank has demonstrated a healthy track record inthe niche corporate and wholesale segments; however, as it grows larger,developing a retail customer base will be important for sustaining profitability- this remains the key execution challenge.


Current Investment ArgumentsA-list management and ability to raise capital: Yes Bank has an A-list topmanagement team, which brings to table rich experience from the best banksin India. The bank's performance also benefits from management's ability toraise equity capital (at increasing, book-accretive premiums).

Strong asset quality: The bank has maintained strong asset quality in spiteof growing at a fast clip over the past few years (gross and net NPA ratiosat just 0.3% and 0.04%, respectively), which has been aided by the smallersize of its balance sheet so far. The bank has also been astute in managingits growth rate and asset-liability durations in-line with the changing externalenvironment.

Valuations provide margin of safety from retail growth challenges: YesBank's growth premium has reduced over time due to execution challengesin creating a retail deposit base (now trading at 1.8x due to cyclical slowdownvs. five-year median of 2.5x). However, taking the challenges of building aretail deposit base head-on, the bank has doubled its branch network overthe past 18 months to 305 branches and aggressively increased savingsrate to 7% as a smart customer acquisition strategy. While it has fallenshort of its retail expansion goals in the past and challenges remain significant,valuations at 1.8x FY2013E ABV in our view provide a better risk-returntrade-off than inthe past. Hence, we recommend a Buy rating on the stockwith a target price of `̀̀̀̀361.

CMP/TP/Upside: `287 / `361 / 26%Yes Bank

RATING BUY

52 WEEK HIGH / LOW 342 / 231

MARKET CAP (`̀̀̀̀ CR) 10,086

LIQUIDITY HIGH


PROMOTERS 26.2

FII 44.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

YES BANK (1.2) 6.2 57.0 12.4 -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 35.0 37.2 39.3 58.3 -

PAT GROWTH* 33.3 52.2 53.8 67.4 -

NIM# 2.7 2.7 2.7 2.6 -

ROE# - 21.1 20.7 19.0 -NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

Banking

ANGEL ESTIMATES


PAT GROWTH (%) 27.9 8.4

ROE (%) 22.2 20.1

P/ABV 2.2 1.8


BUY / HOLD / SELL 53 / 3 / 3


KEY RATIOS


NIMS 2.8 2.7 2.5 2.5


ROA 1.6 1.5 1.4 1.3

ROE 20.3 21.1 22.2 20.1

B/S RATIOS (%)

CASA RATIO 10.5 10.3 11.7 13.2


CAR 20.6 16.5 16.3 16.3

- TIER I 12.9 9.7 9.7 9.6

ASSET QUALITY (%)

GROSS NPAS 0.3 0.2 0.2 0.2

NET NPAS 0.1 0.0 0.0 0.0

SLIPPAGES 0.9 0.2 0.3 0.5




EPS 14.1 20.9 26.8 29.0

ABVPS ( 75% COVERAGE FOR NPAS) 91.0 109.3 132.6 157.0

DPS 1.5 2.5 3.0 4.0


KEY RATIOS

VALUATION RATIOS

P/E 20.4 13.7 10.7 9.9

P/ABV 3.2 2.6 2.2 1.8

DIVIDEND YIELD (%) 0.5 0.9 1.0 1.4

DUPONT ANALYSIS

NII 2.7 2.6 2.4 2.4

(-) PROV. EXP. 0.5 0.2 0.2 0.2

ADJ NII 2.2 2.4 2.2 2.1

TREASURY 0.3 (0.1) 0.0 0.0

INT. SENS. INC. 2.5 2.3 2.3 2.2

OTHER INC. 1.6 1.4 1.2 1.2

OP. INC. 4.1 3.7 3.4 3.3

OPEX 1.7 1.4 1.3 1.4

PBT 2.5 2.3 2.1 1.9

TAXES 0.8 0.8 0.7 0.6

ROA 1.6 1.5 1.4 1.3

LEVERAGE 12.6 13.9 15.6 15.6

ROE 20.3 21.1 22.2 20.1


BALANCE SHEET


RESERVE & SURPLUS 2,750 3,447 4,256 5,102

DEPOSITS 26,799 45,939 54,208 65,592

- GROWTH (%) 65.7 71.4 18.0 21.0

BORROWINGS 2,564 3,333 5,842 6,117

TIER 2 CAPITAL 2,185 3,358 3,962 4,715

OTHER LIAB. & PROV. 1,745 2,583 3,085 3,696



BAL.WITH BANKS & MONEY AT CALL 678 420 1,434 1,711

INVESTMENTS 10,210 18,829 23,381 27,990

ADVANCES 22,193 34,364 40,549 48,253

- GROWTH (%) 78.9 54.8 18.0 19.0

FIXED ASSETS 115 132 156 181

OTHER ASSETS 1,191 2,186 2,656 3,170

TOTAL ASSETS 36,383 59,007 71,700 85,569

- GROWTH (%) 58.9 62.2 21.5 19.3



NET INTEREST INCOME 788 1,247 1,579 1,861

- YOY GROWTH (%) 54.1 58.2 26.6 17.9

OTHER INCOME 576 623 789 939

- YOY GROWTH (%) 32.3 8.3 26.5 19.0


- YOY GROWTH (%) 44.1 37.2 26.6 18.3

OPERATING EXPENSES 500 680 874 1,136

- YOY GROWTH (%) 19.5 35.9 28.5 30.0

PRE - PROVISION PROFIT 863 1,190 1,494 1,664

- YOY GROWTH (%) 63.6 37.9 25.5 11.4

PROVISION AND CONTINGENCIES 137 98 117 172

- YOY GROWTH (%) 121.6 (28.2) 19.4 46.6


- YOY GROWTH (%) 55.9 50.3 26.0 8.4

PROVISION FOR TAXATION 249 365 447 484

- AS A % OF PBT 34.2 33.4 32.4 32.4

PAT 478 727 930 1,008

- YOY GROWTH (%) 57.2 52.2 27.9 8.4



Company BackgroundFederal Bank is the largest old generation private sector bank, having alarge presence in Kerala with 486 of its 823 branches. Close to half of itsbranch network is located in semi-urban areas. NRI customers in the MiddleEast form a substantial part of the bank's business; NRI deposits constitute~21% of its total deposits. Over the past one year, the bank's new CEO(coming from Standard Chartered Bank) has been focusing on improvingits asset quality.

Structural SnapshotGrowth opportunity: Federal Bank's growth is expected to be in-line withthe sector, though with a bias towards market share loss in the long term.

Competitive position: The bank enjoys a strong albeit niche customer legacy,but with limited scope for broad-based growth into other regions or productsegments, in our view.


Current Investment ArgumentsAsset quality to improve: During FY2011, the bank had witnessed elevatedNPAs from its retail and SME loan book. However, management is takingvarious steps to stabilize its asset-quality woes and expects higher recoveriesand lower slippages going forward, subject to the external environment.

RBI's move to deregulate NRE FD rates negative for the bank: One ofthe key differentiators for the bank was the lower cost of NRE depositscomprising ~12% of its total deposits (type of NRI deposits where interestincome is tax-free and where RBI-regulated rates were as low as 3-4% untilrecently). However, following RBI's recent deregulation, banks have increasedNRE FD rates by almost 500bp, leaving negligible cost advantage fromthese deposits over domestic FD rates. Consequently, over a one-year period,as these deposits re-price upwards to new interest rates, the bank's NIMcould be impacted by up to 45bp, posing a negative for the bank's earningsoutlook.

Valuations limit upside: Old private bank stocks such as Federal Bankhave outperformed since the RBI's intention of awarding more bank licenses,potentially due to increased M&A expectations (leading to inadequate marginof safety at current valuations in our view). Valuations at 1.0x FY2013 ABVare higher than the 0.6-0.7x range at which mid-size PSU banks with similarKPIs are trading. While in the medium term we expect a gradual increase inthe bank's leverage to lead to higher RoEs, relatively high valuations coupledwith the diminished advantage of low-cost NRE deposits are likely to limitupside from current levels. Hence, we recommend a Neutral rating onthe stock.

CMP/TP/Upside: `364 / - / -Federal Bank

RATING NEUTRAL

52 WEEK HIGH / LOW 477 / 323


LIQUIDITY MEDIUM


PROMOTERS -

FII 43.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

FEDERAL BANK (6.9) (3.4) 32.2 12.9 41.1

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 1.5 16.6 21.5 22.1 20.1

PAT GROWTH* 36.2 26.4 16.8 21.1 25.4

NIM# 3.5 3.8 3.7 3.5 3.4


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 25.5 1.7

ROE (%) 13.7 12.5

P/ABV 1.1 1.0


BUY / HOLD / SELL 29 / 3 / 0


KEY RATIOS


NIMS 3.5 3.8 3.5 3.1


ROA 1.1 1.2 1.3 1.1

ROE 10.3 12.0 13.7 12.5

B/S RATIOS (%)

CASA RATIO 26.2 26.9 26.4 25.6

LOAN DEPOSIT RATIO 74.7 74.3 73.6 73.0

CAR 18.4 16.8 16.6 15.4

- TIER I 16.9 15.6 14.6 13.7

ASSET QUALITY (%)

GROSS NPAS 3.0 3.5 3.1 2.7

NET NPAS 0.5 0.6 0.5 0.5

SLIPPAGES 3.3 3.2 2.4 2.1




EPS 27.2 34.3 43.1 43.8

ABVPS (75% COVER. FOR NPAS) 273.9 298.3 332.7 367.2

DPS 5.0 8.5 7.5 8.0


KEY RATIOS

VALUATION RATIOS

P/E 13.4 10.6 8.4 8.3

P/ABV 1.4 1.3 1.1 1.0

DIVIDEND YIELD (%) 1.3 2.2 2.0 2.1

DUPONT ANALYSIS

NII 3.4 3.7 3.4 3.1

(-) PROV. EXP. 1.0 1.1 0.7 0.6

ADJ NII 2.4 2.6 2.7 2.5

TREASURY 0.3 0.1 0.1 0.0

INT. SENS. INC. 2.7 2.7 2.8 2.5

OTHER INC. 1.0 1.0 0.8 0.8

OP. INC. 3.7 3.7 3.6 3.3

OPEX 1.6 1.8 1.7 1.6

PBT 2.1 1.9 1.9 1.7

TAXES 1.0 0.7 0.6 0.5

ROA 1.1 1.2 1.3 1.1

LEVERAGE 9.2 9.7 10.5 11.2

ROE 10.3 12.0 13.7 12.5


BALANCE SHEET


RESERVE & SURPLUS 4,519 4,938 5,525 6,116

DEPOSITS 36,058 43,015 50,327 59,889

- GROWTH (%) 12.0 19.3 17.0 19.0

BORROWINGS 1,227 1,582 3,121 3,682

BOND CAPITAL 320 306 677 677

OTHER LIAB. & PROV. 1,380 1,445 1,670 2,018



BAL.WITH BANKS & MONEY AT CALL 405 813 1,230 1,451

INVESTMENTS 13,055 14,538 18,480 21,780

ADVANCES 26,950 31,953 37,066 43,738

- GROWTH (%) 20.4 18.6 16.0 18.0

FIXED ASSETS 290 290 336 384

OTHER ASSETS 658 927 1,108 1,308

TOTAL ASSETS 43,676 51,456 61,491 72,554

- GROWTH (%) 12.4 17.8 19.5 18.0




- YOY GROWTH (%) 7.3 23.8 11.0 5.5

OTHER INCOME 531 517 504 565

- YOY GROWTH (%) 2.9 (2.7) (2.5) 12.1


- YOY GROWTH (%) 6.0 16.6 7.9 6.9

OPERATING EXPENSES 677 836 959 1,103

- YOY GROWTH (%) 18.5 23.5 14.7 15.0

PRE-PROVISION PROFIT 1,265 1,427 1,483 1,507

- YOY GROWTH (%) 0.4 12.8 3.9 1.6


- YOY GROWTH (%) (13.2) 29.6 (25.3) 1.3

PROFIT BEFORE TAX 860 902 1,091 1,110

- YOY GROWTH (%) 8.4 4.9 21.0 1.7


- AS A % OF PBT 46.0 34.9 32.4 32.4

PAT 465 587 737 750

- YOY GROWTH (%) (7.2) 26.4 25.5 1.7



Company BackgroundSouth Indian Bank (SIB) is a small old generation private sector bank with~84% of its branches in southern India (66% in Kerala alone). Like FederalBank, SIB also has a large NRI customer base (14% of total deposits).Of late, the bank has aggressively started focusing on the gold loan portfolio- a highly profitable and secured loan segment. Gold loans accounted for~26% of the bank's loan book as of 2QFY2012 and management is targetingto further increase the same.

Structural SnapshotGrowth opportunity: SIB's growth is expected to be in-line with the sector’sgrowth, though with a slight bias towards market share loss in the longterm; Momentum in the gold loan portfolio is expected to sustain the bank'shigh growth in the near term.

Competitive position: Gold loans have been a key differentiator of late;Else primarily a niche customer legacy, with limited scope for broad-basedgrowth into other regions or product segments.

Nature of business: Cyclical and rate-sensitive sector; significant entry barriersfor new players.

Current Investment ArgumentsStrong business growth: SIB has been growing at a healthy pace primarilydue to a rapidly growing gold loan portfolio (84% CAGR over FY2009-11).Gold loans (at ~`6,500cr) now constitute ~26% of the overall loan book.The bank's plans to raise substantial `1,000cr of equity capital (~59% ofFY2011 net worth) to maintain its strong growth are temporarily on holddue to market conditions.

NIMs likely to have peaked out: SIB's NIMs have been healthy despite itsrelatively low CASA deposits due to increasing share of high-yielding goldloans. However, increasing competition in the gold loan space and entry ofseveral players are likely to reduce the so-far above-average profitability ofthis segment going forward. Also, the RBI's recent move of deregulatinginterest rates on NRE deposits has diminished the competitive cost advantageof these deposits, in our view. Assuming all the NRE term and savings deposits(comprising 8.5% of deposits) re-price over the next one year, the bank'sNIMs could get impacted by up to 35bp.

Valuations limit upside: Old private bank stocks such as SIB have outperformedsince the RBI's intention of awarding more bank licenses, potentially due toincreased M&A expectations (leading to inadequate margin of safety at currentvaluations, in our view). Current valuations at 1.1x FY2013E ABV have factoredin the positives, in our view, and are considerably above the valuations ofsmall and mid-size PSU banks, which have similar fundamentals, even afterfactoring in robust growth witnessed due to the sharp rise in gold loans.Hence, we maintain our Neutral stance on the stock.

CMP/TP/Upside: `23 / - / -South Indian Bank

RATING NEUTRAL



LIQUIDITY MEDIUM


PROMOTERS -

FII 42.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SOUTH IND BANK (3.6) 0.7 58.2 23.7 28.9

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 31.0 27.2 22.5 20.9 16.1

PAT GROWTH* 35.7 25.1 24.5 39.7 21.1

NIM# 3.0 2.8 2.7 2.8 2.8


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 33.8 (3.6)

ROE (%) 21.1 17.5

P/ABV 1.3 1.1


BUY / HOLD / SELL 16 / 5 / 0


KEY RATIOS


NIMS 2.5 2.8 2.9 2.7


ROA 1.0 1.0 1.1 0.9

ROE 17.0 18.5 21.1 17.5

B/S RATIOS (%)

CASA RATIO 23.1 21.5 21.0 20.9


NETWORTH/ ASSETS 16.7 18.4 19.3 19.4

CAR 15.4 14.0 12.7 12.5

- TIER I 12.4 11.3 10.4 10.3

ASSET QUALITY (%)

GROSS NPAS 1.3 1.1 0.9 0.8

NET NPAS 0.4 0.3 0.2 0.2

SLIPPAGES 1.5 0.7 1.4 1.8

NPA PROVISIONING EXP. / ASSETS 0.2 0.1 0.2 0.2

NPA PROVISION COVERAGE 70.8 73.9 75.8 75.1


EPS 2.1 2.6 3.5 3.3


DPS 0.4 0.5 0.6 0.6


KEY RATIOS

VALUATION RATIOS

P/E 11.0 8.8 6.6 6.8

P/ABV 1.8 1.5 1.3 1.1

DIVIDEND YIELD (%) (%) 1.8 2.2 2.6 2.6

DUPONT ANALYSIS

NII 2.5 2.7 2.8 2.7

(-) PROV. EXP. 0.2 0.3 0.3 0.3

ADJ NII 2.3 2.4 2.6 2.4

TREASURY 0.3 0.1 0.1 0.0

INT. SENS. INC. 2.6 2.6 2.7 2.4

OTHER INC. 0.6 0.5 0.6 0.5

OP. INC. 3.2 3.1 3.2 3.0

OPEX 1.6 1.6 1.6 1.6

PBT 1.6 1.5 1.6 1.3

TAXES 0.6 0.5 0.5 0.4

ROA 1.0 1.0 1.1 0.9

LEVERAGE 16.7 18.4 19.3 19.4

ROE 17.0 18.5 21.1 17.5


BALANCE SHEET


RESERVE & SURPLUS 1,372 1,734 2,047 2,345

DEPOSITS 23,012 29,721 35,071 40,682

- GROWTH (%) 27.2 29.2 18.0 16.0

BORROWINGS 1 25 30 35

TIER 2 CAPITAL 330 265 313 363

OTHER LIAB. & PROV. 706 962 1,197 1,387



BAL.WITH BANKS & MONEY AT CALL 597 638 775 898

INVESTMENTS 7,156 8,924 8,583 9,909

ADVANCES 15,823 20,489 26,021 30,184

- GROWTH (%) 33.6 29.5 27.0 16.0

FIXED ASSETS 153 357 422 488

OTHER ASSETS 415 585 691 800

TOTAL ASSETS 25,534 32,820 38,771 44,924

- GROWTH (%) 25.3 28.5 18.1 15.9



NET INTEREST INCOME 568 791 1,018 1,115

- YOY GROWTH (%) 8.7 39.2 28.7 9.6

OTHER INCOME 208 197 228 243

- YOY GROWTH (%) 26.9 (5.6) 16.1 6.5

OPERATING INCOME 777 988 1,246 1,358

- YOY GROWTH (%) 13.0 27.2 26.2 9.0

OPERATING EXPENSES 366 463 572 680

- YOY GROWTH (%) 11.5 26.3 23.6 19.0

PRE - PROVISION PROFIT 411 525 675 678

- YOY GROWTH (%) 14.5 27.9 28.4 0.5


- YOY GROWTH (%) (24.5) 84.4 19.6 25.6


- YOY GROWTH (%) 21.9 21.3 30.0 (3.6)


- AS A % OF PBT 36.4 34.3 32.4 32.4

PAT 234 293 391 377

- YOY GROWTH (%) 20.0 25.1 33.8 (3.6)



Company BackgroundState Bank of India (SBI) is the largest bank in India, with an asset size of~`12,40,000cr. The bank has the widest network of ~13,500 branches,with dominant presence across all regions of the country, including two-thirds of its branches in rural and semi-urban areas (in comparison, the secondlargest PSU bank has ~5,300 branches and the largest private sector bankhas ~2,500 branches). The bank also has 164 overseas branches, whichaccount for ~14% of its total loans. It has subsidiaries in life insurance,asset management, credit cards and capital markets, among others; andfive regional subsidiary banks (having ~4,800 branches and combined assetsize of ~`3,75,000cr).

Structural SnapshotGrowth opportunity: Enjoying maximum public confidence, SBI is one ofthe few PSU banks to have gained not only credit market share but alsosavings market share over FY2007-11. Post capital infusion by the Governmentof India, we expect SBI's growth to be a notch higher than the expectedmedium-term sectoral growth of 17-18%.

Competitive position: SBI's dominant savings market share (~26%) enablesit to have one of the lowest cost of funds. Moreover, government businesscontributes significant free floats and fee income (at 1.3% of average assets,highest amongst PSU banks). Poor asset quality, especially from prioritysector lending, has been the bank's Achilles heel.


Current Investment ArgumentsImproving savings market share: Until FY2007, SBI lost CASA marketshare to private sector banks pursuing aggressive branch expansion. However,since then the bank's market share of savings deposits has expanded substantiallyby 400bp to 26.4% (FY2007-1HFY2012), driven by relatively fast branchexpansion (8.3% CAGR vs. 2-5% for most PSU banks), leveraging its tremendoustrust factor in the country. Even in FY2011, the bank added 1,000+ branchesto further bolster its already strong network to 13,542 branches.

Provisioning costs to decline: Provisioning costs for the bank in 1HFY2012at 0.9% of assets were already higher than 2008 levels of ~0.5%, partlydue to one-time regulatory provisions. Consequently, although SBI's coreRoEs have improved over the past few years, actual RoEs are below corelevels, leaving scope for improvement even after factoring in higher NPAs inthe coming quarters. Hence, unlike other PSU banks, SBI is likely to reporta healthy earnings CAGR of 26% over FY2011-13E.

Reasonable valuations: In light of its dominant position and reach, strongsavings market share gains, high fee income and superior earnings quality,current valuations at 1.2x FY2013E ABV adjusting for value of subsidiaries(1.5x without adjusting for subsidiaries) are quite reasonable, in our view.Hence, we maintain our Buy recommendation on the stock with a targetprice of `̀̀̀̀2,359

CMP/TP/Upside: `1,884 / `2,359 / 25%State Bank of India

RATING BUY

52 WEEK HIGH / LOW 2,960 / 1,576

MARKET CAP (`̀̀̀̀ CR) 119,615

LIQUIDITY HIGH


PROMOTERS (GOVT.) 59.4

FII 10.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ST. BK OF INDIA (1.8) (24.9) 18.0 10.3 24.7

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 14.3 25.1 22.3 15.9 14.6

PAT GROWTH* 12.4 (9.8) 7.1 13.4 17.8

NIM# 3.2 3.0 2.7 2.8 3.0


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 29.6 22.5

ROE (%) 16.6 17.9

P/ABV 1.8 1.5


BUY / HOLD / SELL 33 / 14 / 11


KEY RATIOS


NIMS 2.5 3.0 3.4 3.4


ROA 0.9 0.7 0.8 0.8

ROE* 15.7 13.3 16.6 17.9

B/S RATIOS (%)

CASA RATIO 47.3 49.4 50.4 50.6


CAR 13.4 12.0 12.0 11.7

- TIER I 9.5 7.8 7.6 7.4

ASSET QUALITY (%)

GROSS NPAS 3.0 3.3 4.8 6.1

NET NPAS 1.7 1.6 2.1 2.3

SLIPPAGES 2.2 2.8 3.7 3.7




EPS 144.4 130.1 168.7 206.7

ABVPS (75% COVER. FOR NPAS) 972.5 967.6 1,067.2 1,237.9

DPS 30.0 30.0 31.5 39.5


KEY RATIOS

VALUATION RATIOS

P/E 13.0 14.5 11.2 9.1

P/ABV 1.9 1.9 1.8 1.5

DIVIDEND YIELD (%) 1.6 1.6 1.7 2.1

DUPONT ANALYSIS*

NII 2.4 2.9 3.2 3.2

(-) PROV. EXP. 0.4 0.9 1.1 1.1

ADJ NII 1.9 2.0 2.1 2.2

TREASURY 0.2 0.1 0.0 0.0

INT. SENS. INC. 2.1 2.0 2.1 2.2

OTHER INC. 1.3 1.3 1.1 1.1

OP. INC. 3.4 3.3 3.3 3.3

OPEX 2.0 2.0 2.1 2.1

PBT 1.4 1.3 1.2 1.2

TAXES 0.5 0.6 0.4 0.4

ROA 0.9 0.7 0.8 0.8

LEVERAGE 17.7 19.1 20.9 21.2

ROE 15.7 13.3 16.6 17.9


BALANCE SHEET


RESERVE & SURPLUS 65,314 64,351 72,421 82,289

DEPOSITS 804,116 933,933 1,074,023 1,256,607

- GROWTH (%) 8.4 16.1 15.0 17.0

BORROWINGS 71,031 79,945 87,865 102,802

TIER 2 CAPITAL 31,980 39,624 45,171 51,495

OTHER LIAB. & PROV. 80,337 105,248 117,473 140,535

TOTAL LIABILITIES 1,053,414 1,223,736 1,397,587 1,634,363



INVESTMENTS 295,785 295,601 378,524 468,124

ADVANCES 631,914 756,719 862,660 983,433

- GROWTH (%) 16.5 19.8 14.0 14.0

FIXED ASSETS 4,413 4,764 5,280 5,992

OTHER ASSETS 35,113 43,778 46,542 54,454

TOTAL ASSETS 1,053,414 1,223,736 1,397,587 1,634,363

- GROWTH (%) 9.2 16.2 14.3 17.0




- YOY GROWTH (%) 13.4 37.4 29.6 15.6

OTHER INCOME 14,968 15,825 15,473 17,965

- YOY GROWTH (%) 17.9 5.7 (2.2) 16.1


- YOY GROWTH (%) 15.1 25.1 19.2 15.8


- YOY GROWTH (%) 29.8 13.3 16.3 17.0


- YOY GROWTH (%) 2.3 38.3 21.8 14.7


- YOY GROWTH (%) 17.7 136.2 40.4 10.8


- YOY GROWTH (%) (1.8) 7.4 8.9 18.1


- AS A % OF PBT 34.2 44.7 34.2 31.7

PAT 9,166 8,265 10,713 13,124

- YOY GROWTH (%) 0.5 (9.8) 29.6 22.5




Company BackgroundPunjab National Bank (PNB) is the country's second-largest bank, with abalance sheet size of over `4lakh cr and a pan-India network of 5,300+branches. The bank's network is primarily spread over northern India, in Punjab,Haryana and Uttar Pradesh. More than 63% of its branches are based inrural and semi-urban hinterland, which results in a large legacy of low-costCASA deposits (at 36.3% of deposits, one of the highest in the sector).

Structural SnapshotGrowth opportunity: PNB has been growing its loan book well ahead ofthe industry's over the past three years (26.5% vs 18.5% industry growth).However, in our view, it will be difficult for PSU banks such as PNB totranslate this kind of balance sheet growth into similar level of earningsgrowth in the medium term, with the key constraints being asset-qualityissues as well as loss in CASA market share. Accordingly, we expect thebank to report earnings growth a notch below the sector's average, thoughbetter than mid-size PSU banks.

Competitive position: The bank enjoys a strong CASA legacy but has beenlosing CASA market share consistently to private banks (down from 7.9% inFY2002 to 6.7% in 1HFY2012). Overall, we expect PSU banks as a groupto lose market share to private banks in the medium to long term.


Current Investment ArgumentsStrong CASA legacy, but losing market share: PNB enjoys a structuraladvantage of having a better CASA ratio of 36.3%, which is driven by strongrural and semi-urban presence, especially in North India. That said, the bankis losing its market share like most other public sector banks on account ofslow branch expansion and competition from private banks - savings marketshare declined by 50bp to 7.4% during FY2008-1HFY2012.

Persistent asset-quality pressures: Asset-quality pressures for the bankcontinue to persist. Management expects strong recoveries and upgradationsin 2HFY2012, but taking into account the bank's relatively high exposure torisky sectors (reflected in higher yields) and the overall deterioratingmacro-economic environment, we remain cautious on asset-quality pressures.

Reasonable valuations: The bank's valuations have corrected to 1.0x FY2013EABV vs. its five-year range of 1.1-1.6x and median of 1.4x due to theasset-quality concerns faced by the sector. Taking into account the bank'sstructurally low cost of deposits vs. peers and valuations at the lower end ofits historical trading range, we currently have a positive stance on the bank.Hence,we maintain our Buy recommendation on the stock with a target priceof `̀̀̀̀1,059.

CMP/TP/Upside: `911 / `1,059 / 16%Punjab National Bank

RATING BUY

52 WEEK HIGH / LOW 1,234 / 752

MARKET CAP (`̀̀̀̀ CR) 28,865

LIQUIDITY MEDIUM



FII 18.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

PNJB NTL BANK (7.0) (20.1) 26.0 12.0 -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 17.5 27.6 27.0 20.0 18.4

PAT GROWTH* 12.1 13.5 29.3 25.2 25.3

NIM# 3.6 3.6 3.4 3.4 3.6


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 11.9 2.9

ROE (%) 22.6 19.7

P/ABV 1.2 1.0


BUY / HOLD / SELL 47 / 10 / 7


KEY RATIOS


NIMS 3.2 3.6 3.5 3.4


ROA 1.4 1.3 1.2 1.0

ROE 26.6 24.4 22.6 19.7

B/S RATIOS (%)

CASA RATIO 40.8 38.5 36.6 36.0


CAR 14.2 12.4 12.4 12.4

- TIER I 9.1 8.4 8.4 8.3

ASSET QUALITY (%)

GROSS NPAS 1.7 1.8 2.7 4.1

NET NPAS 0.5 0.8 1.0 1.3

SLIPPAGES 1.8 2.3 2.2 2.8




EPS 123.9 139.9 156.6 161.2


DPS 22.0 22.0 28.5 30.0


KEY RATIOS

VALUATION RATIOS

P/E 7.4 6.5 5.8 5.7

P/ABV 1.8 1.5 1.2 1.0

DIVIDEND YIELD (%) 2.4 2.4 3.1 3.3

DUPONT ANALYSIS

NII 3.1 3.5 3.4 3.3

(-) PROV. EXP. 0.5 0.7 0.8 1.0

ADJ NII 2.6 2.8 2.5 2.4

TREASURY 0.3 0.1 0.1 0.0

INT. SENS. INC. 2.9 2.8 2.6 2.4

OTHER INC. 1.0 1.0 0.9 0.8

OP. INC. 3.9 3.8 3.5 3.2

OPEX 1.8 1.9 1.7 1.7

PBT 2.2 1.9 1.8 1.5

TAXES 0.7 0.6 0.6 0.5

ROA 1.4 1.3 1.2 1.0

LEVERAGE 18.5 18.6 19.0 19.0

ROE 26.6 24.4 22.6 19.7


BALANCE SHEET


RESERVE & SURPLUS 17,408 21,192 25,104 29,107

DEPOSITS 249,330 312,899 378,607 442,971

- GROWTH (%) 18.9 25.5 21.0 17.0

BORROWINGS 8,572 20,399 23,639 27,641

TIER 2 CAPITAL 10,690 11,190 12,869 14,928

OTHER LIAB. & PROV. 10,318 12,328 14,760 17,413




INVESTMENTS 77,724 95,162 127,317 151,569

ADVANCES 186,601 242,107 278,423 322,970

- GROWTH (%) 20.6 29.7 15.0 16.0

FIXED ASSETS 2,513 3,106 3,625 4,112

OTHER ASSETS 6,320 8,259 9,940 11,623

TOTAL ASSETS 296,633 378,325 455,296 532,377

- GROWTH (%) 20.1 27.5 20.3 16.9




- YOY GROWTH (%) 20.6 39.3 18.4 17.9

OTHER INCOME 3,610 3,613 4,001 4,231

- YOY GROWTH (%) 23.6 0.1 10.8 5.8


- YOY GROWTH (%) 21.5 27.6 16.6 15.2


- YOY GROWTH (%) 13.2 33.6 14.1 15.0


- YOY GROWTH (%) 27.5 23.6 18.3 15.3

PROV. AND CONT. 1,422 2,492 3,371 4,795

- YOY GROWTH (%) 44.9 75.3 35.3 42.3


- YOY GROWTH (%) 24.0 11.2 11.9 2.9

PROV FOR TAXATION 1,999 2,130 2,383 2,453

- AS A % OF PBT 33.9 32.5 32.4 32.4

PAT 3,905 4,434 4,962 5,107

- YOY GROWTH (%) 26.4 13.5 11.9 2.9



Company BackgroundBank of Baroda (BoB) is the third-largest public sector bank in India, witha balance sheet size of almost `3.9lakh cr. The bank has a network of ~3,500domestic branches and over 1,800 ATMs, mainly in western India (~45% oftotal branch network). The bank has a strong presence overseas, with over25% of its advances coming from overseas branches.

Structural SnapshotGrowth opportunity: BoB has grown faster than the industry, leading to87bp credit market share gains over FY2008-11, while maintaining a betterasset-quality profile and CASA market share performance than peers. In themedium to long term, we expect BoB's growth to largely range from in-lineto a notch above its peer average.

Competitive position: BoB has delivered healthy performance over the pastfew years, backed by investments in its channels to improve its customerproposition. That said, in the medium to long term, we expect PSU bankssuch as BoB to lose their market share to private banks, though at a lowerrate than witnessed during FY2002-08 and at a relatively low rate than mid-size PSU banks.


Current Investment ArgumentsImprovement in core return ratios: The bank's credit growth (~29% CAGR)comfortably outpaced the sector's growth (~20% CAGR) duringFY2007-11, which increased the bank's leverage and operating efficiencycloser to optimum levels (operating expenses declined from 2% of assets inFY2007 to 1.3% in 1HFY2012), driving improvement in core RoE from 12.4%to 21.5%. Moreover, this growth has, in our view, not been driven by above-average risk taking, considering the bank's moderate yields (evidenced inlow net NPA ratio at 0.5% in 2QFY2012).

Focus on channel improvements: The bank has drawn aggressive expansionplans for opening ~550 branches (~15% of existing branch network) inFY2012. Also, being one of the larger west-based PSU banks, it has beenone of the better performers relative to peers on the channel improvementfront (such as internet banking, phone banking and cash management), reflectedin healthy CASA at a 20.6% CAGR over FY2007-11.

Attractive valuations: BoB has been rerated in recent years due to healthyimprovement in its core profitability. The bank's current valuations at 1.0xFY2013E ABV are similar to valuations at which its peers are trading, while,in our view, the bank has a better asset-quality and earnings outlook ascompared to peers. As a result, it is one of our preferred picks amongstlarge PSU banks. Hence, we maintain our Buy recommendation on thestock with a target price of `̀̀̀̀906.

CMP/TP/Upside: `743 / `906 / 22%Bank of Baroda

RATING BUY

52 WEEK HIGH / LOW 1,007 / 631

MARKET CAP (`̀̀̀̀ CR) 29,109

LIQUIDITY MEDIUM



FII 13.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BANK OF BARODA (0.8) (9.9) 45.6 25.9 33.9

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 21.4 32.8 24.9 21.3 15.9

PAT GROWTH* 14.4 38.7 43.5 38.7 31.5

NIM# 2.8 2.8 2.6 2.7 3.0


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 9.7 8.9

ROE (%) 20.4 19.1

P/ABV 1.2 1.0


BUY / HOLD / SELL 52 / 9 / 3


KEY RATIOS


NIMS 2.4 2.8 2.7 2.7


ROA 1.2 1.3 1.2 1.1

ROE 21.9 23.5 20.4 19.1

B/S RATIOS (%)

CASA RATIO 29.6 28.7 28.2 27.9


CAR 14.4 14.5 14.1 14.0

- TIER I 9.2 10.0 9.7 9.6

ASSET QUALITY (%)

GROSS NPAS 1.4 1.4 1.7 2.6

NET NPAS 0.3 0.3 0.5 0.9

SLIPPAGES 1.2 1.1 1.2 1.7




EPS 83.7 108.0 118.4 129.0


DPS 15.0 16.5 23.5 25.5


KEY RATIOS

VALUATION RATIOS

P/E 8.9 6.9 6.3 5.8

P/ABV 1.8 1.4 1.2 1.0

DIVIDEND YIELD (%) 2.0 2.2 3.2 3.4

DUPONT ANALYSIS

NII 2.4 2.8 2.6 2.6

(-) PROV. EXP. 0.3 0.4 0.5 0.5

ADJ NII 2.1 2.3 2.2 2.1

TREASURY 0.3 0.1 0.0 0.0

INT. SENS. INC. 2.4 2.5 2.2 2.1

OTHER INC. 0.8 0.7 0.7 0.7

OP. INC. 3.2 3.2 2.9 2.8

OPEX 1.5 1.5 1.2 1.2

PBT 1.7 1.8 1.7 1.6

TAXES 0.5 0.4 0.5 0.5

ROA 1.2 1.3 1.2 1.1

LEVERAGE 18.0 17.6 17.2 17.5

ROE 21.9 23.5 20.4 19.1


BALANCE SHEET


RESERVE & SURPLUS 14,741 20,600 24,180 28,082

DEPOSITS 241,262 305,439 363,473 425,263

- GROWTH (%) 25.4 26.6 19.0 17.0

BORROWINGS 6,160 12,906 15,394 18,012

TIER 2 CAPITAL 7,190 9,402 10,906 12,651

OTHER LIAB. & PROV. 8,598 9,657 13,149 15,770




INVESTMENTS 61,182 71,261 92,655 111,153

ADVANCES 175,035 228,676 265,265 307,707

- GROWTH (%) 22.2 30.6 16.0 16.0

FIXED ASSETS 2,285 2,300 2,661 3,020

OTHER ASSETS 4,347 6,226 7,427 8,689

TOTAL ASSETS 278,317 358,397 427,496 500,170

- GROWTH (%) 22.8 28.8 19.3 17.0




- YOY GROWTH (%) 15.9 48.2 18.0 17.1

OTHER INCOME 2,806 2,809 3,003 3,448

- YOY GROWTH (%) 1.8 0.1 6.9 14.9


- YOY GROWTH (%) 11.0 32.8 15.3 16.6


- YOY GROWTH (%) 6.6 21.5 3.8 18.1


- YOY GROWTH (%) 14.6 41.5 22.9 15.8

PROVISION AND CONTINGENCIES 697 1,331 1,936 2,436

- YOY GROWTH (%) (27.5) 90.9 45.4 25.8


- YOY GROWTH (%) 26.8 33.3 17.6 12.8


- AS A % OF PBT 27.8 24.9 30.0 32.4

PAT 3,058 4,242 4,653 5,066

- YOY GROWTH (%) 37.3 38.7 9.7 8.9



Company BackgroundBank of India (BoI) is amongst the five largest banks in India, with a balancesheet size of over `3.5 lakh cr. The bank has a pan-India network of 3,700+branches, of which ~63% are located in rural and semi-urban areas. Thebank also has considerable presence overseas, which accounts for ~24%of its total loans (amongst the highest in the Indian banking industry).

Structural SnapshotGrowth opportunity: The bank's relatively high pace of credit growth hasled to market share gains of ~50bp over FY2007-11. However, to matchthis with similar level of earnings growth in the medium term, asset-qualityissues as well as loss in CASA market share are expected to be the keyconstraints.

Competitive position: Overall, we expect PSU banks such as BoI to losetheir market share to private banks in the medium to long term. BoI has alsobeen embattled with asset-quality issues in recent years.


Current Investment ArgumentsEmbattled with asset-quality issues: Asset-quality pressures, which hadmoderated in FY2011 post the severe stress witnessed in FY2010, haveonce again risen in 1HFY2012, with slippages rate rising to 4.2%. Whilethe spike was partly due to the migration to system-based NPA recognitionplatform, the rate of slippages could remain on the higher side in the comingquarters as well due to the weakening macro environment. As a result, earnings,which are expected to decline by ~6% yoy in FY2012 due to lower NIMs,are likely to remain subdued even in FY2013. Consequently, the bank's RoEs,which were unsustainably high at 28% in FY2008 and FY2009 and subsequentlydeclined to 14% in FY2010 itself, are likely to remain at sub-14% till FY2013,as the bank continues to pay the price for high risk-taking in FY2008-09.

Modest fee income and funding mix: The bank's international operationscontribute a substantial ~24% to its advances and enable a wider spectrumof fee-based services to its corporate and retail customers. The bank has arelatively moderate funding mix, with domestic CASA ratio at 30.2% as of2QFY2012.

Outlook and valuation: At the CMP, the stock is trading at cyclically lowvaluations of 1.0x FY2013E ABV compared to its historical range of1.1-1.6x, with a median of 1.3x. However, valuations are relatively high comparedto peers, considering the poor RoE outlook for the bank due to macro headwinds.Accordingly, we recommend a Neutral rating on the stock.

CMP/TP/Upside: `306 / - / -Bank of India

RATING NEUTRAL

52 WEEK HIGH / LOW 499 / 261

MARKET CAP (`̀̀̀̀ CR) 16,736

LIQUIDITY MEDIUM



FII 15.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BANK OF INDIA (10.4) (28.6) 6.3 8.5 34.9

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 16.3 24.8 18.1 22.3 15.3

PAT GROWTH* (20.4) 42.9 7.4 28.8 25.7

NIM# 2.3 2.6 2.6 2.7 2.7


Banking

ANGEL ESTIMATES


PAT GROWTH (%) (5.6) 6.1

ROE (%) 13.9 13.3

P/ABV 1.1 1.0


BUY / HOLD / SELL 13 / 17 / 28


KEY RATIOS


NIMS 2.4 2.6 2.1 2.1


ROA 0.7 0.8 0.6 0.6

ROE 14.2 17.3 13.9 13.3

B/S RATIOS (%)

CASA RATIO 27.8 25.4 25.3 25.1


CAR 12.9 12.2 12.1 11.8

- TIER I 8.5 8.3 8.0 7.6

ASSET QUALITY (%)

GROSS NPAS 2.9 2.2 4.4 5.6

NET NPAS 1.3 0.9 2.3 2.8

SLIPPAGES 2.9 1.7 4.5 3.8




EPS 33.1 45.5 42.9 45.5


DPS 7.0 7.0 8.0 8.5


KEY RATIOS

VALUATION RATIOS

P/E 9.3 6.7 7.1 6.7

P/ABV 1.3 1.1 1.1 1.0

DIVIDEND YIELD (%) 2.3 2.3 2.6 2.8

DUPONT ANALYSIS

NII 2.3 2.5 2.1 2.1

(-) PROV. EXP. 0.9 0.6 0.8 0.7

ADJ NII 1.4 1.9 1.2 1.3

TREASURY 0.2 0.1 0.1 0.0

INT. SENS. INC. 1.7 2.0 1.3 1.4

OTHER INC. 0.8 0.7 0.7 0.7

OP. INC. 2.5 2.7 2.1 2.1

OPEX 1.5 1.6 1.3 1.3

PBT 1.0 1.1 0.8 0.9

TAXES 0.3 0.3 0.2 0.3

ROA 0.7 0.8 0.6 0.6

LEVERAGE 20.4 21.8 22.3 23.1

ROE 14.2 17.3 13.9 13.3


BALANCE SHEET


RESERVE & SURPLUS 13,704 16,743 18,584 20,536

DEPOSITS 229,762 298,886 343,719 398,714

- GROWTH (%) 21.1 30.1 15.0 16.0

BORROWINGS 14,079 12,862 14,704 17,037

TIER 2 CAPITAL 8,320 9,160 10,717 12,432

OTHER LIAB. & PROV. 8,590 12,975 13,218 15,919




INVESTMENTS 67,080 85,872 98,141 113,439

ADVANCES 168,491 213,096 249,323 289,214

- GROWTH (%) 17.9 26.5 17.0 16.0

FIXED ASSETS 2,352 2,481 2,751 3,092

OTHER ASSETS 5,829 12,413 11,181 12,954

TOTAL ASSETS 274,982 351,173 401,490 465,185

- GROWTH (%) 21.9 27.7 14.3 15.9




- YOY GROWTH (%) 4.7 35.7 (0.6) 15.1

OTHER INCOME 2,617 2,642 3,125 3,335

- YOY GROWTH (%) (14.3) 1.0 18.3 6.7


- YOY GROWTH (%) (2.1) 24.8 4.1 12.7


- YOY GROWTH (%) 18.5 38.2 (5.6) 14.0


- YOY GROWTH (%) (13.8) 14.4 13.3 11.6


- YOY GROWTH (%) 71.1 (14.6) 63.5 1.0


- YOY GROWTH (%) (40.1) 40.2 (13.8) 22.5

PROVISION FOR TAXATION 753 1,007 663 1,197

- AS A % OF PBT 30.2 28.8 22.0 32.4

PAT 1,741 2,489 2,349 2,492

- YOY GROWTH (%) (42.1) 42.9 (5.6) 6.1



Company BackgroundCanara Bank is the largest south-based PSU bank (overall fifth largest bankin India), with a balance sheet size of over `3.5lakh cr. The bank has areasonably large pan-India presence, with about 45% of its 3,400+ branchesoutside South India (the bank also has 2,600+ ATMs).

Structural SnapshotGrowth opportunity: The bank's relatively high pace of credit growth hasled to market share gains of 44bp over FY2008-11. However, in our view, itwill be difficult for PSU banks such as Canara Bank to translate such growthin balance sheet into similar level of earnings growth in the medium term,with the key constraints being asset-quality issues as well as loss in CASAmarket share. Accordingly, we expect the bank to post earnings growth anotch below the sector's average, though better than mid-size PSU banks.

Competitive position: Overall, we expect PSU banks such as Canara Bankto lose market share to private banks in the medium to long term. Moreover,amongst larger banks, Canara Bank has a relatively low CASA ratio of 25.8%,leading to lower margins.

Nature of business: Cyclical and rate sensitive sector; Significant entrybarriers for new players.

Current Investment ArgumentsWeak deposit franchise likely to keep NIMs under pressure: Canara Bankhas a relatively weak deposit mix, with a CASA ratio of 25.8% anda relatively high proportion of bulk deposits and CDs at ~30% of deposits.Accordingly, we expect the bank's NIM to dip by ~50bp for FY2012 comparedto FY2011.

Asset quality to remain an overhang: The bank's advances grew at anabove-average 26% CAGR over FY2008-11, driven by strong traction ininfrastructure-related loans, which now contribute ~17% to its total loans.The bank has already experienced substantial slippages in the past threequarters, partly due to migration to system-based NPA recognition, but therate of slippages could remain on the higher side due to the weakeningmacro environment. As a result, earnings, which are expected to decline inFY2012 due to lower NIMs, are likely to remain flat even going into FY2013.

Valuations largely factor in the negatives: The stock has considerablyunderperformed its peers (Bank Nifty by 15% over the past one year), primarilydue to concerns regarding NIMs and asset quality. Cyclically low valuationsof 0.9x FY2013E ABV vs. five-year average of 1.2x and range of 0.8-1.4x, inour view, largely factor in the negatives and a downward bais on interestrates is a positive for the bank. Hence, we recommend Buy on the stockwith a target price of `̀̀̀̀510.

CMP/TP/Upside: `421 / `510 / 21%Canara Bank

RATING BUY

52 WEEK HIGH / LOW 668 / 350

MARKET CAP (`̀̀̀̀ CR) 18,635

LIQUIDITY MEDIUM



FII 13.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CANARA BANK (7.3) (27.6) 27.1 9.9 -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 11.5 23.3 21.7 16.2 14.2

PAT GROWTH* (15.4) 33.2 37.0 24.5 30.3

NIM# 2.3 2.7 2.5 2.5 2.8


Banking

ANGEL ESTIMATES


PAT GROWTH (%) (14.8) 1.5

ROE (%) 17.8 15.8

P/ABV 0.9 0.9


BUY / HOLD / SELL 23 / 7 / 6


KEY RATIOS


NIMS 2.4 2.7 2.2 2.2


ROA 1.2 1.3 0.9 0.8

ROE 26.8 26.4 17.8 15.8

B/S RATIOS (%)

CASA RATIO 29.1 28.3 27.8 27.3


CAR 13.4 15.4 15.5 15.3

- TIER I 8.5 10.9 10.7 10.4

ASSET QUALITY (%)

GROSS NPAS 1.5 1.4 2.2 3.3

NET NPAS 1.1 0.8 1.5 2.0

SLIPPAGES 2.4 2.1 2.6 2.7




EPS 73.7 90.9 77.4 78.6


DPS 10.0 11.0 14.5 14.5


KEY RATIOS

VALUATION RATIOS

P/E 5.7 4.6 5.4 5.4

P/ABV 1.4 1.0 0.9 0.9

DIVIDEND YIELD (%) 2.4 2.6 3.4 3.4

DUPONT ANALYSIS

NII 2.3 2.6 2.2 2.1

(-) PROV. EXP. 0.5 0.4 0.5 0.5

ADJ NII 1.8 2.2 1.7 1.7

TREASURY 0.4 0.1 0.0 0.0

INT. SENS. INC. 2.2 2.3 1.7 1.7

OTHER INC. 0.8 0.8 0.8 0.8

OP. INC. 3.0 3.1 2.5 2.5

OPEX 1.4 1.5 1.3 1.3

PBT 1.6 1.7 1.2 1.2

TAXES 0.3 0.3 0.3 0.4

ROA 1.2 1.3 0.9 0.8

LEVERAGE 21.5 19.7 18.8 19.1

ROE 26.8 26.4 17.8 15.8


BALANCE SHEET


RESERVE & SURPLUS 14,262 19,597 22,280 25,016

DEPOSITS 234,651 293,973 341,008 395,570

- GROWTH (%) 25.6 25.3 16.0 16.0

BORROWINGS 1,041 5,198 6,023 6,975

TIER 2 CAPITAL 7,399 9,063 10,695 12,299

OTHER LIAB. & PROV. 6,977 7,805 8,957 10,636




INVESTMENTS 69,677 83,700 95,892 113,121

ADVANCES 169,335 212,467 250,711 288,318

- GROWTH (%) 22.5 25.5 18.0 15.0

FIXED ASSETS 2,859 2,844 3,197 3,591

OTHER ASSETS 3,217 6,359 7,368 8,532

TOTAL ASSETS 264,741 336,079 389,406 450,939

- GROWTH (%) 20.6 26.9 15.9 15.8




- YOY GROWTH (%) 20.4 37.7 0.5 14.7

OTHER INCOME 2,858 2,703 3,001 3,389

- YOY GROWTH (%) 17.7 (5.4) 11.0 12.9


- YOY GROWTH (%) 19.5 23.3 3.2 14.2


- YOY GROWTH (%) 13.5 27.1 6.3 15.0


- YOY GROWTH (%) 24.1 20.7 1.0 13.6


- YOY GROWTH (%) (17.8) (12.8) 69.0 11.2


- YOY GROWTH (%) 48.6 31.5 (13.6) 14.6

PROVISION FOR TAXATION 800 1,000 912 1,493

- AS A % OF PBT 20.9 19.9 21.0 30.0

PAT 3,021 4,026 3,430 3,483

- YOY GROWTH (%) 45.8 33.2 (14.8) 1.5



Company BackgroundIDBI Bank is the sixth largest PSU bank in India, with a branch network of~900 branches and a balance sheet size of over `2.5lakh cr. IDBI wasincorporated in 1964 as a development financial institution; but in October2004, it was transformed into a banking company with the reverse mergerof IDBI and its subsidiary IDBI Bank. The bank now offers an array of wholesaleand retail banking products, apart from providing long-term finance for industrialdevelopment.

Structural SnapshotGrowth opportunity: IDBI Bank is in a position to grow its CASA depositsand balance sheet a notch faster than its peers over the medium to longterm, in our view, on account of its relatively new and fast expanding branchnetwork than other PSU banks.

Competitive position: Overall, we expect PSU banks, including IDBI Bank,to lose their market share to private banks in the medium to long term. However,compared to its peers, the bank is rapidly transforming its deposit basefrom wholesale to retail, which is expected to improve core profitability inthe medium term. Legacy asset-quality issues, however, continue to houndthe bank.


Current Investment ArgumentsStrong branch expansion and relatively healthy fee income: IDBI Bankenjoys the advantage of a modern, 100% CBS branch network, which isgrowing organically at a much faster rate than other PSU banks (17-18%CAGR post the FY2007 UWB acquisition). Relative to other PSU banks,on account of the bank's strong corporate relationships and governmentmandates, the bank's fee income at 0.8% of overall assets is also healthy.

SASF - A burden on the bank's books: At the time of its merger,IDBI Bank had to set up a stressed asset stabilization fund (SASF) of ~`9,000cr,through which the bank has witnessed only ~`3,500cr worth of cash recoveries(as of FY2011). The possibility of an entire recovery seems implausible andthe large remaining unrecoverable amount of ~`5,541cr would eventuallyhave to be reduced from its net worth (denting net worth by ~36%).

Outlook and valuation: The bank has been among the fastest-growing banksin terms of CASA deposits over the past few years (CAGR of 36% overFY2007-11) even when compared to private banks and now has a marketshare of 2.1% (as of FY2011). At the CMP, the bank is trading at moderatevaluations of 0.8x FY2013E P/ABV, adjusting for the SASF amount (0.6xwithout adjusting). In our view, the bank is one of the PSU banks to watchout for, especially once near-term asset quality headwinds subside. Hence,we recommend a Buy rating on the stock with a target price of `̀̀̀̀107

CMP/TP/Upside: `93 / `107 / 15%IDBI Bank

RATING BUY



LIQUIDITY MEDIUM



FII 3.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

IDBI BANK (13.0) (35.7) 15.5 (1.0) 20.4

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* (3.5) 44.5 38.6 31.0 17.9

PAT GROWTH* 20.2 60.0 31.3 24.1 9.1

NIM# 1.9 1.8 1.3 1.0 0.7


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 12.8 7.1

ROE (%) 13.9 13.4

P/ABV 0.7 0.6


BUY / HOLD / SELL 11 / 7 / 3


KEY RATIOS


NIMS 1.2 1.8 1.8 1.8


ROA 0.5 0.7 0.7 0.7

ROE 13.2 15.8 13.9 13.4

B/S RATIOS (%)

CASA RATIO 14.6 20.9 23.4 26.3


CAR 11.3 13.6 13.5 13.3

- TIER I 6.2 8.0 7.7 7.5

ASSET QUALITY (%)

GROSS NPAS 1.5 1.8 2.7 3.5

NET NPAS 1.0 1.1 1.5 1.6

SLIPPAGES 1.4 1.4 1.6 1.7




EPS 14.2 16.8 18.9 20.3


DPS 3.0 3.5 4.0 4.0


KEY RATIOS

VALUATION RATIOS

P/E 6.5 5.6 4.9 4.6

P/ABV 0.8 0.7 0.7 0.6

DIVIDEND YIELD (%) 3.2 3.8 4.3 4.3

DUPONT ANALYSIS

NII 1.1 1.8 1.7 1.8

(-) PROV. EXP. 0.8 0.8 0.6 0.5

ADJ NII 0.3 1.0 1.2 1.2

TREASURY 0.3 0.1 0.0 0.0

INT. SENS. INC. 0.7 1.1 1.2 1.3

OTHER INC. 0.7 0.8 0.8 0.8

OP. INC. 1.4 1.9 2.0 2.0

OPEX 0.9 0.9 1.0 1.1

PBT 0.5 0.9 1.0 1.0

TAXES 0.0 0.3 0.3 0.3

ROA 0.5 0.7 0.7 0.7

LEVERAGE 25.9 23.3 20.2 20.5

ROE 13.2 15.8 13.9 13.4


BALANCE SHEET


RESERVE & SURPLUS 9,440 13,583 14,987 16,524

DEPOSITS 167,667 180,486 205,754 234,559

- GROWTH (%) 49.2 7.6 14.0 14.0

BORROWINGS 35,010 36,607 39,868 44,328

TIER 2 CAPITAL 12,699 14,962 16,608 18,601

OTHER LIAB. & PROV. 8,031 6,754 7,638 8,613



BAL.WITH BANKS & MONEY AT CALL 679 1,207 7,078 8,014

INVESTMENTS 73,345 68,269 82,940 96,023

ADVANCES 138,202 157,098 174,379 195,304

- GROWTH (%) 33.6 13.7 11.0 12.0

FIXED ASSETS 2,997 3,037 3,324 3,650

OTHER ASSETS 4,446 4,206 4,745 5,372

TOTAL ASSETS 233,573 253,377 285,840 323,610

- GROWTH (%) 35.5 8.5 12.8 13.2




- YOY GROWTH (%) 82.0 91.9 7.3 17.1

OTHER INCOME 2,181 2,084 2,144 2,451

- YOY GROWTH (%) 39.6 (4.4) 2.9 14.3


- YOY GROWTH (%) 58.4 44.5 5.8 16.2


- YOY GROWTH (%) 36.9 23.1 16.5 24.8


- YOY GROWTH (%) 78.0 59.6 0.1 10.9


- YOY GROWTH (%) 226.3 20.3 (20.0) 10.6


- YOY GROWTH (%) 6.0 118.3 16.6 11.0


- AS A % OF PBT 1.3 27.6 30.0 32.4

PAT 1,031 1,650 1,861 1,994

- YOY GROWTH (%) 20.1 60.0 12.8 7.1



Company BackgroundUnion Bank of India is the seventh largest public sector bank, with a balancesheet size of almost `2.5lakh cr. The bank has a reasonably large pan-Indiapresence with 3,000+ branches and over 2,700 ATMs. The bank was one ofthe early adopters of core banking technology amongst PSU banks.

Structural SnapshotGrowth opportunity: The bank's relatively high pace of credit growth hasled to market share gains of ~40bp over FY2008-11. However, decliningCASA market share (~60bp over FY2008-11) and weakening asset qualityare expected to be an impediment to such balance sheet growth, translatinginto equally high earnings growth in the medium term.

Competitive position: Overall, we expect PSU banks such as Union Bankof India to lose their market share to private banks in the medium to longterm. Moreover, amongst larger banks, Union Bank of India has been witnessingrelatively high asset-quality concerns of late.


Current Investment ArgumentsCASA ratio expected to sustain at ~32% levels: We are relatively positiveon the bank's CASA growth outlook, owing to its large branch expansion inrecent years compared to its peers. The bank has opened ~400 branchesin the past two years, which in our view should aid the bank in maintainingits CASA ratio at ~32% levels. The bank is aiming to open another 225branches during FY2012.

High provisioning impacting profitability: Union Bank of India had managedto improve its asset quality over FY2011 (slippage ratio of 1.4% as of 4QFY2011).However, from 1QFY2012, the bank, on account of stress from SME andagri portfolio and shift to system-based NPA recognition platform, had seenits slippages balloon from 1.4% in 4QFY2011 to 4.8% as of 2QFY2012and provision coverage ratio decline to 60.5%. Although the asset qualityimproved in 3QFY2012 with slippage ratio declining to 1.5%, higher provisioningexpenses (75.7% of PPP) negatively impacted the profitability. However,with slippages expected to decline in the coming few quarters, profitabiltyis expected to improve back to normalised levels, in our view.

Reasonable valuation: In our view, Union Bank of India is structurally amongthe more profitable and competitive PSU banks. Going ahead, pick-up inrecoveries from the technically slipped accounts is likely to cushion furtherstress. Moreover, asset-quality stress seems to have been largely factoredinto the price, in our view. The stock is trading at cheap valuations of 0.8xFY2013E P/ABV, lower than other large PSU banks, and well below itsfive-year median of 1.2x and range of 0.9-1.5x. Hence, we recommend aBuy rating with a target price of `̀̀̀̀222.

CMP/TP/Upside: `188 / `222 / 18%Union Bank of India

RATING BUY

52 WEEK HIGH / LOW 360 / 156


LIQUIDITY MEDIUM



FII 11.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

UNION BANK (24.5) (40.6) 6.9 9.7 -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 5.7 33.9 24.1 22.4 18.3

PAT GROWTH* 16.2 0.3 14.5 25.3 29.6

NIM# 2.9 3.0 2.7 2.8 3.0


Banking

ANGEL ESTIMATES


PAT GROWTH (%) (7.0) 7.2

ROE (%) 16.3 15.4

P/ABV 0.8 0.8


BUY / HOLD / SELL 28 / 12 / 12


KEY RATIOS


NIMS 2.4 3.0 2.8 2.8


ROA 1.2 1.0 0.8 0.7

ROE 26.2 20.9 16.3 15.4

B/S RATIOS (%)

CASA RATIO 31.7 31.8 32.4 32.2


CAR 12.5 13.0 12.9 11.5

- TIER I 7.9 8.7 8.5 7.5

ASSET QUALITY (%)

GROSS NPAS 2.2 2.4 3.7 5.1

NET NPAS 0.8 1.2 1.8 2.2

SLIPPAGES 1.8 2.4 3.0 3.1




EPS 41.1 39.6 36.7 39.4


DPS 5.5 8.0 7.0 7.5


KEY RATIOS

VALUATION RATIOS

P/E 4.6 4.8 5.1 4.8

P/ABV 1.1 0.9 0.8 0.8

DIVIDEND YIELD (%) 2.9 4.3 3.7 4.0

DUPONT ANALYSIS

NII 2.4 2.9 2.7 2.7

(-) PROV. EXP. 0.5 0.6 0.9 0.9

ADJ NII 1.9 2.3 1.8 1.8

TREASURY 0.3 0.2 0.1 0.1

INT. SENS. INC. 2.2 2.5 2.0 1.9

OTHER INC. 0.8 0.7 0.7 0.7

OP. INC. 3.0 3.2 2.7 2.6

OPEX 1.4 1.8 1.5 1.5

PBT 1.6 1.4 1.1 1.1

TAXES 0.4 0.4 0.4 0.3

ROA BEFORE PREF DIVIDEND 1.2 1.0 0.8 0.7

PREF. DIVIDEND - 0.0 0.0 0.0

ROA 1.2 1.0 0.8 0.7

LEVERAGE 22.5 21.7 21.3 21.7

ROE 26.2 20.9 16.3 15.4


BALANCE SHEET


RESERVE & SURPLUS 9,919 12,129 13,627 15,235

DEPOSITS 170,040 202,461 230,806 270,043

- GROWTH (%) 22.6 19.1 14.0 17.0

BORROWINGS 3,125 7,126 8,109 9,461

TIER 2 CAPITAL 6,090 6,190 6,995 8,044

OTHER LIAB. & PROV. 5,483 7,443 8,380 9,878




INVESTMENTS 54,404 58,399 70,245 84,820

ADVANCES 119,315 150,986 170,614 196,206

- GROWTH (%) 23.6 26.5 13.0 15.0

FIXED ASSETS 2,305 2,293 2,531 2,864

OTHER ASSETS 3,361 4,208 4,789 5,587

TOTAL ASSETS 195,162 235,984 268,553 313,295

- GROWTH (%) 21.2 20.9 13.8 16.7




- YOY GROWTH (%) 9.9 48.3 9.8 15.3

OTHER INCOME 1,975 2,039 2,101 2,201

- YOY GROWTH (%) 33.2 3.2 3.0 4.8


- YOY GROWTH (%) 16.4 33.9 8.1 12.9


- YOY GROWTH (%) 13.3 57.5 (1.2) 15.0


- YOY GROWTH (%) 18.7 17.6 16.7 11.2


- YOY GROWTH (%) 13.9 63.3 59.9 16.4


- YOY GROWTH (%) 20.2 4.3 (3.1) 7.2


- AS A % OF PBT 26.8 29.6 32.4 32.4

PAT 2,075 2,082 1,936 2,075

- YOY GROWTH (%) 20.2 0.3 (7.0) 7.2



Company BackgroundCentral Bank of India is one of the larger mid-size PSU banks, with a balancesheet size of ~`2.2lakh cr. The bank has one of the largest branch networksof ~4,000 branches, which are well spread across several major states ofIndia. The bank also has the second highest proportion of rural andsemi-urban branches (63% of total branches). In the past, the bank's focuson low-yielding bulk corporate loans was contributing to lower profitability,but slowly the bank is trying to increase its retail lending (still low at about11% of loans).

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as Central Bank of Indiaare expected to gradually lose their market share, as private sector banksmake inroads into their hinterlands.

Competitive position: In the context of the overall sector, mid-size PSUbanks, in our view, have a relatively weak competitive position compared toprivate as well as large PSU banks. Central Bank of India also suffers fromrelatively low branch and employee productivity, leading to further loss incompetitiveness within its peer set.


Current Investment ArgumentsLow branch productivity and structurally higher opex structure: The banksuffers from low branch and employee productivity in terms of business perbranch as well as business per employee. Business per branch for FY2011was ~34% lower than large and medium PSU peer banks. Due to this, thebank suffers from higher operating expenses, as reflected in opex-to-averageassets ratio of ~1.6% during FY2009-11.

Near-term asset-quality concerns: A late starter in CBS implementation,the bank commenced the switchover to NPA-based recognition system onlypost 1QFY2012. The bank still has to switch over accounts below ̀ 10lakhs(comprising 20% of loan book) in 2HFY2012, which could lead to increasedNPAs. Also, the bank's exposure to the infrastructure sector is relativelyhigh at ~21% of the funded exposure, with the power sector accounting forover two-thirds of the same.

Valuations: At the CMP, the stock is trading at cheap valuations of 0.6xFY2013E ABV compared to its trading range of 0.6-1.5x with a median of1.1x since its listing in 2007. However, we believe this is outweighed by thesubstantial near-term concerns on asset quality. While the stock has correctedsubstantially over the past year, it is still trading higher than some of theother mid-size PSU banks with better asset-quality outlook and return ratios.Hence, we maintain our Neutral rating on the stock.

CMP/TP/Upside: `76 / - / -Central Bank of India

RATING NEUTRAL



LIQUIDITY MEDIUM



FII 2.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CENTRAL BANK (26.5) (47.0) 31.0 - -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 8.1 54.0 28.2 17.6 13.1

PAT GROWTH* (35.6) 12.4 33.6 34.2 37.5

NIM# 2.7 2.8 2.1 2.3 3.0


Banking

ANGEL ESTIMATES


PAT GROWTH (%) (22.1) 17.8

ROE (%) 12.6 11.4

P/ABV 0.7 0.6




KEY RATIOS


NIMS 1.6 2.8 2.7 2.7


ROA 0.6 0.6 0.4 0.4

ROE 25.4 23.2 12.6 11.4

B/S RATIOS (%)

CASA RATIO 34.4 35.2 35.8 35.8


CAR 12.2 11.6 13.0 12.7

- TIER I 6.8 6.3 8.2 7.9

ASSET QUALITY (%)

GROSS NPAS 2.3 1.8 3.8 5.3

NET NPAS 0.7 0.7 1.8 2.4

SLIPPAGES 1.2 1.3 3.1 3.1




EPS 24.7 27.7 13.5 15.9


DPS 2.2 3.4 1.5 2.0


KEY RATIOS

VALUATION RATIOS

P/E 3.1 2.7 5.6 4.8

P/ABV 0.7 0.6 0.7 0.6

DIVIDEND YIELD (%) 2.9 4.5 2.0 2.6

DUPONT ANALYSIS

NII 1.5 2.7 2.5 2.5

(-) PROV. EXP. 0.3 0.5 0.8 0.8

ADJ NII 1.2 2.2 1.7 1.7

TREASURY 0.5 0.2 0.1 0.1

INT. SENS. INC. 1.7 2.4 1.8 1.8

OTHER INC. 0.6 0.5 0.5 0.5

OP. INC. 2.3 2.9 2.3 2.3

OPEX 1.3 2.0 1.6 1.6

PBT 0.9 0.8 0.7 0.7

TAXES 0.3 0.2 0.2 0.2

ROA 0.6 0.6 0.5 0.5

PREF. DIVIDEND 0.0 0.1 0.1 0.1

ROA POST PREF. DIVIDEND 0.6 0.6 0.4 0.4

LEVERAGE 42.1 40.6 32.0 27.6

ROE 25.4 23.2 12.6 11.4


BALANCE SHEET

SHARE CAPITAL 1,771 2,021 2,264 2,264

- EQUITY 404 404 647 647

- PREFERENCE 1,367 1,617 1,617 1,617

RESERVE & SURPLUS 5,921 6,827 9,843 10,721

DEPOSITS 162,107 179,356 199,085 224,966

- GROWTH (%) 23.5 10.6 11.0 13.0

BORROWINGS 2,751 7,283 8,107 9,140

TIER 2 CAPITAL 4,575 5,605 6,278 7,031

OTHER LIAB. & PROV. 5,545 8,666 7,937 9,130




INVESTMENTS 50,563 54,504 60,454 69,276

ADVANCES 105,383 129,725 145,292 162,728

- GROWTH (%) 23.3 23.1 12.0 12.0

FIXED ASSETS 2,343 2,425 2,619 2,864

OTHER ASSETS 5,165 7,819 8,705 9,813

TOTAL ASSETS 182,672 209,757 233,513 263,253

- GROWTH (%) 23.7 14.8 11.3 12.7




- YOY GROWTH (%) 14.2 109.2 5.6 11.5

OTHER INCOME 1,735 1,265 1,297 1,357

- YOY GROWTH (%) 62.2 (27.1) 2.5 4.6


- YOY GROWTH (%) 29.8 54.0 5.0 10.2


- YOY GROWTH (%) 19.4 80.0 (8.8) 8.0


- YOY GROWTH (%) 43.3 25.9 26.4 12.7

PROVISION AND CONTINGENCIES 509 932 1,820 1,931

- YOY GROWTH (%) (0.5) 83.2 95.2 6.1


- YOY GROWTH (%) 67.5 7.1 (12.3) 20.9


- AS A % OF PBT 31.7 24.5 29.0 32.4

PAT 1,058 1,252 1,033 1,189

- YOY GROWTH (%) 85.3 18.3 (17.5) 15.1

PREFERENCE DIVIDEND 61 131 160 160

PAT AVL. TO EQ SHAREHOLDERS 998 1,121 874 1,029

- YOY GROWTH (%) 102.1 12.4 (22.1) 17.8



Company BackgroundSyndicate Bank is a south-based mid-size PSU bank, with an asset base inexcess of `1.6lakh cr. The bank has 2,500+ branches, with a more spread-out network than other regional banks, having 53% branches in the southand the remaining spread across several states of the country (23% of branchesin the northern region). The bank also has a reasonable presence overseas,which accounts for ~10% of its total loans.

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as Syndicate Bank are expectedto gradually lose their market share, as private sector banks make inroadsinto their stronghold regions.

Competitive position: In the context of the overall sector, mid-size PSUbanks such as Syndicate Bank, in our view, have a relatively weak competitiveposition compared to private as well as large PSU banks.


Current Investment ArgumentsBetter asset quality and moderate NIM to drive profitability: The bankwitnessed a surge in slippages in 2QFY2012 to 3.6% due to the switchoverto system-based NPA recognition platform; slippages are also likely to remainabove average levels due to the deteriorating domestic macro environment.However, the bank's conservative lending, visible in its low yield on advancesand moderate advances growth (16% CAGR over FY2010-12E), is expectedto lead to better asset quality than peers. Moreover, the bank's calculatedNIM improved by 90bp in FY2011 over FY2010 to healthy 3.0%. In-linewith our view that margins are likely to remain stable for the sector as awhole, we expect Syndicate Bank's NIM to also remain healthy in the comingquarters.

Attractive valuations: We expect Syndicate Bank to deliver RoEs of 18.5%and 16.5% in FY2012 and FY2013, respectively, on the back of its betterasset-quality outlook than peers and moderate NIM. The bank has a modestCASA franchise with a CASA ratio of 30.8% (as of 3QFY2012), while feeincome is also modest at 0.6% of average assets (as of FY2011). However,that said, the bank's relatively cheap valuations and low asset-quality concernsturn the tide in the stock's favor. The stock is currently trading at a substantialdiscount (0.6x FY2013E ABV) vs. its five-year range of 0.7-1.3x and medianof 0.9x. Also, the valuations appear cheap compared to its peers, which aretrading at higher multiples, although they have similar or poorer fundamentals.We value the stock at 0.7x FY2013E ABV and continue to maintain ourBuy recommendation with a target price of `̀̀̀̀106.

CMP/TP/Upside: `84 / `106 / 26%Syndicate Bank

RATING BUY



LIQUIDITY MEDIUM



FII 3.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SYNDICATE BANK (18.9) (16.9) 9.9 2.5 24.7

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 14.8 35.6 20.7 16.5 14.3

PAT GROWTH* 32.0 28.8 7.3 14.3 16.1

NIM# 3.3 3.0 2.4 2.5 3.1


Banking



ANGEL ESTIMATES


PAT GROWTH (%) 26.8 2.0

ROE (%) 18.5 16.5

P/ABV 0.6 0.6


KEY RATIOS


NIMS 2.1 3.0 3.1 3.0


ROA 0.6 0.7 0.8 0.7

ROE 16.6 17.6 18.5 16.5

B/S RATIOS (%)

CASA RATIO 31.2 30.9 30.3 29.4


CAR 12.7 13.0 13.0 12.6

- TIER I 8.2 9.3 9.1 8.8

ASSET QUALITY (%)

GROSS NPAS 2.2 2.4 3.6 5.2

NET NPAS 1.1 1.0 1.7 2.5

SLIPPAGES 1.8 1.7 3.0 3.2




EPS 15.6 18.3 23.2 23.6


DPS 3.0 3.7 4.5 5.0


KEY RATIOS

VALUATION RATIOS

P/E 5.4 4.6 3.6 3.6

P/ABV 0.9 0.7 0.6 0.6

DIVIDEND YIELD (%) 3.6 4.4 5.4 5.9

DUPONT ANALYSIS

NII 2.0 3.0 3.0 2.9

(-) PROV. EXP. 0.5 1.0 1.1 1.0

ADJ NII 1.5 2.0 1.9 2.0

TREASURY 0.3 0.0 0.1 0.0

INT. SENS. INC. 1.8 2.0 2.0 2.0

OTHER INC. 0.6 0.6 0.6 0.6

OP. INC. 2.4 2.6 2.6 2.6

OPEX 1.5 1.7 1.6 1.5

PBT 0.9 0.9 1.0 1.0

TAXES 0.3 0.2 0.2 0.3

ROA 0.6 0.7 0.8 0.7

LEVERAGE 27.4 24.9 23.6 24.0

ROE 16.6 17.6 18.5 16.5


BALANCE SHEET


RESERVE & SURPLUS 5,105 6,478 7,506 8,528

DEPOSITS 117,026 135,596 157,291 184,031

- GROWTH (%) 1.0 15.9 16.0 17.0

BORROWINGS 8,555 6,010 6,972 8,138

TIER 2 CAPITAL 3,618 3,518 4,045 4,571

OTHER LIAB. & PROV. 4,225 4,364 5,197 6,124




INVESTMENTS 33,011 35,068 41,795 53,368

ADVANCES 90,406 106,782 122,799 138,763

- GROWTH (%) 10.9 18.1 15.0 13.0

FIXED ASSETS 701 693 779 883

OTHER ASSETS 2,198 2,031 2,356 2,750

TOTAL ASSETS 139,051 156,539 181,585 211,965

- GROWTH (%) 6.8 12.6 16.0 16.7




- YOY GROWTH (%) 7.5 60.0 16.7 13.2

OTHER INCOME 1,167 915 1,065 1,166

- YOY GROWTH (%) 27.6 (21.6) 16.4 9.4


- YOY GROWTH (%) 12.8 35.6 16.6 12.6


- YOY GROWTH (%) 13.5 25.3 4.3 13.7


- YOY GROWTH (%) 12.1 46.8 28.1 11.7


- YOY GROWTH (%) 10.2 109.3 27.1 3.6


- YOY GROWTH (%) 13.3 9.5 29.2 20.8


- AS A % OF PBT 30.7 18.5 20.0 32.4

PAT 813 1,048 1,328 1,355

- YOY GROWTH (%) (10.9) 28.8 26.8 2.0



Company BackgroundAllahabad Bank is a mid-size public sector bank, with a branch network ofover 2,400 branches and balance sheet of ~`1.6lakh cr. The bank's branchesare mostly concentrated in the northern (~40%) and eastern (~40%) statesof India.

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as Allahabad Bank are expectedto gradually lose their credit market share, as private sector banks makeinroads into their hinterlands.

Competitive position: In the context of the overall sector, mid-size PSUbanks, in our view, have a relatively weak competitive position compared toprivate as well as large PSU banks.


Current Investment ArgumentsHealthy retail deposit base: Allahabad Bank has a substantial 41% of itsbranches in the CASA deposit-rich rural areas, which ensure relatively highsustainability of the low-cost deposits reservoir, also reflected in the strong24.0% CAGR in the bank's saving account deposits over FY2009-11. Althoughthe bank's CASA market share reduced by 25bp over FY2006-1HFY2012to 2.4%, the decline in market share has been one of the lowest in its peergroup. Also, the bank has a relatively low share of wholesale deposits andCDs at 12.1%.

Higher yielding loans could lead to higher NPAs: Allahabad Bank hadone of the highest reported yield on advances for 2QFY2012 (12.6%) amongstall PSU banks. The bank's yield on advances has risen by 185bp yoy, thehighest increase within the PSU segment, indicating increased risk takingin the form of higher yielding loans over the past one year. While the bank'sprovisioning costs are on the higher side (0.9% for 1HFY2012 comparedto average 0.8% for PSUs), its risk-adjusted yields are still well above sectoraverage, indicating the possibility of negative surprises on theasset-quality front. As a result, with no additional room for expansion in yieldsand asset quality expected to further see deterioration due to the higherrisk taking, higher-than-peer average return ratios for the bank could comeunder pressure.

Outlook and valuation: The bank's return ratios are on the higher side;however, higher estimated provisioning expenses are expected to impactprofitability going forward. That said, positives for Allahabad Bank includemoderateCASA ratio of 30.6% and better-than-peer average fee income at 0.8x ofassets. The bank is trading at valuations of 0.7x FY2013E ABV comparedto its median of 1.0x and 5 year range of 0.6-1.2x. Hence, we recommendan Accumulate rating on the stock with a target price of `̀̀̀̀158.

Banking CMP/TP/Upside: `142 / `158 / 12%Allahabad Bank

RATING ACCUMULATE

52 WEEK HIGH / LOW 240 / 114


LIQUIDITY MEDIUM



FII 11.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ALLAHABAD BANK (6.8) (31.1) 37.7 9.3 -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 23.9 29.4 26.9 21.2 19.3

PAT GROWTH* 21.2 18.0 13.4 15.0 43.0

NIM# 3.4 3.0 2.6 2.7 3.1


ANGEL ESTIMATES


PAT GROWTH (%) 28.6 (6.6)

ROE (%) 21.9 17.6

P/ABV 0.7 0.7


BUY / HOLD / SELL 22 / 1 / 1


KEY RATIOS


NIMS 2.5 3.0 3.4 3.3


ROA 1.1 1.0 1.1 0.9

ROE 22.2 21.0 21.9 17.6

B/S RATIOS (%)

CASA RATIO 34.5 33.5 35.0 35.5


CAR 13.6 13.0 13.6 13.7

- TIER I 8.1 8.6 9.1 9.1

ASSET QUALITY (%)

GROSS NPAS 1.7 1.7 2.8 4.4

NET NPAS 0.7 0.8 0.9 1.4

SLIPPAGES 2.1 2.4 2.4 3.1




EPS 27.0 29.9 38.4 35.9


DPS 5.5 6.0 7.5 7.0


KEY RATIOS

VALUATION RATIOS

P/E 5.2 4.7 3.7 4.0

P/ABV 1.1 0.9 0.7 0.7

DIVIDEND YIELD (%) 3.9 4.2 5.3 4.9

DUPONT ANALYSIS

NII 2.4 2.9 3.3 3.2

(-) PROV. EXP. 0.7 0.8 0.9 0.9

ADJ NII 1.7 2.1 2.4 2.3

TREASURY 0.5 0.1 0.0 0.0

INT. SENS. INC. 2.2 2.2 2.4 2.3

OTHER INC. 0.9 0.9 0.8 0.7

OP. INC. 3.1 3.1 3.2 3.1

OPEX 1.5 1.7 1.7 1.7

PBT 1.6 1.4 1.5 1.4

TAXES 0.5 0.4 0.4 0.5

ROA 1.1 1.0 1.1 0.9

LEVERAGE 20.2 20.2 19.1 18.5

ROE 22.2 21.0 21.9 17.6


BALANCE SHEET


RESERVE & SURPLUS 6,306 8,031 9,446 10,767

DEPOSITS 106,056 131,887 146,395 166,890

- GROWTH (%) 24.8 24.4 11.0 14.0

BORROWINGS 1,424 3,006 3,348 3,814

TIER 2 CAPITAL 4,012 3,912 4,460 5,084

OTHER LIAB. & PROV. 3,455 3,974 4,339 4,907




INVESTMENTS 38,429 43,247 45,113 51,365

ADVANCES 71,605 93,625 106,732 121,675

- GROWTH (%) 21.8 30.8 14.0 14.0

FIXED ASSETS 1,118 1,148 1,240 1,371

OTHER ASSETS 1,379 2,239 2,493 2,840

TOTAL ASSETS 121,699 151,286 168,463 191,938

- GROWTH (%) 24.6 24.3 11.4 13.9




- YOY GROWTH (%) 22.8 51.8 30.6 11.0

OTHER INCOME 1,516 1,370 1,336 1,401

- YOY GROWTH (%) 32.7 (9.6) (2.5) 4.9


- YOY GROWTH (%) 26.2 29.4 22.2 9.8


- YOY GROWTH (%) 15.6 44.5 13.0 13.7


- YOY GROWTH (%) 34.1 19.9 29.2 7.2


- YOY GROWTH (%) (5.9) 44.7 31.0 15.4


- YOY GROWTH (%) 64.7 9.0 28.1 2.3


- AS A % OF PBT 31.9 26.3 26.0 32.4

PAT 1,206 1,423 1,830 1,708

- YOY GROWTH (%) 57.0 18.0 28.6 (6.6)



Company BackgroundCorporation Bank is a mid-size PSU bank, with a balance sheet size of~`1.4lakh cr. The bank's branches are mainly concentrated in the southernstates (~50%) with majority being in Karnataka (~26%). The bank, unlikemost other PSU banks, has more than half of its branches located in urbanand metropolitan areas (~56%).

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as Corporation Bank areexpected to gradually lose their credit market share, as private sector banksmake inroads into their hinterlands.

Competitive position: In the context of the overall sector, mid-size PSUbanks, in our view, have a relatively weak competitive position compared toprivate as well as large PSU banks. Further, unlike most PSUs, CorporationBank has more than half of its branches located in urban and metropolitanareas, and although this has often prompted the bank to be ahead of otherPSU banks in implementing newer technologies and services, it also exposesthe bank to much higher competition from private banks.


Current Investment ArgumentsModern, cost-efficient network to support moderate CASA growth: DuringFY2007-11, growth in the bank's average CASA deposits was robust relativeto peers at 20.4%. We believe the bank's efficient and expanding network,supported by a consistent track record in early adoption of emerging technologies,creates a positive traction in its deposit franchise, though this is temperedmainly by substantial competition from larger banks.

Low operating cost and superior asset quality: Large corporates comprise~38% of the bank's credit book, leading to relatively low yield on advances,but simultaneously offering superior asset quality to the bank.Corporation Bank is also among the most cost-efficient PSU banks, both interms of its operating expenses as a percentage of average assets as wellas branch and employee productivity.

Valuations reasonable: The bank's low CASA ratio (~22%) has contributedto higher margin pressures, given the prevailing high interest rates. Accordingly,peaking of interest rates bodes well for it. Currently, the stock is trading at0.6x FY2013E ABV (five-year range of 0.8x-1.4x and median of 1.0x), whichwe believe provides a margin of safety from current macro headwinds.Also, the structural positive for the bank is its proactive investment in moderndistribution and payment systems, which has led to consistently faster CASAgrowth compared to peers. We value the bank at 0.8x FY2013E ABVand recommend a Buy rating on the stock with a target price of `̀̀̀̀450.

CMP/TP/Upside: `387 / `450 / 16%Corporation Bank

RATING BUY



LIQUIDITY MEDIUM



FII 4.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CORP. BANK (6.6) (30.4) 27.3 4.0 12.4

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 21.3 25.5 25.8 18.8 17.2

PAT GROWTH* 14.0 20.8 24.4 26.0 18.4

NIM# 2.1 2.4 2.2 2.4 2.9


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 3.7 (7.0)

ROE (%) 19.0 15.5

P/ABV 0.7 0.6


BUY / HOLD / SELL 18 / 5 / 2


KEY RATIOS


NIMS 2.0 2.4 2.0 2.1


ROA 1.2 1.1 1.0 0.8

ROE 21.9 21.9 19.0 15.5

B/S RATIOS (%)

CASA RATIO 28.6 26.0 25.5 25.1


CAR 15.4 14.1 14.8 14.6

- TIER I 9.3 8.7 9.1 8.8

ASSET QUALITY (%)

GROSS NPAS 1.0 0.9 1.9 2.8

NET NPAS 0.3 0.5 1.0 1.3

SLIPPAGES 1.0 1.3 1.8 1.8




EPS 81.6 95.4 99.0 92.1


DPS 16.5 20.0 20.0 19.0


KEY RATIOS

VALUATION RATIOS

P/E 4.7 4.1 3.9 4.2

P/ABV 1.0 0.8 0.7 0.6

DIVIDEND YIELD (%) 4.3 5.2 5.2 4.9

DUPONT ANALYSIS

NII 1.9 2.3 2.0 2.1

(-) PROV. EXP. 0.5 0.5 0.6 0.5

ADJ NII 1.4 1.8 1.4 1.5

TREASURY 0.6 0.2 0.1 0.1

INT. SENS. INC. 2.1 1.9 1.6 1.6

OTHER INC. 0.9 0.9 0.8 0.8

OP. INC. 2.9 2.8 2.4 2.4

OPEX 1.3 1.3 1.2 1.2

PBT 1.7 1.5 1.2 1.2

TAXES 0.5 0.4 0.2 0.4

ROA 1.2 1.1 1.0 0.8

LEVERAGE 18.6 19.8 19.5 19.2

ROE 21.9 21.9 19.0 15.5


BALANCE SHEET


RESERVE & SURPLUS 5,631 6,990 8,111 9,148

DEPOSITS 92,734 116,748 134,260 154,399

- GROWTH (%) 25.3 25.9 15.0 15.0

BORROWINGS 4,290 10,628 3,539 4,063

TIER 2 CAPITAL 4,788 5,338 6,085 6,876

OTHER LIAB. & PROV. 4,081 3,658 5,157 5,945




INVESTMENTS 34,523 43,453 43,346 51,535

ADVANCES 63,203 86,850 99,009 111,881

- GROWTH (%) 30.3 37.4 14.0 13.0

FIXED ASSETS 293 331 352 392

OTHER ASSETS 2,857 2,482 2,720 3,123

TOTAL ASSETS 111,667 143,509 157,301 180,578

- GROWTH (%) 28.5 28.5 9.6 14.8




- YOY GROWTH (%) 12.6 54.5 1.9 16.1

OTHER INCOME 1,493 1,324 1,488 1,510

- YOY GROWTH (%) 34.9 (11.3) 12.4 1.5


- YOY GROWTH (%) 21.4 25.5 5.2 11.2


- YOY GROWTH (%) 20.4 30.3 10.4 15.0


- YOY GROWTH (%) 22.0 22.7 1.9 8.7


- YOY GROWTH (%) 29.8 45.2 22.0 5.4


- YOY GROWTH (%) 19.9 16.3 (5.2) 10.2


- AS A % OF PBT 29.6 26.9 20.0 32.4

PAT 1,170 1,413 1,466 1,364

- YOY GROWTH (%) 31.1 20.8 3.7 (7.0)



Company BackgroundIndian Bank is a Chennai-based mid-size public sector bank, with 1,927branches and a balance sheet size of ~`1.3lakh cr. Around two-thirds of thebank's branches are spread across the southern states with majority beingin the parent state of Tamil Nadu (43%).

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as Indian Bank are expectedto gradually lose their market share as private sector banks make inroadsinto their hinterlands.

Competitive position: In the context of the overall sector, mid-size PSUbanks such as Indian Bank, in our view, have a relatively weak competitiveposition compared to private as well as large PSU banks.

Nature of business: Cyclical and rate-sensitive sector; significant entry barriersfor new players.

Current Investment ArgumentsHealthy profitability: Indian Bank's performance has broadly been positiveand balanced since its listing in 2007, leading to a gradual improvement inthe quality of earnings, visible amongst other things in the substantial 80bpdecline in the bank's operating costs as a percentage of assets. Additionally,the bank's CMD has a five-year tenure, which provides a reasonable strategicstability to the bank.

Relatively high yields: A large portion of SME and mid-corporate loans hascontributed to the bank's relatively high yield on advances, while asset qualityhas held up reasonably so far, resulting in the bank enjoying one of thehighest risk-adjusted yields in its peer group (90bp higher than sector averagein FY2011). This has supported NIMs, which, in FY2011, were higher thaneven larger banks having 40% CASA deposits vs. Indian Bank's 30%. Pastexperience shows that bank's that delivered high NIMs on the back of highyields later paid the price for the higher risk taken, in the form higher NPAsin subsequent years. Accordingly, going ahead, as in case of other bankswith unsustainably high yields, we are cautious on the bank's asset qualityand NIM outlook.

Valuations higher than peers: At the CMP, the stock is trading at 0.8xFY2013E ABV, which is at the lower end of its five-year range of 0.8-1.3x,providing valuation upsides as the macro environment improves. However,valuations are relatively high compared to peers, which are trading at 0.5-0.7x FY2013E ABV and even some of the larger banks trading at about 0.8xFY2013E ABV. As these relatively high valuations are primarily attributableto the bank's high NIMs, which may not sustain in the medium term, webelieve the risk-return trade-off in case of Indian Bank is less favorable.Hence, we recommend an Accumulate rating on the stock with a targetprice of `̀̀̀̀223, implying a 9.7% upside from current levels.

CMP/TP/Upside: `204 / `223 / 10%Indian Bank

RATING ACCUMULATE

52 WEEK HIGH / LOW 255 / 167


LIQUIDITY MEDIUM



FII 9.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

INDIAN BANK (2.7) (2.6) 17.0 - -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 16.6 16.5 19.5 20.6 20.5

PAT GROWTH* 12.7 10.5 19.9 27.0 NA

NIM# 3.5 3.7 3.6 3.5 3.4


Banking


BUY / HOLD / SELL 18 / 0 / 0

ANGEL ESTIMATES



ROE (%) 20.4 18.4

P/ABV 0.9 0.8


KEY RATIOS


NIMS 3.5 3.7 3.5 3.4


ROA 1.7 1.5 1.3 1.2

ROE 25.6 23.5 20.4 18.4

B/S RATIOS (%)

CASA RATIO 32.2 30.9 30.5 30.4


CAR 12.7 13.6 13.5 13.5

- TIER I 11.1 11.0 11.0 11.1

ASSET QUALITY (%)

GROSS NPAS 0.8 1.0 1.9 3.2

NET NPAS 0.2 0.5 0.9 1.2

SLIPPAGES 1.1 1.5 1.9 2.2




EPS 35.1 38.8 40.0 41.8


DPS 6.5 7.5 7.5 8.0


KEY RATIOS

VALUATION RATIOS

P/E 5.8 5.2 5.1 4.9

P/ABV 1.3 1.1 0.9 0.8

DIVIDEND YIELD (%) 3.2 3.7 3.7 3.9

DUPONT ANALYSIS

NII 3.4 3.6 3.4 3.3

(-) PROV. EXP. 0.4 0.6 0.7 0.7

ADJ NII 3.0 3.0 2.7 2.6

TREASURY 0.4 0.1 0.1 0.0

INT. SENS. INC. 3.4 3.2 2.8 2.6

OTHER INC. 1.0 0.9 0.8 0.8

OP. INC. 4.4 4.1 3.6 3.4

OPEX 1.9 1.7 1.6 1.6

PBT 2.5 2.4 2.0 1.8

TAXES 0.9 0.8 0.6 0.6

ROA 1.7 1.5 1.3 1.2

LEVERAGE 15.3 15.3 15.3 15.2

ROE 25.6 23.5 20.4 18.4


BALANCE SHEET


- EQUITY 430 430 430 430

- PREFERENCE 400 400 400 400

RESERVE & SURPLUS 7,442 8,691 10,034 11,433

DEPOSITS 88,228 105,804 121,675 138,709

- GROWTH (%) 21.6 19.9 15.0 14.0

BORROWINGS 657 800 2,840 3,234

TIER 2 CAPITAL 300 1,300 1,521 1,734

OTHER LIAB. & PROV. 3,932 4,293 5,118 5,772




INVESTMENTS 28,268 34,784 39,640 45,071

ADVANCES 62,146 75,250 88,042 100,368

- GROWTH (%) 20.8 21.1 17.0 14.0

FIXED ASSETS 1,580 1,606 1,818 2,008

OTHER ASSETS 1,282 1,516 1,769 2,015

TOTAL ASSETS 101,389 121,718 142,018 161,712

- GROWTH (%) 20.5 20.1 16.7 13.9




- YOY GROWTH (%) 21.2 27.7 11.6 11.2

OTHER INCOME 1,316 1,182 1,224 1,254

- YOY GROWTH (%) 27.1 (10.2) 3.6 2.4


- YOY GROWTH (%) 22.9 16.5 9.8 9.3


- YOY GROWTH (%) 22.3 11.3 12.6 13.6


- YOY GROWTH (%) 23.3 19.8 8.2 6.7

PROVISION AND CONTINGENCIES 396 657 964 1,083

- YOY GROWTH (%) (10.6) 66.1 46.6 12.4


- YOY GROWTH (%) 31.7 12.0 (1.4) 4.6


- AS A % OF PBT 33.9 34.9 32.4 32.4

PAT 1,555 1,714 1,755 1,835

- YOY GROWTH (%) 24.9 10.2 2.4 4.6

PREFERENCE DIVIDEND (INCL DDT) 46 46 37 37

PAT AVL. FOR EQ. SHAREHOLDERS 1,509 1,668 1,717 1,798

- YOY GROWTH (%) 25.5 10.5 2.9 4.7



Company BackgroundAndhra Bank is a mid-size PSU bank, with a balance sheet size of~`1.2lakh cr. The bank has a network of over 1,652 branches, mainly concentratedin the southern region (66% in the parent state of Andhra Pradesh).

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as Andhra Bank are expectedto gradually lose their credit market share, as private sector banks makeinroads into their hinterlands.

Competitive position: In the context of the overall sector, mid-size PSUbanks, in our view, have a relatively weak competitive position compared toprivate as well as large PSU banks. Further, in case of Andhra Bank, asset-quality pressures going ahead could lead to underperformance within themid-PSU segment.


Current Investment ArgumentsModerate fee income, low CASA: During FY2007-11, fee income for thebank posted a CAGR of only 12.8% compared to advances reporting aCAGR of 26.5%. However, at 0.8% of overall assets for FY2011, fee incomefor the bank is moderate compared to other mid-size PSU banks. On theCASA front, the bank's market share has fallen by 35bp over FY2005-1HFY2012and the bank's CASA ratio, at 26.1%, is on the lower end compared topeers.

Risk-adjusted yields expected to fall: The bank has one of the highestyields in the industry (12.5% as of 2QFY2012), also reflected in the relativelystrong NIM of 3.3% (as of FY2011). This can be partly attributed to thebank's high concentration in the hinterland of its home state. That said, it isdifficult for banks to remain insulated from competition on the lending sideand, as a result, we expect a decline in the bank's risk-adjusted yields andoverall profitability over the medium term. Also, in the current environment,the bank's provisioning expenses are likely to increase at a faster rate, giventhe high yield on advances and relatively high exposure to riskier sectors.

Valuations provide inadequate margin of safety: At the CMP, the stock istrading at 0.7x FY2013E ABV, which is at the lower end of its five-yearrange of 0.7-1.3x, providing valuation upsides once the macro-environmentimproves. However, relatively high risk exposures, particularly the power sector(more than 20% of the loan book), create risk of higher deterioration in thebank’s asset quality in the coming quarters, in our view. Considering, thebank's peers are also trading at similar valuations of 0.7x, with similar orbetter asset-quality outlook, we remain Neutral on the stock.

CMP/TP/Upside: `97 / - / -Andhra Bank

RATING NEUTRAL



LIQUIDITY MEDIUM



FII 13.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ANDHRA BANK (20.8) (25.7) 19.1 1.6 28.2

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 15.9 30.3 27.9 20.3 19.3

PAT GROWTH* 4.3 21.2 30.1 21.1 26.5

NIM# 3.5 3.3 2.9 3.0 3.2


Banking

ANGEL ESTIMATES


PAT GROWTH (%) (0.9) (8.6)

ROE (%) 18.1 14.6

P/ABV 0.8 0.7


BUY / HOLD / SELL 10 / 2 / 2


KEY RATIOS


NIMS 2.8 3.3 3.3 3.1


ROA 1.3 1.3 1.1 0.8

ROE 26.0 23.2 18.1 14.6

B/S RATIOS (%)

CASA RATIO 29.4 29.1 28.4 28.8


CAR 13.9 14.4 13.8 13.6

- TIER I 8.2 9.7 9.4 9.2

ASSET QUALITY (%)

GROSS NPAS 0.9 1.4 3.6 5.5

NET NPAS 0.2 0.4 1.8 2.5

SLIPPAGES 0.9 1.4 3.5 3.5




EPS 21.6 22.6 22.4 20.5


DPS 5.0 5.5 5.0 4.5


KEY RATIOS

VALUATION RATIOS

P/E 4.5 4.3 4.3 4.7

P/ABV 1.1 0.8 0.8 0.7

DIVIDEND YIELD (%) 5.2 5.7 5.2 4.6

DUPONT ANALYSIS

NII 2.8 3.2 3.2 3.1

(-) PROV. EXP. 0.5 0.6 0.9 1.0

ADJ NII 2.3 2.6 2.3 2.1

TREASURY 0.4 0.1 0.0 0.0

INT. SENS. INC. 2.7 2.7 2.4 2.1

OTHER INC. 0.8 0.8 0.7 0.6

OP. INC. 3.5 3.5 3.0 2.8

OPEX 1.7 1.7 1.5 1.5

PBT 1.8 1.8 1.5 1.2

TAXES 0.5 0.5 0.4 0.4

ROA 1.3 1.3 1.1 0.8

LEVERAGE 19.7 18.3 17.0 17.5

ROE 26.0 23.2 18.1 14.6


BALANCE SHEET


RESERVE & SURPLUS 3,925 5,933 6,864 7,719

DEPOSITS 77,688 92,156 108,744 123,969

- GROWTH (%) 30.8 18.6 18.0 14.0

BORROWINGS 2,832 4,620 5,442 6,193

TIER 2 CAPITAL 3,020 3,020 3,382 3,822

OTHER LIAB. & PROV. 2,392 2,612 3,284 3,714




INVESTMENTS 20,881 24,204 34,703 40,128

ADVANCES 56,114 71,435 80,008 90,409

- GROWTH (%) 27.1 27.3 12.0 13.0

FIXED ASSETS 356 317 363 400

OTHER ASSETS 1,825 2,485 2,927 3,331

TOTAL ASSETS 90,342 108,901 128,275 145,976

- GROWTH (%) 31.9 20.5 17.8 13.8




- YOY GROWTH (%) 34.9 46.8 18.5 10.1

OTHER INCOME 965 897 838 926

- YOY GROWTH (%) 26.0 (7.0) (6.6) 10.5


- YOY GROWTH (%) 32.1 30.3 13.0 10.2


- YOY GROWTH (%) 22.2 26.3 7.5 14.4


- YOY GROWTH (%) 40.5 33.3 16.9 7.5

PROVISION AND CONTINGENCIES 374 646 1,077 1,334

- YOY GROWTH (%) (4.1) 72.8 66.7 23.8


- YOY GROWTH (%) 59.9 23.1 (1.3) (2.6)


- AS A % OF PBT 27.2 28.3 28.0 32.4

PAT 1,046 1,267 1,256 1,148

- YOY GROWTH (%) 60.1 21.2 (0.9) (8.6)



Company BackgroundUnited Bank of India is a mid-size public sector bank, with operations mostlyconcentrated in the eastern and northeastern states of India (81%). Thesestates have contributed to the bank's high CASA deposits, though low creditdemand especially in the northeast has prompted the bank to so far relymore on large corporate loans, including in consortium.

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as United Bank of India areexpected to gradually lose their credit market share as private sector banksmake inroads into their hinterlands.

Competitive position: In the context of the overall sector, mid-size PSUbanks, in our view, have a relatively weak competitive position compared toprivate as well as large PSU banks.


Current Investment ArgumentsHigh CASA ratio with healthy growth in savings account deposits: UnitedBank of India has grown its CASA deposits at a healthy CAGR of 19.4%over FY2007-11 compared to 12.2% for its peers. A high CASA ratio (39.9%as of 2QFY2012) has allowed the bank to maintain healthy margins (3.2%for 2QFY2012). The bank has further levers in the form of low CD ratio(69.4% as of 2QFY2012) and change in loan mix (retail and SME constitutea low 30.0% of total advances as of 2QFY2012) for improving its margins.

Asset quality has been a concern recently: The bank's slippage run-rateaveraged ~`250cr for FY2011; however, in 2QFY2012, this figure has jumpedmore than 2x to `621cr. While partly attributable to the shift to system-based NPA recognition platform, chunky NPAs from some large corporateaccounts, particularly iron and steel, have also added to the pain (lent inconsortium). The bank's risk-adjusted yields are already on the lower sideand, in our view, should see improvement in the medium term; however, inthe near term, asset quality could remain volatile.

Valuations inexpensive: We believe the bank has several levers for structurallyimproving its ROA, but challenges of improving yields while maintaining theasset quality continue to remain an investment concern on the stock. Thatsaid, the bank is trading at inexpensive valuations of 0.6x FY2013E ABV(one of the lowest in the industry). The bank's peers are trading in the rangeof 0.6x-0.8x FY2013 ABV, in spite of having similar and in some cases muchlower CASA ratios. We value the stock at 0.7x FY2013E ABV; and hence,recommend a Buy rating on the stock with a target price of `̀̀̀̀70.

CMP/TP/Upside: `60 / `70 / 17%United Bank of India

RATING BUY



LIQUIDITY LOW



FII 0.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

UNITED BANK (17.0) (35.9) - - -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 15.9 43.9 27.0 14.0 15.3

PAT GROWTH* 13.7 49.7 46.6 17.4 37.3

NIM# 2.9 2.7 2.3 2.4 2.9


Banking

ANGEL ESTIMATES


PAT GROWTH (%) (0.7) 9.5

ROE (%) 12.1 12.1

P/ABV 0.6 0.6




KEY RATIOS


NIMS 2.1 2.7 2.7 2.7


ROA 0.5 0.6 0.6 0.6

ROE 11.6 14.1 12.1 12.1

B/S RATIOS (%)

CASA RATIO 38.1 40.8 42.1 42.2


CAR 12.8 13.1 13.1 12.6

- TIER I 8.2 8.9 8.8 8.4

ASSET QUALITY (%)

GROSS NPAS 3.2 2.5 4.0 5.5

NET NPAS 1.8 1.4 2.3 2.8

SLIPPAGES 2.7 2.3 3.4 3.4




EPS 9.6 13.3 13.2 14.4


DPS 2.0 2.2 2.5 3.0


KEY RATIOS

VALUATION RATIOS

P/E 6.2 4.5 4.5 4.2

P/ABV 0.7 0.6 0.6 0.6

DIVIDEND YIELD (%) 3.3 3.7 4.2 5.0

DUPONT ANALYSIS

NII 2.0 2.6 2.6 2.6

(-) PROV. EXP. 0.7 1.0 1.0 0.9

ADJ NII 1.3 1.6 1.6 1.7

TREASURY 0.3 0.2 0.1 0.1

INT. SENS. INC. 1.6 1.8 1.8 1.8

OTHER INC. 0.5 0.5 0.5 0.5

OP. INC. 2.1 2.3 2.3 2.3

OPEX 1.5 1.6 1.5 1.5

PBT 0.6 0.8 0.8 0.8

TAXES 0.1 0.2 0.3 0.3

ROA 0.5 0.6 0.6 0.6

PREFERENCE DIVIDEND 0.0 0.1 0.1 0.1

ROA AFTER PREF DIV 0.4 0.5 0.5 0.5

LEVERAGE 26.4 25.8 25.3 25.6

ROE 11.6 14.1 12.1 12.1


BALANCE SHEET

SHARE CAPITAL 866 1,144 1,144 1,144

- EQUITY 316 344 344 344

- PREFERENCE 550 800 800 800

RESERVE & SURPLUS 3,037 3,877 4,231 4,608

DEPOSITS 68,180 77,845 85,629 96,761

- GROWTH (%) 25.0 14.2 10.0 13.0

BORROWINGS 915 2,887 2,968 3,344

TIER 2 CAPITAL 1,525 1,525 1,769 1,999

OTHER LIAB. & PROV. 2,481 2,763 3,188 3,613




INVESTMENTS 26,068 26,259 26,107 29,225

ADVANCES 42,330 53,502 62,063 70,131

- GROWTH (%) 19.6 26.4 16.0 13.0

FIXED ASSETS 651 819 873 954

OTHER ASSETS 1,578 2,133 2,343 2,640

TOTAL ASSETS 77,005 90,041 98,930 111,469

- GROWTH (%) 24.1 16.9 9.9 12.7




- YOY GROWTH (%) 19.8 55.9 14.6 11.6

OTHER INCOME 559 637 640 631

- YOY GROWTH (%) 13.8 14.0 0.4 (1.4)


- YOY GROWTH (%) 18.0 43.9 11.4 9.0


- YOY GROWTH (%) 2.8 21.0 6.3 15.0


- YOY GROWTH (%) 44.2 72.1 15.8 4.2


- YOY GROWTH (%) 8.0 80.1 12.4 1.7


- YOY GROWTH (%) 132.6 63.0 20.0 7.1


- AS A % OF PBT 21.5 21.7 32.4 32.4

PAT 322 524 542 581

- YOY GROWTH (%) 181.0 62.5 3.5 7.1

PREFERENCE DIVIDEND 17 67 88 84

PAT AVL. TO EQ. SHAREHOLDERS 305 457 454 497

- YOY GROWTH (%) 166.1 49.7 (0.7) 9.5



Company BackgroundVijaya Bank is a mid-size PSU bank with a balance sheet size of ~`90,000cr.The bank's branches are mainly concentrated in the southern states (~60%),with majority being in the parent state of Karnataka (~40%). The bank, unlikemost other PSU banks, has more than half of its branches located in theurban and metropolitan areas (~56%).

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as Andhra Bank are expectedto gradually lose their credit market share as private sector banks makeinroads into their hinterlands.

Competitive position: In the context of the overall sector, mid-size PSUbanks, in our view, have a relatively weak competitive position compared toprivate as well as large PSU banks. Moreover, in our view, Vijaya Bank isstructurally weaker compared to its peers in terms of relatively low CASAdeposits, higher operating costs and lower fee income as a percentage ofassets.


Current Investment ArgumentsUnfavorable deposit mix: The bank's CASA market share has declinedcontinuously over FY2005-1HFY2012 (42bp) and stands at a small 1.0%as of 1HFY2012. In fact, with the persistence of higher FD interest rates,the bank has seen further erosion in its CASA ratio over the past few quarters.Along with a low CASA ratio (25% as of 2QFY2012), the bank also has ahigh proportion of bulk deposits (~33% as of FY2011). Owing to anunfavorable deposit mix, we expect the bank's NIM to remain under pressurein the medium term.

Lower return ratios: The bank's RoA and RoE, at 0.5% and 13.8% in FY2011,are on the lower side. Apart from low CASA, this is also on account of lowerfee income (0.55% of average assets as of FY2011) and high operatingexpenses (1.65% of average assets). The bank is also facing asset-qualitypressures, as evident in its higher slippages (5.0% in 1QFY2012 and 3.7%for 2QFY2012) and lower provision coverage ratio of 66.1% as of 2QFY2012.

Valuations seem justified: Considering the persistent asset-quality issuesand lower estimated RoAs, the current valuations of 0.7x FY2013E ABVlook expensive compared to peers that have better return ratios and earningsprofile. The bank, in our view, is commanding high valuations due to expectationsof large recoveries from its existing NPAs. However, we believe these valuationsprovide inadequate comfort in light of the bank's weaker fundamentals. Hence,we have a Neutral rating on the stock.

CMP/TP/Upside: `53 / - / -Vijaya Bank

RATING NEUTRAL



LIQUIDITY MEDIUM



FII 4.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

VIJAYA BANK (3.8) (41.7) 17.4 1.5 22.2

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 2.3 16.5 22.1 13.1 14.9

PAT GROWTH* 41.0 3.3 13.2 32.8 22.2

NIM# 2.5 2.6 2.3 2.3 3.0


Banking



ANGEL ESTIMATES


PAT GROWTH (%) 10.0 (2.9)

ROE (%) 13.3 11.6

P/ABV 0.7 0.7


CASH FLOW


NIMS 2.3 2.6 2.3 2.4


ROA 0.7 0.5 0.5 0.5

ROE 18.8 13.8 13.3 11.6

B/S RATIOS (%)

CASA RATIO 24.6 25.3 25.3 25.7


CAR 12.5 13.9 15.8 15.2

- TIER I 7.7 9.9 9.3 8.9

ASSET QUALITY (%)

GROSS NPAS 2.4 2.6 3.1 4.8

NET NPAS 1.4 1.5 5.6 6.7

SLIPPAGES 3.4 3.2 4.7 4.0




EPS 10.8 8.8 9.8 9.5


DPS 2.5 2.5 2.0 2.0


KEY RATIOS

VALUATION RATIOS

P/E 4.9 6.0 5.3 5.5

P/ABV 0.9 0.8 0.7 0.7

DIVIDEND YIELD (%) 4.8 4.8 3.8 3.8

DUPONT ANALYSIS

NII 2.2 2.6 2.3 2.3

(-) PROV. EXP. 0.5 0.6 0.7 0.7

ADJ NII 1.6 2.0 1.6 1.6

TREASURY 0.4 0.2 0.1 0.1

INT. SENS. INC. 2.1 2.1 1.7 1.7

OTHER INC. 0.6 0.5 0.6 0.5

OP. INC. 2.7 2.7 2.2 2.2

OPEX 1.6 1.9 1.4 1.4

PBT 1.1 0.8 0.9 0.8

TAXES 0.3 0.1 0.2 0.3

ROA 0.7 0.5 0.5 0.5

LEVERAGE 26.6 25.4 25.0 25.7

ROE 18.8 13.8 13.3 11.6


BALANCE SHEET

SHARE CAPITAL 934 1,673 1,673 1,673

RESERVE & SURPLUS 2,542 3,144 3,499 3,837

DEPOSITS 61,932 73,248 82,771 92,703

- GROWTH (%) 13.6 18.3 13.0 12.0

BORROWINGS 289 525 1,404 1,567

TIER 2 CAPITAL 1,650 1,500 1,830 2,068

OTHER LIAB. & PROV. 2,877 1,600 2,439 2,646



BAL.WITH BANKS & MONEY AT CALL 1,450 542 1,872 2,090

INVESTMENTS 21,107 25,139 24,181 26,170

ADVANCES 41,522 48,719 59,437 67,163

- GROWTH (%) 17.1 17.3 22.0 13.0

FIXED ASSETS 493 486 540 585

OTHER ASSETS 1,551 1,924 2,205 2,461

TOTAL ASSETS 70,222 81,691 93,615 104,495

- GROWTH (%) 12.5 16.4 14.6 11.6




- YOY GROWTH (%) 28.8 34.3 2.7 14.0

OTHER INCOME 679 533 551 609

- YOY GROWTH (%) (2.8) (21.5) 3.3 10.6


- YOY GROWTH (%) 16.7 16.5 2.8 13.3


- YOY GROWTH (%) 15.9 33.8 (16.5) 13.4


- YOY GROWTH (%) 17.6 (1.0) 29.2 13.2


- YOY GROWTH (%) (0.4) 23.3 37.8 16.3


- YOY GROWTH (%) 29.5 (13.3) 23.1 10.7


- AS A % OF PBT 27.6 13.8 23.0 32.4

PAT 507 524 576 560

- YOY GROWTH (%) 93.3 3.3 10.0 (2.9)



Company BackgroundBank of Maharashtra (BoM) is a mid-size Pune-based public sector bank,with operations mostly concentrated in the parent state of Maharashtra (~65%branches as of FY2011). The bank has the highest number of branches inMaharashtra (1,021 as of FY2011) after State Bank of India, which hasallowed the bank to grow in-line with the state's progress over the pastdecade.

Structural SnapshotGrowth opportunity: Mid-size PSU banks such as BoM are expected togradually lose their credit market share as private sector banks make inroadsinto their hinterlands.

Competitive position: In the context of the overall sector, mid-size PSUbanks, in our view, have a relatively weak competitive position compared toprivate as well as large PSU banks. However, amongst mid-size PSU banks,BoM benefits from having ~65% of its branches in Maharashtra, which hashealthy credit demand (evidenced from the state's high credit to GDP of157% compared to pan-India ratio of 72.7%).


Current Investment ArgumentsBetter asset quality than peers: The bank does not have materially highexposure to any industry, except the power sector (13.0% of overall grossadvances), of which 71% is towards SEB lending, where no material NPVloss is expected. Also, the bank had implemented system-based NPA recognitionsystem in FY2011 itself and since then has been seeing recoveries andupgrades from technical slippages. Conservative credit growth, moderateyield loan book and recoveries post CBS implementation have allowed thebank to progressively improve its asset quality over the past few quarters.The bank's capital adequacy is below 8%, but it expects adequate equitycapital infusion from the government to take it above 8%.

Healthy CASA ratio: BoM has enjoyed a healthy CASA ratio in the vicinityof 40% over the past several years on the back of strong rural andsemi-urban presence (accounting for ~55% of the entire branch network).The bank also has a large share of local government accounts in Maharashtra(~30% of saving accounts) and gets healthy fee income business from thestate government.

Valuation inexpensive for BoM: At the CMP, the stock is trading at attractivevaluations, in our view, of 0.7x FY2013E ABV vs. its five-year range of0.6-1.2x and median of 0.9x. On the back of high NIM, moderate fee incomeand better asset quality than peers, we expect the bank to deliver a healthy26.3% earnings CAGR over FY2011-13E. We value the stock at 0.8x and,hence, recommend a Buy rating with a target price of `̀̀̀̀53, implying anupside of 18.4%.

CMP/TP/Upside: `45 / `53 / 18%Bank of Maharashtra

RATING BUY



LIQUIDITY MEDIUM



FII 0.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BANK OF MAHA. (3.5) (25.6) 22.8 (1.1) -

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 23.2 32.4 18.3 16.8 12.3

PAT GROWTH* 50.2 (32.5) (3.3) 42.3 20.7

NIM# 3.4 2.8 2.4 2.6 2.8


BankingBanking

ANGEL ESTIMATES


PAT GROWTH (%) 40.3 58.4

ROE (%) 13.7 16.9

P/ABV 0.7 0.7




KEY RATIOS


NIMS 2.1 2.8 3.3 3.4


ROA 0.7 0.4 0.5 0.7

ROE 19.7 11.3 13.7 16.9

B/S RATIOS (%)

CASA RATIO 36.9 40.4 40.4 39.4


CAR 12.8 13.4 13.6 15.3

- TIER I 5.7 8.0 7.9 9.4

ASSET QUALITY (%)

GROSS NPAS 3.0 2.5 2.8 4.3

NET NPAS 1.6 1.3 0.6 1.0

SLIPPAGES 2.5 1.7 1.8 2.7




EPS 10.2 6.2 8.6 9.8


DPS 2.0 2.0 1.5 2.0


KEY RATIOS

VALUATION RATIOS

P/E 4.4 7.3 5.2 4.6

P/ABV 0.9 0.8 0.7 0.7

DIVIDEND YIELD (%) 4.4 4.4 3.3 4.4

DUPONT ANALYSIS

NII 2.0 2.7 3.2 3.2

(-) PROV. EXP. 0.4 0.6 1.2 1.0

ADJ NII 1.6 2.0 1.9 2.3

TREASURY 0.3 0.1 0.0 0.0

INT. SENS. INC. 1.9 2.1 2.0 2.3

OTHER INC. 0.6 0.6 0.7 0.7

OP. INC. 2.5 2.8 2.7 3.0

OPEX 1.6 2.2 1.8 1.8

PBT 0.9 0.5 0.9 1.2

TAXES 0.2 0.1 0.3 0.4

ROA 0.7 0.4 0.6 0.8

PREFERENCE DIVIDEND - 0.0 0.1 0.1

ROA AFTER PREF DIV. 0.7 0.4 0.5 0.7

LEVERAGE 29.1 27.6 26.0 23.1

ROE 19.7 11.3 13.7 16.9


BALANCE SHEET

SHARE CAPITAL 431 1,070 1,070 1,260

RESERVE & SURPLUS 2,428 2,901 3,233 4,402

DEPOSITS 63,304 66,845 74,198 84,585

- GROWTH (%) 21.1 5.6 11.0 14.0

BORROWINGS 129 577 640 735

TIER 2 CAPITAL 2,668 2,500 2,875 3,335

OTHER LIAB. & PROV. 2,096 2,550 2,835 3,082



BAL.WITH BANKS & MONEY AT CALL 1,379 203 424 487

INVESTMENTS 21,324 22,491 22,360 25,075

ADVANCES 40,315 46,881 53,913 62,539

- GROWTH (%) 17.6 16.3 15.0 16.0

FIXED ASSETS 660 667 718 799

OTHER ASSETS 2,063 2,354 2,613 3,000

TOTAL ASSETS 71,056 76,442 84,851 97,398

- GROWTH (%) 20.4 7.6 11.0 14.8




- YOY GROWTH (%) 3.2 51.9 29.3 15.9

OTHER INCOME 591 531 617 630

- YOY GROWTH (%) 18.2 (10.2) 16.2 2.1


- YOY GROWTH (%) 7.5 32.4 26.5 13.2


- YOY GROWTH (%) 11.4 53.2 (12.0) 13.0

PRE - PROVISION PROFIT 815 855 1,715 1,945

- YOY GROWTH (%) 2.6 5.0 100.5 13.4


- YOY GROWTH (%) (13.0) 90.1 111.0 (11.0)

PROFIT BEFORE TAX 569 388 729 1,067

- YOY GROWTH (%) 11.3 (31.8) 88.0 46.4


- AS A % OF PBT 22.7 14.8 34.0 32.4

PAT 440 330 481 721

- YOY GROWTH (%) 17.2 (24.8) 45.6 49.8

PREFERENCE DIVIDEND - 34 65 62

PAT AVL. TO EQ. SHAREHOLDERS 440 297 416 659

- YOY GROWTH (%) 17.2 (32.5) 40.3 58.4



Company BackgroundJammu and Kashmir (J&K) Bank is a mid-size public sector bank, with abranch network of over 550 branches and operations mostly concentratedin the parent state of J&K (~80% branches as of FY2011). The bank hasthe highest number of branches (~450) in J&K (SBI with 156 branchescomes a distant second), allowing the bank to maintain a favorable depositmix along with healthy margins.

Structural SnapshotGrowth opportunity: The bank's growth potential is linked to that of J&Kstate, whose GDP is at present growing at 6.6%, below India's overall GDPgrowth rate of 7-8% and where credit demand is below the country's average(credit-to-GDP at 52% vs. 88% at all-India level).

Competitive position: In the context of the overall sector, mid-size PSUbanks, in our view, have a relatively weak competitive position compared toprivate as well as large PSU banks. However, J&K Bank is mostly insulatedfrom competition in its core market areas, rendering slight advantage to thebank compared to other mid-size PSU banks.


Current Investment ArgumentsRobust asset quality: Over the years, the bank has maintained robust assetquality, with the best-in-industry provision coverage ratio (92.0% as of 2QFY2012).Slippages declined considerably (0.8% for 2QFY2012 compared to 1.3%for 4QFY2011) and were lower compared to most other PSU banks in2QFY2012.

Strong branch network and legacy - Dominant market share: The bank,with ~450 branches, has the highest number of branches in J&K (SBI with156 comes a distant second). Due to its strong branch network and legacyof banking relationships, the bank has a dominant 70% market share in depositsin J&K. CASA deposits constituted strong 47.8% of incremental depositsgrowth from FY2004-11. This strong base of low-cost deposits is expectedto sustain relatively high NIM of 3.2-3.4% vs. other mid-size banks.

Outlook and valuation: The stock is trading at 0.8x FY2013E ABV vis-à-visits historic range of 0.8-1.4x and five-year median of 1.0x. Immediate leversin the form of increased CD ratio from the current low of 59.5% to higheryielding advances are likely to provide near-term higher momentum to NIIgrowth for the bank relative to other mid-size banks. However, the bank'sincreasing non-J&K exposure on the asset side poses medium-term concerns.Also, the stock has been one of the best-performing stocks in the PSUspace in the past one year and current relatively high valuations are likely tolimit outperformance. Hence, we recommend an Accumulate rating onthe stock with a target price of `̀̀̀̀820.

CMP/TP/Upside: `742 / `820 / 11%J&K Bank

RATING ACCUMULATE

52 WEEK HIGH / LOW 915 / 645


LIQUIDITY MEDIUM



FII 24.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

J&K BANK (10.3) 3.7 33.7 3.6 31.8

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 13.1 24.3 21.1 19.8 15.9

PAT GROWTH* 22.3 20.1 19.6 28.3 13.9

NIM# 3.5 3.4 3.1 3.0 3.0


Banking

ANGEL ESTIMATES


PAT GROWTH (%) 23.7 6.6

ROE (%) 20.2 18.6

P/ABV 0.9 0.8


BUY / HOLD / SELL 10 / 2 / 0


KEY RATIOS


NIMS 2.9 3.4 3.4 3.5


ROA 1.3 1.3 1.4 1.4

ROE 18.2 19.0 20.2 18.6

B/S RATIOS (%)

CASA RATIO 40.7 40.5 40.1 40.7


CAR 15.9 13.7 14.2 14.9

- TIER I 12.8 11.3 11.8 12.5

ASSET QUALITY (%)

GROSS NPAS 2.0 1.9 2.3 2.9

NET NPAS 0.3 0.2 0.3 0.5

SLIPPAGES 0.9 1.2 1.3 1.6




EPS 105.7 126.9 157.0 167.4


DPS 22.0 26.0 32.0 34.0


KEY RATIOS

VALUATION RATIOS

P/E 7.0 5.8 4.7 4.4

P/ABV 1.2 1.0 0.9 0.8

DIVIDEND YIELD (%) 3.0 3.5 4.3 4.6

DUPONT ANALYSIS

NII 2.8 3.3 3.4 3.4

(-) PROV. EXP. 0.4 0.5 0.4 0.4

ADJ NII 2.4 2.9 3.0 3.0

TREASURY 0.4 0.2 0.0 0.0

INT. SENS. INC. 2.8 3.1 3.1 3.0

OTHER INC. 0.6 0.6 0.6 0.6

OP. INC. 3.4 3.6 3.6 3.6

OPEX 1.4 1.6 1.5 1.5

PBT 2.0 2.0 2.1 2.0

TAXES 0.7 0.7 0.7 0.7

ROA 1.3 1.3 1.4 1.4

LEVERAGE 14.2 14.3 14.2 13.5

ROE 18.2 19.0 20.2 18.6


BALANCE SHEET


RESERVE & SURPLUS 2,962 3,430 4,011 4,631

DEPOSITS 37,237 44,676 50,037 54,540

- GROWTH (%) 12.8 20.0 12.0 9.0

BORROWINGS 500 505 424 463

BOND CAPITAL 600 600 672 732

OTHER LIAB. & PROV. 1,199 1,249 1,377 1,419



BAL.WITH BANKS & MONEY AT CALL 1,870 574 1,131 1,237

INVESTMENTS 13,956 19,696 20,354 20,222

ADVANCES 23,057 26,194 30,647 35,550

- GROWTH (%) 10.2 13.6 17.0 16.0

FIXED ASSETS 204 394 428 454

OTHER ASSETS 715 676 757 828

TOTAL ASSETS 42,547 50,508 56,569 61,835

- GROWTH (%) 12.9 18.7 12.0 9.3




- YOY GROWTH (%) 11.9 37.9 16.9 11.1

OTHER INCOME 416 365 325 372

- YOY GROWTH (%) 59.2 (12.4) (11.0) 14.4


- YOY GROWTH (%) 21.7 24.3 11.6 11.6


- YOY GROWTH (%) 22.6 31.4 7.0 13.0

PRE-PROVISION PROFIT 958 1,149 1,317 1,458

- YOY GROWTH (%) 21.2 20.0 14.6 10.7


- YOY GROWTH (%) 4.6 29.1 (11.5) 34.8


- YOY GROWTH (%) 25.3 18.0 20.6 6.6


- AS A % OF PBT 35.3 34.2 32.4 32.4

PAT 512 615 761 812

- YOY GROWTH (%) 25.0 20.1 23.7 6.6



Company BackgroundHDFC is India's leading housing finance company, with a balance sheetsize of over `1.5lakh cr. The company's primary business is to provide loansfor the purchase or construction of residential houses. HDFC's distributionnetwork spans 298 outlets, covering more than 90 locations across India.From its origins as a specialized mortgage company, HDFC has grown intoa financial conglomerate with market leading group companies in banking,asset management and insurance.

Structural SnapshotGrowth opportunity: While overall credit penetration in India is in any caselow, the underpenetration is much starker in retail loans (it stands at ~6%of GDP in India, as against 70-100% in most developed countries). Growingurbanization, increasing number of nuclear families, rising disposable incomeand greater availability of cheap home loans are expected to drive healthy20%+ growth in the home loan segment over the medium to long term.

Competitive position: The housing finance industry is a keenly competitivesegment, with banks having a significant presence. However, large housingfinance companies, like HDFC, with a dedicated focus on thesegment - leading to robust loan sourcing and appraisal as well as highcredit rating enabling competitive cost of funds - should be able to withstandcompetition from banks, even going forward. The company also has one ofthe most well regarded top managements in the industry as well as awell-established conservative risk management philosophy.

Nature of business: Cyclical and rate-sensitive sector

Current Investment ArgumentsConsistency in performance: HDFC has witnessed healthy growth in itsloan portfolio, registering a CAGR of 21.1% over FY2006-11. During theperiod, HDFC's earnings have also witnessed an equally healthy 18.8%CAGR. This has been backed by the company's strong asset quality, lowoperating costs and ability to keep cost of funds on the lower side. Weexpect HDFC's loan book to continue growing at 20% over FY2011-13,resulting in earnings growth of 16.0% and an average RoE of 36.9% overthe same period.

Valuations expensive: At the CMP, HDFC's core business (after adjusting`226/share towards the value of subsidiaries) is trading at 4.4x FY2013EABV (including subsidiaries the stock is trading at 4.3x FY2013E ABV). Weexpect HDFC to post a healthy PAT CAGR of 15.7% over FY2011-13E.However, considering that the stock is currently trading at 4.3x one-yearforward P/ABV (only slightly lower than its median of 4.6x over the past fiveyears) and at a ~55% premium to the Sensex in P/E terms (compared to anaverage of ~37% over the past five years), we consider the stock to be fullyvalued and, hence, recommend Neutral on the stock.

NBFC CMP/TP/Upside: `691 / - / -HDFC

RATING NEUTRAL

52 WEEK HIGH / LOW 737 / 583

MARKET CAP (`̀̀̀̀ CR) 101,811

LIQUIDITY HIGH


PROMOTERS -

FII 59.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HDFC 2.5 5.8 30.7 16.6 27.4

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 9.9 23.7 13.0 24.3 22.6

PAT GROWTH* 10.1 25.1 13.2 23.0 22.3

NIM# 3.0 3.6 3.5 3.5 2.6


ANGEL ESTIMATES


PAT GROWTH (%) 15.0 16.3

ROE (%) 39.0 34.0

P/ABV 5.4 4.3


BUY / HOLD / SELL 22 / 20 / 3


KEY RATIOS


NIMS 3.4 3.6 3.4 3.3


ROA 2.6 2.9 2.7 2.6

ROE* 31.6 40.8 39.0 34.0

B/S RATIOS (%)


ASSET QUALITY (%)

GROSS NPAS 0.80 0.77 0.75 0.77

NET NPAS 0.13 - - -



EPS 19.7 24.1 27.7 31.1


DPS 7.2 9.0 10.4 11.6


KEY RATIOS

VALUATION RATIOS

P/E 35.1 28.7 24.9 22.2

P/ABV 6.5 5.9 5.4 4.3

DUPONT ANALYSIS*

NII 3.3 3.5 3.3 3.2

(-) PROV. EXP. 0.1 0.1 0.1 0.1

ADJ NII 3.2 3.5 3.3 3.1

TREASURY 0.2 0.3 0.2 0.2

INT. SENS. INC. 3.4 3.8 3.5 3.3

OTHER INC. 0.6 0.5 0.6 0.6

OP. INC. 4.0 4.3 4.1 4.0

OPEX 0.3 0.3 0.3 0.3

PBT 3.7 4.0 3.8 3.7

TAXES 1.1 1.1 1.1 1.0

ROA 2.6 2.9 2.7 2.6

LEVERAGE 12.0 14.2 14.3 12.9

ROE 31.6 40.8 39.0 34.0


BALANCE SHEET


RESERVE & SURPLUS 14,911 17,023 18,629 23,872

LOAN FUNDS 96,565 115,410 139,642 164,468

- GROWTH (%) 15.2 19.5 21.0 17.8

OTHER LIAB. & PROV. 4,878 6,775 8,567 10,326


INVESTMENTS 10,727 11,832 12,658 13,611

ADVANCES 97,967 117,127 141,723 170,068

- GROWTH (%) 15.0 19.6 21.0 20.0

FIXED ASSETS 222 234 276 323

OTHER ASSETS 7,725 10,309 12,474 14,969

TOTAL ASSETS 116,641 139,502 167,131 198,970

- GROWTH (%) 14.7 19.6 19.8 19.1




- YOY GROWTH (%) 10.9 25.4 13.5 17.4

OTHER INCOME 910 1,071 1,293 1,531

- YOY GROWTH (%) 71.3 17.7 20.7 18.5


- YOY GROWTH (%) 19.9 23.7 14.9 17.7


- YOY GROWTH (%) 2.4 17.7 15.0 20.0


- YOY GROWTH (%) 21.6 24.2 14.9 17.5


- YOY GROWTH (%) 16.0 20.7 11.1 100.6


- YOY GROWTH (%) 21.7 24.3 15.0 16.3


- AS A % OF PBT 27.8 27.4 27.4 27.4

PAT 2,826 3,535 4,064 4,725

- YOY GROWTH (%) 23.8 25.1 15.0 16.3




Company BackgroundLIC Housing Finance (LICHF) is the second biggest specialized mortgagelender in India, with a balance sheet size of ~`63,000cr. The credit portfoliofor LICHF is ~`56,000cr, of which more than 90% is derived from the retailsegment. The company has a network of over 200 offices spread acrossthe country and is promoted by the state-owned life insurance behemoth,Life Insurance Corporation of India (LIC), which owns a 37% stakein the company.

Structural SnapshotGrowth opportunity: While overall credit penetration in India is, in any case,low, the underpenetration is much starker in retail loans (it stands at ~6%of GDP in India, as against 70-100% in most developed countries). As aresult, we expect healthy 20%+ growth in the home loan segment over themedium to long term.

Competitive position: The housing finance industry is a keenly competitivesegment, with banks having a significant presence. However, large housingfinance companies, like LICHF, with a dedicated focus on the segment -leading to robust loan sourcing and appraisal as well as high credit ratingenabling competitive cost of funds - should be able to withstand competitionfrom banks, even going forward.

Nature of business: Cyclical and rate-sensitive sector.

Current Investment ArgumentsStrong pick-up in loan offtake over the past couple of years: LICHF hasbeen able to grow its loan book at a 35.9% CAGR over FY2009-11, drivenby a strong parent brand, success of its home loan products (~25% of itsloan book comprised teaser loans as of FY2011) and strategic focus ontier-2 and tier-3 cities to sell its home loans.

Concerns on the regulatory front: LICHF's loan disbursements throughits product 'Advantage-5' are still under scrutiny from the NHB and couldbe classified as teaser loan, leading to higher provisioning for the company.Also, capital adequacy requirements are relatively less strict for HFCs (12%CAR required with no specific requirement for tier-1 capital) as comparedto NBFCs (15% CAR required, 10% minimum tier-1 in case of IFCs). As ofFY2011, the CAR of LICHF stood at 14.6% (tier-1 ratio of 8.7% including1HFY2012 profits), and considering LICHF is leveraged 12-13 times,the company might experience equity dilution in future if CAR requirementsare raised. At present we have built in `500cr of capital infusion in thecompany.

Valuations reasonable: The stock used to trade in a lower range earlier(0.8x-2.0x and median of 1.25x), but it has been rerated over the past threeyears to a 1.9x average. At the CMP, the stock is trading at a P/ABV multipleof 1.8x FY2013E ABV. Considering that interest rates have peaked and thecompany has healthy growth prospects, we recommend an Accumulaterating on the stock with a target price of `̀̀̀̀262.

CMP/TP/Upside: `237 / `262 / 10%LIC Housing Finance

RATING ACCUMULATE

52 WEEK HIGH / LOW 254 / 164

MARKET CAP (`̀̀̀̀ CR) 11,271

LIQUIDITY HIGH


PROMOTERS (GOVT. INSTITUTION) 36.5

FII 40.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

LIC HOUSING 2.2 39.3 70.2 48.5 37.8

BANKEX (6.4) (12.5) 28.3 7.1 25.5



(%) 3M 1Y 3Y 5Y 10Y

OP. INC. GROWTH* 5.9 64.9 35.9 32.7 24.7

PAT GROWTH* (58.0) 47.2 36.0 36.1 23.1

NIM# 2.8 3.1 3.0 3.3 NA


NBFC

ANGEL ESTIMATES


PAT GROWTH (%) (0.0) 32.7

ROE (%) 20.3 21.7

P/ABV 2.2 1.8


BUY / HOLD / SELL 20 / 11 / 6


KEY RATIOS


NIMS 2.7 3.1 2.8 2.7


ROA 1.9 2.1 1.6 1.7

ROE 23.6 25.8 20.3 21.7

ASSET QUALITY (%)

GROSS NPAS 0.69 0.47 0.53 0.58

NET NPAS 0.12 0.03 0.05 0.06



EPS 13.9 20.5 19.6 26.1


DPS 3.0 3.5 3.3 4.4


KEY RATIOS

VALUATION RATIOS

P/E 17.0 11.6 12.1 9.1

P/ABV 3.3 2.7 2.2 1.8

DIVIDEND YIELD (%) 1.3 1.5 1.4 1.9

DUPONT ANALYSIS

NII 2.7 3.1 2.7 2.6

(-) PROV. EXP. (0.1) 0.6 0.5 0.2

ADJ NII 2.8 2.5 2.3 2.4

TREASURY 0.0 0.4 0.0 0.0

INT. SENS. INC. 2.8 2.9 2.3 2.4

OTHER INC. 0.4 0.3 0.3 0.3

OP. INC. 3.2 3.2 2.6 2.7

OPEX 0.6 0.5 0.4 0.4

PBT 2.6 2.8 2.2 2.3

TAXES 0.7 0.7 0.6 0.6

ROA 1.9 2.1 1.6 1.7

LEVERAGE 12.4 12.4 12.7 12.7

ROE 23.5 25.8 20.3 21.7


BALANCE SHEET


RESERVE & SURPLUS 3,293 4,074 5,350 6,387

LOAN FUNDS 34,758 45,163 58,887 72,431

- GROWTH (%) 36.7 29.9 30.4 23.0

OTHER LIAB. & PROV. 2,096 4,298 3,774 4,858


INVESTMENTS 1,389 1,403 1,783 2,196

ADVANCES 38,081 51,090 64,884 79,807

- GROWTH (%) 37.6 34.2 27.0 23.0

FIXED ASSETS 36 47 59 70

OTHER ASSETS 736 1,090 1,384 1,702

TOTAL ASSETS 40,242 53,630 68,110 83,775

- GROWTH (%) 37.0 33.3 27.0 23.0



NET INTEREST INCOME 937 1,441 1,667 1,991

- YOY GROWTH (%) 17.6 53.8 15.7 19.4

OTHER INCOME 137 331 193 228

- YOY GROWTH (%) 51.1 141.4 (41.6) 18.1


- YOY GROWTH (%) 21.1 65.0 5.0 19.3


- YOY GROWTH (%) 24.2 12.9 18.4 19.8


- YOY GROWTH (%) 20.4 76.3 3.2 19.2

PROVISION AND CONTINGENCIES (28) 261 288 166

- YOY GROWTH (%) (641.2) (1,017.3) 10.4 (42.3)


- YOY GROWTH (%) 25.2 42.1 1.7 32.7


- AS A % OF PBT 27.4 24.7 26.0 26.0

PAT 662 974 974 1,293

- YOY GROWTH (%) 24.6 47.2 (0.0) 32.7



Capital Goods NEUTRAL

Glass half fullIndia is going through a slowdown in investment cycle because of variouscyclical and structural issues - such as high interest rates, slowdown in consumerdemand, policy inaction and high inflationary pressures. We believe the environmentis gloomy and would remain the same for a few more quarters. Therefore, weare looking beyond the current slowdown and selecting companies that areexpected to excel and benefit from the next uptick in the investment cycle.We prefer companies that have a strong business model in place, experiencedmanagement at the helm of affairs, strong product portfolio and offer attractiverisk reward ratio.

Slowdown is here to be experienced…: The great Indian capex cycle, whichwitnessed a sharp increase in the past few years due to favorable policies,abundance liquidity and ever-burgeoning demand, has come to a standstill.A number of factors have led to this slowdown; these are structural (policyinaction and unavailability of resources like land and fuel) and cyclical (overcapacity,high interest rates, inflationary pressures and high commodity prices) in nature.Further, outbreak of scams and unfavorable government policies, such asenvironment clearance and uncertainty over tax regime, has also dented investor(domestic and international) confidence. Therefore, as expected, the numberof projects that have been stalled and cancelled has increased. Similarly,there has been an uptick in the number of shelved projects in recent times.Therefore, we believe there is some more pain left in the system (near term)as our economy grapples with these issues and given the world economy isalso in weak shape.

… But things to pick up going ahead: Notwithstanding, it should be notedthat there is a pertinent need of infrastructure in the country, which is acknowledgedby one and all - though it is difficult to gauge the timelines, given the numberof variables impacting it positively and negatively at any given point in time.Therefore, we believe the next upturn in the Indian capex cycle could be ledby infrastructure. Our analysis of potential ordering in various segments suggestsa healthy pipeline. Within the infrastructure segment, sectors such as power,metro rail, railways and defense, are likely to contribute more. We expectindustrial capex to subsequently increase, given its dependence on infrastructuregrowth. Sector wise, order pipeline from the cement sector looks weak, asthe sector grapples with an oversupply situation created during the boomtime. However, order pipeline from the steel segment looks strong. On thenon ferrous side, we expect a capex of >`60,000cr from three majors - Sterlite,Hindalco and Nalco - in the next five years.

Hence, we look beyond…: Based on an analysis of the above fundamentals,CRG (`134/`158/18%) and Jyoti (`50/`61/22%) are the top buys in ourcoverage universe. We continue to maintain our negative view on BHEL despitelow valuations, as we believe the company is facing structural issues.We maintainour Sell call on ABB (`727/`427/-41%) on account of expensive valuationsand Neutral on BGR, Thermax and KEC.


BTG

BHEL 266 - Neutral

BGR 228 - Neutral

T&D/Industrials

ABB 727 427 Sell

Crompton Greaves 134 158 Buy

Thermax 496 - Neutral

KEC Intl' 53 - Neutral

Jyoti Structures 50 61 Buy


Slowdown is here to be experienced…The great Indian capex cycle, which witnessed a sharp increasein the past few years due to favorable policies, abundance liquidityand ever-burgeoning demand, has come to a standstill. A numberof factors have led to this slowdown; these are structural (policyinaction and unavailability of resources like land and fuel) andcyclical (overcapacity, high interest rates, inflationary pressuresand high commodity prices) in nature. These factors have resultedin a slowdown in many capex projects. Further, outbreak ofscams and unfavorable government policies, such as environmentclearance and uncertainty over tax regime, has also dentedinvestor (domestic and international) confidence. Therefore, asexpected, the number of projects that have been stalled andcancelled has increased - for government and private alike. Thetotal project cost (TPC) of these projects increased to>`4 lakhcr in September 2011 (~41.0% yoy jump). Private sector (~47%yoy) projects have suffered more compared to government projects(~24.0% yoy). Similarly, there has been an uptick in the numberof shelved projects in recent times. Also, industrial productionactivity has been decelerating in the past year, which suggeststhat ordering for the capital goods sector could remain weakfor the next few quarters. Therefore, we believe there is somemore pain left in the system (near term) as our economy grappleswith these issues and given the world economy is also in doldrums.

Source: Industry data, Angel Research

Exhibit 2: ... so are projects cancelled

(5,000)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

4Q Avg - Govt 4Q Avg - Pvt

Jun-

95

Mar

-96

Dec

-96

Sep

-97

Jun-

98

Mar

-99

Dec

-99

Sep

-00

Jun-

01

Mar

-02

Dec

-02

Sep

-03

Jun-

04

Mar

-05

Dec

-05

Sep

-06

Jun-

07

Mar

-08

Dec

-08

Sep

-09

Jun-

10

Mar

-11

Dec

-11

(cr

)`

in the Indian capex cycle could be led by infrastructure. Ouranalysis of potential ordering in various segments suggests a healthypipeline. Within the infrastructure segment, sectors such as power,metro rail, railways and defense, are likely to contribute more.

… But things to pick up going aheadNotwithstanding, it should be noted that there is a pertinentneed of infrastructure in the country, which is acknowledgedby one and all - though it is difficult to gauge the timelines,given the number of variables impacting it positively and negativelyat any given point in time. Therefore, we believe the next upturn

Central sector Project Fuel State Capacity (MW)

NPCIL Kundamkulam Nuclear Tamil Nadu 2,000

NTPC Sipat STPP Coal Chattisgarh 1,980

NTPC Jajjhar Power plant Coal Haryana 1,500

NTPC Simhadri Stage 2 Coal AP 1,000

SJVNL Rampur Hydro Electric Project Hydro HP 414

NHPC Uri II Hydro J&K 240

State Sector

AP Power Develop & Co. Karim Nagar Gas AP 2,100

Pragati Power Pragati III Gas Delhi 1,500

Mahagenco Bhusawal TPS Expansion Coal Maha. 1,000

GSPC Pipavav Power Pipavav Power project Gas Gujarat 700

UPRUVNL Paricha TPS extn - Stg 2 Unt 5 Coal UP 500

Private Sector

Tata Power Mundra UMPP Coal Gujarat 4,000

Adani Power Mundra SEZ power plant Coal Gujarat 3,960

Reliance Power Sasan UMPP Coal MP 3,960

Essar Power Salaya Phase I & II Coal Gujarat 2,520

Sterlite Energy Jharsugudha Coal Orissa 2,400

India Bulls power Nashik TPP Coal Maha. 1,200

JP Associates Karcham Wangtoo Hydro HP 1,000

GVK Goindwal Sahib Power project Coal Punjab 540


Exhibit 3: Power projects expected to be commission in the next five years


Exhibit 1: Projects stalled are on a rise...

(50,000)

0

50,000

100,000

150,000

200,000

250,000

300,000

Jun-

95

Mar

-96

Dec

-96

Sep

-97

Jun-

98

Mar

-99

Dec

-99

Sep

-00

Jun-

01

Mar

-02

Dec

-02

Sep

-03

Jun-

04

Mar

-05

Dec

-05

Sep

-06

Jun-

07

Mar

-08

Dec

-08

Sep

-09

Jun-

10

Mar

-11

4Q Avg - Govt 4Q Avg - Pvt

Dec

-11

(cr

)`

Particulars Description Cost (US$ mn)

Transmission system for Karanpura 3,000 MW HVDC North karanpura 1,403(2000 MW)

East-South Link HVDC Bipole Phase II Hyderabad-Raichur-Davagere and(2,000 MW) Hyderabad-Gooty-Bangalore 830.0

Transmission for Parbati and Koldam - 660.0

Transmission System for Charra - 532.0(2,000MW)

Transmission system for Sipat Phase -II Seoni-Chhegaon (I I line) and(1,000 MW) Chhegaon-Nagda 765 kV SC 449.0

Transmission system for Damwe (1,000MW), Dehnang (520 MW)North Easter Hydel projects and Subansiri (500MW) 447.0

Transmission system for Jayamkondam - 293.0(2,000 MW)

Transmission system for Bhusawal Phase I I - 199.0(2,000 MW)

Transmission system for Sugen CCPP - NA(1100 MW)

Transmission system for Teesta III - NA(1,200MW)

Transmission system for Gas-BasedPower Plant near Hazira (1,500MW) - NA

Transmission system for Gas-BasedPower Plant near Pallatana (740 MW) - NA


Exhibit 4: Major T&D projects in the next five years

Capital Goods


Cost Length Planned

( `̀̀̀̀ cr) (km) completion date

Chennai Metro Rail Project 146,000 50 Dec-15

Hyderabad Elevated MRTS project 121,000 - Dec-13

Charkop-Bandra-Mankhurd-Metro Railway project 120,000 38 Dec-15

Delhi metro Rail project phase II 89,000 68 -

Bangalore Metro Rail Project 82,000 33 Dec-12

Kochi Metro Rail Project 30,000 25 Dec-11

Jacob Circle- Wadala-Chembur Monorail project route I - 25 -

Versova-Andheri-Ghatkopar Metro Rail Project 24,000 11 Mar-12


Exhibit 5: Major MRTS projects - Though they are behind schedule in most cases

We expect industrial capex to increase, given its dependenceon infrastructure growth. Sector wise, order pipeline from thecement sector looks weak, as the sector grapples with anoversupply situation created during the boom time. However,order pipeline from the steel segment looks strong. Major playerssuch as Tata Steel, JSW Steel, SAIL, POSCO, Arcelor Mittaland Vedanta have announced capacity addition plans totaling60mn tonnes, which are expected to be commissioned overthe next five years. On the non ferrous side, we expect a capexof >`60,000cr from three majors - Sterlite, Hindalco and Nalco- in the next five years.

Source: Industry data, Angel Research. It should be noted that some upwardrevision can be expected on the back of unannounced capex

Exhibit 6: Cement capex showing a downward trend45.7

25.9

20.3 20.624.4

18.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

FY10 FY11 FY12E FY13E FY14E FY15E

Expected Addition MnT

Company Capacity Location

(mn tonnes)

SAIL 10.0 Multiple states

JSPL 7.6 Orissa/Jharkhand

JSW Steel 6.2 Karnataka

Tata Steel 6.0 Orissa

Posco 6.0 Orissa/Karnataka

Arcelor Mittal 6.0 Jharkhand/Orissa

Vedanta 5.0 Orissa

Essar Steel 4.0 Orissa

Bhushan Steel 3.5 Orissa

RINL 2.7 Brownfield expansion (Vizag)

Monnet Ispat 2.4 Chattishgarh

Total 59.4


Exhibit 7: Major capacity expansion plans (next five years)


Exhibit 8: Expected industrial and infrastructure spend (`̀̀̀̀ cr)

37357

28349

9008

22057

14642

7415

0 10000 20000 30000 40000

Total

Infrastructure

Industrial

FY2006-10 FY2011-15

1.2x

1.9x

1.7x

Some activity on reforms - Attempt to resolve somestructural issuesThere have been some minor activities on the reform front inthe past six months, such as the new land reforms bill beingintroduced, some no-go areas being allowed for mining, newinfrastructure lending norms for setting up of debt funds, increasingconsensus on the likely imposition of import duties and higherpower tariffs by various SEBs.

Hence, we look beyond…We see a remote possibility of any near-term solution for theproblem in hand. However, we prefer to look beyond the currentslowdown and select companies that are expected to exceland benefit from the next uptick in the investment cycle. Theseinclude companies that have a strong business model in place,experienced management at the helm of affairs, strong productportfolio and offer attractive risk reward ratio.

Against this backdrop we prefer CRG (`134/`158/18%) andJyoti Structures(`50/`61/22%) as our top buys in our coverageuniverse. We continue to maintain our negative view on BHELdespite low valuations, as we believe the company is facingstructural issues.We maintain our Sell call on ABB (`727/`427/-41%) on account of expensive valuations and Neutral on BGR,Thermax and KEC.

Capital Goods


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

Exhibit 9: Our Coverage Universe Valuation Comparison P/E (x) P/BV (x) EPS CAGR (%) RoE(%)

Price FY11/ FY12E/ FY13E/ FY11/ FY12E/ FY13E/ FY09-11 FY11-13E FY11/ FY12E/ FY13E/

CY10 CY11E CY12E CY10 CY11E CY12E CY10 CY11E CY12E

BTG

BHEL 266 10.7 9.3 10.2 3.2 2.6 2.2 39.4 2.5 33.6 30.8 23.0

BGR 228 5.1 6.3 6.8 1.7 1.5 1.3 67.1 (13.4) 39.0 25.0 20.1

T&D/Industrials

ABB* 727 243.6 81.8 40.9 6.4 6.0 5.3 (66.0) 144.2 2.6 7.6 13.9

CRG 134 9.2 16.5 11.0 2.6 2.4 2.0 (2.7) (8.2) 33.8 15.1 19.9

Thermax 496 15.5 14.4 15.2 4.5 3.6 3.1 32.7 1.8 31.9 28.0 21.9

Kec Intl' 53 6.7 7.9 6.0 1.5 1.3 1.1 28.7 5.7 34.7 24.9 26.6

Jyoti Stryctures 50 4.1 3.5 4.1 0.7 0.6 0.5 8.0 0.1 18.7 18.5 13.7

Capital Goods


Exhibit 10: Capital Goods sector performance and rating comparisonAngel Rating Recommendation Stock price performance over

Buy Hold Sell 1m 3m 6m 12m

ABB Sell 0 5 34 31.8 2.0 (17.8) (1.4)

AIA Engineering Not Rated 4 2 5 7.8 (5.0) (22.9) (23.6)

BEML Ltd Not Rated 3 1 0 16.1 8.1 (8.4) (43.3)

Bharat Electronics Not Rated 11 0 0 6.2 (2.4) (13.0) (11.7)

BHEL Neutral 20 14 13 14.7 (18.1) (32.9) (39.1)

BGR Neutral 7 7 19 19.0 (29.7) (52.2) (63.8)

Carborundum Universal Not Rated 5 0 3 409 (9.5) (7.9) 14.6

Crompton Buy 16 13 16 16.4 (7.2) (35.7) (53.8)

Cummins India Not Rated 12 6 8 18.3 (2.0) (20.5) (26.2)

Larsen & Toubro Buy 37 8 4 23.4 (48.1) (59.9) (56.0)

Siemens India Not Rated 2 5 13 15.7 (10.4) (18.1) 1.6

Thermax Neutral 11 16 12 24.1 15.0 (15.5) (32.0)

Voltas Not Rated 12 7 12 12.3 (11.7) (44.6) (57.8)


Company BackgroundBHEL is the largest manufacturer of power equipment (boiler and turbinegenerators) in India with ~65% market share. The company operates in twosegments - power (80% of FY2011 revenues) and industry (20% of FY2011revenue). The company has 15 manufacturing facilities spread across thecountry with a combined manufacturing capacity of 15GW p.a. and is planningto reach 20GW p.a. by FY2012E. Sets produced by BHEL account for~62% of India's installed power capacity, which generate ~74% of India'spower. Notably, BHEL is the first domestic company to foray into the supercriticaltechnology.

Structural SnapshotGrowth opportunity: BHEL has strong revenue visibility for the next coupleof years owing to its robust order backlog of `1.6 lakh cr (3.8x FY2011revenue). However, there is uncertainty over the company's long-term growthprospects, considering the tough competition posed by international anddomestic players in recent times. In our view, even if BHEL manages to bagorders, against our expectations, they will come at a cost of its margins.

Nature of business: Technology-intensive, High RoE project business; Prospectsrely on the power sector.

Competitive position: Losing its dominant position in the power equipmentspace to domestic players (who have collaborated with foreign players) andinternational competitors.

Current Investment ArgumentsDeteriorating dynamics in the BTG space: Recent trends in biddings andprojects wins indicate that BHEL's leadership position is under threat, thushinting for a loss in its market share going ahead. Further, given the structuralissues faced by the power sector, times look tough for BTG players in thenear to medium term.

Concerns visible beyond 2013: While the current operating metrics appearsound (strong OB/Sales of 3.8x and 20% + EBITDA margin), we expectBHEL to face pressure going ahead. In our view, the company's growth andmargins are likely to trim mainly due to 1) deceleration of order inflow growthfrom a 26.2% CAGR over FY2006-11 to negative growth over FY2011-14E; and 2) a 200-250bp margin dip from FY2013 due to higher importedcontent of supercritical equipment. Hence, we believe the company’s earningscould face severe strain in the times to come.

More underperformance likely: BHEL has underperformed the Sensex by26.9% (vindicating our negative stance on the stock) over the last twelvemonths and is trading at historically low one-year forward valuations of 10.2xFY2013, owing to 1) delay in big-ticket orders; 2) weak investment capexand 3) changing competitive dynamics in the BTG space. We believe theseconcerns are far from over and, hence, expect the stock to further underperformand maintain our Neutral view on the stock.

Capital Goods CMP/TP/Upside: `266 / - / -BHEL



FII 12.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BHEL (18.1) (39.1) (2.1) 3.2 33.4

BSE CAP GOODS (10.6) (27.9) 13.8 0.7 31.3



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 24.2 26.4 29.2 25.5 19.3

PAT GROWTH* 23.6 39.9 28.4 29.2 34.5

OPM# 18.6 20.2 17.6 18.4 16.2

ROE# - 33.6 30.0 29.8 21.2NOTE: * ABOVE 1 YEAR ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 15.9 (9.3)

ROE (%) 30.8 23.0

P/E 9.3 10.2

P/BV 2.6 2.2


BUY / HOLD / SELL 20 / 14 / 13

RATING NEUTRAL

52 WEEK HIGH / LOW 464 / 225

MARKET CAP (`̀̀̀̀ CR) 66,807

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 148 270 1,480 1,480

DEFERRED TAX LIABILITY (1,529) (2,165) (2,165) (2,165)



GROSS BLOCK 6,858 8,344 9,941 11,449


NET BLOCK 2,609 3,610 4,476 5,127



CURRENT ASSETS 43,002 51,621 62,707 64,473




TOTAL ASSETS 14,516 18,260 24,712 29,299


PROFIT & LOSS


% CHG 24.6 26.4 21.0 0.4


EBITDA 5,825 8,575 10,207 9,480

(% OF NET SALES) 17.3 20.2 19.8 18.3



OTHER INCOME 1,165 1,027 850 900

(% OF PBT) 17.6 11.3 8.3 9.5

RECURRING PBT 6,621 9,066 10,257 9,424

EXTRAORDINARY EXPENSE/(INC.) - - - -

PBT (REPORTED) 6,621 9,066 10,257 9,424

TAX 2,294 3,012 3,241 3,063

(% OF PBT) 34.6 33.2 31.6 32.5

PAT (REPORTED) 4,327 6,053 7,015 6,361

LESS: MINORITY INTEREST (MI) - - - -

PRIOR PERIOD ITEMS - - - -

PAT AFTER MI (REPORTED) 4,327 6,053 7,015 6,361

ADJ. PAT 4,327 6,053 7,015 6,361

% CHG 38.9 39.9 15.9 (9.3)


KEY RATIOS

VALUATION RATIOS

P/E 15.0 10.7 9.3 10.2

P/CEPS 13.9 9.9 8.4 9.0

P/BV 4.1 3.2 2.6 2.2

EV/SALES 1.7 1.3 1.2 0.9

EV/EBITDA 9.5 6.5 5.6 5.5

PER SHARE DATA (‘`̀̀̀̀)

EPS (BASIC) 17.7 24.7 28.7 26.0


CASH EPS 19.1 26.7 31.7 29.5

DPS 4.7 6.2 6.2 6.2

BOOK VALUE 64.9 82.3 103.7 122.5

RETURNS (%)

ROCE (PRE-TAX) 37.7 44.4 40.1 29.6


ROE 30.0 33.6 30.8 23.0

TURNOVER RATIOS (X)



PAYABLES (DAYS) 332 345 359 354


CASH FLOW STATEMENT



(INC)/DEC IN WORKING CAPITAL (2,403) (2,236) (5,986) 1,099

LESS: OTHER INCOME 1,165 1,027 850 900

DIRECT TAXES PAID 2,021 3,649 3,241 3,063

CASH FLOW FROM OPERATIONS 1,345 2,617 911 7,416

(INC.)/DEC.IN FIXED ASSETS (1,752) (2,137) (1,600) (1,300)

(INC.)/DEC. IN INVESTMENTS - (5) - -

OTHER INCOME 1,165 1,027 850 900



INC./(DEC.) IN LOANS (18) 122 1,210 -


OTHERS 119 0.1 - -

CASH FLOW FROM FINANCING (1,350) (1,652) (564) (1,774)

INC./(DEC.) IN CASH (474) (150) (403) 5,242

OPENING CASH BALANCES 10,330 9,856 9,706 9,303

CLOSING CASH BALANCES 9,856 9,706 9,303 14,546




Company BackgroundBGR Energy Systems (BGR) is one of the leading players in the the Balanceof Plant (BoP) and EPC space of the power sector. The company has takenseveral big leaps over the years - from being a mere manufacturer of a fewBoP components to executing turnkey BoP projects and now gradually executingfull-fledged EPC contracts. In 2010, BGR ambitiously ventured into settingup a manufacturing facility of 4,000MW for supercritical boilers and turbinegenerators in a JV with Hitachi (76:24).

Structural SnapshotGrowth opportunity: BoP orders for most of the projects in the 12th planare yet to be placed (in contrast to BTG orders). As per industry estimates,~1,110 BoP packages (`1,40,000cr) are expected to get tendered duringthe 12th plan, thus providing adequate opportunities to the company.

Competitive position: BGR is a preferred player in the BoP segment, asthe company is one of the few players that have a strong expertise in BoPand EPC. The company is a new entrant in the BTG space and has wononly one order on the back of extremely competitive pricing (negative forthe company in context of operating margins).

Nature of business: Mainly a project business thriving on power BoP andEPC projects, which face moderate competition.

Current Investment ArgumentsGrowth to remain under pressure: Over the past 6-8 quarters, BGR hasbeen witnessing a dry spell on the order inflow front, barring the recentaggressively won NTPC bulk order and one large order in the EPC space.Therefore, the order inflow trend has been largely disappointing. Further,with persistent headwinds in the power sector, we do not expect any trendreversal in the near to medium term. Moreover, the recently bagged ordersare of high gestation period and would contribute majorly post FY2013.Hence, we do not expect a substantial pick up in revenue till FY2013 (11.7%decline in FY2012E and 7.6% growth in FY2013E), leading to earnings declineof 19.5% and 6.8% for FY2012E and FY2013E, respectively.

Investment commitments + Elongated working capital = Soaring debt:BGR's working capital has seen severe deterioration over the past few quarters(from 74 days in FY2010 to 225 days in 1HFY2012), mainly due to highreceivables (owing to the retention money from SEBs such as RRVUNLand TNEB, which are facing high financial strain). Amid issues impairing thepower sector, credit availability may harden for SEBs, as banks have alreadychosen to remain risk-averse. Hence, in our view, tight liquidity is likely totransmit negatively on BGR's books. Along with this, BTG venture is expectedto stretch its balance sheet - we expect the leverage to rise from 1.3x in1HFY2012 to 1.9x in FY2013.

Valuation: At the CMP, the stock is trading at PE multiple of 6.8x FY2013EEPS, which we believe is reasonable amidst the structural issues (slowdownof order inflow in BTG space and high leverage) faced by the company.Hence, we maintain our Neutral view on the stock.

Capital Goods CMP/TP/Upside: `228 / - / -BGR Energy


PROMOTERS 81.1

FII 0.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BGR (29.7) (63.8) 13.4 - -

BSE CAP GOODS (10.6) (27.9) 13.8 0.7 31.3

SENSEX (2.6) (12.3) 21.3 3.3 17.3NOTE: Returns in excess of 1 year on a CAGR basis


(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (32.1) 54.5 46.2 43.3 -

PAT GROWTH* (34.0) 60.1 54.0 51.2 -

OPM# 14.3 11.3 11.1 11.0 -

ROE# - 39.0 31.0 34.9 -NOTE: * ABOVE 1 YEAR ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) (19.5) (6.8)

ROE (%) 25.0 20.1

P/E 6.3 6.8

P/BV 1.5 1.3


BUY / HOLD / SELL 7 / 7 / 19

RATING NEUTRAL

52 WEEK HIGH / LOW 660 / 173


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 807 1,337 3,037 3,137




GROSS BLOCK 182 251 776 2,613


NET BLOCK 145 198 706 2,518


INVESTMENTS 1 1 1 1

CURRENT ASSETS 3,644 5,115 6,329 5,148




TOTAL ASSETS 1,672 2,649 4,525 4,783


PROFIT & LOSS


% CHG 59.2 54.5 (11.7) 7.6


EBITDA 344 536 525 520

(% OF NET SALES) 11.2 11.3 12.5 11.5




(% OF PBT) 8.2 4.6 2.5 3.3



PBT (REPORTED) 305 481 394 367

TAX 104 158 134 125

(% OF PBT) 34.0 32.8 32.5 32.5

PAT (REPORTED) 201 323 260 242




ADJ. PAT 201 323 260 242

% CHG 74.4 60.1 (19.5) (6.8)


KEY RATIOS

VALUATION RATIOS

P/E 8.2 5.1 6.3 6.8

P/CEPS 7.8 4.8 6.0 6.1

P/BV 2.3 1.7 1.5 1.3

EV/SALES 0.5 0.4 1.1 0.9

EV/EBITDA 4.5 3.7 8.6 8.1


EPS (BASIC) 28.0 44.8 36.0 33.6


CASH EPS 29.4 47.2 38.3 37.1

DPS 7.0 10.0 10.0 10.0

BOOK VALUE 98.1 131.9 156.3 178.2

RETURNS (%)

ROCE (PRE-TAX) 22.1 24.0 14.2 10.6


ROE 31.7 39.0 25.0 20.1

TURNOVER RATIOS (X)



PAYABLES (DAYS) 209 186 231 222


CASH FLOW STATEMENT



(INC)/DEC IN WORKING CAPITAL 18 (706) (2,190) 1,968

LESS: OTHER INCOME (25) (22) (10) (12)


CASH FLOW FROM OPERATIONS 205 (388) (1,923) 2,224

(INC.)/DEC.IN FIXED ASSETS (65) (147) (525) (1,837)



CASH FLOW FROM INVESTING (40) (125) (515) (1,825)

ISSUE OF EQUITY 0.0 0.2 0.00 0.00

INC./(DEC.) IN LOANS 98 530 1,700 100


OTHERS 83 210 - -

CASH FLOW FROM FINANCING 39 446 1,616 16

INC./(DEC.) IN CASH 287 143 (823) 415






Company BackgroundABB India (ABB) is the Indian subsidiary of Switzerland-based ABB Group,which is one of the world's leading power and automation engineering companies.The group provides solutions for energy-efficient generation, power transmissionand distribution (T&D) and process automation. The power-related segmentis the company's major revenue contributor, accounting for ~53% of itstotal CY2010 revenue, while 40% is contributed by the automation segment.

Structural SnapshotGrowth opportunity: Improving ordering in the T&D segment and the HVDCproject will help support order inflow for the coming quarters. Also from along-term perspective, ABB has substantial growth avenues from the powersegment - PGCIL has envisaged T&D capex of `1lakh cr for the 12th plan,28% of which is expected to be deployed in sub-station segment. In contrast,the weak investment cycle prevailing across the industrial sector is likely torestrict order inflow for the automation segment.

Competitive position: ABB benefits from the strong pedigree of its parentgroup, enabling it to bring the world's latest technology into the country,such as flexible AC transmission systems (FACTS) and SCADA. However,in the past few years, power products segment, namely transformers, isfacing stiff competition from Chinese/Korean players, leading to a loss inthe company's market share.

Nature of business: Mix of products and projects; Moderate-to-high entrybarriers in case of high-end technological products.

Current Investment ArgumentsChanged dynamics lead to a loss in market share: After the exclusion ofthe circuit breaker in the scope of the substation contract in early FY2012,new entrants such as L&T, EMC, Crompton Greaves and Techno Electrichave rushed to capture this segment as - 1) separate scope of work hasmade it easier for general contractors to bid; and 2) general products andcivil works constitute a major portion of the sub-station contract. Especiallyin the 765kV segment, these new entrants have posed a tough competitionto traditional T&D majors such as ABB, Areva and Siemens (which togethercommanded 100% market share in FY2011) and have already captured~71% market share YTD FY2012. As a result, order intake from this segmentis likely to decline going ahead.

Unjustifiably rich valuations: In an environment where most capital goodsstocks (including some of ABB's closest peers) are trading at a significantdiscount to their historical average, ABB trades at premium valuations, despitecontinued earnings disappointments and deteriorating return ratios (~14%in CY2012E from 29% in CY2008). At the CMP, the stock trades at 40.9xits CY2012E P/E, which is highly expensive compared to its peers such asCrompton Greaves (11.0x its FY2013E P/E) and Areva T&D (21.8x its CY2012EP/E). We believe the market is factoring in a possible delisting that is keepingthe stock at elevated levels. But, we maintain Sell on the stock on valuationbasis with a target price of `̀̀̀̀427. (PE multiple of 24.0x CY2012E EPS)

Capital Goods CMP/TP/Downside: `727 / `427 / 41%ABB India


PROMOTERS (ABB GROUP) 75.0

FII 3.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ABB 2.0 (1.4) 16.8 0.2 33.2

BSE CAP GOODS (10.6) (27.9) 13.8 0.7 31.3



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 29.2 0.8 2.0 16.2 23.0

PAT GROWTH* 92.6 (82.2) (49.5) (22.0) 1.6

OPM# 3.8 1.3 7.0 8.9 9.4

RoE# - 2.6 15.9 23.1 21.6NOTE: * ABOVE 1 YEAR ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 197.7 100.3

ROE (%) 7.6 13.9

P/E 81.8 40.9

P/BV 6.0 5.3


BUY / HOLD / SELL 0 / 5 / 34

RATING SELL

52 WEEK HIGH / LOW 908 / 542

MARKET CAP (`̀̀̀̀ CR) 15,481

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - 100 100

DEFERRED TAX LIABILITY - - - -



GROSS BLOCK 879 998 1,598 1,823


NET BLOCK 673 766 1,272 1,389



CURRENT ASSETS 4,749 4,926 5,921 6,024




TOTAL ASSETS 2,424 2,424 2,662 2,990

Y/E DECEMBER (`̀̀̀̀ CR) CY2009 CY2010 CY2011E CY2012E

PROFIT & LOSS


% CHG (8.8) 0.8 21.9 16.1


EBITDA 527 84 384 679

(% OF NET SALES) 8.5 1.3 5.0 7.6

DEPRECIATION& AMORT. 49 52 94 108



(% OF PBT) 13.8 85.3 8.8 6.5



PBT (REPORTED) 527 100 285 571

TAX 173 37 97 194

(% OF PBT) 32.8 36.9 34.0 34.0

PAT (REPORTED) 355 63 188 377




ADJ. PAT 355 63 188 377

% CHG (35.2) (82.2) 197.7 100.3


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 43.4 243.6 81.8 40.9

P/CEPS 38.2 134.1 54.5 31.8

P/BV 6.4 6.4 6.0 5.3

EV/SALES 2.4 2.4 2.0 1.7

EV/EBITDA 28.2 176.7 39.9 22.4


EPS (BASIC) 16.7 3.0 8.9 17.8


CASH EPS 19.0 5.4 13.3 22.9

DPS 2.0 2.0 2.0 2.0

BOOK VALUE 113.7 114.4 120.9 136.4

RETURNS (%)

ROCE (PRE-TAX) 21.2 1.3 11.4 20.2


ROE 15.7 2.6 7.6 13.9

TURNOVER RATIOS (X)



PAYABLES (DAYS) 197 181 188 188

Y/E DECEMBER CY2009 CY2010 CY2011E CY2012E

CASH FLOW STATEMENT



(INC)/DEC IN WORKING CAPITAL (63) 102 (158) (130)




(INC.)/DEC.IN FIXED ASSETS (163) (104) (592) (225)

(INC.)/DEC. IN INVESTMENTS 44 - - -




INC./(DEC.) IN LOANS - - 100 -


OTHERS 4 - - -

CASH FLOW FROM FINANCING (50) (50) 50 (50)

INC./(DEC.) IN CASH 176 63 (417) 80



Y/E DECEMBER (`(`(`(`(` CR) CY2009 CY2010 CY2011E CY2012E


Company BackgroundCrompton Greaves (CG), part of the US$4bn Avantha Group, is one of theleading players in the power T&D equipment business in India. The companyoperates across three segments - power systems (65% of FY2011 revenue),consumer products (20% of FY2011 revenue) and industrial systems (15%of FY2011 revenue). CG is a globally diversified company and derives ~50%of its revenue from international operations, led by a series of acquisitionsundertaken over FY2006-11. Europe and North America are the two biggestmarkets outside Asia and jointly account for ~29% of the company's revenue.

Structural SnapshotGrowth opportunity: The power systems segment has been a key growthdriver for the company, on the back of the phenomenal growth opportunitiesin the Indian T&D sector, coupled with strategic overseas acquisitions byCG. But the company's growth has trickled to single-digit levels since FY2010,led by a deteriorating business environment in Europe and North America.The company's other segments - industry and consumer - are currently onthe back foot, owing to deceleration in investment capex and inflationarypressures. Hence, we believe currently CG is facing business headwinds,which are likely to keep its growth under check. Nonetheless, the upcomingopportunities in the domestic T&D space should help the company sail throughthe current slowdown - PGCIL has envisaged T&D capex of `1 lakh cr forthe 12th plan, 28% of which is expected to be deployed in the sub-stationsegment, thus providing a number of opportunities to CG.

Competitive position: CG is losing its market share in the domestic T&Dand industrial space to new players. However, the company has a strongfoothold in the consumer segment.

Nature of business: Diversified; More skewed towards the T&D space (domesticand international); Low entry barriers for new players.

Current Investment ArgumentsBusiness under stress: We believe CG's power and industrial segmentare facing several headwinds on the international and domestic businessfronts, as reflected in the pressure witnessed in its recent quarterly numbers,mainly due to increasing competitive pressures (taking a toll on profitability)and general slowdown faced by economies (impeding the revenue visibility).To put things in perspective, CG has a sizeable exposure in the currentlytroubled geographies of Europe (17% of FY2011 revenue) and North America(11.5% of FY2011 revenue). Likewise, CG's consumer segment, which hadexpanded admirably in the past is currently facing the brunt of inflationarypressures. Therefore, we believe CG's near-to-medium term performancewould be under pressure.

Valuations factoring most of the concerns: While CG is facing businessheadwinds, we expect an earnings recovery (50.2% in FY2013) on the backof low base. In addition, the latent potential in the company, decent returnratios (~18%) and current undemanding valuations of 11.0x PE FY2013(on our conservative estimates) makes CG attractive. We maintain Buy onthe stock with a target price of 158 (PE multiple of 13.0x FY2013E EPS).

Capital Goods CMP/TP/Upside: `134 / `158 / 18%Crompton Greaves


PROMOTERS (AVANTHA GROUP) 41.7

FII 16.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CROMPTON (7.2) (53.8) 21.8 2.4 55.0

BSE CAP GOODS (10.6) (27.9) 13.8 0.7 31.3



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 12.8 9.5 13.6 19.4 22.6

PAT GROWTH* (45.4) 12.4 29.8 31.2 74.0

OPM# 8.4 13.4 12.9 11.7 9.9


ANGEL ESTIMATES


PAT GROWTH (%) (44.0) 50.2

ROE (%) 15.1 19.9

P/E 16.5 11.0

P/BV 2.4 2.0


BUY / HOLD / SELL 16 / 13 / 16

RATING BUY

52 WEEK HIGH / LOW 297 / 108


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 501 470 967 867




GROSS BLOCK 2,986 3,780 4,530 4,930


NET BLOCK 1,262 1,831 2,296 2,400

CAPITAL WIP 114 110 110 110


CURRENT ASSETS 4,102 4,550 5,603 6,140




TOTAL ASSETS 3,104 3,885 4,736 5,252


PROFIT & LOSS


% CHG 4.6 9.5 9.6 9.0


EBITDA 1,277 1,344 984 1,324

(% OF NET SALES) 14.0 13.4 9.0 11.1




(% OF PBT) 9.2 9.3 12.3 9.5

RECURRING PBT 1,189 1,229 739 1,084

EXTRAORDINARY INC/(EXP) 35 (38) 0 0

PBT (REPORTED) 1,224 1,191 739 1,084

TAX 365 310 219 303

(% OF PBT) 30.7 25.2 29.7 28.0

PAT (REPORTED) 824 919 519 780

LESS: MINORITY INTEREST (MI) 3 0.4 0 0


PAT (AFTER MI) 860 889 519 780

ADJUSTED PAT 825 927 519 780

% CHG 47.3 12.4 (44.0) 50.2


KEY RATIOS

VALUATION RATIOS

P/E 10.4 9.2 16.5 11.0

P/CEPS 8.7 7.6 10.6 8.0

P/BV 3.4 2.6 2.4 2.0

EV/SALES 0.9 0.8 0.8 0.7

EV/EBITDA 6.3 6.2 9.3 6.7


EPS (BASIC) 12.9 14.4 8.1 12.2


CASH EPS 15.3 17.5 12.5 16.8

DPS 2.2 2.2 2.2 2.2

BOOK VALUE 38.8 50.8 56.3 65.9

RETURNS (%)

ROCE (PRE-TAX) 43.7 34.3 16.3 20.6


ROE 44.4 33.8 15.1 19.9

TURNOVER RATIOS (X)



PAYABLES (DAYS) 122 118 116 119


CASH FLOW STATEMENT

PROFIT BEFORE TAX 1,189 1,229 739 1,084


(INC)/DEC IN WORKING CAPITAL (13) (446) (679) (254)





(INC.)/DEC. IN INVESTMENTS (386) (121) 275 (100)



ISSUE OF EQUITY 55.0 - - -

INC./(DEC.) IN LOANS (217) (31) 497 (100)


OTHERS (52) 124 - -


INC./(DEC.) IN CASH 103 (370) (18) 57






Company BackgroundThermax provides a range of engineering solutions to the energy (78% ofFY2011 revenue) and environment (22% of the FY2011 revenue) sectors,aided through a combination of technology and strategic alliances. The companyoffers industrial boilers (small/medium-sized) and integrated solutions in theareas of heating, cooling, power, waste management, air pollution controlsand chemicals. After attaining a leadership position in the mid-size industrialboilers market, the company (through a JV with Babcock and Wilcox) hasforayed into supercritical boilers to reap the opportunities outlined in theIndian power sector.

Structural SnapshotGrowth opportunity: The energy segment derives substantial orders fromeconomy-linked industrial sectors such as metal, cement, power, refinery,paper and pulp, sugar and food. We believe sector-related dynamics (currentlynegative) would continue to be a lead indicator for order inflow going ahead.

Competitive position: Leading player in the small and medium-size industrialboilers market. The company is one of the few companies in the world thatprovides total integrated solutions in the areas of heating, cooling, power,water and waste management, air pollution controls and chemicals.

Nature of business: Being sensitive to fluctuations in the industrial capex,the business is highly cyclical. Business generates superior return ratios(>25%) but has moderate entry barriers.

Current Investment ArgumentsWeak outlook on industrial capex: Thermax trails its fortune towards industrialcapex, especially in sectors such as metals, cement and oil and gas, whichform its mainstream arena for offering products and solutions. However, thetough macro climate has paused additional investments in major industrialsectors, thereby halting new order disbursements. Hence, we expect subduedperformance on the order inflow front from Thermax, leading to a passivetop-line and earnings CAGR of 5.1% and 0.9%, respectively over FY2011-13E.

Slowdown in the power sector - A concern for the BTG venture: In FY2010,Thermax ventured into BTG equipment manufacturing through a JV with B&W(estimated TPC of `825cr) for manufacturing supercritical boilers, but it isyet to bag any orders for the same. Also, the company has witnessed competitivepressures as equipment ordering has been sedate due to various concerns.Further, management has refrained from entering into aggressive pricing forbagging orders. Therefore, visibility of returns on this investment is an overhangon the stock.

Strong fundamentals at reasonable valuations: We believe Thermax isone of the best plays for revival in industrial capex due to its strong businessfundamentals (negative working capital, negligible debt, healthy return ratios(~28-30%) and net cash balance of ~8.1% of the market cap). However,the stock has rallied >20% in the past fifteen days and is currently tradingat reasonable PE multiples of 15.2x FY2013E EPS, leaving limited upsideto our fair value. Hence, we recommend a Neutral rating on the stock.

Capital Goods CMP/TP/Upside: `496 / - / -Thermax


PROMOTERS 62.0

FII 11.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

THERMAX 15.0 (32.0) 40.9 3.8 43.1

BSE CAP GOODS (10.6) (27.9) 13.8 0.7 31.3



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 19.4 58.5 15.3 26.8 27.4

PAT GROWTH* 13.6 47.3 9.5 30.1 30.1

EBITDA MARGIN# 10.8 10.8 11.6 11.9 10.6


ANGEL ESTIMATES


PAT GROWTH (%) 7.9 (5.6)

ROE (%) 28.0 21.9

P/E 14.4 15.2

P/BV 3.6 3.1


BUY / HOLD / SELL 11 / 16 / 12

RATING NEUTRAL

52 WEEK HIGH / LOW 731 / 388


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS


RESERVES& SURPLUS 1,054 1,291 1,605 1,896







GROSS BLOCK 742 1,068 1,328 1,488


NET BLOCK 537 785 974 1,047



CURRENT ASSETS 2,431 2,997 3,092 3,253




TOTAL ASSETS 1,110 1,545 1,859 2,050


PROFIT & LOSS

TOTAL INCOME 3,368 5,336 5,826 5,896

% CHG (2.7) 58.5 9.2 1.2


EBITDA 395 574 629 596

(% OF NET SALES) 11.7 10.8 10.8 10.1

DEPRECIATION& AMORTISATION 44.2 54.1 71.9 87.3



(% OF PBT) 13.0 10.1 9.2 12.2


EXTRAORDINARY EXPENSE/(INC.) 115 - - -

PBT (REPORTED) 286 574 610 575

TAX 142 197 198 187

(% OF PBT) 49.6 34.3 32.5 32.5

PAT (REPORTED) 144 377 412 389

LESS: MINORITY INTEREST (MI) (0.4) (4.7) - -



ADJ. PAT 259 382 412 389

% CHG (9.9) 47.3 7.9 (5.6)


KEY RATIOS

VALUATION RATIOS

P/E 22.8 15.5 14.4 15.2

P/CEPS 19.5 13.6 12.2 12.4

P/BV 5.5 4.5 3.6 3.1

EV/SALES 1.5 1.0 0.9 0.8

EV/EBITDA 12.4 8.9 8.4 8.4


EPS (BASIC) 21.8 32.0 34.6 32.6


CASH EPS 25.5 36.6 40.6 39.9

DPS 5.0 9.0 7.0 7.0

BOOK VALUE 90.5 110.4 136.7 161.2

RETURNS (%)

ROCE (PRE-TAX) 33.0 39.2 32.8 26.0


ROE 25.0 31.9 28.0 21.9

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



(INC)/DEC IN WORKING CAPITAL 469 (212) (314) 29

LESS: OTHER INCOME 52 58 56 70

DIRECT TAXES PAID 142 195 198 187



(INC.)/DEC. IN INVESTMENTS (227) 129 - -




INC./(DEC.) IN LOANS 4 140 - (100)


OTHERS 11 42 - -

CASH FLOW FROM FINANCING (66) 15 (98) (198)

INC./(DEC.) IN CASH 300 57 (178) 157






Company BackgroundKEC International (KEC) is a flagship company of the RPG Group. The companyis a global player in the T&D space, present across 45 countries (~51% ofrevenue from international operations). The company acquired U.S.-basedSAE Tower Holdings LLC (SAE) in FY2011. KEC has also forayed into newbusiness verticals such as cable, telecom, railway and water resourcemanagement - though currently these businesses are at a nascent stage.

Structural SnapshotGrowth opportunity: Globally the thumb rule entails that for every rupeeinvested in generation, an equivalent amount is to be invested in T&D; however,India has spent only 50%, thus creating a huge opportunity for players inthe T&D space. PGCIL has envisaged T&D capex of ~`1 lakh cr for the12th plan, 55% of which is estimated to be transmission and sub-stationcapex, thus providing a number of opportunities to the company, given itsstrong presence in the domestic T&D market. Moreover, KEC has strongrevenue visibility for the next couple of years, owing to its strong robustbacklog of `9,340cr (2.0x FY2011 revenue).

Competitive position: KEC is among the top three players in the domestictransmission EPC space.

Nature of business: Predominantly a contract business undertaking transmissionline and substation works for transmission utilities, domestically as well asglobally. The business entails a sparse technological aspect compared tothe equipment businesses (like BTG, transformers and circuit breakers),thus, making it a low entry-barrier business. Working capital requirementsare usually high on account of the high working capital days (81 days).

Current Investment ArgumentsDiversified play: KEC has diversified business operations, with equal exposureto domestic and international markets. The company has also ventured innew businesses of railway and water, which have fared well and order inflowshave started picking up. Against this backdrop, the company has performedwell on the order inflow front in the past few quarters - (`1,200 in 2QFY2012,`1,300cr in 1QFY2012; `1,300cr in 4QFY2011, `2,300 in 3QFY2011).Therefore, diversification has helped the company to insulate itself from theslowdown in any particular segment/geography.

SAE to aid positively: SAE's contribution to the company so far has beenextremely positive (constituting ~13% of the company's revenue with 13%+EBITDA margin and 20% of the company's order backlog). In addition, KECis poised to benefit by tapping opportunities offered by different geographies(Brazil and Mexico), where KEC was not present earlier.

Valuations: Amidst strong order wins in quick succession (`1,600cr) inpast few days, the stock has witnessed a substantial rally, gaining ~50%.At the CMP, the stock trades at reasonable valuations of 6.0x FY2013 PE.We believe the recent run-up in the stock price has factored in most of thepositives and further upside seems limited. Hence, we recommend Neutralon the stock.

Capital Goods CMP/TP/Upside: `53 / - / -KEC International

SHAREHOLDING PATTERN


FII 2.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

KEC (9.5) (42.1) 16.2 (9.3) -

BSE CAP GOODS (10.6) (27.9) 13.8 0.7 31.3

SENSEX (2.6) (12.3) 21.3 3.3 17.3

NOTE: ABOVE 1 YEAR ON CAGR BASIS


(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 26.2 14.5 16.6 17.0 -

PAT GROWTH* (55.2) 7.7 5.3 14.1 -

OPM# 7.2 10.3 9.8 10.9 -

ROE# - 34.7 41.9 77.4 -NOTE: * ABOVE 1 YEAR ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) (15.6) 32.2

ROE (%) 24.9 26.6

P/E 7.9 6.0

P/BV 1.3 1.1


BUY / HOLD / SELL 25 / 4 / 3

RATING NEUTRAL



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 787 1,432 1,782 1,882




GROSS BLOCK 836 1,038 1,213 1,413


NET BLOCK 679 802 927 1,069


INVESTMENTS - - - -

CURRENT ASSETS 2,680 3,587 4,448 4,929




TOTAL ASSETS 1,620 2,428 2,916 3,209


PROFIT & LOSS


% CHG 13.9 14.5 20.9 14.7


EBITDA 406 462 462 561

(% OF NET SALES) 10.4 10.3 8.6 9.0




(% OF PBT) 0.6 0.8 1.3 1.0


EXTRAORDINARY EXPENSE/(INC.) 0 0 0 0

PBT (REPORTED) 294 316 267 342

TAX 104 111 93 113

(% OF PBT) 35.2 35.1 35.0 33.0

PAT (REPORTED) 191 205 173 229




ADJ. PAT 191 205 173 229

% CHG 60.3 7.7 (15.6) 32.2


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 6.9 6.7 7.9 6.0

P/CEPS 6.0 5.6 6.1 4.8

P/BV 1.8 1.5 1.3 1.1

EV/SALES 0.5 0.6 0.6 0.5

EV/EBITDA 5.0 5.7 6.6 5.4


EPS (BASIC) 7.7 8.0 6.7 8.9


CASH EPS 8.8 9.6 8.7 11.2

DPS 1.2 1.2 1.2 1.2

BOOK VALUE 29.8 35.4 40.7 48.2

RETURNS (%)

ROCE (PRE-TAX) 32.3 24.1 17.5 18.4


ROE 44.4 34.7 24.9 26.6

TURNOVER RATIOS (X)



PAYABLES (DAYS) 186 180 180 181


CASH FLOW STATEMENT






CASH FLOW FROM OPERATIONS (107) (71) (212) 232





ISSUE OF EQUITY 0.0 2.1 0.0 0.0

INC./(DEC.) IN LOANS 165 645 350 100


OTHERS 106 (243) - -


INC./(DEC.) IN CASH (71) 89 (70) 104






Company BackgroundJyoti Structures Ltd. (JSL) is one of the leading EPC players in the transmissionline and substation segments, with business presence across transmissionline towers, substation and rural electrification. The company offers a widerange of services in design, engineering, tower testing, manufacturing,construction and project management. In addition to its strong domesticpresence, JSL is also exploring T&D capex opportunities on the global frontthrough recent overseas JVs and investments (Jyoti America and Gulf Jyoti).

Structural SnapshotGrowth opportunity: Globally the thumb rule entails that for every rupeeinvested in generation, an equivalent amount is to be invested in T&D; however,India has spent only 50%, thus creating a huge opportunity for players inthe T&D space. PGCIL has envisaged T&D capex of `1 lakh cr for the 12thplan, 55% of which is expected to be deployed in transmission and sub-station projects, thus providing an array of opportunities to JSL, given itsstrong foothold in the T&D segment.

Competitive position: JSL is among the top three players in the transmissionEPC space in the country.

Nature of business: Predominantly a contract business, undertaking transmissionline and substation works for PGCIL and SEBs. The business entails asparse technological aspect compared to the equipment businesses (likeBTG, transformers, and circuit breakers) - thus, low entry barriers (new playersentering the transmission EPC space are on the rise). In addition, the businessis subject to high working capital requirements (118 days as of 1HFY2012).

Current Investment ArgumentsExpect stable order inflows: Despite seasonal weakness in the T&D segment,JSL's performance has been fairly decent (bagged orders worth `1,200crin 1HFY2012 against reported revenue of `1,270cr). Further, ordering hasgathered steam, especially from PGCIL, which has tendered orders worth`7,400cr in 3QFY2012. As per the announcements, JSL has pocketed ordersworth ~`400cr in 3QFY2012, indicating its consistency in securing orders.We expect ordering to further strengthen in 4QFY2012 (seasonally the strongestquarter), factoring in orders worth ~`1,500cr for 2HFY2012 for JSL, registering28.5% growth over 1HFY2012.

Diversification to gradually materialize: JSL has been actively tappingthe overseas markets by entering into JVs in South Africa and the Gulf. Inaddition, the company recently forayed into the U.S. by setting up a transmissiontower plant (revenue potential of ~`340cr annually - @100% capacity utilization).We believe these ventures will benefit the company in the long run, therebyinsulating it from domestic headwinds.

Valuation: The stock has underperformed the BSE Sensex by ~17% overthe past three months. At the CMP of ̀ 50, the stock is trading at undemandingvaluations (PE 4.1x and PBV 0.5x on FY2013E) with limited downside. Hence,we maintain Buy on the stock with a Target Price of `̀̀̀̀61 by assigningPE multiple of 5.0x to its FY2013E EPS.

Capital Goods CMP/TP/Upside: `50 / `61 / 22%Jyoti Structures


PROMOTERS 27.8

FII 8.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

JYOTI STRUC. (19.4) (57.6) (7.2) (20.5) 27.0

BSE CAP GOODS (10.6) (27.9) 13.8 0.7 31.3



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 16.5 12.7 20.4 28.0 24.3

PAT GROWTH* (10.9) 18.4 5.3 51.3 38.3

OPM# 10.8 11.2 11.1 11.8 10.9


ANGEL ESTIMATES


PAT GROWTH (%) 16.7 (14.1)

ROE (%) 18.5 13.7

P/E 3.5 4.1

P/BV 0.6 0.5


BUY / HOLD / SELL 23/3/0

RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 369 477 727 604


TOTAL LIABILITIES 878 1,071 1,428 1,395


GROSS BLOCK 244 283 318 358


NET BLOCK 175 196 208 221



CURRENT ASSETS 1,350 1,572 2,158 1,878




TOTAL ASSETS 878 1,071 1,428 1,395


PROFIT & LOSS


% CHG 15.8 12.7 18.0 (2.5)


EBITDA 229 268 313 303

(% OF NET SALES) 10.7 11.2 11.0 11.0




(% OF PBT) 4.6 3.1 4.1 4.1



PBT (REPORTED) 137 156 173 148

TAX 53 56 56 48

(% OF PBT) 38.7 36.1 32.5 32.5

PAT (REPORTED) 83 100 116 100




ADJ. PAT 84 100 116 100

% CHG (0.9) 18.4 16.7 (14.1)


KEY RATIOS

VALUATION RATIOS

P/E 4.8 4.1 3.5 4.1

P/CEPS 4.0 3.4 2.9 3.2

P/BV 0.8 0.7 0.6 0.5

EV/SALES 0.3 0.3 0.4 0.3

EV/EBITDA 3.2 3.1 3.5 2.8


EPS (BASIC) 10.3 12.1 14.2 12.2


CASH EPS 12.5 14.7 17.0 15.4

DPS 1.0 1.5 1.0 1.0

BOOK VALUE 59.8 70.1 83.1 94.1

RETURNS (%)

ROCE (PRE-TAX) 26.1 25.4 23.1 19.6


ROE 18.6 18.7 18.5 13.7

TURNOVER RATIOS (X)



PAYABLES (DAYS) 111 113 114 116


CASH FLOW STATEMENT



(INC)/DEC IN WORKING CAPITAL (86) (152) (390) 171



CASH FLOW FROM OPERATIONS 10 (36) (257) 291


(INC.)/DEC. IN INVESTMENTS 0 0 0 0



ISSUE OF EQUITY 0.1 0.0 0 0.0

INC./(DEC.) IN LOANS 56 108 250 (123)


OTHERS 10 2


INC./(DEC.) IN CASH 15 13 (40) 125






Cement NEUTRAL


UltraTech 1,197 - Neutral

ACC 1,153 - Neutral

Ambuja Cements 160 - Neutral

Shree Cement 2,148 - Neutral

India Cements 74 - Neutral

Madras Cements 108 - Neutral

J K Lakshmi Cement 44 51 Buy

Valuations ahead of the cycleAll-India capacity utilization to remain low: All-India cement capacity stoodat ~288mtpa in FY2011. During the past four years, cement capacity haswitnessed a 12.6% CAGR, which was almost double the growth rate in cementdemand (6.9% CAGR). As a result, industry utilization levels declined fromthe highs of FY2007 (90.6%) to 73.3% in FY2011. However, going ahead,we expect the pace of capacity addition to moderate, with only 31mtpa ofcapacity to come on stream over FY2012-13 (5.3% CAGR). But the biggerconcern for the sector now is demand slowdown. Over FY2001-10, cementdemand grew by 1x India's GDP growth rate. But, all-India cement demand,after being mediocre at 4.5% in FY2011, is expected to remain muted at 5%during FY2012 vs. GDP growth of 8.5% and 7% in FY2011 and FY2012E,respectively. Even after factoring 8% demand growth rate for FY2013E, industrycapacity utilization for the year is expected to be only 75.0% (although higherthan 73.3% and 72.0% in FY2011 and FY2012E, respectively).

State-wise demand-supply dynamics: About 90% of India's total limestonereserves are concentrated in nine states, mainly Andhra Pradesh (AP), Karnataka,Gujarat, Rajasthan and Madhya Pradesh (MP). In the long run, naturally a largepart of cement capacity will also be located in these states. But as far as thescenario for the next several years is concerned, due to the abundant availabilityof limestone, even in case of the other states with balance 10% of India's limestonereserves, those reserves itself are more than adequate to meet nearby cementdemand for several decades. This negates the need for relying on the clusteredcapacities in few of the cement hubs like AP and Rajasthan and has led toconcentration of excess supply in these states.

We expect capacities in these states, especially in AP and Rajasthan, to face prolongedutilization pressures, as they do not have any major supply-deficit region nearby tosupply their excess, without sacrificing on margins to the extent of substantial freightcost differential. On the other hand, companies with capacities in potentially favorablestates (i.e., states where either there is a supply deficit or surplus that can be moreeconomically supplied to nearby deficit states) are better placed. Amongst our coverageuniverse, Ambuja Cements has the highest capacity in such favorable states(81% of its total capacity) followed by ACC and UltraTech (51% and 42% of totalcapacities, respectively).

Outlook and valuation: In our view, the cement sector's valuations in terms ofEV/sales and EV/tonne are ahead of the cycle when compared to utilization levelsand are almost 23% more expensive than historical valuations during periods ofsimilar utilization levels. But, despite low capacity utilization, cement companieshave managed to maintain relatively healthy pricing due to production disciplineadopted by them, which has led to high valuations currently. However, in our view,this is a thin investment thesis to rely on, as there exists persistent risk of breakdownin the production discipline. Hence, we maintain our Neutral view on the sector.Though, Ambuja Cements has the most favorable locational presence, it is tradingat rich valuations and therefore, we maintain our Neutral recommendation on thestock. Among other large caps, we prefer ACC over UltraTech on a relative basisconsidering its better locational presence. But, we have a Neutral view on thestock, as we expect limited absolute upside. While valuations are cheap for IndiaCements, Madras Cements and Shree Cement, we have a Neutral view on themdue to their unfavorable locational presence, especially for south-based players.That said, we maintain our Buy recommendation on JK Lakshmi Cement due to itsattractive valuations, as it is trading at EV/tonne of US$35 on current capacity.


All-India capacity utilization to remain low: All-India cementcapacity stood at ~288mtpa in FY2011. During the past fouryears, the Indian cement industry witnessed ambitious capacityaddition of ~109mtpa at a CAGR of 12.6%, on the back ofhigh capacity utilization (86.4% in FY2006 and 90.4% in FY2007)and comparatively low per capita cement consumption in India(which prevails even now). However, demand grew at a modestpace of 6.9% over the same period, forcing industry utilizationlevels to decline continuously from the highs of FY2007 to73.3% in FY2011.

Going forward, we estimate another 31mtpa of capacity to comeon stream during FY2012-13 at a CAGR of 5.3%. Of this, ~20mtpacapacity is expected to be added in FY2012 and ~11mtpa inFY2013. YTD 11mtpa of capacity has been added in FY2012,which includes ACC (3mtpa in Maharashtra), Ambuja Cements(1.1mtpa in Chhattisgarh and 0.9mtpa in Maharashtra),JP Associates (1mtpa in UP) and KCP (1.5mtpa in AP).

However, the bigger concern for the sector now is demandslowdown. Over FY2001-10, cement demand grew by 1x India'sGDP growth rate. However, all-India cement demand, after beingmediocre at 4.5% in FY2011, is expected to remain muted at5% during FY2012 vs. GDP growth of 8.5% and 7% in FY2011and FY2012E, respectively. Even after factoring in 8% demandgrowth rate for FY2013E, industry capacity utilization for theyear is expected to be only 75.0% (although higher than 73.3%and 72.0% in FY2011 and FY2012E, respectively).

Further, it should be noted that we have not taken into considerationthe capacities of cement players such as Bharathi Cement,JSPL, Murli Agro, Vicat-Sagar, JSW Cement, ABG Cement andfew others who are not members of the CMA (combined FY2013capacity estimated to be 29.2mtpa).

Source: CMA, Company, Angel Research

Exhibit 1: All-India cement capacity additions player wise in FY2012-13E Capacity additions in FY2012E-mt Capacity additions in FY2013E-mt

Companies FY11-mt South East & NE West North Central FY12E-mt South East & NE West North Central FY13E-mt

UltraTech 48.8 48.8 48.8

ACC 27.1 3.0 30.1 30.1

Ambuja Cements 25.0 1.1 0.9 27.0 27.0

Jaiprakash 23.7 5.0 1.0 29.7 3.0 32.7

India Cements 15.6 15.6 15.6

Shree Cement 13.5 13.5 13.5

Madras Cements 12.5 2.0 14.5 14.5

Dalmia Cement 9.0 9.0 9.0

JK Cement 7.9 7.9 7.9

Century Cements 7.8 7.8 1.5 0.3 0.4 10.0

Others 96.9 3.5 0.6 - 2.7 0.4 104.2 - 3.2 - - 2.9 110.3

Total 287.6 10.5 1.7 3.9 2.7 1.4 307.8 3.0 4.7 0.3 - 3.3 319.1

Production 211.0 221.5 239.3

Utilization (%) 73.3 72.0 75.0

Source: CMA, Company, Angel Research

Exhibit 2: All-India cement capacity utilization trend

84

.2

26

65.0

70.0

75.0

80.0

85.0

90.0

95.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0(%)(mn tns)

Capacity Production Utilization (RHS)

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

96

.2

10

5.7

11

0.9

117

.0

12

0.2

13

3.0

14

6.0

15

0.5

157

.1

16

4.7

171

.1

178

.9

20

9.2

23

0,6

26

6.2

287

.6

30

7.8

319

.1

62

.4

69

.6

76.2

83

.2

87.9

10

0.5

11

0.1

10

6.9

11

6.4

12

3.5

13

3.6

147

.8

16

1.6

174

.3

187

.6

20

1.0

21

1.0

22

1.5

23

9.3

Cement


Cement

Source: CMA, Company, Angel Research; Note: FY2009 figures are actual, FY2009E and FY2013E figures are Angel Research estimates; FY2013E capacity ofMurli Agro (3mtpa) in Maharashtra and Khyber (0.3mtpa) in J&K has not been considered in the above analysis

Exhibit 3: Demand-supply dynamics in Category I states

State FY09 FY13E FY09 FY13E Cap. Cons. FY09 FY13E FY09E FY13E FY09E FY13E

Maharashtra 13.1 20.7 21.9 32.4 12.1 10.3 (8.8) (11.7) Gujarat, Karnataka Gujarat, Karnataka - -

UP 8.3 13.6 17.9 25.3 13.3 9.1 (9.6) (11.7) MP, Rajasthan MP, Rajasthan, Uttarakhand - -

West Bengal 6.3 9.4 7.7 11.4 10.5 10.6 (1.3) (2.0) Chhattisgarh Odisha, Chhattisgarh - -

Punjab 4.8 4.8 6.3 10.3 0.0 13.2 (1.5) (5.5) HP HP, Rajasthan - -

Haryana 2.3 3.4 7.3 9.9 10.2 8.0 (5.0) (6.5) HP, Rajasthan HP, Rajasthan - -

Kerala 0.6 0.6 7.9 9.2 - 3.8 (7.3) (8.6) TN, Karnataka TN, Karnataka - -

Bihar 1.0 2.6 5.1 6.7 27.0 7.2 (4.1) (4.1) Jharkhand, MP Jharkhand, MP - -

NCR 0.0 0.0 4.8 5.8 - 5.2 (4.8) (5.8) Rajasthan Rajasthan - -

J&K 0.5 0.5 1.1 1.1 - 0.5 (0.6) (0.9) HP HP - -

Goa 0.0 0.0 0.5 0.7 - 9.4 (0.5) (0.7) Karnataka Karnataka - -

Puducherry 0.0 0.0 0.4 0.4 - (0.1) (0.4) (0.4) TN TN - -

Chandigarh 0.0 0.0 0.4 0.3 - (9.9) (0.4) (0.3) Rajasthan Rajasthan - -

N.E. states

except Meghalaya 0.2 1.8 2.1 3.2 73.2 11.3 (1.9) (1.4) Meghalaya Meghalaya - -

Indigenouscapacity (mtpa)

Indigenousconsumption (mt) CAGR (%)

Indigenoussurplus/ (deficit) -mt

Net surplus/(deficit) -mtPotential nearby states to meet deficit

Category I: Indigenous supply-deficit states

These are states where their own cement demand is more than cement capacities located within the states. Logically, capacitiesthat operate in such states would be expected to witness the highest capacity utilization at highest margins (due to relativelylower freight cost). Indigenous supply deficit in these states is expected to be met by excess capacities of nearby states, thoughat a relatively lower margin than the indigenous capacities (on account of freight cost differential).

State-wise demand-supply dynamics

Around 90% of India's total limestone reserves are concentratedin nine states - AP, Karnataka, Gujarat, Rajasthan, Meghalaya,Himachal Pradesh (HP), Jammu & Kashmir (J&K), MP andChhattisgarh. In the long run, when reserves of the other remainingstates (balance 10%) would deplete, major capacities wouldcome up in these reserve-rich states. Despite such major capacityadditions, the number of years of these reserves (based oncurrent capacity) would still stretch into thousands because ofthe abundant availability of limestone in these reserve-rich ninestates.

However, as far as the scenario for the next several years isconcerned, due to the abundant availability of limestone, evenin case of the other states with balance 10% of India's limestonereserves, those reserves itself are adequate to meet the internalcement demand within those states and even of the neighboringstates that have negligible limestone reserves for several decades.So, except for few states with nil/minimal limestone reserves,most Indian states have abundant limestone reserves and,consequentially, enough cement capacities have come up inall these states, negating the need for relying on the clusteredcapacities in few of the cement hubs like AP and Rajasthan.However, limestone concentration in the earlier-mentioned ninestates has led to huge capacity clusters coming up overthere (68% of India's total cement capacity in FY2011), whichhas led to concentration of most of the all-India excess supplyin these states.

We expect capacities in these states, especially in AP andRajasthan, to face prolonged utilization pressures as they donot have any major supply-scarce region nearby to supply theirexcess. With cement being a low-value commodity, even fewhundred kilometers of distance can add meaningfully to theper tonne freight cost, which would eat away into the marginsof those players with capacities located in these clusters.

To arrive at player-wise locational advantage based on thesestate-wise cement demand-supply dynamics, we have dividedthe states into four categories as follows:

I) States where the state's own cement demand is more thancement capacities located within the state i.e., indigenoussupply-deficit states

II) States where although own cement demand is less than cementcapacities located within the state, but there are indigenous supply-deficit states nearby where the entire excess can be supplied

III) States where own cement capacities exceed own demandas well as that of nearby supply-deficit states, but thestate's excess capacity as a percentage of its total capacity isless than 25%

IV) States where own cement capacities exceed own demandas well as that of nearby supply-deficit states, but the state'sexcess capacity as a percentage of its total capacity is morethan 25%.


Capacities in these states are also expected to report relativelyhealthy capacity utilization, though at notch lower margins, sincesupply of excess capacities to nearby states would be at freightcost disadvantage compared to indigenous capacities over there.State wise, capacities of Himachal Pradesh can theoreticallypark their entire surplus (after catering to own demand) to nearbysupply-deficit states of J&K, Haryana and Punjab. Capacitiesof Gujarat are expected to supply their surplus toWestern Maharashtra more economically.

In FY2009, Odisha and Uttarakhand were cement-scarce states,but they have become supply surplus in FY2011 on account ofcapacity addition of 3.8mtpa and 3.0mtpa, respectively, duringFY2010-11. During FY2012-13E, we expect no capacity additionsin these states. Companies that are expected to benefit byhaving substantial (more than 25% of their total) capacitiesin these states in FY2013E are OCL India, Lafarge, GujaratSidhee Cement, Saurashtra Cement, Century Ply boards,Ambuja Cements (40%) and ACC (28%).

Category II: States where indigenous cement supply is more than indigenous cement demand, but have cement-deficit statesnearby to supply their entire excess

Source: CMA, Company, Angel Research; Note: FY2009 figures are actual, FY2009E and FY2013E figures are Angel Research estimates, FY2013E capacity ofAdhunik Cement (1.5mtpa) in Meghalaya has not been considered in the above analysis

Exhibit 5: Demand-supply dynamics in Category II states


Gujarat 19.4 24.7 12.1 19.3 6.2 12.4 7.3 5.4 Maharashtra Maharashtra 0.6 -

Odisha 4.7 8.5 5.5 7.7 16.0 9.0 (0.8) 0.7 Chhattisgarh West Bengal - -

HP 6.2 10.1 1.9 4.4 13.0 23.1 4.3 5.7 J&K, Haryana, J&K, Haryana, Punjab - -

Uttarakhand, Punjab

Jharkhand 5.2 5.2 3.1 3.9 0.0 5.5 2.1 1.3 Bihar Bihar - -

Uttarakhand 1.0 4.0 2.4 3.4 41.4 8.6 (1.4) 0.6 HP UP - -

Meghalaya 1.6 1.7 0.7 0.5 2.3 (5.5) 0.9 1.2 Other N.E states Other N.E. states - -




Net surplus/(deficit) -mt

Potential nearby states to supply surplus/meet deficit

Cement

Source: Company, Angel Research, Note: Total include capacities of ACC, Ambuja Cements and other CMA companies

Exhibit 4: Player-wise capacities in Category I statesCompanies Capacities % to company's Additions in Capacities Additions in Capacities % to company's

as of FY11-mt total capacity FY12E-mt as of FY12E-mt FY13E-mt as of FY13E-mt total capacity

UltraTech 12.7 25.9 - 12.7 - 12.7 25.9

Ambuja Cements 10.2 40.8 0.9 11.1 - 11.1 41.1

ACC 3.8 14.2 3.0 6.8 - 6.8 22.7

JP Associates 4.5 19.0 1.0 5.5 - 5.5 16.8

Century Textile 1.9 24.4 - 1.9 1.8 3.7 37.0

Heidelberg Cement 1.5 48.9 - 1.5 1.9 3.4 56.7

Century Ply-boards 0.0 0.0 - - 3.2 3.2 72.7

Birla Corp 2.2 36.7 0.8 3.0 - 3.0 32.3

Others 7.1 - 0.6 7.7 - 7.7 -

Total 43.9 15.3 6.2 50.1 6.9 57.0 17.9

Maharashtra and Uttar Pradesh (UP) are two of the major stateswithin this category. Looking at Maharashtra's dynamics, thestate has most of its internal capacities located on its easternside, which can supply their entire production to meet the state'sown demand emanating from its central and eastern regions(to the east of the Western Ghats). The supply-deficit southernand western parts of the state can be catered most economicallyby Karnataka and Gujarat, respectively, rather than AP. Similarly,in case of UP, the state's supply deficit can logically be metmostly by surplus capacities of MP, as MP's capacity cluster iscloser to most parts of UP, leading to relatively minimal demandleft to be catered by Rajasthan.

Companies that either have capacity or are coming up withnew capacities in these states are expected to be benefittedthe most. Over FY2012-13E, major capacity additions expectedin these states are Century Ply-boards (3.2mtpa comprising1.6mtpa each in Bihar and Assam), ACC (3mtpa in Maharashtra),Heidelberg (1.9mtpa in UP) and Century Textiles (1.8mtpa inMaharashtra). Companies that are expected to have substantial(more than 25% of their total) capacities in these states byFY2013E are Century Plyboards, Heidelberg Cement, AmbujaCements (41%), Century Textile, Birla Corp. and UltraTech(26%).


Source: Company, Angel Research, Note: Total includes capacities of ACC, Ambuja Cements and other CMA companies

Exhibit 6: Player-wise capacities in Category II statesCompanies Capacities % to company's Additions in Additions in Capacities % to company's

as of FY11-mt total capacity FY12E-mt FY13E-mt as of FY13E-mt total capacity

Ambuja Cements 10.7 42.8 - - 10.7 39.6

ACC 8.3 30.6 - - 8.3 27.5

JP Associates 8.0 33.8 - - 8.0 24.5

UltraTech 8.0 16.4 - - 8.0 16.4

OCL India 5.4 100.0 - - 5.4 100.0

Lafarge 3.4 51.9 - - 3.4 51.9

Gujarat Siddhi & Saurashtra Cement 2.7 100.0 - - 2.7 100.0

Sanghi Inds. 2.6 100.0 - - 2.6 100.0

Shree Cement 1.8 13.3 - - 1.8 13.3

Century Ply-boards 1.2 100.0 - - 1.2 27.3

Others 2.1 - - - 2.1 -

Total 54.2 18.8 - - 54.2 17.0

During FY2009-13E, the pace of capacity addition in thesestates is expected to be much higher than the growth in indigenousas well as nearby states demand, which is expected to resultin higher theoretical net surplus (i.e., surplus after catering todemand of its own and nearby supply-deficit states) for thesestates. State wise, in FY2009, Karnataka had no net surplus(after meeting its own demand and that of nearby supply-deficitstates of Goa, Southern Maharashtra and Northern Kerala, whichit could cater to most economically). Over FY2009-13E, weexpect capacity addition of 10.9mtpa at a CAGR of 15.0% vs.state's demand CAGR of 3.5% to result in net surplus for thestate. Also, we expect net surplus of TN and MP to increase

significantly in FY2013E from FY2009 levels. Excess capacitiesof these states also have the option to cater to supply deficitsin states farther away, but after sacrificing on margins.

Major capacities that are coming up in these states overFY2012-13E include JP Associates’ 3mtpa capacity in Karnatakaand Madras Cements’ 2mtpa capacity in TN. Companies thatare expected to have substantial (more than 25% of theirtotal) capacities in these states in FY2013E are ChettinadCement, Prism Cement, Kesoram Industries, Dalmia Cement,Madras Cements (68%), Century Textile, ACC (39%), JKCement, India Cements (38%) and JP Associates.

Category III: States where own cement capacities exceed own demand as well as that of nearby supply-deficit states, but the state's excesscapacity as a percentage of its total capacity is less than 25%


Exhibit 8: Player-wise capacities in Category III statesCompanies Capacities % to company's Additions in Capacities Additions in Capacities % to company's

as of FY11-mt total capacity FY12E-mt as of FY12E-mt FY13E-mt as of FY13E-mt total capacity

JP Associates 9.0 38.0 - 9.0 3.0 12.0 36.7

ACC 11.9 43.8 - 11.9 - 11.9 39.5

UltraTech 10.0 20.5 - 10.0 - 10.0 20.5

Chettinad Cement 8.5 100.0 - 8.5 - 8.5 100.0

Madras Cements 7.8 62.7 2.0 9.8 - 9.8 67.6

Dalmia Cement 6.5 72.2 - 6.5 - 6.5 72.2

India Cements 5.9 37.7 - 5.9 - 5.9 37.7

Kesoram Inds. 5.8 79.3 - 5.8 - 5.8 79.3

Prism Cement 5.6 100.0 - 5.6 - 5.6 100.0

Century Cements 3.8 48.7 - 3.8 0.4 4.2 42.0

JK Cement 3.0 38.1 - 3.0 - 3.0 38.1

Others 4.3 - 1.2 5.5 1.0 6.5 -

Total 82.0 28.5 3.2 85.3 4.4 89.7 28.1

Source: CMA, Company, Angel Research; Note: FY2009 figures are actual, FY2009E and FY2013E figures are Angel Research estimates, FY2013E capacity ofVicat- Sagar(5.5mtpa) and JSW Steel (5.2mtpa) in Karnataka and few others has not been considered in the above analysis, Total such capacities in FY2013E inKarnataka is 10.7mtpa

Exhibit 7: Demand-supply dynamics in Category III states


TN 24.4 36.3 15.9 18.1 10.4 3.4 8.6 18.1 Kerala Kerala 1.2 9.4

Karnataka 14.7 25.6 11.7 13.4 15.0 3.5 3.0 12.2 Goa, Maharashtra, Goa, Maharashtra, - 4.8

Kerala Kerala

MP 19.0 27.7 8.4 11.3 10.0 7.8 10.6 16.4 Bihar, UP Bihar, UP 1.8 5.9






Cement


Even in FY2009, these states had high net surplus as a percentageto total capacity, which is expected to further increase in FY2013Eon account of a) 34.6mtpa of expected capacity addition inthese states at a CAGR of 9% during FY2010-13E; b) expecteddecline in demand in AP particularly; and c) expected reductionin surplus demand of nearby states, particularly for Chhattisgarh.State wise, we expect capacities of Rajasthan to park some oftheir excess to nearby supply-deficit states of Haryana, Punjab,UP, Chandigarh and NCR. Similarly, excess capacities ofChhattisgarh would be in a position to supply some of theirsurplus to West Bengal and Assam. But the state with the highestcapacity, AP is expected to have the highest net surplus, as it

is surrounded by cement-surplus states on all sides (Karnatakaand TN in south; and Chhattisgarh and Odisha in north) andeven supply-deficit states nearby such as Maharashtra can bemore economically catered by other states, as explained earlier.

Amongst our coverage, companies that are expected to havethe highest exposure to these states (i.e., capacity in thesestates as a percentage to its total capacity) in FY2013Ewould be Shree Cement (87%), followed by JK LakshmiCement(79%), India Cements (55%), UltraTech (37%) andMadras Cements (25%).

Category IV: States where own cement capacities exceed own demand as well as that of nearby supply-deficit states, but the state's excesscapacity as a percentage of its total capacity is more than 25%

Source: CMA, Company, Angel Research; Note: FY2009 figures are actual, FY2009E and FY2013E figures are Angel Research estimates, FY2013E capacity ofBharathi Cement (5mtpa), Nagarjuna(2mtpa), Deccan (1.8mtpa),JSPL (2.5mtpa) and few others has not been considered in the above analysis; Total suchcapacities in FY2013E in AP is11.1mtpa and Chhattisgarh is 2.5mtpa

Exhibit 9: Demand-supply dynamics in Category IV states


AP 38.5 55.6 18.0 13.6 9.6 (6.7) 20.6 42.0 Odisha - 20.6 42.0

Rajasthan 33.9 47.0 11.0 13.9 8.5 6.1 22.9 33.0 Haryana, UP, Haryana, UP, Punjab, 10.7 16.4

Chandigarh, NCR Chandigarh, NCR

Chhattisgarh 11.2 15.6 4.2 5.9 8.6 9.2 7.1 9.7 West Bengal, Odisha, West Bengal, Assam 4.0 8.2

Assam







Exhibit 10: Player-wise capacities in Category IV statesCompanies Capacities % to company's Additions in Capacities Additions in Capacities % to company's

as of FY11-mt total capacity FY12E-mt as of FY12E FY13E-mt as of FY13E-mt total capacity

UltraTech 18.1 37.1 - 18.1 - 18.1 37.1

Shree Cement 11.7 86.7 - 11.7 - 11.7 86.7

India Cements 8.6 55.2 - 8.6 - 8.6 55.2

Penna Cement 7.7 100.0 0.5 8.2 - 8.2 100.0

JP Associates 2.2 9.3 5.0 7.2 - 7.2 22.0

Binani Cement 6.3 100.0 - 6.3 - 6.3 100.0

Zuari Cement 5.7 100.0 - 5.7 - 5.7 85.1

Ambuja Cements 4.1 16.4 1.1 5.2 - 5.2 19.3

My Home Inds. 4.9 100.0 - 4.9 - 4.9 100.0

JK Cement 4.9 61.9 - 4.9 - 4.9 61.9

Birla Corp 2.3 37.9 2.2 4.5 - 4.5 47.8

JK Lakshmi Cement 4.2 88.4 - 4.2 - 4.2 79.2

Madras Cements 3.7 29.2 - 3.7 - 3.7 25.2

ACC 3.1 11.4 - 3.1 - 3.1 10.2

Orient Cement 3.0 60.0 - 3.0 - 3.0 60.0

Others 17.2 - 2.0 19.2 - 19.2 -

Total 107.5 37.4 10.7 118.2 - 118.2 37.0

Based on this analysis of India's cement capacity clusters and state-wise demand supply dynamics, we have assigned a weightedaverage score to cement players based on their capacity locations in various categories at the end of FY2013E. Amongst ourcoverage universe, Ambuja Cements is expected to emerge as the company having the most favorable locational presence andShree Cement and India Cements having the worst.

This analysis is not to indicate that plants in category I II and IV states would not actually sell anything out of the implied netsurplus. Rather, in our view, it indicates that margins of the plants in these states would be most at risk, due to the freight costdisadvantage i.e. sales of the implied net surplus would involve a tradeoff with margins.

Cement


Cement

Outlook and valuation: Our concern on the cement sectorstems from low capacity utilization, which is due to poor demandgrowth and excess capacity. In our view, the cement sector'svaluations in terms of EV/sales and EV/tonne are trading aheadof the cycle when compared to utilization levels and are almost23% more expensive than historical valuations during periodsof similar utilization levels. But, despite low capacity utilization,cement companies have managed to maintain relatively healthypricing due to production discipline adopted by them, whichhas led to high valuations currently. However, in our view, thisis a thin investment thesis to rely on, as there exists persistentrisk of breakdown in the production discipline. Hence, we maintainour Neutral view on the sector.

Though Ambuja Cements has the most favorable locationalpresence, it is trading at rich valuations and, hence, we maintainour Neutral recommendation on the stock. Among otherlarge caps, we prefer ACC over UltraTech on a relative basisconsidering its better locational presence. But, we have aNeutral view on the stock, as we expect limited absoluteupside. While valuations are cheap for India Cements, Madras


Exhibit 12: One-year forward EV/sales vs. utilization

70.0

75.0

80.0

85.0

90.0

95.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Apr

-01

Oct

-01

Apr

-02

Oct

-02

Apr

-03

Oct

-03

Apr

-04

Oct

-04

Apr

-05

Oct

-05

Apr

-06

Oct

-06

Apr

-07

Oct

-07

Apr

-08

Oct

-08

Apr

-09

Oct

-09

Apr

-10

Oct

-10

Apr

-11

Oct

-11

EV/Sales(x)-LHS Utilization 1yr fwd(%) -RHS

Cements and Shree Cement, we have a Neutral view onthem due to their unfavorable locational presence, especiallyfor south-based players. That said, we maintain our Buyrecommendation on JK Lakshmi Cement due to its attractivevaluations, as it is trading at EV/tonne of US$35 on currentcapacity (US$ 23 on FY2013E basis).

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

Exhibit 13: Recommendation summaryCMP Target Upside

Company ( `̀̀̀̀) ( `̀̀̀̀) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E Reco (%)

UltraTech 1,197 - 18,228 20,033 21.7 21.7 2,037 2,267 8.3 7.2 129 123 Neutral -

ACC^ 1,153 - 9,493 10,777 20.3 21.3 1,074 1,269 10.1 8.0 118 112 Neutral -

Ambuja Cements^ 160 - 8,484 9,635 24.0 24.5 1,213 1,412 11.0 9.1 155 148 Neutral -

Shree Cement 2,148 - 4,260 5,205 23.5 25.1 247 434 6.8 4.6 77 57 Neutral -

India Cements 74 - 4,032 4,224 18.6 18.4 258 282 5.4 5.2 52 51 Neutral -

Madras Cements 108 - 3,060 3,254 30.5 28.3 351 363 5.6 5.0 53 45 Neutral -

JK Lakshmi Cement 44 51 1,483 1,751 16.5 17.2 72 95 3.9 2.7 30 23 Buy 16

Sales ( `̀̀̀̀ cr)

Source: Company, Angel Research; Note: Power requirement has been computed assuming PLFs of 70% and power consumption per tonne of cement to be sameas per the latest available Annual Report; Power capacities do not include wind power capacity in case of ACC, Madras Cements, India Cements, MangalamCement and power tie-ups in case of JK Lakshmi Cement and India Cements; Smaller players have been ignored while giving the weighted scores and ranks.

Exhibit 11: Player-wise ranking based on locational advantage; captive power as a percentage of total power and EBIT marginsCompany Cement Capacity Weighted Loctation Captive power Captive as % FY11/CY10

in FY13E/CY12E average wise capacity in FY13E/ of total EBIT

(in mtpa) Category -I Category -II Category -III Category -IV score Ranks CY12E (in MW) power req. margins

Century Ply-boards 4.4 73 27 - - 3.73 1 71 116 26.1

Heidelberg Cement 6.0 57 - 43 - 3.12 2 8 10 8.1

Ambuja Cements 27.0 41 40 - 19 3.03 3 400 106 21.2

ACC 30.1 23 28 39 10 2.63 4 361 85 18.4

Century Textile 10.0 37 - 42 21 2.53 5 77 61 17.6

JP Associates 32.7 17 24 37 22 2.36 6 339 72 17.7

UltraTech 48.8 26 16 20 37 2.31 7 529 81 14.7

Orient Cement 5.0 40 - - 60 2.20 8 50 76 22.6

Birla Corp 9.3 32 - 19 48 2.14 9 77 59 16.6

Prism Cement 5.6 - - 100 - 2.00 10 - - 5.9

Madras Cements 14.5 7 - 68 25 1.89 11 157 81 15.2

Kesoram Inds. 7.3 - - 79 21 1.79 12 75 80 14.8

Dalmia Cement 9.0 - - 72 28 1.72 13 72 65 8.8

India Cements 14.1 7 - 38 55 1.59 14 132 62 3.1

JK Lakshmi Cememts 5.3 10 10 - 79 1.52 15 66 97 7.5

JK Cement 7.9 - - 38 62 1.38 16 106 95 7.3

Shree Cement 13.5 - 13 - 87 1.27 17 260 149 7.1

Mangalam Cement 2.0 - - - 100 1.00 18 35 125 6.4

Rain Commodities 2.9 - - - 100 1.00 19 - - 7.2

EV/EBITDA (x) EV/Tonne (US $)PAT ( `̀̀̀̀cr)OPM (%)

% to total capacity as of FY13E/CY12E


Company BackgroundUltraTech (UTCEM) became India's largest cement player on a standalonebasis, with total capacity of 48.8mtpa, post the merger of Samruddhi (erstwhilecement division of Grasim) with itself in 2010. UTCEM also acquired a controllingstake in Dubai-based ETA Star (cement capacities of 3mtpa in the MiddleEast and Bangladesh) in 2010, which took its consolidated total capacityto 51.8mtpa. UTCEM is a pan-India player, with 22 cement plants spreadacross the country. Of its total capacity, the southern, western and northernregions constitute the maximum share (26%, 26% and 23%, respectively),as against 14% by the eastern and northeastern region and 11% by thecentral region.

Structural SnapshotGrowth opportunity: The Indian cement industry is expected to witness7-8% growth in the medium term, given the low per capita cementconsumption levels in India currently as compared to other countries (India's176kg vs. China's 1,210kg and world average of 433kg, as per industryestimates) and past experiences of cement growth in other countries duringsimilar growth phases as India's. However, significant capacity addition duringthe past four years (~109mtpa, 12.6% CAGR) vs. modest demand growth(6.9% CAGR) has resulted in a decline in utilization levels from 90.4% inFY2007 to 73.3% in FY2011.

Competitive position: Being a pan-India player, UTCEM is relatively insulatedfrom the risks of demand slowdown and price correction in any particularregion.

Nature of business: Cyclical; Low entry barriers for new players.

Current Investment ArgumentsIncreased use of captive power to protect margins: Currently, UTCEMhas 504MW of captive power capacity, which the company is planning toexpand by 70MW. Increased use of captive power for its overall powerrequirements would aid the company’s operating margins.

Relatively unfavorable capacity location among cement majors: About42% of UTCEM's total capacity is expected to achieve relatively higher capacityutilization, as it is located in states with favorable demand supply dynamics.However, its balance 58% capacity, which is located in AP, Rajasthan,Chhattisgarh, Karnataka, TN and MP, is expected to operate at relativelylower utilization and margins, as all these states have overcapacities afterfulfilling their own cement demand and surplus demand of nearby states.

Capacity expansion in favorable states: Over the next three years, UTCEMhas planned to set-up brownfield clinkerization plants at Chhattisgarh (4.8mtpa)and Karnataka (4.4mtpa) and split grinding units at various locations. Thiscapacity expansion is expected to aid its growth in the next up cycle.

Current valuation: The stock is trading at relative expensive valuation ofEV/tonne of US$145 on current capacity (US$123 on FY2013E capacity). Hence,we remain Neutral on the stock.

Cement CMP/TP/Upside: `1,197 / - / -UltraTech


PROMOTERS (ADITYA BIRLA GROUP) 3.4

FII 17.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

UTCEM 6.7 18.3 46.5 1.2 -

SENSEX (2.6) (12.3) 21.3 3.3 17.3NOTE: ABOVE 1 YEAR ON CAGR BASIS,


(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 23.1 87.4 33.8 31.9 -

PAT GROWTH* 93.4 28.4 11.3 43.4 -

OPM# 22.4 20.5 24.6 26.8 21.9


ANGEL ESTIMATES


PAT GROWTH (%) 45.1 11.3

ROE (%) 17.7 17.1

P/E 16.1 14.5

P/BV 2.7 2.3


BUY / HOLD / SELL 14 / 20 / 19

RATING NEUTRAL

52 WEEK HIGH / LOW 1,234/890

MARKET CAP (`̀̀̀̀ CR) 32,796

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,605 4,145 3,795 4,155

DEFERRED TAX LIABILITY 831 1,730 1,730 1,730



GROSS BLOCK 8,078 17,942 19,142 20,542


NET BLOCK 4,942 11,401 11,691 12,115

CAPITAL WORK-IN-PROGRESS 259 1,105 1,905 3,505

INVESTMENTS 1,670 3,730 3,730 3,730

CURRENT ASSETS 1,472 3,757 4,880 5,551




TOTAL ASSETS 7,044 16,541 17,873 20,105




% CHG 10.4 87.9 36.3 9.9


EBITDA 2,038 2,707 3,911 4,297

(% OF NET SALES) 28.9 20.5 21.7 21.7




(% OF PBT) 3.5 6.8 4.8 4.3

RECURRING PBT 1,588 1,786 2,911 3,239

% CHG 16.7 12.5 62.9 11.3


PBT (REPORTED) 1,588 1,786 2,911 3,239

TAX 495 382 873 972

(% OF PBT) 31.2 21.4 30.0 30.0

PAT (REPORTED) 1,093 1,404 2,037 2,267

ADJ. PAT 1,093 1,404 2,037 2,267

% CHG 11.9 28.4 45.1 11.3

BASIC EPS (`̀̀̀̀) 87.8 51.2 74.3 82.7

% CHG 11.9 (41.7) 45.1 11.3


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 13.6 23.4 16.1 14.5

P/CEPS 10.1 15.1 11.1 10.1

P/BV 3.2 3.1 2.7 2.3

EV/SALES 2.2 2.6 1.8 1.6

EV/EBITDA 7.5 12.4 8.3 7.2


EPS (BASIC) 87.8 51.2 74.3 82.7


CASH EPS 119.0 79.2 107.5 118.3

DPS 7.0 5.1 13.0 14.4

BOOK VALUE 370.2 389.2 450.6 518.9

RETURNS (%)

ROCE (PRE-TAX) 24.4 16.5 17.4 17.5


ROE 26.6 18.4 17.7 17.1

TURNOVER RATIOS (X)





CASH FLOW STATEMENT







(INC.)/ DEC. IN FIXED ASSETS (259) (1,223) (2,000) (3,000)

(INC.)/ DEC. IN INVESTMENTS (635) (542) - -




INC./(DEC.) IN LOANS (537) (1) (350) 360


OTHERS - (25) - -


INC./(DEC.) IN CASH (20) 61 207 110





Company BackgroundIn 2005, ACC was acquired by the world's second largest cement company,Holcim. Currently, Holcim Group in India (ACC and Ambuja Cements takentogether) has the largest cement capacity in the country (57mtpa). ACChas a standalone total capacity of 30mtpa, with 16 cement plants spreadacross the country. Similar to UltraTech, the company is also a pan-Indiaplayer but with a southern inclination (36% of its total capacity is in southas against 22% in north, 22% in east and northeast, 17% in central and 4%in west).

Structural SnapshotGrowth opportunity: Considering the low per capita cement consumptionlevels in India currently as compared to other countries (India's 176kg vs.China's 1,210kg and world average of 433kg, as per industry estimates)and past experiences of cement growth in other countries during similargrowth phases as India's, we expect the Indian cement industry to witness7-8% growth in the medium term. However, significant capacity additionduring the past four years (~109mtpa, 12.6% CAGR) vs. modest demandgrowth (6.9% CAGR) has resulted in a decline in utilization levels from 90.4%in FY2007 to 73.3% in FY2011.

Competitive position: ACC is a pan-India player and, hence, is relativelyinsulated from the risks of demand slowdown and price correction in anyparticular region.


Current Investment ArgumentsFavorable capacity location to augur well for the company: Around 51%of ACC's total capacity is located in states where either cement supply isless than cement demand; or if it is more, excess can economically be suppliedto nearby supply-deficit states and, hence, all such capacities can rationallyachieve relatively higher capacity utilization. Even its entire south India plantcapacity is at Karnataka and TN, where demand-supply dynamics are farbetter than those seen in AP.

Growth to be driven by capacity addition: Post the expansion of Wadiplant and the commissioning of the 3mtpa Chanda plant, ACC's total capacitycurrently stands at 30mtpa. The company's capacity has increased by ~7mtpasince CY2008-end. These capacity additions are expected to drive its growthgoing ahead, as was reflected by the 11.4% yoy increase in its dispatchesduring CY2011.

Higher fuel availability for CPPs - Lower power and fuel costs: Powerand fuel costs are expected to be lower for the company, as it currently has87% self sufficiency in power with 361MW of captive power plant (CPP),access to highest coal linkage in the industry and few captive coal blocks.

Current valuation: The stock is trading at EV/tonne of US$128 on currentcapacity (US$112 on FY2013E capacity), which in our view is fair. Hence,we continue to remain Neutral on the stock.

Cement CMP/TP/Upside: `1,153 / - / -ACC


PROMOTORS (MNC) 50.3

FII 17.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ACC 2.3 14.1 32.3 1.0 21.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 31.3 (3.9) 3.9 19.4 11.6

PAT GROWTH* 67.6 (30.3) (3.6) 30.0 30.0

OPM# 14.2 23.5 25.1 26.3 19.8


ANGEL ESTIMATES


PAT GROWTH (%) (4.1) 18.2

ROE (%) 15.7 16.7

P/E 20.2 17.1

P/B 3.0 2.7


BUY / HOLD / SELL 10 / 15 / 31

RATING NEUTRAL

52 WEEK HIGH / LOW 1,233 / 917

MARKET CAP (`̀̀̀̀ CR) 21,643

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 567 524 521 496




GROSS BLOCK 6,826 8,077 9,640 10,044


NET BLOCK 4,158 5,082 6,173 6,085

CAPITAL WORK-IN-PROGRESS 2,156 1,563 404 723

INVESTMENTS 1,476 1,703 1,503 1,603

CURRENT ASSETS 2,256 2,753 3,816 4,513


NET CURRENT ASSETS (858) (993) (28) 443


TOTAL ASSETS 6,932 7,355 8,052 8,853




% CHG 12.5 (2.6) 19.0 13.5


EBITDA 2,644 1,812 1,881 2,261

(% OF NET SALES) 32.9 23.5 20.3 21.3




(% OF PBT) 3.3 6.7 13.6 11.1

RECURRING PBT 2,294 1,461 1,512 1,879

% CHG 32.1 (36.3) 3.5 24.2


PBT (REPORTED) 2,294 1,461 1,512 1,879

TAX 688 341 439 610

(% OF PBT) 30.0 23.4 29.0 32.4

PAT (REPORTED) 1,607 1,120 1,074 1,269

ADJ. PAT 1,607 1,120 1,074 1,269

% CHG 32.5 (30.3) (4.1) 18.2

BASIC EPS (`̀̀̀̀) 85.5 59.6 57.1 67.5

% CHG 32.5 (30.3) (4.1) 18.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 13.5 19.3 20.2 17.1

P/CEPS 11.1 14.3 14.0 12.3

P/BV 3.6 3.3 3.0 2.7

EV/SALES 2.3 2.4 2.0 1.7

EV/EBITDA 6.9 10.0 10.1 8.0


EPS (BASIC) 85.5 59.6 57.1 67.5


CASH EPS 103.7 80.5 82.3 93.7

DPS 26.9 35.5 19.9 23.5

BOOK VALUE 320.1 344.2 381.4 425.4

RETURNS (%)

ROCE (PRE-TAX) 36.3 19.9 18.3 20.9


ROE 29.4 17.9 15.7 16.7

TURNOVER RATIOS (X)



PAYABLES (DAYS) 193 203 182 170


CASH FLOW STATEMENT







(INC.)/ DEC. IN FIXED ASSETS (1,544) (657) (404) (723)

(INC.)/ DEC. IN INVESTMENTS (797) (227) 200 (100)


CASH FLOW FROM INVESTING (2,264) (786) 2 (614)


INC./(DEC.) IN LOANS 85 (43) (3) (25)


OTHERS - - - -


INC./(DEC.) IN CASH (276) 372 595 412

OPENING CASH BALANCES 984 708 1,080 1,675

CLOSING CASH BALANCES 708 1,080 1,675 2,087



Company BackgroundSwiss cement major, Holcim acquired a controlling stake in Ambuja Cements(ACEM) in 2005. In India, Holcim Group currently controls one-fifth of thetotal cement capacity through ACEM and ACC. On standalone basis, ACEMis the third largest cement player in India with total capacity of 27mtpa. Thecompany majorly focuses on northern and western India, with no plants insouthern India. Of its current total capacity, 40% capacity is in the western,38% in northern, 16% in eastern and northeastern and 6% in central region.

Structural SnapshotGrowth opportunity: Considering the low per capita cement consumptionlevels in India currently as compared to other countries (India's 176kg vs.China's 1,210kg and world average of 433kg, as per industry estimates)and past experiences of cement growth in other countries during similargrowth phases as India's, we expect the Indian cement industry to witness7-8% growth in the medium term. Over FY2012-13E, regions where thecompany has a major presence, northern and western India are expected towitness healthy demand, at a CAGR of 8.0% and 6.7%, respectively, withminimal capacity addition at a CAGR of 5.0% and 2.0%, respectively, whichis expected to improve utilization for the region as well as for the company.

Competitive position: ACEM is present all over India except south, whichis facing a supply glut and, hence, the company is best positioned amongstcement majors to sustain higher utilizations and margins.


Current Investment ArgumentsMost favorable capacity location among cement majors: ACEM has 81%of its total capacity located in states where supply either is less than demandor is in excess and can be economically sold to nearby supply-deficit states.Logically capacities in these states are expected to report relatively higherutilization and margins.

Capacity addition to lead to volume growth: During the past two years,Ambuja has added ~5mtpa of grinding capacities at various locations toreach its current overall capacity of 27mtpa. Going ahead, we expect thesecapacity expansions undertaken by the company to drive its volume growth.

New clinker capacities/CPPs to aid margin expansion: Stabilization ofproduction at the company's new clinker plants with capacity of 2.2mtpaeach at Bhatapara and Rauri has resulted in elimination of externalhigh-cost clinker purchase. The company is also expected to record savingsin energy cost, following the commissioning of 66MW of new captive powercapacities in CY2010, which has taken its overall captive power capacitybeyond 400MW.

Current valuation: The stock is trading at rich valuations of EV/tonne ofUS$166 on current capacity (US$148 on FY2013E capacity), which webelieve factors in the positives such as favorable locational presence. Hence,we continue to remain Neutral on the stock.

Cement CMP/TP/Upside: `160 / - / -Ambuja Cements



FII 26.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ACEM 3.0 25.4 29.7 1.7 18.4



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 15.4 4.4 9.7 23.3 19.3

PAT GROWTH* 12.8 1.5 0.8 21.4 20.5

OPM# 17.4 26.4 26.0 29.6 29.1


ANGEL ESTIMATES


PAT GROWTH (%) (2.0) 16.5

ROE (%) 15.7 16.5

P/E 20.3 17.4

P/BV 3.0 2.7


BUY / HOLD / SELL 8 / 16 / 29

RATING NEUTRAL

52 WEEK HIGH / LOW 166 / 112

MARKET CAP (`̀̀̀̀ CR) 24,542

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS








GROSS BLOCK 6,224 8,779 9,710 10,148


NET BLOCK 3,440 5,628 6,121 6,102

CAPITAL WORK-IN-PROGRESS 2,714 931 439 728


CURRENT ASSETS 1,979 3,135 3,810 4,684




TOTAL ASSETS 7,122 7,926 8,716 9,636




% CHG 16.4 4.7 12.9 13.6


EBITDA 1,971 1,951 2,012 2,330

(% OF NET SALES) 27.9 26.4 24.0 24.5



OTHER INCOME 151 120 190 182

(% OF PBT) 8.4 7.4 11.2 9.0

RECURRING PBT 1,803 1,635 1,708 2,018

% CHG 8.5 (9.3) 4.4 18.1

EXTRAORDINARY EXPENSE/(INC.) - (27) - -

PBT (REPORTED) 1,803 1,662 1,708 2,018

TAX 585 398 495 605

(% OF PBT) 32.4 24.0 29.0 30.0

PAT (REPORTED) 1,218 1,264 1,213 1,412

ADJ. PAT 1,218 1,237 1,213 1,412

% CHG 3.0 1.5 (2.0) 16.5

BASIC EPS (`̀̀̀̀) 8.0 8.1 7.9 9.2

% CHG 2.8 0.8 (2.0) 16.5


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 20.0 19.9 20.3 17.4

P/CEPS 16.1 14.9 14.9 13.1

P/BV 3.8 3.4 3.0 2.7

EV/SALES 2.9 3.0 2.6 2.2

EV/EBITDA 10.5 11.2 11.0 9.1


EPS (BASIC) 8.0 8.1 7.9 9.2


CASH EPS 9.9 10.7 10.7 12.2

DPS 1.4 3.0 2.8 3.2

BOOK VALUE 42.4 47.7 52.8 58.8

RETURNS (%)

ROCE (PRE-TAX) 24.9 20.8 18.9 20.4


ROE 20.1 17.9 15.7 16.5

TURNOVER RATIOS (X)



PAYABLES (DAYS) 113 136 133 123


CASH FLOW STATEMENT





LESS: DIRECT TAXES PAID 585 398 495 605



(INC.)/ DEC. IN INVESTMENTS (395) 101 (50) (50)

OTHER INCOME 151 120 190 182

CASH FLOW FROM INVESTING (1,528) (550) (298) (596)


INC./(DEC.) IN LOANS (123) (101) - -


OTHERS - - - -


INC./(DEC.) IN CASH 29 867 209 581





Company BackgroundShree Cements (SRCM) is the leading cement company in North India, withcurrent total capacity of 13.5mtpa spread across Rajasthan (11.7mtpa) andUttarakhand (1.8mtpa). The company has ambitiously grown its cement capacityby five times in the past six years. In FY2011 alone, the company added3.3mtpa of cement capacity and 1mtpa of clinker capacity. Also, SRCM hasventured into the power generation business and is expected to have 560MWof capacity by FY2012-end post the commissioning of the new 300MWcapacity.

Structural SnapshotGrowth opportunity: North India, the company's major market, expects capacityaddition at a CAGR of only 2.0% over FY2012-13E, as against modestexpected growth in demand, at a CAGR of 6.7%, which is expected to slightlyimprove utilizations for the capacities operating in the region.

Competitive position: SRCM currently controls 19% of the total capacityin north India and faces tough competition from 14 odd players.


Current Investment ArgumentsOne of the lowest-cost cement producers: SRCM is one of thelowest-cost cement producers in north India, primarily because of its captivepower plant and lesser power consumption per tonne of cement (one of thelowest in the industry due to higher proportion of PPC (~80%) in overallsales volumes) and lower freight cost as its grinding units are close to demandcenters.

Growth to be driven by capacity addition: SRCM has recently added 3.3mtpaof cement capacity by commissioning new grinding plants and byde-bottlenecking. The company is also expected to commission new merchantpower capacity of 300MW in 3QFY2012E. We expect these capacity additionsto drive its revenue growth going ahead.

Having the most unfavorable plant locations amongst our coveragecompanies: SRCM has 87% of its total capacity located in Rajasthan, whichis expected to face prolonged utilizations and margin pressures, asstate-wise it is India's second biggest capacity cluster (44.8mtpa of totalcapacity in FY2011) and has huge demand supply gap even after cateringto surplus demand of nearby states (Punjab, Haryana, Chandigarh, NCRand UP), in addition to its own demand. The balance 13% capacity is inUttarakhand, where demand supply dynamics are much better than Rajasthan'sand, hence, capacities in the state are expected to witness relativelyhigher utilizations.

Current valuation: SRCM's cement business is trading at EV/tonne of US$85on current capacity (US$57 on FY2013E capacity), which, when consideringits unfavorable plant locations, in our view offers inadequate margin of safety.Hence, we maintain our Neutral recommendation on the stock.

Cement CMP/TP/Upside: `2,148 / - / -Shree Cement


PROMOTERS 64.8

FII 8.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SRCM 14.5 20.4 64.2 7.7 46.9



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 19.1 (3.2) 18.7 38.4 22.4

PAT GROWTH* 263.2 (61.8) (9.1) 63.9 23.5

OPM# 23.4 25.2 32.4 35.7 30.5


ANGEL ESTIMATES


PAT GROWTH (%) (4.5) 75.9

ROE (%) 11.8 18.2

P/E 30.3 17.2

P/BV 3.4 2.9


BUY / HOLD / SELL 25 / 11 / 6

RATING NEUTRAL

52 WEEK HIGH / LOW 2,200/1,505


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,106 2,008 1,608 1,308




GROSS BLOCK 2,951 4,042 5,242 5,442


NET BLOCK 752 1,167 1,700 1,154

CAPITAL WORK-IN-PROGRESS 967 1,028 78 78

INVESTMENTS 1,592 1,196 1,546 1,846

CURRENT ASSETS 1,582 1,439 1,339 1,726




TOTAL ASSETS 3,927 3,922 3,716 3,789




% CHG 34.2 (3.6) 21.3 22.2


EBITDA 1,439 886 999 1,309

(% OF NET SALES) 39.5 25.2 23.5 25.1



OTHER INCOME 129 124 126 134

(% OF PBT) 14.8 78.2 48.7 24.6


% CHG 20.1 (81.7) 63.4 108.9

EXTRAORDINARY EXPENSE/(INC.) - 48 - -

PBT (REPORTED) 868 110 260 542

TAX 192 (99) 13 108

(% OF PBT) 22.1 (90.0) 5.0 20.0

PAT (REPORTED) 676 210 247 434

ADJ. PAT 676 258 247 434

% CHG 17.0 (61.8) (4.5) 75.9

BASIC EPS (`̀̀̀̀) 194.0 74.1 70.8 124.5

% CHG 17.0 (61.8) (4.5) 75.9


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 11.1 29.0 30.3 17.2

P/CEPS 6.0 8.4 8.2 6.3

P/BV 4.1 3.8 3.4 2.9

EV/SALES 1.8 1.9 1.6 1.1

EV/EBITDA 4.6 7.6 6.8 4.6


EPS (BASIC) 194.0 74.1 70.8 124.5


CASH EPS 357.8 254.2 262.2 338.8

DPS 15.2 16.3 9.9 17.4

BOOK VALUE 526.2 570.1 631.1 738.2

RETURNS (%)

ROCE (PRE-TAX) 26.2 5.4 8.7 15.0


ROE 45.2 13.5 11.8 18.2

TURNOVER RATIOS (X)





CASH FLOW STATEMENT





DIRECT TAXES PAID 190 (71) 13 108




OTHER INCOME 129 124 126 134



INC./(DEC.) IN LOANS 610 (98) (400) (300)


OTHERS - - 19 -


INC./(DEC.) IN CASH (97) 45 153 180





Company BackgroundIndia Cements (ICEM) is the largest cement company in south India, with acapacity of 13mtpa spread across four plants each in TN and AP. The companyalso has a plant at Parli in Maharashtra (1.1mtpa). It has recently commissioneda plant of 1.5mtpa capacity at Banswara in Rajasthan through its subsidiary,Trinetra Cement, thereby taking its consolidated capacity to 15.6mtpa. Thecompany also bought franchise rights of IPL team, Chennai Super Kings,for 10 years in 2008 for US$91mn.

Structural SnapshotGrowth opportunity: South India, the company's major market, is expectedto witness capacity addition of 13.5mtpa during FY2012-13E, which willadd to its existing overcapacity woes, amidst minimal demand growth. Hence,the region is expected to remain a laggard with capacity utilization likely tobe 64% in FY2013E.

Competitive position: Despite being the leading player in south, ICEM controlsonly 12.4% of the region's current total capacity of 104.7mtpa, which isdistributed among 21 odd players.


Current Investment ArgumentsWorst plant locations amongst our coverage: About 93% of the company'sconsolidated total capacity is located in TN, AP and Rajasthan. As per ourestimates, for FY2013E, capacity situation in TN is expected to be slightlybetter than the other two, as a large part of its excess of 18.1mt can besupplied to Kerala (where the total deficit is expected to be 8.6mt). However,AP is expected to have India's highest indigenous demand supply gap (42mt)and no nearby supply deficit-state to sell its excess more economically thanother states. Further, Rajasthan's net demand supply gap is expected to behuge at 16.4mt even after factoring in supplies of 16.6mt to nearby supply-deficit states (Punjab, Haryana, Chandigarh, NCR and UP). Capacities inall these states are expected to witness prolonged utilization and marginpressures.

Large capex burden: As of FY2011, ICEM had invested `1,040cr (17.5%of gross block) in CWIP, which is not expected to result in creation of anyadditional cement capacities in the near future as the amount has beenutilized by the company in acquiring limestone-bearing lands and railwaysidings (as per management's guidance) and hence, the company's returnratios for the next few years are expected to remain subdued.

Key valuation parameter: Though the stock is trading at low valuations ofEV/tonne of US$60 on current capacity (US$51 on FY2013E capacity), webelieve this is justified considering the company's unfavorable locationalpresence. Hence, we maintain our Neutral recommendation on the stock.

Cement CMP/TP/Upside: `74/ - / -India Cements


PROMOTERS 25.8

FII 32.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ICEM (2.0) (25.1) (11.7) (21.4) 6.3



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 29.5 (7.3) 3.9 17.3 10.5

PAT GROWTH* - (87.1) (58.8) 5.1 (0.3)

OPM# 23.3 10.2 18.5 24.4 18.0


ANGEL ESTIMATES


PAT GROWTH (%) 545.2 9.1

ROE (%) 7.5 8.0

P/E 8.8 8.1

P/BV 0.7 0.6


BUY / HOLD / SELL 27 / 11 / 5

RATING NEUTRAL



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,133 2,456 2,756 2,756




GROSS BLOCK 5,710 5,926 6,226 6,576


NET BLOCK 3,919 3,834 3,885 3,972

CAPITAL WORK-IN-PROGRESS 703 1,040 1,040 940


CURRENT ASSETS 2,645 2,904 3,095 3,270




TOTAL ASSETS 6,538 6,820 7,071 7,212



TOTAL OPERATING INCOME 3687 3417 4032 4224

% CHG 9.8 (7.3) 18.0 4.8

TOTAL EXPENDITURE 2945 3067 3283 3446

EBITDA 743 350 748 778

(% OF NET SALES) 20.1 10.2 18.6 18.4




(% OF PBT) 22.8 108.5 48.7 46.9


% CHG (32.9) (87.3) 451.6 9.1

EXTRAORDINARY EXPENSE/(INC.) (44) (28) 0 0

PBT (REPORTED) 531 90 341 372

TAX 177 22 83 90

(% OF PBT) 33.3 24.2 24.2 24.2

PAT (REPORTED) 354 68 258 282

ADJ. PAT 311 40 258 282

% CHG (39.2) (87.1) 545.2 9.1

BASIC EPS (`̀̀̀̀) 10.1 1.3 8.4 9.2

% CHG (33.8) (87.1) 545.2 9.1


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 7.3 57.0 8.8 8.1

P/CEPS 3.9 7.3 4.5 4.2

P/BV 0.7 0.7 0.7 0.6

EV/SALES 1.0 1.1 1.0 1.0

EV/EBITDA 4.9 10.8 5.4 5.2


EPS (BASIC) 10.1 1.3 8.4 9.2


CASH EPS 19.1 10.2 16.5 17.7

DPS 2.3 1.7 4.2 4.6

BOOK VALUE 113.0 113.4 111.8 116.4

RETURNS (%)

ROCE (PRE-TAX) 8.2 1.6 7.2 7.2


ROE 9.7 1.2 7.5 8.0

TURNOVER RATIOS (X)



PAYABLES (DAYS) 136 129 125 122


CASH FLOW STATEMENT








(INC.)/ DEC. IN INVESTMENTS (155) 154 (30) -




INC./(DEC.) IN LOANS 145 323 300 -


OTHERS (18) (0) 178 -

CASH FLOW FROM FINANCING 375 270 (7) (141)

INC./(DEC.) IN CASH (31) (21) (26) 130





Company BackgroundMadras Cements (MC) is one of the largest cement players in southernIndia, with a capacity of 11.5mtpa spread across five locations in TN (total7.5mtpa); one in AP (3.7mtpa); and one in Karnataka (0.3mtpa). Apart fromthis, the company also has a plant at Kolaghat in West Bengal (1mtpa).Madras Cements is in the process of setting up another 2mtpa unit at itsAriyalur plant, thereby taking its total TN capacity to 9.5mtpa and all Indiacapacity to 14.5mtpa. The company also has wind power generation capacityof ~159MW.

Structural SnapshotGrowth opportunity: South India, the company's major market, is expectedto witness a capacity addition of 13.5mtpa during FY2012-13E, which willadd to its existing overcapacity woes, amidst minimal demand growth. Hence,the region is expected to remain a laggard with capacity utilization likely tobe 64% in FY2013E.

Competitive position: MC controls only 11% of the current total capacityin the south (104.7mtpa) and faces stiff competition from 21 odd players.


Current Investment ArgumentsNew captive power plants (CPPs) to reduce power costs: MC has recentlycommissioned 40MW of CPP and is expected to add another 45MW ofCPPs, thereby taking its total CPP capacity to ~157MW. Going ahead, weexpect the CPPs to considerably reduce power costs for the company.

Capacity addition to drive volume growth: MC is in the process of expandingits Ariyalur plant capacity by 2mtpa. Also, in the past two years, the companyhas added ~2.5mtpa of capacities at various locations to reach its currentoverall capacity of 12.5mtpa. We expect capacity expansions undertakenby the company to propel its volume growth going ahead.

Unfavorable plant locations: Around 93% of company's total capacity isin TN (68%) and AP (25%). As per our estimates, in FY2013E, AP is expectedto have India's highest indigenous demand supply gap (42mt) and no nearbysupply-deficit state, where it can supply more economically than other states.However, capacity situation in TN is slightly better, with the expected demandsupply gap of 18.1mt and a nearby supply-deficit state of Kerala (total deficitexpected to be 8.6mt), where it can supply a large part of its excess moreeconomically than Karnataka. Capacities in both these states are expectedto register extended low capacity utilization and margins.

Current valuation: It is trading at moderate valuations of EV/tonne ofUS$72 on current capacity of 12.5mtpa (US$45 on FY2013E capacity). However,considering its unfavorable locational presence and risk of margin pressure(if ongoing production discipline in southern India breaks down), we remainNeutral on the stock.

Cement CMP/TP/Upside: `108/ - / -Madras Cements


PROMOTERS 42.0

FII 7.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MC 8.7 10.8 17.3 (9.9) 17.7



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 27.6 (7.0) 9.0 20.9 15.5

PAT GROWTH* 256.6 (40.4) (19.9) 21.4 16.2

OPM# 32.6 23.7 28.7 31.8 27.4


ANGEL ESTIMATES


PAT GROWTH (%) 66.6 3.2

ROE (%) 18.6 16.5

P/E 7.3 7.1

P/BV 1.3 1.1



RATING NEUTRAL



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,567 2,791 2,641 2,141




GROSS BLOCK 4,811 5,266 5,616 5,666


NET BLOCK 3,693 3,946 4,043 3,838



CURRENT ASSETS 1,135 1,099 1,283 1,249




TOTAL ASSETS 4,710 5,115 5,278 5,090




% CHG 14.0 (7.0) 17.5 6.3


EBITDA 857 617 932 920

(% OF NET SALES) 30.6 23.7 30.5 28.3




(% OF PBT) 3.8 13.4 5.2 5.4


% CHG (2.9) (44.0) 76.5 3.2


PBT (REPORTED) 531 297 524 541

TAX 177 86 173 179

(% OF PBT) 33.3 29.0 33.0 33.0

PAT (REPORTED) 354 211 351 363

ADJ. PAT 354 211 351 363

% CHG (2.9) (40.4) 66.6 3.2

BASIC EPS (`̀̀̀̀) 14.9 8.9 14.8 15.2

% CHG (2.9) (40.4) 66.6 3.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 7.2 12.1 7.3 7.1

P/CEPS 4.7 5.9 4.2 4.1

P/BV 1.6 1.5 1.3 1.1

EV/SALES 1.9 2.0 1.7 1.4

EV/EBITDA 6.1 8.5 5.6 5.0


EPS (BASIC) 14.9 8.9 14.8 15.2


CASH EPS 23.1 18.1 25.4 26.0

DPS 2.3 1.5 2.1 2.1

BOOK VALUE 65.5 72.9 85.6 98.7

RETURNS (%)

ROCE (PRE-TAX) 14.8 8.1 13.1 12.8


ROE 25.1 12.8 18.6 16.5

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (119) 85 (124) 54





(INC.)/ DEC. IN INVESTMENTS - - - (50)




INC./(DEC.) IN LOANS 103 225 (150) (500)


OTHERS (7) 22 11 -


INC./(DEC.) IN CASH (4) 5 (8) 21





Company BackgroundJK Lakshmi Cement (JKLC) is a mid-size cement company with current totalcapacity of 4.75mtpa spread across Rajasthan (4.2mtpa) and Gujarat (0.5mtpa).The company is looking forward to increase its total capacity to 5.3mtpa, bycommissioning a 0.55mtpa split grinding unit at Jhajjar inHaryana by March 2012. The company also has plans to set up a 2.7mtpagreen field plant at Durg in Chhattisgarh by March 2013, taking its totalcapacity to 8.0mtpa.

Structural SnapshotGrowth opportunity: JKLC's major market is north India, which expects capacityaddition at a CAGR of only 2.0% over FY2012-13E, as against modestexpected growth in demand, at a CAGR of 6.7%, which is expected to slightlyimprove utilizations for the capacities operating in the region.

Competitive position: The company controls only 7% of the total capacityof Rajasthan and Gujarat (69.5mtpa as of FY2011) and faces tough competitionfrom some 15 odd players in these states.


Current Investment ArgumentsRising captive power usage to improve profitability: JKLC has a powerpurchase tie-up with VS Lignite for 21MW power for the next 20 years at`3.2/unit (closer to its captive power cost) in addition to its current totalcaptive power capacity of 66MW, which has been expanded recently by30MW. Thus, effectively the company has access to 87MW of cheaper power,which is more than sufficient for its current capacity.

Strong balance sheet: As of September 2011, JKLC's debt stood at ̀ 997cr,of which `94cr was on account of deferred sales tax (interest free). Thecompany's cash and investments stand at `550cr. Thus, JKLC's balancesheet is well placed, with net debt/equity at 0.33x, which will help thecompany to leverage, if required, for its current (Durg plant) as well as futureexpansion plans.

Unfavorable plant locations to affect profitability: JKLC has 79% of itstotal capacities in Rajasthan, which is state-wise India's second biggestcapacity cluster with 44.8mtpa of total capacity in FY2011. Capacities inRajasthan face huge demand-supply gap even after catering to surplus demandof nearby supply-deficit states (Haryana, Punjab, NCR, Chandigarh and UP),apart from meeting its own demand.

Current valuation: JKLC is trading at cheap valuations in terms of replacementcost (EV/tonne of US$35 on current capacity and US$23 on FY2013Ecapacity), even after considering its presence in unfavourable locations. Hence,we maintain our Buy recommendation on the stock with a target priceof `̀̀̀̀51.

Cement CMP/TP/Upside: `44 / `51 / 16%JK Lakshmi Cement


PROMOTERS 44.2

FII 4.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

JKLC 6.4 (15.3) 29.2 (13.4) 22.9



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 33.1 (11.5) 6.0 17.7 14.0

PAT GROWTH* 12.1 (82.9) (41.6) (2.2) -

OPM# 11.6 13.9 22.3 25.3 19.6


ANGEL ESTIMATES


PAT GROWTH (%) 80.0 31.6

ROE (%) 6.7 8.3

P/E 7.5 5.7

P/BV 0.5 0.5



RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS


RESERVES& SURPLUS 960 985 1,039 1,117


TOTAL LOANS 922 1,017 1,117 1,667




GROSS BLOCK 1,904 2,319 2,469 2,469

LESS: ACC. DEPRECIATION 841 938 1,036 1,140

NET BLOCK 1,063 1,381 1,432 1,329

CAPITAL WORK-IN-PROGRESS 182 74 624 1,274






TOTAL ASSETS 2,035 2,171 2,325 2,953




% CHG 21.7 (11.5) 12.4 18.1


EBITDA 425 183 245 301

(% OF NET SALES) 28.5 13.9 16.5 17.2




(% OF PBT) 10.5 35.3 36.4 29.9


% CHG 43.1 (81.6) 61.0 31.6


PBT (REPORTED) 331 60 96 127

TAX 90 20 24 32

(% OF PBT) 27.1 32.9 25.0 25.0


ADJ. PAT 235 40 72 95

% CHG 31.4 (82.9) 80.0 31.6

BASIC EPS (`̀̀̀̀) 19.2 3.3 5.9 7.8

% CHG 31.4 (82.9) 80.0 31.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 2.3 13.4 7.5 5.7

P/CEPS 1.7 4.3 3.1 2.7

P/BV 0.5 0.5 0.5 0.5

EV/SALES 0.4 0.7 0.7 0.5

EV/EBITDA 1.6 5.3 3.9 2.7


EPS (BASIC) 19.2 3.3 5.9 7.8


CASH EPS 26.2 10.2 14.0 16.2

DPS 2.9 1.5 1.5 1.5

BOOK VALUE 80.9 84.3 88.7 95.0

RETURNS (%)

ROCE (PRE-TAX) 19.1 4.7 6.5 7.5


ROE 25.3 3.9 6.7 8.3

TURNOVER RATIOS (X)



PAYABLES (DAYS) 106 116 113 111


CASH FLOW STATEMENT








(INC.)/ DEC. IN INVESTMENTS (392) (47) 400 -




INC./(DEC.) IN LOANS 219 96 100 550


OTHERS (54) (12) - -


INC./(DEC.) IN CASH (107) (148) (46) 50





FMCG NEUTRAL


ITC 209 - Neutral

HUL 392 - Neutral

Nestle 4,077 - Neutral

Asian Paints 2,728 - Neutral

Dabur 97 110 Accu.

Colgate 967 - Neutral

GCPL 399 430 Accu.

GSKCHL 2,486 - Neutral

Marico 152 - Neutral

TGBL 94 102 Accu.

Britannia 451 495 Accu.

Positives priced inFMCG Index has outperformed the broader markets by 31% in the past oneyear, with industry stalwarts HUL and ITC leading the outperformance by 31%and 17%, respectively. Most stocks touched their all-time highs during thepast year on the back of steady top-line growth and earnings growth. Also,with a hoard of uncertainties surmounting the local as well as global economies,the defensive nature of the stocks played out well towards their outperformance.

Low consumption – Key to growth: Consumption in many categories withhigh growth rates is still very low in urban India (like penetration of deodorantsat ~6%, skin creams at ~30% and noodles at ~21%). In rural India, penetrationof these products is even lower. With rising income levels and changing consumerbehavior in the country, consumer spending on branded FMCG products isset to rise. Also, growth in modern retail (currently contributing ~6% to FMCGsales) offers scope for further growth.

Premium product offerings – A trump card for growth: FMCG companiessee a vast scope for premium products in light of changing consumer lifestyles,urbanization, higher disposable income and increasing awareness. Most FMCGcompanies have introduced premium products, which come with health andwellness benefits and cater to specific needs of consumers. We believe companieswill be able to garner higher margins and profitability in the long run, as acceptabilityto such products gains traction.

Distribution strength and expansion to drive growth: Most FMCG companiesin the past few years have been ramping up their distribution to reach thelarge untapped domestic population. HUL has a direct reach to almost 1.5mnoutlets and indirect reach to 6.5mn outlets. Marico and Godrej indirectly reachto ~3mn outlets, while Nestle and Colgate have a reach to more than 4mnoutlets. Nestle and Asian Paints are in the process of expanding their capacitiesto cater to the growing demand for their products.

Companies looking for growth opportunities outside India: Intense competitionin categories such as soaps and detergents, personal care and other homecareproducts has motivated many FMCG companies to scout for growth opportunitiesoverseas. Dabur, GCPL Marico and TGBL have been very aggressive in theirexpansion plans overseas. These companies are present in various developingcountries in the Latin American, Southeast Asian and MENA regions. Thoughthere are advantages of overseas expansion, companies are also subject tovarious risks such as currency fluctuations, political and economic instability,and execution and integration risks.

Outlook and valuation: FMCG Index has outperformed the broader marketsby 31% in the past one year, with industry stalwarts HUL and ITC leading theoutperformance by 31% and 17%, respectively. Our FMCG universe is tradingat 25x FY2013E earnings against its historical median of 23x (upper end ofthe range 19-26x). In terms of valuations, the sector is trading at ~80% premiumto Sensex P/E, against its historical premium of ~50%. Though we remainpositive on the long-term domestic consumption story, we believe all the above-mentioned positives are already factored in and, hence, we maintain our Neutralstance on the sector. Further, we believe as valuations for companies in thesector are at their highs, any further upside would be a function of a positivesurprise in a company's earnings growth. That said, we remain positive onselect companies that offer products where penetration level is low and atthe same time profitability is high – such as Dabur, Britannia and TGBL.



Exhibit 1: FMCG sales growth trajectory in the past 10 years

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY07

FY0

8

FY0

9

FY1

0

(`cr

)

The Indian FMCG industry in FY2010 stood at `1,30,000cr,contributing 2.2% to the country's GDP. In the past five years,the industry has grown at ~2x the country's GDP. Accordingto a report by Booz & Company, the industry is expected toreport a 12% CAGR and become a `4,00,000cr industry by2020. Further, the industry is set for a paradigm shift withincreasing income levels (both urban and rural India) and changingconsumer behavior as its key growth drivers.

Nature of competition

From unorganized players: In categories like biscuits, hairoil, soaps and skin creams, the market is fragmented asinfrastructure is poor and limits the penetration of MNCs andnational players in rural areas. Also, low brand awareness andspurious and duplicate products are a threat to organized playersin these categories.

Among organized players (Domestic): The competitivescenario is high in many categories. FMCG companies havealways been in the limelight for their strategies towards competition,be it price war between HUL and P&G or Coke and Pepsi; ortheir innovative marketing strategies.

Among organized players (International): Internationalcompanies are launching products in the domestic market,thus posing competition to domestic players. For instance,Unilever launched Sure; GSKCH launched Lucozade; ITC launchedLucky Strikes (a product of its global shareholder, British AmericanTobacco).

Inorganic expansion to fill the portfolio gap: GCPL'sacquisition of Issue, Megasari and GSL; Marico's acquisitionof Code10; Dabur's acquisition of Hobi and Namaste Group.

Penetration levels indicate lot of headroom

We believe companies that have underpenetrated products inrural and urban India will grow at a faster pace compared tocompanies that have highly penetrated products.


Exhibit 2: FMCG sales growth trajectory in the past 10 years Product category Rural (%) Urban (%) Benefitting

Companies

Shampoos 46 62 HUL, P&G, Dabur

Utensils Cleaners 17 59 HUL, Jyothy Labs,

Talcum Powder 25 48 GCPL

Soft Drinks 12 37 Dabur

Skin cream 19 30 HUL, Dabur, Marico

Chocolates 7 28 Nestle

Baby Food 5 28 Nestle

Ice-cream 9 25 HUL

Coffee 8 23 HUL, Nestle

Noodles 2 21 HUL, ITC, Nestle, GSK

Malt based beverages 10 20 GSK

Floor cleaner 2 18 HUL, GCPL

Toilet cleaner 2 16 HUL, GCPL

Ketchup 3 15 Nestle, HUL

Breakfast cereals 1 10 Britannia,

Baby oils 2 8 Dabur

Milk powder 3 7 Nestle

Deodorants 1 6 HUL

Home care

Various products under this category such as laundry bars, mosquitorepellents, dish washing cleaners and surface cleaners are availablein various variants and have a vast presence in the unorganizedmarket. Most of these products are available at low price points,giving low margins to players operating in the segment; however,products such as air care and electric variants of mosquitorepellents are premium-price products. In terms of opportunity,due to the low penetration of most of these products, thesesegments offer a number of opportunities to grow upon volumesand increased acceptability in the market.

Personal care

Under this category, products such as soaps, shampoos,toothpastes and hair oil are available in many variants, acrossvarious price points. Use of these products is not affected byany economic condition. These are mass products and havelimited volume growth opportunities; however, sales of theseproducts are least affected by inflation. On the other hand,products such as skin care and cosmetics have comparativelylow penetration in India, even when these are available at variousprice points. All these are expanding segments and offer companiesattractive opportunities to tap on. In personal care, deodorantshave the lowest penetration, even when many variants are available,and pricing varies from brand to brand. Thus, deodorant offersa great potential to enhance volume growth.

Packaged goods

Penetration level is low in the packaged goods category ascompared to home and personal care categories. The packagedgoods category witnesses high competition in products suchas biscuits, chocolates, ice cream and edible oil due to availabilityof variants across various price points and presence of theunorganized market. All these are mass products and offer attractivevolume growth opportunities. Other products such as soups,noodles, malt-based beverages and snack bars are all nichecategory products with limited acceptability in the market dueto premium pricing. Volume growth of these products as such

FMCG


does not get affected in any economic condition, as targetedconsumers do not face any financial crunches. Also, the smallsize of these segments ensures modest volume growth.

Outlook and valuationConsumption in many categories with high growth rates is stillvery low in urban India (like penetration of deodorants at ~6%,skin creams at ~30% and noodles at ~21%). In rural India,penetration of these products is even lower. With rising incomelevels and changing consumer behavior in the country, consumerspending on branded FMCG products is set to rise. Also, growthin modern retail (currently contributing ~6% to FMCG sales)offers scope for further growth.

FMCG Index has outperformed the broader markets by 31% inthe past one year, with industry stalwarts HUL and ITC leadingthe outperformance by 31% and 17%, respectively. Our FMCGuniverse is trading at 25x FY2013E earnings against its historicalmedian of 23x (upper end of the range 19-26x). In terms ofvaluations, the sector is trading at ~80% premium to SensexP/E, against its historical premium of ~50%. Though we remainpositive on the long-term domestic consumption story, we believeall the above-mentioned positives are already factored in and,hence, we maintain our Neutral stance on the sector. Further,we believe as valuations for companies in the sector are attheir highs, any further upside would be a function of a positivesurprise in a company's earnings growth. That said, we remainpositive on select companies that offer products where penetrationlevel is low and at the same time profitability is high – such asDabur, Britannia and TGBL.


Exhibit 3: One-year forward P/E

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Mar

-05

Dec

-05

Sep

-06

Jun-

07

Mar

-08

Dec

-08

Sep

-09

Jun-

10

Mar

-11

Dec

-11

Mcap 15x 18x 21x 24x 27x

(M C

ap)


Exhibit 4: Our FMCG universe P/E trends

(P/E

)

P/E Median 15th percentile 85th percentile

15

17

19

21

23

25

27

29

31

33

Mar

-05

Dec

-05

Sep

-06

Jun-

07

Mar

-08

Dec

-08

Sep

-09

Jun-

10

Mar

-11

Dec

-11

Source: Company, Angel Research; Note: * December year end

Exhibit 5: Recommendation summaryCompany Reco Mcap CMP TP Upside P/E (x) EV/Sales (x) RoE (%) CAGR #

( `̀̀̀̀ cr) ( `̀̀̀̀) ( `̀̀̀̀) (%) FY12E FY13E FY12E FY13E FY12E FY13E Sales EPS

ITC Neutral 162,824 209 - - 28.1 23.7 6.2 5.2 33.8 34.2 17.6 17.4

HUL Neutral 84,625 392 - - 33.4 29.4 3.7 3.2 87.7 85.1 12.7 17.2

Nestle* Neutral 39,310 4,077 - - 40.2 33.2 5.1 4.2 91.3 73.8 20.2 20.2

Asian Paints Neutral 26,168 2,728 - - 26.6 21.6 2.7 2.3 39.6 38.3 17.3 19.8

Dabur Accumulate 16,830 97 110 14 25.3 21.2 3.3 2.8 43.1 42.0 20.5 18.2

Colgate Neutral 13,151 967 - - 30.0 25.6 4.9 4.2 111.6 108.1 14.9 12.9

GCPL Accumulate 12,907 399 430 8 24.1 18.5 3.2 2.5 36.6 29.4 22.9 20.2

GSKCHL* Neutral 10,456 2,486 - - 30.1 25.3 3.5 2.9 32.6 31.8 17.3 17.5

Marico Neutral 9,339 152 - - 30.7 23.9 2.5 2.1 29.9 29.0 17.8 28.2

TGBL Accumulate 5,807 94 102 9 17.3 13.6 0.8 0.7 8.4 10.2 9.0 42.3

Britannia Accumulate 5,384 451 495 10 29.2 20.0 1.1 0.9 37.8 46.0 17.5 36.0

FMCG


Company BackgroundITC is a diversified conglomerate, present across various categories – cigarettes(60% of revenue); hotels (3% of revenue); paperboards and packaging(9% of revenue); agri-business (14% of revenue); and other FMCG (brandedapparel, personal care, stationery, safety matches and specialty papers; 14%of revenue). Although ITC is a market leader in the cigarettes category, it israpidly gaining market share even in its evolving businesses of packagedfoods and confectionery, branded apparel, personal care and stationery.

Structural SnapshotGrowth opportunity: In the ~ `24,000cr cigarette industry in India, ITC hasa 73% volume and 82% revenue market share, where volume growth hasbeen on an average at ~2% in the last decade. We believe cigarette consumptionin India will continue to grow at this average. Cigarettes generate ~65% ofITC's gross revenue and 81% of operating profit. Also, the branded packagedfood industry (reporting a ~19% CAGR currently) accounts for 52% of theoverall FMCG market, providing a huge market potential to be captured.

Competitive position: ITC is a leader in the cigarettes category with 73%volume and 82% revenue market share; ~5% market share in soaps.

Nature of business: Defensive; Diversified branded business.

Current Investment ArgumentsCigarettes to grow by double digits and post impressive EBIT margin:We believe the cigarette business is well poised to post double-digit salesand EBIT growth in FY2013E. The company has taken prices hikes in brandssuch as Classic, Navy Cut and Gold Flake.

Non-cigarette FMCG to register a ~20% CAGR over FY2011-13E: Whilecigarettes remain the main profit center for the company, investments innon-cigarette businesses such as FMCG, hotels and paperboards have startedyielding positive results. Over FY2011-13E, we expect non-cigarette EBITto register a ~20% CAGR, aided by 1) reduction in non-cigarette FMCGlosses (likely breakeven in FY2013); 2) improvement in hotel margins, aidedby higher ARRs and uptick in the economy; and 3) higher margins in thepaperboards and packaging business.

Valuation: At the CMP of `209, the stock is trading at 23.7x FY2013EEPS. We recommend Neutral on the stock with a fair value of `̀̀̀̀219,based on our SOTP valuation.

FMCG CMP/TP/Upside: `209 / - / -


PROMOTERS -

FII 16.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ITC 0.8 20.0 36.1 19.7 24.4

BSE FMCG 2.5 13.4 27.7 16.1 16.2

SENSEX (2.6) (12.3) 21.3 3.3 17.3NOTE: * ABOVE 1 YEAR ON CAGR BASIS


(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 20.5 16.6 15.0 16.7 17.6

PAT GROWTH* 21.5 22.8 16.6 16.7 17.2

OPM# 35.3 33.8 32.8 32.5 27.1


ANGEL ESTIMATES


PAT GROWTH (%) 16.3 18.6

ROE (%) 33.8 34.2

P/ E 28.1 23.7


BUY / HOLD / SELL 47 / 7 / 1

RATING NEUTRAL

52 WEEK HIGH / LOW 217 / 149

MARKET CAP (`̀̀̀̀ CR) 162,824

LIQUIDITY HIGH

ITC


BALANCE SHEET

SOURCES OF FUNDS


PREFERENCE CAPITAL - - - -







GROSS BLOCK 11,968 12,766 14,900 17,667


NET BLOCK 8,142 8,345 9,765 11,762


GOODWILL - - - -

INVESTMENTS 5,727 5,555 6,240 6,875

CURRENT ASSETS 8,143 10,203 11,112 12,659




TOTAL ASSETS 14,957 16,854 19,867 23,337



NET SALES 18,153 21,168 24,706 29,294


% CHG 16.3 16.6 16.7 18.6


EBITDA 6,074 7,153 8,388 10,004

% CHG 25.0 17.8 17.3 19.3

(% OF NET SALES) 33.5 33.8 34.0 34.2

EBIT 5,465 6,497 7,674 9,233

% CHG 26.8 18.9 18.1 20.3

(% OF NET SALES) 30.1 30.7 31.1 31.5

RECURRING PBT 6,015 7,268 8,479 10,052

% CHG 24.7 20.8 16.7 18.6

TAX 1,954 2,281 2,679 3,177

(% OF PBT) 32.5 31.4 31.6 31.6

ADJ. PAT 4,061 4,988 5,799 6,876

% CHG 24.4 22.8 16.3 18.6

(% OF NET SALES) 22.4 23.6 23.5 23.5

ADJ. EPS (`̀̀̀̀) 5.2 6.4 7.4 8.8

% CHG 24.4 22.8 16.3 18.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 40.1 32.6 28.1 23.7

P/CEPS 17.1 28.6 25.0 21.3

P/BV 5.7 10.1 8.9 7.5

DIVIDEND YIELD (%) 4.8 2.1 1.8 1.8

EV/SALES 8.5 7.3 6.2 5.2

EV/EBITDA 25.5 21.5 18.3 15.3


EPS (BASIC) 5.2 6.4 7.4 8.8


CASH EPS 12.2 7.3 8.4 9.8

DPS 10.0 4.5 3.8 3.8

BOOK VALUE 36.8 20.6 23.5 28.0

RETURNS (%)

ROCE 36.8 40.8 41.8 42.7


ROE 29.2 33.2 33.8 34.2

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




INTEREST / DIVIDEND (NET) (267) (336) (395) (414)


OTHERS 206 (25) - -


(INC.)/ DEC. IN FIXED ASSETS (1,204) (1,122) (1,993) (2,988)

(INC.)/ DEC. IN INVESTMENTS (2,889) 172 (685) (635)

CASH FLOW FROM INVESTING (4,093) (950) (2,678) (3,623)

ISSUE OF EQUITY 721 904 6 -

INC./(DEC.) IN LOANS (70) (9) (22) (20)



CASH FLOW FROM FINANCING (712) (3,220) (3,024) (3,018)

INC./(DEC.) IN CASH 95 1,117 (340) (79)






Company BackgroundHUL, a 52% subsidiary of Unilever, is one of India's largest consumer goodscompanies. HUL is present across four main product categories – 1) soapsand detergents (45% of revenue); 2) personal products (mainly shampoos,skin care and toothpaste; 30% of revenue); 3) beverages (mainly tea andcoffee; 12% of revenue); 4) packaged foods and ice cream (6% of revenue);and 5) others, mainly consisting of water purifiers. The company, with itsiconic brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely,Pond's, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup,Axe, Brooke Bond, Bru, Knorr, Kissan and Walls, has a vast presence inrural as well as urban Indian markets, with one of the largest distributionnetworks spanning over 6.3mn retail outlets.

Structural SnapshotGrowth opportunity: According to industry sources, penetration of the soapsand detergent segment is pegged at ~98% in India, offering little room forgrowth. HUL is now increasing its focus in product categories with lowpenetration, such as the skin care (estimated penetration level at~30% inurban India and ~19% in rural India).

Competitive position: HUL has ~45% value share of the toilet soaps market,with its key brands Lux, Lifebuoy, Hamam, Breeze, Pears, Dove and Liril.In detergents, the company has ~37% value share of the detergents market,with its four key brands - Surf, Rin, Wheel and Sunlight. The company is aleader in tea (Brooke Bond and Lipton) and coffee (Bru) and other packagedfoods like Annapurna (atta and salt), Kissan (Ketchups and Jams) and Knorr(soups, meals and noodles).

Nature of business: Defensive sector; Branded business.

Current Investment ArgumentsIncreasing innovation and brand repositioning to accelerate growth: HULhas been re-launching products from its existing brands and has increasedthe pace of new launches, targeting the mid/premium market segment.For the S&D and personal products segments, we model in revenue CAGRsof 8.5% and 15.7% and expect margin to come in at ~12% and ~25%,respectively, over FY2011-13E.

Healthy domestic growth rates and strong balance sheet provide furtherimpetus: HUL is a cash-rich, zero-debt company enjoying high RoE of ~75%.We have modeled in a recurring earnings CAGR of ~17% overFY2011-13E, though we expect the company's margin to be under pressuredue to high input cost inflation.

Rich valuations: The stock is trading at rich valuations of ~30x FY2013EEPS against its five-year historical valuations of 24x. We see limited upsidein the stock at these levels and continue to maintain our Neutral ratingon the stock.

FMCG CMP/TP/Upside: `392 / - / -HUL


PROMOTERS (UNILEVER) 52.5

FII 18.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HUL 18.1 30.6 15.6 12.4 6.5

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 18.0 10.7 12.4 11.8 6.2

PAT GROWTH* 22.6 0.9 6.8 9.0 4.7

OPM# 13.4 12.2 13.3 13.4 15.7


ANGEL ESTIMATES


PAT GROWTH (%) 20.6 13.7

ROE (%) 87.7 85.1

P/E 33.4 29.4


BUY / HOLD / SELL 16 / 18 / 17

RATING NEUTRAL


MARKET CAP (`̀̀̀̀ CR) 84,625

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - - -




GROSS BLOCK 3,582 3,760 4,241 4,779


NET BLOCK 2,162 2,169 2,413 2,683


GOODWILL - - - -

INVESTMENTS 1,264 1,261 1,761 2,261

CURRENT ASSETS 5,368 6,095 6,561 7,067



TOTAL ASSETS 2,335 2,424 2,935 3,415



NET SALES 17,524 19,401 21,886 24,662


% CHG (13.4) 10.7 12.8 12.7


EBITDA 2,548 2,365 2,975 3,460

% CHG (4.1) (7.2) 25.8 16.3

(% OF NET SALES) 14.5 12.2 13.6 14.0

EBIT 2,364 2,144 2,737 3,192

% CHG (3.9) (9.3) 27.7 16.6

(% OF NET SALES) 13.5 11.1 12.5 12.9

RECURRING PBT 2,707 2,730 3,290 3,767

% CHG (10.5) 0.9 20.5 14.5

PBT (REPORTED) 2,806 2,937 3,290 3,767

TAX 604 631 757 885

(% OF PBT) 22.3 23.1 23.0 23.5

ADJ. PAT 2,103 2,099 2,534 2,881

(% OF NET SALES) 12.6 11.9 11.6 11.7

ADJ. EPS (`̀̀̀̀) 9.6 9.7 11.7 13.3

% CHG (16.0) 0.9 20.6 13.7


KEY RATIOS

VALUATION RATIO (X)

P/E 38.8 36.7 33.4 29.4

P/CEPS 37.0 36.5 30.5 26.9

P/BV 32.8 32.1 26.9 23.3

DIVIDEND YIELD (%) 1.7 1.7 2.0 2.4

EV/SALES 4.7 4.3 3.7 3.3

EV/EBITDA 32.3 34.9 27.4 23.4

EV / TOTAL ASSETS 35.2 34.0 27.8 23.7


EPS (BASIC) 9.6 9.7 11.7 13.3


CASH EPS 10.6 10.7 12.8 14.6

DPS 6.5 6.5 8.0 9.5

BOOK VALUE 12.0 12.2 14.6 16.8

RETURNS (%)

ROCE (PRE-TAX) 103.6 90.1 102.1 100.5

ANGEL ROIC (PRE-TAX) - - - -

ROE 90.5 80.5 87.7 85.1

TURNOVER RATIOS (X)



PAYABLES (DAYS) 110 114 108 106


CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 1,375 (242) 896 281



OTHERS (67) (416) 26 11





ISSUE OF EQUITY 32 (73) 0.2 -

INC./(DEC.) IN LOANS (422) - - -



CASH FLOW FROM FINANCING (1,929) (1,525) (1,855) (2,218)

INC./(DEC.) IN CASH 115 (252) 565 (52)






Company BackgroundNestlé India, a 61.9% subsidiary of its global parent Nestlé SA, is one of thelargest and most diversified food and beverage (F&B) companies in India.The company's product portfolio in CY2010 comprised milk products andnutrition (~44% of sales), prepared dishes and cooking aids (~27%), chocolatesand confectionery (~15%) and beverages (~14%). While Nestlé enteredthe Indian market way back in 1912, when it began as a trading company,its real activity in the country started in 1961 when it set up its first factoryat Moga, Punjab, to develop milk. Nestlé has seven factories across thecountry and is now involved in the manufacturing and marketing of a rangeof quality products across the F&B segment.

Structural SnapshotGrowth opportunity: Nestlé enjoys a strong position across categories inthe F&B space through a diversified portfolio of established brands, includingMaggi, Nescafé, Everyday, Kit Kat and Milkmaid. Growth opportunities forthe company lay in underpenetrated categories such as instant noodles,value-added dairy products, chocolates and confectionery, which are witnessingan uptrend in consumer demand. Also, changing lifestyles and focus onhealth and wellness will be the key growth drivers for the company.

Competitive position: Nestlé is a market leader in baby foods, infant formula,dairy whitener, sweetened condensed milk, instant coffee, wafer and whitechocolates, instant noodles and ketchups and No. 2 in healthy soupsand chocolates.


Current Investment ArgumentsBest play on the emerging growth opportunity in the F&B space: Nestléenjoys a strong position across categories in the F&B space through itsdiversified portfolio of established brands such as Maggi, Nescafé, Everyday,Kit Kat and Milkmaid. We are particularly bullish on underpenetrated categoriessuch as instant noodles, value-added dairy products, chocolates andconfectionery, which are witnessing an uptrend in consumer demand.

However, valuations at 155% premium to the Sensex capture full potential:At the CMP, Nestlé is trading at ~180% premium to the Sensex, significantlyahead of its five-year average historical premium of ~76%. While Nestléhas been able to maintain these premium valuations because of its strongparentage, dominant brands, high RoE and OPM, we believe current valuationscapture the full potential of near-term growth. We remain cautious in termsof Nestlé being able to maintain this triple-digit premium to the Sensex onaccount of gross margin pressures due to rising input costs and competitionin the high-growth noodles category from HUL, GSKCHL and ITC. Nestléis trading at 33.2x FY2013E EPS, above its historical valuations of 28x.We remain Neutral on the stock.

FMCG CMP/TP/Upside: `4,077 / - / -Nestlé



FII 10.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

NESTLÉ (1.2) 11.6 40.1 29.6 23.5

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 19.9 21.9 21.3 20.4 14.7

PAT GROWTH* 19.5 25.0 24.5 21.7 21.1

OPM# 20.9 20.0 19.7 19.4 18.9


ANGEL ESTIMATES


PAT GROWTH (%) 19.3 21.0

ROE (%) 91.3 73.8

P/E 40.2 33.2


BUY / HOLD / SELL 12 / 11 / 14

RATING NEUTRAL

52 WEEK HIGH / LOW 4,549 / 3,160

MARKET CAP (`̀̀̀̀ CR) 39,310

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS - - - -


TOTAL LIABILITIES 613 889 1,319 1,954


GROSS BLOCK 1,641 1,855 2,217 2,659

LESS: ACC. DEPRECIATION 745 842 995 1,178

NET BLOCK 896 1,013 1,222 1,480


GOODWILL - - - -


CURRENT ASSETS 857 1,046 1,720 2,342


NET CURRENT ASSETS (566) (624) (165) 190

TOTAL ASSETS 613 889 1,319 1,954



NET SALES 5,129 6,255 7,536 9,040


% CHG 18.6 21.9 20.5 19.9


EBITDA 1,034 1,250 1,483 1,796

% CHG 19.8 20.8 18.7 21.1

(% OF NET SALES) 20.2 20.0 19.7 19.9

EBIT 923 1,122 1,330 1,612

% CHG 19.7 21.5 18.5 21.2

(% OF NET SALES) 18.0 17.9 17.6 17.8

RECURRING PBT 917 1,145 1,363 1,650

% CHG 19.4 21.2 18.4 21.2

TAX 262 326 386 468

(% OF PBT) 27.3 28.1 28.0 28.0

ADJ. PAT 655 819 977 1,182

(% OF NET SALES) 13.6 13.4 13.2 13.3

ADJ. EPS (`̀̀̀̀) 67.9 84.9 101.3 122.6

% CHG 22.6 25.0 19.3 21.0


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 60.0 48.0 40.2 33.2

P/CEPS 51.3 41.5 34.8 28.8

P/BV 67.6 46.0 30.6 20.5

DIVIDEND YIELD (%) 1.2 1.2 1.2 1.2

EV/SALES 7.6 6.2 5.2 4.3

EV/EBITDA 37.8 31.3 26.0 21.2


EPS (BASIC) 67.9 84.9 101.3 122.6


CASH EPS 79.5 98.2 117.2 141.7

DPS 48.5 48.5 48.5 48.5

BOOK VALUE 60.3 88.7 133.3 199.2

RETURNS (%)

ROCE (PRE-TAX) 164.3 149.4 120.5 98.5


ROE 124.2 114.0 91.3 73.8

TURNOVER RATIOS (X)





CASH FLOW STATEMENT






OTHERS (14) (11) 7 1

CASH FLOW FROM OPERATIONS 871 1,057 1,153 1,420


(INC.)/ DEC. IN INVESTMENTS (168) 53 - -







INC./(DEC.) IN CASH (38) 100 499 426


CLOSING CASH BALANCES 156 255 754 1,180




Company BackgroundAsian Paints (APL) is India's largest paints company, with a market share of~50%. The company is mainly present in the decorative segment, whichcontributes over 75% to its sales. The company features among the top 10decorative paint players globally. APL has a large distribution network ofaround 25,000 dealers and 18,000 'Colour World' outlets. The company'sinternational revenue comes from countries in the Caribbean, Middle East,South Pacific and Asian regions.

Structural SnapshotGrowth opportunity: The paint industry's volume growth rate is pegged at1.5-2x India's GDP growth. Increasing income levels and strong demandfor decorative paints and premium products will be the key growth driversfor companies with a strong brand presence and a widespread distributionnetwork. Also, shift from the unorganized to the organized sector will be agrowth trigger for the paint industry. As per capita consumption increasesfrom the current estimated 1-1.5kg, large companies, like APL, are expectedto continue to deliver strong revenue growth.

Competitive position: APL is the market leader in the paints industry, witha market share of over 50% in terms of volumes, followed by Berger Paints,Nerolac and Akzo Nobel. With 20,000 Colour World stores in India, thecompany has an added competitive advantage over its competitors.

Nature of business: Branded business; High entry barriers; Relatively cyclicalwhen compared to peers in the FMCG sector.

Current Investment ArgumentsUncertainty over demand conditions hover: Although APL has not witnessedany slowdown in demand for paints, we do not expect growth to be as robustconsidering the price hikes (~12% yoy). Also, due to the slowdown in thecurrent environment, we expect demand for paints to remain sluggish.

Margin pressure to continue: We expect APL to sustain its OPM at ~17%in FY12E and do not expect it to witness any improvement in gross marginand operating margin in the remaining quarters. The company has beenfacing raw-material cost pressure since many quarters. Management maintainsthat price of TiO2 is very high and is not expected to witness a decline sosoon. Currently, TiO2 price is higher by over 40% yoy.

Sluggishness in the international business: APL's international businesshas been sluggish for a few quarters now. We do not expect any positivesurprises on this front, as a number of uncertainties prevail in many countrieswhere the company operates.

Valuation: At the CMP, the stock is trading at 21.6xFY2013E EPS againstits five-year historical average valuations of 20x. We believe the stock isrichly valued and offers limited upside from the CMP. We wait for betterentry opportunities and, hence, remain Neutral on the stock.

FMCG CMP/TP/Upside: `2,728/ - / -Asian Paints


PROMOTERS 52.8

FII 17.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

APL (12.8) 2.0 43.3 27.8 31.3

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 24.3 15.3 20.5 19.5 19.2

PAT GROWTH* (2.8) 1.0 27.3 (3.6) 23.1

OPM# 14.3 17.0 15.9 15.1 11.5


ANGEL ESTIMATES


PAT growth (%) 16.6 23.2

RoE (%) 39.6 38.3

P/E 26.6 21.6


BUY / HOLD / SELL 13 / 12 / 5

RATING NEUTRAL

52 WEEK HIGH / LOW 3366 / 2396

MARKET CAP (`̀̀̀̀ CR) 26,168

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS






TOTAL LOANS 229 235 180 125




GROSS BLOCK 1,500 1,988 2,152 2,357


NET BLOCK 873 1,273 1,310 1,374


GOODWILL 37 37 37 37


CURRENT ASSETS 1,844 2,319 2,741 3,625



TOTAL ASSETS 2,090 2,617 3,164 3,872



NET SALES 6,681 7,706 9,092 10,608


% CHG 22.3 15.3 18.0 16.7


EBITDA 1,227 1,313 1,542 1,865

% CHG 83.2 7.0 17.5 20.9

(% OF NET SALES) 18.4 17.0 17.0 17.6

EBIT 1,144 1,200 1,415 1,723

% CHG 92.0 4.9 17.9 21.8

(% OF NET SALES) 17.1 15.6 15.6 16.2

RECURRING PBT 1,256 1,260 1,486 1,815

% CHG 102.4 0.3 17.9 22.2

TAX 373 379 453 554

(% OF PBT) 29.7 30.1 30.5 30.5

ADJ. PAT 836 843 983 1,211

% CHG 107.9 1.0 16.6 23.2

(% OF NET SALES) 12.5 10.9 10.8 11.4

ADJ. EPS (`̀̀̀̀) 87.0 87.9 102.5 126.3

% CHG 107.9 1.0 16.6 23.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 31.4 31.0 26.6 21.6

P/CEPS 28.5 27.4 23.6 19.3

P/BV 15.3 12.0 9.4 7.4

DIVIDEND YIELD (%) 1.0 1.2 1.3 1.5

EV/SALES 3.8 3.3 2.8 2.3

EV/EBITDA 20.9 19.3 16.4 13.3


EPS (BASIC) 87.0 87.9 102.5 126.3


CASH EPS 95.8 99.7 115.8 141.0

DPS 27.0 32.0 35.0 40.0

BOOK VALUE 178.3 228.0 289.6 369.1

RETURNS (%)

ROCE (PRE-TAX) 61.3 51.0 49.0 49.0


ROE 57.4 43.3 39.6 38.3

TURNOVER RATIOS (X)





CASH FLOW STATEMENT






OTHERS 12 109 (104) 1

CASH FLOW FROM OPERATIONS 1,105 776 855 1,164




INC./(DEC.) IN LOANS (79) 5 (55) (55)




INC./(DEC.) IN CASH (105) 27 (19) 456






Company BackgroundDabur is a leading Indian FMCG company, offering products in the hair oil,shampoo, oral care, home care, skin care, foods and healthcare categories.The company has many iconic brands such as Dabur, Vatika, Hajmola, Realand Fem. The company has 17 manufacturing facilities, with a presence inover 60 countries. The company is currently headed by Mr. Sunil Duggal.

Structural SnapshotGrowth opportunity: Dabur will be one of the major beneficiaries of theIndian consumption story, with ~50% of its revenue generated from ruraland semi urban India. Also, with increasing awareness levels among consumers,companies in the health and wellness segment would tend to grow at afaster pace. Dabur, a well-established brand in the fruit juices and healthsupplements categories, will be one of the major beneficiaries of rural growthand changing consumer preferences.

Competitive position: Dabur is a market leader in heavy amla-based oil,with a ~57% market share; Fem is a market leader in bleaches; Dabur is No.1 in Chywanprash and honey products and No. 2 in glucose.


Current Investment ArgumentsNiche positioning and acquisitions to drive growth: Dabur's niche positioning,based on its ayurvedic/herbal offerings, provides it an attractive and uniqueproposition in terms of product portfolio. We believe the recent acquisitionswill contribute steadily to the company's top-line growth. We model in a20% CAGR in revenue over FY2011-13E, with the health supplements, babycare, home care and foods segments leading the company’s growth.

Margin to remain under pressure: We expect Dabur to remain under marginpressure due to increased raw-material prices. Also, due to new productlaunches, various marketing initiatives and increased competition, the company'sad spends could witness a spike. We have modeled in OPM of ~18% forFY2012E and FY2013E.

Acquisition rationale: Acquisitions of Hobi Group and Namaste Group provideDabur an entry into attractive new markets. Management has stated thatthese integrations are on track, and the company plans to introduce its coreproducts in international markets.

Valuations: At the CMP, the stock is trading at 21.2x FY2013E EPS. Wemaintain our Accumulate recommendation on the stock with a targetprice of `̀̀̀̀110.

FMCG CMP/TP/Upside: `97 / `110 / 14%Dabur


PROMOTERS (BURMAN GROUP) 68.7

FII 19.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

DABUR (2.5) (3.5) 28.9 11.5 24.3

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 29.8 20.3 20.0 16.9 13.9

PAT GROWTH* 8.4 13.4 19.7 20.2 21.5

OPM# 18.7 18.5 22.9 21.2 17.2


ANGEL ESTIMATES


PAT GROWTH (%) 17.0 19.4

ROE (%) 43.1 42.0

P/E 25.3 21.2


BUY / HOLD / SELL 19 / 15 / 7

RATING ACCUMULATE


MARKET CAP (`̀̀̀̀ CR) 16,830

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS


RESERVES& SURPLUS 848 1,217 1,525 1,910

SHAREHOLDERS FUNDS 935 1,391 1,699 2,084


TOTAL LOANS 179 1,051 1,051 1,021




GROSS BLOCK 986 1,934 2,354 2,691


NET BLOCK 647 1,499 1,820 2,044


GOODWILL - - - -


CURRENT ASSETS 1,106 1,853 2,180 2,560



TOTAL ASSETS 1,129 2,465 2,773 3,129



NET SALES 3,390 4,077 5,179 5,919


% CHG 20.9 20.3 27.0 14.3


EBITDA 629 755 922 1,089

% CHG 33.7 20.0 22.1 18.1

(% OF NET SALES) 18.6 18.5 17.8 18.4

EBIT 573 673 823 976

% CHG 36.0 17.5 22.2 18.6

(% OF NET SALES) 16.9 16.5 15.9 16.5


% CHG 35.1 17.8 17.6 19.4

PBT (REPORTED) 599 708 832 994

TAX 100 139 166 199

(% OF PBT) 16.7 19.6 20.0 20.0

ADJ. PAT 501 569 666 795

% CHG 28.1 13.4 17.0 19.4

(% OF NET SALES) 14.8 13.9 12.8 13.4

ADJ. EPS (`̀̀̀̀) 2.9 3.3 3.8 4.6

% CHG 28.1 13.4 17.0 19.4


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 33.6 29.6 25.3 21.2

P/CEPS 15.1 25.9 22.0 18.5

P/BV 9.0 12.1 9.9 8.1

DIVIDEND YIELD (%) 2.1 1.2 1.8 2.1

EV/SALES 5.0 4.3 3.3 2.9

EV/EBITDA 26.7 23.3 18.8 15.8


EPS (BASIC) 5.8 3.3 3.8 4.6


CASH EPS 6.4 3.7 4.4 5.2

DPS 2.0 1.2 1.8 2.0

BOOK VALUE 10.8 8.0 9.8 12.0

RETURNS (%)

ROCE 52.3 37.5 31.4 33.1


ROE 57.1 48.9 43.1 42.0

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




INTEREST / DIVIDEND (NET) 12 10 47 44




(INC.)/ DEC. IN INVESTMENTS (104) (163) 50 -



INC./(DEC.) IN LOANS (51) 872 - (30)




INC./(DEC.) IN CASH 44 80 144 93






Company BackgroundColgate-Palmolive, a 51% subsidiary of Colgate Palmolive Company, U.S.,is a leading FMCG player in the Indian oral care market. The oral care segmentcontributes ~96% to the company's revenue, with the personal care andhousehold care segment contributing the balance. The company, under thePalmolive brandname, is present in the personal care segment.

Structural SnapshotGrowth opportunity: Low per capita consumption of toothpaste in India(127gms/person) as compared to 200+ gms/person in China, Malaysia andPhilippines and 500+ gms/person in U.S. presents a key growth opportunityto the company. Further, increasing awareness about personal oral hygieneand higher spends on FMCG products provide a huge growth opportunityto oral care product companies.

Competitive position: Colgate enjoys a leadership position in the Indianoral care space, with ~53% market share in toothpaste, ~46% in toothpowderand ~40% in toothbrush categories in volume terms.


Current Investment ArgumentsOral care category witnessing high competition: We believe competitionin the oral care category is set to intensify for all players. Colgate has launchedpremium products, such as Colgate Sensitive Pro-Relief toothpaste and Colgate3600 Sensitive Pro-Relief toothbrush, post Glaxo's launch of Sensodyneand HUL showing aggression through product launches and higher ad spends.We also expect P&G to intensify competition in India, as it is doing globally.This could lead to much higher ad spends and affect Colgate's profitability.

Limited earnings growth and OPM under pressure: As expected, Colgateis witnessing a slippage in margins from FY2010. While we have modeledin a margin contraction of 52bp for FY2012E, we highlight the same is atrisk to - 1) higher excise duty due to further roll-back, 2) rise in competitiveintensity and 3) deterioration in product mix. Moreover, we have modeled ina higher tax rate for FY2011-13E at 26%, as income tax benefits at Baddifacility reduce from 100% to 30%.

Expensive valuations for a muted earnings CAGR: At the CMP of `967,the stock is trading at P/E of 25.6x FY2013E EPS, against its five-yearhistorical average of 22x. In terms of earnings growth, we do not expect anypositive surprises and, hence, we maintain our Neutral rating on the stockand wait for better entry opportunities.

FMCG CMP/TP/Upside: `967 / - / -Colgate



FII 19.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

COLGATE (3.7) 16.8 34.7 21.5 20.4

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

Sales Growth* 19.1 13.2 14.6 14.5 7.1

PAT GROWTH* (0.6) (4.9) 20.2 24.9 20.9

OPM# 17.1 20.3 23.6 22.1 19.2


ANGEL ESTIMATES


PAT GROWTH (%) 8.8 17.2

ROE (%) 111.6 108.1

P/E 30.0 25.6


BUY / HOLD / SELL 6 / 9 / 27

RATING NEUTRAL

52 WEEK HIGH / LOW 1,085 / 784

MARKET CAP (`̀̀̀̀ CR) 13,151

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS


RESERVES& SURPLUS 313 370 387 536


TOTAL LOANS 5 0 0 0




GROSS BLOCK 494 539 580 666


NET BLOCK 206 214 219 264








TOTAL ASSETS 313 367 384 532



NET SALES 1,962 2,221 2,550 2,931


% CHG 15.8 13.2 14.8 14.9


EBITDA 425 451 504 596

% CHG 59.7 6.0 11.9 18.2

(% OF NET SALES) 21.7 20.3 19.8 20.3

EBIT 388 416 469 554

% CHG 59.3 7.4 12.6 18.2

(% OF NET SALES) 19.8 18.8 18.4 18.9


% CHG 38.4 7.3 13.8 17.2

TAX 62 117 154 180

(% OF PBT) 12.7 22.6 26.0 26.0

ADJ. PAT 423 403 438 514

% CHG 45.8 (4.9) 8.8 17.2

(% OF NET SALES) 21.6 18.1 17.2 17.5

ADJ. EPS (`̀̀̀̀) 31.1 29.6 32.2 37.8

% CHG 43.4 (4.9) 8.8 17.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 31.1 32.7 30.0 25.6

P/CEPS 28.5 30.1 27.8 23.7

P/BV 40.3 34.2 32.8 23.9

DIVIDEND YIELD (%) 2.1 2.3 2.3 2.4

EV/SALES 6.5 5.7 4.9 4.2

EV/EBITDA 33.0 30.6 26.8 22.4


EPS (BASIC) 31.1 29.6 32.2 37.8


CASH EPS 33.9 32.1 34.8 40.8

DPS 20.0 22.1 22.0 23.0

BOOK VALUE 24.0 28.2 29.5 40.4

RETURNS (%)

ROCE 150.3 122.5 124.9 120.9


ROE 156.1 113.4 111.6 108.1

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (23) 4 119 59



OTHERS 70 31 (30) 7



(INC.)/ DEC. IN INVESTMENTS 17 (18) - -



INC./(DEC.) IN LOANS (0) (5) - -




INC./(DEC.) IN CASH 96 48 98 164






Company BackgroundGCPL is a leading FMCG company in the household and personal careproducts category, with brands such as Good Knight, HIT, Cinthol, GodrejNo.1 and Expert. The company has built a foothold in Africa, Latin America,Indonesia and U.K. through several acquisitions. Currently, ~36% of thecompany's revenue comes from its international business.

Structural SnapshotGrowth opportunity: GCPL’s strategic presence in Africa, where large MNCshave less presence, offers it a firm ground to tap the untapped market.Also, the company's international business reduces its dependence on thedomestic soap category, where competition is fierce.

Competitive position: GCPL has ~10% market share in the soaps category,with brands like Godrej No.1, Cinthol and Fairglow. In the hair color category,GCPL has a ~29% market share; while in the household insecticides category,the company has a market share of 37%.


Current Investment ArgumentsAcquisitions to drive a 16% CAGR in EPS over FY2011-13E: Managementhas constantly reiterated that all recent international acquisitions have beenEPS-accretive. Over FY2011-13E, we expect GCPL to post a 16% CAGRin its EPS, largely driven by consolidation of its recent acquisitions.

Dependence on soaps to decline, home care to emerge as the largestcategory: Over FY2011-13E, we expect the personal wash (including soaps)category to contribute 24-25% to the company's total consolidated revenue.Further, we expect the home care segment's contribution to increase to50-51%. We believe the shift in revenue mix is likely to help GCPL de-riskits dependence on the highly competitive soaps market and increase itsfocus on the high-margin, high-growth insecticides business.

Synergistic benefits and cross-pollination opportunities: We believe thereare synergistic benefits in terms of distribution and supply-chain networksthrough the integration of Godrej Household Products Ltd., which is likelyto reflect over FY2011-13E. Moreover, GHPL's strong presence in southernIndia complements GCPL's strong presence in northern India well, givingGCPL a balanced presence.

Valuation: The stock is trading at 18.5x FY2013E EPS, against its five-yearhistorical average of 20x. We maintain our Accumulate rating on the stockwith a target price of `̀̀̀̀430.

FMCG CMP/TP/Upside: `399 / `430 / 8%GCPL


PROMOTERS (GODREJ GROUP) 67.3

FII 19.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

GCPL (3.0) (3.9) 44.2 20.9 39.8

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 24.5 78.4 48.9 40.9 0.0

PAT GROWTH* (2.5) 41.8 44.6 32.1 0.0

OPM# 17.6 17.6 17.5 18.2 0.0


ANGEL ESTIMATES


PAT GROWTH (%) 11.0 30.2

ROE (%) 36.6 29.4

P/E 24.1 18.5


BUY / HOLD / SELL 32 / 8 / 2

RATING ACCUMULATE

52 WEEK HIGH / LOW 464 / 326

MARKET CAP (`̀̀̀̀ CR) 12,907

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




MINORITY INTEREST - - - -

TOTAL LOANS 37 2,005 1,755 1,555




GROSS BLOCK 359 660 860 1,038


NET BLOCK 206 282 420 524


GOODWILL 368 2,795 2,945 3,095

INVESTMENTS 67 - - -

CURRENT ASSETS 910 1,506 1,717 1,934

CURRENT LIABILITIES 553 867 1,230 1,483


TOTAL ASSETS 998 3,732 3,908 4,139



NET SALES 2,041 3,643 4,470 5,503

OTHER OPERATING INCOME 2 3 7 7


% CHG 46.3 78.4 22.8 23.1


EBITDA 407 641 782 993

% CHG 96.6 57.3 22.1 27.0

(% OF NET SALES) 20.0 17.6 17.5 18.1

EBIT 384 591 720 918

% CHG 104.2 54.0 21.9 27.5

(% OF NET SALES) 18.8 16.2 16.1 16.7


% CHG 100.7 45.7 12.1 30.2

TAX 80 130 151 196

(% OF PBT) 19.1 21.3 22.0 22.0

ADJ. PAT 340 482 535 696

% CHG 96.7 41.8 11.0 30.2

(% OF NET SALES) 16.6 13.2 12.0 12.7

ADJ. EPS (`̀̀̀̀) 10.5 14.9 16.5 21.5

% CHG 96.7 41.8 11.0 30.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 38.0 26.8 24.1 18.5

P/CEPS 33.8 24.3 21.6 16.7

P/BV 12.9 7.5 6.0 5.0

DIVIDEND YIELD (%) 1.0 1.3 1.5 1.8

EV/SALES 6.2 4.0 3.2 2.6

EV/EBITDA 31.0 22.9 18.2 14.2


EPS (BASIC) 11.0 14.9 16.5 21.5


CASH EPS 11.8 16.4 18.4 23.8

DPS 4.1 5.0 6.0 7.0

BOOK VALUE 31.0 53.3 66.5 79.8

RETURNS (%)

ROCE 41.5 25.0 18.9 22.8


ROE 44.5 38.4 36.6 29.4

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




INTEREST / DIVIDEND (NET) (16) 25 55 46


CASH FLOW FROM OPERATIONS 310 353 1,143 780

(INC.)/ DEC. IN FIXED ASSETS 34 (2,743) (240) (191)




INC./(DEC.) IN LOANS (241) 1,969 (250) (200)



CASH FLOW FROM FINANCING (324) 2,244 (414) (511)

INC./(DEC.) IN CASH (47) (78) 489 78






Company BackgroundGSKCHL is one the largest players in the health foods industry in India anda clear market leader in the hot malted beverages category. The company'sflagship product, Horlicks is a highly popular brand with a rich heritage,ranking No. 1 in the malted beverages category with a ~50% market share.The company also sells other malted beverages brands, such as Boost,Maltova and Viva. GSKCHL is also present in the biscuits segment throughits Horlicks biscuits range. In addition, the company promotes and distributesa number of OTC products from its global parent, which include prominenthousehold names like Eno, Crocin and Iodex. GSKHCL has a strong marketingand distribution network in India, comprising over 1,800 wholesalers and400,000 retail outlets.

Structural SnapshotGrowth opportunity: The hot malted beverages category offers a potentialfor sustainable growth, owing to its low penetration levels. The category'sgrowth has started to pick up on account of rising per capita income, growingmodern retail trade, higher promotional activity and better rural penetration.Moreover, increasing awareness about such products along with a mindsetshift towards healthier beverages provides a huge opportunity to leaders likeGSKCHL. Since kids are the key growth drivers of this category, brand positioningwould continue to play a critical role in the performance of such products.

Competitive position: GSKCHL is a clear market leader in the malted beveragescategory, with a market share of 70%. The company's core brands, Horlicksand Boost, have stood the test of times from competition like Cadbury, Heinzand Nestle, owing to their strong brand equity, innovative variants and astrong foothold in key markets like southern India.

Nature of business: Defensive; Branded business.

Current Investment ArgumentsAnchor brands to perform well coupled with new launches: We expectGSKHCL to perform well with its anchor brands – Horlicks and Boost. Also,with the launch of innovative and premium products, GSKCHL tends to maintainits margins and market share. In the MFD (milk food drinks) category, weexpect Horlicks to witness double-digit volume growth by CY2012E. Similarly,Boost is expected to post double-digit volume growth. Though the companyhas pricing power, innovative launches such as small pack sizes will help thecompany garner a market share in rural markets and penetrate new areas.

Earnings growth and margins to remain stable at ~17%: OverCY2011-12, we expect the company's margin to remain at ~17% due tointensive competition in the business environment (leading to a considerableexpenditure in advertisements) and mounting high raw-material inflation. Weexpect the company's earnings to witness a 17% CAGR over CY2010-12E.

Valuation: At the CMP, the stock is trading at 25.9xFY2013E EPS, againstits five-year historical average valuations of 20x. We believe the stock isrichly valued and offers limited upside from the CMP. We wait for betterentry opportunities and, hence, remain Neutral on the stock.

FMCG CMP/TP/Upside: `2,486/ - / -GSKCHL



FII 15.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

GSKCHL 7.1 17.1 65.3 33.1 20.4

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 17.5 20.0 21.9 19.0 12.1

PAT GROWTH* 31.1 30.2 22.4 22.6 10.3

OPM# 16.4 21.2 16.0 16.4 17.6


ANGEL ESTIMATES


PAT GROWTH (%) 16.1 18.9

ROE (%) 32.6 31.8

P/ E 30.7 25.9


BUY / HOLD / SELL 18 / 5 / 1

RATING NEUTRAL

52 WEEK HIGH / LOW 2,700 / 1,908

MARKET CAP (`̀̀̀̀ CR) 10,456

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - - -




GROSS BLOCK 492 533 707 858


NET BLOCK 128 136 270 372



INVESTMENTS - - - -

CURRENT ASSETS 1,173 1,423 1,508 1,753



TOTAL ASSETS 894 933 1,148 1,399



NET SALES 1,922 2,306 2,723 3,174


% CHG 24.6 20.0 18.1 16.5


EBITDA 311 489 447 537

% CHG 30.8 57.3 (8.5) 72.8

(% OF NET SALES) 16.2 21.2 16.4 16.9

EBIT 269 449 407 488

% CHG 37.3 67.1 (9.4) 20.0

(% OF NET SALES) 14.0 19.5 14.9 15.4

ECURRING PBT 354 446 523 622

% CHG 23.9 26.1 17.2 18.9

TAX 124 152 175 208

(% OF PBT) 35.0 34.1 33.5 33.5

ADJ. PAT 230 294 348 413

(% OF NET SALES) 12.0 12.7 12.8 13.0

ADJ. EPS (`̀̀̀̀) 54.7 71.2 82.7 98.3

% CHG 21.2 30.2 16.1 18.9


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 46.4 35.7 30.7 25.9

P/CEPS 38.9 31.5 27.5 23.1

P/BV 11.8 11.1 9.1 7.5

DIVIDEND YIELD (%) 0.7 2.0 1.1 1.3

EV/SALES 5.1 4.2 3.6 3.0

EV/EBITDA 31.8 25.8 21.7 17.8

EV / TOTAL ASSETS 11.0 10.4 8.5 6.8


EPS (BASIC) 54.7 71.2 82.7 98.3


CASH EPS 65.3 80.7 92.3 109.9

DPS 18.0 50.0 27.0 33.0

BOOK VALUE 215.2 228.3 279.4 339.1

RETURNS (%)

ROCE (PRE-TAX) 32.3 36.9 39.1 38.3

ANGEL ROIC (PRE-TAX) 94.2 1,418.7 447.4 156.1

ROE 27.9 32.2 32.6 31.8

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 211 169 (122) 23



OTHERS (5) 4 (2) 3


(INC.)/ DEC. IN FIXED ASSETS 41 111 123 162

(INC.)/ DEC. IN INVESTMENTS - - - -


ISSUE OF EQUITY - (0.00) - -





INC./(DEC.) IN CASH 349 39 8 163






Company BackgroundMarico is one of India's leading FMCG companies, offering products in thebeauty and wellness segment. The company is present in over 25 countriesacross Asia and the Africa. The company offers products in the hair care,skin care and edible oils segments. Marico's product portfolio includes brandssuch as Parachute, Saffola, Hair & Care, Nihar, Mediker, Revive and Manjal.The company's brand Parachute is a household name in India.

Structural SnapshotGrowth opportunity: The beauty and wellness segment is riding on a positivegrowth path, on the back of fast-changing lifestyles, growing health consciousness,high disposable incomes and demand for quality products. Marico has astrong brand portfolio comprising Parachute, Saffola, Nihar, Mediker, Reviveand After-Shower in this segment. Further, speciality clinics, like Kaya, areexpected to gain growth momentum with increasing income levels and awareness.

Competitive position: Marico has a 53% market share in the oils category,where Parachute has a 46% market share of the Indian coconut oil market.Saffola constitutes 53% of the super premium refined edible oil market.


Current Investment ArgumentsImpressive volume growth across categories/strong pricing power: Weexpect Marico to post healthy volume growth in its core brands in FY2012E.The company has not witnessed significant slowdown in volume growth despitesteep price hikes. Over the past few months, raw-material prices have beensoftening; so, we do not expect any steep price hikes further. Although marginswill not improve significantly due to softening of raw-material prices, webelieve they will stabilize going forward.

International business gaining momentum: Marico's international businessnow contributes ~23% to its top line. The company maintains its leadershipposition in different categories in different regions. The recently acquiredICP in Vietnam is expected to contribute ~5% to Marico's top line. Webelieve the company's international business will post a ~31% CAGR overFY2011-13E.

Valuation: At the CMP, the stock is trading at 23.9x FY2013E EPS againstits five-year historical average valuations of 22x. We believe the stock isrichly valued and offers limited upside from the CMP. We wait for betterentry opportunities and, hence, maintain our Neutral view on the stock.

FMCG CMP/TP/Upside: `152 / - / -Marico


PROMOTERS 62.8

FII 25.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MARICO 0.3 15.5 39.1 21.8 39.7

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 25.1 17.6 18.0 22.3 16.9

PAT GROWTH* 9.4 (1.6) 16.5 24.2 18.7

OPM# 12.0 13.1 13.7 13.6 12.1


ANGEL ESTIMATES


PAT GROWTH (%) 28.2 28.2

ROE (%) 29.9 29.0

P/E 30.7 23.9


BUY / HOLD / SELL 25 / 14 / 8

RATING NEUTRAL



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 446 772 500 455



GROSS BLOCK 468 640 696 735


NET BLOCK 226 304 288 239


GOODWILL 146 519 524 529


DEFERRED TAX ASSET 62 30 30 30

CURRENT ASSETS 897 1,220 1,288 1,672



TOTAL ASSETS 1,112 1,709 1,713 1,980



NET SALES 2,661 3,128 3,779 4,341


% CHG 11.4 17.6 20.8 14.9


EBITDA 375 410 480 577

% CHG 23.4 9.2 17.1 20.3

(% OF NET SALES) 14.1 13.1 12.7 13.3

EBIT 315 339 401 494

% CHG 17.5 7.6 18.2 23.4

(% OF NET SALES) 11.8 10.8 10.6 11.4


% CHG 25.7 6.5 18.7 27.9

TAX 64 85 78 99

(% OF PBT) 20.9 25.9 20.0 20.0

ADJ. PAT 241 238 305 390

% CHG 18.5 (1.6) 28.2 28.2

(% OF NET SALES) 9.1 7.6 8.1 9.0

ADJ. EPS (`̀̀̀̀) 3.9 3.9 5.0 6.4

% CHG 18.5 (1.6) 28.2 28.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 38.7 39.3 30.7 23.9

P/CEPS 30.7 26.1 23.7 19.7

P/BV 14.2 10.2 7.8 6.2

DIVIDEND YIELD (%) 0.4 0.4 0.6 0.7

EV/SALES 3.7 3.2 2.6 2.3

EV/EBITDA 25.8 24.2 20.3 16.4


EPS (BASIC) 4.0 3.9 5.0 6.4


CASH EPS 4.9 5.8 6.4 7.7

DPS 0.7 0.7 0.8 1.1

BOOK VALUE 10.7 14.9 19.4 24.5

RETURNS (%)

ROCE 32.5 24.0 23.4 26.8


ROE 43.6 36.5 29.9 29.0

TURNOVER RATIOS (X)





CASH FLOW STATEMENT






OTHERS 39 49 47 16



(INC.)/ DEC. IN INVESTMENTS (71) (9) (19) (21)



INC./(DEC.) IN LOANS 72 326 (272) (45)




INC./(DEC.) IN CASH 21 102 (77) 174






Company BackgroundTata Global Beverages Limited (TGBL) is an emerging player in the globalbeverage market. The company has made a strategic shift from being alocal tea company to a global beverage company through various acquisitionsand strategic partnerships with global beverage giants such as PepsiCoand Starbucks. As a result, the company has made an entry into the top 10global companies list in the hot drinks category, posing a challenge to globalplayers like Nestlé, Unilever and Kraft Foods. The company's product portfoliocomprises leading global brands like Tetley and Eight O' Clock and localbrands like Tata Tea.

Structural SnapshotGrowth opportunity: Growth opportunity: TGBL holds a strong growth potentialwith increasing consumption of healthy beverages in India and globally.Acquisitions and strategic partnerships with global beverage giants like PepsiCoand Starbucks offer a huge market potential for TGBL, as it can developand market products in local as well as global markets.

Competitive position: TGBL, led by its various acquisitions in recent years,has become a global non-alcoholic beverage company. The company nowfeatures among the global top 10 players list in the hot drinks category. Thecompany has a 1.5% share in the global list and is a leader in the Indian teamarket. Also, the company is the second largest global tea marketing companyand the third largest player (post the acquisition of Eight O' Clock coffeethrough its subsidiary Tata Coffee) in the branded coffee market in the U.S.

Nature of business: Branded business; Highly competitive.

Current Investment ArgumentsWe estimate TGBL to post a ~9% CAGR over FY2011-13E on the basis ofprice and volume-led growth. Despite slow revenue growth, we expect healthyexpansion of 150bp in the company's OPM over FY2011-13E, from 8.6%in FY2011 to ~10% in FY2013E, due to changes in cost structure andselective price hikes in key products. Adjusted earnings for the companyare expected to witness a robust ~40% EPS CAGR over FY2011-13E,primarily due to increased OPM.

Valuation: Despite its leadership position in the Indian packaged tea market,No. 2 position in the global tea market and generating ~90% of itstotal revenue from branded products, TGBL is trading at 13.6x FY2013EEPS (which is at a discount to its FMCG peers, trading at 20-35x FY2013EEPS). Also, on EV/Sales basis, the stock is trading at 0.7x FY2013EEV/Sales (historical average of 1x EV/ Sales). Hence, we recommend anAccumulate rating on the stock with a target price of `̀̀̀̀102.

FMCG CMP/TP/Upside: `94 / `102 / 9%TGBL



FII 9.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TGBL 7.3 (10.7) 14.3 5.9 18.7

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 11.3 3.4 11.6 14.0 -

PAT GROWTH* 27.5 (44.8) 114.9 (3.2) -

OPM# 6.6 8.6 14.9 17.0 -


ANGEL ESTIMATES


PAT GROWTH (%) 59.4 27.2

ROE (%) 8.4 10.2

P/E 16.6 13.6


BUY / HOLD / SELL 13 / 12 / 5

RATING ACCUMULATE



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




MINORITY INTEREST 1,057 1,108 1,108 1,108

TOTAL LOANS 1,797 1,042 942 842




GROSS BLOCK 1,470 1,563 1,703 1,856


NET BLOCK 718 721 750 783


GOODWILL 2,929 3,038 3,038 3,038


CURRENT ASSETS 3,998 3,376 3,620 3,757



TOTAL ASSETS 6,652 6,170 6,152 6,227



NET SALES 5,783 5,982 6,522 7,109


% CHG 19.3 3.4 9.0 9.0


EBITDA 514 513 602 720

% CHG (2.3) (0.0) 17.3 19.5

(% OF NET SALES) 8.9 8.6 9.2 10.1

EBIT 411 414 492 600

% CHG (3.8) 0.8 18.8 21.9

(% OF NET SALES) 7.1 6.9 7.5 8.4

REPORTED PBT 641 494 558 694

% CHG (49.0) (22.9) 12.8 24.4

PBT (RECURRING) 633 451 558 694

TAX 248 202 184 229

(% OF PBT) 38.6 40.9 33.0 33.0

ADJ. PAT 382 211 336 427

% CHG 73.2 (44.8) 59.4 27.2

(% OF NET SALES) 6.6 3.5 5.2 6.0

ADJ. EPS (`̀̀̀̀) 6.2 3.4 5.4 6.9

% CHG 73.2 (44.8) 59.4 27.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 14.5 26.4 16.6 13.6

P/CEPS 11.4 17.9 12.5 10.6

P/BV 1.5 1.4 1.4 1.4

DIVIDEND YIELD (%) 2.2 2.2 4.4 4.3

EV/SALES 0.9 0.8 0.7 0.7

EV/EBITDA 9.6 9.8 8.0 7.0


EPS (BASIC) 6.2 3.4 5.4 6.9


CASH EPS 7.9 5.0 7.2 8.9

DPS 2.0 2.0 4.0 4.0

BOOK VALUE 59.6 63.4 64.6 67.4

RETURNS (%)

ROCE 6.2 6.7 8.0 9.6


ROE 10.4 5.4 8.4 10.2

TURNOVER RATIOS (X)





CASH FLOW STATEMENT






OTHERS (147) (71) (8) 12



(INC.)/ DEC. IN INVESTMENTS 1,472 5 (29) (8)

CASH FLOW FROM INVESTING 1,384 (81) (173) (165)

ISSUE OF EQUITY - (63) 0.1 -

INC./(DEC.) IN LOANS (634) (755) (100) (100)



CASH FLOW FROM FINANCING (871) (1,007) (420) (399)

INC./(DEC.) IN CASH 815 (907) 54 (70)

OPENING CASH BALANCES 1,089 1,904 997 1,052

CLOSING CASH BALANCES 1,904 997 1,052 981




Company BackgroundBritannia is one of the foremost food companies in India. The company ispresent across the biscuits, dairy products and breads segments and hasrecently forayed into the breakfast cereals category with the launch ofHealthy Start. Britannia derives ~85% of its revenue from the biscuits segment,where it has formidable brands such as Tiger (glucose biscuits), Treat (creambiscuits), 50-50 (crackers), Good Day (premium cookies and the company'shighest selling brand) and Nutrichoice (premium high-fiber biscuits).

Structural SnapshotGrowth opportunity: The biscuit industry, which has been steadily recordingdouble-digit value growth over FY2008-11, is one of the largest growingFMCG categories in India. The industry stands at ~`10,782cr in value andhas recorded a 9.2% CAGR over FY2006-11. Biscuit volume growth wasestimated to be at ~6% yoy in FY2011, despite no significant change indistribution network, implying that the key reason for increased biscuit volumesis higher per capita consumption of biscuits to ~2.1kg/year (1.8kg/year inFY2009), with a 55% penetration level in the rural market and 85% penetrationin the urban market.

Competitive position: Britannia is the market leader in the sweet cookiesand Marie biscuit segments, which constitute 35% of the biscuit market.In the Marie biscuit segment, Britannia has a 37% market share, followedby Parle and ITC (11% and 7% share, respectively). Overall, Britannia enjoysthe No. 2 position in the Indian biscuit market with a 38% market share.


Current Investment ArgumentsRenewed product portfolio to aid growth: Britannia has recently forayedinto breakfast cereals, milk and premium category biscuits. We believe thisrejig in product portfolio offers significant uptrading benefits to the company,thereby fuelling growth. Also, with increased per capita consumption andpenetration, the company will continue to grow at a pace faster than itshistorical growth.

Cooling raw-material prices to help improve margins: Over the past oneyear, raw-material prices have been trending high, putting significant marginpressure on Britannia. However, prices of major commodities (like sugarand wheat) have shown some signs of cooling in the past one quarter. Whilewe have limited visibility on raw-material prices over the longer term, withthe onset of normal monsoons, we do not expect a significant rise in theprices of these commodities going ahead. Moreover, we believe the company'svarious cost-rationalization methods and improving sales mix will aid operatingmargins to increase from the current level of 5.3% to 5.8% in FY2012E and7.1% in FY2013E.

Valuation: At the CMP, the stock is trading at 20x FY2013 EPS, howeveron account of subdued operating margins, the company is trading at attractive0.9x FY2013E EV/Sales against its historical average of 1.5x EV/Sales.We expect Britannia to post margin expansion of 130bp over FY2013.Hence, we maintain our Accumulate rating on the stock with a targetprice of `̀̀̀̀495, based on 22x FY2013E EPS.

FMCG CMP/TP/Upside: `451/ `495 / 10%Britannia


PROMOTERS (WADIA GROUP) 51.0

FII 12.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BRITANNIA (0.5) 27.0 20.0 15.2 14.2

BSE FMCG 2.5 13.4 27.7 16.1 16.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 18.2 23.8 17.7 19.7 12.7

PAT GROWTH* 18.8 24.7 (10.1) (1.1) 8.5

OPM# 4.8 5.3 7.3 7.7 8.4


ANGEL ESTIMATES


PAT GROWTH (%) 26.7 46.0

ROE (%) 37.8 46.0

P/E 29.2 20.0



RATING ACCUMULATE

52 WEEK HIGH / LOW 498 / 324


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 430 431 431 25

DEFERRED TAX LIABILITY (7) 6 6 6



GROSS BLOCK 548 594 758 872


NET BLOCK 282 304 416 470


GOODWILL - - - -





TOTAL ASSETS 819 889 961 676



NET SALES 3,403 4,214 4,964 5,799


% CHG 9.4 23.8 17.8 16.8


EBITDA 162 224 287 412

% CHG (38.2) 38.0 28.0 43.8

(% OF NET SALES) 4.8 5.3 5.8 7.1

EBIT 125 179 234 352

% CHG (45.6) 43.8 30.7 50.2

(% OF NET SALES) 3.7 4.3 4.7 6.1


% CHG (33.9) 18.4 27.3 46.0

TAX 4 53 68 99

(% OF PBT) 2.5 26.7 27.0 27.0

ADJ. PAT 117 145 184 269

% CHG (35.4) 24.7 26.7 46.0

(% OF NET SALES) 3.4 3.4 3.7 4.6

ADJ. EPS (`̀̀̀̀) 9.8 12.2 15.4 22.5

% CHG (35.4) 24.7 26.7 46.0


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 46.2 37.1 29.2 20.0

P/CEPS 26.8 28.4 22.8 16.4

P/BV 13.6 11.9 10.3 8.4

DIVIDEND YIELD (%) 1.5 1.2 1.1 0.9

EV/SALES 1.5 1.2 1.1 0.9

EV/EBITDA 32.2 23.3 18.2 12.7



CASH EPS 16.8 15.9 19.8 27.5

DPS 5.0 6.5 8.0 10.6

BOOK VALUE 33.2 37.8 43.8 53.9

RETURNS (%)

ROCE 14.9 21.0 25.3 43.0


ROE 26.7 34.3 37.8 46.0

TURNOVER RATIOS (X)





CASH FLOW STATEMENT








(INC.)/ DEC. IN INVESTMENTS (68) (54) 60 360

CASH FLOW FROM INVESTING (108) (102) (109) 243


INC./(DEC.) IN LOANS (2) 2 - (406)


INTEREST/DIVIDEND PAID (NET) (21) 15 7 19


INC./(DEC.) IN CASH (17) 5 4 27





185January 2012 Please refer to important disclosures at the end of this report 185

Infrastructure POSITIVE


E & C Companies

Larsen & Toubro 1,274 1,608 Buy

Jaiprakash Asso. 66 88 Buy

Sadbhav Engg. 117 150 Buy

Punj Lloyd 49 - Neutral

Hind. Const. 22 - Neutral

Nagarjuna Const. 46 59 Buy

IVRCL 40 56 Buy

Simplex Infra 198 233 Buy

Patel Engg. 98 - Neutral

Madhucon Proj 52 77 Buy

CCCL 18 - Neutral

Road Developers

IRB Infra 159 182 Buy

ITNL 185 227 Buy

Ashoka Buildcon 195 245 Buy

Negatives cappedInfrastructure development inevitable for India's economic growth in themedium term: Importance of infrastructure development is well acknowledgedby the government and, therefore, it is focusing on infrastructure creationwith active participation of the private sector. For bridging the infrastructuredeficit and for sustaining a higher growth rate, the Twelfth Five Year Plan(FY2012-17) envisages a total investment of ~US$1,000bn in infrastructure(Eleventh Five Year Plan investment: ~US$500bn).

Near-term scenario to remain murky: However, during the past one year,infrastructure stocks have been punished by investors, leading to a huge declinein their prices (30-70%). This downward spiral in infrastructure stocks hasbeen caused mainly due to 1) deteriorating business environment owing tohigh interest rates; policy inaction; and negative investment climate for theinfrastructure sector; and 2) stretched balance sheet on account of elongatedworking capital (WC) and elevated debt levels, leading to consistent earningsunderperformance. Further, given no visible signs of reversal of trends, wecontinue with our view that the environment for the sector will remain murkyin the near term. The infrastructure sector’s valuations (FY2013 PE of7.0-18.0x vs. past average of 20.0-30.0x) have slipped to historical lows, afterthe dismal performance of 2011. This has been on the back of consistentearnings downgrades (30-40% downgrade in FY2012/FY2013 earnings) andwell-known concerns plaguing the sector.

We do not expect more earnings downward revision, given the already subduedexpectations and peaking of interest rates. Further, there have been recentpositive developments on the reform front in the past six months, such as newland reforms bill being introduced, some no-go areas being allowed for mining,new infrastructure lending norms for setting up of debt funds, increasing consensuson the likely imposition of import duties and hikes in power tariffs by variousSEBs. Therefore, we expect outperformance from the sector in the mediumto long term; but any meaningful rerating of the sector will have to be precededby consistent and aggressive push on infrastructure spend/policy reformsfrom the government’s side and interest rate cuts.

Valuations offer favorable risk reward ratio: We have revised downwardsour earnings estimates (20-30%) - building in subdued order inflows leadingto flat revenue growth, flat/declining margins and no major respite on thedebt front - for most companies for FY2012/13. Further, considering the macroand micro variables, we believe our EPS estimates face limited downsiderisks. Further, earnings catalysts are weak and so is positive news flow; butafter the underperformance in the past 12 months, the sector trades at undemandingvaluations on subdued earnings estimates. Hence, we believe the time hascome for the recognition of opportunities on offer.

We are positive on companies that have: 1) strong execution skills (L&T,SEL and IRB) - necessary for maintaining revenue momentum; 2) balancesheet strength (L&T, IRB and SEL) - very important due to the high interestrate scenario and poor environment for raising fund; and 3) decent orderbook (L&T, IVRCL, SEL and IRB) - to weather the drying up of orders. Hence,we maintain L&T, IVRCL and SEL as our top picks in the E&C space andrecommend IRB in the development space.


Near-term scenario to remain murkyDuring the past one year, infrastructure stocks have been punishedby investors leading to a huge decline in their prices (30-70%).This downward spiral in infrastructure stocks has been causedmainly due to a deteriorating business environment andstretched balance sheet.

Deteriorating business environmentDuring the past few quarters, business environment forinfrastructure companies has been miserable due to severalheadwinds faced by the sector such as: 1) high interest rates;2) policy inaction; and 3) negative investment climate for theinfrastructure sector.

High interest rate scenario: Consistent hike in repo rates bythe RBI (in order to contain inflation) has accentuated the alreadyhigh interest cost for companies in the sector. High interestcost (owing to a high interest rate regime and increased debtlevels) resulted in a decline in the bottom line of most companiesunder our coverage. However, the recent RBI commentary indicatesa pause in further interest rate hikes. Therefore, in our businessmodels, we have not factored in any further rates hikes, thusinterest costs of companies would increase primarily due tohigher debt levels. Further, going ahead, we are penciling insome respite on the interest rate front in FY2013, givinginfrastructure companies the much-needed relief.


Exhibit 1: Interest cost as a percentage of sales on a rise

- 5.0 10.0 15.0 20.0

CCCL

HCC

IRB Infra

IVRCL

JAL

L&T

MPL

NCC

Sadbhav

Simplex In.

2QFY11 1QFY12 2QFY12


Exhibit 2: Increase in interest cost on a yoy basis (`̀̀̀̀ cr)

0

20

40

60

80

100

120

140

160

180

200

CCCL HCC IRB Infra IVRCL L&T MPL NCC Sadbhav Simplex In.

2QFY11 2QFY12

Policy inaction: Policy paralysis (slowdown in decision making,corruption scandals and a government fearful of a political backlashto any bold moves) has led to derailing of key infrastructureprojects in the country. This is evident from the government'slatest quarterly project implementation status report, which points

out that of the 590 major projects of `150cr or more, 283have been delayed. Further, infrastructure projects draw investmentsin India and as a result of these problems the inflow of FDI isalso showing a decline.

Negative investment climate for the infrastructure sector:On account of the above-mentioned reasons, there has been aconsiderable slowdown in investments in infrastructure fromboth the government and private sector. Consequently, therehas been a slowdown in order inflow for companies across allinfrastructure sectors, which is becoming a cause of concern,as diminishing order book has a direct impact on revenue visibility.

Further, given no visible signs of reversal of trends, we continuewith our view that the environment for the sector will remainmurky in the near term.

Stretched balance sheet - A worryElongated WC: During the last few quarters, WC requirementacross sectors has gone up significantly. This jump in WC canbe attributed to the increase in the following factors: 1) loansand advances - to lend support to subsidiaries and smallsubcontractors; and 2) debtors - liquidity crunch faced by clientsand lack of bargaining power on the contractor's front. Further,given the current headwinds faced by the economy, we do notexpect any improvement in 2HFY2012.

Elevated debt levels: Companies' debt levels, which are alreadyabove comfort limits, have further increased to 1) fund theirgrowing WC requirements; and 2) equity infusion in subsidiaries.


Exhibit 3: Average WC trend (days)

10393

103

120

141

171

50

70

90

110

130

150

170

190

FY2007 FY2008 FY2009 FY2010 FY2011 FY2012E


Exhibit 4: Debt levels above comfort levels

20.1 20.2

31.5

25.7

20.3

9.9

4.7

15.1 14.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

CC

CL

HC

C

IRB

Infr

a

IVRC

L

L&T

MPL

NC

C

Sadbhav

Sim

ple

xIn

.

FY2011 (` cr) 1HFY12 % chg over FY11

Infrastructure


Structural outlook remains strongInfrastructure development inevitable for India's economic growthin the medium term: Over the years, India has been experiencinginfrastructure-related concerns such as power deficits, inadequateroad network and insufficient facilities at its ports. Therefore, it isimperative to rapidly increase the investment in infrastructure fromthe current levels. The government's focused initiatives towardsinfrastructure creation with active participation of the private sectorwill hold key to the Indian economy's growth. For bridging infrastructuredeficit and for sustaining a higher growth rate, the Twelfth Five YearPlan (FY2012-17) envisages a total investment of ~US$1,000bn ininfrastructure (Eleventh Five Year Plan investment: ~US$500bn).

Characteristics of the construction industry(1) High level of fragmentation: The Indian construction industry is highly fragmented, which can be attributed to low entrybarriers due to limited capital requirement. Capital expenditure required is only to the extent of equipment required to executethe projects unlike manufacturing, which requires production facilities. (2) WC-intensive: The construction industry has highWC requirements, and these requirements enhance during the slowdown/tight liquidity scenario. Further, any delay in paymentespecially from government departments pushes up receivables.

Despite high levels of fragmentation and WC requirements, the construction industry is expected to be the biggest beneficiaryof the surge in infrastructure investment over the next five years, as construction accounts for ~65% of the total investment ininfrastructure. Hence, investments in the infrastructure sector over the next 5-10 years - power, roads, bridges, city infrastructure,ports, airports and telecommunications - would provide the necessary impetus to the construction industry.


Exhibit 6: Subdued expectations for most companies EPS ( `̀̀̀̀) EPS growth (%)

FY2010 FY2011 FY2012E FY2013E FY2010 FY2011 FY2012E FY2013E

Larsen & Toubro 47.0 54.3 64.2 71.0 11.5 15.5 18.3 10.5

Jaiprakash Asso. 4.7 5.5 2.7 4.2 10.2 18.1 (50.2) 53.5

Sadbhav Engg. 3.6 8.0 9.1 9.0 (28.6) 122.1 14.5 (1.9)

Punj Lloyd (10.9) (5.4) 1.9 2.9 51.1 - - 53.3

Hind. Const. 1.3 1.2 (1.0) 0.6 7.2 (12.8) - -

Nagarjuna Const. 7.8 6.4 3.6 3.8 30.2 (18.4) (44.1) 7.8

IVRCL Infra 7.9 5.9 3.8 4.6 (6.5) (25.3) (36.1) 22.5

Simplex Infra 25.6 21.5 18.9 25.9 9.2 (16.1) (11.9) 36.8

Patel Engg. 28.4 17.6 14.0 14.5 42.4 (38.1) (20.3) 3.5

Madhucon Proj 6.2 5.6 4.4 4.7 (2.4) (10.2) (20.5) 6.3

CCCL 5.0 2.5 (1.1) 1.6 26.6 (48.8) - -

IRB Infra 11.6 13.6 11.9 13.1 119.2 17.3 (12.6) 9.8

ITNL 17.7 22.3 24.4 25.7 - 25.9 9.5 5.3

Ashoka Buildcon 15.3 19.2 21.0 24.7 130.8 25.5 9.8 17.6

Infrastructure

Source: Planning Commission, Angel Research, Note: *Estimated; Othersinclude water supply, airports, ports, storage and gas.

Exhibit 5: Sector-wise investment (`̀̀̀̀ cr)

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Ele

ctric

ity

Roa

d

Tele

com

Rai

lway

s

Irrig

atio

n

Oth

ers

10th plan (FY03-07) 11th plan (FY07-12) 12th plan* (FY12-17)

Outlook: The infrastructure sector’s valuations (FY2013 PE of7.0-18.0x vs. the past average of 20.0-30.0x) have slipped tohistorical lows, after the dismal performance in 2011. This hasbeen on the back of consistent earnings downgrades (30-40%downgrade in FY2012/FY2013 earnings) and well-known concernsplaguing the sector. We do not expect more earnings downwardrevision, given the already subdued expectations and peakingof interest rates. Further, there have been recent positivedevelopments on the reform front in the past six months, such

as new land reforms bill being introduced, some no-go areasbeing allowed for mining, new infrastructure lending norms forsetting up of debt funds, increasing consensus on the likelyimposition of import duties and hikes in power tariffs by variousSEBs. Therefore, we expect outperformance from the sectorin the medium to long term; but any meaningful rerating of thesector will have to be preceded by consistent and aggressivepush on infrastructure spend/policy reforms from the government’sside and interest rate cuts.


Valuations offer favorable risk reward ratio: We have reviseddownwards our earnings estimates (20-30%) - building in subduedorder inflows leading to flat revenue growth, flat/declining marginsand no major respite on the debt front - for most companies forFY2012/13. Further, considering the macro and micro variables,we believe our EPS estimates face limited downside risks. Further,earnings catalysts are weak and so is positive news flow; butafter the underperformance in the past 12 months, the sectortrades at undemanding valuations on subdued earnings estimates.

Infrastructure

We are positive on companies that have: 1) strong executionskills (L&T, SEL and IRB) - necessary for maintaining revenuemomentum; 2) balance sheet strength (L&T, IRB and SEL) -very important due to the high interest rate scenario and poorenvironment for raising fund; and 3) decent order book (L&T,IVRCL, SEL and IRB) - to weather the drying up of orders.Hence, we maintain L&T, IVRCL and SEL as our top picks inthe E&C space and recommend IRB in the developmentspace.

Hence, we believe the time has come for the recognition ofopportunities on offer.


Exhibit 8: SOTP break-upCompany Core Const. Real Estate Road BOT Invst. In Subsidiaries Others Total

`̀̀̀̀ % to TP `̀̀̀̀ % to TP `̀̀̀̀ % to TP `̀̀̀̀ % to TP `̀̀̀̀ % to TP `̀̀̀̀

L&T 1,276 79 - - - - 332 21 - - 1,608

JP Assoc. 31 35 24 27 - - - - 33 37 88

Sadbhav 81 54 - - 70 46 - - - - 150

Punj Lloyd 47 100 - - - - - - - - 47

HCC 4 12 12 37 16 51 - - - - 32

NCC 31 52 2 3 8 14 - - 18 31 59

IVRCL 37 66 - - - - 19 34 - - 56

Simplex In. 233 100 - - - - - - - - 233

Patel Engg 42 45 17 18 16 17 - - 19 21 94

Madhucon 23 30 2 3 52 68 - - - 77

CCCL 17 100 - - - - - - - - 17

IRB Infra 116 64 - - 61 34 4 2 - 182

ITNL 59 26 - - 143 63 - - 25 11 227

ABL 104 42 - - 141 58 - - - - 245


Exhibit 7: Recommendation SummaryCompany CMP TP/ Rating Top-line ( `̀̀̀̀ cr) EPS (`̀̀̀̀) P/E OB/

SOTP FY11 FY12E FY13E CAGR (%) FY11 FY12E FY13E CAGR (%) FY11 FY12E FY13E Sales(x)

E&C Companies

L&T 1,274 1,608 Buy 43,905 53,779 60,258 17.2 54.3 63.7 70.9 14.2 23.5 20.0 18.0 3.2

JP Assoc. 66 88 Buy 13,832 13,763 16,017 7.6 5.5 2.7 4.2 (12.6) 12.0 24.2 15.7 -

Sadbhav 117 150 Buy 2,209 2,602 2,585 8.2 8.0 9.1 9.0 6.0 14.7 12.8 13.1 2.8

Punj Lloyd 49 - Neutral 7,850 9,585 10,592 16.2 (5.4) 1.9 2.9 - - 25.9 16.9 3.3

HCC 22 - Neutral 4,093 3,915 4,633 6.4 1.2 (3.1) 0.6 (25.8) 18.5 - 33.6 4.0

NCC 46 59 Buy 5,074 5,095 5,749 6.4 6.4 3.6 3.8 (22.4) 7.2 12.9 12.0 3.4

IVRCL 40 56 Buy 5,651 5,598 6,458 6.9 5.9 3.8 4.6 (11.5) 6.7 10.6 8.6 4.5

Simplex In. 198 233 Buy 4,889 5,562 6,485 15.2 21.5 18.9 25.9 9.8 9.2 10.4 7.6 3.1

Patel Engg 98 - Neutral 3,476 3,271 3,586 1.6 17.6 14.0 14.5 (9.2) 5.6 7.0 6.8 2.7

Madhucon 52 77 Buy 1,816 1,952 2,503 17.4 5.6 4.4 4.7 (8.1) 9.4 11.8 11.1 3.8

CCCL 18 - Neutral 2,199 2,350 2,451 5.6 2.5 (1.1) 1.6 (20.5) 7.0 - 11.0 2.7

Road Developers

IRB Infra 159 182 Buy 2,438 3,037 3,781 24.5 13.6 11.9 13.1 (2.1) 11.6 13.3 12.1 -

ITNL 185 227 Buy 4,049 5,169 6,609 27.8 22.3 24.4 25.7 7.4 8.3 7.6 7.2 5.2

ABL 195 245 Buy 1,302 1,627 1,831 18.6 19.2 21.0 24.7 13.6 10.2 9.3 7.9 5.0


Company BackgroundL&T, the largest Indian infrastructure conglomerate, is present across almostall the infrastructure segments and is at the forefront of the Indian infragrowth story. Over the years, the company has diversified across varioussegments to encash the untapped infra opportunity, not only in India but inother geographies as well, and has an excellent track record of achievingthe same. Over the past 10 years (FY2001-11), L&T has reported a CAGRof 19.5% and 28.8% in its top line and bottom line, respectively.

Structural SnapshotGrowth opportunity: Over the years, India has been experiencing infrastructure-related concerns such as power deficits, inadequate road network and insufficientfacilities at its ports. Therefore, it is imperative to rapidly increase the investmentin infrastructure from the current 6% of GDP (China invests 11% of GDP ininfrastructure). L&T's strong balance sheet, sound execution engine, widearray of capabilities and integrated operations tailored to suit India's infrastructuregrowth story lead us to place faith in the company and its talent to tap thepotential opportunity.

Competitive position: L&T faces competition in most of the segments; butgiven its quality of construction and financial strength, the company hasbeen able to evade it and maintain above-industry return ratios.

Nature of business: Cyclical; Capital intensive; Low entry barriers for newplayers in most segments.

Current Investment ArgumentsConcerns overdone: L&T stock has underperformed BSE Sensex by ~25.3%in the past three months, owing to factors such as slowing order inflowsand rising competition (especially in the BTG equipment segment), leadingto fears of slippage on revised order inflow guidance. We believe thoughL&T would find it difficult to meet its guidance for FY2012, it is better placedthan its peers on a number of parameters (such as diversification and balancesheet strength), and further its current market price factors in the short-term negatives.

Best stock to play the Indian infrastructure theme: We believe L&T isbest placed to benefit from the gradual recovery in the capex cycle, givenits diverse exposure to sectors, strong balance sheet and cash flow generationas compared to its peers, which grapple with issues such as strained cashflow, high leverage and limited net worth and technological capabilities.

Valuations attractive: On the valuation front, due to the recent correction,the stock is trading at PE of 13.4x FY2013E earnings, adjusted for subsidiaryvalue, which is lower than its historical PE of 15-20x. Hence, we believethe recent correction provides a good opportunity to Buy with a SOTPtarget price of `̀̀̀̀1,608.

InfrastructureTOPPICK

CMP/TP/Upside: `1,274 / `1,608 / 26%L&T


PROMOTERS -

FII 17.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

L&T (9.0) (23.4) 20.5 10.2 32.6



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 22.7 18.6 20.8 24.4 19.5

PAT GROWTH* 18.0 15.5 22.1 31.4 28.8

OPM# 9.6 12.8 12.3 11.7 9.7


ANGEL ESTIMATES


PAT GROWTH (%) 17.3 11.2

ROE (%) 16.7 16.1

P/E 20.0 18.0

P/BV 3.1 2.7


BUY / HOLD / SELL 37 / 8 / 4

RATING BUY

52 WEEK HIGH / LOW 1,933 / 971

MARKET CAP (`̀̀̀̀ CR) 77,931

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 6,801 7,161 8,381 10,276




GROSS BLOCK 7,236 8,897 10,241 12,144


NET BLOCK 5,508 6,673 7,330 8,417

CAPITAL WORK-IN-PROGRESS 858 785 942 1,130

INVESTMENTS 13,705 14,685 15,685 17,185

CURRENT ASSETS 26,362 34,951 43,277 49,799




TOTAL ASSETS 25,190 29,271 33,797 39,457




% CHG 9.2 18.6 22.5 12.0


EBITDA 4,739 5,599 6,337 7,198

(% OF NET SALES) 12.9 12.9 11.9 12.1



OTHER INCOME (INCL ASS/JV PFT ) 768 1,087 1,606 1,734

(% OF PBT) 16.6 19.8 24.7 23.9

RECURRING PBT 4,623 5,475 6,506 7,263

EXTRAORDINARY EXPENSE/(INC.) (1,394) (429) - -

PBT (REPORTED) 6,016 5,904 6,506 7,263

TAX 1,641 1,946 2,111 2,356

(% OF PBT) 27.3 33.0 32.4 32.4

PAT (REPORTED) 4,376 3,958 4,395 4,906




ADJ. PAT (EXCL. DIV. FROM SUBS) 2,893 3,342 3,921 4,361

% CHG 11.5 15.5 17.3 11.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 27.1 23.5 20.0 18.0

P/CEPS 23.8 20.0 16.9 15.1

P/BV 4.2 3.6 3.1 2.7

EV/SALES 2.3 1.9 1.6 1.4

EV/EBITDA 17.5 14.9 13.2 11.9


EPS (BASIC) 72.6 65.0 72.0 79.7


CASH EPS 53.6 63.9 75.5 84.8

DPS 10.2 12.4 14.5 15.1

BOOK VALUE 299.9 357.8 412.0 473.6

RETURNS (%)

ROCE (PRE-TAX) 19.7 18.5 17.9 17.4


ROE 18.8 16.6 16.7 16.1

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (1,143) 1,711 2,139 3,030

LESS: OTHER INCOME 768 1,087 1,606 1,734


CASH FLOW FROM OPERATIONS 5,124 1,723 1,337 958


(INC.)/ DEC. IN INVESTMENTS (5,442) (979) (1,000) (1,500)

OTHER INCOME 768 1,087 1,606 1,734

CASH FLOW FROM INVESTING (6,154) (1,482) (895) (1,858)

ISSUE OF EQUITY 2,133 347

INC./(DEC.) IN LOANS 168 360 1,220 1,895

DIVIDEND PAID (INCL. TAX) 863 996 1,085 1,139

OTHERS 249 345 (4) (3)

CASH FLOW FROM FINANCING 1,687 57 131 753

INC./(DEC.) IN CASH 657 299 573 (147)

OPENING CASH BALANCES 775 1,432 1,730 2,304





Company BackgroundJaiprakash Associates (JAL), the flagship company of Jaypee Group, wasset up in 1958 by Jai Prakash Gaur, who started as a small-time constructioncontractor in Kota, Rajasthan. Over the years, JAL has transformed itselfinto a large infrastructure conglomerate in India. The company is presentacross the following sectors: 1) cement (the third-largest group, ~26.2mtcapacity in FY2011); 2) power (the largest private sector hydro-electric powerutility, ~1,700MW operational capacity); 3) real estate (one of the largestland banks in NCR, with over 695mn sq. ft. area; 4) engineering and construction(E&C, the largest company in the hydro-electric power sector); 5) expressways/highways (Yamuna expressway is one of the biggest toll projects); and6) hospitality.

Structural SnapshotGrowth opportunity: Over the years, India has been experiencing infrastructure-related concerns such as power deficits, inadequate road network and insufficientfacilities at its ports. For bridging the infrastructure deficit and for sustaininga higher growth rate, the Twelfth Five-Year Plan envisages a total investmentof ~US$1,000bn in infrastructure. Thus, JAL, being a diversified infrastructureconglomerate, is expected to benefit from the same.

Competitive position: JAL faces stiff competition in all the segments. Thecompany also operates in the commodity business (mainly cement), whichgives it low bargaining power.

Nature of business: Low entry barriers in all segments where JAL operates,except the technology-intensive hydro power segment.

Current Investment ArgumentsCement capacity expansion instills confidence: JAL is on its way to becomeone of the leading players in the cement space, following capacity expansionfrom 9.0mtpa in FY2008 to 35.9mtpa in the next few years. We believe thecement capacity that JAL proposes to set up would enable it to enjoy operatingleverage benefits and catapult it into the league of cement majors like ACCand Ambuja.

Diversified play: JAL is a unique play on the ongoing infrastructure themewith a bouquet of offerings in construction, cement, power and real estate.Moreover, not only does the company have diversified offerings, it also enjoyslarge benefits in each of them. We expect the company to benefit as theinfrastructure theme pans out going ahead.

Valuations: We have valued JAL's cement and construction business at 6xEV/EBITDA - `62.2/share and `31.2/share, respectively. We have valuedits power and real estate business on mcap basis (giving 15% holding companydiscount), which contributes ̀ 57.0/share to our target price. The hotel segmentcontributes `0.8/share. Treasury shares (`5.7/share) have been valued atthe current market price, whereas net debt is accounted for on a per sharebasis in our valuation at `68.6. We recommend a Buy rating on the stockwith an SOTP target price of `̀̀̀̀88, implying an upside of 33% from currentlevels.

Infrastructure JP AssociatesCMP/TP/Upside: `66 / `88 / 33%


PROMOTERS 46.9

FII 18.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

JAL (9.5) (27.9) 12.7 (7.7) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 2.0 33.6 47.9 33.0 -

PAT GROWTH* 11.4 18.1 24.4 9.0 -

OPM# 23.9 27.2 29.5 30.0 -


ANGEL ESTIMATES


PAT GROWTH (%) (50.2) 53.5

ROE (%) 6.1 8.8

P/E 24.2 15.7

P/BV 1.4 1.3


BUY / HOLD / SELL 20 / 6 / 3

RATING BUY


MARKET CAP (`̀̀̀̀ CR) 14,045

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 17,909 21,708 23,666 23,942

DEFERRED TAX LIABILITY 956 1,220 1,220 1,220



GROSS BLOCK 12,847 14,796 18,966 21,311


NET BLOCK 10,619 11,957 15,348 16,817


INVESTMENTS 5,576 6,484 7,428 7,596

CURRENT ASSETS




TOTAL ASSETS 27,366 32,325 34,691 35,676


PROFIT & LOSS

NET SALES 10,355 13,832 13,763 16,017

% CHG 68.4 33.6 (0.5) 16.4


EBITDA 2,891 3,756 3,368 3,909

(% OF NET SALES) 27.9 27.2 24.5 24.4




(% OF PBT) - - - -

RECURRING PBT 1,379 1,754 861 1,321

EXTRAORDINARY EXPENSE/(INC.) 719.5 0.8 - -

PBT (REPORTED) 2,098 1,755 861 1,321

TAX 390 587 279 429

(% OF PBT) 18.6 33.4 32.5 32.5

PAT (REPORTED) 1,708 1,169 582 893



PAT AFTER MI (REPORTED) 1,708 1,169 582 893

ADJ. PAT 989 1,168 582 893

% CHG 10.2 18.1 (50.2) 53.5


KEY RATIOS

VALUATION RATIO (X)

P/E 14.2 12.0 24.2 15.7

P/CEPS 6.5 7.9 10.3 7.9

P/BV 1.7 1.5 1.4 1.3

EV/SALES 2.7 2.4 2.5 2.2

EV/EBITDA 9.7 8.9 10.3 9.0


EPS (BASIC) 4.7 5.5 2.7 4.2


CASH EPS 10.2 8.4 6.4 8.3

DPS 1.1 0.8 0.8 0.9

BOOK VALUE 40.0 44.2 46.1 49.4

RETURNS (%)

ROCE (PRE-TAX) 10.2 10.5 7.7 8.6


ROE 13.0 13.0 6.1 8.8

TURNOVER RATIOS (X)



PAYABLES (DAYS) 239 186 195 205


CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 2,725 1,676 (532) 674



CASH FLOW FROM OPERATIONS (1,474) 100 1,892 1,094

INC./ (DEC.) IN FIXED ASSETS 3,077 4,410 2,264 1,010

INC./ (DEC.) IN INVESTMENTS (214) 908 945 168


CASH FLOW FROM INVESTING 2,863 5,318 3,209 1,178


INC./(DEC.) IN LOANS 4,803 3,799 1,958 276


OTHERS (594) (172) - -

CASH FLOW FROM FINANCING 5,307 3,801 1,784 92

INC./(DEC.) IN CASH 971 (1,417) 467 8






Company BackgroundSadbhav Engineering Ltd. (SEL) was incorporated in 1988. The companyis a leading EPC and infrastructure development company based in Ahmedabad.SEL is present in the roads and highways (87% of order book), irrigation(4%) and mining (9%) sectors. The company forayed into the road sectorin 1995 and has since then executed several projects for NHAI and stategovernments. Currently, SEL is one of the largest BOT players in India withnine projects (operational: 4; under construction: 5) in its portfolio throughits 77.8% owned subsidiary, Sadbhav Infrastructure Project Ltd. (SIPL).

Structural SnapshotGrowth opportunity: SEL currently has an order book of `6,259cr (2.8xFY2011 revenue, which provides decent revenue visibility. However, in recenttimes, the road sector has witnessed very aggressive competition. SEL hasstayed away from such competition, which has resulted in drying of orderinflow for the company.

Competitive position: During the past few quarters, the road sector haswitnessed aggressive bidding due to the entry of many new players. Goingahead as well, we do not expect any significant moderation in competition,given the lack of opportunities from the other parts of the economy.

Nature of business: Low entry barriers; Rate sensitive.

Current Investment ArgumentsSound balance sheet: SEL has a sound balance sheet with parent netdebt/equity at 0.6x as of 2HFY2012 - only company in our universe to havereduced its debt in FY2011. The company's working capital position (73days - 1HFY2012) is also much better than its peers. This has insulated thecompany's earnings to a great extent in such an exorbitant interest ratescenario, which has been the key concern for the decline in the sector'searnings and has aided the company to outperform on the bourses.

Funds tied up for projects in hand: SEL had successfully raised `400crthrough stake dilution (22.2% in August 2010) in SIPL. This has made SELfully tied up for the projects in hand. This money raising was a timely developmentfor SEL, given its then huge equity commitment towards under developmentprojects. Also, this helped the company to focus on project execution, whichis SEL's forte, leading to early completion of projects - a rare phenomenonin the industry.

Valuations: At current levels, the stock is trading at PE of 13.0x FY2013Estandalone earnings. Our SOTP-based target price works out to ̀ 150/share,implying a 29% upside from current levels, based on a target P/E multipleof 9.0x to its FY2013E earnings and valuing its BOT arm on DCF (FCFE)basis. Hence, we recommend a Buy rating on the stock with a SOTPtarget price of `̀̀̀̀150. SEL is also one of our top picks in the sector.

Infrastructure CMP/TP/Upside: `117 / `150 / 29%


PROMOTERS 47.5

FII 20.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SEL (9.6) 13.7 54.7 18.0 -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 65.0 75.8 35.0 50.1 -

PAT GROWTH* 32.1 122.1 31.2 61.6 -

OPM# 10.5 10.2 10.8 11.2 -

ROE# - 23.5 20.7 21.0 -

ANGEL ESTIMATES


PAT GROWTH (%) 14.5 (1.9)

ROE (%) 19.7 15.7

P/E 12.8 13.0

P/BV 2.3 1.9


BUY / HOLD / SELL 20 / 0 / 0

RATING BUY



LIQUIDITY LOW

Sadbhav Eng.


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 424 396 515 445




GROSS BLOCK 332 372 412 456


NET BLOCK 210 230 238 248

GOODWILL - - - -


CURRENT ASSETS 1,009 1,434 1,718 1,726




TOTAL ASSETS 830 1,038 1,295 1,405




% CHG 17.0 75.8 17.8 (0.7)


EBITDA 138 226 270 273

(% OF NET SALES) 11.0 10.2 10.4 10.6




(% OF PBT) 17.0 11.1 17.9 33.8



PBT (REPORTED) 98 176 221 281

TAX 44 56 72 91

(% OF PBT) 45.0 32.0 32.4 32.4

PAT (REPORTED) 54 120 149 190




ADJ. PAT 54 120 137 134

% CHG (28.6) 122.1 14.5 (1.9)


KEY RATIOS

VALUATION RATIO (X)

P/E 32.4 14.6 12.8 13.0

P/CEPS 22.7 11.9 10.4 10.3

P/BV 4.5 2.8 2.3 1.9

EV/SALES 1.7 0.9 0.8 0.8

EV/EBITDA 15.4 9.1 8.2 7.5


EPS (BASIC) 4.3 8.0 10.0 12.7


CASH EPS 5.1 9.8 11.2 11.3

DPS 0.4 0.5 0.5 0.5

BOOK VALUE 26.1 41.8 51.0 63.0

RETURNS (%)

ROCE (PRE-TAX) 16.4 21.3 20.4 17.7


ROE 14.7 23.5 19.7 15.7

TURNOVER RATIOS (X)



PAYABLES (DAYS) 128 125 136 145


CASH FLOW STATEMENT






CASH FLOW FROM OPERATIONS (95) 161 (77) 215






INC./(DEC.) IN LOANS 213 (28) 119 (70)


OTHERS (3) (3) - -


INC./(DEC.) IN CASH 35 40 (24) 91






Company BackgroundPunj Lloyd (Punj) is a diversified global engineering and construction company,with presence across the infrastructure (34% of order book), pipeline (20%),and process (20%) segments . Punj Group has three main entities - Punj,headquartered in India; SEC in Singapore; and Simon Carves in the U.K.Punj started as a pipeline company in 1982. Over the years, Punj, with thehelp of various JVs and acquisitions, has increased its expertise in basicinfrastructure projects, such as roads, power, cross-country pipelines, urbaninfrastructure, tankages and terminals, and process plants, among others.Punj was listed in 2006; and in the same year, it acquired SEC and SimonCarves.

Structural SnapshotGrowth opportunity: Currently, Punj has an order book of `26,690cr (3.4xFY2011 revenue) - ~45% domestic and the balance from overseas. Further,Punj Group is very diversified in terms of geography, as it is actively involvedin projects in India, South Asia, South East Asia, the Caspian, Middle Eastand North Africa (MENA) and in some parts of U.K. and Europe. This offersa number of opportunities to Punj.

Competitive position: Punj faces competition in most of the segments acrossgeographies. For orders from the Middle East, Punj has been facing stiffcompetition from the Koreans who have bagged majority of the new orders,resulting in lower order booking for Punj.

Nature of business: Low entry barriers in most segments, except the pipelineand oil and gas segments.

Current Investment ArgumentsElongated working capital --> Increase in leverage: Over the past fiveyears, there has been a steady deterioration in the company's working capital(164 days as of 2HFY2012 from 49 days in FY2007). Also, given significantdelays for release of payments by PSU clients, has led to the company's netdebt to equity deteriorated to 1.4x at the end of 2HFY2012 from 0.5x at theend of FY2007.

Auditor qualification: Punj has total auditor qualification of ~`1,400cr (~47%of net worth FY2011), which is significantly above comfort levels. Further,lack of clarity on these and material impact of the same would remain anoverhang on the stock.

Quality of order book: Punj has not removed the slow-moving Libyan orders(`3,900cr) from its order book (`26,990cr), despite political instability inLibya. Further, these orders have been slow moving since the last 3-4 quarters.

Poor profitability: Punj's performance at the earnings level has been poorwith the company posting losses at consolidated level in the past few years.Further, going ahead as well, limited clarity on the same remains a concern.

Valuations: We have valued Punj on 0.5x P/BV (FY2013) and have arrivedat a fair value of `47. We continue to maintain our Neutral view on thestock due to the above-mentioned concerns.

Infrastructure CMP/TP/Upside: `49 / - / -Punj Lloyd


PROMOTERS 37.2

FII 9.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

PUNJ (11.2) (50.7) (24.5) (25.4) -

SENSEX (2.6) (12.6) 21.3 3.3 17.3

NOTE: ABOVE 1 YEAR ON CAGR BASIS


(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 20.3 (24.9) 0.4 36.0 -

PAT GROWTH* 3.4 - - - -

OPM# 8.4 5.2 4.1 5.9 -

ROE# - - - 6.5 -NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS


BUY / HOLD / SELL 2 / 4 / 17

RATING NEUTRAL



LIQUIDITY MEDIUM

ANGEL ESTIMATES


PAT GROWTH (%) - 53.3

ROE (%) 2.1 3.1

P/E 25.7 16.8

P/BV 0.5 0.5


BALANCE SHEET

SOURCES OF FUNDS

EQUITY SHARE CAPITAL 66.4 66.4 66.4 66.4



TOTAL LOANS 4,455 4,542 5,586 5,896




GROSS BLOCK 3,120 3,365 3,865 4,185


NET BLOCK 2,178 2,252 2,458 2,460



CURRENT ASSETS 8,828 9,367 11,157 12,191




TOTAL ASSETS 7,709 7,752 8,843 9,236




% CHG (12.3) (24.9) 22.1 10.5


EBITDA 365 411 799 893

(% OF NET SALES) 3.5 5.2 8.3 8.4




(% OF PBT) (76.7) (141.8) 101.3 79.0

RECURRING PBT (141) (133) 97 143


PBT (REPORTED) 21 16 97 143

TAX 137 66 34 46

(% OF PBT) 654.4 417.3 35.0 32.5

PAT (REPORTED) (116) (50) 63 96

LESS: MINORITY INTEREST (MI) (2) (3) - -


PAT AFTER MI (REPORTED) (108) (60) 63 96

ADJ. PAT (363) (179) 63 96

% CHG 51.1 - - 53.3


KEY RATIOS

VALUATION RATIO (X)

P/E - - 25.7 16.8

P/CEPS - 17.8 4.5 3.9

P/BV 0.5 0.5 0.5 0.5

EV/SALES 0.5 0.6 0.7 0.6

EV/EBITDA 15.0 12.0 7.8 7.1


EPS (BASIC) (10.9) (5.4) 1.9 2.9

EPS (FULLY DILUTED) (10.9) (5.4) 1.9 2.9

CASH EPS (4.1) 2.7 10.7 12.5

DPS 0.2 0.2 0.4 0.4

BOOK VALUE 91.2 89.7 91.2 93.6

RETURNS (%)

ROCE (PRE-TAX) 2.0 1.8 6.1 6.4


ROE (13.2) (5.9) 2.1 3.1

TURNOVER RATIOS (X)



PAYABLES (DAYS) 151 194 197 206


CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 1,786 (690) 1,087 216



CASH FLOW FROM OPERATIONS (1,783) 721 (829) 85


(INC.)/DEC. IN INVESTMENTS 279 (2) - -




INC./(DEC.) IN LOANS 896 87 1,043 310


OTHERS (6) (79) - -

CASH FLOW FROM FINANCING 1,532 (6) 1,029 296

INC./(DEC.) IN CASH (201) 604 (282) 258

OPENING CASH BALANCES 812 611 1,215 933

CLOSING CASH BALANCES 611 1,215 933 1,191




Company BackgroundEstablished in 1926, Hindustan Construction Company (HCC) is one ofIndia's oldest construction and infrastructure development companies. HCC'score business is diversified across three broad verticals: 1) engineeringand construction (E&C); 2) asset development; and 3) real estate. HCC'sE&C order book is dominated by the power (hydro and nuclear) segment -58% of OB, followed by road (22%) and irrigation (20%).

Structural SnapshotGrowth opportunity: Since the past few quarters, order inflow for HCChas been very sluggish due to various concerns affecting the sector (readpower), resulting in a decline in its order book. This trend is expected tocontinue for some more quarters, given the power sector is facingcyclical and structural problems; hence, HCC's medium-term growthprospects look weak.

Competitive position: HCC is expected to maintain its market share in thehydro and nuclear power segments, as there are just a handful of players inthese segments. However, in the road segment, HCC is expected to loseits market share on account of intense bidding and entry of many new players,which will make it difficult for HCC to win new projects.

Nature of business: Cyclical; Rate sensitive; Low entry barriers except forthe hydro and nuclear power segments.

Current Investment ArgumentsHuge investments and elongated working capital = Balance sheet stretched:HCC's balance sheet is loaded with debt (`4,171cr as of 2QFY2012; netD/E = 2.7 - standalone level) because of its BOT/real estate investmentsand funding of its working capital requirements (328 days as of 1HFY2012).Going ahead as well, owing to its commitments, we believe HCC will notget any respite on these fronts.

Deteriorating business environment: Slowdown on the execution front,along with macro headwinds faced by the sector, has resulted in erodingthe company's profitability. Further, the fact that there are no signs of reversalin sight paints a bleak outlook for the company in the medium term.

Uncertainty on the Lavasa project: Lavasa received clearance for theconstruction and development for Phase 1 in November 2011, post oneyear of legal battle with MOEF, which resulted in huge losses to HCC. However,the project still remains under the cloud of uncertainty and continues to bean overhang on the stock.

Valuations: We have valued HCC on an SOTP basis with a fair value of`32/share, by assigning 6x FY2013E earnings for the EPC arm (`3.9/share).The company's real estate venture (`11.7/share) has been valued on NAVbasis (50% discount). BOT assets (`16.3/share) have been valued by givinga 30% discount to the Private Equity deal. Although our fair value implies anupside of 52.7% from current levels, we continue to maintain our Neutralrecommendation on the stock, owing to the above-mentioned concerns.

Infrastructure CMP/TP/Upside: `22 / - / -HCC


PROMOTERS 39.9

FII 24.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HCC (21.3) (46.9) (1.3) (22.3) 27.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (6.2) 12.3 9.9 15.6 25.1

PAT GROWTH* - (12.8) (1.0) (1.7) 7.1

OPM# 11.7 13.2 12.8 11.9 13.0


ANGEL ESTIMATES


PAT GROWTH (%) - -

ROE (%) - 3.1

P/E - 33.6

P/BV 1.0 1.1


BUY / HOLD / SELL 4 / 12 / 9

RATING NEUTRAL



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,515 3,471 4,436 3,878




GROSS BLOCK 1,814 1,987 2,161 2,370


NET BLOCK 1,150 1,184 1,189 1,211



CURRENT ASSETS 4,624 6,096 6,817 7,257




TOTAL ASSETS 4,174 5,160 5,873 5,290




% CHG 10.0 12.3 (4.3) 18.3


EBITDA 443 540 470 583

(% OF NET SALES) 12.2 13.2 12.0 12.6




(% OF PBT) 10.7 15.2 (12.0) 28.9

RECURRING PBT 122 112 (99) 59

% CHG 5.8 (8.4) (188.8) (159.3)

EXTRAORDINARY EXPENSE/(INC.) - - (166) -

PBT (REPORTED) 122 112 (266) 59

TAX 40 41 (78) 20

(% OF PBT) 33.2 36.4 29.4 33.6

PAT (REPORTED) 81 71 (187) 39



PAT AFTER MI (REPORTED) 81 71 (187) 39

ADJ. PAT 81 71 (187) 39

% CHG 7.2 (12.8) - -


KEY RATIOS

VALUATION RATIO (X)

P/E 16.1 18.5 - 33.6

P/CEPS 6.7 5.9 - 5.8

P/BV 0.9 0.9 1.0 1.1

EV/SALES 1.0 1.1 1.4 1.1

EV/EBITDA 8.2 8.5 12.0 8.7


EPS (BASIC) 2.7 1.2 (3.1) 0.6

EPS (FULLY DILUTED) 1.3 1.2 (3.1) 0.6

CASH EPS 3.2 3.7 (0.3) 3.7

DPS 0.8 0.9 0.9 0.9

BOOK VALUE 25.0 25.1 21.0 20.5

RETURNS (%)

ROCE (PRE-TAX) 8.6 8.3 5.4 7.1


ROE 6.5 4.7 - 3.1

TURNOVER RATIOS (X)


RECEIVABLES (DAYS) 1 0.4 - -

PAYABLES (DAYS) 186 229 283 299


CASH FLOW STATEMENT

PROFIT BEFORE TAX 122 112 (266) 59




DIRECT TAXES PAID 40 41 (78) 20







INC./(DEC.) IN LOANS 193 957 965 (558)


OTHERS 25 10 - -


INC./(DEC.) IN CASH 34 5 (88) 35






Company BackgroundNagarjuna Construction Company (NCC), starting off as a building/industrialconstruction company, has emerged as an EPC contractor with a diversifiedproduct portfolio. NCC's presence across all the key infrastructure verticals:1) roads (4% of order book); 2) buildings (39%); 3) water (11%); 4) irrigation(12%); 5) electrical (4%); 6) power (9%); 7) oil and gas (6%); and 8) metals(2%) endows it with a relatively de-risked business model. NCC has alsoventured in international geographies (11% of order book) such as Omanand UAE, which further diversifies its business.

Structural SnapshotGrowth opportunity: Currently, NCC has an order book of ~`16,570cr (3.3xFY2011 revenue), which provides good revenue visibility. NCC's order inflowhas been decent at `3,095cr in 1HFY2012, on account of its presence innine verticals. Management expects the road, building, water and electricalsegments to gather momentum and add significantly to the company's orderbook. Further, NCC's order book will get a boost because of its captivepower plant orders worth ~`5,000cr.

Competitive position: NCC faces tough competition in all the segments itoperates in. During the past few quarters, the road sector has witnessedentry of many new players, leading to aggressive bidding. NCC has notbeen able to bag any road BOT project in past 8-10 quarters due to itsconservative bidding strategy.


Current Investment ArgumentsStrong and diversified infrastructure play: The government's focused initiativestowards infrastructure creation with active participation of the private sectorwill hold key to the Indian economy's growth. For bridging the infrastructuredeficit and for sustaining a higher growth rate, the Twelfth Five-Year Planenvisages a total investment of ~US$1trillion in infrastructure. NCC, withits diversified presence, is well placed to benefit from the opportunities presentedby this spending.

Valuations: At the current price, the stock is trading at attractive valuations(4.5x its FY2013E earnings adjusted for its investments and subsidiaries)and at 0.5x FY2013E on P/BV basis (standalone). We have valued NCC onan SOTP basis with a target price of ̀ 59/share, by assigning 8.0x FY2013Eearnings for its E&C arm (`30.7/share) and 5.0x FY2013E earnings for itsinternational subsidiaries (`7.6/share). The company's real estate venture(`1.9/share) has been valued on P/B basis and its BOT assets (`8.4/share)have been valued on DCF basis. The company's power ventures (`10.8/share) have been valued on P/BV basis (0.5-1). Our target price impliesan upside of 28% from current levels. Hence, we recommend Buy onthe stock with a SOTP target price of `̀̀̀̀59.

Infrastructure CMP/TP/Upside: `46 / `59 / 28%NCC


PROMOTERS 19.5

FII 44.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

NCC (18.0) (59.9) (7.8) (26.6) 36.5



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (9.2) 6.2 13.5 22.5 35.3

PAT GROWTH* (75.2) (18.4) 0.3 9.3 41.6

OPM# 9.5 9.6 9.6 9.7 8.9


ANGEL ESTIMATES


PAT GROWTH (%) (44.1) 7.8

ROE (%) 3.8 4.0

P/E 12.9 12.0

P/BV 0.5 0.5


BUY / HOLD / SELL 28 / 7 / 4

RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,530 2,484 2,734 3,559




GROSS BLOCK 756 923 1,053 1,233


NET BLOCK 553.8 674.5 726.4 814.8

CAPITAL WORK-IN-PROGRESS 43.4 46.9 50.5 56.7

INVESTMENTS 941 1,201 1,501 1,849

CURRENT ASSETS 4,092 4,946 4,965 5,755




TOTAL ASSETS 3,785 4,894 5,192 6,074




% CHG 15.1 6.2 0.4 12.8


EBITDA 483 488 486 542

(% OF NET SALES) 10.1 9.6 9.5 9.4




(% OF PBT) 22.6 38.9 65.6 81.8



PBT (REPORTED) 337 266 135 146

TAX 116 97 44 47

(% OF PBT) 34.5 36.7 32.4 32.4

PAT (REPORTED) 221 168 91 99


PRIOR PERIOD ITEMS 4.1 4.8 - -


ADJ. PAT 200 163 91 99

% CHG 30.2 (18.4) (44.1) 7.8


KEY RATIOS

VALUATION RATIOS (X)

P/E 5.9 7.2 12.9 12.0

P/CEPS 4.7 5.1 7.0 6.2

P/BV 0.5 0.5 0.5 0.5

EV/SALES 0.5 0.7 0.7 0.8

EV/EBITDA 5.2 7.2 7.8 8.6


EPS (BASIC) 8.4 6.4 3.6 3.8


CASH EPS 9.9 9.0 6.6 7.4

DPS 1.3 1.0 1.4 1.4

BOOK VALUE 86.9 92.7 94.6 96.8

RETURNS (%)

ROACE (PRE-TAX) 12.8 9.7 8.1 8.0


ROE 10.2 7.1 3.8 4.0

TURNOVER RATIOS (X)



PAYABLES (DAYS) 126 131 139 135


CASH FLOW STATEMENT

PROFIT BEFORE TAX (EXCLUDING MI) 337 266 135 146





CASH FLOW FROM OPERATIONS (272) (635) 126 (393)






INC./(DEC.) IN LOANS 286 954 249 826


OTHERS (6) (6) - -


INC./(DEC.) IN CASH 49 (44) (12) (24)






Company BackgroundIVRCL is one of the leading construction companies in India. Set up in 1987,the company is based in Hyderabad and is promoted by E Sudhir Reddy.IVRCL has a track record of executing infrastructure projects over the pasttwo decades. The company is the leader in water management and irrigationsystems in India. The company also operates in the construction of road,buildings, industrial structures and power transmission towers. IVRCL hastwo listed subsidiaries, namely: 1) IVRCL Assets and Holdings (IVRCLAH)and 2) Hindustan Dorr Oliver (HDO). IVRCLAH currently holds BOT projectsassets (to be demerged and amalgamated with IVRCL from FY2013) andland bank. HDO is mainly involved in industrial projects in areas ofmining and minerals, water and wastewater, fertilizers and chemicals andpulp and paper.

Structural SnapshotGrowth opportunity: Currently, IVRCL has a robust order book of ~`25,500cr(4.5x FY2011 revenue), which provides good revenue visibility. Diversifiedacross six segments, the order book is dominated by the irrigation and watersegment (42%), followed by the transportation (26%) and building (20%)segments. In the past few quarters, despite order inflow being very sluggishfor the sector, IVRCL has scored well. The company witnessed order inflowof ~`8,000cr in 1HFY2012. However, going ahead, times are challengingfor contractors as the sector is under pressure and facing various headwinds.

Competitive position: IVRCL faces tough competition in all the segmentsit operates in and has no bargaining power.


Current Investment ArgumentsEquity infusion - The key catalyst: IVRCL is looking for funds either throughmonetizing captive road projects or monetizing its land bank, given its equitycommitment over the next 12-18 months and its already stretched balancesheet. Management has chalked out a plan to reduce the company's debtlevels by FY2012-end and is looking to amalgamate its BOT assets back toIVRCL - thereby creating clarity over the end-use of funds. If this is achieved,it would not only improve IVRCL's working capital cycle but also lend a fillipfor the execution of its parent company.

Trading at undemanding valuations: At current levels, IVRCL is trading atvaluations of mere 0.5x FY2013E P/BV and 8.6x PE on FY2013E basis(standalone basis). We have valued IVRCL on an SOTP basis - the coreconstruction business has been valued at P/E of 8.0x FY2013E EPS of`4.6 (`37.0/share), whereas its stake in subsidiaries IVRCLAH (`15.5/share)and HDO (`3.8/share) has been valued on mcap basis, post assigning a20% holding company discount. Hence we maintain Buy on the stockwith a SOTP target price of `̀̀̀̀56.

Infrastructure CMP/TP/Upside: `40 / `56 / 40%IVRCL


PROMOTERS 11.2

FII 37.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

IVRCL 8.0 (59.5) (11.0) (27.7) 26.8



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (2.7) 2.9 15.6 30.5 35.9

PAT GROWTH* (65.1) (25.3) (9.1) 11.2 28.6

OPM# 9.0 9.1 9.1 9.4 9.1


ANGEL ESTIMATES


PAT GROWTH (%) (36.1) 22.5

ROE (%) 5.0 5.8

P/E 10.6 8.6

P/BV 0.5 0.5


BUY / HOLD / SELL 30 / 5 / 3

RATING BUY



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,613 2,096 2,832 3,367




GROSS BLOCK 750 924 1,049 1,199


NET BLOCK 566 692 723 767



CURRENT ASSETS 4,952 5,703 6,378 7,338



MIS. EXP. NOT WRITTEN OFF (1) - - -

TOTAL ASSETS 3,478 4,092 4,910 5,550




% CHG 10.3 2.9 (0.9) 15.4


EBITDA 531 515 494 593

(% OF NET SALES) 9.7 9.1 8.8 9.2




(% OF PBT) 19.4 24.3 62.5 51.0



PBT (REPORTED) 329 233 149 183

TAX 118 75 48 59

(% OF PBT) 35.7 32.1 32.4 32.4

PAT (REPORTED) 211 158 101 124




ADJ. PAT 211 158 101 124

% CHG (6.5) (25.3) (36.1) 22.5


KEY RATIOS

VALUATION RATIOS

P/E 5.0 6.7 10.6 8.6

P/CEPS 4.0 4.6 5.5 4.6

P/BV 0.6 0.5 0.5 0.5

EV/SALES 0.5 0.5 0.7 0.7

EV/EBITDA 4.7 5.9 7.6 7.2


EPS (BASIC) 7.8 5.9 3.8 4.6


CASH EPS 9.9 8.8 7.3 8.6

DPS 1.5 1.6 1.7 1.8

BOOK VALUE 69.4 74.4 77.5 81.4

RETURNS (%)

ROACE (PRE-TAX) 14.2 11.6 8.9 9.3


ROE 11.5 8.2 5.0 5.8

TURNOVER RATIOS (X)



PAYABLES (DAYS) 142 180 189 174


CASH FLOW STATEMENT






CASH FLOW FROM OPERATIONS (58) (320) (609) (413)






INC./(DEC.) IN LOANS 220 483 736 535


OTHERS 68 (37) - -


INC./(DEC.) IN CASH 63 (21) 8 (6)






Company BackgroundSimplex Infrastructure (Simplex) is one of oldest construction companies inIndia, based in Kolkata. Over the years, Simplex has diversified across varioussegments to encash upon the untapped construction opportunities, and ithas an excellent track record of achieving the same. The company is presentacross eight segments - buildings (24% of order book), bridges (7%), industrial(14%), marine (2%), pilling (5%), power (25%), rail and roads (13%) andurban infrastructure (10%).

Structural SnapshotGrowth opportunity: Simplex is a pure construction play (not an asset developer)and has its order book growth linked to industrial capex and infrastructurespend. In the past many quarters, there has been a slowdown in industrialcapex owing to various issues, such as slowdown in demand, high interestrates and delays on clearances. Recent management commentary and ourinteraction with various industry heads indicate that the slowdown is expectedto persist in the near term and revival can be expected only in 2HFY2013.On the infrastructure front, apart from the road segment, no other segmentis witnessing decent order awarding.

Competitive position: Simplex faces fierce competition in most of the segments,given the market is highly fragmented and requires little specialization.

Nature of business: Working capital intensive; Cyclical and interest-ratesensitive sector; Low technological intensity and no entry barriers.

Current Investment ArgumentsDiversified play: Simplex is involved in the different segments of the infrastructuresector, indicating the company's strong execution capabilities. In terms ofits client profile, Simplex has a healthy mix of private (62% of order book),government (29%) and PPP projects (9%). This successful diversificationhas not only provided Simplex the experience of executing different andcomplex projects but has also qualified it to bid for bigger ticket-size projectsgoing ahead.

Better placed than most peers: Simplex has faced problems on two majorfronts - high leverage on the balance sheet (net D/E 1.6x as of 1HFY2012)and slowdown on the order inflow front. These problems are primarily dueto higher working capital days (from 92 days in FY2010 to 123 days in1HFY2012 - but not due to huge investments in ambitious BOT projects)and slowing economy. Therefore, once the economy revives, Simplex wouldbe one of the infra companies to benefit the most, considering that it has nostructural issues compared to peers.

Valuations attractive: Due to the recent correction, the stock is trading atPE of 7.6x FY2013E earnings, which is lower than its historical PE of 15-20x. Hence, we believe the recent correction provides a good opportunityto Buy with a target price of `̀̀̀̀233.

Infrastructure CMP/TP/Upside: `198 / `233 / 18%Simplex Infra


PROMOTERS 55.0

FII 13.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SIMPLEX (8.5) (45.6) 12.0 (11.9) 45.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 25.7 7.1 20.3 (19.8) 28.7

PAT GROWTH* (33.5) (16.1) 5.8 (36.2) 35.6

OPM# 9.0 9.8 9.5 9.4 8.5


ANGEL ESTIMATES


PAT GROWTH (%) (11.9) 36.8

ROE (%) 8.3 10.5

P/E 10.4 7.6

P/BV 0.8 0.8


BUY / HOLD / SELL 17 / 7 / 2

RATING BUY

52 WEEK HIGH / LOW 389 / 157


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS


RESERVES & SURPLUS 968 1,078 1,160 1,277


TOTAL LOANS 1,302 1,661 2,216 2,220




GROSS BLOCK 1,277 1,509 1,684 1,859


NET BLOCK 988 1,123 1,189 1,243



CURRENT ASSETS 3,125 3,767 4,517 5,035




TOTAL ASSETS 2,374 2,893 3,530 3,652




% CHG (3.1) 7.1 13.8 16.6


EBITDA 454 477 520 613

(% OF NET SALES) 10.0 9.8 9.4 9.5




(% OF PBT) 13.0 18.8 28.1 20.8



PBT (REPORTED) 201 218 141 193

TAX 71 92 46 62

(% OF PBT) 35.6 42.3 32.4 32.4

PAT (REPORTED) 129 126 95 130

LESS: MINORITY INTEREST (MI) 1.9 1.4 1.1 1.4



ADJ. PAT 127 107 94 129

% CHG 9.2 (16.1) (11.9) 36.8


KEY RATIOS

VALUATION RATIO (X)

P/E 7.7 9.2 10.4 7.6

P/CEPS 4.5 4.8 4.8 3.9

P/BV 1.0 0.9 0.8 0.8

EV/SALES 0.5 0.5 0.6 0.5

EV/EBITDA 4.8 5.3 5.9 5.0


EPS (BASIC) 25.6 25.1 18.9 25.9


CASH EPS 44.2 40.9 41.0 50.2

DPS 2.0 2.0 2.0 2.0

BOOK VALUE 196.9 219.0 235.6 259.2

RETURNS (%)

ROACE (PRE-TAX) 13.0 11.8 10.4 11.3


ROE 13.5 10.3 8.3 10.5

TURNOVER RATIOS (X)



PAYABLES (DAYS) 141 141 141 143


CASH FLOW STATEMENT

PROFIT BEFORE TAX (EXCL. MI) 201 217 140 191











INC./(DEC.) IN LOANS 107 358 555 5


OTHERS 82 (29) - 0


INC./(DEC.) IN CASH (9) (2) (4) 47






Company BackgroundPatel Engineering (PEL) provides the entire range of civil engineering servicesinvolved in the design and construction of hydroelectric projects, commercialbuildings, industrial complexes, dams, tunnels, underground structures, bridgesand national highways. The power (40%) and irrigation (46%) segmentsaccount for a majority of PEL's total order book and the balance is contributedby the transportation segment (14%).

Structural SnapshotGrowth opportunity: Though there is a large potential in hydropower developmentin India, it is hit by several headwinds such as land acquisition, environmentand forest clearances, geological surprises, rehabilitation and resettlement(R&R) issues, funding issues, free power conditions imposed by states, andlaw and order problems in some projects. With the current policy paralysis,we do not expect these problems to be resolved and the resultant orderingactivity from the hydro power segment is expected to be slow. After thepolitical crisis in Andhra Pradesh, ordering activity in the irrigation segmenthas come down considerably - sensing that many companies have diversifiedinto different segments, which PEL has not been able to carry out. On thetransportation front, PEL is serving a one-year ban from the NHAI's sideand, hence, order inflow is expected to be muted.

Competitive position: PEL faces fierce competition in the transportationand irrigation segment, given the market is highly fragmented and requireslittle specialization. The company is expected to maintain its market share inthe hydro power segments, as there are just a handful of players.

Nature of business: Working capital intensive; Cyclical and interest-ratesensitive sector; Relatively high technological intensity than peers and moderate-to-high entry barriers.

Current Investment ArgumentsStructural issues on the business front: PEL's core E&C business is currentlyfacing strong headwinds, with its large projects facing delays and drying oforder inflow for the last many quarters. Further, the longer gestation natureof its order book and increasing debt levels put the company's growth visibilityfor the next few quarters under doubt. Further, there is no clarity on theexecution schedule of its 1,050MW thermal power project owing to pendingclearances.

Valuations: Given the sharp fall in the stock price in the past 12 months,PEL's valuations have come down drastically vindicating our negative stanceon the stock. However, we are concerned about the growth prospects ofthe company and believe that it is facing structural issues, which will taketime to be sorted out. Further, there are better plays available in the infrastructurespace than PEL. Hence, we maintain our Neutral view on the stock.

Key risks to our recommendation: 1) Pick-up in order inflow from the powersegment in the near term; 2) earlier-than-expected execution from itsslow-moving orders; and 3) raising of capital and the resultant decline indebt levels.

Infrastructure CMP/TP/Upside: `98 / - / -Patel Engineering


PROMOTERS 45.6

FII 7.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

PEL 3.3 (61.1) (15.4) (26.8) 20.2



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 23.8 8.9 23.3 30.5 -

PAT GROWTH* (31.0) (38.1) (6.8) 10.6 -

OPM# 11.8 14.3 15.4 14.8 -


ANGEL ESTIMATES


PAT GROWTH (%) (20.3) 3.5

ROE (%) 6.6 6.5

P/E 7.0 6.8

P/BV 0.5 0.4



RATING NEUTRAL



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,138 2,806 2,905 3,092




GROSS BLOCK 861 1,008 1,108 1,233


NET BLOCK 555 644 662 697



CURRENT ASSETS 3,758 4,548 4,695 5,011




TOTAL ASSETS 3,574 4,317 4,505 4,784




% CHG 29.7 8.9 (5.9) 9.6


EBITDA 509 497 464 469

(% OF NET SALES) 15.9 14.3 14.2 13.1



OTHER INCOME (INCL ASS/JV PFT) 98 89 98 107

(% OF PBT) 32.0 40.4 65.6 69.7



PBT (REPORTED) 305 220 149 154

TAX 93 54 45 46

(% OF PBT) 30.5 24.6 30.0 30.0

PAT (REPORTED) 212 166 104 108




ADJ. PAT 198 123 98 101

% CHG 42.4 (38.1) (20.3) 3.5


KEY RATIOS

VALUATION RATIOS

P/E 3.5 5.6 7.0 6.8

P/CEPS 2.2 3.4 3.8 3.6

P/BV 0.5 0.5 0.5 0.4

EV/SALES 0.8 0.9 1.0 1.0

EV/EBITDA 5.1 6.5 7.0 7.5


EPS (BASIC) 30.2 22.6 14.0 14.5


CASH EPS 44.0 29.3 25.7 27.4

DPS 2.0 1.0 1.1 1.2

BOOK VALUE 195.2 204.5 217.2 230.3

RETURNS (%)

ROACE (PRE-TAX) 12.5 10.5 8.7 8.2


ROE 16.7 8.8 6.6 6.5

TURNOVER RATIOS (X)





CASH FLOW STATEMENT






CASH FLOW FROM OPERATIONS (433) (478) 266 (55)


(INC.)/ DEC. IN INVESTMENTS 21 (8) (200) (150)




INC./(DEC.) IN LOANS 391 668 99 186


OTHERS (166) (100) - -


INC./(DEC.) IN CASH (62) 11 104 (96)






Company BackgroundMadhucon Projects Ltd. (MPL) is a Hyderabad-based construction companypromoted by N. Seethaiah and N. Krishnaiah. The company operates in theroad (58% of order book), irrigation (19%), power (10%), mining (7%) andreal estate (6%) segments. MPL has a portfolio of seven road BOT projects(four operational and three under development); three power projects (300MWx2and a recent international foray); a coal mine in Indonesia; and land bank inHyderabad.

Structural SnapshotGrowth opportunity: MPL's two major growth drivers (road and power sectors)are very differently poised currently. NHAI has set aggressive targets (~7,000kmof project awarding in FY2012E) and is on course to implement the same(~4,500km already awarded). In contrast, the power sector is currently plaguedwith various structural and cyclical issues and there seems to be no respitein the near to medium term on the same.

Competitive position: MPL faces fierce competition in most of the segments,given the market is highly fragmented and requires little specialization.

Nature of business: Capital intensive, cyclical and interest-rate sensitivesector; Low technological intensity and no entry barriers.

Current Investment ArgumentsCaptive order inflows drive the order book's growth: As of 2QFY2012,MPL had an order book of `6,500cr (3.6x FY2011 revenue), lending goodrevenue visibility. In recent times, the order book has witnessed tractionfrom the road segment. However, in the past, the quality of the company'sorder book was affected by the high share of projects pending financialclosure (FC); these concerns are now put to rest with the FC for two of itsroad projects achieved, which contribute significantly (>35% of order book)to the overall scheme of things.

Capital raising - The key catalyst: We believe the key triggers to watchout for MPL should be pick-up in execution in the development businessand building of an attractive asset portfolio to raise money. However, theseplans would fructify somewhere in 2HFY2013 only and will be based onmarket conditions prevailing then. Hence, we believe until then the stockwould perform in-line with peers and real value would be created only onunlocking at the subsidiary level. It should be noted that failing to raise moneywould stretch the company's already leveraged balance sheet (net D/E of1.3x as of 1HFY2012).

Valuations: We have assigned P/E of 5.0x on FY2013E standalone earnings(`23.5/share) and valued the BOT projects on DCF basis (`40.1/share)and other investments in Madhucon Infra and the real estate venture on BVbasis (`12.0/share and `2.0/share, respectively). At the CMP, the stock istrading at a discount to our SOTP target price of `̀̀̀̀77, hence we maintainour Buy rating on the stock.

Infrastructure CMP/TP/Upside: `52 / `77 / 48%Madhucon Projects


PROMOTERS 57.7

FII 10.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MPL (26.0) (46.7) 14.2 (20.0) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 18.3 30.8 35.0 39.6 31.6

PAT GROWTH* (10.4) (10.2) (4.5) 4.2 24.1

OPM# 13.0 9.5 10.4 12.4 14.1


ANGEL ESTIMATES


PAT GROWTH (%) (20.5) 6.3

ROE (%) 5.2 5.3

P/E 11.8 11.1

P/BV 0.6 0.6



RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 513 751 1,206 1,487




GROSS BLOCK 491 505 535 595


NET BLOCK 273 241 218 213

CAPITAL WORK-IN-PROGRESS - - - -

INVESTMENTS 639 756 870 1,043

CURRENT ASSETS 753 1,386 1,894 2,355




TOTAL ASSETS 1,101 1,363 1,847 2,159




% CHG 35.4 30.8 7.5 28.2


EBITDA 135 172 218 255

(% OF NET SALES) 9.8 9.5 11.2 10.2



OTHER INCOME (INCL PFT FROM ASS/JV) 5.6 8.9 9.8 10.7

(% OF PBT) 8.1 12.5 19.7 20.4




TAX 24 23 17 18

(% OF PBT) 34.1 33.0 34.0 34.0





ADJ. PAT 46 41 33 35

% CHG (2.4) (10.2) (20.5) 6.3


KEY RATIOS


P/E 8.4 9.4 11.8 11.1

P/CEPS 4.2 4.3 4.5 3.8

P/BV 0.7 0.6 0.6 0.6

EV/SALES 0.6 0.6 0.8 0.7

EV/EBITDA 6.2 6.2 7.0 6.9


EPS (BASIC) 6.2 6.4 4.4 4.7


CASH EPS 12.5 12.0 11.5 13.6

DPS 0.4 0.2 0.5 0.5

BOOK VALUE 78.1 82.2 86.1 90.2

RETURNS (%)

ROACE (PRE-TAX) 9.0 10.1 10.3 9.4


ROE 8.2 6.9 5.2 5.3

TURNOVER RATIOS (X)



PAYABLES (DAYS) 133 153 195 182


CASH FLOW STATEMENT






CASH FLOW FROM OPERATIONS 73 (81) (316) (5)






INC./(DEC.) IN LOANS 193 238 456 281


OTHERS (2) (30) - -


INC./(DEC.) IN CASH (29) 9 1 49






Company BackgroundCCCL was incorporated in 1997 by four ex-L&T professionals with over 20years of experience each in the construction sector. CCCL provides integratedturnkey construction services across four segments - industrial, commercial,infrastructure and residential. The commercial (42.9%) and infrastructure(46.3%) segments dominate the company's order book - `5,936cr (as of2QFY2012). The company majorly operates in southern India and, over thepast 4-5 years, CCCL has also increased its presence in the northern andwestern regions, albeit slowly.

Structural SnapshotGrowth opportunity: For CCCL, order visibility in the commercial segmentis mainly restricted to hospitals and educational institutions, but this segmentfaces stiff competition. In infrastructure space, the number of enquiries inthe power sector remains high but the conversion ratio is negligible. Henceorder inflow from both these segments is expected to be subdued forsome time. However, on the residential front, demand for low-costhousing and premium segment housing seems to be on the rise, which augurswell for CCCL.

Competitive position: The construction industry is fragmented in India withnumerous players, which results in immense competition, especially for jobsinvolving low technology and capital requirement. Thus, orders of smallerticket size (CCCL's market) face maximum competition, particularly duringthe slowdown.

Nature of business: Cyclical; Rate sensitive; Low entry barriers.

Current Investment ArgumentsSlow-moving orders: As of 2QFY2012, of its total order book of `5,936cr,CCCL had ~`2,000cr (`1,000cr - power and metro projects each) worth ofslow-moving orders, which would keep its revenue growth under check forthe next few quarters.

EBITDAM to remain under pressure: Since the past few quarters, CCCLhas been reporting EBITDAM of 1.4-4.8%, owing to: 1) management's errorin estimating commodity prices for fixed price contracts; 2) high labor andprocurement costs; and 3) low-margin legacy orders. Further, as per management,pressure on EBITDAM is expected to remain for the next few quarters, whichcontinues to be an overhang on the stock.

Return ratios take a hit: In the past, CCCL has enjoyed superior returnratios, because of which the stock traded at a premium to its peers. Currently,the company's return ratios have taken a hit due its poor performance. Goingahead, we see pressure on return ratios to continue and expect some improvementonly in FY2013.

Valuations: CCCL is trading at PE of 11.0x FY2013E EPS, inspite of itspoor earnings visibility and a deteriorating business environment. Hence,we believe the stock is fairly valued and recommend a Neutral rating.

Infrastructure CMP/TP/Upside: `18 / - / -CCCL


PROMOTERS 50.8

FII 9.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CCCL (6.8) (65.8) (18.6) - -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 9.5 11.3 14.2 - -

PAT GROWTH* - (48.9) (19.2) - -

OPM# 1.4 7.0 7.7 - -

ROE# - 7.7 13.1 - -NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) - -

ROE (%) - 4.9

P/E - 11.0

P/BV 0.5 0.5



RATING NEUTRAL



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 339 431 582 670




GROSS BLOCK 190 220 250 280


NET BLOCK 157 173 186 198



CURRENT ASSETS 1,358 1,514 1,631 1,742




TOTAL ASSETS 988 1,121 1,240 1,345




% CHG 7.3 11.3 6.9 4.3


EBITDA 179 153 82 135

(% OF NET SALES) 9.1 7.0 3.5 5.5



OTHER INCOME (INCL PFT FROM ASS/JV) 6 5 6 7

(% OF PBT) 4.5 5.5 - 15.5

RECURRING PBT 142 95 (0) 44


PBT (REPORTED) 142 95 (0) 44

TAX 50 36 10 14

(% OF PBT) 35.5 37.7 - 32.4

PAT (REPORTED) 92 59 (10) 30

LESS: SHARE OF JV PARTNERS PROFIT 12.2 9.5 -


PAT AFTER MI (REPORTED) 92 47 (20) 30

ADJ. PAT 92 47 (20) 30

% CHG 26.6 (48.8) - -


KEY RATIOS

VALUATION RATIOS

P/E 3.6 7.0 - 11.0

P/CEPS 3.2 5.4 - 6.8

P/BV 0.6 0.5 0.5 0.5

EV/SALES 0.3 0.3 0.4 0.3

EV/EBITDA 2.8 4.4 10.3 6.3


EPS (BASIC) 5.0 2.5 (1.1) 1.6

EPS (FULLY DILUTED) 5.0 2.5 (1.1) 1.6

CASH EPS 5.6 3.3 (0.2) 2.6

DPS 0.5 0.5 0.6 0.6

BOOK VALUE 31.9 34.0 32.3 33.2

RETURNS (%)

ROACE (PRE-TAX) 19.3 13.2 5.6 9.0


ROE 16.6 7.7 (3.3) 4.9

TURNOVER RATIOS (X)





CASH FLOW STATEMENT

PROFIT BEFORE TAX (EXCL. MI) 142 83 (10) 44







(INC.)/ DEC. IN INVESTMENTS 47 6 (30) (10)




INC./(DEC.) IN LOANS 141 93 151 87


OTHERS 6 6 - -


INC./(DEC.) IN CASH 40 (85) (28) 87






Company BackgroundIncorporated in 1998, IRB is the pioneer and one the largest players in theroad BOT business in India, with strong in-house integrated execution capabilities.IRB's road business can be divided into two verticals: 1) engineering andconstruction (E&C); and 2) toll collection and maintenance. The E&C armcomplements its BOT vertical and leads to time and cost control for projectsin hand/under development. IRB's current road portfolio comprises 18 projects- of which 10 are operational and eight are under construction/development.The company also has one airport project, which is at a very nascent stage;decent land bank; and one small wind mill project.

Structural SnapshotGrowth opportunity: IRB has a road BOT portfolio of 6,722 lane km, ofwhich 3,413 lane km is operational and the balance is under construction/development. Further, IRB has projects worth `5,218cr at RFP (request forproposal) and `35,304cr at RFQ (request for qualification) stages.

Competitive position: The road sector has witnessed the entry of manynew players during the past few quarters, which has led to aggressive bidding.Going ahead as well, we do not expect any significant moderation in theintensity of competition, given the lack of opportunities from the other partsof the economy. However, the fact that IRB has decent orders in hand insulatesit, to some extent, from the current competitive frenzy in the road segment.

Nature of business: Low entry barriers; Rate sensitive; Capital intensive.

Current Investment ArgumentsIntegrated business model: IRB's integrated business model ensures thetimely completion of projects, reduces its reliance on subcontractors andcontrols costs. Further, it allows capturing the entire value in the BOT developmentbusiness, including EPC margins, developer returns and operation andmaintenance (O&M) margins.

OB/Sales providing good revenue visibility: IRB achieved its yearly orderinflow guidance by winning the Ahmedabad Vadodara project and is stayingaway from current competition. The order book of `7,568cr, excluding O&Morders (4.5x FY2011 E&C revenue), lends good revenue visibility for thenext few years.

Negligible dependence on capital markets: As per our analysis, IRB hasan equity requirement of ~`2,148cr (FY2012-14E), and its internal accruals/support (cash flows from the E&C and BOT segments) would substantiallyfund this requirement. Further, the company would be able to keep its debtequity position within reasonable limits.

Valuations: At the CMP of `159, the stock is trading at a discount to ourFY2013E SOTP target price of `182/share - road BOT SPVs have beenvalued on DCF basis (FCFE method) (`61.4/share); the construction segmenthas been valued on 6.0x EV/EBITDA basis (`115.9/share); and its investmentshave been valued on 1x P/BV (`4.4/share). Hence, with a Buy rating, thestock is our top pick in the road sector.



PROMOTERS 67.6

FII 17.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

IRB (6.0) (22.1) 13.6 - -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 50.1 43.0 49.3 - -

PAT GROWTH* 11.1 17.4 58.4 - -

OPM# 43.7 44.9 45.3 - -


ANGEL ESTIMATES


PAT GROWTH (%) (12.6) 9.8

ROE (%) 15.2 14.7

P/E 13.3 12.1

P/BV 1.9 1.7


BUY / HOLD / SELL 44 / 0 / 2

RATING BUY

52 WEEK HIGH / LOW 230 / 121


LIQUIDITY MEDIUM

IRB Infra


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 2,915 4,626 6,949 7,512




GROSS BLOCK 4,019 4,132 7,397 7,397


NET BLOCK 3,467 3,362 6,299 5,844

CAPITAL WORK-IN-PROGRESS 880 2,508 1,442 3,515


CURRENT ASSETS 1,148 2,038 2,839 2,502




TOTAL ASSETS 5,060 7,171 9,830 10,768




% CHG 71.9 43.0 24.6 24.5

TOTAL EXPENDITURE 906 1,344 1,723 2,254

EBITDA 799 1,094 1,313 1,528

(% OF NET SALES) 46.9 44.9 43.3 40.4




(% OF PBT) 11.7 11.2 18.2 19.3



PBT (REPORTED) 417 576 532 602

TAX 13 112 126 156

(% OF PBT) 3.2 19.4 23.7 26.0

PAT (REPORTED) 403 464 406 445




ADJ. PAT 385 452 395 434

% CHG 119.2 17.4 (12.6) 9.8


KEY RATIOS

VALUATION RATIOS

P/E 13.7 11.6 13.3 12.1

P/CEPS 9.3 7.8 7.3 5.9

P/BV 2.6 2.2 1.9 1.7

EV/SALES 4.5 3.6 3.4 3.1

EV/EBITDA 9.6 7.9 7.9 7.6


EPS (BASIC) 11.6 13.6 11.9 13.1


CASH EPS 17.1 20.4 21.8 26.7

DPS 1.5 2.0 2.0 2.0

BOOK VALUE 61.4 73.2 83.3 94.5

RETURNS (%)

ROCE (PRE-TAX) 13.2 14.2 11.6 10.4


ROE 20.4 20.2 15.2 14.7

TURNOVER RATIOS (X)





CASH FLOW STATEMENT








(INC.)/ DEC. IN INVESTMENTS 66 (10) (6) (6)



ISSUE OF EQUITY - (0) - -

INC./(DEC.) IN LOANS 429 1,710 2,323 564


OTHERS (66) 1 - -

CASH FLOW FROM FINANCING 288 1,652 2,264 504

INC./(DEC.) IN CASH 95 690 592 (593)






Company BackgroundIL&FS Transportation Networks Ltd. (ITNL) was incorporated in 2000 byIL&FS as a transportation infrastructure company. The company is currentlyone of the largest private sector BOT road operators in India. Owing to thefinancial background of its promoters (IL&FS), ITNL, unlike peers does nothave own in-house construction arm and outsources construction work tothird-party contractors. In March 2008, ITNL commenced its internationaloperations through the acquisition of Elsamex S.A., a provider of maintenanceservices primarily for highways and roads in Spain and other European countries.Over the years, ITNL has also diversified into metro, bus and airportprojects - though they are very small contributors in terms of revenue.

Structural SnapshotGrowth opportunity: In FY2011, ITNL had a market share of ~7% of roadprojects awarded by NHAI. Currently, ITNL has a portfolio of 7,026 lane km,of which 2,979 lane km is operational and the balance (4,047 lane km) isunder construction. Further, ITNL has a good bid pipeline with projects worth`61,412cr at RFQ (request for qualification) and `7,177cr at RFP (requestfor proposal) stages.

Competitive position: During the past few quarters, the road sector haswitnessed aggressive bidding due to the entry of many new players. We donot expect any significant moderation in competition, given the lack of opportunitiesfrom the other parts of the economy. However, ITNL has decided to stayaway from aggressive bidding to win projects, as it has a decent order bookin hand. Hence, we are not factoring in any major order inflows forFY2012-13, resulting in subdued growth numbers going ahead.

Nature of business: Low entry barrier; Rate sensitive; Capital intensive.

Current Investment ArgumentsSet to capitalize on emerging opportunities: ITNL is well poised to leverageon the growing opportunities in the road segment, owing to its: strongparentage and experienced management. Further, inspite of being diversifiedgeographically across India (presence in 14 states), outsourcing of constructionwork helps in timely and cost-effective operations.

Hedged revenue stream: We believe ITNL has a hedged road BOT assetportfolio currently, as it is bi-furcated equally into toll and annuity projects inrevenue terms. This relatively insulates the company from traffic-related revenuerisks and resultant chances of disappointment.

Valuations: At the CMP of `185, the stock is trading at a ~23% discountto our FY2013E SOTP target price of ̀ 227/share. We have valued the company'sinvestments on DCF/Mcap/BV basis and its construction segment has beenvalued on 6.0x EV/EBITDA basis. Hence, we maintain our Buy view onthe stock; however, given the high leverage on the company's balancesheet, we expect the stock to underperform IRB Infra.

Infrastructure CMP/TP/Upside: `185 / `227 / 23%ITNL


PROMOTERS 71.2

FII 2.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ITNL (10.5) (25.5) - - -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 42.1 68.5 - - -

PAT GROWTH* 8.2 25.9 - - -

OPM# 28.4 28.5 - - -

ROE# - 21.8 - - -NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES



ROE (%) 19.2 17.4

P/E 7.6 7.2

P/BV 1.3 1.2


BUY / HOLD / SELL 25 / 1 / 2

RATING BUY

52 WEEK HIGH / LOW 268 / 144


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS



SHAREHOLDER'S FUNDS 1,704 2,274 2,670 3,090

TOTAL LOANS 3,322 5,467 8,301 10,324




GROSS BLOCK 1,913 3,342 8,862 11,280


NET BLOCK 1,618 2,978 8,411 10,690



CURRENT ASSETS 2,303 3,235 4,013 4,441




TOTAL ASSETS 5,260 8,068 11,297 13,740




% CHG 96.1 68.5 27.7 27.9


EBITDA 794 1,156 1,419 1,569

(% OF NET SALES) 33.1 28.5 27.5 23.7




(% OF PBT) 16 12 12 14



PBT (REPORTED) 524 675 745 789

TAX 186 224 264 279

(% OF PBT) 35 33 35 35

PAT (REPORTED) 338 450 481 510

ADD: SHARE OF ASSOCIATE 9 (5) 9 9



ADJ. PAT 344 434 475 500

% CHG 1,213 25.9 9.5 5.3


KEY RATIOS

VALUATION RATIOS

P/E 10.4 8.3 7.6 7.2

P/CEPS 8.9 7.2 6.4 5.6

P/BV 2.1 1.6 1.3 1.2

EV/SALES 2.6 2.1 2.2 2.0

EV/EBITDA 8.0 7.4 8.0 8.5


EPS (BASIC) 17.7 22.3 24.4 25.7


CASH EPS 20.8 25.5 28.9 32.9

DPS 3.0 3.5 3.5 3.5

BOOK VALUE 87.7 117.1 137.4 159.1

RETURNS (%)

ROACE (PRE-TAX) 17.9 16.4 13.8 11.4


ROE 26.2 21.8 19.2 17.4

TURNOVER RATIOS (X)



PAYABLES (DAYS) 172 135 155 142


CASH FLOW STATEMENT












INC./(DEC.) IN LOANS 1,262 2,145 2,834 2,023


OTHERS (1,478) 287 9 9

CASH FLOW FROM FINANCING 348 2,353 2,763 1,952

INC./(DEC.) IN CASH 383 (23) 67 (30)






Company BackgroundAshoka Buildcon (ABL) is an integrated road player involved in building andoperating roads and bridges in India on a BOT basis. The company is basedin Nashik, Maharashtra. The company's business is organized into four divisions:1) BOT division; 2) engineering and construction (E&C) division; 3) RMCand bitumen division; and 4) toll collection contract division. ABL, traditionallya state player, has transformed into a national player by winning four NHAIprojects totaling to a TPC of ~`5,156cr. ABL has executed 3,095 lane km(1,155 lane km - third party; and 1,941 lane km - captive), which makes itone of the most seasoned players in the road segment.

Structural SnapshotGrowth opportunity: ABL currently has a portfolio of 3,709 lane km - operational1,204 lane km and 2,505 lane km under construction/development. Goingahead, we believe ABL will be more conservative while bidding, owing to:1) strong order book in hand (`5,150cr 5.0x FY2011 C&EPC revenue) and2) focus on arranging the equity required for the current portfolio.

Competitive position: During the past few quarters, the road sector haswitnessed aggressive bidding due to the entry of many new players. Goingahead as well, we do not expect any significant moderation in competition,given the lack of opportunities from the other parts of the economy.

Nature of business: Low entry barriers; Rate sensitive; Capital intensive.

Current Investment ArgumentsIntegrated business model: ABL's integrated business model ensures timelycompletion of projects, reduces its reliance on subcontractors and controlscosts. In the past, many industry players have witnessed severe strain onthe financials and profitability of their projects because of their inability tocontrol these important factors. Even in current times, there are developerswho do not have an integrated business model and are dependent on contractorsfor construction activities, thus making them vulnerable.

Road sector, opportunities galore: Of the 49,254km of the planned NHunder the National Highways Development Project (NHDP), the NHAI isstill left with ~21,117km that has to be awarded. State highways andmega projects also provide a number of opportunities for road focused playerlike ABL.

Valuations: At the CMP of `195, the stock is trading at a discount to ourFY2013E SOTP target price of ̀ 245/share. The company's road BOT SPVshave been valued on NPV basis (`104/share). The construction segmenthas been valued at 5.0x EV/EBITDA basis (`141/share). Hence, we maintainour Buy recommendation on the stock; but given the expected increasein leverage on the balance sheet (consolidated net D/E is expected to risefrom 1.4x in FY2011 to 3.0x by FY2013E), owing to its commitments towardsthe current portfolio, we expect the stock to underperform IRB Infra.



PROMOTERS 67.2

FII 1.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ABL (18.6) (28.9) - - -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 56.8 63.7 - - -

PAT GROWTH* - 25.5 - - -

OPM# 23.3 19.4 - - -


ANGEL ESTIMATES


PAT GROWTH (%) 9.8 17.6

ROE (%) 11.7 12.2

P/E 9.3 7.9

P/BV 1.0 0.9



RATING BUY

52 WEEK HIGH / LOW 308 / 180


LIQUIDITY LOW

Ashoka Buildcon


BALANCE SHEET

SOURCES OF FUNDS


RESERVES & SURPLUS 404 830 941 1,071


TOTAL LOANS 1,122 1,283 2,181 3,468




GROSS BLOCK 791 1,389 1,809 2,249


NET BLOCK 461 1,020 1,326 1,644

CAPITAL WORK-IN-PROGRESS 814 673 1,149 2,047


CURRENT ASSETS 685 815 1,172 1,485




TOTAL ASSETS 1,669 2,289 3,297 4,714




% CHG 53.5 63.7 25.0 12.5


EBITDA 214 252 353 424

(% OF NET SALES) 26.9 19.4 21.7 23.1




(% OF PBT) 15.8 23.3 15.0 14.7



PBT (REPORTED) 118 235 158 185

TAX 32 24 46 54

(% OF PBT) 27.1 10.4 29.0 29.0

PAT (REPORTED) 86 210 112 132




ADJ. PAT 80 101 111 130

% CHG 130.8 25.5 9.8 17.6


KEY RATIOS

VALUATION RATIOS

P/E 12.8 10.2 9.3 7.9

P/CEPS 7.0 6.1 4.6 4.1

P/BV 2.2 1.2 1.0 0.9

EV/SALES 2.6 1.7 1.9 2.4

EV/EBITDA 9.6 8.9 8.9 10.4


EPS (BASIC) 17.6 19.2 21.0 24.7


CASH EPS 27.8 32.3 42.9 47.8

DPS - - - -

BOOK VALUE 87.8 169.7 190.6 215.4

RETURNS (%)

ROACE (PRE-TAX) 10.7 9.3 8.5 7.5


ROE 21.2 14.9 11.7 12.2

TURNOVER RATIOS (X)



PAYABLES (DAYS) 190 141 126 148


CASH FLOW STATEMENT







(INC.)/ DEC. IN FIXED ASSETS (478) (457) (896) (1,339)





INC./(DEC.) IN LOANS 399 161 898 1,287

DIVIDEND PAID (INCL. TAX) - - - -

OTHERS (6) (13) - -

CASH FLOW FROM FINANCING 393 369 898 1,287

INC./(DEC.) IN CASH 15 (24) 15 12






Media POSITIVE


DB Corp. 185 274 Buy

Offering value... at a discountSize and growth of the M&E industry: The Indian media and entertainment(M&E) industry is expected to post a ~14% CAGR over CY2011-15 to ~`1,276bn.Within the M&E industry, television is expected to outperform print media,increasing its contribution to the overall industry’s revenue, from the current45.5% to 49.4% in CY2015E. Advertising revenue, the key driver duringCY2006-09,is likely to register a lower 13.6% CAGR over CY2010-14E, in-line with the recent slowdown in the economy. Radio and internet advertisingis likely to outperform the M&E industry's growth rate, owing to lower base,growing acceptability and being a cheaper platform for advertising.

Print media: The Indian print media sector contributed ~30% to the totalrevenue ( ̀ 1,276bn) of the Indian M&E industry. The sector registered a modest6.4% CAGR over CY2007-10 to `193bn, largely due to growth in advertisingand circulation, driven by rising penetration and new edition launches. Advertisementrevenue registered a 7.9% CAGR during the period. However, the sector'sperformance was adversely impacted during the current year, owing to highernewsprint prices and lower demand due to the economic slowdown, leadingto a decline in advertising growth rate.

The print media sector is expected to post a CAGR of 10% to `310bn byCY2015E. Advertising will increase its dominance as the primary revenuesource for the industry; it is expected to constitute 76% of the overall revenuein CY2015E from the current 65%. The segment's advertising revenue is expectedto report a higher CAGR of 13.3% compared to 2.1% CAGR in circulationrevenue, driven by rising spends across sectors once macroeconomic concernssubside.

Regional players to ride the print media sector's growth: Currently, Englishprint contributes ~40% to the total revenue of the sector. However, with growthaccelerating in the smaller towns and cities of India, especially Tier II and II Icities, regional print players are expected to benefit the most. Hindi print isestimated to grow faster than English print, leading to a reduction in ad premiumgap between English and Hindi.

Outlook and valuation: With improving scenario, we are factoring in bettervisibility in advertising spends (particularly FY2013E) as business confidencelevels restore and consumer spending rises. Further, higher stress on thedevelopment of Tier-II, III and rural markets is expected to drive the penetrationlevels of media segments. Swift action in terms of policymaking (CASimplementation, roll-out of Phase III radio licensing and revision of FDI caps)is likely to improve the investment environment for both domestic entrepreneursand foreign investors. Given the media sector's significant underperformanceand cheap valuations of the underlying stocks (Jagran Prakashan tradingat ~12.8x FY2013E earnings, against its five-year median of 21x),we expect the sector to outperform the broader markets going forward.

HT Media 131 170 Buy

Jagran 98 137 Buy

PVR 138 - Neutral

SUN TV 297 - Neutral


Source: FICCI-KPMG M&E Report 2011, Angel Research

Exhibit 2: Print media sector - Size and growth trends CAGR

( `̀̀̀̀ bn) CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY07-10 CY11-15E

Print Media 160 173 175 193 211 232 254 280 310 6.4 10.1

Advertising 100 108 103 126 143 162 183 208 236 7.9 13.3

Circulation 60 64 72 67 68 70 71 72 74 3.6 2.1

Regional players to ride the print media sector's growth

Currently, English print contributes ~40% to the total revenueof the sector. However, with growth accelerating in the smallertowns and cities of India, especially Tier II and III cities, regionalprint players will benefit the most. Hindi print is estimated togrow faster than English print, leading to a correction in adpremium gap.


Exhibit 3: English print vs. Hindi printCAGR

( `̀̀̀̀ bn) CY2011 CY2012 CY2013 CY2014 CY2015 CY10-15Hindi 64 70 77 87 96 10.8Advertising 42 48 55 64 73 14.5Circulation 21 22 22 23 23 1.8

English 84 91 97 105 112 7.5Advertising 58 64 70 77 84 9.7Circulation 26 27 27 28 28 1.9

Size and growth of the M&E industryThe Indian M&E industry is expected to post a ~14% CAGR over CY2011-15 to ̀ 1,276bn. Factoring the macroeconomic concerns,we expect the industry to grow by 13% in 2012 to `834bn from `737bn in 2011.

Within the M&E industry, television is expected to outperform print media, increasing its contribution to the overall industry’srevenue, from the current 45.5% to 49.4% in CY2015E. Advertising revenue, the key driver during CY2006-09, is likely to registera lower 13.6% CAGR over CY2010-14E, in-line with the recent slowdown in the economy.

Radio and internet advertising is likely to outperform the M&E industry's growth rate, owing to lower base, growing acceptabilityand being a cheaper platform for advertising.


Exhibit 1: Advertising revenue across segmentsCAGR

( `̀̀̀̀ bn) CY2006 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 CY2013 CY2014 CY2015 CY07-10 CY10-15

Television 61 71 83 88 103 118 136 157 183 241 13.2 18.5

Print Media 85 100 108 103 126 143 162 183 208 236 8.0 13.4

Radio 6 7 8 8 10 12 15 18 21 25 10.6 20.1

OOH advt. 12 14 16 14 17 19 22 24 27 30 6.7 12.0

Internet advt. 2 4 6 8 10 13 18 22 28 36 36.9 29.2

Total ad. mkt. 166 196 221 220 266 305 353 404 467 568 10.6 16.4

Opportunities galore in the media sector

Favorable demographic composition: About 70% of theIndian population is below 30 years of age, presenting an excellentopportunity for marketers.

Huge advertising potential: India's advertising to GDP ratiois still at a low 0.5% vs. developed economies like U.S., whereit is as high as 0.9%

Low media penetration: Media spend in India as a percentageof GDP is at 0.4%. This ratio is almost half of the world's averageof 0.8% and is much lower compared to developed countrieslike U.S. and Japan. This indicates the potential for growth inspends, as the industry in India matures.

Print media

The Indian print media sector contributed ~30% to the total

revenue (~`1,276bn) of the Indian M&E sector. The sectorregistered a modest 6.4% CAGR over CY2007-10 to `193bn,largely owing to advertising growth and circulation, driven byrising penetration and new edition launches. Advertisement revenueregistered a 7.9% CAGR during the period. However, the sector'sperformance was adversely impacted during the current year,owing to higher newsprint prices and lower demand due to theeconomic slowdown, leading to a decline in advertising growthrate.

The print media sector is expected to post a lower CAGR of10% to ̀ 31,000cr by CY2015. Advertising is expected to increaseits dominance as the primary revenue source for the industryand is expected to constitute 76% of the overall revenue inCY2015 from the current 65%. The segment's advertising revenueis expected to register a higher CAGR of 13.3% compared toa 2.1% CAGR in circulation revenue, driven by rising spendsacross sectors once macroeconomic concerns subside.


Abundant opportunities for regional print companies

Large untapped local ad market: Tier I I and II I cities of Indiaare on a growth path, whereby local advertisement marketswill see a surge in growth. Regional print companies are bestsuited to cater to their needs in these areas, wherein regionalplayers are customizing their editions towards local public throughsplit editions and city-specific supplements to meet localadvertisement demands.

Demographic catalyst: Regional print companies, unlike Englishnewspapers, have a niche clientele to be addressed in theirrespective geographies. This provides these players a competitiveadvantage over English dailies.

Regional print companies have an edge over English dailieswhen it comes to brand association in remote areas, makingthem the preferred choice among local and national advertisers.

Regional print companies are an effective mode of advertisingfor local educational institutes, real estate firms, and retail firms.Also, national advertisers like FMCG companies, consumer durablecompanies and auto companies invest a sizeable portion of

their ad spends in these companies.

Dependable platform of media: Regional print players, whohave been present in the market for a long period, are seen asa dependable source of information and have influencedgenerations in these markets, ensuring strong brand loyalty amongstreaders. Also, in Tier I I and III cities of India, digital media likethe internet is still at a nascent stage and is highly underpenetrated.This offers an advantage to regional players, as regional printis the main source of content in local and regional markets.

Television

The television sector registered a CAGR of 11.4% overCY2007-10 to ̀ 29700cr in CY2010, largely driven by advertising,which posted a robust CAGR of 12% during the period.Subscription revenue registered a modest CAGR of 11.4%during the period on the back of growth in subscriber base,following the advent of digital distribution platforms (DTH/CAS).However, carriage fee remains as one of the biggest concernsfor broadcasters, as channels increasingly compete for premiumplacements.


Exhibit 4: Television sector - Size and growth trends CAGR

( `̀̀̀̀ bn) CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY07-10 CY11-15E

TV distribution 140 158 169 194 222 253 298 350 416 11.4 17.0

TV advertising 71 83 88 103 118 136 157 183 214 13.2 16.0

Total 211 241 257 297 340 389 455 533 630 12.0 16.7

The television sector is expected to register a CAGR of 16.7%to ̀ 630bn by CY2015E, backed by robust growth in advertisingand subscription revenue, registering a CAGR of 13.2% and11.4%, respectively, over CY2010-15E.

Outlook and valuation

With improving scenario, we are factoring in better visibility inadvertising spends (particularly FY2013E) as business confidencelevels restore and consumer spending rises. Further, higherstress on development of Tier-II, III and rural markets is expectedto drive penetration levels of media segments. Swift action interms of policymaking (delay in CAS implementation, roll-outof Phase II I radio licensing and revision of FDI caps) is likely toimprove the investment environment for both domesticentrepreneurs and foreign investors. Given the media sector'ssignificant underperformance and cheap valuations of the underlying Source: Company, Angel Research

Exhibit 5: Jagran trading at discount vs its 5yr average PE and 5yr Sensex avg PE

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

Apr

-06

Dec

-06

Jul-0

7

Mar

-08

Nov

-08

Jun-

09

Feb-

10

Sep

-10

May

-11

Jan-

12

5 yr avg Sensex PE 5 yr avg Jagran PE Jagran PE

stocks (Jagran Prakashan trading at ~12.8x FY2013E earnings,against its five-year median of 21x), we expect the sector tooutperform the broader markets going forward.


Exhibit 6: Recommendation summaryCompany Reco Mcap CMP TP Upside P/E (x) EV/Sales (x) RoE (%) CAGR #

( `̀̀̀̀ cr) ( `̀̀̀̀) ( `̀̀̀̀) (%) FY12E FY13E FY12E FY13E FY12E FY13E Sales EPS

DB Corp Buy 3,390 185 274 48.1 14.3 12.3 2.3 2.0 26.2 25.4 12.6 2.1

HT Media Buy 3,085 131 170 29.5 15.3 13.9 1.6 1.4 14.4 13.9 12.9 7.1

Jagran Buy 3,095 98 137 40 14.7 12.8 2.4 2.2 30.2 33.8 8.9 4.7

PVR Neutral 374 138 143 3.9 17.2 14.0 0.8 0.6 6.2 7.2 12.4 48.4

SUN TV Neutral 11,698 297 - - 14.4 13.0 5.4 4.9 30.0 27.3 7.4 5.3


Company BackgroundDBCL is one of the leading publishing houses, with its newspapers cumulativelycommanding the highest readership and circulation in the country. The companypublishes seven newspapers and 64 editions in three languages (Hindi,Gujarati, Marathi and English) across 13 states in India. Dainik Bhaskar, itsflagship publication, is the market leader in terms of readership in MadhyaPradesh, Chattisgarh, Chandigarh and Haryana. DBCL's combined averagedaily readership of Dainik Bhaskar, Divya Marathi, Business Bhaskar, DivyaBhaskar and Saurashtra Samachar is 19.2mn readers, making it the mostwidely read newspaper group in India.

Structural SnapshotGrowth opportunity: DBCL has a relatively advertising-focused revenuemodel, and its multistate leadership ensures high advertising revenue. DainikBhaskar has a strong foothold in the Hindi belt. Divya Bhaskar contributessteady ~17% to the company's total revenue. According to IRS 3Q2011survey, DBCL increased its readership, with 4.9% ror growth over 2Q. DainikBhaskar reported strong growth of 7.7% in Chhattisgarh and 2% in MadhyaPradesh. The company recently forayed into Maharashtra, which is 1) thethird largest state with an average GDP growth rate of 14.5%, 2) per capitaincome of the state stands at a healthy `79,515, 3) the state has a highliteracy rate of 77% and a penetration gap of 71%, and 4) the state admarket is estimated at ~`700cr (excl. Mumbai) and is growing at 15% per year.

Competitive position: DBCL leads its nearest competitor in its market witha huge margin in terms of circulation. The company has made significantinroads in terms of expanding its footprints in the urban regions of MadhyaPradesh, Rajasthan, Gujarat, Haryana, Punjab and Chandigarh, cementingits aggressive dominance in these markets in terms of readership.

Nature of business: Ad revenue cyclical; High brand loyalty; Significantentry barriers for new players.

Current Investment ArgumentsWell-planned aggression edges DBCL over peers: We believe DBCL'scontinuous endeavors to diversify its print business coupled with aggressiveexpansion into new markets (urban towns beyond metros) backed by exhaustivemarket research and focus on achieving leadership is the key differentiatingfactor compared to its peers. The company has been successful in executingits expansion plans with launches in Maharashtra and Jharkhand.

Peg a 15% CAGR in ad revenue, new launches to contribute 2-3%: Weexpect ~15% yoy growth in ad revenue over FY2012E/FY2013E for DBCL(lower than FY2011 ad revenue growth) to factor in a slump in the macroeconomicenvironment and high base of FY2011.

Valuation: At the CMP of `̀̀̀̀185, DBCL is trading at attractive valuations of12x FY2013E consolidated EPS of `̀̀̀̀15.5. We maintain our Buy view on thestock with a target price of `̀̀̀̀274. Downside risks to our estimates include:any further rise in newsprint prices; competition becoming fierce; and higher-than-expected loss increase in the breakeven period of its new launches.

Media DB Corp


PROMOTERS 86.4

FII 5.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

DB CORP (17.8) (24.9) - - -

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 17.6 19.1 13.7 - -

PAT GROWTH* (37.1) 42.2 50.8 - -

OPM# 21.8 31.1 25.6 - -


ANGEL ESTIMATES


PAT GROWTH (%) (8.0) 15.8

ROE (%) 26.2 25.4

P/E 14.3 12.3


BUY / HOLD / SELL 24 / 4 / 3

RATING BUY

52 WEEK HIGH / LOW 269 / 170


LIQUIDITY LOW

CMP/TP/Upside: `185 / `274 / 48%


BALANCE SHEET

SOURCES OF FUNDS


SHARE CAPITAL SUSPENSE ACCOUNT 1 3 - -


SHAREHOLDERS FUNDS 649 829 986 1,180


TOTAL LOANS 321 237 187 149




GROSS BLOCK 660 807 831 906


NET BLOCK 547 634 609 625






TOTAL ASSETS 1,035 1,136 1,243 1,399


KEY RATIOS

VALUATION RATIO (X)

P/E 18.5 13.1 14.3 12.3

P/BV 5.2 4.1 3.4 2.9

DIVIDEND YIELD (%) 1.1 2.2 1.9 2.1

EV/SALES 3.3 2.8 2.3 2.0

EV/EBITDA 10.6 8.9 8.5 7.0



CASH EPS 12.2 16.5 15.7 18.2

DPS 2.0 4.0 3.6 3.8

BOOK VALUE 35.7 45.2 53.8 64.4

RETURNS (%)

ROCE 30.7 31.8 28.6 29.8


ROE 40.3 35.0 26.2 25.4

TURNOVER RATIOS (X)





WC (DAYS) 56 58 48 50


CASH FLOW STATEMENT






OTHERS 2 30 (8) (2)



(INC.)/ DEC. IN INVESTMENTS 3 4.22 - -


INC./(DEC.) IN LOANS (242) (84) (50) (38)




INC./(DEC.) IN CASH 147 (20) 91 97



Y/E MARCH (`̀̀̀̀CR) FY2010 FY2011 FY2012E FY2013E



NET SALES 1,051 1,251 1,413 1,586


% CHG 10.7 19.1 13.0 12.2


COST OF MATERIALS 328 378 443 483

EBITDA 331 389 390 452

% CHG 144.2 17.6 0.2 16.0

(% OF NET SALES) 31.5 31.1 27.6 28.5


% CHG 258.9 27.8 (1.0) 15.8

TAX 106 98 117 136

(% OF PBT) 37.6 27.4 33.0 33.0

PAT (REPORTED) 175 259 238 275

LESS: MINORITY INTEREST (MI) (8) 0.3 - -

ADJ. PAT 183 260 238 275

(% OF NET SALES) 17.4 20.8 16.8 17.4

ADJ. EPS (`̀̀̀̀) 10.0 14.1 13.0 15.0

% CHG 283.9 41.4 (8.0) 15.8



Company BackgroundHT Media (HTML) is the second largest print media company in terms ofreadership/circulation and the largest listed company in terms of revenue.The company's two key offerings, Hindustan Times and Hindustan, featurein the top five newspapers in their respective categories in terms of readership.The company is a market leader in Delhi (Hindustan Times), Bihar andJharkhand (Hindustan) and has emerged as a strong contender in the financialdaily segment (Mint).

Structural SnapshotGrowth opportunity: Hindustan is the leading player in Bihar and Jharkhand,which are among the fastest growing states in India. In the past three years,Hindustan has grown by 37% with the addition of 32.8lakh readers. Also,with rising consumption in these markets, HT Media with its regional print isset to ride the growth path.

Competitive position: According to IRS 3Q2011 survey, Hindustan continuesto maintain its leadership position with 75% AIR share in Bihar and is thenumber one player in Jharkhand. AIR growth in UP and UT markets hasbeen one of the fastest in the print sector. Mint stood at the second positionin the business daily category with a 29% readership share.


Current Investment ArgumentsSteady ad revenue growth, Burda JV to scale up the top line: HTMLrecorded impressive ad revenue during the quarter, with yoy growth of 12.5%and a robust 35.4% qoq increase in the English print and 24.5% yoy/18%qoq in the Hindi print segments, despite tough macroeconomic conditions.We estimate this growth in ad revenue to prolong with the English print(HT and Mint) and Hindi print (HMVL) businesses, posting CAGRs of ~12%and 18% over FY2011-13, respectively. Hindustan's ad revenue will growthe most in UP (we peg a CAGR of ~20% over FY2011-13), while HTMumbai will be the maximum growth driver for the English print's ad revenue(we peg a CAGR of ~13% over FY2011-13). Burda JV, which has recentlyachieved EBITDA breakeven, is likely to contribute ~`80cr in FY2012 and~`90cr in FY2013 to the company's top line.

New businesses continue to grow, expect OPM of ~18% overFY2011-13: In terms of operating performance, HTML's new businessescontinued to grow during the quarter (radio and internet gained traction).Going forward, we believe continuous improvement in ad yields will helpHTML post margins of ~18% during FY2012-13.

Valuation: At the CMP, the stock trades at 13.9x FY23013E EPS. We maintainour Buy view on the stock with a target price of `̀̀̀̀170. Downside risks toour estimates include - 1) any further rise in newsprint prices, 2) competitionbecoming fierce and 3) higher-than-expected losses/increase in the breakevenperiod of its new launches.

Media CMP/TP/Upside: `131 / `170 / 30%HT Media


PROMOTERS 68.8

FII 11.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HT MEDIA (6.3) (8.5) 28.6 (4.7) -

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 13.4 2384.1 219.5 111.4 -

PAT GROWTH* 13.0 2087.8 482.7 110.0 -

OPM# 10.4 12.8 16.1 13.8 -


ANGEL ESTIMATES


PAT GROWTH (%) 11.4 10.4

ROE (%) 14.4 13.9

P/E 15.3 13.9


BUY / HOLD / SELL 25 / 6 / 1

RATING BUY

52 WEEK HIGH / LOW 175 / 107


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 402 312 247 202

DEFERRED TAX LIABILITY 18 (9) (9) (9)



GROSS BLOCK 1,033 1,213 1,363 1,646


NET BLOCK 712 805 865 1,041


CURRENT ASSETS 671 756 1,003 1,064

CASH 109 115 197 162

LOANS & ADVANCES 200 242 292 327

OTHER 362 398 514 575



TOTAL ASSETS 1,413 1,736 1,880 2,064



NET SALES 1,413 1,767 2,010 2,255


% CHG 4.9 25.1 13.7 12.1


COST OF MATERIALS 515 671 777 889

PERSONNEL 252 301 334 372

OTHERS 78 89 101 108

EBITDA 250 317 360 402

% CHG 184.4 26.9 13.4 11.7


% CHG 860.7 34.9 19.3 10.3

PBT (REPORTED) 188 257 307 338

TAX 54 71 86 95

(% OF PBT) 28.2 27.7 28.0 28.0

ADJ. PAT 138 181 202 223

% CHG 589.8 31.1 11.4 10.4

(% OF NET SALES) 9.8 10.2 10.0 9.9

ADJ. EPS (`̀̀̀̀) 5.9 7.7 8.6 9.5

% CHG 589.8 31.1 11.4 10.4


KEY RATIOS

VALUATION RATIOS(X)

P/E 22.4 17.1 15.3 13.9

P/BV 3.2 2.4 2.1 1.8

DIVIDEND YIELD (%) 0.3 0.3 0.3 0.4

EV/SALES 2.4 1.9 1.6 1.4

EV/EBITDA 13.5 10.3 8.7 7.8

EV / TOTAL ASSETS 2.4 1.9 1.7 1.5



DPS 0.4 0.4 0.4 0.5

BOOK VALUE 41.3 55.4 63.5 72.4

RETURNS (%)

ROCE 13.5 14.8 14.9 14.9


ROE 15.2 15.9 14.4 13.9

TURNOVER RATIOS (X)



PAYABLES (DAYS) 142 115 143 142

WC CYCLE (EX-CASH) (DAYS) (4) 8 (6) (3)


CASH FLOW STATEMENT




INTEREST / DIVIDEND (NET) 15 (6) (6) (15)


OTHERS (6) 51 23 (3)



(INC.)/ DEC. IN INVESTMENTS (133) (284) 75 0


INC./(DEC.) IN LOANS 31 (90) (65) (45)




INC./(DEC.) IN CASH (7) (17) 82 (35)

OPENING CASH BALANCES (1) (8) (25) 57

CLOSING CASH BALANCES (8) (25) 57 22




Company BackgroundDainik Jagran with AIR of ~16.4mn is the most read newspaper in Indiapublished by Jagran Prakashan (JPL). The company enjoys a leadership positionin Uttar Pradesh, the largest Hindi market for almost a decade now. Thecompany is present in the rapidly growing Hindi markets in Bihar, Delhi,Haryana, Jharkhand, Punjab and Uttar Pradesh. Apart from its commandingposition in print media, JPL is also involved in the internet, OOH and eventmanagement business.

Structural SnapshotGrowth opportunity: JPL is the leading player in Uttar Pradesh, where printmedia readership is estimated at less than 15%. With a leadership positionin Uttar Pradesh and the state's ad market pegged at ~`800cr, JPL is slatedto benefit first, once macroeconomic concerns start to fade. Further, regionalprint players are expected to benefit with increased focus of national advertiserson the growing regional ad market.

Competitive position: According to IRS 3Q2011 survey, Dainik Jagran continuesto maintain its leadership position with 16.5mn readers, growing by 0.4%qoq (3.2% yoy) in Uttar Pradesh. AIR in Uttar Pradesh stood at 9mn ascompared to 7mn for Amar Ujala. Bihar, Jharkhand and Uttaranchal alsoregistered modest growth as per the survey.


Current Investment ArgumentsHealthy ad revenue growth on account of higher color inventory, peg a10% CAGR: For FY2012-13E, we expect ad revenue to grow by ~9% yoy.We maintain a conservative stance on management's robust guidance of14-15% yoy growth due to lower national advertisements (management guidance)and low pick-up in advertisements from the education sector (expect pressureto ease in 2HFY2012). Also, with upcoming elections in Uttar Pradesh, thecompany will monetize its leadership position further.

Underperformance a good entry point; JPL attractive at 12.8x FY2013EEPS: JPL acquired the print business from Mid-Day Multimedia, whose presencein markets such as Mumbai, Delhi, Bangalore and Pune (recently launched)is likely to fill the gap in JPL's portfolio vs. its peers HT Media (HT andHindustan) and DB Corp. (Dainik Bhaskar and DNA), who offer both Englishand Hindi publications to their advertisers. Hence, we believe JPL's combinedofferings are going to record a healthy 9% CAGR in revenue overFY2011-13E. With JPL's wider portfolio (including Mid-Day Publications),we believe the company is well poised to benefit from steady growth in printmedia. We believe the underperformance of the stock and attractivevaluations (at the CMP, the stock trades at 12.8x FY2013E EPS) providea good entry point for investors.

Media CMP/TP/Upside: `98 / `137 / 40%



FII 11.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

JPL (7.8) (21.0) 20.9 7.9 -

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 10.3 18.4 14.2 18.3 21.5

PAT GROWTH* (17.5) 19.5 29.3 43.3 35.8

OPM# 25.9 32.8 29.4 27.5 19.6


ANGEL ESTIMATES


PAT GROWTH (%) 0.2 14.6

ROE (%) 30.2 33.8

P/E 14.7 12.8


BUY / HOLD / SELL 27 / 5 / 2

RATING BUY



LIQUIDITY LOW

TOPPICKJagran Prakashan


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 121 192 172 152




GROSS BLOCK 564 730 763 867


NET BLOCK 369 472 437 462






TOTAL ASSETS 792 956 926 948



NET SALES 942 1,221 1,336 1,447

% CHG 14.4 29.6 9.4 8.3

TOTAL EXPENDITURE 660 864 967 1,039

EBITDA 282 357 368 408

(% OF NET SALES) 30.0 29.2 27.6 28.2


% CHG 91.7 18.8 2.0 9.8

PBT (REPORTED) 259 306 314 345

TAX 83 98 104 104

(% OF PBT) 32.1 31.7 33.0 30.1

PAT (REPORTED) 176 208 210 241


ADJ. PAT 176 210 210 241

% CHG 92.0 19.5 0.1 14.6

(% OF NET SALES) 18.7 17.2 15.8 16.7

ADJ. EPS (`̀̀̀̀) 5.6 6.6 6.7 7.6

% CHG 92.0 19.5 0.1 14.6


KEY RATIOS


P/E 17.6 14.8 14.7 12.8

P/BV 4.8 4.4 4.5 4.2

DIVIDEND YIELD (%) 3.6 4.3 5.1 5.5

EV/SALES 3.5 2.7 2.4 2.2

EV/EBITDA 11.5 9.1 8.8 8.0

EV / TOTAL ASSETS 4.0 3.4 3.5 3.4



DPS 3.5 4.2 5.0 5.4

BOOK VALUE 20.3 22.2 21.9 23.2

RETURNS (%)

ROCE (PRE-TAX) 30.0 33.3 31.8 35.2


ROE 30.0 31.6 30.2 33.8

TURNOVER RATIOS (X)






CASH FLOW STATEMENT




INTEREST / DIVIDEND (NET) (9) (1) 3 2


OTHERS (21) 34 (29) -


(INC.)/ DEC. IN FIXED ASSETS (38) (216) 3 (108)


CASH FLOW FROM INVESTING (48) (251) 3 (108)


INC./(DEC.) IN LOANS (20) 71 (20) (20)




INC./(DEC.) IN CASH 2 (47) 7 (27)





Company BackgroundPVR is one of India's leading multiplex cinema operators. The company isthe pioneer of the multiplex culture in the country, as it was the first to establisha multiplex cinema in India, PVR Anupam, in Saket, Delhi, in 1997. The companyis also present in the entertainment space through PVR Blu-O bowling alleys.

Structural SnapshotGrowth opportunity: Increasing urbanization, changing consumer lifestyleand growing youth population in the country will drive growth of multiplexcompanies. Also, as compared to western developed countries, India issignificantly low in terms of number of movie screens/million.

Competitive position: PVR currently has 158 screens and 40,062 seats in36 properties. In 2QFY2012, occupancy level increased to 36% (30% in2QFY2011), ATP stood at ̀ 152 and footfalls increased to 7.1mn from 5.7mn.

Nature of business: Capital intensive; Low entry barriers for new players.

Current Investment ArgumentsDe-risked business due to various entertainment offerings: PVR is presentacross the movie value chain (exhibition-production-distribution) and hasforayed into retail entertainment through PVR Blu-O, which is expected toshow strong growth going ahead. PVR's earnings are expected to registera CAGR of ~80% over FY2011-13E on incremental earnings from its newlyopened properties (further, it is likely to open a new property in 2HFY2012E),reduction in depreciation cost and an impressive movie pipeline.

Set for expansion: PVR has ambitious plans to open 55 new screens inFY2012 (keeping a conservative stance, we have factored in opening of 20screens in FY2012; however, opening of more than 20 screens in FY2012poses an upside risk to our estimates). For FY2012, we have factored in4,800 seat additions, resulting from four new properties.

Valuation: Due to over capacity and low occupancies, the sector is sufferingfrom low RoEs (PVR’s RoE also stands at low 7.2% in FY2013E). At theCMP, the stock is trading at 14x FY2013E EPS. We maintain our Neutralview on the stock.

Media CMP/TP/Upside: `138 / - / -PVR


Promoters 44.8

FII 3.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

PVR 12.0 1.9 10.0 (8.7) -

BSE SMALLCAP (9.1) (29.5) 22.0 (3.7) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 2.5 36.9 19.8 - -

PAT GROWTH* 58.2 504.7 (27.7) - -

OPM# 20.2 12.8 13.9 - -


ANGEL ESTIMATES


PAT GROWTH (%) 166.1 22.8

ROE (%) 6.2 7.2

P/E 17.2 14.0



RATING NEUTRAL



LIQUIDITY LOW


BALANCE SHEET





TOTAL LOANS 180 162 141 121




GROSS BLOCK 380 455 437 461


NET BLOCK 352 389 324 294


GOODWILL - - - -





MIS. EXP. NOT WRITTEN OFF 0 0.38 - -

TOTAL ASSETS 566 589 585 587



NET SALES 334 457 507 577


% CHG (5.1) 36.9 10.9 13.9


EBITDA 34 85 84 97

% CHG (27.5) 149.2 (1.4) 14.9

(% OF NET SALES) 10.2 18.7 16.6 16.7

EBIT 7 18 37 43

% CHG (43.0) 163.9 104.7 17.9


TAX (0) 15 15 18

(% OF PBT) (14.6) 97.9 40.0 40.0

ADJ. PAT 1 8 22 27

% CHG (84.5) 504.7 166.1 22.8

(% OF NET SALES) 0.4 1.8 4.3 4.6

BASIC EPS ( `̀̀̀̀) 0.5 3.0 8.0 9.8

ADJ. EPS (`̀̀̀̀) 0.5 3.0 8.0 9.8

% CHG (84.5) 504.7 166.1 22.8


KEY RATIOS

VALUATION RATIO (X)

P/E 261.5 45.8 17.2 14.0

P/BV 1.1 1.1 1.0 1.0

DIVIDEND YIELD (%) 0.7 0.8 1.1 1.1

EV/SALES 1.5 0.9 0.8 0.6

EV/EBITDA 15.6 5.4 5.4 4.2

EV / TOTAL ASSETS 0.9 0.8 0.8 0.7



DPS 1.0 1.1 1.5 1.5

BOOK VALUE 120.6 125.7 132.0 140.1

RETURNS (%)

ROCE (PRE-TAX) 1.3 3.1 6.2 7.4


ROE 0.5 2.5 6.2 7.2

TURNOVER RATIOS (X)






CASH FLOW STATEMENT





DIRECT TAXES PAID (0) 15 15 18

OTHERS (3) (11) 2 12



(INC.)/ DEC. IN INVESTMENTS 8 89 7 (10)


INC./(DEC.) IN LOANS 33 (18) (21) (20)




INC./(DEC.) IN CASH 12 58 (15) 25





Company BackgroundSun TV (STNL) is the leading broadcaster in the south Indian states of TamilNadu, Andhra Pradesh, Karnataka and Kerala. The company is promoted byKalanithi Maran. The group is present across the media value chain, viz.broadcasting, radio, films, cable distribution, DTH and print media. STNLhas the largest broadcasting network in South India, with 20 channels inthe GEC, kids, movies and news space. Besides TV broadcasting, STNLowns FM radio licenses for 45 cities. STNL has a strong movie library comprisingmore than 8,500 titles, with rights across all the four major south Indianlanguages. Apart from having an extensive movie library, STNL purchasesaround 90% of all movie releases in these languages.

Structural SnapshotGrowth opportunity: STNL has a leadership in the southern states, havinga combined ad market size of ~`2,700cr. Also, with increased income levels,consumption of media is bound to rise. Moreover, national advertisers arerecognizing the potential of regional players.


Competitive position: The southern regional markets of Tamil Nadu, AndhraPradesh, Karnataka and Kerala account for ~73% of the total regionaladvertisement revenue. STNL is well placed to ride the regional wave, withits dominant market share across lucrative southern markets through its bouquetof 20 channels across genres like GECs, music, news and movies, includingflagship channels - Sun TV (Tamil Nadu, market share 68%), Gemini TV(Andhra Pradesh, market share 36%), Udaya TV (Karnataka, market shareof 40%) and Surya TV (Kerala, market share of 33%).

Current Investment ArgumentsSTNL's ad revenue to be at par with regional advertising, we peg a 14%CAGR: During FY2011-13E, we peg STNL's ad revenue to post a 14%CAGR, at par with regional advertising during the period, driven by1) absorption of rate hikes (8-32% hike in ad rates across Tamil channelsand 6-43% in Telugu channels effective from January 2011 and another setof price hikes taken effective from April 2011); 2) increasing DTH subscriberbase; and 3) dominant position in South India, where competition is limited.

DTH to drive a 15.9% CAGR in pay revenue: During FY2011-13E, weexpect STNL to register a robust 15.9% CAGR in overall DTH revenue. Thedigitization drive across the nation and consumers shifting to superior-qualityDTH from cable television would also benefit STNL, as it is a known playerin South India (STNL receives ~60% of its revenue from Sun Direct). Weexpect STNL's DTH subscriber base to reach ~9mn by FY2013.

Valuation: At the CMP, the stock is trading at 13x FY2013E (below itsmedian of 23x). We remain positive on STNL's business, considering the company’svast dominance in its markets. We believe the recent not-in-favor incidentsstill are an overhang on the stock. Accordingly, we expect the stock price toremain range-bound. Hence, we remain Neutral on the stock.

Media CMP/TP/Upside: `297 / - / -SUN TV Networks


PROMOTERS 77.0

FII 15.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

COMPANY 10.3 (41.4) 20.9 (5.8) -

BSE200 INDEX (3.4) (14.1) 22.1 3.5 19.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 6.2 38.6 32.3 - -

PAT GROWTH* 7.6 48.1 33.1 - -

OPM# 0.8 78.4 74.8 - -


ANGEL ESTIMATES


PAT GROWTH (%) 5.6 10.7

ROE (%) 30.0 27.3

P/E 14.4 13.0


BUY / HOLD / SELL 24 / 6 / 3

RATING NEUTRAL


MARKET CAP (`̀̀̀̀ CR) 11,698

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS


PREFERENCE CAPITAL 88 88 88 88




TOTAL LOANS - - - -




GROSS BLOCK 1,888 2,257 2,577 2,891


NET BLOCK 898 786 635 434

NON CURRENT ASSETS 30 35 40 35

CURRENT ASSETS 1,035 1,522 2,051 2,665



TOTAL ASSETS 2,045 2,575 3,122 3,757



NET SALES 1,453 2,013 2,090 2,321


% CHG 39.8 38.6 3.8 11.1


COST OF PRODUCTION 119 135 139 155

EBITDA 1,091 1,578 1,638 1,820

EBIT 770 1,097 1,168 1,304

% CHG 40.5 43.0 6.0 11.3

PBT (REPORTED) 800 1,144 1,212 1,349

TAX 299 383 406 454

(% OF PBT) 37.4 33.5 33.5 33.6

ADJ. PAT 520 770 813 900

% CHG 41.2 48.1 5.6 10.7

(% OF NET SALES) 35.8 38.2 38.9 38.8

ADJ. EPS (`̀̀̀̀) 13.2 19.5 20.6 22.8

% CHG 41.2 48.1 5.6 10.7


KEY RATIOS

VALUATION RATIO (X)

P/E 22.5 15.2 14.4 13.0

P/BV 6.2 4.8 3.9 3.3

DIVIDEND YIELD (%) 2.5 1.7 1.9 1.9

EV/SALES 7.8 5.6 5.4 4.9

EV/EBITDA 10.4 7.2 6.9 6.2

EV / TOTAL ASSETS 5.5 4.4 3.6 3.0



DPS 7.5 5.0 5.8 5.8

BOOK VALUE 47.8 61.3 75.2 91.3

RETURNS (%)

ROCE (PRE-TAX) 39.7 47.5 41.0 37.9


ROE 27.9 35.4 30.0 27.3

TURNOVER RATIOS (X)






CASH FLOW STATEMENT





DIRECT TAXES PAID 383 406 (406) (454)

OTHERS 3 36 36 (0)








INC./(DEC.) IN CASH 327 541 541 547





Metals POSITIVE

COVERAGECOMPANIES CMP (`̀̀̀̀) TARGET (`̀̀̀̀) RECO

Ferrous

Tata Steel 435 510 Buy

SAIL 91 - Neutral

JSW Steel 667 699 Accum.

Bhushan Steel 334 293 Reduce

Monnet Ispat 436 528 Buy

Mining

NMDC 175 231 Buy

Sesa Goa 189 208 Accum.

Coal India 350 - Neutral

MOIL 253 - Neutral

Non-Ferrous

Hind. Zinc 126 142 Accum.

Sterlite Inds 115 147 BUY

Hindalco 146 162 Accum.

Nalco 56 - Neutral

Strong capacity expansion aheadDomestic demand to witness strong growth during CY2011-15: India'sper capita steel consumption stands at 46kg, compared to global averageper capita consumption of 198kg and China's per capita consumption of 427kg,implying a strong potential for increasing consumption going forward. Overthe past decade, steel consumption has grown at an average of 1.2x GDPgrowth. Going forward, with GDP expected to grow by 7-8%, we expect steeldemand to post a CAGR of 10% over the next decade.

Capacity expansion lined up to meet growth: Indian steelmakers have linedup strong expansion plans to meet the growing steel demand. Steel capacityis expected to increase from 78mn tonnes in FY2011 to 100mn tonnes byFY2014. Indian steelmakers enjoy a cost advantage over global peers onaccount of availability of iron ore at lower cost, captive iron ore mines and lowcost of labor.

Near-term outlook remains gloomy, although INR depreciation mutes pricedeclines: Globally, steel prices have declined by 12-20% during July-December2011. However, domestic steel prices remained flat on account of INR depreciationagainst the USD. Given that the spread between steel prices and key inputshas declined sharply, we believe steel companies' operating margins are closeto their bottom levels. Steel consumption in India grew by only 1.8% in 1HFY2012on account of subdued demand. Nevertheless, steel demand growth improvedto 7.7% yoy in 3QFY2012.

Aluminium capacity to leap-frog: India is ranked sixth among the countrieswith highest bauxite reserves. Indian bauxite reserves are expected to lastover 300 years, with proven and probable reserves estimated at ~1.2bn tonnes.However, India's aluminium capacity currently stands at only 1.5mn tonnes(~3.5% of world capacity).

Per capita consumption for aluminium is much lower in India compared todeveloped economies (2kg in India as compared to 22kg in the U.S.). Overthe past decade, aluminium consumption has grown at an average of 1.4xGDP growth. Going forward, with GDP expected to grow by 7-8%, we expectaluminium demand to witness a CAGR of 12% over the next decade. Hence,Hindalco aims to ramp up its capacity from 0.5mn tonnes to 1.5mn tonnes infour years, while Sterlite aims to ramp up its capacity from 0.7mn tonnes to2.5mn tonnes over the medium term.

Weakening INR softens price decline for domestic base metal players:Base metal prices have also declined by 15-20% during 3QFY2012 on accountof escalating Eurozone debt crisis. Although base metal prices are likely toremain under pressure in the near term due to concerns on growth, high costof production should lend support to prices. While the copper market is strugglingwith supply constraints, downside for aluminium prices is capped due to highenergy cost. Moreover, INR depreciation against the USD would partially offsetthe impact of lower LME prices for domestic players.

Selective stocks look attractive: Metal stocks have been battered over thepast one year on account of escalating Eurozone debt crisis, subdued domesticdemand and rising input costs without the corresponding increase in finishedproduct prices. Nevertheless, we believe the recent decline has left some ofthe stocks undervalued. We like companies with captive resources, strong visibilityover expansion plans, low leverage levels and compelling valuations. Hence,our top picks are NMDC, Tata Steel, Sterlite Industries and Hindustan Zinc.


Aluminium capacity to leap-frog: India is ranked sixth amongthe countries with highest bauxite reserves. Indian bauxite reservesare expected to last over 300 years, with proven and probablereserves estimated at ~1.2bn tonnes. However, India's aluminiumcapacity currently stands at only 1.5mn tonnes (~3.5% of worldcapacity).

Per capita consumption in India for aluminium is much lower inIndia compared to developed economies (2kg in India as comparedto 22kg in the U.S.). Over the past decade, aluminium consumptionhas grown at an average of 1.4x GDP growth. Going forward,with GDP expected to grow by 7-8%, we expect aluminiumdemand to witness a CAGR of 12% over the next decade. Hence,Hindalco aims to ramp up its capacity from 0.5mn tonnes to1.5mn tonnes in four years, while Sterlite aims to ramp up itscapacity from 0.7mn tonnes to 2.5mn tonnes over the medium term.

Metals

Domestic demand to witness strong growth duringCY2011-15: India's per capita steel consumption stands at 46kg,compared to global average per capita consumption of 198kgand China's per capita consumption of 427kg, implying a strongpotential for increasing consumption going forward. Over thepast decade, steel consumption has grown at an average of1.2x GDP growth. Going forward, with GDP expected to growby 7-8%, we expect steel demand to witness a CAGR of 10%over the next decade.


Exhibit 1: Per capita consumption - Comparison

0

200

400

600

800

1,000

1,200

South Korea China Russia World India

(kg

s)


Exhibit 2: Steel consumption forecast

70

102

0

20

40

60

80

100

120

CY2011 CY2015

CAGR of 10.0%

(mn

tonn

es)

Capacity expansion lined up to meet growth: Indian steelmakershave lined up strong expansion plans to meet the growing steeldemand. Steel capacity is expected to increase from 78mn tonnesin FY2011 to 100mn tonnes by FY2014. These capacities willbe aided by cost advantage that Indian companies have overglobal peers on account of availability of iron ore at lower cost,captive iron ore mines and low cost of labor.


Exhibit 3: Domestic steel capacity expansion

78

118

5 102

0

20

40

60

80

100

120

FY2011 FY2012E FY2013E FY2014E Total

(mn

tonn

es p

.a.)

Depressed steel operating margins currently imply limitedmargin risks hereon: The spread between steel prices andraw-material prices (iron ore and coking coal) remains low currently.Considering that ~75% of the world's steel companies are notintegrated, we believe steel companies' operating margins areclose to their bottom levels.


Exhibit 4: Spread between steel prices and raw materials remains low

0100200300400500600700800900

1,0001,1001,2001,300

Coking coal (fob, Australia) Iron ore (fob, Australia) World HRC price

(US

$/t

onne

)

Jan-

08

Mar

-08

May

-08

Jul-0

8S

ep-0

8

Nov

-08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Mar

-09

Mar

-10

Mar

-11

Mar

-12

May

-09

May

-10

May

-11

Jul-0

9

Jul-1

0

Jul-1

1

Sep

-09

Sep

-10

Sep

-11

Nov

-09

Nov

-10

Nov

-11

Near-term outlook remains gloomy, although INR depreciationmutes price declines: Globally, steel prices have declined by12-20% during July-December 2011. However, domestic steelprices remained flat on account of INR depreciation againstthe USD. Steel consumption in India grew by only 1.8% in1HFY2012 on account of subdued demand. Looking ahead,we expect steel consumption to pick up from 2HFY2012. asevident from improvement in steel demand improved in 3QFY2012(+7.7% yoy).


Exhibit 5: July-December 2011 price movement

(25)

(20)

(15)

(10)

(5)

0

India

HRC

USA

HRC

Chin

adom

est

ic

Worl

dH

RC

INR

depre

ciation

CIS

HRC

Iron

ore

(%)


Metals


Exhibit 6: July-December 2011 price movement

(30)

(25)

(20)

(15)

(10)

(5)

0

MC

X z

inc

MC

X a

lum

iniu

m

MC

X le

ad

INR

dep

reci

atio

n

LME

alum

iniu

m

LME

zinc

LME

lead

(%)

Weakening INR softens price decline for domestic base metalplayers: Base metal prices have also declined by 15-20% during3QFY2012 on account of escalating Eurozone debt crisis. Althoughbase metal prices are likely to remain under pressure in thenear term due to concerns on growth, high cost of productionshould lend support to prices. While the copper market is strugglingwith supply constraints, downside for aluminium prices is cappeddue to high energy cost. Zinc and lead prices are unlikely tosee any major upside as the market remains in surplus. Moreover,INR depreciation against the USD would partially offset theimpact of lower LME prices for domestic players.

Selective stocks look attractive: Metal stocks have been batteredover the past one year on account of escalating Eurozone debtcrisis, subdued domestic demand and rising input costs withoutany corresponding rise in finished product prices. Nevertheless,we believe the recent decline has left some of the stocksundervalued. We like companies with captive resources, strongvisibility over expansion plans, low leverage and compellingvaluations. Hence, our top picks are NMDC, Tata Steel, SterliteIndustries and Hindustan Zinc.

Exhibit 7: Rating scale

Most preferred ☺

Moderate

Least preferred



Exhibit 9: Recommendation summaryCMP Target Reco Market Cap Upside PER (x) P/BV (x) EV/EBITDA (x) ROE (%) RoCE (%)

( `̀̀̀̀) Price ( `̀̀̀̀) ( `̀̀̀̀ cr) (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Ferrous

Tata Steel 435 510 Buy 41,745 17 7.3 6.4 1.0 0.8 5.6 4.6 24.4 14.2 10.5 11.1

SAIL 91 - Neutral 37,690 - 9.9 7.4 0.9 0.8 7.9 5.6 9.7 11.7 7.2 9.4

JSW Steel 667 699 Accum. 14,888 5 9.8 5.7 0.9 0.8 4.9 3.6 10.0 15.3 10.1 14.6

Bhushan 334 293 Reduce 7,085 (12) 8.8 8.6 1.1 0.9 10.0 8.7 12.8 11.7 7.6 7.4

Monnet 436 528 Buy 2,805 21 9.2 6.9 1.2 1.0 9.2 6.3 13.7 16.7 8.0 11.0

Mining

NMDC 175 231 Buy 69,501 32 8.7 7.8 2.7 2.2 4.6 3.6 35.8 31.1 44.7 39.1

Sesa Goa 189 208 Accum. 16,465 10 6.2 6.0 1.1 0.9 4.5 4.5 19.3 17.0 19.3 17.5

Coal India 350 - Neutral 221,262 - 14.9 14.3 4.9 3.9 9.9 9.0 37.8 30.5 35.2 28.0

MOIL 253 - Neutral 4,251 - 9.6 8.8 1.7 1.5 4.1 3.4 19.4 18.4 21.1 19.7

Non-Ferrous

Hind. Zinc 126 142 Accum. 53,345 13 8.9 8.3 1.9 1.6 5.3 4.0 23.7 20.9 22.7 20.0

Sterlite Inds 115 147 Buy 38,715 28 8.1 6.3 0.8 0.7 3.2 2.5 11.0 12.5 9.7 11.4

Hindalco 146 162 Accum. 28,029 11 8.4 7.3 0.9 0.8 5.5 5.1 11.0 11.3 7.6 7.9

Nalco 56 - Neutral 14,471 - 14.5 11.9 1.2 1.1 6.6 4.0 8.6 9.9 6.5 9.5


Exhibit 8: Comparison of companies under our coverage

Rating parameters Tata SAIL JSW Bhus Monnet NMDC Sesa CIL MOIL HZL Sterlite Hindalco Nalco

Captive resources ☺ ☺ ☺ ☺ ☺ ☺ ☺ ☺ ☺ ☺

Visibility over

volume growth ☺ ☺ ☺ ☺ ☺

Leverage levels ☺ ☺ ☺ ☺ ☺ ☺

Valuation ☺ ☺ ☺ ☺ ☺ ☺ ☺ ☺

FERROUS MINING NON-FERROUS


Company BackgroundIncorporated in 1907, Tata Steel is the world's tenth largest steel companyand the world's second most geographically diversified steel producer withmajor operations in India and Europe. During April 2007, the company acquiredCorus (now Tata Steel Europe), the second largest steel producer in Europe,for US$12bn. The company’s India operations capacity stands at 6.8mntonnes, while its European operations capacity stands at 16.0mn tonnes.

Structural SnapshotGrowth opportunity: With domestic steel demand expected to increase ata CAGR of 10% over the coming decade, Tata Steel aims to ramp up itsdomestic capacity from 6.8mn tonnes currently to 15.9mn tonnes by FY2015.

Competitive position: The company's India operations are one of thelowest-cost producers of steel, as they are backed by captive mines (100%integration for iron ore and 50% integration for coking coal). However, thecompany's European operations have a higher cost of production as theydo not have captive iron ore/coking coal mines.

Nature of business: Cyclical; Any change in global prices of steel and keyinputs (iron ore and coking coal) has a direct bearing on the company'sprofitability.

Current Investment ArgumentsExpansion plans on track: Tata Steel is expanding its domestic capacity atits Jamshedpur plant from 6.8mn tonnes to 9.7mn-tonnes. The plant is expectedto be commissioned by 4QFY2012. We expect this expansion to contributeover `2,500cr p.a. to the company's consolidated EBITDA, once the newplant reaches optimum capacity utilization. Further, the company's expansionplans of setting up a 6mn-tonne integrated steel plant in two phases of 3mntonnes each in Odisha for a capex of `34,500cr are also on track. All ofthese expanded facilities will be backed by captive iron ore.

Higher integration levels for Tata Steel Europe (TSE) to boost earnings:Tata Steel is in the process of developing a coking coal mine in Mozambiqueand an iron ore mine in Canada to enhance integration levels of TSE. Theprojects are expected to be commissioned in phases, beginning from 2HFY2012,resulting in 20% integration for coking coal and 10% integration for ironore. We expect these backward-integration strategies at Mozambique andCanada to boost TSE's earnings from 2HFY2013E.

Valuation: The stock is currently trading at 5.6x and 4.6x FY2012E andFY2013E EV/EBITDA, compared to its five-year average EV/EBITDA of 7.2x.We continue to like Tata Steel on the back of its upcoming brownfield capacityin India and restructuring initiatives at its European operations. Hence,we maintain our Buy recommendation on the stock with an SOTP targetprice of `̀̀̀̀510.

Metal CMP/TP/Upside: `435 / `510 / 17%Tata Steel


PROMOTERS (TATA) 30.7

FII 15.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TATA STEEL 0.8 (28.9) 29.4 0.8 21.5

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 14.5 16.0 (3.2) 41.9 33.0

PAT GROWTH* (81.4) - (2.1) 15.0 24.8

OPM# 8.4 13.5 11.2 17.3 22.1


ANGEL ESTIMATES


PAT GROWTH (%) (22.2) 15.2

ROE (%) 24.4 14.2

P/E 7.3 6.4

P/BV 1.0 0.8


BUY / HOLD / SELL 38 / 12 / 6

RATING BUY

52 WEEK HIGH / LOW 663 / 333

MARKET CAP (`̀̀̀̀ CR) 41,745

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 53,307 60,684 63,184 60,684


OTHER LIABILITIES 964 879 879 879



GROSS BLOCK 97,289 113,986 118,986 119,986


NET BLOCK 36,525 52,393 52,634 47,635


GOODWILL 14,542 15,298 15,298 15,298

DEFFERED TAX ASSET - 176 176 176

INVESTMENTS 5,418 7,847 4,347 4,347

CURRENT ASSETS 43,868 59,769 67,029 72,182



TOTAL ASSETS 79,641 101,722 112,383 116,411


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) - 5.6 7.3 6.4

P/CEPS 15.5 3.1 2.9 3.4

P/BV 1.7 1.2 1.0 0.8

EV/EBITDA 9.9 5.2 5.6 4.6


EPS (BASIC) (24.9) 99.0 100.9 69.5

ADJUSTED EPS (FULLY DILUTED) (20.5) 77.5 59.3 68.3

DPS - 12.9 13.7 9.4

BOOK VALUE 257.3 370.9 446.1 514.6

RETURNS (%)

ROCE (PRE-TAX) 5.5 13.9 10.5 11.1


ROE (8.0) 30.8 24.4 14.2

TURNOVER RATIOS (X)



SOLVENCY RATIOS (X)

NET DEBT TO EQUITY 2.0 1.4 1.1 0.9

INTEREST COVERAGE (EBIT / INTEREST) 1.2 4.2 3.7 3.9


CASH FLOW STATEMENT


DEPRECIATION 4,492 4,415 4,759 5,999

CHANGE IN WORKING CAPITAL 8,443 (6,819) 2,413 (475)

LESS: OTHER INCOME 1,186 981 739 939




(INC.)/ DEC. IN INVESTMENTS 194,182 1,785 (3,500) -

(INC.)/ DEC. IN LOANS AND ADVANCES - - - -

OTHER INCOME (1,185.9) (981) (739.0) (938.8)


ISSUE OF EQUITY 2,446 4,557 - -

INC./(DEC.) IN LOANS (6,261) 2,151 2,500 (2,500)

DIVIDEND PAID (INCL. TAX) (1,321) (714) (1,335) (920)

OTHERS - - (36) 941

CASH FLOW FROM FINANCING (5,135) 5,993 1,129 (2,479)

INC./(DEC.) IN CASH 667 4,078 5,508 (248)




Note: Financials on Consolidated basisNote: Financials on Consolidated basis

PROFIT & LOSS STATEMENTY/E MARCH (`̀̀̀̀ CR) FY2010 FY2011 FY2012E FY2013E


% CHG (30.5) 16.0 3.7 13.8


EBITDA 8,043 15,996 15,288 17,806

(% OF NET SALES) 7.9 13.5 12.4 12.7

DEPRECIATION& AMORTISATION 4,492 4,415 4,759 5,999

EBIT 3,551 11,581 10,528 11,806


OTHER INCOME 1,186 981 739 939

RECURRING PBT 1,715 9,792 8,424 9,711

EXTRAORDINARY INC/(EXPENSE) (1,684) 2,310 3,887 0

PBT (REPORTED) 31 12,102 12,311 9,711

TAX 2,152 3,246 2,780 3,205

PAT (REPORTED) (2,121) 8,856 9,531 6,506

ADD: SHARE OF EARNINGS OF ASSO. 127 60 69 80

LOSS TO MINORITY INTEREST (15) 66 73 80

PAT AFTER MI (REPORTED) (2,009) 8,983 9,674 6,666

ADJ. PAT (1,822) 7,435 5,786 6,666

% CHG - - (22.2) 15.2

(% OF NET SALES) (1.8) 6.3 4.7 4.8


Company BackgroundIncorporated in 1973, SAIL is one of the leading steelmaking companies inIndia with an annual steel production capacity of 13.5mn tonnes. Major plantsowned by SAIL are located at Bhilai, Bokaro, Durgapur, Rourkela, Burnpurand Salem. The company's steel plants are fully backed by captive iron oremines. SAIL has a Navratna status; thus, it enjoys significant operationaland financial autonomy. During February 2011, SAIL received clearancesfor Chiria iron ore mines, which have proven reserves of 1.8bn tonnes.

Structural SnapshotGrowth opportunity: With domestic steel demand expected to witness aCAGR of 10% over the next decade, SAIL aims to almost double its capacityto benefit from this demand by FY2015E.

Competitive position: Although the company's operations are backed bycaptive iron ore mines, its high employee costs result in high conversioncost of steel.

Nature of business: Cyclical; Changes in the global prices of steel andcoking coal (key input) have a direct bearing on the company's profitability.The company derives 30% of coking coal requirement from Coal India, whileit imports 70% of its coking coal requirement from Australia.

Current Investment ArgumentsVolume growth to double, albeit in 2-3 years: SAIL is expected to increaseits saleable steel production capacity from 13.5mn tonnes to 23.1mn tonnesby FY2015E for a capex of `70,000cr. We expect robust profitability fromthese plants, with captive iron ore backing the upcoming steel expansion.Also, we expect SAIL's older loss-making plants to be modernized as partof its modernization program. Post the expansion and modernization of thesteel plants, SAIL will also benefit from the improvement in its product mix.However, SAIL has reported delays in some of these projects by one year.We do not rule out further delays and cost overruns in its expansion plans.

Cost pressures to persist: SAIL reported disappointing profitability during1HFY2012 on account of higher input, power, fuel and staff costs.The company’s 1HY2012 operating margins average 11.0% compared toaverage of 16.2% in 1HFY2011. Going forward, we expect these cost pressuresto persist, which are expected to keep margin improvement muted in FY2012E.Further, we do not expect any meaningful rise in steel prices in the nearterm. Nevertheless, declining coking coal prices (partially offset by INRdepreciation against the USD) should benefit the company’s margins slightly.

Valuation: The stock is currently trading at 7.9x and 5.6x FY2012E andFY2013E EV/EBITDA, significantly higher than its peers. Moreover, the companyhas reported delays and cost overruns in most of its expansion projects.Hence, we have a Neutral view on the stock.

Metal CMP/TP/Upside: `91 / - / -SAIL



FII 3.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SAIL (10.6) (39.9) 6.1 (0.5) 34.0

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 2.2 5.0 2.7 8.9 11.2

PAT GROWTH* 7.0 (27.7) (13.5) 4.0 -

OPM# 12.2 17.7 20.6 23.4 20.7


ANGEL ESTIMATES


PAT GROWTH (%) (22.0) 33.3

ROE (%) 9.7 11.7

P/E 9.9 7.4

P/BV 0.9 0.8


BUY / HOLD / SELL 15 / 12 / 21

RATING NEUTRAL


MARKET CAP (`̀̀̀̀ CR) 37,690

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS

EQUITY SHARE CAPITAL 4,130 4,130 4,130 4,130



TOTAL LOANS 17,638 21,260 26,260 31,260




GROSS BLOCK 37,419 40,466 62,266 77,766


NET BLOCK 15,109 16,633 36,817 49,845



CURRENT ASSETS 40,035 38,833 36,745 39,638




TOTAL ASSETS 52,812 60,434 68,761 78,355




% CHG (5.5) 5.0 7.7 18.8


EBITDA 9,945 7,544 6,261 9,414

(% OF NET SALES) 24.5 17.7 13.6 17.1

DEPRECIATION 1,337 1,484 1,616 2,472

EBIT 8,608 6,060 4,645 6,942

(% OF NET SALES) 21.2 14.2 10.1 12.6

INTEREST EXPENSES 402 472 508 1,099

OTHER INCOME 1,926 1,440 1,549 1,734

RECURRING PBT 10,132 7,027 5,686 7,577

% CHG 7.7 (30.6) (19.1) 33.3

EXTRAORDINARY INC/(EXPENSE) - - - -

PBT (REPORTED) 10,132 7,157 5,686 7,577

TAX 3,378 2,276 1,876 2,500

PAT (REPORTED) 6,754 4,881 3,809 5,077

ADJ. PAT 6,754 4,881 3,809 5,077

% CHG 9.4 (27.7) (22.0) 33.3


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 5.6 7.7 9.9 7.4

P/CEPS 4.7 5.9 6.9 5.0

P/BV 1.1 1.0 0.9 0.8

EV/EBITDA 3.3 5.5 7.9 5.6



CASH EPS 19.6 15.4 13.1 18.3

DPS 3.3 2.6 1.0 1.0

BOOK VALUE 81.7 91.0 99.1 110.2

RETURNS (%)

ROCE (PRE-TAX) 19.2 10.7 7.2 9.4


ROE 21.9 13.7 9.7 11.7

TURNOVER RATIOS (X)


PAYABLES (DAYS) 132 118 118 118

SOLVENCY RATIOS (X)

NET DEBT TO EQUITY (0.2) 0.1 0.3 0.3

INTEREST COVERAGE (EBIT / INT.) 21.4 12.8 9.1 6.3


CASH FLOW STATEMENT


DEPRECIATION 1,426 1,607 1,616 2,472

CHANGE IN WORKING CAPITAL 1,427 (3,265) 1,125 (827)

LESS: OTHER INCOME (4,435) (930) - -





OTHER INCOME (2,112.9) (1,697) - -



INC./(DEC.) IN LOANS 8,886 3,609 5,000 5,000

DIVIDEND PAID (INCL. TAX) 1,402 1,400 483 483

OTHERS 169.4 536 - -

CASH FLOW FROM FINANCING 7,359 1,693 4,517 4,517

INC./(DEC.) IN CASH 4,199 (4,973) (3,232) 1,238






Company BackgroundIncorporated in 1994, JSW Steel is India's second largest private sectorsteel maker with a steel making capacity of 11mn tonnes. The company hasthe most modern, eco-friendly steel plants with the latest technologies forboth upstream and downstream processes. The company has an iron oremine in Karnataka, which fulfills 15% of its requirement (temporarily shutdown due to mining ban in Karnataka). During FY2011, the company acquired49% stake in Ispat Industries for an enterprise value of US$3bn; the combinedcapacity of both the companies stands at 14mn tonnes.

Structural SnapshotGrowth opportunity: JSW Steel had expanded its capacity by 3.2mn tonnes(completed during 1QFY2012), taking its total capacity to 11mn tonnes -the benefits of which will be fully reflected in FY2013. Further, the companyaims to expand its steel capacity in Vijaynagar plant from 10mn tonnes to12mn tonnes by FY2014.

Competitive position: Although the company does not have significant captiveresources, its conversion cost is one of the lowest in India on account oflarge-scale production. With capacity expansion at its Vijaynagar plant (from10mn tonnes to 12mn tonnes), we expect the company to reap the benefitsof economies of scale, which is expected to lower unit cost of steel production.

Nature of business: Cyclical; Changes in the global prices of steeland key inputs (iron ore and coking coal) have a direct bearing on the company'sprofitability.

Current Investment ArgumentsUtilization levels to improve going forward: JSW Steel's Vijaynagar plantoperated at low utilization levels (30-60%) during 2QFY2012 due to shortageof iron ore on the back of ban in iron ore mining in Karnataka. However, weexpect mining operations to be restored gradually (in 3-6 months), whichwill result in improved iron ore supplies. Thus, we model utilization levels of77% and expect sales volume growth of 22.3% for FY2013. Further,commissioning of the beneficiation plant during FY2012 is expected to loweriron ore cost for the company. We expect domestic iron ore prices to remainfirm; hence, sourcing of low-grade iron ore fines will reduce the impact ofincreasing iron ore costs.

Valuation: The stock is currently trading at a 4.9x and 3.6x FY2012E andFY2013E EV/EBITDA, compared to its five-year historical average of 7.4x.On P/BV basis, the stock is trading at 0.9x and 0.8x FY2012E and FY2013E,respectively. Moreover, considering the anticipated improvement in utilizationin FY2013, we recommend an Accumulate rating on the stock with atarget price of `̀̀̀̀699.

Metal CMP/TP/Upside: `667 / `699 / 5%JSW Steel


PROMOTERS (JINDAL) 37.7

FII 21.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

JSW Steel 13.9 (32.3) 45.9 8.7 27.7

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M** 1Y 3Y 5Y 10Y

SALES GROWTH* 35.3 27.2 24.6 31.3 35.7

PAT GROWTH* 74.8 32.8 3.4 23.6 -

OPM# 15.9 20.4 20.2 24.1 24.5

ROE# - 14.3 13.7 18.6 21.2NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS, **STANDALONE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) (6.3) 71.5

ROE (%) 10.0 15.3

P/E 9.8 5.7

P/BV 0.9 0.8


BUY / HOLD / SELL 21 / 11 / 21

RATING ACCUMULATE

52 WEEK HIGH / LOW 1,056 / 464

MARKET CAP (`̀̀̀̀ CR) 14,888

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




SHARE WARRANTS - 529.4 529.4 529.4


TOTAL LOANS 16,173 16,474 17,474 18,574




GROSS BLOCK 26,792 32,684 41,751 47,751


NET BLOCK 21,453 25,811 32,902 36,394


GOODWILL 899 1,093 1,093 1,093

INVESTMENTS 628 2,914 2,914 2,914

CURRENT ASSETS 5,470 9,565 10,428 11,383


NET CURRENT ASSETS (2,603) (1,036) (645) (355)

TOTAL ASSETS 27,334 35,289 37,704 41,386




% CHG 19.0 27.2 35.9 26.8


EBITDA 4,071 4,879 5,543 8,132

(% OF NET SALES) 21.5 20.4 17.0 19.6


EBIT 2,772 3,319 3,566 5,625

(% OF NET SALES) 14.7 13.9 10.9 13.6

INTEREST & OTHER CHARGES 1,108 945 1,257 1,608


RECURRING PBT 1,792 2,442 2,410 4,118

EXTRAORDINARY INC/(EXPENSE) 408 - - -

PBT (REPORTED) 2,200 2,442 2,410 4,118

TAX 647 782 771 1,318

(% OF PBT) 29.4 32.0 32.0 32.0

PAT (REPORTED) 1,553 1,659 1,639 2,800

ADD: SHARE OF EARNINGS OF ASSO. 11 71 - 23

LESS: MINORITY INTEREST (MI) 33 24 4 (5)


ADJ. PAT 1,321 1,754 1,643 2,818

% CHG 64.2 32.8 (6.3) 71.5


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 10.5 8.5 9.8 5.7

P/CEPS 4.3 4.5 4.1 2.8

P/BV 1.4 0.9 0.9 0.8

EV/EBITDA 6.8 5.4 4.9 3.6



CASH EPS 154.8 148.5 162.2 238.7

DPS 9.5 10.0 10.0 10.0

BOOK VALUE 480.0 704.6 768.2 883.7

RETURNS (%)

ROCE (PRE-TAX) 10.7 10.9 10.1 14.6


ROE 16.1 14.3 10.0 15.3

TURNOVER RATIOS (X)

INVENTORY (DAYS) 71 69 70 70



SOLVENCY RATIOS (X)


INTEREST COVERAGE 2.5 3.5 2.8 3.5


CASH FLOW STATEMEENT


DEPRECIATION 1,299 1,560 1,976 2,507

CHANGE IN WORKING CAPITAL (471) (1,314) (241) (1,314)

LESS: OTHER INCOME 793 567 - -

DIRECT TAXES PAID 459 427 771 1,318




OTHER INCOME 13 53 - 23


ISSUE OF EQUITY - 5,936 - -

INC./(DEC.) IN LOANS 629 401 1,000 1,100


OTHERS 1,149 1,001 - -

CASH FLOW FROM FINANCING (576) 5,096 759 859

INC./(DEC.) IN CASH (147) 293 167 (1,025)






Company BackgroundIncorporated in January 1983, Bhushan Steel is India's third largest secondarysteel producer company with an existing steel production capacity of2.2mn tonnes. The company is the largest auto-grade steelmaker in Indiaand specializes in manufacturing value-added flat products. The companyhas three manufacturing units in India – Uttar Pradesh (Sahibabad unit),Maharashtra (Khopoli unit) and Odisha (Meramandali unit) – and a strongsales network across many countries.

Structural SnapshotGrowth opportunity: Bhushan Steel is on the verge of a massive expansionplan to ramp up its steel capacity. The company has already completedPhase-I and Phase-II during FY2010 and FY2011, respectively, wherein itsprimary steelmaking capacity was raised from 0.9mn tonnes to 2.2mn tonnes.Going forward, the company is expected to commission Phase-III duringOctober 2012, wherein it will increase its capacity from 2.2mn tonnes to4.7mn tonnes by FY2014.

Competitive position: The company does not have a captive iron ore orcoal mines; thus, its profitability is affected by any increase in iron ore andcoal prices.

Nature of business: Cyclical; Change in the global prices of steel and keyinputs (iron ore and coal) have a direct bearing on the company's profitability.

Current Investment ArgumentsVolume growth sweetened by increasing EBITDA/tonne: With thecommissioning of Bhushan Steel's Phase-III expansion plan, we expect thecompany's sales volume to grow at a 24.8% CAGR over FY2011-15E, muchhigher than its peers. Despite lack of captive iron ore and coal mines, BhushanSteel’s cost of production is expected to be lower than other non-integratedproducers due to a) combination of BF-EAF technology to produce steeland b) lower conversion costs. The usage of BF-EAF technology is expectedto result in lower coal costs.

Debt equity ratio at uncomfortable level for a non-integrated commodityproducer: Bhushan Steel's debt-equity ratio stood at 2.8x as of March 31,2011. Going forward, on the back of massive expansion plans, the company'sdebt-equity ratio is expected to remain high at 2.8x and 2.4x for FY2012and FY2013, respectively, which exposes the company to a huge financialrisk in case of sharp decline in steel prices.

Valuation: Although we expect, the company’s production and sales volumeto grow to 4.1mn tonnes in FY2015 from 1.6mn tonnes in FY2011,we remain concerned over its high debt levels. Further, at the CMP,the stock is trading at 10.0x FY2012E and 8.7x FY2013E EV/EBITDA,a significant premium to its peers. Hence, we recommend a Reduce ratingon the stock with a target price of `̀̀̀̀293 (valuing the stock at 8.4x FY2013EEV/EBITDA).

Metal CMP/TP/Downside: `334 / `293 / 12%Bhushan Steel


PROMOTERS 70.0

FII 1.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BHUSHAN 3.9 (18.0) 77.9 32.6 61.6

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 43.4 24.1 18.5 20.2 22.4

PAT GROWTH* (20.1) 22.1 34.6 46.2 36.7

OPM# 29.2 29.1 25.2 22.4 18.9


ANGEL ESTIMATES


PAT GROWTH (%) (22.1) 2.9

ROE (%) 12.8 11.7

P/E 8.8 8.6

P/BV 1.1 0.9



RATING REDUCE

52 WEEK HIGH / LOW 530 / 297


LIQUIDITY MEDIUM


BALANCE SHEETY/E MARCH (`̀̀̀̀ CR) FY2010 FY2011 FY2012E FY2013E

KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 8.4 6.9 8.8 8.6

P/BV 1.8 1.2 1.1 0.9

EV/EBITDA 12.4 11.5 10.0 8.7



CASH EPS 49.7 59.6 69.7 75.8

DPS 0.5 0.5 0.5 0.5

BOOK VALUE 186.2 277.7 315.0 353.4

RETURNS (%)

ROCE (PRE-TAX) 9.4 9.3 7.6 7.4


ROE 26.5 21.0 12.8 11.7

TURNOVER RATIOS (X)



SOLVENCY RATIOS (X)


NET DEBT TO EBITDA 7.5 8.0 7.3 6.3



CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (953) (825) (48) 202






OTHER INCOME 24 24 - -



INC./(DEC.) IN LOANS 3,062 5,130 3,000 3,200


OTHERS 1,017 1,612 - -


INC./(DEC.) IN CASH (4) (85) 413 3,798





SOURCES OF FUNDS




TOTAL LOANS 11,404 16,593 19,593 22,793




GROSS BLOCK 3,686 14,424 18,024 20,524


NET BLOCK 2,079 12,566 15,490 17,210



CURRENT ASSETS 3,770 5,018 5,513 9,109




TOTAL ASSETS 15,725 23,187 26,980 30,996



% CHG 13.8 24.1 24.5 5.9


EBITDA 1,453 2,037 2,591 2,915

% CHG 41.1 40.2 27.2 12.5

(% OF NET SALES) 25.8 29.1 29.9 31.7


INTEREST & OTHER CHARGES 210 414 910 1,102


(% OF PBT) 10.2 4.5 6.4 6.5

RECURRING PBT 1,151 1,456 1,073 1,105

% CHG 105.3 26.4 (26.3) 2.9

PBT (REPORTED) 1,151 1,456 1,073 1,105

TAX 306 423 268 276

(% OF PBT) 26.5 29.0 25.0 25.0

PAT AFTER MI (REPORTED) 846 1,033 805 828

ADJ. PAT 846 1,033 805 828

% CHG 100.8 22.1 (22.1) 2.9



Company BackgroundIncorporated in 1990, Monnet Ispat and Energy (MIL) principally manufacturessponge iron (capacity - 1.0mn tonnes), ingots (capacity - 0.3mn tonnes),structural steel (capacity - 0.2mn tonnes) and ferro alloys (capacity - 58ktpa).MIL has a captive coal mine (reserves - 90mn tonnes; production - 1.2mntonnes) for production of sponge iron. The company's plants are located inRaipur and Raigarh in Chhattisgarh. The company has been allocated severalcoal blocks such as Gare Palma IV/5, Urtan North, Rajgamar and Mandakini- which are under various stages of clearances.

Structural SnapshotGrowth opportunity: MIL is setting up a 1.5mn-tonne steel-melting-shopfacility (downstream) alongwith finishing lines and 0.6mn tonnes of a pigiron plant. Total capex for the project is pegged at `4,000cr. The plant isexpected to begin progressive commissioning in mid-FY2013E. However,full benefits of these facilities would be witnessed in FY2014E. Also, thecompany has acquired two coal assets in Indonesia during CY2011. Thecompany aims to commence production from these mines in FY2013E. MILtargets production of ~5m tonnes of coal once it reaches full capacity.

Competitive position: Although the company's sponge iron operations arebacked by a captive non-coking coal mine, MIL lacks integration for ironore.

Nature of business: Cyclical; Global changes in the prices of steel andiron ore (key input) have a direct bearing on the company's profitability.

Current Investment ArgumentsSignificant value unlocking lies ahead in Monnet Power: MIL is settingup a 1,050MW (2x525) power plant through Monnet Power. The plant isbeing set up at a cost of `5,000cr, with equity contribution of `1,200cr andthe balance being funded through debt. MIL has diluted a 12.5% stake toBlackstone for a consideration of `275cr, thus valuing the total equity stakeat `2,200cr. We expect the plant to be operational in FY2014E. With acaptive coal block (Utkal B-2) backing this project, we expect robust profitabilityfrom the power business.

Valuation: MIL is on the verge of a massive expansion in its steel and powerbusinesses. Although there could be some delays in the commencement ofthe power plant, it is backed by captive coal. The stock is currently tradingat 6.3x FY2013E EV/EBITDA, below its five-year historical tradingrange of 7.5x. Given the strong visibility over its expansion plans,we recommend Buy on the stock with a target price of `̀̀̀̀528,valuing the steel business at 5.0x FY2013E EV/EBITDA and investmentin Monnet Power at 2.0x P/BV.

Metal CMP/TP/Upside: `436 / `528 / 21%Monnet Ispat


PROMOTERS 49.4

FII 35.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MIL (13.7) (25.9) 37.2 13.3 53.9

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 27.1 6.3 10.7 22.4 32.2

PAT GROWTH* 17.3 (0.9) 19.7 23.2 44.5

OPM# 26.1 29.6 28.4 26.8 25.0


ANGEL ESTIMATES


PAT GROWTH (%) 6.8 39.7

ROE (%) 13.7 16.7

P/E 9.2 6.9

P/BV 1.2 1.0



RATING BUY

52 WEEK HIGH / LOW 622 / 305


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




SHARE WARRANTS 27 - - -

TOTAL LOANS 1,495 2,672 3,672 4,672




GROSS BLOCK 1,439 1,477 3,077 4,377


NET BLOCK 1,128 1,094 2,618 3,800

CAPITAL WORK-IN-PROGRESS 721 1,513 713 413


CURRENT ASSETS 1,143 2,092 2,683 3,289




TOTAL ASSETS 3,288 4,903 6,170 7,558




% CHG (4.4) 6.3 25.4 50.0


EBITDA 464 465 519 872

(% OF NET SALES) 31.3 29.6 26.3 29.5


EBIT 392 392 444 755

% CHG 26.8 (0.1) 13.3 69.9

(% OF NET SALES) 26.5 24.9 22.5 25.5



(% OF PBT) 9.1 6.2 6.3 5.0

SHARE IN PROFIT OF ASSOCIATES - - - 1.0



PBT (REPORTED) 331 365 389 544

TAX 60 80 85 119


ADJ. PAT 288 285 304 425

% CHG 24.1 (0.9) 6.8 39.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 9.8 9.8 9.2 6.9

P/BV 1.4 1.3 1.2 1.0

EV/SALES 2.1 2.7 2.4 1.8

EV/EBITDA 6.7 9.1 9.2 6.3



CASH EPS 65.9 55.7 59.0 84.4

DPS 5.0 5.0 5.0 5.0

BOOK VALUE 307.1 324.8 366.2 426.4

RETURNS (%)

ROCE (PRE-TAX) 13.0 9.6 8.0 11.0


ROE 18.2 15.1 13.7 16.7

TURNOVER RATIOS (X)



SOLVENCY RATIOS (X)


INTEREST COVERAGE 5.3 7.9 5.6 3.2


CASH FLOW STATEMENT




LESS: OTHER INCOME 61 (27) - -


CASH FLOW FROM OPERATIONS 478 (25) 309 343

(INC.)/DEC. IN FIXED ASSETS (485) (831) (800) (1,000)

(INC.)/DEC.IN INVESTMENTS (330) (5) - -




INC./(DEC.) IN LOANS 216 1,177 1,000 1,000

DIVIDEND PAID (INCL. TAX) 28 - 38 38

OTHERS 58 (135) - -

CASH FLOW FROM FINANCING 281 1,322 962 962

INC./(DEC.) IN CASH (40) 483 471 306






Company BackgroundIncorporated in November 1958, government-owned NMDC is India's largestiron ore producer with a capacity of 36mn tonnes. The company operateshigh-grade iron ore mines at Kirandul and Bacheli in Chhattisgarh and Donimalaiin Karnataka. The average mine life of NMDC is 38 years currently.

Structural SnapshotGrowth opportunity: With India’s steel capacity expected to grow from 78mntonnes in FY2011 to 100mn tonnes by FY2014, NMDC’s iron ore miningcapacity is expected to witness a CAGR of 11.0% over FY2011-15 to reapthe benefits of steel capacity expansion as production of 1 tonne of steelrequires ~1.8 tonnes of iron ore. Further, NMDC is setting up a 3mn-tonnesteel plant along with Russian steelmaker Severstal by FY2015E.

Competitive position: NMDC enjoys high margins compared to its peersdue to high-grade captive iron ore mines and low-cost production.

Nature of business: Cyclical; Change in iron ore price has a direct bearingon the company's profitability. However, NMDC is less affected by fluctuationsin iron ore prices as it sells iron ore in the domestic market at a discount(30-50%) to global prices.

Current Investment ArgumentsTargets production of 40mn tonnes by FY2014-15E: Management aimsto ramp up the company's production capacity to 40mn tonnes byFY2014-15E through increased exploration of its existing mines and developmentof new mines, i.e., Deposit 11B and Deposit 13 in Bailadila and Kumaraswany,respectively, in Karnataka. We expect NMDC's sales volume to post a CAGRof 11% during FY2011-13E.

Strong balance sheet could pave way for overseas acquisitions: DuringSeptember 2011, NMDC purchased a 50% stake in Australia-based LegacyIron Ore (Legacy) as a cornerstone investor for `92cr. Also, the company iscurrently prospecting various mining assets, including an iron ore mine anda phosphate mine in Australia, an iron ore mine in Brazil and a coking coalasset in Russia. With a strong balance sheet having net cash of `20,725cr(September 30, 2011), we do not rule out the company acquiring moremining assets overseas. However, given that NMDC is a government-ownedcompany, we do not foresee a big-ticket acquisition.

Valuation: Over the past five years, NMDC has traded at an averageEV/EBITDA of 13.7x, compared to its current valuation of 3.6x FY2013EV/EBITDA. Strong balance sheet, presence in sellers market (iron ore),relative immunity to iron ore price declines, low cost of production,high-grade mines, long mine life and compelling valuations make NMDC anattractive bet at these levels. Valuing the stock at 5.5x FY2013E EV/EBITDA,we derive a fair price of `̀̀̀̀231 and recommend a Buy rating on the stock.

Metal CMP/TP/Upside: `175 / `231 / 32%



FII 0.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

NMDC (27.9) (30.1) 6.0 18.2 71.9

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 24.5 82.2 25.8 25.1 26.4

PAT GROWTH* 42.4 88.3 26.0 28.9 39.4

OPM# 79.5 76.1 74.7 75.4 62.6


ANGEL ESTIMATES


PAT GROWTH (%) 22.8 12.1

ROE (%) 35.8 31.1

P/E 8.7 7.8

P/BV 2.7 2.2


BUY / HOLD / SELL 12 / 0 / 6

RATING BUY

52 WEEK HIGH / LOW 305 / 137

MARKET CAP (`̀̀̀̀ CR) 69,501

LIQUIDITY MEDIUM

TOPPICKNMDC


BALANCE SHEET

SOURCES OF FUNDS







GROSS BLOCK 1,771 2,273 3,273 4,273


NET BLOCK 787 1,099 1,960 2,802



CURRENT ASSETS 14,264 19,172 24,333 30,316

CASH 12,855 17,228 22,359 28,225

LOANS & ADVANCES 683 1,043 1,043 1,043

OTHERS 726 901 932 1,048




TOTAL ASSETS 14,357 19,317 25,432 32,286




% CHG (17.5) 82.2 11.7 12.6


EBITDA 4,422 8,646 10,149 11,437

(% OF NET SALES) 70.9 76.1 79.9 80.0


EBIT 4,349 8,521 10,009 11,280

(% OF NET SALES) 69.7 75.0 78.8 78.9

OTHER INCOME 862 1,206 1,905 2,074

(% OF PBT) 16.5 12.4 16.0 15.5

SHARE IN PROFIT OF ASSOCIATES - - - -

RECURRING PBT 5,211 9,727 11,914 13,354

% CHG (21.6) 86.7 22.5 12.1


PBT (REPORTED) 5,211 9,727 11,914 13,354

TAX 1,760 3,228 3,932 4,407


ADJ. PAT 3,451 6,499 7,983 8,947

% CHG (21.1) 88.3 22.8 12.1


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 20.1 10.7 8.7 7.8

P/CEPS 19.7 10.5 8.6 7.6

P/BV 4.9 3.6 2.7 2.2

EV/EBITDA 12.8 6.0 4.6 3.6


EPS (BASIC) 8.7 16.4 20.1 22.6


CASH EPS 8.9 16.7 20.5 23.0

DPS 2.0 3.2 4.0 4.5

BOOK VALUE 36.0 48.5 63.9 81.2

RETURNS (%)

ROCE (PRE-TAX) 33.4 50.6 44.7 39.1


ROE 26.6 38.8 35.8 31.1

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




OTHERS (832) (1,143) - -



INC./ (DEC.) IN FIXED ASSETS (422) (517) (1,068) (1,074)

INC./ (DEC.) IN INVESTMENTS - - - -

INC./ (DEC.) IN LOANS AND ADVANCES - - - -

OTHER INCOME 828 1,022 - -

CASH FLOW FROM INVESTING 407 506 (1,068) (1,074)


DIVIDEND PAID (INCL. TAX) (895) (853) (1,868) (2,094)

OTHERS - (142) - -

CASH FLOW FROM FINANCING (895) (994) (1,868) (2,094)

INC./(DEC.) IN CASH 3,115 4,373 5,131 5,867






Company BackgroundIncorporated in 1965, Sesa Goa's primary business includes mining andexporting of iron ore. The company has mining operations in Goa and Karnatakawith total reserves of 306mn tonnes and mining capacity of 22mn tonnes.Sesa Goa also operates a metallurgical coke division (capacity - 0.6mntonnes). In 2007, Vedanta Resources, a diversified metals and mining group,acquired 51% controlling stake in Sesa Goa from Mitsui & Co. Ltd.During CY2011, Sesa Goa acquired a 20% stake in oil-producer Cairn Indiafor ~`13,000cr.

Structural SnapshotGrowth opportunity: Sesa Goa had obtained a Prospecting License in CY2005from the Jharkhand government and applied for a mining lease during 2009.Iron ore reserves in these mines are estimated to be ~60mn tonnes. Althoughthe commencement of production looks unlikely in the near term, there couldbe potential volumes from these mines over the medium term.

Competitive position: Sesa Goa has low cost of production at its Goamines (contributes 80% to its volumes). However, its iron ore realizationdepends on global prices.

Nature of business: Cyclical; Any change in global iron ore price has adirect bearing on the company's profitability.

Current Investment ArgumentsCommencement of operations in Karnataka to drive volume growth:During 1QFY2012, the Supreme Court had imposed a blanket ban in Karnataka(capacity - 6mn tonnes), where Sesa Goa operated its mines. The minesare currently being inspected for any irregularities. We expect the SupremeCourt to lift the ban in the coming three-six months and, henceforth,Sesa Goa should restart production. Thus, commencement from Karnatakamines could restore its FY2013E volumes to FY2011 levels of 21mn tonnes.

Western Cluster Ltd. (WCL) - A long-term story: During August 2011,Sesa Goa acquired a 51% stake in WSL, Liberia, for a cash considerationof US$90mn (~`400cr). WCL will develop the Western Cluster Iron oreproject in Liberia, which includes development of iron ore deposits and therequired infrastructure for iron ore export. WCL has potential iron ore resourcesof over 1bn tonnes (~330mn tonnes of saleable product); it is in close proximityto the existing port infrastructure and has access to land for railway corridor.Sesa Goa aims to commence production from this mine in 3-4 years.

Valuation: The stock is currently trading at an EV/EBITDA of 4.5x each forFY2012E and FY2013E EV/EBITDA, compared to its five-year historicalaverage of 5.5x. We believe the current stock price discounts negativessuch as acquisition of a minority stake in the unrelated oil business via acquisitionof Cairn India's stake, increased export duty and railway freight and lowervolumes from Goa mines. Hence, we recommend an Accumulate ratingon the stock with an SOTP target price of `̀̀̀̀208.

Metal CMP/TP/Upside: `189 / `208 / 10%Sesa Goa


PROMOTERS (VEDANTA) 55.1

FII 24.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SESA GOA (12.9) (39.7) 35.0 18.4 65.3

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (14.0) 57.1 34.0 37.9 37.8

PAT GROWTH* (32.2) 60.6 39.7 49.0 72.2

OPM# 32.9 56.5 53.8 53.0 41.2


ANGEL ESTIMATES


PAT GROWTH (%) (35.6) 3.6

ROE (%) 19.3 17.0

P/E 6.2 6.0

P/BV 1.1 0.9


BUY / HOLD / SELL 12 / 18 / 10

RATING ACCUMULATE

52 WEEK HIGH / LOW 344 / 149

MARKET CAP (`̀̀̀̀ CR) 16,465

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,961 999 3,937 3,937




GROSS BLOCK 2,751 3,065 4,265 5,265


NET BLOCK 2,177 2,416 3,519 4,410


INVESTMENTS 4,565 8,800 12,123 12,123

CURRENT ASSETS 4,416 3,660 4,339 6,258

CASH 2,392 897 1,990 3,743



TOTAL ASSETS 9,997 13,878 19,401 21,773



TOTAL REVENUE 5,858 9,205 7,979 9,073

% CHG 18.1 57.1 (13.3) 13.7


EBITDA 3,149 5,203 3,314 3,712

(% OF NET SALES) 53.7 56.5 41.5 40.9


EBIT 3,074 5,107 3,218 3,603

% CHG 23.4 66.1 (37.0) 12.0

(% OF NET SALES) 52.5 55.5 40.3 39.7


OTHER INCOME 426 540 380 418

RECURRING PBT 3,445 5,608 3,401 3,805


PBT (REPORTED) 3,445 5,560 3,401 3,805

TAX 806 1,337 986 1,141

(% OF PBT) 23.4 24.1 29.0 30.0

PAT (REPORTED) 2,639 4,222 2,415 2,663

LESS: MINORITY INTEREST (MI) 10 - - -


ADJ. PAT 2,629 4,222 2,718 2,818

% CHG 32.2 60.6 (35.6) 3.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 6.4 4.0 6.2 6.0

P/CEPS 5.8 3.9 6.0 5.8

P/BV 2.0 1.3 1.1 0.9

EV/EBITDA 7.6 5.1 4.5 4.5


EPS (BASIC) 31.6 49.1 30.6 31.7


CASH EPS 32.5 48.5 31.6 32.9

DPS 3.3 5.0 1.5 5.0

BOOK VALUE 95.3 144.0 173.0 199.7

RETURNS (%)

ROCE (PRE-TAX) 41.7 42.9 19.3 17.5


ROE 41.6 40.7 19.3 17.0

TURNOVER RATIOS (X)



PAYABLES (DAYS) 351 403 250 250


CASH FLOW STATEMENT




LESS: OTHER INCOME (363) (451) - -

DIRECT TAXES PAID 764 1,368 986 1,141



(INC.)/DEC. IN INVESTMENTS (3,078) (4,131) (3,323) -

(INC.)/DEC. IN LOANS AND ADVANCES

OTHER INCOME (2,168) 2,150 303.6 154

CASH FLOW FROM INVESTING (5,394) (2,965) (3,919) (496)


INC./(DEC.) IN LOANS 2,358 (6.6) 2,938 -


OTHERS 6 85 - -

CASH FLOW FROM FINANCING 2,682 (420) 2,804 (445)

INC./(DEC.) IN CASH (141) 149 1,093 1,753






Company BackgroundCoal India (CIL), a Navratna company, is the largest coal producing companyin the world, based on its raw coal production (431mn tonnes in FY2011).The company is also the largest coal reserve holder in the world, based onits reserve base (18bn tonnes). The company caters to large thermal powergeneration companies, steel and cement producers and other industrialcompanies in the public and private sector.

Structural SnapshotGrowth opportunity: As per Ministry of Coal, Indian demand for coal isexpected to grow from 625mn tonnes in FY2011 to 886mn tonnes in FY2015,considering the growth in user industries (power, cement and metals).To cater to this rising demand, CIL aims to increase its production at afaster pace over the medium term. However, CIL is facing constraints toramp up its production currently on account of stricter stance on environmentalissues by the government. Also, in order to improve its margins, CIL aims toincrease the current capacity of its benficiation plants from 22mn tonnes to111mn tonnes by FY2017.

Competitive position: CIL enjoys ~81% share in India's coal productionand has virtual monopoly in the Indian market.

Nature of business: The company sells ~80% of its production to powercompanies, whose business is stable. Also, CIL is not exposed to significantcoal price fluctuations as it sells coal at a significant discount (10-30%) toglobal benchmark prices.

Current Investment ArgumentsProduction growth to remain muted in the near term: We expect CIL'sproduction to grow by only 6.7% and 3.4% in FY2012 and FY2013, respectively,on account of the imposition of stringent environmental laws byregulatory authorities. On the sales volumes front, the company is currentlyfacing shortage of railway rakes, despite improvement in availability of railwayrakes during FY2012.

Lower e-auction sales could hit margins: CIL sells 11-12% of its totalvolumes via e-auction, which commands a premium of 80-150% over regulatedcoal prices. However, during 2QFY2012, CIL diverted some portion of coal(meant for e-auction) to power producers at lower rates. Although CIL hasresumed e-auction sales post 2QFY2012, any further diversion of e-auctioncoal to power producers at lower rates could hit the company's margins.

Valuation: We believe the probability of raising coal prices by CIL fromcurrent levels is low in the near term. Also, we believe the company is unlikelyto meet its production and offtake targets for FY2012E. Moreover, consideringthe current valuation of 9.0x FY2013E EV/EBITDA, we recommend a Neutralrating on the stock.

Metal CMP/TP/Upside: `350 / - / -Coal India



FII 5.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CIL 3.0 7.5 - - -

BSE METAL INDEX 2.6 14.2 27.8 16.0 16.1



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 12.7 12.6 13.2 10.3 -

PAT GROWTH* 19.7 12.9 36.4 12.2 -

OPM# 20.9 28.0 19.5 19.7 20.5


ANGEL ESTIMATES


PAT GROWTH (%) 35.6 4.7

ROE (%) 37.8 30.5

P/E 14.9 14.3

P/BV 4.9 3.9


BUY / HOLD / SELL 33 / 8 / 3

RATING NEUTRAL

52 WEEK HIGH / LOW 422 /289

MARKET CAP (`̀̀̀̀ CR) 221,262

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 2,087 1,554 1,434 1,314

SHIFTING AND REHAB. FUND 1,477 1,621 1,621 1,621



GROSS BLOCK 34,945 36,852 40,852 43,852


NET BLOCK 12,031 12,974 14,955 15,800


INVESTMENTS 1,282 1,064 1,064 1,064

CURRENT ASSETS 54,313 64,396 74,127 85,147



NET DEFERRED TAX ASSETS 1,086 873 873 873

TOTAL ASSETS 29,436 36,525 48,018 59,796




% CHG 9.3 12.6 25.6 6.7


EBITDA 10,745 14,057 16,911 17,269

(% OF NET SALES) 24.1 28.0 26.8 25.7

DEPRECIATION 1,329 1,673 2,019 2,154

EBIT 9,416 12,384 14,892 15,114

% CHG 895.2 31.5 20.2 1.5


OTHER INCOME 4,901 4,796 6,626 7,406


PROVISION 209 578 - -

RECURRING PBT 14,228 17,101 21,472 22,479

EXTRAORDINARY INC/(EXPENSE) (54.0) (60.2) - -

PBT (REPORTED) 13,965 16,463 21,472 22,479

TAX 4,342 5,596 6,656 6,968

PAT (REPORTED) 9,622 10,867 14,816 15,510

EXTRAORDINARY (EXPENSE)/INC. 211.3 - - -

NET INCOME 9,834 10,867 14,816 15,510

PAT (REPORTED) 9,834 10,867 14,816 15,510

ADJ. PAT 9,676 10,928 14,816 15,510

% CHG 142.1 12.9 35.6 4.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 22.5 20.4 14.9 14.3

P/CEPS 19.8 17.6 13.1 12.5

P/BV 8.6 6.6 4.9 3.9

EV/SALES 4.1 3.5 2.6 2.3

EV/EBITDA 17.0 12.5 9.9 9.0


EPS (BASIC) 15.6 17.2 23.5 24.6


CASH EPS 17.7 19.9 26.7 28.0

DPS 3.5 3.9 3.9 4.4

BOOK VALUE 41.0 52.8 71.2 90.0

RETURNS (%)

ROCE (PRE-TAX) 36.3 37.6 35.2 28.0

ROE 43.8 36.7 37.8 30.5

TURNOVER RATIOS (X)





CASH FLOW STATEMENT


DEPRECIATION 679 1,673 2,019 2,154

CHANGE IN WORKING CAPITAL 2,268 (3,822) (323) (620)

LESS: OTHER INCOME 406.4 306 - -




(INC.)/ DEC. IN INVESTMENTS 223 3,184 0 0



CASH FLOW FROM INVESTING (1,775) 697 (4,000) (3,000)


INC./(DEC.) IN LOANS (62) (410) (120) (120)

DIVIDEND PAID (INCL. TAX) (2,210) (2,583) (3,202) (3,613)

OTHERS 109 82 - -


INC./(DEC.) IN CASH 9,383 6,784 9,190 10,312






Company BackgroundIncorporated in 1962, MOIL is the largest producer of manganese ore byvolume (~50% of India's production) in India with a capacity of 1.1mn tonnesand reserves of 22mn tonnes (constituting 16% of India's manganese reserves).Based on its current production, MOIL has a mine life of 20 years. MOILproduces high, medium and low-grade manganese ore. All its mines arelocated in Maharashtra and Madhya Pradesh, benefiting from the well-developedroad and rail infrastructure of these states. MOIL is also actively involved inexploration and development activities to increase its reserves.

Structural SnapshotGrowth opportunity: With steel capacity expected to grow from 78mn tonnesin FY2011 to 100mn tonnes by FY2014, MOIL is expanding its capacity ata CAGR of 10.7% over FY2011-2015 as production of 1 tonne of steelrequires ~33kg of manganese ore.

Competitive position: MOIL enjoys a market share of ~50% in India. Althoughthe company is one of the lowest cost producers, it faces threat of importsfrom other countries.

Nature of business: Cyclical; Change in global manganese ore price has adirect bearing on MOIL's profitability.

Current Investment ArgumentsProduction capacity to expand, albeit gradually: MOIL has started expandingits existing mines to augment its production capacity to 1.5mn tonnes byFY2015 from 1.0mn tonnes in FY2011. Also, the company has entered intoJVs with SAIL and Rashtriya Ispat Nigam Ltd. (RINL) to set up two ferroalloy plants in Chhattisgarh and Andhra Pradesh. The proposedinstalled capacity in case of the JV with SAIL is 1,06,000 tonnes and thatin case of RINL is 57,500 tonnes. The plants are expected to be commissionedin CY2013.

Steep decline in manganese ore prices: Manganese ore prices have slumpedby over 40% since January 2011 on account of oversupply in global markets.Going forward, we do not expect any meaningful increase in manganeseore prices until there is sharp de-stocking globally. Although we expect salesvolume growth of 10.0% yoy in FY2012, lower realizations are expected toresult in margin contraction during FY2012.

Valuation: The stock is currently trading at 4.1x and 3.4x FY2012E andFY2013E EV/EBITDA. Although the company's sales volumes are expectedto post a CAGR of 8-10% during FY2011-15, we do not foresee any meaningfulrise in manganese ore prices in the coming year. Hence, we recommendNeutral on the stock.

Metal CMP/TP/Upside: `253 / - / -MOIL



FII 4.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MOIL 3.4 (39.6) - - -

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (12.6) 17.6 5.3 28.0 20.7

PAT GROWTH* (31.9) 26.1 8.4 39.1 40.1

OPM# 44.7 67.3 66.8 63.3 48.5


ANGEL ESTIMATES


PAT GROWTH (%) (24.4) 8.7

ROE (%) 19.4 18.4

P/E 9.6 8.8

P/BV 1.7 1.5



RATING NEUTRAL

52 WEEK HIGH / LOW 443 / 218


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




DEFERRED TAX LIABILITIES 13 2 2 2



GROSS BLOCK 357 396 513 597


NET BLOCK 197 206 296 352

CAPITAL WORK-IN-PROGRESS 22 29 - -

INVESTMENTS - 2 2 2

CURRENT ASSETS 1,742 2,204 2,485 2,760

CASH 1,487 1,880 2,149 2,399


OTHERS 192 165 161 168



TOTAL ASSETS 1,690 2,130 2,465 2,795



TOTAL OPERATING INCOME 969 1,140 939 986

% CHG (25.0) 17.6 (17.7) 5.0


EBITDA 602 767 512 546

% CHG (34.5) 27.4 (33.3) 6.6

(% OF NET SALES) 62.1 67.3 54.5 55.3


EBIT 577 735 485 518

% CHG (35.6) 27.4 (34.0) 6.9

(% OF NET SALES) 59.5 64.4 51.6 52.5

OTHER INCOME 130 145 180 205

(% OF PBT) 18.4 16.5 27.1 28.4


% CHG (29.8) 24.5 (24.4) 8.7


PBT (REPORTED) 707 880 665 723

TAX 240 292 221 240

(% OF PBT) 34.0 33.2 33.2 33.2

PAT (REPORTED) 466 588 444 483

% CHG (29.7) 26.1 (24.4) 8.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 9.1 7.2 9.6 8.8

P/CEPS 8.7 6.9 9.0 8.3

P/BV 2.5 2.0 1.7 1.5

EV/EBITDA 4.6 3.1 4.1 3.4


EPS (BASIC) 27.8 35.0 26.4 28.8


CASH EPS 29.2 36.9 28.1 30.4

DPS 5.6 7.0 5.0 7.0

BOOK VALUE 99.8 126.7 146.6 166.3

RETURNS (%)

ROCE (PRE-TAX) 38.1 38.5 21.1 19.7


ROE 31.1 30.9 19.4 18.4

TURNOVER RATIOS (X)






CASH FLOW STATEMENT




LESS: OTHER INCOME (127.5) 0.2 - -








INC./(DEC.) IN CASH 255 393 269 250






Company BackgroundIncorporated in 1966, Hindustan Zinc Ltd. (HZL), a subsidiary of SterliteIndustries, is a vertically integrated company with its mining and smeltingoperations located mainly in Rajasthan and Andhra Pradesh. HZL's currentzinc reserves stand at 34.1mn tonnes with a production capacity of 1.1mntonnes of zinc p.a., indicating a mine life of 31 years. HZL currently operatesthree underground mines, namely Sindesar Khurd, Rajpura Dariba, and ZawarMines, and one open cast mine, Rampura Agucha Mine.

Structural SnapshotGrowth opportunity: HZL is expanding its silver-rich zinc mine at SindesarKhurd, which is expected to result in robust growth in zinc (8.0% CAGRover FY2011-13) and silver volumes (38.0% CAGR over FY2011-13). Further,given its cash-rich balance sheet, the company is searching for the next legof growth.

Competitive position: The company has high-grade zinc-lead mines;It is one of the lowest-cost producers of zinc-lead in the world.

Nature of business: Cyclical. Change in global prices of zinc, lead andsilver have a direct bearing on its profitability.

Current Investment ArgumentsMining in Kayar could be the next phase of growth: Since expansion atSindesur Khurd is nearing its completion, HZL has now commenced workat its underground Kayar mine, which has 11mn tonnes of high-grade reserves(10-12% zinc content). The company aims to mine 1mn tonnes per year,once it is fully operational. Further, HZL is currently exploring over 6,200sq. km. area in 10 Reconnaissance Permits. In the past seven years, thecompany's exploration activities have resulted in addition of 167mn tonnesof ore (net of depletions) to its reserve and resource base.

Current zinc prices below the marginal cost of production: Zinc priceshave declined by ~20% during the past six months on account of sovereigndebt crisis in Europe. At current levels of US$2,000/tonne, zinc prices arearound the marginal cost of production for many mines across the world.Hence, we believe probability of a further decline from these levels is low.

Valuation: Despite the recent decline in zinc price, we expect HZL's netprofit to grow by 21.8% and 7.4% yoy in FY2012E and FY2013E, respectively;on account of expansion of its zinc-lead smelting capacity. Furthermore, thecompany's balance sheet remains strong with cash and equivalents at ̀ 16,255cras of December 31, 2011 (cash per share - `38.4). At the CMP, the stockis trading at 4.0x FY2013E EV/EBITDA, a discount to its five-year historicalaverage of 4.6x. Hence, we recommend Accumulate on the stock with atarget price of `̀̀̀̀142.

Metal CMP/TP/Upside: `126 / `142 / 13%Hindustan Zinc



FII 1.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HZL 5.6 (5.5) 54.6 10.2 49.1

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 5.6 23.3 8.4 21.0 21.2

PAT GROWTH* 0.6 21.3 3.7 27.2 40.0

OPM# 51.1 55.4 53.9 61.0 47.9


ANGEL ESTIMATES


PAT GROWTH (%) 21.8 7.4

ROE (%) 23.7 20.9

P/E 8.9 8.3

P/BV 1.9 1.6


BUY / HOLD / SELL 36 / 7 / 1

RATING ACCUMULATE


MARKET CAP (`̀̀̀̀ CR) 53,345

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 60 - - -




GROSS BLOCK 8,241 9,802 10,802 11,329


NET BLOCK 6,164 7,254 7,724 7,678

CAPITAL WORK-IN-PROGRESS 1,113 875 575 275

INVESTMENTS 10,949 9,335 9,335 9,335

CURRENT ASSETS 1,995 7,589 13,176 19,264

CASH 928 5,633 10,856 16,822



TOTAL ASSETS 18,896 23,478 28,708 34,624




% CHG 43.3 23.3 18.8 8.3


EBITDA 4,792 5,623 6,440 6,904

% CHG 75.3 17.3 14.5 7.2

(% OF NET SALES) 58.3 55.4 53.4 52.8


EBIT 4,458 5,148 5,911 6,331

% CHG 82.0 15.5 14.8 7.1

(% OF NET SALES) 55.6 51.9 50.2 49.7


OTHER INCOME 600 852 1,413 1,529

(% OF PBT) 12.0 14.2 19.3 19.5

RECURRING PBT 5,014 5,981 7,304 7,847

EXTRAORDINARY INC/(EXPENSE) - 21.2 - -

PBT (REPORTED) 5,014 5,960 7,304 7,847

TAX 973 1,059 1,333 1,436


ADJ. PAT 4,041 4,900 5,971 6,411

% CHG 48.2 21.3 21.8 7.4


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 13.2 10.9 8.9 8.3

P/CEPS 12.2 9.9 8.2 7.6

P/BV 2.9 2.4 1.9 1.6

EV/EBITDA 8.9 7.0 5.3 4.0


EPS (BASIC) 9.6 11.6 14.1 15.2


CASH EPS 10.4 12.7 15.4 16.5

DPS 6.0 0.7 1.5 1.0

BOOK VALUE 42.9 53.3 65.7 79.7

RETURNS (%)

ROCE (PRE-TAX) 26.4 24.3 22.7 20.0


ROE 24.9 24.1 23.7 20.9

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




LESS: OTHER INCOME (563) (835) - -

DIRECT TAXES PAID 785 1,116 1,333 1,436


(INC.)/ DEC. IN FIXED ASSETS (2,247) (1,446) (700) (227)

(INC.)/ DEC. IN INVESTMENTS (3,922) 1,870 - -

(INC.)/ DEC. IN LOANS AND ADVANCES (96) 28 - -

OTHER INCOME 2,288 (4,082) - -

CASH FLOW FROM INVESTING (3,977) (3,631) (700) (227)



OTHERS 33.0 8 - -


INC./(DEC.) IN CASH 8 250 5,224 5,965






Company BackgroundIncorporated in 1975, Sterlite Industries India Ltd. (Sterlite) is India's largestnon-ferrous metals and mining company. The company produces zinc, leadand silver through its 65%-owned subsidiary, Hindustan Zinc (HZL),with zinc production capacity of 1.1mn tonnes. HZL contributes ~80% toSterlite's consolidated EB ITDA. Sterlite also produces aluminium(capacity - 0.7mn tonnes including its associate Vedanta Aluminium). Thecompany also has world-class copper smelting and refining operations (capacity- 0.4mn tonnes). In February 2011, Sterlite, through its wholly owned subsidiary,Sterlite Infra, acquired 100% stake in Namibian Skorpian mines for US$707mn.Skorpion mines have reserves and resources of 8.7mn tonnes of zinc andlead.

Structural SnapshotGrowth opportunity: The company is expanding its copper smelting operationsfrom 0.4mn tonnes to 0.8mn tonnes by FY2013. Also, the company aims toramp up aluminium production from 0.7mn tonnes currently to 2.5mn tonnes(although the timeframe is unclear currently). The allocated coal block forits aluminium operations have received forest stage-1 clearance. The companyexpects to get forest stage-2 clearance by 4QFY2012 and, thereafter,it can commence production in two quarters. Also, Sterlite is expanding thepower capacity at its aluminium operations from the current levels of 1,470MWto 3,870MW.

Competitive position: Although the company's fortunes are related to theincrease/decrease in global non-ferrous metal prices, it is one of thelowest-cost zinc producers in the world. However, its cost of production foraluminium and power is high due to lack of captive bauxite and coal mines.

Nature of business: Cyclical; Any change in global zinc, lead and aluminiumprices as well as domestic power tariffs has a direct bearing on the company'sprofitability.

Current Investment ArgumentsZinc-lead expansion and power to aid growth: As mentioned in our investmentarguments for HZL, it is expanding its silver-rich zinc mine at Sindesar Khurd,which is expected to result in robust growth in zinc (8.0% CAGR overFY2011-13E) and silver volumes (38.0% CAGR over FY2011-13E).

Sterlite Energy Limited (SEL) to reach full production capacity in FY2013:Sterlite is setting up a 2400MW power plant for commercial operations viaits subsidiary, SEL. SEL has already commissioned two units of 600MWeach at Jharsuguda. SEL will synchronize the remaining two units of 600MWeach during 4QFY2012, the benefits of which will be witnessed in FY2013.

Valuation: At the CMP, the stock is trading at 3.2x FY2012E and 2.5x FY2013EEV/EBITDA, a significant discount to its five-year historical average of 7.1x.On P/BV basis, the stock is trading at 0.8x and 0.7x FY2012E and FY2013E,respectively. Hence, we recommend Buy on the stock with an SOTP targetprice of `̀̀̀̀147 (65% of value is derived from HZL).

Metal CMP/TP/Upside: `115 / `147 / 28%Sterlite Industries


PROMTERS (VEDANTA) 53.3

FII 19.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

STERLITE (9.6) (35.6) 18.9 (3.6) 43.1

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 68.1 23.3 7.2 17.0 27.3

PAT GROWTH* 0.9 27.7 4.7 25.7 44.4

OPM# 24.5 26.6 25.1 29.2 25.8


ANGEL ESTIMATES


PAT GROWTH(%) (5.5) 28.3

ROE (%) 11.0 12.5

P/E 8.1 6.3

P/BV 0.8 0.7


BUY / HOLD / SELL 41 / 4 / 3

RATING BUY


MARKET CAP (`̀̀̀̀ CR) 38,715

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 9,260 11,729 14,729 15,229




GROSS BLOCK 18,179 31,189 36,689 43,189


NET BLOCK 12,266 21,397 25,136 29,477


INVESTMENTS 20,304 12,955 12,955 12,955

CURRENT ASSETS 17,511 27,939 33,259 35,242



TOTAL ASSETS 56,234 65,629 73,436 80,103




% CHG 16.7 23.3 21.1 17.5


EBITDA 6,475 8,049 8,480 10,883

(% OF NET SALES) 26.4 26.6 23.0 25.1

DEPRECIATION& AMORTISATION 750 1,030 1,761 2,159

EBIT 5,725 7,019 6,719 8,724

(% OF NET SALES) 23.2 23.1 18.2 20.2

INTEREST & OTHER CHARGES 292 301 1,031 1,142

OTHER INCOME 1,506 2,472 3,132 3,679

RECURRING PBT 6,939 9,191 8,820 11,261

% CHG 20.5 32.4 (4.0) 27.7

EXTRAORDINARY INC/(EXPENSE) (297) (57) - -

PBT (REPORTED) 6,642 9,134 8,820 11,261

TAX 1,233 1,812 1,411 2,477

PAT (REPORTED) 5,409 7,322 7,409 8,783

ADD: SHARE OF EARNINGS OF ASSO. 59 (285) (750) (420)

LESS: MINORITY INTEREST (MI) 1,724 1,995 1,852 2,196


ADJ. PAT 3,986 5,088 4,807 6,168

% CHG 14.1 27.7 (5.5) 28.3


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 9.7 8.0 8.1 6.3

P/CEPS 8.2 6.3 5.9 4.7

P/BV 1.0 0.9 0.8 0.7

EV/EBITDA 3.9 3.5 3.2 2.5


EPS (BASIC) 11.9 15.0 14.3 18.3


CASH EPS 14.1 18.2 19.5 24.8

DPS 1.3 1.8 1.7 2.1

BOOK VALUE 110.1 123.3 137.6 155.9

RETURNS (%)

ROCE (PRE-TAX) 11.8 11.5 9.7 11.4


ROE 12.7 13.0 11.0 12.5

TURNOVER RATIOS (X)

INVENTORY / SALES (DAYS) 59.0 82.9 82.9 82.9

RECEIVABLES (DAYS) 8.4 19.0 19.0 19.0

PAYABLES (DAYS) 57.0 88.9 88.9 88.9


CASH FLOW STATEMENT


DEPRECIATION 750 1,030 1,761 2,159

CHANGE IN WORKING CAPITAL (7,316) (315) (574) (114)

LESS: OTHER INCOME (1,483) (1,974) (2,602) (2,616)


CASH FLOW FROM OPERATIONS (2,822) 5,855 5,994 8,213




OTHERS - (4,500) - -


ISSUE OF EQUITY 7,653 - - -

INC./(DEC.) IN LOANS 2,246 2,563 3,000 500

DIVIDEND PAID (INCL. TAX) 449 502 - -

OTHERS (2,201) (457) - -

CASH FLOW FROM FINANCING 11,651 1,604 3,000 500

INC./(DEC.) IN CASH (2,167) 6,575 3,594 713






Company BackgroundIncorporated in 1958, Hindalco is one of the world's largest aluminium rollingcompanies and one of biggest producers of primary aluminium in Asia.The company is also into copper smelting and has one of the world's largestcustom copper smelter with a capacity of 0.5mn tonnes (non-integrated).The company’s aluminium operations in India have a capacity of 0.5mn tonneswith captive bauxite mines (reserves - 443mn tonnes). During February 2007,Hindalco acquired Novelis for US$6bn, making the combined entity the world'slargest rolled-aluminium producer. Novelis has a market share of ~17% inthe global flat-rolled aluminium product market. In FY2011, Novelis’ salesvolume stood at 2.7mn tonnes of aluminium products.

Structural SnapshotGrowth opportunity: Hindalco aims to expand its India operationsthree-fold over the next four years, with per capita consumption of aluminiumin India being one of the lowest (2kg compared to 22kg in the U.S.) andanticipated 12% growth in aluminium demand in the coming decade.

Competitive position: Hindalco's India aluminium operations enjoyhigher margins compared to global peers as its operations arebacked by captive bauxite and coal mine (which contribute ~75% to Hindalco'sstandalone EBIT).

Nature of business: Cyclical; High capital requirements and difficultyin securing bauxite and coal mines pose significant entry barriers fornew players.

Current Investment ArgumentsAluminium capacity to increase three-folds in the next four years: Hindalcoaims to increase its aluminium capacity by almost three-folds in the nextfour years to 1.5mn tonnes. Consequently, we expect production and salesvolume to record significant growth over FY2011-14E. All of these newcapacities will be backed by captive bauxite and coal mines; however, thereis lack of clarity on production from Mahan coal block on account of environmentalissues currently.

Novelis to expand its capacity: Novelis plans to increase its capacity by~20% by FY2014E. Capacity at its Pinda operations in Brazil is being increasedby ~220kt, while the balance will be through debottlenecking (a 3-4% increasein capacity every year). We expect steady EBITDA of ~US$1bn per yearfrom Novelis, given its stable conversion business.

Valuations attractive: The stock is currently trading at FY2012E and FY2013EEV/EBITDA of 5.5x and 5.1x, respectively, compared to its five-year historicalaverage of 6.8x. On P/BV basis, the stock is trading at 0.9x and 0.8x FY2012Eand FY2013E, respectively. Moreover, given the strong visibility over its expansionplans, we recommend Accumulate on the stock with an SOTP targetprice of `̀̀̀̀162.

Metal CMP/TP/Upside: `146 / `162 / 11%Hindalco


PROMOTERS (BIRLA) 32.1

FII 34.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HINDALCO 8.0 (37.6) 41.1 (1.6) 8.8

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M** 1Y 3Y 5Y 10Y

SALES GROWTH* 7.2 18.7 6.3 43.0 40.5

PAT GROWTH* 15.8 (37.2) 1.6 9.3 13.7

OPM# 10.8 11.1 10.6 13.2 16.2

ROE# - 9.7 11.1 14.5 15.0NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS,** STANDALONE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 36.3 14.7

ROE (%) 11.0 11.3

P/E 8.4 7.3

P/BV 0.9 0.8


BUY / HOLD / SELL 33 / 8 / 5

RATING ACCUMULATE

52 WEEK HIGH / LOW 252 / 112

MARKET CAP (`̀̀̀̀ CR) 28,029

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 23,999 27,692 31,192 34,692




GROSS BLOCK 41,189 39,265 47,265 57,265


NET BLOCK 24,567 23,464 28,630 35,478


GOODWILL 4,433 8,941 8,941 8,941

INVESTMENTS 11,246 10,855 10,855 10,855

CURRENT ASSETS 23,188 27,985 24,927 26,278



TOTAL ASSETS 51,219 62,692 69,471 76,735




% CHG (7.5) 18.7 5.8 3.7


EBITDA 9,746 8,002 7,824 8,911

% CHG 227.3 (17.9) (2.2) 13.9

(% OF NET SALES) 16.1 11.1 10.3 11.3


EBIT 6,962 5,252 4,990 5,758

INTEREST & OTHER CHARGES 1,104 1,839 972 1,095

OTHER INCOME 323 431 792 856

RECURRING PBT 6,181 3,843 4,811 5,519

% CHG (1,121.7) (37.8) 25.2 14.7

PBT (REPORTED) 6,181 3,843 4,811 5,519

TAX 1,829 964 1,263 1,487

PAT (REPORTED) 4,352 2,879 3,547 4,032


ADJ. PAT 3,910 2,456 3,349 3,842

% CHG 826.2 (37.2) 36.3 14.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 7.2 11.4 8.4 7.3

P/CEPS 4.2 5.4 4.5 4.0

P/BV 1.3 1.0 0.9 0.8

EV/EBITDA 4.0 5.3 5.5 5.1



CASH EPS 35.0 27.2 32.3 36.5

DPS 1.4 1.4 1.4 1.4

BOOK VALUE 112.6 151.7 167.8 186.4

RETURNS (%)

ROCE (PRE-TAX) 14.0 9.2 7.6 7.9


ROE 20.9 9.7 11.0 11.3

TURNOVER RATIOS (X)



SOLVENCY RATIOS (X)




CASH FLOW STATEMENT


DEPRECIATION 2,784 2,725 2,834 3,152


LESS: OTHER INCOME (2,799) 1,675 - -

DIRECT TAXES PAID 635 1,313 1,263 1,487



(INC.)/ DEC. IN INVESTMENTS (1,614) 507 - -


OTHER INCOME (348) (519) - -


ISSUE OF EQUITY 2,754 10 - -

INC./(DEC.) IN LOANS (321) 3,738 3,500 3,500


OTHERS 1,677 2,539 - -

CASH FLOW FROM FINANCING 428 825 3,231 3,231

INC./(DEC.) IN CASH (76) 361 2,721 739






Company BackgroundNalco, a Navratna company, is one of India's largest aluminium producerand has Asia's largest integrated aluminium complex. The company engagesinto alumina refining (capacity - 2.1mn tonnes), aluminium smelting(capacity - 0.7mn tonnes) and power generation (capacity - 1,200MW).Nalco has a captive bauxite mine at Panchpatmalli with a mining capacity of6.3mn tonnes p.a. The company also sells excess power. Nalco exports itsproducts to Southeast Asia, Far East, Indian subcontinent, Gulf, Chinaand the U.S.

Structural SnapshotGrowth opportunity: Nalco aims to diversify into the power, copper anduranium businesses. The company also aims to set up aluminium projects inAndhra Pradesh and Indonesia. However, these plans are still at anascent stage.

Competitive position: Although the company has captive bauxite mines toproduce aluminium, its costs are relatively higher on account of higher employeeand power costs.

Nature of business: Cyclical; High capital requirements and difficulty insecuring bauxite and coal mines pose significant entry barriers for new players.

Current Investment ArgumentsMargins to remain under pressure: Nalco has been facing coal supplyissues, which have disrupted its operations in the past four quarters. Thecompany sources its annual coal requirement from Mahanadi Coalfields Ltd.,but the supply is not evenly distributed. In our view, the company's powercosts will remain high on account of rise in coal prices domestically andINR depreciation against the USD (which increases the cost of importedcoal). Further, prices of other key raw materials, such as caustic soda andcarbon, have also increased during FY2012E. These factors along with asteep decline in global aluminium price (~20%)during June-December 2011are expected to result in a decline in Nalco's margins during FY2012E.

Limited growth visibility: Nalco aims to diversify into other businesses suchas power and mining other metals. However, there is little clarity on its proposedexpansion plans, as they are in various stages of financial closure and significantprogress is yet to be made.

Valuations: The stock is currently trading at FY2012E and FY2013E EV/EBITDA of 6.6x and 4.0x, respectively, compared to its five-year historicalaverage of 6.8x. On P/BV basis, the stock is trading at FY2012E and FY2013Eof 1.2x and 1.1x, respectively. However, given the limited visibility over itsexpansion plans and the recent rise in cost of production, we recommendNeutral on the stock.

Metal CMP/TP/Upside: `56/ - / -Nalco



FII 4.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

NALCO (6.6) (39.0) 8.3 1.8 15.0

BSE METAL INDEX (1.3) (30.9) 30.8 4.1 25.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 8.9 17.1 6.7 3.2 9.7

PAT GROWTH* (37.8) 31.3 (13.6) (7.0) 5.0

OPM# 9.6 26.6 27.2 37.2 43.3


ANGEL ESTIMATES


PAT GRoWTH (%) (7.0) 21.9

ROE (%) 8.6 9.9

P/E 14.5 11.9

P/BV 1.2 1.1


BUY / HOLD / SELL 6 / 9 / 15

RATING NEUTRAL


MARKET CAP (`̀̀̀̀ CR) 14,471

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS

EQUITY SHARE CAPITAL 644 1,289 1,289 1,289



TOTAL LOANS - 15 15 15




GROSS BLOCK 11,018 12,076 13,333 14,533


NET BLOCK 4,836 5,494 6,243 6,727


GOODWILL - - - -

INVESTMENTS 987 1,332 1,332 1,332

CURRENT ASSETS 5,210 6,045 7,268 8,411



TOTAL ASSETS 11,056 11,873 12,566 13,328




% CHG 1.6 17.1 15.1 30.5


EBITDA 1,102 1,585 1,304 1,944

(% OF NET SALES) 21.8 26.6 19.0 21.7


EBIT 783 1,163 797 1,227

(% OF NET SALES) 15.5 19.5 11.6 13.7

INTEREST & OTHER CHARGES 2 - 2 2

OTHER INCOME 374 362 532 585

RECURRING PBT 1,155 1,525 1,326 1,810

% CHG (39.6) 32.0 (13.0) 36.5


PBT (REPORTED) 1,155 1,525 1,326 1,810

TAX 341 455 332 597

PAT (REPORTED) 814 1,069 995 1,213

PAT AFTER MI (REPORTED) 814 1,069 995 1,213

ADJ. PAT 814 1,069 995 1,213

% CHG (35.3) 31.3 (7.0) 21.9


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 17.8 13.5 14.5 11.9

P/CEPS 12.8 9.7 9.6 7.5

P/BV 1.4 1.3 1.2 1.1

EV/EBITDA 9.4 5.9 6.6 4.0


EPS (BASIC) 3.2 4.1 3.9 4.7


CASH EPS 4.4 5.8 5.8 7.5

DPS 0.6 0.9 1.0 1.5

BOOK VALUE 40.3 43.3 46.0 49.0

RETURNS (%)

ROCE (PRE-TAX) 7.3 10.1 6.5 9.5


ROE 8.1 9.9 8.6 9.9

TURNOVER RATIOS (X)



PAYABLES (DAYS) 718 970 970 970


CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (20) 288 460 560

LESS: OTHER INCOME 8.8 (56) - -



(INC.)/ DEC. IN FIXED ASSETS (678) (833) (957) (1,100)

(INC.)/ DEC. IN INVESTMENTS - - - -


OTHERS 84 65 - -




DIVIDEND PAID - - 301 452

OTHERS 304 219 - -


INC./(DEC.) IN CASH 275 643 704 937






Oil & Gas POSITIVE


RIL 785 923 Buy

ONGC 272 324 Buy

GAIL 369 434 Buy

Cairn India 347 - Neutral

Gas reforms to address ballooning demandIndia set to become a top refining hub: Currently, India is the fifth largestrefining country in the world, accounting for ~4% of the world's refining capacity.India's exports of refined petroleum products stood at 50mn tonnes duringFY2011. RIL, with ~30% of India's refining capacity, accounts for more than70% share in the exports of refined petroleum products from India. Goingforward, India's refinery capacity is expected to increase from 193mn tonnesin FY2011 to 239mn tonnes by FY2015. Hence, India's exports of refinedpetroleum products are expected to rise to 70mn tonnes by FY2014, makingit one of the world's major exporters of refined petroleum products.

Gas demand to remain strong in India; increase in regulated gas pricesto encourage supplies: India's per capita consumption of gas stands at 50kgoecompared to world average of 450kgoe. Currently, gas constitutes only 11%of India's energy basket compared to 25% of the global energy basket, providingscope to increase gas penetration. Domestic gas demand witnessed a 13.5%CAGR during FY2007-11; and going forward as well, gas demand is expectedto post a CAGR of 10-12% over the medium term.

The key constraint has been on the supply front. Gas supplies have declinedin the past one year on account of a steep fall in production from KG-D6basin (average of 39mmscmd in December 2011 compared to average of55mmscmd in December 2010), which constitutes ~35% of India's total gasproduction. This has resulted in increased demand-supply gap for natural gas.One of the key reasons discouraging oil majors to increase their gas productionwas irrational (lower) APM (administered price mechanism) gas pricing. However,during May 2010, the government increased APM prices from US$1.8/mmbtuto US$4.2/mmbtu. Despite this increase, current domestic prices are at asignificant discount to international prices. ONGC sells gas to the prioritysector at US$4.2/mmbtu and to the non-priority sector at US$4.2-5.3/mmbtucompared to international LNG price of US$11-14/mmbtu. RIL and ONGChave been demanding higher prices for some of their upcoming productionblocks as the current price of US$4.2-5.7/mmbtu is unviable to undertakeproduction from certain blocks.

Hence, going forward, to boost investments in exploratory blocks, the governmentis expected to take further policy measures, such as increase domestic gasprice, which would boost profits of majors such as RIL and ONGC and incentivizethem to make higher investments to expand their E&P activities. This wouldalso be a positive for GAIL, which is in the process of almost doubling its gastransmission capacity.

Recent decline in the stock price makes valuations attractive: Over thepast 6-8 months, stock prices of oil and gas companies have declined significantly.While RIL's stock has fallen due to declining production from KG-D6 basin,we expect RIL to ramp up its production over the next two years with the helpof BP's technical expertise. For ONGC, although there is an overhang on thesubsidy-sharing mechanism, its inexpensive valuation makes it an attractivebet at these levels. GAIL stock has also recently declined, with the fall inbroad markets, although its operating business remains stable andexpansion plans are on track. We continue to maintain our positive view onRIL, ONGC and GAIL.


Oil & Gas

India set to become a top refining hub: Currently, India isthe fifth largest refining country in the world, accounting for~4% of the world's refining capacity. India's exports of refinedpetroleum products stood at 50mn tonnes during FY2011. RIL,with ~30% of India's refining capacity, accounts for more than70% share in the exports of refined petroleum products fromIndia. Going forward, India's refinery capacity is expected toincrease from 193mn tonnes in FY2011 to 239mn tonnes byFY2015. Hence, India's exports of refined petroleum productsare expected to rise to 70mn tonnes by FY2014, making Indiaone of the world's major exporters of refined petroleum products.

Source: BP Statistical Review, Angel Research

Exhibit 1: World's top five refining countries18

10

64

4

-

2

4

6

8

10

12

14

16

18

20

US China RussianFederation

Japan India

(mnbpd)

Refining capacity


Exhibit 2: India refining capacity expansion (over FY2011-15)

0

10

20

30

40

50

60

70

80

IOC

HP

CL

BP

CL

CP

L

NR

L

MR

PL

Bin

a

RIL

Ess

ar

NO

CL

HM

EL

Sp

ice

(mn

tonn

es p

.a.)

Existing New addition

Gas demand to remain strong in India; increase in regulatedgas prices to encourage supplies: India's per capita consumptionof gas stands at 50kgoe compared to world average of 450kgoe.Currently, gas constitutes only 11% of India's energy basketcompared to 25% of the global energy basket, providing a scopeto increase gas penetration. Domestic gas demand reported a13.5% CAGR during FY2007-11; and going forwardas well, gas demand is expected to post a 10-12% CAGR overthe medium term.

The key constraint has been on the supply front. Gas supplieshave declined in the past one year on account of a steep fall inproduction from KG-D6 basin (average of 39mmscmd in December2011 compared to average of 55mmscmd in December 2010),which constitutes ~35% of India's total gas production. Thishas resulted in increased demand-supply gap for natural gas.One of the key reasons discouraging oil majors to increasetheir gas production was irrational (lower) APM (administeredprice mechanism) gas pricing. However, during May 2010,

Source: PLNG, Angel Research

Exhibit 4: India's natural gas demand forecast

0

50

100

150

200

250

300

350

FY2013E FY2014E FY2015E FY2016E FY2017E

(mm

scm

d)

Price sensitive demand Price resistant demand

RIL is demanding higher price than US$4.2/mmbtu for thedevelopment of a satellite field in the KG-D6 block and R-series,as it estimates that current prices of US$4.2/mmbtu are notviable to develop the satellite field. The current internationalprice is around ~US$11-14/mmbtu compared to the domesticprice range of US$4.2-US$5.7/mmbtu. RIL has also requestedthe government to approve pricing formula based on Asian LNGprice for its forthcoming production from the coal bed methane(CBM) block. Similarly, ONGC is also demanding a higher priceto develop its KG-DW 98/2 block to be viable.

Recent decline in the stock price makes valuations attractive:Over the past 6-8 months, stock prices of oil and gas companieshave declined significantly. While RIL's stock has fallen due todeclining production from KG-D6 basin, we expect RIL to ramp

the government increased APM prices from US$1.8/mmbtu toUS$4.2/mmbtu. Despite this increase, current domestic pricesare at a significant discount to international prices. ONGC sellsgas to the priority sector at US$4.2/mmbtu and to thenon-priority sector at US$4.2-5.3/mmbtu compared to internationalLNG price of US$11-14.0/mmbtu. RIL and ONGC have beendemanding higher prices for some of their upcoming productionblocks, as the current price of US$4.2-5.7/mmbtu is unviableto undertake production from certain blocks.

Hence, going forward, to boost investments in exploratory blocks,the government is expected to take further policy measures,such as increase domestic gas price, which would boost profitsof majors such as RIL and ONGC and incentivize them to makehigher investments to expand their E&P activities. This wouldalso be a positive for GAIL, which is in the process of almostdoubling its gas transmission capacity.

Source: PLNG, Angel Research

Exhibit 3: Natural gas pricing in IndiaProducer Gas price (US$/mmbtu)

ONGC (APM) 4.2

ONGC and OIL (Non APM) 4.8-5.2

ONGC & OIL (North East) 2.5

PMT/ Ravva/Lakshmi 5.3

RIL KG-D6 4.2

Term R-LNG 8.0

Spot LNG 11.0-14.0


Oil & Gas

up its production over the next two years with the help of BP'stechnical expertise. For ONGC, although there is an overhangon the subsidy-sharing mechanism, its inexpensive valuationmakes it an attractive bet at these levels. GAIL stock has alsorecently declined, with the fall in broad markets, although itsoperating business remains stable and expansion plans are ontrack. We continue to maintain our positive view on RIL, ONGCand GAIL.


Exhibit 5: Recommendation summaryCMP Target Reco Market Cap Upside PER (x) P/BV (x) EV/EBITDA (x) ROE (%) RoCE (%)

( `̀̀̀̀) Price ( `̀̀̀̀) ( `̀̀̀̀ cr) (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

RIL 785 923 Buy 257,271 18 12.2 11.4 1.4 1.2 6.8 6.3 12.9 12.4 9.6 9.7

ONGC 272 324 Buy 232,453 19 8.7 8.2 1.7 1.5 3.8 3.3 21.5 19.9 20.5 19.2

GAIL 369 434 Buy 46,820 18 11.7 10.4 2.1 1.8 6.4 5.6 19.3 18.7 22.4 22.3

Cairn India 347 - Neutral 66,056 - 10.9 8.6 1.4 1.2 7.2 5.1 14.0 15.3 16.5 18.6


Company BackgroundReliance Industries (RIL), India's one of the largest listed company, ranksamongst the biggest petrochemical companies in Asia. The company is alsothe world's largest polyester producer and has the world's largest refineryin Jamnagar. RIL operates in three business segments: petrochemicals (23%of gross sales), refining (73% of gross sales), and oil and gas (4% of grosssales). During 2002, RIL discovered huge natural gas reserves (12TCF ofgas) in KG D6 block of Andhra Pradesh. In February 2011, RIL sold 30%stake in 23 oil and gas blocks to U.K.-based BP for US$7.2bn.

Structural SnapshotGrowth opportunity: Any increase in regulated domestic gas price couldpave way for exploring new gas blocks. Also, the company aims to expandits business in telecom, retail and petrochemicals transportation.

Competitive position: RIL has higher refining margins compared to globalpeers, as its Jamnagar refinery can refine the most complex varieties of crudeand manufacture various grades of fuel.

Nature of business: Changes in global refining margins and prices ofpetrochemical products have a direct bearing on the company’s profitability.

Current Investment ArgumentsRamp-up in KG-D6 could re-rate the stock: RIL's upstream segment stillhas significant upside in store, considering the huge untapped resources.RIL's natural gas production stands at ~40mmscmd, significantly below itspotential of 80mmscmd from KG-D6 due to constraints over reservoir pressure.Nevertheless, we believe RIL can ramp up its production over the mediumterm with the help of BP's technical expertise. Also, RIL has recently concludedseveral three-year exploration phases on the prospective eastern coast andis expected to commence with the development phase soon. RIL expects tocommence significant E&P activities from CY2014E.

Foray into newer businesses: RIL has been eyeing inorganic routes fordiversifying its asset portfolio by entering into newer ventures, such as retailand telecom, on the back of significant cash pile (`74,539cr as on December31, 2011) and treasury stocks. Initiatives such as shale gas acquisitions,with in-place reserves of ~12TCF, could prove to be a potential trigger forthe stock in the long term.

Valuations attractive: Over the last five years, RIL has traded at an averageone-year forward P/E of 17.7x, while currently it is trading at a P/E of 12.2xFY2012E and 11.4x FY2013E. On a P/B basis, the stock trades at 1.4xFY2012E and 1.2x FY2013E. We maintain our Buy view on the stockwith an SOTP target price of `̀̀̀̀923.

Oil & Gas CMP/TP/Upside: `785 / `923 / 18%


PROMOTERS (AMBANI) 44.7

FII 20.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

RIL (11.0) (25.6) 6.8 1.9 19.8

BSE O&G INDEX (8.7) (20.5) 10.0 3.8 24.9



(%) 3M** 1Y 3Y 5Y 10Y

SALES GROWTH* 42.4 30.5 24.7 26.3 28.4

PAT GROWTH* (13.6) 27.1 7.1 16.5 22.6

OPM# 8.6 14.7 15.1 16.0 17.4

ROE# - 13.8 13.5 16.2 17.0NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS, **STANDALONE BASIS

ANGEL ESTIMATES



ROE (%) 12.9 12.4

P/E 12.2 11.4

P/BV 1.4 1.2


BUY / HOLD / SELL 41 / 10 / 3

RATING BUY

52 WEEK HIGH / LOW 1,066 / 688

MARKET CAP (`̀̀̀̀ CR) 257,271

LIQUIDITY HIGH

TOPPICKReliance Inds.


BALANCE SHEET

SOURCES OF FUNDS

QUITY SHARE CAPITAL 2,978 2,981 2,981 2,981


HAREHOLDERS FUNDS 141,576 154,094 172,409 191,954


TOTAL LOANS 64,606 84,106 70,314 65,390




GROSS BLOCK 224,125 238,293 254,973 275,371


NET BLOCK 160,191 158,099 163,335 171,767


INVESTMENTS 13,112 21,596 21,596 21,596

CURRENT ASSETS 69,106 98,080 118,476 126,720

CURRENT LIAB. AND PROV. 42,586 57,445 62,170 64,272



TOTAL ASSETS 216,860 250,073 256,239 272,985




% CHG 34.7 30.5 19.1 5.0


EBITDA 30,894 38,961 35,758 37,747

(% OF NET SALES) 15.2 14.7 11.3 11.4


EBIT 19,948 24,840 24,313 25,781

(% OF NET SALES) 9.8 9.3 7.7 7.8


OTHER INCOME 2,185 2,543 6,037 6,339

RECURRING PBT 20,074 24,972 27,628 29,640

EXTRAORDINARY INCOME/EXP 8,606 (917) - -

PBT (REPORTED) 28,680 24,055 27,628 29,640

TAX 4,256 4,783 6,631 7,114

PAT (REPORTED) 24,424 19,272 20,998 22,526

MINORITY INTEREST (LOSS) 79.6 22.0 34.0 41.0


ADJ. PAT(CORE) 15,897 20,211 21,032 22,567

% CHG 5.2 27.1 4.1 7.3

(% OF NET SALES) 9.1 7.1 6.6 6.8


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 10.5 13.3 12.2 11.4

P/BV 1.7 1.5 1.4 1.2

EV/SALES 1.4 1.0 0.8 0.7

EV/EBITDA 9.1 7.0 6.8 6.3



CASH EPS 99.8 115.7 108.9 115.8

DPS 7.0 8.5 9.0 10.0

BOOK VALUE 475 517 578 644

RETURNS (%)

ROCE (PRE-TAX) 9.4 10.6 9.6 9.7


ROE 14.3 13.8 12.9 12.4

TURNOVER RATIOS (X)




PAYABLES (DAYS) 78.8 70.3 69.5 73.7

WC CYCLE (EX-CASH) (DAYS) 8.7 15.9 11.6 10.1


CASH FLOW STATEMENT


DEPRECIATION 14,001 16,820 11,445 11,965

CHANGE IN WORKING CAPITAL (5,939) (13,501) 825 1,010

LESS: OTHER INCOME (1,786) (1,722) (3,316) (3,859)




(INC.)/ DEC. IN INVESTMENTS 2,645 (8,102) - -

OTHERS 2,160 9,666 6,037 6,339

CASH FLOW FROM INVESTING (18,231) (32,040) 4,099 (16,215)


INC./(DEC.) IN LOANS (5,822) 20,701 (13,793) (4,924)


OTHERS (14,907) (8,378) (1,078) (371)

CASH FLOW FROM FINANCING (22,436) 14,950 (17,554) (8,276)

INC./(DEC.) IN CASH (8,851) 16,248 16,497 7,152



Y/E MARCH ( `̀̀̀̀ CR) FY2010 FY2011 FY2012E FY2013E



Company BackgroundONGC is the third largest oil and gas exploration and production companyin the world, ranking 23rd among the leading global energy majors. The company’sprimary business includes exploration, development and production of crudeoil, natural gas, LPG and other value-added petroleum products. ONGChas 2P reserves of 1,025mtoe of hydrocarbon, indicating a reserve life of17 years. The company has also set up a subsidiary, ONGC Videsh (OVL),for overseas oil exploration and production. OVL has 2P reserves of 199mtoe,indicating a reserve life of 21 years.

Structural SnapshotGrowth opportunity: Over FY2007-11, although ONGC (standalone) hasincurred a capex of `45,851cr (38% of its average operating cash flow), itsO+OEG (oil and oil equivalent gas) production has recorded a CAGR ofonly 0.4%. Nevertheless, we expect robust volume growth from OVL, whichaims to increase its production at a CAGR of 12.4% during FY2011-13.Also, a concrete subsidy-sharing formula by the government could makeONGC's cash flows more predictable.

Competitive position: The company has a huge base of oil and gas producingblocks in India. ONGC accounted for ~57% of India's O+OEG productionin FY2011 (crude oil - 82% and natural gas - 48%).

Nature of business: Regulated; Any increase in global crude oil price resultsin a higher subsidy burden for ONGC, thus affecting its profits.

Current Investment ArgumentsGas volumes expected to boost valuations: ONGC aims to increase gasproduction from North Tapti, B193 and 28 cluster, B22 cluster WO seriescluster, B46 cluster, cluster 7 and B series. The company aims to increaseits production to 26bcm in FY2013E from 23bcm in FY2011. As far as oilis concerned, ONGC's existing oil fields are matured and, thus, productionfrom these fields is declining. Nevertheless, management expects incrementaloil production from marginal fields (including D1 extension, B193 cluster,B22 clusters, North Tapti, WO series and B46 cluster), which will help arrestthe decline in crude production. ONGC aims to raise its crude oil output to28mn tonnes by FY2014E from 24mn tonnes in FY2011.

OVL's volume story intact: OVL's production has increased steadily from8.0mtoe in FY2007 to 9.5mtoe in FY2011. Going forward, we expect OVL'svolumes to grow to 12mtoe by FY2013E, with incremental productionsfrom Myanmar, Sakhalin-1 and Venezuela coming on stream. Moreover, anyincrease in crude oil or gas price improves margins for OVL, as it does notshare under-recoveries.

Valuation: The stock is currently trading at 8.7x and 8.2x FY2012E andFY2013E P/E, compared to its five-year average P/E of 10.2x. Further, consideringthe anticipated volume growth from OVL during FY2011-13E, we continueto maintain our Buy rating on the stock with an SOTP target price of`̀̀̀̀324.

Oil & Gas CMP/TP/Upside: `272 / `324 / 19%ONGC



FII 5.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ONGC (2.9) (10.6) 17.3 3.2 27.2

BSE O&G INDEX (8.7) (20.5) 10.0 3.8 24.9



(%) 3M** 1Y 3Y 5Y 10Y

SALES GROWTH* 24.3 15.6 6.7 9.7 16.8

PAT GROWTH* 60.4 15.7 4.2 8.4 15.7

OPM# 54.2 41.2 42.2 42.7 41.9

ROE# - 20.7 21.4 24.1 25.5NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS,** STANDALONE BASIS

ANGEL ESTIMATES


PAT growth (%) 19.1 6.5

ROE (%) 21.5 19.9

P/E 8.7 8.2

P/BV 1.7 1.5


BUY / HOLD / SELL 48 / 7 / 1

RATING BUY

52 WEEK HIGH / LOW 326 / 227

MARKET CAP (`̀̀̀̀ CR) 232,453

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 6,267 6,291 9,427 10,862


LIABILITY FOR ABANDONMENT COST 17,459 19,850 19,850 19,850



GROSS BLOCK 193,300 227,273 252,273 277,273


NET BLOCK 75,543 94,293 98,157 100,564


GOODWILL 9,539 8,993 8,993 8,993

INVESTMENTS 5,159 3,356 3,356 3,356

CURRENT ASSETS 50,566 59,412 77,661 96,362




TOTAL ASSETS 137,067 154,623 175,572 196,521




% CHG (2.7) 15.6 6.4 10.3


EBITDA 44,949 48,436 54,937 58,355

(% OF NET SALES) 44.2 41.2 43.9 42.3


EBIT 26,230 27,808 33,802 35,762

% CHG (5.6) 6.0 21.6 5.8

(% OF NET SALES) 25.8 23.6 27.0 25.9

INTEREST & OTHER CHARGES 1,102 437 600 680

OTHER INCOME 5,273 6,946 7,641 8,405

(% OF PBT) 17.3 20.2 18.7 19.3

RECURRING PBT 30,401 34,316 40,843 43,487

% CHG (2.2) 12.9 19.0 6.5

PBT (REPORTED) 30,441 34,316 40,843 43,487

TAX 10,714 11,491 13,676 14,562

PAT (REPORTED) 19,728 22,825 27,166 28,925

ADD: SHARE OF EARNINGS OF ASS. 8 3 10 10



ADJ. PAT 19,404 22,456 26,733 28,463

% CHG (2.3) 15.7 19.1 6.5


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 12.0 10.4 8.7 8.2

P/CEPS 6.1 5.4 4.9 4.6

P/BV 2.3 2.0 1.7 1.5

EV/SALES 2.1 1.8 1.5 1.3

EV/EBITDA 4.7 4.4 3.8 3.3


EPS (BASIC) 22.7 26.2 31.2 33.3


CASH EPS 44.6 50.4 56.0 59.7

DPS 8.3 8.5 9.0 10.0

BOOK VALUE 119 135 156 178

RETURNS (%)

ROCE (PRE-TAX) 19.9 19.1 20.5 19.2


ROE 20.0 20.7 21.5 19.9

TURNOVER RATIOS (X)



PAYABLES (DAYS) 137 134 131 132


CASH FLOW STATEMENT


DEPRECIATION 8,863 11,353 21,135 22,593

CHANGE IN WORKING CAPITAL (473) 6,955 1,416 860

LESS: OTHER INCOME (2,300) (125) (7,641) (8,405)





(INC.)/ DEC. IN LOANS AND ADV. 532 (96) - -

OTHERS 1,868 (6,495) 7,641 8,405


INC./(DEC.) IN LOANS (304) 40 3,136 1,435


OTHERS 109 (1,658) - -


INC./(DEC.) IN CASH (592) 5,894 18,482 18,313



Y/E MARCH ( `̀̀̀̀ CR) FY2010 FY2011 FY2012E FY2013E



Company BackgroundIncorporated in August 1984, GAIL is engaged in the transmission and distributionof natural gas, LPG, liquid hydrocarbons and petrochemicals. The company'ssegments include natural gas marketing, natural gas transmission, LPGtransmission projects and other hydrocarbon production. Currently, GAILoperates a natural gas transmission network of ~8,000km, with a capacityof 170mmscmd. The company also has 27 oil and gas exploration blocksand three coal bed methane blocks. The company has also diversified intoexploration and production and city gas distribution (CGD).

Structural SnapshotGrowth opportunity: Currently, gas constitutes only 11% of India's energybasket compared to 25% of the global energy basket, providing scope toincrease gas penetration. GAIL is well-poised to benefit from increasinggas demand in India as it is currently doubling its transmission capacity.

Competitive position: Dominant; GAIL has a market share of 78% in naturalgas transmission and 70% in natural gas marketing.

Nature of business: Regulated; Tariffs of the company's transmission businessare regulated by Petroleum and Natural Gas Regulatory Board (PNGRB).

Current Investment ArgumentsVolume story yet to unfold: GAIL is expanding its transmission capacityfrom 170mmscmd currently to 300mmscmd in the next two years for a capexof `30,000cr. The company expects incremental gas volumes from the KGbasin, GSPC, marginal fields and new LNG terminals. Although stagnantproduction at KG basin and higher LNG prices are a cause of concern onthe volume front in the near term, we believe GAIL's volume growth couldbe strong (over the medium term) as and when KG-D6 ramps up its production.

Upstream segment could see triggers: GAIL's asset portfolio includesprospective basins such as Myanmar fields and CBM blocks. We view theseblocks as a potential upside for the stock. Of the 27 exploratory blocksowned by GAIL, nine blocks have potential hydrocarbon discoveries. Anymaterial success in the form of a major discovery could be a key catalyst forthe stock.

Valuations attractive: Over the past five years, GAIL has traded at an averageone-year forward P/E of 16.0x, while currently it is trading at a P/E of 11.7xFY2012E and 10.4x FY2013E. On a P/B basis, the stock trades at 2.1xFY2012E and 1.8x FY2013E, compared to its five-year average P/BV of2.7x. Further, considering the anticipated volume growth in the next two-three years, we maintain our Buy rating on the stock with an SOTP targetprice of `̀̀̀̀434.

Oil & Gas CMP/TP/Upside: `369 / `434 / 18%GAIL



FII 14.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

GAIL (9.8) (23.2) 21.3 15.3 23.5

BSE O&G INDEX (8.7) (20.5) 10.0 3.8 24.9



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 19.7 29.9 21.7 18.3 12.7

PAT GROWTH* 30.6 13.4 11.0 9.0 12.2

OPM# 17.3 16.8 17.5 18.6 22.9


ANGEL ESTIMATES


PAT GROWTH (%) 12.8 12.3

ROE (%) 19.3 18.7

P/E 11.7 10.4


BUY / HOLD / SELL 34 / 16 / 5

RATING BUY


MARKET CAP (`̀̀̀̀ CR) 46,820

LIQUIDITY HIGH

P/BV 2.1 1.8


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,480 2,310 2,826 3,321




GROSS BLOCK 17,904 22,144 30,394 35,894


NET BLOCK 8,789 12,404 19,715 24,049

CAPITAL WORK-IN-PROGRESS 5,426 5,879 830 380

GOODWILL - - - -

INVESTMENTS 2,073 2,583 2,583 2,583

CURRENT ASSETS 13,884 11,146 13,883 14,691



TOTAL ASSETS 19,794 23,197 26,685 30,569




% CHG 5.1 29.9 5.0 13.4


EBITDA 4,669 5,455 6,530 7,547

(% OF NET SALES) 18.7 16.8 19.2 19.5

DEPRECIATION& AMORTISATION 562 650 939 1,166

EBIT 4,107 4,804 5,591 6,381

% CHG 17.2 17.0 16.4 14.1

(% OF NET SALES) 16.4 14.8 16.4 16.5


OTHER INCOME 541 519 439 445


RECURRING PBT 4,578 5,240 5,924 6,701

% CHG 8.6 14.4 13.1 13.1

PBT (REPORTED) 4,578 5,240 5,924 6,701

TAX 1,439 1,679 1,906 2,188

PAT (REPORTED) 3,140 3,561 4,018 4,512


ADJ. PAT 3,140 3,561 4,018 4,512

% CHG 12.0 13.4 12.8 12.3


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 14.9 13.1 11.7 10.4

P/CEPS 12.6 11.1 9.4 8.2

P/BV 2.8 2.4 2.1 1.8

EV/SALES 1.7 1.4 1.2 1.1

EV/EBITDA 9.0 8.1 6.4 5.6



CASH EPS 29.2 33.2 39.1 44.8

DPS 7.5 7.5 7.5 8.0

BOOK VALUE 133.4 151.8 176.0 203.5

RETURNS (%)

ROCE (PRE-TAX) 22.1 22.4 22.4 22.3


ROE 19.8 19.7 19.3 18.7

TURNOVER RATIOS (X)



PAYABLES (DAYS) 86.4 69.0 73.0 78.3


CASH FLOW STATEMENT


DEPRECIATION 562 650 939 1,166

CHANGE IN WORKING CAPITAL 1,453 (893) 1,707 464







OTHERS 220 412 439 445


INC./(DEC.) IN LOANS 280 984 516 495

DIVIDEND PAID (1,113) (1,109) (951) (1,015)

OTHERS 287 (263) (106) (125)


INC./(DEC.) IN CASH 715 (2,040) 2,934 464






Company BackgroundCairn India is an oil and gas exploration and production company in Indiawith interests in 11 blocks. Cairn India estimates its Rajasthan block potentialresource at ~6.5bboe with resource in Mangala, Bhagyam, Aishwarya (MBA)and other fields at ~4.0bboe. MBA fields hold resource of 2.1bboe, of which2P reserves are over 1.0bboe. The company operates the largest oil-producingfield in the Indian private sector. The company has pioneered the use ofcutting-edge technology in India to extend production life. Cairn India isworking closely alongside the central and state governments and has operationalpartnership with ONGC, Videocon, Tata and Marubeni. During FY2012, Vedantaacquired a majority stake (59%) in Cairn India.

Structural SnapshotGrowth opportunity: Cairn India aims to commence production from itsblocks in Sri Lanka once it establishes commerciality. Also, there are variousexploratory upsides untapped in Barmer Hills and other fields waiting to bedeveloped and commercialized.

Competitive position: Although crude oil sales price is determined globally,Cairn India's cost of production of crude oil is ~US$3/bbl, one of the lowestin the world.

Nature of business: Cyclical; Cairn India's profitability is co-related to theincrease/decrease in global crude oil price.

Current Investment ArgumentsProduction beyond 175kbopd post FY2013: Cairn India's managementaims to ramp up crude oil producing capacity of 175kbopd by FY2012Efrom 149kbopd in FY2011. However, management opined that due to constraintsin pipeline capacity, ramp-up beyond 175kbopd could be pushed to FY2014E.

Exploratory upsides awaited: There are various exploratory upsides untappedin Barmer Hills and other fields waiting to be developed and commercialized.Currently, various schemes related to exploratory drillings and optimizationof producing fields are awaiting approvals from the government. Cairn Indiahas recently announced two discoveries in Mannar Basin, Sri Lanka. Managementis expected to give details on the commerciality and potential reserves inthe block during 4QFY2012E.

Valuation: Cairn India has the infrastructure in place to ramp up production,while it is awaiting approvals from the government. We expect productionto increase in the coming quarters gradually to reach a production level of175kbopd by FY2013E. However, we believe the current stock price discountsthis production growth. Although we believe there are various exploratoryuntapped upsides in Barmer Hills and other fields waiting to be developed,but currently we lack operational visibilities on these blocks. Hence,we remain Neutral on the stock.

Oil & Gas CMP/TP/Upside: `347 / - / -Cairn India



FII 6.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CAIRN 15.8 1.7 30.5 19.0 -

BSE O&G INDEX (8.7) (20.5) 10.0 3.8 24.9



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (1.3) 533.3 - 205.3 -

PAT GROWTH* (85.6) 502.6 - - -

OPM# 79.3 80.2 68.0 67.5 47.8


ANGEL ESTIMATES


PAT GROWTH (%) (4.1) 26.9

ROE (%) 14.0 15.3

P/E 10.9 8.6

P/BV 1.4 1.2


BUY / HOLD / SELL 37 / 14 / 6

RATING NEUTRAL

52 WEEK HIGH / LOW 372 / 250

MARKET CAP (`̀̀̀̀ CR) 66,056

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS



EQUITY APPLICATION MONEY 55 55 55


TOTAL LOANS 3,401 2,678 - -




GROSS BLOCK 722 6,654 9,354 11,874


NET BLOCK 626 5,924 7,577 8,957


GOODWILL 25,319 25,319 25,319 25,319

INVESTMENTS 1,712 1,094 1,094 1,094

CURRENT ASSETS 2,373 7,961 10,252 17,684




TOTAL ASSETS 37,714 43,533 46,926 54,634




% CHG 13.3 533.3 11.8 18.7


EBITDA 981 8,245 8,519 10,594

(% OF NET SALES) 60.4 80.2 74.2 77.7

TOTAL RECOUPED COST 357 1,193 1,046 1,140

EBIT 623 7,052 7,473 9,454

(% OF NET SALES) 38.4 68.6 65.1 69.4


OTHER INCOME 422 129 462 462

RECURRING PBT 1,016 6,890 7,580 9,612

% CHG 4.5 577.9 10.0 26.8

PBT (REPORTED) 1,016 6,890 7,580 9,612

TAX (35) 556 1,508 1,905

PAT (REPORTED) 1,051 6,334 6,072 7,708


ADJ. PAT 1,051 6,334 6,072 7,708

% CHG 33.4 502.6 (4.1) 26.9

(% OF NET SALES) 64.8 61.6 52.9 56.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 64.2 10.4 10.9 8.6

P/CEPS 46.9 8.8 9.3 7.5

P/BV 1.9 1.6 1.4 1.2

EV/SALES 42.2 6.2 5.3 4.0

EV/EBITDA 69.8 7.8 7.2 5.1


EPS (BASIC) 5.4 33.3 31.9 40.5


CASH EPS 7.4 39.6 37.4 46.5

BOOK VALUE 178.1 211.9 243.8 284.3

RETURNS (%)

ROCE (PRE-TAX) 1.7 17.4 16.5 18.6


ROE 3.2 17.1 14.0 15.3

TURNOVER RATIOS (X)



PAYABLES (DAYS) 615.3 202.0 122.7 89.0


CASH FLOW STATEMENT


DEPRECIATION 178 1,223 1,046 1,140

CHANGE IN WORKING CAPITAL (708) (1,009) 1,330 344


DIRECT TAXES PAID (175) (1,259) (1,508) (1,905)

OTHERS 234 (615) 1,127 305



(INC.)/ DEC. IN INVESTMENTS 2,529 624 - -

OTHER INCOME 236 (2,934) 462 462



INC./(DEC.) IN LOANS (880) (733) (2,678) -

INTEREST PAID (INCL. TAX) (168) (199) (355) (305)

CASH FLOW FROM FINANCING (1,045) (866) (3,033) (305)

INC./(DEC.) IN CASH (1,537) 590 3,842 6,671

OPENING CASH BALANCES 1,897 637 1,227 5,069





Pharmaceuticals POSITIVE


Sun Pharma 529 569 Accum.

Dr Reddy's 1,696 1,920 Accum.

Cipla 332 369 Accum.

Lupin 442 593 Buy

Ranbaxy 463 - Neutral

Glaxo Pharma 1,967 - Neutral

Cadila Healthcare 654 965 Buy

Aventis 2,230 1,937 Reduce

Ipca labs 279 358 Buy

Aurobindo Pharma 97 166 Buy

Alembic Pharmaceutical 38 77 Buy

Indoco Remedies 418 583 Buy

'Healthy' growth outlookGeneric markets expected to post a 9% CAGR until 2015: The global genericindustry is expected to post a 9% CAGR to US$135bn-150bn by CY2015,outpacing the global pharmaceuticals industry's expected growth rate of4-6%. The quantum of products going off-patent in the next five years is equalto the worth of products that have gone off-patent in the past 10 years.Going ahead, rising healthcare spending, ageing population and increasingacceptance for generics are the key growth drivers for the industry.

The key U.S. generic market is likely to report a 6% CAGR to US$48bn inCY2015, driven by unprecedented level of patent expiry. Europe is expectedto post a 6.9% CAGR to US$40bn in CY2015, led by increasing penetrationlevels and initiatives by the government to rein rising healthcare cost. Otherinternational generic markets are estimated to post a 13.3% CAGR to US$55bnin CY2015. More than half of the global generic growth in the next five yearswould come from international markets.

Indian domestic formulation to log in steady health: The Indian domesticformulation industry posted a 14% CAGR during FY2003-08, from ~US$3.9bnin FY2003 to US$7.7bn in FY2008, outpacing the global pharma industry'sgrowth rate of 7%. Over FY2008-13E, the Indian domestic formulation marketis expected to report a robust 12.9% CAGR to US$13.7bn on the back ofchronic therapeutic segments such as anti-diabetic, CVS, CNS and lifestylediseases like gastrointestinal. This growth is expected to be primarily led byvolumes and new product introductions in the chronic therapeutic and lifestylesegments and increased market penetration.

CRAMS - Long-term drivers intact: The CRAMS sector is likely to post seculargrowth of 8.8% over CY2009-12E to US$52bn, as all drivers of outsourcingare intact. India still accounts for 5-6% of the total global outsourcing pie.Going ahead, we expect India's share to grow to lower teens on account ofstrong process-chemistry skills and low-cost advantage. The Indian CRAMSsector is likely to post secular growth of 29.0% over CY2009-12E to US$5.1bn.

Biotech drugs - The next leg of opportunity: Biotech drugs have been growingfaster than traditional drugs. The 20-year patent protection on the first batch ofbiotech drugs, which entered the regulated markets in late 1980s, is set toexpire in the ensuing years. Over 2010-15, biotech drugs worth US$79bn ofglobal sales would face patent expiries. However, unlike traditional drugs, biotechdrugs are complex to manufacture and, hence, difficult to establish comparabilityof generics with innovator drugs. This has posed regulatory hurdles for theapproval of biogeneric drugs. Thus, while Europe has legislation for the sameon a drug-specific basis, U.S. is yet to have its legislation in place. Indian companieslike Ranbaxy, DRL, Wockhardt and Biocon have made investments for the sameand are targeting the semi-regulated and regulated markets in the coming years.

Outlook and valuation: With the expected 21% earnings CAGR overFY2011-13E for our universe, we remain overweight on the sector. In the genericsegment, we prefer Sun Pharma, Cipla, Lupin, Cadila, Aurobindo Pharma and Indoco.


Pharmaceuticals

Generic markets expected to post a 9% CAGR till 2015:The global generic industry (at US$80bn in CY2008) is expectedto post a 9% CAGR to US$135bn-150bn by CY2015, outpacingthe global pharmaceuticals industry's expected growth rate of4-6%. The quantum of products going off-patent in the nextfive years is equal to the worth of products that have goneoff-patent in the past 10 years. Going ahead, rising healthcarespending, ageing population and increasing acceptance forgenerics are the key growth drivers for the industry.


Exhibit 1: Growing demand for generics

20152008

North America

Europe

International

$80bn

Emerging

Generics

Markets

New Products

patent expirations

Developed

Countries

Current portfolio

Future Portfolio

$135-150bn

U.S. generics: Unprecedented level of patent expiries

The U.S. generic market (worth US$32bn in CY2008) is likelyto post a CAGR of 6% to US$48bn in CY2015, driven byunprecedented level of patent expiry. As a result, major globalinnovators will lose about US$70bn of branded value global salesover the next three years, comprising 14-41% of their existingrevenue.

With the U.S. comprising 50% of the overall branded market, itwould capture the maximum upsides from the same. Volume CAGRof 8% in the U.S. market over the past 10 years has been one ofthe key growth drivers, which, to some extent, has offset thesignificant price erosion. Generic companies would continue tobenefit from the ongoing manufacturing challenges across theindustry, resulting into a much more stable base business.


Exhibit 2: Healthy volume growth in the U.S. market

CAGR of 8%

1.4 1.5 1.6 1.7 1.8 2.02.3

2.5 2.6 2.8

-

0.5

1.0

1.5

2.0

2.5

3.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E

(Rx

Volu

me,

bn)

The U.S. generic market is one of the most competitive markets.However, Indian companies are well geared to tap theopportunities by distinguishing themselves through:

Visible Para IV opportunities - Ranbaxy, DRL and Sun Pharma

Targeting limited competition opportunities - DRL, Sun Pharma, Lupin and Cadila Healthcare.

Increasing the portfolio basket by ramping ANDA filings:Sun Pharma, Lupin, DRL and Cadila Healthcare.


Exhibit 3: India – DMF fillings

0.0

10.0

20.0

30.0

40.0

50.0

0

1000

2000

3000

India China Italy Japan Germany

DMF Filings % in Total DMF Filings

Europe: Increasing genericisationThe European generic market (US$25bn in CY2008) is expectedto post a CAGR of 6.9% to US$40bn in CY2015, driven byincreasing penetration levels and initiatives by the governmentto rein rising healthcare cost. The Latin and CCE Europe regions,comprising France, Portugal, Spain, Italy and Hungary, are expectedto grow at a much faster pace of 10-15% CAGR. Governmentand payors are keen to control spiraling healthcare costs, therebyreducing pharmaceutical expenditure by using generics.On the European front, post the change in the overall marketstructure and setbacks for few companies, Indian companieshave become more selective in their approach.


Exhibit 4: Underpenetrated European region (Volume terms)

69

59 5855

1612 12 10 10 8

0

20

40

60

80

100

Den

mar

k

UK

Ger

man

y

Net

herl

and

Fran

ce

Bel

gium

Aus

tria

Port

ugal

Spai

n

Ital

y

Growth Potential

Growth Potential


Exhibit 5: Indian companies – EU presenceCompanies Strategy Adopted

Ranbaxy Not actively targeting the EU region. Mainly present

in Romania, France and U.K.

Dr. Reddy's DRL is reducing Betapharm cost by outsourcing

production to India and reducing its workforce.

The company has won few tenders in Germany.

Cadila Focusing on the branded generic markets like France

and Spain

Lupin Acquired Hormosan in Germany. Targeting U.K.,

France and German markets

Ipca Labs Entering into supply contracts and selling dossiers

Indoco Remedies Entering into supply contracts and selling dossiers


Pharmaceuticals

International markets: Fastest growing marketsThe international generic market (pegged at US$23bn in CY2008)is estimated to post a CAGR of 13.3% to US$55bn in CY2015.More than half of global generic growth in the next five yearswould come from international markets. Growth is likely to bedriven by rising income levels, increased market penetration,longevity of brand and increasing government focus on publichealthcare spending. Among these markets, Japan, China, Russia,Brazil, Mexico and South Africa are the focus areas. Withinternational markets expected to grow at twice the rate of theU.S. and Europe, Indian companies have become aggressive inexpanding these markets with a special focus on Japan, Russia/CIS and LatAm markets.


Exhibit 6: To grow at twice the pace of developed markets

13.3

8.7

6.9

6.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

International Markets

Global Generic

Europe

North America


Exhibit 7: Indian companies in international marketsCompanies % of revenue from Major presence

international markets

Ranbaxy 26 Japan, Russia, Latam and

South Africa

Dr. Reddy's 13 Russia, LatAm and exposure

through GSK alliance

Cipla 54 Asia-Pac, South Africa and

Middle East

Cadila 15 Japan, Brazil, South Africa,

Asia Pacific and CIS

Lupin 18 Japan, South Africa, Asia Pacific

Innovator-generic model gaining currency, Indiancompanies to be the beneficiariesWith the CY2011-14 patent expiry cliff approaching along withincreasing genericisation, global MNC players are now focusingon generic opportunities, especially in emerging markets to diversifytheir revenue base and to reduce cost. Global MNC players havestarted tapping volume-driven branded-generic emerging marketsthrough acquisitions or by entering into alliances with Indiancompanies. In their pursuit to reduce R&D and manufacturingcost, global MNC players have increased outsourcing to low-cost destinations like India. Increasing focus of global MNC playersbodes well for the Indian pharma sector by providing stable revenueflow by entering into long-term contracts.


Exhibit 8: Pruning cost - Top priority for global MNCsCompanies Cost Saving Comment

GlaxoSmithKline GBP 500mn Majority of the API

Pharma by CY2012 manufacture and internal

manufacturing to outsource

to low cost destination

Pfizer US $3bn Half of the cost saving to

by CY2012 come from outsourcing of

R&D and Manufacturing

Sanofi-Aventis Euro 2bn Through Restructuring and

by CY2013 Outsourcing

AstraZeneca Reduce R&D Mainly through cost saving

investment by

US$1bn by CY2014


Exhibit 9: Recent acquisitions and alliancesGlobal MNC Indian companies

Acquisition

Abbott Piramal Healthcare

Daiichi Sankyo Ranbaxy

Sanofi Aventis Shantha Biotech

Manufacturing Alliances

GlaxoSmithKline Pharma Dr Reddy's

Pfizer Aurobindo Pharma

Pfizer Claris Life sciences

Pfizer Strides Arcolab

Biogenerics: Opportunity on the anvilBiotech drugs, which constitute 10-15% of the globalpharmaceutical industry, have been growing faster than traditionaldrugs. The 20-year patent protection on the first batch of biotechdrugs, which entered the regulated markets in the late 1980s,is set to expire in the ensuing years. Over 2010-15, biotech drugsworth US$79bn of global sales would face patent expiries.However, unlike traditional drugs, biotech drugs are complexto manufacture and, hence, it is difficult to establish comparabilityof generics with innovator drugs. This has posed regulatory hurdlesfor the approval of biogeneric drugs. Thus, while Europe haslegislation for the same on a drug-specific basis, U.S. is yet tohave its legislation in place. Indian companies like Ranbaxy, DRL,Wockhardt and Biocon have made investments for the same andare targeting the semi-regulated and regulated markets in thecoming years.


Pharmaceuticals


Exhibit 10: Worldwide sale of expiring products

31

46

3124 22

25

4

6

1120 22 16

0

10

20

30

40

50

60

CY2010 CY2011 CY2012 CY2013 CY2014 CY2015

Conventional Products Biotech Products

Biotech products to play a dominant role in future

(US

$bn

)


Exhibit 11: Biotech product pipeline of Indian companiesBiocon Insulin, EPO, GCSF,Monoconal Antibodies

Dr. Reddy's GCSF, Monoconal Antibodies

Ranbaxy EPO

Wockhardt EPO, Insulin,GSF, Hepatitis Vaccine

Domestic formulation - Shift towards the chronic segmentThe Indian domestic formulation industry registered a CAGR of14% during FY2003-08, from around US$3.9bn in FY2003 toUS$7.7bn in FY2008, outpacing the global pharma industry'sgrowth rate of 7%. Going ahead, the Indian domestic formulationmarket is expected to report a robust CAGR of 12.9% toUS$13.7bn over FY2008-13E from US$7.7bn on the back ofchronic therapeutic segments like anti-diabetic, CVS, CNS andlifestyle diseases like gastrointestinal. Growth is expected to bedriven primarily by volumes and new product introductions in thechronic therapeutic and lifestyle segments and increasing marketpenetration.


Exhibit 12: Key therapeutics segments - Growth in demand( `̀̀̀̀ cr) FY2008 FY2013E % CAGR

(FY2008-2013)

Anti-Diabetic 1,600 3,780 18.8

Anti-Infective 5,730 11,030 14.0

CVS 3,480 7,280 15.9

Dermatology 1,750 3,140 12.4

Gastro Intestinal 3,500 6,740 14.0

Gynaecologicals 1,810 3,480 14.0

Neuro/CNS 1,760 3,150 12.3

Pain/Analgesics 2,840 4,060 7.4

Respiratory 2,880 4,730 10.4

Vit./Min./Nutrients 2,630 4,010 8.8

Others 4,120 7,460 12.6

Total 32,100 58,860 12.9

Consolidation imminent

The Indian formulation industry is highly fragmented, with300-400 units in the organized and 15,000 in the unorganizedsegments. The industry is dominated by Indian companies. Infact, around seven of the top 10 global players are Indian. Onthe basis of market share, the top five and top 10 players accountfor 23% and 37% of the total formulation sales, respectively.Further, new product introductions would be lesser than earlier.Hence, going forward, we believe the Indian formulation marketis set for consolidation, given the challenges ahead. However,we believe consolidation, though imminent, could take longer asvaluations of most companies remain expensive, as evident byAbbott's takeover of Piramal Healthcare.

CRAMS: Long-term growth drivers intact

The CRAMS sector is expected to register secular growth of8.8% over CY2009-12E to US$52bn from the current US$40bn,as all the drivers of outsourcing are intact. India still accountsfor 5-6% of the total global outsourcing pie. Going ahead, weexpect India's share to increase to lower teens on the back ofstrong process-chemistry skills and low-cost advantage. TheIndian CRAMS sector is expected to register secular growth of29.0% over CY2009-12E to US$5.1bn from the current US$2.4bn.


Exhibit 13: CRAMS sector - Global, India growth trend

22.028.5

18.0

23.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

CY2009 CY2012E

Global CMO

40

51.5

ofCAGR

8.8%

2.4

5.1

0

1

2

3

4

5

6

CY2009 CY2012E

Indian CRAMS

CAGRof

29%

(U

S$

bn

)

(U

S$

bn

)

CRAMS - Recent slow growth an aberration; but drivers in place

So far, growth has been subdued for almost all players in theCRAMS segment (except Divi’s Labs) on account of inventoryrationalization resulting in an 11-27% decline in the top line alongwith contraction in operating margins. Several big global M&Adeals were also completed in late CY2009, due to which therewere delays in budget approvals. However, most companies arenow witnessing an uptick in order enquiries from global innovators,indicating improvement in the global scenario.

Risks

Price control

After a long wait of over five years, the NPPP draft has beentaken up for discussion. The NPPP-2011 draft entails significantchanges as compared to 1994 Drug Policy Control Order (DPCO).The key differences between NPPP-2011 vs. DPCO 1994 area) essentiality of drugs vs. economic criteria/market share principle;b) market and cost-based pricing; and c) control of formulationprices vs. control starting from API level. The draft is a shift from


Pharmaceuticals

cost-based pricing to market-based pricing, which is a step inthe right direction. Under market-based pricing, the ceiling pricewould be based on the weighted average price of the top threebrands by value. However, on the negative side, the scope ofthe policy now covers at least 60% of the drugs in value termsfrom the earlier 10-20% and includes combination drugs, whichwere not covered in National List of Essentials Medicines (NLEM)2011. The draft is now open for comments from the industry -post which a new DPCO would come into existence. While thefinancial impact appears benign, given the cost competitivenessof the markets, companies are, however, wary that this may triggergreater regulatory oversight on the industry going forward.

Increasing genericisation: One of the prominent risks facedby the industry is the transformation of the branded-generic marketto generic-generic market, which leads to significant price erosionand margin compression. The point in case is Germany wherethe entire market in 2008 was transformed into generic-genericon the back of government's/payors' push to reduce healthcarecost. Now, most of the other EU markets are slowly moving towardsthe generic-generic model.

Regulatory overhang: Though most of the Indian pharmaceuticalscompanies have successfully complied with cGMP of US FDA,the increasing stringency of the regulator continues to pose arisk to the sector.

Volatile currency movements: Generic players derive around50-60% of there revenue from exports, owing to which they areexposed to foreign exchange fluctuations.

Delays in entering contracts: CRAMS players have beenincurring capex on building up new facilities. Any delay in enteringcontracts would pose a downside risk.

OutlookWith the expected earnings CAGR of 21% over FY2011-13Efor our universe of stocks, we remain overweight on the sector,maintaining a positive future outlook for earnings growth.In the generic segment, we prefer Lupin, Cadila, Arobindo,and Indoco Remedies.

Source: Company, Angel Research; Note: *December year end

Exhibit 14: Comparative Valuation TableCompany CMP Tgt Price Reco Upside FY2013E FY11-13E FY2013E

( `̀̀̀̀) ( `̀̀̀̀) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) ROE (%)

Sun Pharma 529 569 Accu. 8 20.5 5.7 16.3 21.4 21.5 21.4

Dr Reddy's 1,696 1,920 Accu. 13 17.7 3.1 12.1 22.7 22.0 25.2

Cipla 332 369 Accu. 11 18.0 3.2 15.3 23.8 16.5 17.9

Lupin 442 593 Buy 34 14.9 2.4 12.2 23.9 24.8 28.6

Ranbaxy* 463 - Neutral - 8.8 1.4 5.9 21.8 27.7 30.0

Glaxo Pharma* 1,967 - Neutral - 22.6 5.1 14.4 14.6 41.0 30.7

Cadila Healthcare 654 965 Buy 48 13.6 2.1 11.1 19.4 25.5 31.6

Aventis* 2,230 1,937 Reduce (13) 24.9 3.1 20.3 15.4 15.7 17.1

Ipca labs 279 358 Buy 28 10.1 1.5 7.2 14.8 23.3 24.9

Aurobindo Pharma 97 166 Buy 71 5.9 0.9 6.0 4.5 10.6 15.5

Alembic Pharmaceutical 38 77 Buy 103 6.3 0.7 4.5 52.1 26.6 30.9

Indoco Remedies 418 583 Buy 40 7.5 0.9 6.0 15.6 13.9 16.4


Company BackgroundSun Pharma is an international specialty pharma company present globallyacross 40 markets, with a strong presence in India and U.S. In India andrest of the world markets, the company's key chronic therapy areas includecardiology, psychiatry, neurology, gastroenterology and diabetology. Sun Pharmais a market leader in specialty therapy areas in India. The company has emergedas a leading pharma company in India, where it is the sixth largest by prescriptionsales. Also, in the U.S., the key geography, the company has expanded significantlythrough both inorganic and organic routes.

Structural SnapshotGrowth opportunity: In India, the current spending on healthcare (publicand private) is estimated at 6% of GDP and is expected to increase to 10%of GDP by 2016. Thus, on a conservative basis also, the industry can growat a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn(CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn byCY2015. Indian companies, on account of their relative positioning,can grow at around 20% during the period.

Competitive position: Sun Pharma has a market share of ~4.4% in domesticformulations and is the largest Indian filer of ANDAs in the U.S.

Nature of business: Defensive sector insulated from economic cycles;Highly competitive industry, with a high payback period.

Current Investment ArgumentsStrongest ANDA pipeline: Sun Pharma's U.S. business posted a ~30%CAGR over FY2005-11, which contributed 30% to its total turnover in FY2011.Sun Pharma, along with Caraco and Taro, now has 151 ANDAs pendingUSFDA approval, which account for one of the highest in the Indian pharmaspace. The company has filed ~30 ANDAs in each of the past few yearsand has plans to file ~25 ANDAs in FY2012 as well.

Domestic business: Sun Pharma's domestic formulation business has grownabove the industry's average over FY2005-10 at a 24% CAGR; it contributed42% to the company's total turnover in FY2011. The company has strengthof 2,600MRs and one of the highest field force productivity of ~`70lakh/MR per year, which has resulted into high margins from the segment. Thecompany has a market share of ~4.4%, with exposure to psychiatry, neurology,CVS, diabetic and gastroenterology. In FY2011, Sun Pharma launched 39products in the domestic market.

Valuation: Management has guided 28-30% top-line growth for FY2012,with OPM in the historic range post the inclusion of Taro's financials at theconsolidated level. Further, management expects R&D expenses to be ~6%of net sales and capex at `450cr for FY2012. Growth reported during theyear can also be attributed to the consolidation of Taro's financials. We expectSun Pharma's net sales to post a 27.3% CAGR to `̀̀̀̀9,277cr and EPS toregister a 21.4% CAGR to `̀̀̀̀25.9 over FY2011-13E. We recommendAccumulate on the stock with target price of `̀̀̀̀569.

Sun PharmaPharmaceuticals CMP/TP/Upside: `529 / `569 / 8%


PROMOTERS 63.7

FII 19.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SUN PHARMA 9.7 9.1 33.2 22.6 33.6

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 38.3 34.8 19.4 28.4 23.5

PAT GROWTH* 18.7 8.1 6.4 27.4 26.4

OPM# 41.4 34.4 37.4 38.0 35.6


ANGEL ESTIMATES


PAT GROWTH (%) 15.5 27.6

ROE (%) 19.7 21.4

P/E 26.1 20.5

P/BV 4.8 4.0


BUY / HOLD / SELL 31 / 14 / 3

RATING ACCUMULATE

52 WEEK HIGH / LOW 540 / 393

MARKET CAP (`̀̀̀̀ CR) 54,461

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 171 426 426 426




GROSS BLOCK 2,334 3,345 3,658 4,108


NET BLOCK 1,533 2,523 2,474 2,696


GOODWILL 406 772 772 772

INVESTMENTS 3,629 2,231 2,231 2,231

CURRENT ASSETS 3,712 6,340 8,642 10,993



MIS. EXP. NOT WRITTEN OFF - - - 1

TOTAL ASSETS 8,667 10,714 12,759 14,946




% CHG (0.8) 34.8 29.7 25.0


EBITDA 1,493 1,967 2,528 3,253


INTEREST & OTHER CHARGES

OTHER INCOME 167 273 244 272

(% OF PBT) 9.6 13.4 9.7 8.4

RECURRING PBT 1,743 2,036 2,526 3,258

% CHG (10.6) 16.8 24.1 29.0

PBT (REPORTED) 1,743 2,036 2,526 3,257

TAX 68 128 364 498

(% OF PBT) 3.9 6.3 14.4 15.3

PAT (REPORTED) 1,676 1,907 2,163 2,759

LESS: MINORITY INTEREST (MI) (4) 91 65 83


ADJ. PAT 1,680 1,816 2,098 2,677

% CHG (7.6) 8.1 15.5 27.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 40.5 30.2 26.1 20.5

P/CEPS 6.0 5.4 4.7 3.7

P/BV 6.5 5.6 4.8 4.0

EV/SALES 13.6 9.2 7.1 5.7

EV/EBITDA 36.4 26.7 20.9 16.3

PER SHARE DATA (`)`)`)`)`)

EPS (BASIC) 13.0 17.5 20.3 25.9


CASH EPS 88.5 97.5 113.3 142.3

DPS 13.8 16.6 18.8 24.0

BOOK VALUE 81.0 94.7 110.5 130.8

RETURNS (%)

ROCE (PRE-TAX) 16.7 18.2 19.4 21.5


ROE 21.8 20.0 19.7 21.4

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



(INC)/DEC IN WORKING CAPITAL (467) (53) (2,659) (2,058)

DIRECT TAXES PAID 162 - 25 489

CASH FLOW FROM OPERATIONS 1,267 2,187 92 983

(INC.)/DEC.IN FIXED ASSETS (174) (1,137) (187) (450)

(INC.)/DEC. IN INVESTMENTS (1,770) 1,398 - -


CASH FLOW FROM INVESTING (1,944) 262 (187) (450)




OTHERS (60) 357 113 (44)


INC./(DEC.) IN CASH (1,062) 2,149 (438) (93)






Company BackgroundDr. Reddy's Laboratories (DRL) is an integrated global pharmaceutical company.The company operates through three businesses - pharmaceutical servicesand active ingredients, global generics and proprietary products. The company’skey areas include gastro-intestinal, cardiovascular, diabetology, oncology,pain management, anti-infective and paediatrics. DRL's key markets includeIndia, U.S., Russia and CIS, and Germany.

Structural SnapshotGrowth opportunity: In India, the current spending on healthcare (publicand private) is estimated at 6% of GDP and is expected to increase to 10%of GDP by 2016. Thus, on a conservative basis also, the industry can growat a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn(CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn byCY2015. Indian companies, on account of their relative positioning, cangrow at around 20% during the period.

Competitive position: DRL is one of the largest players in the domesticformulation market, with a market share of ~2.2%.

Nature of business: Defensive sector insulated from economic cycles; highlycompetitive industry, with a high payback period.

Current Investment ArgumentsRobust growth in the U.S. ahead: After attaining a critical mass (US$426mnwith 11 new product launches in FY2011), DRL aims to scale up its businessto the next orbit in the U.S. market on the back of a strong product pipeline(75 ANDAs are pending approval, of which 36 are Para IVs and 11 areFTFs). Management has guided for one limited competition opportunity everyyear for the next few years.

Strategic alliances to provide long-term growth: In order to tap the emergingmarket opportunities, DRL entered into an alliance with GSK in FY2011 todevelop and market branded formulations across emerging markets. On thebiogeneric front, the company has developed nine products (four productslaunched in India) on mammalian cell culture with global brand sales of US$30bn.The company has also entered into a marketing agreement with Valent Pharmato market Cloderm cream in the U.S. market. This deal is expected to providean impetus to the company's proprietary products business going forward.

Valuation: DRL has revised its earlier revenue guidance of US$3bn to US$2.7bnby FY2013E with RoCE of 25%. Growth would be driven by the U.S. business,uptick in the domestic formulation and Russian markets and increased contributionfrom GSK's alliance. We expect DRL's net sales to post a 13.3% CAGR to`9,584cr and adjusted EPS to record a 22.7% CAGR to `96.0 overFY2011-13E. At the CMP, the stock is trading at 19.3x FY2012E and 17.7xFY2013E earnings. We maintain our Accumulate view on the stock witha target price of `̀̀̀̀1,920.

Pharmaceuticals CMP/TP/Upside: `1696 / `1920 / 13%Dr. Reddy's Lab.


PROMOTERS 25.6

FII 44.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

DRL 11.9 2.1 54.9 15.9 13.3

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 21.3 6.5 14.4 25.8 16.8

PAT GROWTH* 7.3 16.8 30.7 51.1 7.8

OPM# 20.6 21.0 10.5 14.8 16.1


ANGEL ESTIMATES


PAT GROWTH (%) 37.9 9.2

ROE (%) 28.6 25.2

P/E 19.3 17.7

P/BV 4.9 4.0


BUY / HOLD / SELL 34 / 9 / 9

RATING ACCUMULATE

52 WEEK HIGH / LOW 1,716 / 1,387

MARKET CAP (`̀̀̀̀ CR) 28,748

LIQUIDITY HIGH


BALANCE SHEETY/E MARCH (`̀̀̀̀ CR) FY2010 FY2011 FY2012E FY2013E



% CHG 2.4 6.5 16.6 9.8

EBITDA 1,420 1,566 2,199 2,410

(% OF NET SALES) 20.2 21.0 25.2 25.1




(% OF PBT) 3 1 1 0

RECURRING PBT 1,066 1,208 1,767 1,929

% CHG 6.3 13.3 46.3 9.2

EXTRAORDINARY EXPENSE/(INC.) 860 (37) - -

PBT (REPORTED) 205 1,244 1,767 1,929

TAX 99 140 283 309

(% OF PBT) 48.0 11.3 16.0 16.0


PAT AFTER MI (REPORTED) 107 1,104 1,484 1,620

ADJ. PAT 921 1,076 1,484 1,620

% CHG 4.1 16.8 37.9 9.2


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 31.1 26.6 19.3 17.7

P/CEPS 54.8 18.9 14.6 13.4

P/BV 6.7 6.2 4.9 4.0

EV/SALES 4.2 4.1 3.5 3.1

EV/EBITDA 20.7 19.4 13.7 12.1


EPS (BASIC) 54.6 63.8 87.9 96.0


CASH EPS 31.0 90.0 116.4 126.9

DPS 5.0 5.0 5.0 5.0

BOOK VALUE 254.2 272.5 342.8 419.7

RETURNS (%)

ROCE (PRE-TAX) 16.2 17.7 23.2 22.0


ROE 21.7 24.2 28.6 25.2

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



(INC)/DEC IN WORKING CAPITAL 38 (439) (700) (306)









INC./(DEC.) IN LOANS (483) 892 (563) 402


OTHERS (1,775) (1,081) (116) (522)

CASH FLOW FROM FINANCING (1,169) (410) (976) (445)

INC./(DEC.) IN CASH 99 (86) (254) 1,239




BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,466 2,357 1,794 2,195




NET FIXED ASSETS 1,759 2,478 3,016 3,164



CURRENT ASSETS 4,206 4,832 5,477 7,228

CASH 658 573 319 1,558


OTHER 3,126 3,811 4,635 5,095




TOTAL ASSETS 5,901 7,100 7,725 9,423

Y/E MARCH (`̀̀̀̀ CR) CY2009 CY2010 CY2011E CY2012E



Company BackgroundCipla is a leading pharmaceutical company in India with a strong presencein the export and domestic markets. On the export front, Cipla follows thepartnership model - it has 5,700 product registrations in around 180 countries.In the domestic formulation market, Cipla is a market leader with a marketshare of over 5%.


Competitive position: Amongst Indian companies, Cipla is a leader in thedomestic formulation market with a market share of 5.3%.

Nature of business: Defensive sector insulated from economic cycles; Highlycompetitive industry, with a high pay-back period.

Current Investment ArgumentsExport segment to be the growth driver: Exports contributed 52% to thecompany's total turnover in FY2011, with Africa, U.S. and Latin Americaconstituting more than 60% of total exports. In the U.S., Cipla has enteredinto a partnership with 22 players and has cumulative 64 approved ANDAs,of which 35 have been launched, while 46 are pending for approval.Cipla has developed eight CFC-free inhalers for the EU region, of which sixhave been submitted for regulatory approvals. Launch of CFC-free inhalersin Europe and U.S. with a potential market size of more than US$3bn wouldbe the long-term growth driver for the company.

Increasing penetration in the domestic market: Cipla is one of the largestplayers in the domestic formulation market, with a market share of ~5%,contributing 46% to the total turnover in FY2011. Cipla's distribution networkin India consists of a field force of ~7,000 employees. The company plansto increase its focus on domestic markets with new therapies such as oncologyand neuro-psychiatry in the offering. Cipla plans to focus on growing itsmarket share and sales by increasing penetration in the Indian market, especiallyin rural areas and plans to expand its product portfolio by launching biosimilars,particularly relating to the oncology, anti-asthmatic and anti-arthritis categories.

Valuation: Over FY2011-13E, we expect net sales to post a 15.5% CAGRto `8,164cr and EPS to record a 23.8% CAGR to `18.4 over FY2011-13E.Further with significant capex been incurred and with most of the facilitiescommercialized, management expects Cipla's return ratio to improve asproductivity level increases. We recommend an Accumulate rating onthe stock with a revised target price of `̀̀̀̀369.

Pharmaceuticals CMP/TP/Upside: `332 / `369 / 11%Cipla


PROMOTERS 36.8

FII 13.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CIPLA 14.8 (5.6) 22.6 5.7 13.5

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 20.5 12.4 15.2 16.2 17.0

PAT GROWTH* 4.4 0.3 12.4 10.0 15.8

OPM# 10.4 18.7 17.9 17.9 19.1


ANGEL ESTIMATES


PAT GROWTH (%) 18.3 25.1

ROE (%) 16.4 17.9

P/E 22.3 18.0

P/BV 3.5 3.0


BUY / HOLD / SELL 27 / 10 / 7

RATING ACCUMULATE

52 WEEK HIGH / LOW 356 / 274

MARKET CAP (`̀̀̀̀ CR) 26,641

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




MINORITY INTEREST - - - -

TOTAL LOANS 5.1 571.4 431.4 85.4

DEFERRED TAX LIABILITY 179.2 213.1 245.2 267.8



GROSS BLOCK 2,897 4,241 4,741 5,142


NET BLOCK 2,011 3,094 3,388 3,502



CURRENT ASSETS 4,367 4,660 5,341 6,294



TOTAL ASSETS 6,095 7,451 8,274 9,120




% CHG 7.4 12.4 14.3 16.4


NET RAW MATERIALS 2,453 2,915 3,181 3,698

OTHER MFG COSTS 445 - 564 617

PERSONNEL 319 541 666 808

OTHER 1,075 1,525 1,191 1,306

EBITDA 1,066 1,143 1,404 1,734

(% OF NET SALES) 19.9 18.7 20.0 21.2




RECURRING PBT 1,230 1,158 1,433 1,790

% CHG 8.9 (5.8) 23.8 24.9

EXTRAORDINARY EXPENSE/(INC.) (95.0) - - -

PBT (REPORTED) 1,325 1,158 1,433 1,790

TAX 244 191 263 325

(% OF PBT) 18.4 16.5 18.3 18.2

PAT (REPORTED) 1,081 967 1,171 1,465

ADD: SHARE OF EARNINGS OF ASSOCIATE - 22 - -

ADJ. PAT 986 990 1,171 1,465

% CHG (1.8) 0.3 18.3 25.1


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 24.6 27.5 22.3 18.0

P/CEPS 21.3 21.4 18.4 15.1

P/BV 4.5 4.0 3.5 3.0

EV/SALES 5.0 4.4 3.8 3.2

EV/EBITDA 24.9 23.7 19.2 15.3


EPS (BASIC) 13.5 12.0 14.9 18.4


CASH EPS 15.5 15.5 18.1 22.0

DPS 2.0 2.4 3.0 3.7

BOOK VALUE 73.6 83.0 94.6 109.2

RETURNS (%)

ROCE (PRE-TAX) 15.6 13.1 14.3 16.5


ROE 19.2 15.7 16.4 17.9

TURNOVER RATIOS (X)





CASH FLOW STATEMENT






CASH FLOW FROM OPERATIONS 1,086 898 1,005 1,153


(INC.)/DEC. IN INVESTMENTS (166) (344) - -




INC./(DEC.) IN LOANS (935) 566 (140) (346)


OTHERS 36 (2) - -


INC./(DEC.) IN CASH 9 (20) 125 111






TOPPICK

Company BackgroundLupin, established in 1968, is primarily engaged in the manufacture andglobal distribution of APIs and finished dosages. Over the years, the companyforayed into the U.S. market through a differentiated export strategy of tappingbranded generics and, consequently, gaining a large share of the U.S. prescriptionmarket. Further, to expand its global footprint, Lupin prudently adopted theinorganic growth route. In-line with this, over the past two years, the companymade small acquisitions across geographies.

Structural SnapshotGrowth opportunity: In India, the current spending on healthcare (publicand private) is estimated at 6% of GDP and is expected to increase to 10%of GDP by 2016. Thus, on a conservative basis also, the industry can growat a 14-15% CAGR. On the other hand, the global generic industry, at US$80bn(CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn byCY2015. Amongst the niche segments targeted by the company, oralcontraceptives address an opportunity of US$3bn-4bn in the U.S. market,with high entry barriers.

Competitive position: Lupin is the fifth largest domestic formulation company,with a prescription market share of 2.1% in U.S. generics.


Current Investment ArgumentsU.S. market - The key driver: The high-margin branded generic businesshas been the key differentiator for Lupin in the Indian pharma space. On thegeneric turf, Lupin is currently the fifth largest generic player in the U.S. interms of prescriptions. In the OC segment, Lupin has filed 25-30 ANDAsand expects to get approvals from 2HFY2012. Currently, Lupin's cumulativefilings stand at 152, of which 51 have been approved. As of FY2011, Lupinhad 60 Para IV, of which 15 are FTFs. Overall, we expect the U.S. market toreport a 28.8% CAGR over FY2011-13E.

Domestic formulations on a strong footing: Lupin continues to make stridesin the Indian market. Currently, Lupin ranks No.5, climbing up from beingNo.11 six years ago. Lupin has been the fastest growing company amongthe top five companies in the domestic formulation space, registering a strong20.0% CAGR over the past three years. Six of Lupin's products are amongthe country's top 300 brands. Lupin introduced 41 new products in theIndian market in FY2011 and has a strong field force of 4,000 MRs.

Valuation: We expect Lupin's revenues to grow at a 20.2% CAGR to ̀ 8,426crand earnings to grow at a 24.0% CAGR to `29.7/share over FY2011-13E.Currently, the stock is trading at 19.8x and 14.9x FY2012E and FY2013Eearnings, respectively. We maintain our Buy view on the stock with atarget price of `̀̀̀̀593.

LupinPharmaceuticals CMP/TP/Upside: `442 / `593 / 34%


PROMOTERS 46.9

FII 26.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

LUPIN (6.2) (3.5) 54.8 31.4 45.3

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 23.6 19.7 28.6 27.6 19.4

PAT GROWTH* 24.1 26.5 39.1 37.7 27.5

OPM# 21.4 18.7 18.1 17.0 15.9


ANGEL ESTIMATES


PAT GROWTH (%) 15.6 32.7

ROE (%) 26.9 28.6

P/E 19.8 14.9

P/BV 4.8 3.8

Bloomberg consensus recommendation

BUY / HOLD / SELL 38 / 7 / 4

RATING BUY


MARKET CAP (`̀̀̀̀ CR) 19,760

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 1,140 1,162 958 726




GROSS BLOCK 2,294 2,945 3,455 3,955


NET BLOCK 1,586 2,039 2,392 2,678


GOODWILL 320 320 320 320


CURRENT ASSETS 2,775 3,503 4,240 5,248



TOTAL ASSETS 3,877 4,636 5,300 6,113




% CHG 26.2 19.7 19.0 21.4


EBITDA 854 1,066 1,247 1,630

(% OF NET SALES) 18.0 18.7 18.3 19.7




(% OF PBT) 2 1 4 3

RECURRING PBT 836 996 1,179 1,556

% CHG 37.9 19.2 18.3 32.0


PBT (REPORTED) 836 996 1,179 1,556

TAX 136 117 181 232

(% OF PBT) 16.3 11.7 15.4 14.9

LESS: MINORITY INTEREST (MI) 18 17 - -

PAT AFTER MI (REPORTED) 682 863 997 1,324

ADJ. PAT 682 863 997 1,324

% CHG 35.9 26.5 15.6 32.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 28.9 22.9 19.8 14.9

P/CEPS 24.4 19.1 16.7 12.8

P/BV 7.7 6.0 4.8 3.8

EV/SALES 4.3 3.6 3.0 2.4

EV/EBITDA 24.1 19.2 16.3 12.2


EPS (BASIC) 15.3 19.3 22.4 29.7


CASH EPS 18.1 23.2 26.5 34.5

DPS 3.1 3.9 3.0 5.9

BOOK VALUE 57.7 73.5 92.4 115.1

RETURNS (%)

ROCE (PRE-TAX) 21.9 21.0 21.3 24.8


ROE 34.1 29.5 26.9 28.6

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




LESS: OTHER INCOME


CASH FLOW FROM OPERATIONS 376 818 855 1,241


(INC.)/DEC. IN INVESTMENTS - 18 - -

OTHER INCOME



INC./(DEC.) IN LOANS (83) 23 (205) (231)


OTHERS 597 35 (31) -


INC./(DEC.) IN CASH 124 225 (48) 200






Company BackgroundRanbaxy Laboratories (Ranbaxy), India's largest pharmaceutical company,is an integrated, research-based, international pharmaceutical company. Thecompany is currently present in 23 of the top 25 pharmaceutical markets ofthe world. Ranbaxy has a global footprint in 46 countries, manufacturingfacilities in seven countries and serves customers in over 125 countries.


Competitive position: Ranbaxy is one of the largest players in the domesticformulation market, with a market share of ~4.8%.


Current Investment ArgumentsUSFDA issues resolve on Ranbaxy issue: Ranbaxy has signed a consentdecree with the USFDA regarding the ongoing cGMP issues. We note thatthe consent decree lays out a plan of action as agreed by the two parties toresolve the outstanding issues. However, the timeline regarding the resolutionis still unclear. Further, the company will be provisioning US$500mn as potentialcivil and criminal liabilities that could arise from the Department of Justice(DoJ) investigation. Additionally, recently the DoJ has announced the filingof consent decree for Ranbaxy's Paonta Sahib and Dewas facilities. Althoughthe clarity and roadmap of the re-approval for both the facilities have emerged,forfeiting exclusivity is a clear negative for the company.

Looking for profitable growth: Ranbaxy's OPM collapsed from 12.6% inCY2006 to 6.1% in CY2009 on USFDA issues, high operating leverageand realized losses in forex hedges. However, the company is now targetingto achieve profitable growth by closing down low-margin facilities in variousemerging markets, reduce its work force in Europe and transfer its newdrug discovery research division to Daiichi. Further, resolution of the USFDAissue would help reduce costs incurred on remedial measures. Going forward,Ranbaxy aims to achieve double-digit margins in its base business.

Valuation: The stock is trading at EV/sales of 1.9x CY2011E and 1.4x CY2012E,which is attractive. Moreover, considering that the current financials donot include major upsides from other Para IV opportunities (which couldbe at risk) besides Nexium and Lipitor, we believe the downside is limited.However, given the low profitability in the base business and lack ofclarity on Para-IVs going forward, we recommend Neutral on the stock.

RanbaxyPharmaceuticals CMP/TP/Upside: `463 / - / -



FII 10.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

RANBAXY (10.0) (19.2) 28.8 2.2 7.2

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 7.7 18.0 9.8 11.5 11.9

PAT GROWTH* - 654.7 23.1 41.9 21.2

OPM# 5.0 16.9 2.6 5.9 9.4


ANGEL ESTIMATES


PAT GROWTH (%) 14.1 79.3

ROE (%) 20.3 30.0

P/E 15.7 8.8

P/BV 3.0 2.4


BUY / HOLD / SELL 1 5 / 10 / 19

RATING NEUTRAL

52 WEEK HIGH / LOW 573 / 367

MARKET CAP (`̀̀̀̀ CR) 19,538

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




MINORITY INTEREST 53.3 64.7 79.7 94.8

TOTAL LOANS 3,630 4,335 2,104 1,424




GROSS BLOCK 4,125 4,804 5,284 5,710


NET BLOCK 2,398 2,647 2,783 2,880


GOODWILL 2,093 1,901 1,901 1,901


CURRENT ASSETS 6,009 8,693 8,503 10,113



TOTAL ASSETS 7,552 9,982 8,725 9,716




% CHG 2.5 18.0 15.4 18.4


NET RAW MATERIALS 3,208 3,153 3,762 3,595


PERSONNEL 1,417 1,506 1,795 2,116

OTHER 1,746 1,858 2,213 2,609

EBITDA 445 1,440 1,733 2,885

(% OF NET SALES) 6.1 16.9 17.0 24.0




(% OF PBT) 54.2 34.6 5.9 3.6

RECURRING PBT 817 1,911 1,585 2,800

EXTRAORDINARY EXPENSE/(INC.) (193) 410.5 - -

PBT (REPORTED) 1,010 2,322 1,585 2,800

TAX 699 585 331 563

(% OF PBT) 69.2 25.2 20.9 20.1

PAT (REPORTED) 311 1,737 1,254 2,237


PAT AFTER MI (REPORTED) 296 1,497 1,239 2,222

ADJ. PAT 144 1,086 1,239 2,222

% CHG (218.5) 654.7 14.1 79.3


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 65.6 13.0 15.7 8.8

P/CEPS 34.5 9.5 12.6 7.6

P/BV 4.5 3.5 3.0 2.4

EV/SALES 3.0 2.4 1.9 1.4

EV/EBITDA 49.1 14.3 11.3 5.9

PER SHARE DATA (`)

EPS (BASIC) 7.1 35.5 29.4 52.8


CASH EPS 13.4 48.7 36.8 60.7

DPS - 2.0 5.9 10.6

BOOK VALUE 103.3 133.1 156.2 195.6

RETURNS (%)

ROCE (PRE-TAX) 2.4 10.1 15.2 27.7


ROE 3.3 21.8 20.3 30.0

TURNOVER RATIOS (X)




Y/E MARCH CY2009 CY2010 CY2011E CY2012E

CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL (27) (299) (89) 1,155




INC./ (DEC.) IN FIXED ASSETS 490 426 299 425

INC./ (DEC.) IN INVESTMENTS (52) (56) - -


CASH FLOW FROM INVESTING 333 (290) 206 325


INC./(DEC.) IN LOANS (446) 825 (2,231) (680)

DIVIDEND PAID (INCL. TAX) - (98) (290) (520)

OTHERS (1,279) (317) 30 (56)

CASH FLOW FROM FINANCING (1,723) 436 (2,491) (1,256)

INC./(DEC.) IN CASH (1,154) 2,023 (1,300) 2,050






Company BackgroundGlaxoSmithKline Pharmaceuticals (Glaxo) is the third largest pharmaceuticalplayer in the Indian market with a market share of 5%. The company's productportfolio includes both prescription medicines and vaccines. Glaxo sellsprescription medicines across therapeutic areas such as anti-infectives,dermatology, gynaecology, diabetes, oncology, cardiovascular diseases andrespiratory diseases. A large portion of the company's revenue comes fromthe acute therapeutic portfolio. However, the company is now scouting foropportunities in the high-growth therapeutic areas such as CVS, CNS, diabetesand oncology. Further, with a strong parentage, Glaxo plans to increase itsproduct portfolio through patented launches and vaccines.

Structural SnapshotGrowth opportunity: In India, the current spending on healthcare (publicand private) is estimated at 6% of GDP and is expected to increase to 10%of GDP by 2016. Thus, on a conservative basis also, the industry can growat a 14-15% CAGR.

Competitive position: Glaxo is the second largest MNC company in theIndian domestic formulation industry with a market share of ~5%.

Nature of business: Defensive sector insulated from economic cycles; Highlycompetitive industry, with a high payback period.

Current Investment ArgumentsRenewed focus on the Indian market: Glaxo is among the top five playersin the Indian market, having a market share of ~5%. Post the IPR regime,the company has renewed its focus on the domestic market with the launchof five patented products (mainly Tykerb and Rotarix) in the last two years.In CY2011, the company plans to launch 4-6 branded generic products,two oncology products and Synflorix vaccine. During 1QCY2011, the companylaunched two new products namely the branded generic Calpol-T in thefast-growing pain segment and Ansolar (Sunscreen gel), which is a productfrom the Stiefel dermatology range. The company has also received marketingapprovals for two innovative products - namely Votrient for renal carcinomaand Revolade for platelet depletion.

New product launches since CY2007 accounted for 26% yoy top-line growthregistered by the company in CY2010. Further, in-line with market dynamics,Glaxo has launched patented products at discounts in India compared tothe other markets.

Outlook and valuation: Glaxo has a strong balance sheet with cash of~`2,000cr (~12% of market cap), which could be used for future acquisitionsor higher dividend payouts. We expect Glaxo's net sales to post a 13.9%CAGR to `2,788cr and EPS to register a 14.6% CAGR to `86.9 overCY2010-12E. At current levels, the stock is trading at 27.3x and 22.6x CY2011Eand CY2012E earnings, respectively. We continue to remain Neutral onthe stock.

Glaxo PharmaPharmaceuticals CMP/TP/Upside: `1,967 / - / -



FII 17.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

GLAXO (6.1) (14.6) 19.8 12.5 20.4

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 4.4 12.8 10.4 7.4 7.5

PAT GROWTH* (7.7) 15.5 16.5 13.1 23.2

OPM# 29.0 35.3 33.2 32.2 24.3


ANGEL ESTIMATES


PAT GROWTH (%) (23.4) 66.4

ROE (%) 21.1 30.7

P/E 27.3 22.6

P/BV 7.4 6.5


BUY / HOLD / SELL 9 / 4 / 15

RATING NEUTRAL

52 WEEK HIGH / LOW 2,475 / 1,830

MARKET CAP (`̀̀̀̀ CR) 16,664

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 5 5 5 5




GROSS BLOCK 333 363 383 403


NET BLOCK 93 109 111 113



CURRENT ASSETS 2,183 2,510 2,698 3,144



TOTAL ASSETS 1,747 1,900 2,208 2,532


PROFIT & LOSS STATEMENTY/E DECEMBER (`̀̀̀̀ CR) CY2009 CY2010 CY2011E CY2012E

KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 32.8 29.7 27.3 22.6

P/CEPS 31.8 28.8 36.2 22.1

P/BV 9.3 8.5 7.4 6.5

EV/SALES 7.8 6.8 6.0 5.1

EV/EBITDA 22.2 19.3 16.8 14.4

PER SHARE DATA (`)

EPS (BASIC) 60.0 66.2 72.0 86.9


CASH EPS 61.9 68.3 54.3 89.1

DPS 30.0 40.0 34.6 41.7

BOOK VALUE 210.9 230.4 264.2 302.4

RETURNS (%)

ROCE (PRE-TAX) 39.9 40.6 41.5 41.0

ROE 29.8 30.9 21.1 30.7

TURNOVER RATIOS (X)





CASH FLOW STATEMENT

PROFIT BEFORE TAX AND EXCEPTIONALS 761 872 971 1,099


(INC)/DEC IN WORKING CAPITAL 20 88 (247) 31




(INC.)/DEC.IN FIXED ASSETS (21) (20.6) (33) (20)

(INC.)/DEC. IN INVESTMENTS (580) (30) (0) -

OTHER INCOME 101 126 113 122

CASH FLOW FROM INVESTING (500) 75 81 102


INC./(DEC.) IN LOANS 0 0.26 - -


OTHERS 1,160 (48) (6) -


INC./(DEC.) IN CASH 777 269 39 353





% CHG 12.6 12.9 13.7 13.9


EBITDA 674 759 870 991

(% OF NET SALES) 35.3 35.3 35.5 35.5


INTEREST & OTHER CHARGES 0 1 - -

OTHER INCOME 101 126 113 122

RECURRING PBT 761 872 971 1,100

% CHG 8.6 14.5 11.4 13.3

EXTRAORDINARY EXPENSE/(INC.) (7) 18 - -

PBT (REPORTED) 769 854 971 1,100

TAX 261 293 342 363

(% OF PBT) 33.9 34.4 35.2 33.0

PAT (REPORTED) 508 561 629 737

EXCEPTIONAL ITEMS - - 186


ADJ. PAT 500 578 443 737

% CHG 8.1 15.5 (23.4) 66.4


Company BackgroundCadila Healthcare (Cadila) operates in the API, formulations, animal healthproducts and cosmeceutical segments. The company's global operationsare spread across the U.S., Europe, Japan, Brazil, South Africa and 25 otheremerging markets. Having already achieved the US$1bn mark in 2011, thecompany is expected to achieve sales of over US$3bn by 2015 and be aresearch-driven pharmaceutical company by 2020.

Structural SnapshotGrowth opportunity: In India, the current spending on healthcare (publicand private) is estimated at 6% of GDP and is expected to increase to 10%of GDP by 2016. Thus, on a conservative basis also, the industry can growat a 14-15% CAGR. On the other hand, global generic industry, at US$80bn(CY2008), is expected to grow at a CAGR of 9% to US$135bn-150bn byCY2015. Indian companies, on account of their relative positioning, cangrow at around 20% during the period.

Competitive position: Cadila is the fifth largest player in the domesticformulation market.


Current Investment ArgumentsStrong domestic portfolio: Cadila is the fifth largest player in the domesticmarket, with sales of about `2,232cr in FY2011, contributing 49% to itsoverall top line. The company enjoys a leadership position in the CVS, GI,women healthcare and respiratory segments, with a sales force of 4,500MRs.Going forward, the company expects its domestic formulation business togrow at above-industry average of 12-14% on the back of new productlaunches and field force expansion.

Exports on a strong footing: Cadila has a two-fold focus on exports (contributedaround 51% to its FY2011 top line), wherein it is targeting developed aswell as emerging markets. The company has developed a formidable presencein the developed markets of U.S., Europe (France and Spain) and Japan.In the U.S., the company achieved critical scale of US$215mn in FY2011.In Europe, the company's growth going forward would be driven by newproduct launches and improvement in margin by product transfer to Indianfacilities. In emerging markets, Cadila is aggressively targeting Brazil andthe CIS region.

Outlook and valuation: We expect Cadila's net sales to post a 19.2% CAGRto `6,343cr and EPS to report a 19.4% CAGR to `48.2 over FY2011-13E.At current levels, the stock is trading at 17.3x FY2012E and 13.6x FY2013Eearnings. We recommend Buy on the stock with the revised target priceof `̀̀̀̀965.

Pharmaceuticals CMP/TP/Upside: `654 / `965 / 48%Cadila Healthcare


PROMOTERS 74.8

FII 5.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CADILA (13.8) (17.5) 56.9 24.9 32.5

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 10.2 25.6 25.4 25.3 19.0

PAT GROWTH* (39.9) 36.3 39.4 34.9 25.9

OPM# 10.7 19.3 18.6 18.1 17.8


ANGEL ESTIMATES


PAT GROWTH (%) 8.5 28.0

ROE (%) 31.4 31.6

P/E 17.3 13.6

P/BV 4.9 3.8


BUY / HOLD / SELL 25 / 15 / 4

RATING BUY

52 WEEK HIGH / LOW 984 / 643

MARKET CAP (`̀̀̀̀ CR) 13,384

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 1,091 1,097 735 735




GROSS BLOCK 2,074 2,348 2,657 2,985


NET BLOCK 1,201 1,349 1,519 1,689



CURRENT ASSETS 1,775 2,283 2,893 3,810



MIS. EXP. NOT WRITTEN OFF 10 - - 1

TOTAL ASSETS 2,872 3,448 3,724 4,499




% CHG 25.9 25.6 15.8 21.1


EBITDA 708 861 1,038 1,207

(% OF NET SALES) 19.8 19.3 19.8 19.0




RECURRING PBT 620 842 979 1,186

% CHG 57.5 35.8 16.2 21.2

PBT (REPORTED) 616 842 979 1,186

TAX 74.1 106.4 191.1 183.7

(% OF PBT) 12.0 12.6 19.5 15.5

PAT (REPORTED) 542 736 787 1,003



ADJ. PAT 522 711 772 987

% CHG 59.3 36.3 8.5 28.0


KEY RATIOS

VALUATION RATIO (X)

P/E 26.4 19.3 17.3 13.6

P/CEPS 20.5 16.0 14.6 11.7

P/BV 8.2 6.2 4.9 3.8

EV/SALES 4.0 3.2 2.6 2.1

EV/EBITDA 20.1 16.5 13.2 11.1


EPS (BASIC) 24.7 33.8 37.7 48.2


CASH EPS 31.9 40.9 44.6 56.0

DPS 5.0 7.4 8.1 10.3

BOOK VALUE 79.7 106.1 134.3 170.6

RETURNS (%)

ROCE (PRE-TAX) 20.9 23.2 25.0 25.5


ROE 37.0 37.4 31.4 31.6

TURNOVER RATIOS (X)





CASH FLOW STATEMENT

PROFIT BEFORE TAX 616 824 979 1,186


(INC.)/DEC. IN WORKING CAPITAL (40) (211) (193) (215)





(INC.)/DEC. IN INVESTMENTS (84) (0) 6 -




INC./(DEC.) IN LOANS (177) 7 (363) -


OTHERS 2 (130) 152 -


INC./(DEC.) IN CASH (1) 44 90 388






Company BackgroundSanofi, a leading global pharmaceutical company, operates in India throughfour entities - Aventis Pharma Limited, Sanofi-Synthelabo (India) Limited,Sanofi Pasteur India Private Limited and Shantha Biotechnics. Aventis Pharma,focuses its activities on seven major therapeutic areas namely - cardiovasculardiseases, metabolic disorders, thrombosis, oncology, central nervous systemdisorders, internal medicine and vaccines. Predominately a domesticcompany, the company is the second largest MNC in India, enjoying a marketshare of 1.4%.

Structural SnapshotGrowth opportunity: In India, the current spending on healthcare (publicand private) is estimated at 6% of GDP and is expected to increase to 10%of GDP by 2016. Thus, on a conservative basis also, the industry can growat a 14-15% CAGR.

Competitive position: Aventis is the third largest MNC in the domesticformulation industry. The company has a market share of 1.4%.


Current Investment ArgumentsFocus on top-line growth: Aventis recorded a revenue CAGR of 5.3% to`1,085cr over CY2006-10 on the back of slower-than-expected growth onthe domestic formulation front and loss of distribution rights of Rabipur vaccine.Going forward, to grow in-line with the industry's average in the domesticsegment, Aventis has rolled out its Prayas project, an initiative to increaseits penetration in rural areas.

Under the project, the company would launch low-price products in theanti-infective and NSAID therapeutic segments and increase its field force.The project is expected to provide incremental revenue of `500cr over thenext five years. Aventis also plans to launch CVS and vaccine products inthe domestic market post the acquisition of Shantha Biotech by its parentcompany. We expect the company's net sales to log a 13.6% CAGR overCY2010-12E, majorly driven by its domestic formulation sales.

Valuation: Aventis has a strong balance sheet with significant cash, whichcould be used for future acquisitions or higher dividend payouts. We expectthe company’s net sales to post a 12.6% CAGR to `1,450cr and EPS toregister a 15.4% CAGR to `89.7cr over CY2010-12E. At current levels,the stock is trading at 26.1x and 24.9x CY2011E and CY2012E earnings,respectively. We recommend Reduce on the stock with a target price of`̀̀̀̀1,937.

Pharmaceuticals CMP/TP/Downside: `2,230 / `1,937 / 13%Aventis


PROMOTERS 60.4

FII 9.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

AVENTIS (2.7) 20.7 38.8 10.1 19.9

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 13.5 11.4 7.9 6.1 7.1

PAT GROWTH* 15.9 (1.5) 2.6 1.3 8.7

OPM# 16.1 13.2 20.5 21.7 21.1


ANGEL ESTIMATES


PAT GROWTH (%) 27.1 4.8

ROE (%) 18.3 17.1

P/E 26.1 24.9

P/BV 4.5 4.0



RATING REDUCE

52 WEEK HIGH / LOW 2,430 / 1 ,747


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - - -



GROSS BLOCK 335 375 396 417


NET BLOCK 145 171 170 167


INVESTMENTS 5.2 0.4 0.4 0.4

CURRENT ASSETS 1,014 1,214 1,149 1,300



DEFERRED TAX ASSETS 15 10 17 20

TOTAL ASSETS 932 1,014 1,142 1,277




% CHG 0.7 11.4 12.1 13.1


EBITDA 148 143 182 214

(% OF NET SALES) 15.2 13.2 14.9 15.3


INTEREST & OTHER CHARGES 0.1 2.9 - 0




% CHG (7.0) (3.4) 19.9 6.9

PBT (REPORTED) 241 234 280 299

TAX 84.0 79.0 82.6 92.4

(% OF PBT) 34.8 33.8 29.6 30.9

PAT (REPORTED) 157 155 197 206

EXTRA-ORDINARY ITEMS 75.7 - -


ADJ. PAT 157 155 197 206

% CHG (5.3) (1.5) 27.1 4.8


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 32.6 33.1 26.1 24.9

P/CEPS 29.4 20.4 23.4 22.3

P/BV 5.5 5.1 4.5 4.0

EV/SALES 4.7 4.1 3.6 3.1

EV/EBITDA 30.8 31.3 24.5 20.3


EPS (BASIC) 68.4 67.3 85.5 89.7


CASH EPS 75.9 109.1 95.2 100.0

DPS 20.0 55.0 25.7 26.9

BOOK VALUE 404.6 440.3 495.9 554.5

RETURNS (%)

ROCE (PRE-TAX) 14.8 12.6 14.8 15.7


ROE 17.9 15.9 18.3 17.1

TURNOVER RATIOS (X)





CASH FLOW STATEMENT








(INC.)/DEC. IN INVESTMENTS - (5) 0 -

OTHER INCOME 111 113 120 109

CASH FLOW FROM INVESTING 70 82 99 88




OTHERS 2 (9) - (0)


INC./(DEC.) IN CASH 88 69 21 103





Company BackgroundIpca Labs is a market leader in the anti-malarials and rheumatoid arthritissegments. The company is also a notable name in the domestic formulationsegment, with 150 formulations across major therapeutic segments.The company has seven production units, approved by most of the discerningregulatory authorities including USFDA, UKMHRA, Australia-TGA, SouthAfrica-MCC and Brazil-ANVISA.


Competitive position: Ipca Labs is a market leader in the anti-malarials andrheumatoid arthritis segments in India.


Current Investment ArgumentsDomestic formulations business: Ipca Labs has been successful in changingits business focus to the high-margin chronic and lifestyle segments fromthe low-margin anti-malarial segment. The company's chronic and lifestylesegments, comprising CVS, anti-diabetics, pain-management, CNS anddermatology products, constitute more than 50% of its domestic formulationsales. Management has ramped up its field force significantly with the additionof divisions in the domestic formulations segment, taking the current strengthto nearly 5,000MRs.

Exports to be the next growth avenue: On the formulations front, IpcaLabs has been increasing its penetration in regulated markets, viz. Europeand U.S., by expanding the list of generic drugs backed by its own API. Inthe emerging and semi-regulated markets, the company plans to focus onbuilding brands in the CVS, CNS, pain management and anti-malarial segmentsalong with tapping new geographies. On the API front, where it is amongthe low-cost producers, Ipca Labs is aggressively pursuing supply tie-upswith pharma MNCs.

Indore SEZ approval and tender business to enhance momentum: IpcaLabs is awaiting USFDA approval for its Indore SEZ. Once approved, thefacility would cater to the U.S. generic market and should post sales of`300cr-350cr. Further, the company has received approval from the WHOfor its anti-malarial product, making the company eligible to participate inthe global tender worth US$300mn along with three other players.

Valuation: We expect IPCA Labs' revenues to witness a 16.3% CAGR to`2,569cr and EPS to register a 14.8% CAGR to `27.5 over FY2011-13E,driven by the U.S. and domestic markets and the API segment. We recommendBuy on the stock with a target price of `̀̀̀̀358.

IPCA LabsPharmaceuticals CMP/TP/Upside: `279 / `358 / 28%


PROMOTERS 46.1

FII 9.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

IPCA LABS 12.7 (13.5) 58.3 16.8 42.7

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 20.2 21.2 21.6 20.1 16.6

PAT GROWTH* (17.1) 8.1 24.5 33.7 29.2

OPM# 24.6 19.1 17.1 17.0 15.8


ANGEL ESTIMATES


PAT GROWTH (%) 15.0 37.8

ROE (%) 21.9 24.9

P/E 13.9 10.1

P/BV 2.8 2.3


BUY / HOLD / SELL 27 / 1 / 1

RATING BUY

52 WEEK HIGH / LOW 351 / 231


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS


RESERVES & SURPLUS 840 1,026 1,219 1,506


MINORITY INTEREST (1) (1) (1) (1)

TOTAL LOANS 455 531 531 531




GROSS BLOCK 881 988 1,178 1,366


NET BLOCK 638 699 828 946



CURRENT ASSETS 899 1,059 1,292 1,521

CASH 11 11 72 114


OTHER 768 930 1,032 1,191



TOTAL ASSETS 1,398 1,663 1,897 2,202




% CHG 21.2 21.2 17.2 15.4


EBITDA 326 360 452 548

(% OF NET SALES) 20.9 19.1 20.5 21.5






% CHG 35.3 13.1 24.9 24.2


PBT (REPORTED) 266 341 371 461

TAX 63 78 120 115

PAT (REPORTED) 204 262 251 346

ADD: SHARE OF EARNINGS OF ASSO. 2 - - -


ADJ. PAT 202 218 251 346

% CHG 14.3 8.1 15.0 37.8

(% OF NET SALES) 13.2 13.9 11.4 13.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 17.0 13.3 13.9 10.1

P/CEPS 13.8 11.0 11.2 8.4

P/BV 4.0 3.3 2.8 2.3

EV/SALES 2.5 2.1 1.8 1.5

EV/EBITDA 12.0 11.2 8.8 7.2


EPS (BASIC) 16.4 20.9 20.0 27.5


CASH EPS 20.1 25.3 24.9 33.1

DPS 2.8 4.2 4.0 5.5

BOOK VALUE 69.1 83.7 99.0 121.8

RETURNS (%)

ROCE (PRE-TAX) 21.9 19.9 22.0 23.3


ROE 27.0 22.8 21.9 24.9

TURNOVER RATIOS (X)





CASH FLOW STATEMENT










INC./(DEC.) IN LOANS (7) 76 - -


OTHERS 10 (23) - 1


INC./(DEC.) IN CASH (1) - 62 42






Company BackgroundAurobindo Pharmaceuticals Ltd. (APL) manufactures generic pharmaceuticalsand active pharmaceutical ingredients. The company's manufacturing facilitiesare approved by several leading regulatory agencies such as US FDA, UKMHRA, WHO, Health Canada, MCC South Africa and ANVISA Brazil. Thecompany's robust product portfolio is spread over six major therapeutic/product areas, encompassing antibiotics, anti-retrovirals, CVS, CNS,gastroenterological and anti-allergic.


Competitive position: A leader in the ARV business globally.


Current Investment ArgumentsGrowth triggers in place: APL has increased its global filings (ANDAs anddossiers) dramatically from 313 in FY2008 to 1,171 in FY2010, as it proposesto scale up from SSP and Cephs to NPNC products. Further, the company'stransformation from being a pure API supplier to becoming a formidableformulations player has increased its cost efficiencies, as 90% of its formulationis now backward integrated. Thus, to leverage on its cost efficiency andstrong product filings, APL entered into long-term supply agreements withPfizer (March 2009) and AstraZeneca (September 2010), which providesignificant revenue visibility going ahead. APL is also in discussion withother MNCs for more supply agreements.

U.S. and ARV formulation segments: APL's business, excluding the supplyagreements, would primarily be driven by the U.S. and ARV segments onthe formulation front. APL has been an aggressive filer in the U.S. market,with 209 ANDAs filed and 134 approvals received until FY2011. Amongstpeers, APL is the third largest ANDA filer. APL expects to file 15-20 ANDAsevery year going forward. We believe APL is well placed to tap this opportunity.We expect the base business (ex-Pfizer) to post a 36.0% CAGR overFY2010-12 and contribute US$268mn by FY2012, as the company movestowards the high revenue-generating NPNC and injectable (SSP and Cephs)products.

Outlook and valuation: We estimate APL's net sales to log a 12.7% CAGRto ̀ 5,343cr over FY2011-13E. Even after factoring in lower profitability goingforward, the stock trades at attractive valuations. Hence, even after thedowntrend, we maintain our Buy recommendation on the stock with atarget price of `̀̀̀̀166.

Pharmaceuticals CMP/TP/Upside: `97 / `166 / 71%Aurobindo Pharm.


PROMOTERS 54.7

FII 13.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

APL (23.9) (62.1) 50.9 (7.9) 15.1

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 23.9 22.5 21.3 22.6 15.0

PAT GROWTH* - 15.9 33.7 65.7 24.2

OPM# 17.7 17.1 16.1 15.2 13.1


ANGEL ESTIMATES


PAT GROWTH (%) (12.2) 3.9

ROE (%) 17.4 15.5

P/E 6.1 5.9

P/BV 1.0 0.8


BUY / HOLD / SELL 16 / 6 / 6

RATING BUY



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS


SHARE APPLICATION MONEY - - - -




TOTAL LOANS 2,155 2,414 1,687 1,917




GROSS BLOCK 2,312 2,387 2,947 3,427


NET BLOCK 1,615 1,688 2,042 2,290



INVESTMENTS 0.3 39 0.3 0.3

CURRENT ASSETS 2,506 3,392 3,397 4,024




TOTAL ASSETS 4,079 4,987 4,704 5,397




% CHG 16.2 22.5 6.6 14.4


EBITDA 617 704 670 766

(% OF NET SALES) 18.3 17.1 14.8 14.6






% CHG 100 16.4 (20) 4.3


PBT (REPORTED) 754 788 603 629

TAX 191 225 142 149

PAT (REPORTED) 563 563 462 480

ADD: SHARE OF EARNINGS OF ASSO. - - - 1



ADJ. PAT 454 526 462 480

% CHG 50.7 15.9 (12.2) 3.9


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 4.8 5.0 6.1 5.9

P/CEPS 3.8 3.8 4.2 4.0

P/BV 1.5 1.2 1.0 0.8

EV/SALES 1.4 1.2 1.0 0.9

EV/EBITDA 7.7 7.2 6.7 6.0


EPS (BASIC) 20.2 19.3 15.9 16.5


CASH EPS 25.6 25.2 22.9 24.5

DPS 1.0 1.1 1.0 1.0

BOOK VALUE 65.7 84.0 98.7 114.1

RETURNS (%)

ROCE (PRE-TAX) 12.1 11.7 9.6 10.6


ROE 29.6 24.6 17.4 15.5

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



(INC.)/DEC. IN WORKING CAPITAL (134) (593) 90 (308)





(INC.)/DEC. IN INVESTMENTS (9) 38 (38) -




INC./(DEC.) IN LOANS (1) 260 (727) 230


OTHERS (239) (123) 77 62

CASH FLOW FROM FINANCING (263) 100 (683) 258

INC./(DEC.) IN CASH (55) 115 (157) 200






Company BackgroundAlembic Pharmaceuticals (Alembic) is a leading pharmaceutical companyin India. The company is vertically integrated to develop pharmaceuticalformulations and intermediates. Alembic is the market leader in the macrolidessegment of anti-infective drugs in India. Alembic's manufacturing facilitiesare located in Vadodara and Baddi in Himachal Pradesh (for the domesticand non-regulated export market). The company’s Panelav facility housesthe API and formulation manufacturing (both US FDA approved) plants.


Competitive position: Alembic is the market leader in the macrolides segmentof anti-infective drugs in India.

Nature of business: Defensive sector insulated from economic cycles; Highlycompetitive industry, with a long payback period.

Current Investment ArgumentsGrowth triggers in place: Alembic has been restructuring its business portfolio,which would aid in improving its growth and operating performance.The company's domestic formulation business (57% of sales in FY2012)has 75% of its revenue coming from the anti-infective, respiratory,gynecological and gastro therapeutic space. Alembic has a strong fieldforce of ~2,700 MRs.

Alembic's exports formulation business contributed 14% to its total turnover,with U.S. and Europe contributing the most. In the U.S., YTD the companyhas filed for 41 ANDAs and has received 15 approvals. The internationalAPI business contributes 28% to the total turnover. Going forward, managementexpects its domestic formulation business to grow at industry pace. Further,revenue from the U.S. generic market is expected to scale up on the backof product approvals.

Profitability and return ratios to improve: We expect Alembic's marginsto improve from current levels of 12.2% in FY2011 to 15.0% by FY2013,given the improving productivity of the field force going ahead. The companyplans to reduce debt (currently at ̀ 339cr) going ahead, as it does not foreseeany major capital expenditure requirements except the normal capex, whichwould aid improvement in its return ratios.

Outlook and valuation: Alembic's growth and profitability have improvedpost the restructuring carried out by management. Over FY2011-13, weexpect Alembic to post a CAGR of 15.4% and 52.1% in its sales and netprofit, respectively. At the CMP, the stock is trading at attractive valuationsand we recommend a Buy view on the stock with a target price of `̀̀̀̀77.

Pharmaceuticals CMP/TP/Upside: `38 / `77 / 103%Alembic Pharm.



FII 7.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ALEMBIC (15.8) - - - -

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 15.1 - - - -

PAT GROWTH* 34.5 - - - -

OPM# 15.3 - - - -

ROE# - - - - -NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 80.3 28.3

ROE (%) 28.0 30.9

P/E 8.0 6.3

P/BV 2.1 1.8



RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS

EQUITY SHARE CAPITAL 38 38 38

RESERVES & SURPLUS 259 304 361

SHAREHOLDERS FUNDS 297 341 400

TOTAL LOANS 328 343 359

DEFERRED TAX LIABILITY 5 5 5

TOTAL LIABILITIES 630 690 764


GROSS BLOCK 434 484 534

LESS: ACC. DEPRECIATION 162 200 243

NET BLOCK 272 283 291

CAPITAL WORK-IN-PROGRESS 27 7 8

INVESTMENTS 3.3 3 3

CURRENT ASSETS 542 643 746

CURRENT LIABILITIES 214 247 284

NET CURRENT ASSETS 328 396 462

TOTAL ASSETS 630 690 764

Y/E MARCH (`̀̀̀̀ CR) FY2011 FY2012E FY2013E


TOTAL OPERATING INCOME 1,184 1,370 1,576

% CHG - 15.7 15.0

TOTAL EXPENDITURE 1,040 1,171 1,339

EBITDA 144 199 236

DEPRECIATION & AMORTISATION 30 39 43

INTEREST & OTHER CHARGES 26 31 32

OTHER INCOME 18 18 18

(% OF PBT) 25 16 13

RECURRING PBT 71 112 143

% CHG 57.3 28.3

EXTRAORDINARY EXPENSE/(INC.) - - -

PBT (REPORTED) 71 112 143

TAX 21 22 29

(% OF PBT) 30.2 20.0 20.0

PAT (REPORTED) 50 89 115

PAT AFTER MI (REPORTED) 50 89 115

ADJ. PAT 50 89 115

% CHG - 80.3 28.3


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 14.5 8.0 6.3

P/CEPS 9.1 5.6 4.6

P/BV 2.4 2.1 1.8

EV/SALES 0.9 0.8 0.7

EV/EBITDA 7.2 5.3 4.5


EPS (BASIC) 2.6 4.7 6.1

EPS (FULLY DILUTED) 2.6 4.7 6.1

CASH EPS 4.2 6.8 8.3

DPS 1.5 1.9 2.3

BOOK VALUE 15.7 18.1 21.2

RETURNS (%)

ROCE (PRE-TAX) 16.2 24.3 26.6

ANGEL ROIC (PRE-TAX) 16.7 25.2 27.3

ROE 14.9 28.0 30.9

TURNOVER RATIOS (X)

INVENTORY / SALES (DAYS) 71 71 70

RECEIVABLES (DAYS) 72 72 71

PAYABLES (DAYS) 67 69 68

Y/E MARCH FY2011 FY2012E FY2013E

CASH FLOW STATEMENT

PROFIT BEFORE TAX 71 112 143

DEPRECIATION 30 39 43

(INC)/DEC IN WORKING CAPITAL (49) (68) (56)

DIRECT TAXES PAID 19 22 29

CASH FLOW FROM OPERATIONS 33 60 101

(INC.)/DEC.IN FIXED ASSETS (63) (31) (51)

(INC.)/DEC. IN INVESTMENTS (0) (0) -

CASH FLOW FROM INVESTING (63) (31) (51)

ISSUE OF EQUITY - - -

INC./(DEC.) IN LOANS (32) 15 16

DIVIDEND PAID (INCL. TAX) (29) (45) (57)

OTHERS 119 - 1

CASH FLOW FROM FINANCING 29 (30) (40)

INC./(DEC.) IN CASH (1) (1) 10

OPENING CASH BALANCES 7 6 6

CLOSING CASH BALANCES 6 6 15


Note: Financials on Consolidated basisNote: Financials on Consolidated basis


Company BackgroundIndoco has a strong brand portfolio of 120 products and a base of 1,600MRs.The company operates in various therapeutic segments, including anti-infective,anti-diabetic, CVS, ophthalmic, dental care, pain management and respiratory.Prominent Indoco brands include Cyclopam, Vepan, Febrex Plus, ATM,Sensodent-K and Sensoform. The company's Top-10 brands contribute over50% to its domestic sales. Indoco now proposes to scale up its exportsbusiness through higher exposure to the regulated markets.


Competitive position: Indoco ranks 23rd in the industry in terms of thenumber of prescription drugs offered.


Current Investment ArgumentsDomestic formulations back on the growth trajectory: Indoco operatesin various therapeutic segments, including anti-infective, anti-diabetic, CVS,ophthalmic, dental care, pain management and respiratory. Post the restructuringof its domestic business in FY2009, which has resulted in improved workingcapital cycle, Indoco is back on its growth trajectory with its domestic formulationbusiness outpacing the industry's growth rate in the past two quarters. Further,the company plans to increase its sales force by 180MRs in FY2012E toincrease its penetration in tier-I I/rural markets.

Scaling-up on the export front: Indoco has also started focusing on regulatedmarkets by entering into long-term supply contracts. The company is currentlyexecuting several contract-manufacturing projects, covering a number ofproducts for its clients in the U.K., Germany and Slovenia.

Further, Indoco has entered into a supply agreement with Watson (U.S.market) and Aspen Pharma (emerging markets) for ophthalmic products.Although milestone payments from the contracts have commenced in FY2011,we expect substantial revenue flow from the deals to commence from FY2013-14.

Valuations: For FY2012, management has maintained its guidance of 20%growth, with 2HFY2012 expected to be more robust than 1HFY2012. Weexpect revenues to post a 19.5% CAGR to ̀ 694cr and EPS to post a 17.4%CAGR to `55.5 over FY2011-13E. At `̀̀̀̀418, the stock is trading at 9.8xand 7.5x FY2012E and FY2013E earnings, respectively. We recommenda Buy with a target price of `̀̀̀̀583.

Indoco RemediesPharmaceuticals CMP/TP/Upside: `418 / `583 / 40%


PROMOTERS 61.1

FII 2.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

INDOCO 6.9 (13.5) 50.4 4.0 -

BSE HC INDEX 4.1 (5.3) 29.7 9.8 17.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 9.4 20.7 22.6 14.9 15.2

PAT GROWTH* (9.5) 21.5 17.3 11.4 12.1

OPM# 12.4 13.5 13.2 14.5 16.6


ANGEL ESTIMATES


PAT GROWTH (%) 2.2 30.7

ROE (%) 14.1 16.4

P/E 9.8 7.5

P/BV 1.3 1.2



RATING BUY

52 WEEK HIGH / LOW 490 / 360


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 66 100 126 165




GROSS BLOCK 268 296 413 473


NET BLOCK 197 213 308 346


INVESTMENTS - - - -





TOTAL ASSETS 401 476 549 645




% CHG 14.4 20.7 16.5 22.5


NET RAW MATERIALS 174 213 253 307


PERSONNEL 56 67 73 89

OTHER 69 105 118 144

EBITDA 53 64 82 104

(% OF NET SALES) 13.3 13.5 14.7 15.2






TAX 1 5 14 18

(% OF PBT) 2.4 9.7 21.1 20.5


ADJ. PAT 42 51 52 68

% CHG 33.5 21.5 2.2 30.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 12.2 10.1 9.8 7.5

P/CEPS 9.5 8.0 7.2 5.7

P/BV 1.7 1.5 1.3 1.2

EV/SALES 1.4 1.2 1.1 0.9

EV/EBITDA 10.2 9.1 7.3 6.0


EPS (BASIC) 34.3 41.5 42.5 55.5


CASH EPS 44.0 52.5 57.7 72.9

DPS 7.0 8.3 8.5 11.1

BOOK VALUE 252.7 285.0 317.5 360.0

RETURNS (%)

ROCE (PRE-TAX) 10.8 11.6 12.4 13.9


ROE 14.3 15.5 14.1 16.4

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




LESS: OTHER INCOME - - 2 2





OTHER INCOME - - 2 2



INC./(DEC.) IN LOANS 13 75 73 96


OTHERS (2) (48) (45) (55)


INC./(DEC.) IN CASH 9 (10) 14 12





Power NEUTRAL

COVERAGECompanies CMP(`̀̀̀̀) Target (`̀̀̀̀) Reco

NTPC 171 199 Buy

CESC 240 304 Buy

GIPCL 72 95 Buy

Plagued with problemsHuge capacity addition expected over FY2011-15E, but PLFs to decline:India's power generation capacity currently stands at 1,86,654MW, and weexpect 83,000MW of generation capacity to be added in India over FY2011-15E at a CAGR of 10.3%. Currently coal-based power capacity at 1,04,000MWcommands a dominant share of ~55% in overall power generation capacity.This dominance is set to continue with coal-based capacity expected to accountfor 77% of the generation capacity estimated to be added over FY2011-15E.However, domestic coal production (Coal India being the major player with80% share of domestic production) has not been sufficient to meet the country'soverall coal demand. Coal India's production, which reported a CAGR of 4.6%over FY2007-11, is expected to remain low on account of imposition of stringentenvironment laws. In all, we expect domestic coal production to witness a 5.4%CAGR over FY2011-15E. Hence, although 64,000MW of coal-based capacityis expected to be added over FY2011-15E, incremental domestic coal wouldsupport only 28,000MW of capacity. Domestic coal deficit is expected to resultin imports increasing from 89mt in FY2011 to 175mt in FY2015. Domestic coalshortage coupled with poor outlook for gas output is expected to result in all-India PLF declining by 418bp over the aforementioned period, leading to 8.0%growth in power generation, lagging the 10.3% growth in generation capacity.

Private sector players most affected due to fuel issues: A substantial portionof private sector power projects are expected to operate under competitive bidding(case 1 and case 2) and merchant routes. Projects operating under this routehave minimal protection from fuel-related issues. Currently, fuel-related issuesfaced by power generators pertain to the unexpected increase in cost of fuelcompared to the cost on which long-term PPAs were signed (due to instancessuch as Indonesian regulation and lower-than-contracted domestic coal supply).These issues are expected to cause fuel shortage, resulting in higher coal cost.Long-term PPAs under case 1 and case 2 routes were signed by these companies,taking into account the predetermined fuel cost; and they do not provide forpassing on the increase in coal cost. In effect, this has pushed the IRRs for theseprojects down substantially, making them unviable for project promoters. CPSUssuch as NTPC are better placed in this situation, considering that they operateunder cost-plus PPAs, which permit them to pass on the increase in fuel costs.Further, CPSUs get preference with respect to allocation of coal linkages. Thus,private sector players are the most vulnerable to fuel-related issues.

Sector's valuations at above-comfort levels considering the headwinds:Stocks in the power sector have corrected substantially in the past one year,with the BSE Power Index losing ~26% (vs. a 12% decline in the Sensex)during the period. Post this correction, top Indian IPPs are trading at P/BV of1.3-2x on FY2013E, which we believe is still above comfort levels, consideringthe concerns surrounding the sector. In this scenario, we believe power generatorsoperating under the cost-plus route (allowed to pass on the increase in fuelcosts and guaranteed regulated returns) and with assured power offtake dueto long-term PPAs are better placed than their private sector peers. We maintainour Buy view on NTPC (cumulative PPAs for 1,00,000MW and paymentassured under the tripartite agreement), CESC (standalone power businesstrading at attractive valuations, P/BV of 0.6x on FY2013E basis) and GIPCL(P/BV of 0.7x on FY2013E basis)



Exhibit 3: Newcastle Mckloskey index

01000200030004000

50006000700080009000

0

50

100

150

200

250

US $/tonne- LHS ` / tonne - RHS

Rising prices (INR terms)coal

Jan-

06

May

-06

Sep

-06

Jan-

0 7

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

Power

Huge capacity addition expected over FY2011-15E,but PLFs to declineIndia's capacity addition has gathered pace over the past fewyears, and we expect a total of 83,000MW of capacity to beadded over FY2011-15E. The expected capacity addition overthis period is double the capacity addition over FY2007-11.Growth in capacity is expected to be driven by private sectorplayers. Capacity addition during this period is set to be buoyedby the commissioning of four UMPPs of 4,000MW each.

Source: CEA, Company, Angel Research

Exhibit 1: Cumulative capacity addition over FY2007-11 and FY2011-15E

41,297

83,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

FY2007-11 FY2001-15E

(MW

)

Domination of coal-based capacities set to continueIndia's coal-based power capacity of ~1,04,000MW commandsa dominant share of ~55% in overall power generation capacity.This is set to continue with coal-based capacity expected toaccount for 77% of generation capacity estimated to be addedover FY2011-15E. However, although we expect ~64,000MWof coal-based capacity to be added over the aforementionedperiod, incremental domestic coal would support only 28,000MWof capacity, resulting in low PLF for coal-based plants. Further,with the country's gas output not expected to pick up, we expectlow PLFs for gas-based plants as well. Thus, despite a 10.3%CAGR in India's generation capacity over FY2011-15E, powergeneration CAGR is expected to be much lower at 8.0%.

Coal shortage in power stations to worsen….With poor growth in coal production over the past few years,Coal India has not signed any long-term fuel supply agreementfor projects commissioned after March 2009. Further, as perthe new clause in the fuel supply agreements of Coal India,the company is not bound to pay any penalty if it supplies 50%of the contracted quantity as against the earlier stipulated 90%.Poor infrastructure for handling coal in ports and deficienciesin rail and road infrastructure are also leading to coal shortagein power plants.

Source: Min. of Coal, Angel Research: Note: A number of upcoming powerprojects incl.uded above have been alloted captive coal blocks, higher paceof coal production in these blocks would lead to lower overall coal shortage.

Exhibit 2: India’s Incremental coal production to be insufficientFY12E FY13E FY14E FY15E Total

Inc. coal prodn. to be 10 30 34 39 112

available for power sector (mt)

Capacity that can be

supported (MW) 2,386 7,380 8,475 9,720 27,960

New coal based

capacity exp. (MW) 14,250 16,500 16,500 16,750 64,000

Shortage (MW) (11,864) (9,120) (8,025) (7,030) (36,040)

Little progress in the development of captive coal blocksOf the 195 captive coal blocks that have been allotted by Ministryof Coal since it began the allocation of captive coal blocks in1993, only ~30 have started mining till date. Obtaining environmentand forest clearances as well as obtaining mining lease fromstate governments are the major hurdles in the development ofallotted captive coal blocks. We do not expect much improvementin production from captive coal blocks as progress in thedevelopment of captive mining blocks has been very slow. DuringJune 2011, Ministry of Coal de-allocated 24 captive coal blocksallotted to various companies due to slow progress in development.

India's coal imports to increase by 86mtpa over FY2011-15EDespite having the fourth highest coal reserves globally (provenreserves of 114bn metric tonnes), India faces coal deficit asdomestic coal production (Coal India being the major playerwith 80% share of domestic production) has not been sufficientto meet the demand. Over FY2007-11, while India's coal demandwitnessed a 7.7% CAGR, coal production grew at a lower 5.6%.Delay in development of coal blocks due to issues in land acquisitionand obtaining environment clearance are the prime reasonsfor the slow rate of coal production. Going ahead, we expectIndia's coal imports to surge from 89mt in FY2011 to 175mt inFY2015.

Imported coal not to provide succorAlthough a number of future capacities have been designed tooperate on imported coal (both exclusively and with a mix ofdomestic coal), imported coal is not expected to solve the problemof coal shortage. While imported coal is suitable only for coastalpower projects, the increase in global coal prices, in the pastone year coupled with strong depreciation of INR vs. USD,has made coal imports expensive. We expect India's coal importsto increase from 89mt in FY2011 to 175mt in FY2015.

A major portion of India's coal imports are met by Indonesia,and a large number of projects of India's IPPs are expected tobe fuelled by Indonesian coal on the basis of long-term fuelsupply agreements with Indonesian companies. The Indonesiangovernment's new regulation that linked coal exports to amarket-linked reference price is a huge setback for Indian powergenerators as most of the fuel supply agreements were signedat prices that were at a steep discount to current market rates.As power generators are not liable to pay penalty if the PLFtouches the stipulated level, they would not be inclined to operateat higher levels if the selling price is not viable. Some of themajor projects affected due to Indonesian regulations areTata Power's UMPP at Mundra, Reliance Power's KrishnapatnamUMPP and Adani Power's Mundra power projects.


Power

…thus the power-deficit situation is set to continue

India's overall power deficit stood at 8.5% in FY2011. OverFY2011-15E, the country's power demand is expected to witnessa CAGR of 7.4%. Generation growth is set to be higher thandemand growth at 8.0% CAGR (although lower than growth incapacity at 10.3%). Despite higher generation growth (vs. demandgrowth) power deficit situation is expected to continue, althoughthe level of deficit is expected to reduce.

Source: CEA, Angel Research

Exhibit 4: All- India power-deficit scenario

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E

(%)

to operate on imported coal from Indonesia, which is addingto its fuel woes.

CPSUs such as NTPC are better placed in this situation,considering that they operate under cost-plus PPAs, which permitthem to pass on the increase in fuel costs. Further, CPSUsget preference with respect to allocation of coal linkages.Thus, private sector players are the most vulnerable tofuel-related issues.

Private sector players most affected due to fuel issuesA substantial portion of the private sector power projects (existingand under commissioning) are expected to operate undercompetitive bidding (case 1 and Case 2) and merchant routes.Projects operating under these routes have minimal protectionfrom fuel-related issues. Currently, fuel-related issues faced bypower generators pertain to the unexpected increase in costof fuel compared to the cost on which long-term PPAs weresigned (due to instances such as Indonesian regulation) andlower-than-contracted domestic coal supply. These issues areexpected to cause fuel shortage, leading to higher coal cost.Long-term PPAs under case 1 and case 2 routes were signedby these companies, taking into account the predeterminedfuel cost; and they do not provide for passing on the increasein coal cost. In effect, this has pushed the IRRs for these projectsdown substantially, making them unviable for project promoters.

For instance, Reliance Power which has been allotted captivecoal blocks for operating the Sasan and Tilaiya UMPPs, too isnot very well placed in this regard as the company has wonthese projects by quoting aggressively and is thus liable tosupply power at very low tariff. Reliance Power plans to useexcess coal from the captive coal blocks allotted for SasanUMPP for running its Chitrangi Power Project. However, thereis no certainity as to whether the company would be allowedto use the excess coal as the matter is sub-judice. If the companyis not allowed to use the excess captive coal, then the company’sIRRs at company level would decline sharply. Further, thecompany ‘s port based UMPP at Krishnapatnam is expected

Fuel Off-take type Reliance Tata Adani JSW

(MW) Power Power Power Energy

Coal Cost Plus 1,633* 3,218 - 1,406

Case 1 linkage 447 - 6,520 -

Case 1 captive 3,960$ - - -

Case 2 Imported 3,960 4,000 - -

Case 2 Captive 7,920^ 81# - -

Merchant - w/o linkage - - - 1,734

Merchant - linkage coal 153 - 270

Merchant - 140 - -

Renewable Cost Plus 240 336 - -

Case 1 100 - - -

Gas Yet to be tied up 2,400 - - -

Hydro Merchant - - - 168

PPA - 447 - 72

Total 20,813 8,222 6,520 3,650

Source: Company, Angel Research; Note: Incl. installed projects, projects underconstruction and projects in advanced stage of development; * Incl. 433MWCCPP plants; # Operates on heavy fuel oil; ̂ Sasan and Tilaiya UMPPs; $Chitrangipower project

Exhibit 5: IPP projects classification

Sector valuations at above comfort levels considering theheadwinds: Stocks in the power sector have corrected substantiallyin the past one year, with BSE Power Index losing ~26%(vs. a 12% decline in BSE Sensex) during the period. Post thiscorrection, top Indian private IPPs are trading at P/BV of1.3-2x on FY2013E basis, which we believe is above comfortlevels, considering the concerns surrounding the sector. In thisscenario, in our view, power generators operating under thecost-plus route (allowed to pass on the increase in fuel costsand guaranteed of regulated returns) and with assured poweroff-take due to long-term PPAs are better placed than theirprivate sector peers. We maintain our Buy recommendationon NTPC (cumulative PPAs for 1,00,000MW and paymentassured under tripartite agreement), CESC (power businesstrading at attractive valuations, P/BV of 0.6x on FY2013Ebasis) and GIPCL (P/BV of 0.7x on FY2013E basis)

Source: Company, Angel Research; Note: *Financials on consolidated basis

Exhibit 6: Recommendation summeryCompany M Cap CMP TP Reco Net Sales ( `̀̀̀̀ cr) OPM (% ) Net Profit ( `̀̀̀̀ cr) RoE (%) P/BV (x)

(`(`(`(`(` cr) (`)(`)(`)(`)(`) (`)(`)(`)(`)(`) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

NTPC* 141,327 171 199 Buy 63,970 71,871 24.5 25.0 9,580 10,517 13.3 13.4 1.9 1.7

CESC 2,993 240 304 Buy 4,533 4,880 24.2 23.5 511 525 11.3 10.5 0.6 0.6

GIPCL 1,092 72 95 Buy 1,384 1,437 33.3 30.9 154 166 10.8 10.8 0.7 0.7


Company BackgroundEstablished in 1975, NTPC is India's largest power generation company. NTPChas an installed capacity of 36,014MW (including 3,364MW under JVs), spreadacross 28 power stations. The company's capacity has grown by 6,790MWover FY2007-11. The company envisions being a 75,000MW company byFY2017. NTPC enjoys healthy operational efficiency and has consistently reportedhigh PLF of ~90% compared to all-India PLF of ~75%.

Structural SnapshotGrowth opportunity: India's overall capacity addition for FY2011 stood at~12,000MW, which is just a fraction of the ~1,00,000MW of capacity addedby China every year. NTPC accounts for 17.8% of India's installed capacityand contributed to 27.2% of the country's power generation during FY2011.NTPC (including JVs) currently has 12,928MW of capacity under construction,of which ~10,000MW will be commissioned in FY2012-13. The company'sfuture growth would be driven by the timely execution of its huge capacityaddition plans. NTPC has recently completed the tendering process for awardingBTG orders for 7,200MW (800x9) of super-critical thermal plants. The companyis also expected to award BTG orders for another 5,940MW (660x9) ofprojects shortly (the issue is currently subjudice).

Competitive position: NTPC is comfortably ahead of its competitors dueto cumulative PPAs for 1,00,000MW. Payment for power supply is guaranteedunder the tripartite agreement till FY2016 and on the basis of first chargethereafter. NTPC receives over 80% of its coal requirements from domesticsources and is preferred by the Ministry of Coal over private IPPs with respectto long-term as well as short-term coal supply.

Nature of business: Low risk; Stable and regulated returns.

Current Investment ArgumentsEarnings protected by the regulated return model: NTPC, being a centralpublic utility (CPU) governed by the CERC's regulations, earns RoE of 15.5%(on regulated equity). Additionally, the company has been consistently realizingvarious generation-linked incentives, which add 2-3% to its RoE.

Enjoys robust fuel security: NTPC, which received coal linkages for ninenew projects with total capacity of 10,920MW in FY2011, would be a beneficiaryof the Ministry of Coal's linkage policy for the Twelfth Plan, which givespriority to CPUs. Strong fuel security augurs well for NTPC, whose recoveryof fixed costs is linked to the stipulated level of PAF, which in turn is criticallylinked to coal availability. Additionally, NTPC targets to mine 47mn tonnesof captive coal by FY2017.

Valuation reasonable: For a company with significant fuel security, highRoEs of 18-19% (on regulated equity) as well as significant capacity expansionplans, which enviably have both fuel security and assured offtake, in our view,NTPC is trading reasonably at 1.7x FY2013E P/BV. Hence, we maintainour Buy recommendation on the stock with a target price of `̀̀̀̀199 byassigning a target multiple of 2x on FY2013E P/BV.

Power CMP/TP/Upside: `171 / `199 / 16%NTPC



FII 3.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

NTPC (0.3) (8.5) (1.3) 4.4 -

BSE PWR INDEX (4.3) (25.7) 5.0 0.0 -



(%) 3M^ 1Y 3Y 5Y 10Y

SALES GROWTH* 18.4 19.0 14.1 15.8 11.7

PAT GROWTH* 15.0 5.8 7.8 9.9 9.6

OPM# 21.1 22.8 24.9 26.8 26.9

ROE# - 14.0 14.5 14.6 14.0NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS, ^ONSTANDALONE BASIS

ANGEL ESTIMATES



ROE (%) 13.3 13.4

P/E 14.7 13.4

P/BV 1.9 1.7


BUY / HOLD / SELL 30 / 15 / 4

RATING BUY

52 WEEK HIGH / LOW 198 / 152

MARKET CAP (`̀̀̀̀ CR) 141,327

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 43,844 50,392 55,892 65,142




GROSS BLOCK 71,527 79,210 96,400 114,400


NET BLOCK 38,804 44,863 59,225 73,869


GOODWILL 1 1 1 1

INVESTMENTS 11,778 8,357 7,357 6,357

CURRENT ASSETS 33,215 38,045 41,907 41,014




TOTAL ASSETS 108,592 120,847 132,259 148,357




% CHG 9.0 19.0 11.4 12.3


EBITDA 13,075 13,117 15,701 17,964

(% OF NET SALES) 27.1 22.8 24.5 25.0

DEPRECIATION & AMORTISATION 2,894 2,720 2,828 3,356


OTHER INCOME 2,947 4,488 2,648 2,131

RECURRING PBT 11,049 12,393 12,700 13,581

EXTRAORDINARY EXPENSE/(INC.) - - -

PBT (REPORTED) 11,049 12,393 12,700 13,581

TAX 2,211 3,044 3,120 3,065

(% OF PBT) 20.0 24.6 24.6 22.6

PAT (REPORTED) 8,838 9,348 9,580 10,517

LESS: MINORITY INTEREST (MI) (0.0) (5.2) (5.2) (5.2)

ADJ. PAT AFTER MI (REPORTED) 8,838 9,354 9,586 10,522

% CHG 9.2 5.8 2.5 9.8

(% OF NET SALES) 18.3 16.3 15.0 14.6

BASIC EPS (RS) 10.7 11.3 11.6 12.8

% CHG 9.2 5.8 2.5 9.8


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 16.0 15.1 14.7 13.4

P/CEPS 12.0 11.7 11.4 10.2

P/BV 2.2 2.0 1.9 1.7

EV/SALES 3.3 2.9 2.7 2.6

EV/EBITDA 12.1 12.7 10.9 10.3


EPS (BASIC) 10.7 11.3 11.6 12.8


CASH EPS 14.2 14.6 15.0 16.8

DPS 4.5 4.4 4.4 4.4

BOOK VALUE 77.9 84.0 91.2 99.5

RETURNS (%)

ROCE (PRE-TAX) 9.8 9.1 10.2 10.4


ROE 14.2 14.0 13.3 13.4

TURNOVER RATIOS (X)



PAYABLES (DAYS) 130 116 118 110


CASH FLOW STATEMENT


DEPRECIATION 2,894 2,720 2,828 3,356

CHANGE IN WORKING CAPITAL 408 (2,839) (2,000) (2,235)

LESS: OTHER INCOME 2,947 2,590 2,648 2,131




(INC.)/ DEC. IN INVESTMENTS (82) 3,420 1,000 1,000

OTHER INCOME 2,947 2,590 2,648 2,131



INC./(DEC.) IN LOANS 5,022 6,548 5,500 9,250


OTHERS - - - -


INC./(DEC.) IN CASH (1,198) 1,807 1,240 (3,781)






Company BackgroundCESC is a licensed power distributor in Kolkata and Howrah. The companysupplies power from its own generation plants (capacity of 1,225MW locatedacross four power stations). The company also purchases power from WBSEDCLduring peak periods to meet customer demand. Over the past few years,CESC has consistently reported PLF in excess of 90%. On the distributionfront as well, the company's operational efficiency has improved over theyears, with T&D losses coming down from 22.8% in FY2001 to 12.9% inFY2011. CESC holds a 94% stake in its subsidiary, Spencer's Retail, whichis involved in the retail business.

Structural SnapshotGrowth opportunity: CESC is expanding its generation business and issetting up projects within and outside West Bengal through its subsidiaries.Currently, 1,200MW of capacity is under construction and another 5,869MWof projects are under various stages of development.

Competitive position: CESC is the sole power distributor in Kolkata andHowrah, with 2.5mn customers. However, the company would be facingcompetition for signing PPAs of its upcoming power generation projects.CESC is well placed in terms of fuel security with assured fuel supply for~90% of its existing operations.

Nature of business: While CESC's power distribution business has lowrisks with stable regulated returns, its retail venture is currently in losses.

Current Investment ArgumentsExpansion plans on track: CESC has 1,200MW of generation projectsunder construction at Haldia (600MW) and Chandrapur (600MW), whichare expected to be operational by FY2014. The company has planned capexof ~`2,300cr in its license area over FY2011-14, a portion of which wouldbe added to its regulated equity, thereby contributing to its future earnings.

Retail business on the recovery path: Spencer's Retail has been aloss-making venture since it became CESC's subsidiary in FY2008 andreported an accumulated loss of ̀ 778cr as of FY2011. However, on a positivenote, the retail business has turned EBITDA-positive on store level since1QFY2011. Spencer's Retail is attempting to improve its margins by focusingmore on the high-margin food business and is expected to breakeven at theEBITDA level by FY2014.

Valuations attractive: Currently, CESC's licensed operations, which havea direct exposure to retail customers, generate healthy cash flow. Further,tariff regulation allows for monthly variable cost adjustment, enabling thecompany to pass on the increase on a regular basis to its customers. Thestock is currently trading at 0.6x FY2013E P/BV on a standalone basis,which is attractive, considering the healthy cash inflows. We maintain ourBuy recommendation on the stock with an SOTP target price of`̀̀̀̀304, after valuing Power, Retail and Real Estate businesses at `̀̀̀̀282,`̀̀̀̀11 and `̀̀̀̀11 respectively.

Power CMP/TP/Upside: `240 / `304 / 27%CESC



FII 18.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CESC (11.9) (25.8) 0.4 (6.2) 36.2

BSE PWR INDEX (4.3) (25.7) 5.0 0.0 -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 12.2 19.6 12.3 9.4 8.5

PAT GROWTH* (26.5) 12.9 12.4 19.1 -

OPM# 19.8 25.0 24.0 23.3 25.6


ANGEL ESTIMATES



ROE (%) 11.3 10.5

P/E 5.9 5.7

P/BV 0.6 0.6


BUY / HOLD / SELL 30 / 0 / 0

RATING BUY

52 WEEK HIGH / LOW 365 / 187


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 3,708 3,952 4,352 4,952



APPLICATION OF FUNDS - - - -

GROSS BLOCK 9,990 10,704 11,341 11,852


NET BLOCK 5,859 6,214 6,550 6,748


INVESTMENTS 679 1,084 1,184 2,084

CURRENT ASSETS 2,884 2,893 3,171 3,198




TOTAL ASSETS 7,531 8,256 9,103 10,169




% CHG 8.6 19.6 13.0 7.6


EBITDA 750 1,001 1,098 1,145

(% OF NET SALES) 22.3 25.0 24.2 23.5



OTHER INCOME 156 152 153 176

(% OF PBT) 30.0 24.8 24.0 26.8


% CHG 12.4 17.8 3.8 2.8


PBT (REPORTED) 522 614 638 656

TAX 89 126 127 131

(% OF PBT) 17.0 20.5 19.9 19.9

PAT (REPORTED) 433 488 511 525

ADJ. PAT 432 488 511 525

% CHG 5.8 12.9 4.5 2.8

BASIC EPS (RS) 34.5 38.9 40.7 41.8

% CHG 5.8 12.7 4.5 2.8


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 6.9 6.2 5.9 5.7

P/CEPS 4.7 4.0 3.7 3.6

P/BV 0.8 0.7 0.6 0.6

EV/SALES 1.5 1.3 1.2 1.1

EV/EBITDA 6.6 5.0 5.0 4.6


EPS (BASIC) 34.5 38.9 40.7 41.8


CASH EPS 50.9 60.2 64.6 66.8

DPS 4.7 4.6 4.6 4.6

BOOK VALUE 304.4 342.7 378.3 415.4

RETURNS (%)

ROCE (PRE-TAX) 7.5 9.3 9.2 8.6


ROE 12.0 12.0 11.3 10.5

TURNOVER RATIOS (X)



PAYABLES (DAYS) 271 266 244 236


CASH FLOW STATEMENT









OTHER INCOME 156 152 153 176

CASH FLOW FROM INVESTING (1,262) (961) (879) (1,262)


INC./(DEC.) IN LOANS 151 244 400 600


OTHERS 178 - (6) -

CASH FLOW FROM FINANCING (85) 186 336 542

INC./(DEC.) IN CASH (131) (281) (99) (141)

OPENING CASH BALANCES 1,251 1,120 839 740

CLOSING CASH BALANCES 1,120 839 740 599



Company BackgroundGIPCL is majorly (~63%) owned by various state-owned companies of Gujarat.The company currently has 805MW generation capacity, with 500MW (125x4)lignite-based capacity operational at Surat and the remaining 305MW(160MW+145MW) gas-based capacity operational at Vadodara. The company'sSurat Lignite Power Plant (SLPP) station II (2x125) was declared commercialin FY2011.

Structural SnapshotGrowth opportunity: Currently, GIPCL is in the midst of examining the feasibilityof developing a new 600MW lignite-based power plant in Surat, throughwhich it intends to make the best use of the coal mines in its possession,which have adequate lignite to support 1,000MW of power generation for35 years.

Competitive position: GIPCL has assured offtake for its entire capacity,currently operational through MoUs and PPAs, under the cost-plus model.The company is also well placed in terms of fuel security with regards toSLPP stations due to its captive lignite mines (Vastan and Mangrol).

Nature of business: Low risk; Stable and regulated returns.

Current Investment ArgumentsSLPP expansion to lead to profit growth: GIPCL's SLPP station I I wasbuilt at a cost of `1,630cr (including the cost of development of Mangrolmines). Although SLPP station II commercialized at the beginning of FY2011,it stabilized only by FY2011-end. Hence, the plant had a low PAF for FY2011.Now that the plant has stabilized, the availability factor has also improved,which would result in an improvement in recovery of fixed costs. During1HFY2012, SLPP II reported PAF of 67% vs. 57% in 1HFY2011.

Enjoys reasonably strong fuel security: GIPCL is well placed in terms offuel security, with its entire fuel requirements for 500MW SLPP stations Iand II being met from its captive lignite mines. For gas-based plants, whichhave gas requirements of 1.55-1.60 mmscmd, the company has enteredinto tie-ups with GAIL and RIL-Niko for 1.01mmscmd; while for the remainingquantity, the company has tied up with GSPC and GAIL for the supply ofspot gas on 'as and when' required basis.

Valuations attractive: Considering the fuel security and cost-plus returnbusiness model, which assures RoE of 14% (excl. generation-linked incentives)at 75% and 80% PAF for lignite and gas-based plants, respectively , thestock is trading attractively at 0.7x FY2013 P/BV. The stock has correctedby 9% in the past three months, which provides a good entry point to investors.We have assigned a P/BV of 0.9x on FY2013 book value to arrive at atarget price of `95. We maintain our Buy rating on the stock.

Power CMP/TP/Upside: `72 / `95 / 32%GIPCL



FII 2.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

GIPCL (9.0) (24.0) 15.7 2.4 18.8

BSE PWR INDEX (4.3) (25.7) 5.0 0.0 -

SENSEX (2.6) (12.3) 21.3 3.3 17.3NOTE: ABOVE 1 YEAR ON CAGR BASIS;


(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 41.5 14.8 4.8 7.3 3.0

PAT GROWTH* 78.8 52.5 16.8 7.3 26.4

OPM# 31.2 28.0 23.2 25.3 33.7


ANGEL ESTIMATES


PAT GROWTH (%) (5.6) 7.7

ROE (%) 10.8 10.8

P/E 7.1 6.6

P/BV 0.7 0.7



RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,064 1,114 924 664




GROSS BLOCK 1,936 3,865 3,865 3,865


NET BLOCK 726 2,530 2,364 2,198

CAPITAL WORK-IN-PROGRESS 1,755 - 25 75




NET CURRENT ASSETS (135) (46) 15 (7)


TOTAL ASSETS 2,387 2,525 2,445 2,306




% CHG (18.7) 16.0 27.0 3.8


EBITDA 219 312 461 444

(% OF NET SALES) 23.3 28.7 33.3 30.9




(% OF PBT) 10.8 3.3 2.1 2.0


% CHG 17.9 (5.7) 55.0 7.7


PBT (REPORTED) 128 121 188 202

TAX 22 (42) 34 36

(% OF PBT) 16.8 (34.6) 18.0 18.0

PAT (REPORTED) 107 163 154 166

ADJ PAT 107 163 154 166

% CHG 24.5 52.5 (5.6) 7.7

BASIC EPS (RS) 7.1 10.8 10.2 11.0

% CHG 24.5 52.5 (5.6) 7.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 10.2 6.7 7.1 6.6

P/CEPS 5.6 3.8 3.4 3.3

P/BV 0.9 0.8 0.7 0.7

EV/SALES 2.3 2.0 1.4 1.2

EV/EBITDA 9.8 7.1 4.3 3.9


EPS (BASIC) 7.1 10.8 10.2 11.0


CASH EPS 12.9 19.0 21.2 21.9

DPS 2.9 2.9 2.9 2.9

BOOK VALUE 82.4 90.3 97.5 105.5

RETURNS (%)

ROCE (PRE-TAX) 5.8 7.6 11.9 11.7


ROE 8.8 12.5 10.8 10.8

TURNOVER RATIOS (X)



PAYABLES (DAYS) 206 198 174 176


CASH FLOW STATEMENT





DIRECT TAXES PAID 23 (7) 34 36








INC./(DEC.) IN LOANS 224 49 (190) (260)


OTHERS (5) (18) - -


INC./(DEC.) IN CASH (2) (0) 31 (9)





Real Estate NEUTRAL

COVERAGECompanies CMP Target (`̀̀̀̀) Reco

DLF 210 - Neutral

HDIL 82 115 Buy

Anant Raj 59 78 Buy

Reality caught up with real estateThe real estate sector has witnessed a topsy-turvy ride over the past fiveyears with a boom period during CY2007, backed by strong liquidity, highforeign direct investment (FDI) in the sector, large PE investment and strongdemand from the end-user segment. This was followed by a downfall in CY2008due to the sub-prime crisis, which led to considerable liquidity crisis worldwideand a sharp drop in real estate demand in all markets. However, as the worldrecovered in CY2009, Indian real estate also recovered with prices touchingtheir 2007-08 peaks mostly on the back of investor participation.

Boom to bubble…: However, in CY2011, reality caught the real estate sector.With inflation touching all-time high, the RBI was forced to increase rates 13times; and with real estate prices touching all-time high, affordability becamea major issue. Accordingly, property transactions in major Indian cities declinedby 20-30% for the year. With global uncertainty looming, demand in the commercialand retail segments was sluggish; and due to oversupply in these segments,rentals did not witness any uptick and remained stagnant, thus adding morepressure to the sector. At the end of CY2011, companies are left with negativeto mediocre growth, high leverage, high inventory, high interest cost, increasedraw-material costs and below-par profits, which are not enough to reducetheir debt. The last resort for these companies is to sell their non-core assetsto deleverage their balance sheet, which has seen a proportioned increase indebt over a period of time and became a major overhang for these companies.

No material uptick expected in CY2012/FY2013: We do not expect anymaterial uptick in CY2012 going ahead, as all segments in the sector arefacing sluggish demand and overcapacity. The commercial segment is expectedto witness significant supply in CY2012, which will result in vacancy levelsabove 20%. Vacancy in the retail segment is also expected to remain above20% over CY2011-13; and with retail FDI put on the backburner, we canexpect a number of cancellations/project delays in this segment going ahead.Further, with interest rates remaining high and prices not correcting, we donot expect demand to improve in the residential segment in the coming two-three quarters as end-users are postponing their purchases in anticipation ofa decline in interest rates and prices.

Valuations at a discount, but outlook cautious…: Despite the fact that mostreal estate stocks are available at their all-time low prices we maintain ournegative stance as, we do not foresee any instant catalyst for the sector inthe near term. The sector is facing a cash crunch and is highly leveraged atthis point of time. The sector is also witnessing a slowdown in demand, whichhas significantly affected cash flows. Going ahead, we feel real estate stockswill move on company-specific news - such as deleveraging by DLF couldsee a strong momentum in the stock or speedy approvals for projects andrehabilitation in Mumbai could result in positive momentum for HDIL.

Currently, we have a Neutral recommendation on DLF, owing to concerns ofhigh debt, but quicker sale of non-core assets may result in a change in ourrecommendation in the future. The stock is trading at 18.6x FY2013 EPS and1.4x FY2013E P/BV. HDIL is currently trading at 3.3x FY2013 EPS and 0.3xFY2013E P/BV and ARIL is trading at 6.5x FY2013 EPS and 0.4x FY2013EP/BV, which we beleive are attractive. We have a Buy rating on HDIL andARIL with a target price of `115 and `78, respectively.


Boom to bubbleThe real estate sector has witnessed a topsy-turvy ride overthe past five years with a boom period during CY2007, backedby strong liquidity, high foreign direct investment (FDI) in thesector, large PE investment and strong demand from the end-user segment. This was followed by a downfall in CY2008 dueto the sub-prime crisis, which led to considerable liquidity crisisworldwide and a sharp drop in demand for real estate in allmarkets. However, as the world recovered in CY2009, Indianreal estate also recovered with prices touching their 2007-08peaks mostly on the back of investor participation.

The sector went on a strong expansion mode, where developersstarted to diversify in areas other than their expertise and started tocreate land banks at high prices. Many developers ventured intohospitality, while some entered the insurance and telecom businesses.A number of residential developers entered the malls and officespace, which usually requires more capital and has a larger gestationperiod. This was mainly due to high liquidity, cheap money becauseof low interest rates, cheap labor and construction material costsand in anticipation of full recovery in demand in the coming years.In doing so, the sector piled on lot of debt during the period.

However, in CY2011, reality caught the real estate sector. Withinflation touching all-time high, the RBI was forced to increaserates 11 times; and with real estate prices touching theirall-time highs, affordability became a major issue. Accordingly,property transactions in major Indian cities declined by 20-30%for the year. With global uncertainty looming, demand in thecommercial and retail segment was sluggish; and due to oversupplyin these segments, rentals did not witness any uptick and remainedstagnant, thus adding more pressure to the sector.

At the end of CY2011, companies are left with negative to mediocregrowth, high leverage, high inventory, high interest cost, increasedraw-material costs and below-par profits, which are not enoughto reduce their debt. The last resort for these companies is tosell their non-core assets to deleverage their balance sheet, which

Source: Capitaline, BSE Realty Index, Angel Research

Exhibit 1: Declining sales and profit over the years...

11220

26889

1925718175

22389

3655

12498

7547

4599 4715

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

5,000

10,000

15,000

20,000

25,000

30,000

FY2007 FY2008 FY2009 FY2010 FY2011

Net Sales Adjusted Net Profit

( cr)` ( cr)`

Source: Capitaline, BSE Realty Index, Angel Research

Exhibit 2: Increasing debt and interest costs

19967 31988 39407 41322 46082

726995

2208 2250

2947

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Fy2007 FY2008 FY2009 FY2010 FY2011

Total Debt / Loan Funds Interest

( cr)` ( cr)`

Source: JLL, Angel Research

Exhibit 3: Office vacancy in 3QCY2011

19.719.8

27.6

12.7

0

5

10

15

20

25

30

Delhi Mumbai Chennai Banglore

Office Vacancy


Exhibit 4: Vacancy levels to remain high...

22.8 28

.8 32.9

42.5

41.6

40.5

55.1 57

.7

43.5

22.3

28.8 32

.0

33.1

19.6

30.5 35

.9 39.0

40.9

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E

(mn.

sq.

ft.)

New Completion Net Absorbtion

Retail segment's vacancy levels to remain above 20%Vacant space in shopping centers had increased during2008-09, primarily on account of high real estate costs andlower consumption, owing to which many retailers shifted gearsfrom the rapid expansion mode to the consolidation mode.Therefore, in the short term, vacant spaces are likely to increase,given the considerable rationalization in the supply pipeline.On the other hand, we believe demand is yet to pick up, especiallyin tier-I I and II I cities, which is not the case with metros, wherecatchment areas are witnessing high demand. We expect pricesto remain under pressure, as the segment has fragmented supplydynamics. Initial recovery volumes are likely to be cornered byexperienced players such as Phoenix Mills and not necessarilylarge ones. JLL expects vacancy in the segment to remain above20% over CY2011-13; and with retail FDI being postponed inthe sector, the segment can witness a number of cancellations/project delays going ahead.

Real Estate

has seen a proportioned increase in debt over a period of timeand became a major overhang for these companies.

No material uptick expected in CY2012/FY2013

Commercial demand to pick up after four-five quarters

After registering a sharp decline in the past few quarters, capitalvalues have started to strengthen and registered a marginalappreciation across most micro markets. The commercial sectoris expected to get a huge supply in CY2012, according to JonesLang LaSalle (JLL). CY2012 is likely to see 57.7msf of officespace to be operational, with only 39.0msf estimated to beabsorbed. Vacancy is estimated to be above 20%, which willkeep commercial rates stagnant over the coming quarters. JLLexpects vacancy to remain above 22.9% in CY2012 and graduallyreduce in CY2013.


Residential absorption expected to remain lowResidential property sales in Mumbai have plummeted by over70% since their peak of 2007, as high prices and rising interestrates have dented demand. Mumbai registrations declined by20% yoy and were at their 31-month low in November 2011.With interest rates remaining high and prices not correcting,we do not expect demand to improve in the coming two-threequarters as end-users are postponing their purchases in anticipationof a fall in interest rates and prices. According to Knight Frank,a global real estate consultant, unsold inventory levels are estimatedto be approximately 27% of the under-construction stock. Further,the investors segment, which makes up approximately 20% ofthe market demand, has been observed to be actively reducingits real estate portfolio, thereby adding significant supply intothe market. Unsold inventory in residential real estate was thehighest in Delhi-NCR at 102,758 units, followed by the Mumbaimetropolitan region at 90,512. Bangalore came next with 46,596units, and Pune followed with 40,734 units, according to PropEquity.In Mumbai and Delhi, residential prices are currently ruling 15-20% above their 2008 peak levels; whereas prices in mostother markets are still 10-15% lower than their last peak levels.This has resulted in tapering of volumes in regions such asMumbai and NCR. We believe FY2012-13 will see consolidation,with residential prices remaining soft in Mumbai and Gurgaon(may see a correction of 15-20% in some overheated areas),with a modest to flat 5% decline expected in other markets.


Exhibit 5: : Vacancy to remain above 20% over CY2011-13

3.8 4.1

9.4

8.5

6.3 6.9

18.3

15.6

10.8

2.8

3.7

9.6

6.6

4.0

4.0

12.1

11.3

9.9

0

2

4

6

8

10

12

14

16

18

20

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E

(mn.

sq.

ft.)

New Completion Net Absorbtion

What to expect in CY2012/FY2013Sale of non-core assets to reduce debt and focus more on

their core business area

Strategically and economically planning new land purchases

Greater focus on residential projects than commercial andretail segments, as they can quickly monetize the land

Higher focus on mid-income and affordable housing, whichcan drive future volumes and increase cash flow generation

Labor shortages expected to continue, as the sector continuesto face shortage of 10mn people, which is around 30% of the requirement

Margins to remain under pressure with cost of constructionrising and demand expected to remain sluggish

Raising money to fund future projects through FCCBs and QIPs,among others, as FDI, PE investment and bank funding have dried up

Strong reforms needed - Attempt to speed up approvalsThe real estate sector is witnessing a number of policy changes, asthe government is initiating several policy changes to improve thetransparency in the sector and speed up the approval process. Forinstance, the Maharashtra government has taken a number of policydecisions to ease the accumulation of approvals and regulations inthe Mumbai realty market. Accordingly, the state cabinet has approvedthe setting up of a housing regulator. This will surely help the sectorto become more transparent in future. The Maharashtra governmenthas also approved to amend the eligibility criteria for slum dwellersin Mumbai for rehabilitation housing. As per the new criteria, thosewho have moved into the pre-1995 constructed slum after 1995are also eligible for rehabilitation on payment of a transfer fee. Thiswill speed up the rehabilitation process and will be positive forcompanies like HDIL.

Valuations at a discount, but outlook cautious…Despite the fact that most real estate stocks are available attheir all-time low prices we maintain our negaive stance as, wedo not foresee any instant catalyst for the sector in the nearterm. The sector is facing a cash crunch and is highly leveragedat this point of time. The sector is also witnessing a slowdownin demand, which has significantly affected cash flows. Goingahead, we feel real estate stocks will move on company-specificnews - such as deleveraging by DLF could see a strong momentumin the stock or speedy approvals for projects and rehabilitationin Mumbai could result in positive momentum for HDIL.

Currently, we have a Neutral recommendation on DLF, owing toconcerns of high debt, but quicker sale of non-core assets mayresult in a change in our recommendation in the future. The stockis trading at 18.6x FY2013 EPS and 1.4x FY2013E P/BV. HDIL iscurrently trading at 3.3x FY2013 EPS and 0.3x FY2013E P/BVand ARIL is trading at 6.5x FY2013 EPS and 0.4x FY2013E P/BV, which we beleive are attractive. We have a Buy rating on HDILand ARIL with a target price of `115 and `78, respectively.

Source: PropEquity, Angel Research

Exhibit 6: High inventory levels(msf) Absorption New Inventory Inventory in

launches months of sale

NCR 10 8 132 12

Mumbai 6 5 99 16

Bengaluru 6 4 80 15

Pune 3 2 48 15

Chennai 3 1 32 12

Real Estate

Source: Company, Angel Research; Note: # FY2011-13

Exhibit 7: Our coverage universe valuation comparisonCompany Reco CMP TP Upside P/E (x) P/BV (x) EV/Sales (x) CAGR #

( `̀̀̀̀) ( `̀̀̀̀) (%) FY12E FY13E FY12E FY13E FY12E FY13E Sales EPS

DLF Neutral 210 - - 22.9 18.6 1.4 1.4 5.7 5.2 11.2 8.5

HDIL Buy 82 115 40.2 4.1 3.3 0.3 0.3 3.5 2.9 25.0 12.9

ARIL Buy 59 78 32.2 9.6 6.5 0.4 0.4 4.7 3.7 37.4 30.0


Company BackgroundDLF is India's largest real estate developer with over 60 years of experiencein the industry. The company is mainly involved in the development of residential,commercial and retail properties. DLF has a unique business model withearnings arising from development and rentals. The company has also forayedinto infrastructure, SEZ and hotel businesses. The company has 363msf ofplanned projects with 52msf of projects under construction. The companyhas land resource of 70msf for office and retail development, with 13msf ofprojects under construction.

Structural SnapshotGrowth opportunity: Demand for real estate is expected to remain strongin the long term. Residential demand is expected to stand at approximately4.25mn units, registering a 15% CAGR over 2010-14. Commercial demandover 2010-14 is estimated to be approximately 241msf. Demand for theretail segment is expected to reach 55msf by 2014.This provides stronggrowth visibility for the future.

Competitive position: Strong brand; Largest land bank in India.

Nature of business: Interest-rate sensitive; Cyclical.

Current Investment ArgumentsHigh leverage remains a concern: At the end of 2QFY2012, DLF's debtstood at `25,450cr, with debt-to-equity ratio of 0.9x. The company has beentrying hard to offload its non-core assets but has managed to only sell around`1,000cr of non-core assets due to delay in approvals. The company furtherplans to sell its non-core assets worth ̀ 6,000cr-7,000cr, which we feel mighttake a bit longer due to delay in approvals in the current tight liquidity environment.High debt will be a major overhang for the stock in the coming quarters.

Bumpy road ahead: DLF faces lot of challenges 1) bringing down its gearinglevels in FY2012E 2) getting fast approvals to have successful new launchesand 3) monetizing its non-core assets at a reasonable value. We estimateDLF to sell ~12msf of residential volumes in FY2012E and expect flat growthin FY2013E. In our view, there is a limited upside to our launch estimates,considering the steep price increase in the recent months. For FY2012, wehave assumed a 5% reduction in commercial and retail prices, but flat growthin residential prices, from current levels.

Valuations attractive: The stock is trading at 1.4x FY2013 P/BV and 18.6xFY2013 EPS. However, the stock lacks near-term triggers, given the kind ofmuted visibility on debt reduction and new launches. Hence, we recommendNeutral on the stock.

Real Estate CMP/TP/Upside: `210 / - / -DLF


PROMOTERS 78.6

FII / NRIS / OCBS 15.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

DLF (12.1) (18.2) 2.5 - -

REALTY INDEX (8.1) (32.5) (1.2) - -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 6.9 29.2 (11.6) 52.2 54.7

PAT GROWTH* (11.0) (4.7) (42.3) 50.8 49.4

EBITDA MARGIN# 46.3 39.3 47.4 56.1 47.2

ROE# - 6.7 11.8 31.2 25.3NOTE: ABOVE 1 YEAR- * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) (4.8) 22.9

ROE (%) 6.3 7.5

P/BV 1.4 1.4

P/E 22.9 18.6


BUY / HOLD / SELL 15 / 14 / 15

RATING NEUTRAL

52 WEEK HIGH / LOW 281 / 173

MARKET CAP (`̀̀̀̀ CR) 35,723

LIQUIDITY HIGH


BALANCE SHEET

SOURCES OF FUNDS


PREFERENCE CAPITAL 5,920 1,810 1,810 1,810




TOTAL LOANS 21,677 23,990 24,990 26,490

DEFERRED TAX LIABILITY 251 (163) (163) (163)



GROSS BLOCK 17,884 19,828 22,519 24,612


NET BLOCK 16,558 17,872 19,855 21,160


GOODWILL 1,268 1,384 1,384 1,384

INVESTMENTS 5,505 996 996 996

CURRENT ASSETS 27,306 33,272 32,173 32,319

CURRENT LIABILITIES & PRO. 8,777 13,101 13,248 13,460


TOTAL ASSETS 52,989 50,734 52,503 54,877


PROFIT & LOSS


% CHG (26.0) 28.8 9.5 11.8


EBITDA 3,512 3,753 4,562 5,212

(% OF NET SALES) 47.3 39.3 43.6 44.5



OTHER INCOME 428 584 262 265

(% OF PBT) 17.1 29.2 12.5 10.3

RECURRING PBT 2,505 2,000 2,095 2,565

PBT (REPORTED) 2,505 2,000 2,095 2,565

TAX 702 459 524 641

(% OF PBT) 28.0 23.0 25.0 25.0

PAT (REPORTED) 1,802 1,541 1,571 1,924

ADD: SHARE OF EARNINGS OF ASS. 0.8 8.8 10.0

15.0

LESS: MINORITY INTEREST (MI) 10.8 (7.2) (20.0) (20.0)

PRIOR PERIOD ITEMS (94.2) 97.2 - -


ADJ. PAT 1,802 1,541 1,571 1,924

% CHG (61.5) (4.7) (4.8) 22.9


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 20.8 21.8 22.9 18.6

P/CEPS 18.1 16.3 16.3 13.7

P/BV 1.5 1.5 1.4 1.4

EV/SALES 7.6 6.1 5.7 5.2

EV/EBITDA 16.1 15.6 13.1 11.7



CASH EPS 12.0 13.4 13.4 15.9

DPS 2.1 4.2 4.2 5.5

BOOK VALUE 144.4 144.5 148.9 153.9

RETURNS (%)

ROCE (PRE-TAX) 6.8 6.0 7.5 8.2


ROE 7.3 6.7 6.3 7.5

TURNOVER RATIOS (X)




PAYABLES (DAYS) 410 436 564 506


CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 5,743 (960) 639 (213)

LESS: OTHER ADJUSTMENTS 911 1,706 2,020 2,124



(INC)./DEC. IN FIXED ASSETS (13,325) (1,126) (3,722) (3,228)

(INC.)/DEC IN INVESTMENTS (3,109) 4,509 - -

INTEREST RECEIVED 127 - - -

OTHERS - (1,816) 10 15

CASH FLOW FROM INVESTING (16,306) 1,567 (3,712) (3,213)

ISSUE OF EQUITY 4,523 (4,110) - -

INC./(DEC.) IN LOANS 5,381 2,314 1,000 1,500


INTEREST PAID (2,103) (1,706) (2,020) (2,124)

CASH FLOW FROM FINANCING 7,417 (4,066) (1,470) (1,437)

INC./(DEC.) IN CASH (261) 418 (243) (27)






Company BackgroundHousing Development & Infrastructure Limited (HDIL) has established itselfas one of India's premier real estate development companies. HDIL is alsothe largest slum rehabilitation company, with significant operations in theMumbai Metropolitan Region. The company has completed more than 100mnsq. ft. of construction in all verticals of real estate and has rehabilitatedaround 30,000 families in the past decade. The company's operations rangefrom residential, commercial and retail projects to slum rehabilitation andland development.

Structural SnapshotGrowth opportunity: Nearly 15% of the population in urban areas residesin slums. According to the census of India, 35% of the individuals living inurban areas reside in a single-room house; and in nearly 68% of the cases,four or more individuals reside in these single-room houses. Nearlyone-fourth of the Indian population is below the poverty line. There is a shortageof nearly 24.71mn units of houses in urban areas. In Mumbai, more than54% of the population lives in slum clusters situated in certain pockets ofthe city. A slum population of 7.5mn could translate into 1.5mn families withan average household size of five people. This could translate into SRApotential of 644msf and revenue potential of `2,00,000cr for redevelopers.

Competitive position: Largest player in slum rehabilitation.

Nature of business: Interest-rate sensitive; Cyclical; Strong entry barriersin slum rehabilitation.

Current Investment ArgumentsSlum rehabilitation to drive growth: HDIL is the largest listed slum rehabilitationdeveloper in the Mumbai property market. SRA projects do not involve upfrontinvestment in land compared to conventional real estate projects. The costper sq. ft. in a slum re-development project is around `3,000/sq. ft. versus`5,000-6,000/sq. ft. (including land cost) in case of freehold land due tohigh property prices in Mumbai. This has resulted in a higher margin forHDIL on account of access to cheap land bank in Mumbai. Slum redevelopmentalso has relatively high entry barriers because it requires expertise and experience,as it entails dealing with government agencies and slum dwellers regularlyuntil project completion.

Strong revenue visibility: HDIL has strategically deleveraged its businessmodel by launching various projects through the conventional route sinceMarch 2009, thereby reducing its overdependence on the TDR market. Currently,HDIL has ~14.5msf of residential projects under construction, 80% ofwhich are pre-booked, resulting in `4,600cr of revenue to be booked overFY2012-14E. Further, HDIL has ~25.7msf of new projects in the pipeline inFY2012-13, which would help maintain sales volume.

Valuations attractive: The stock is currently trading at attractive valuations ofjust 0.3x FY2013 P/BV and 3.3x FY2013 EPS. The stock is trading at 43%discount to its one-year forward NAV. We continue to maintain our Buyrecommendation on the stock with a target price of `̀̀̀̀115. At our targetprice the stock will be trading at 4.6x FY2013 EPS and 0.4x FY2013 P/BV.

Real Estate CMP/TP/Upside: `82 / `115 / 40%HDIL


PROMOTERS 39.2


STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HDIL (13.8) (47.2) (9.4) - -

REALTY INDEX (8.1) (32.5) (1.2) - -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 18.3 22.7 (7.9) 33.9 -

PAT GROWTH* (30.5) 44.5 (16.5) 47.6 -

EBITDA MARGIN# 52.7 60.1 53.0 55.1 -

ROE# - 10.0 13.1 44.5 -NOTE: ABOVE 1 YEAR- * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 1.7 23.0

ROE (%) 8.5 9.4

P/BV 0.3 0.3

P/E 4.1 3.3


BUY / HOLD / SELL 16 / 6 / 6

RATING BUY



LIQUIDITY Low


BALANCE SHEET

SOURCES OF FUNDS





TOTAL LOANS 4,102 4,320 4,520 4,720




GROSS BLOCK 194 242 428 574


NET BLOCK 183 228 384 489


GOODWILL 259 220 220 220


CURRENT ASSETS 11,319 15,558 16,577 18,143



TOTAL ASSETS 11,150 13,559 14,652 16,160


PROFIT & LOSS


% CHG (13.0) 22.7 19.9 25.1

TOTAL EXPENDITURE (713) (747) (1,119) (1,420)

EBITDA 810 1,122 1,121 1,383

(% OF NET SALES) 53.2 60.1 50.1 49.3

DEPRECIATION& AMORTISATION (72) (84) (30) (40)

INTEREST & OTHER CHARGES (46) (84) (93) (97)


(% OF PBT) 2 3 5 5

RECURRING PBT 705 986 1,051 1,309


PBT (REPORTED) 705 986 1,051 1,309

TAX (133) (159) (210) (275)

(% OF PBT) 18.9 16.2 20.0 21.0

PAT (REPORTED) 572 827 841 1,034

LESS: MINORITY INTEREST (MI) (0) - - -

PRIOR PERIOD ITEMS & OTHERS - - - -

PAT AFTER MI (REPORTED) 572 827 841 1,034

ADJ. PAT 572 827 841 1,034

% CHG (15.5) 44.5 1.7 23.0


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 6.0 4.2 4.1 3.3

P/CEPS 5.3 3.8 3.9 3.2

P/BV 0.5 0.4 0.3 0.3

EV/SALES 4.4 4.0 3.5 2.9

EV/EBITDA 8.3 6.7 7.0 5.8


EPS (BASIC) 15.9 19.9 20.3 24.9


CASH EPS 15.5 21.8 21.0 25.9

DPS - - - -

BOOK VALUE 169.7 228.6 250.1 281.6

RETURNS (%)

ROCE (PRE-TAX) 7.5 8.4 7.7 8.7


ROE 10.0 10.0 8.5 9.4

TURNOVER RATIOS (X)

INVENTORY / SALES (DAYS) 1,878 1,970 1,913 1,627


PAYABLES (DAYS) 179 297 364 307


CASH FLOW


DEPRECIATION & OTHERS 113 167 123 137

CHANGE IN WORKING CAPITAL (1,615) (3,451) (1,068) (1,411)



CASH FLOW FROM OPERATIONS (931) (2,493) (157) (303)


(INC.)/ DEC. IN INVESTMENTS 0 191 - -

OTHER 14 31 53 64


ISSUE OF EQUITY 2,078 234 - -

(INC.)/DEC. IN LOANS (42) 218 200 200

DIVIDEND PAID (INCL. TAX) (0) - - -

OTHERS (61) 1,375 (41) 177

CASH FLOW FROM FINANCING 1,976 1,827 159 377

INC./(DEC.) IN CASH 716 (562) (131) (8)






Company BackgroundAnant Raj Industries Limited (ARIL), established in 1969, is one the leadingdevelopers in the National Capital Region (NCR). The company has forayedinto Special Economic Zones (SEZs), IT parks, hotels, commercial complexes,malls and residential/service apartments.

Structural SnapshotGrowth opportunity: The demand-supply gap in the residential sector acrosskey cities in India continues to be wide, with demand picking up recentlywhile supply remaining constrained due to the slow pace of constructionactivity. In the top seven cities of the country, latent demand is expected tobe three times higher than the supply and this gap is expected to remain till2014. Within the segment, the gap for mid-income housing is expected tobe three times the supply, which is expected to drive growth in the comingyears.

Competitive position: Land bank in the prime residential area; Largely focusedon the residential sector in NCR.

Nature of business: Interest-rate sensitive; Cyclical.

Current Investment ArgumentsStrong growth ahead: In FY2011, ARIL added nearly 218 acres of land inGurgaon, Manesar, Sonepat, Neemrana and Delhi, with an investment of`837cr - providing the company a potential to generate revenue of ̀ 6,000cr-7,000cr over the next five years. ARIL is expected to execute over 3mn sq.ft. of commercial real estate projects in the next 36 months and 1.35lakhsq. yards for industrial plot development. The company is also building 10mnsq. ft. of residential real estate in the next 48 months and 2.80lakh sq. yardsfor plotted development. This is expected to drive the company's revenuegrowth over the next 48 months. Going ahead, we may see residential contributionfrom new launches at Neemrana and Sector 63 (expected to be launched inthe beginning of 4QFY2012).

Kirti Nagar Mall set to improve lease rental: Partial commencement ofKirti Nagar Mall has contributed only `2cr in 2QFY2012. We expect rentalincome of `15cr in 2HFY2012 from Kirti Nagar Mall, as it is 60% leased outand 25% under fittings. Rental income is likely to increase by 32% yoy to`100cr in FY2012 on commencement of Kirti Nagar Mall, incremental rentfrom Manesar IT project and operation of Tricolour Hotel (4QFY2012).

Valuations attractive: The stock is currently trading 6.5x FY2013 EPS and0.4x FY2013 P/BV. The stock is trading at 47% discount to its one-yearforward NAV. We continue to maintain our Buy recommendation on thestock with a target price of `̀̀̀̀78. At our target price the stock will be tradingat 8.5x FY2013 EPS and 0.6x FY2013 P/BV.

Real Estate CMP/TP/Upside: `59 / `78 / 32%Anant Raj


PROMOTERS 61.9


STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ANANT RAJ 10.7 (40.4) (3.3) (26.3) 58.2

REALTY INDEX (8.1) (32.5) (1.2) - -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (31.3) 48.1 (11.1) 49.5 39.4

PAT GROWTH* (24.7) (29.4) (27.2) 43.0 25.9

OPM# 55.8 55.5 78.0 82.4 53.4

ROE# - 4.6 6.0 11.5 8.9NOTE: ABOVE 1 YEAR- * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 7.7 48.5

ROE (%) 4.8 6.7

P/BV 0.4 0.4

P/E 9.6 6.5


BUY / HOLD / SELL 16 / 1 / 0

RATING BUY


MARKET CAP (` CR) 1,740

LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 139 966 966 1,166




GROSS BLOCK 1,860 2,081 2,699 3,461


NET BLOCK 1,806 2,005 2,608 3,348

CAPITAL WORK-IN-PROGRESS 746 903 385 -


CURRENT ASSETS 1,015 1,761 1,971 2,132



MIS. EXP. NOT WRITTEN OFF 2.7 1.9 - -

TOTAL ASSETS 3,821 4,771 4,918 5,348


PROFIT & LOSS


% CHG 14.2 48.1 25.3 39.5

TOTAL EXPENDITURE (28) (189) (242) (335)

EBITDA 259 236 289 407

(% OF NET SALES) 90.3 55.5 54.4 54.9


INTEREST & OTHER CHARGES (4.9) (21.0) (57.9) (63.9)

OTHER INCOME 53.4 28.9 24.3 37.3

(% OF PBT) 18.0 12.6 10.0 10.4



PBT (REPORTED) 296 230 241 359

TAX (58) (62) (60) (90)

(% OF PBT) 19.6 27.0 25.0 25.0

PAT (REPORTED) 238 168 181 269

LESS: MINORITY INTEREST (MI) (0.1) 0.2 - -

PRIOR PERIOD ITEMS (0.1) - - -


ADJ. PAT 238 168 181 269

% CHG 14.9 (29.4) 7.7 48.5


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 7.3 10.3 9.6 6.5

P/CEPS 7.0 9.6 8.9 6.0

P/BV 0.5 0.5 0.4 0.4

EV/SALES 4.9 6.0 4.8 3.7

EV/EBITDA 5.4 10.9 8.8 6.8



DPS 0.6 0.6 1.0 1.2

BOOK VALUE 121.8 126.2 131.2 139.0

RETURNS (%)

ROCE (PRE-TAX) 6.7 5.2 5.7 7.5


ROE 6.9 4.6 4.8 6.7

TURNOVER RATIOS (X)






CASH FLOW STATEMENT








(INC.)/ DEC. IN INVESTMENTS 14 37 - -




INC./(DEC.) IN LOANS (71) 827 - 200


OTHERS (47) 125 2 0

CASH FLOW FROM FINANCING (80) 931 (19) 166

INC./(DEC.) IN CASH (137) (341) 24 (15)






Software POSITIVE


Large Caps

TCS 1076 1262 Buy

Infosys 2592 3047 Buy

Wipro 404 425 Accu.

HCL Tech 419 520 Buy

Mid Caps

Tech Mahindra 608 666 Accu.

Mahindra Satyam 72 82 Accu.

Mphasis 347 387 Accu.

Mindtree 441 502 Accu.

Infotech Entp 135 - Neutral

Hexaware 81 96 Buy

KPIT Cummins 146 163 Accu.

Persistent 319 - Neutral

Growth momentum to moderate...The IT-BPO sector in India reported aggregate revenue of US$88.1bn in FY2011,indicating a market share of ~6% of the total global outsourcing market andtaking its contribution to ~6.4% of national GDP. The share of the IT-BPOindustry in total Indian exports increased from less than 4% in FY1998 to26% in FY2011.

Investment arguments

INR depreciation - IT sector to be the biggest beneficiary

During September-December 2011, INR depreciated by 10-12% against USD,providing an advantage to IT companies. Although an exports-driven sectorlike IT faces headwinds on account of a weaker demand scenario due to slowglobal growth, the INR depreciation from peak levels is expected to counterthis to an extent by improving the bottom line of Indian IT companies. Thus,we have moderated our quarterly near-term volume growth expectations forIT companies; however, INR depreciation is aiding in the slight upward revisionof earnings of IT companies for FY2013. Consequently, we estimate INR revenuegrowth to be at 15.5-19.0%, higher than USD revenue growth, which is expectedto be at 12.2-15.0% for tier-1 IT companies with TCS leading the pack.

USD revenue growth to moderate in the near termThe recent financial results of Oracle for the quarter ending November 2011raised questions about the health of the technology sector, as the company'snew software sales grew by merely 2% yoy because of delays in decisionmaking by clients, which led to deals not being closed. In addition, recentlyGartner has lowered its global technology spending growth forecast to 3.7%(earlier - 4.6%) to US$3.8tn for CY2012.

Given the current economic uncertainties, we see a moderation in IT budgetsfor CY2012 and expect volume growth of tier-I Indian IT companies to scaledown to sub-15% from 18% plus in FY2012E. However, we do not foreseeany pricing erosion as of now because the current pricing is still at a discountto peak levels and risks are lower as compared to what they were in CY2008,when Lehman bankruptcy was filed.

Outlook and valuationThe global macro data is pointing towards a bleak outlook for future globalcorporate profits, and there is now cautiousness coming from few IT playersin terms of IT budgets for CY2012. However, as per TPI's recent report, dealpipelines of IT companies were higher in 3QCY2011, but few project rampups are getting delayed. Thus, we expect tier-I IT companies (except Wipro)to replicate growth of 20% plus in FY2012. Further, we expect moderation involumes to sub-15% only in FY2013. However, in INR terms, we expect growthto be higher due to assumed INR depreciation. We remain cautiously optimisticon the IT sector, as on one hand global uncertainties are prevailing along withconcerns regarding IT budgets for CY2012, while on the other software companiesare deriving benefits from steep INR depreciation. We prefer diversified playerssuch as TCS, Infosys and HCL Tech (top pick) in tier-I IT companies. In caseof tier-II IT companies, we like MindTree and Hexaware Technologies.


Software

INR depreciation - IT sector to be the biggestbeneficiaryDuring September-December 2011, one of the most volatileperiods in terms of currency was witnessed, as INR depreciatedby 10-12%, providing an advantage to IT companies. Althoughan exports-driven sector like IT faces headwinds on account ofa weaker demand scenario due to slow global growth, the INRdepreciation from peak levels is expected to counter this to anextent by improving the bottom line of Indian IT companies.Thus, we have moderated our quarterly near-term volume growthexpectations for IT companies to sub 15% for FY2013; however,INR depreciation is aiding in the slight upward revision of earningsof IT companies for FY2013. Consequently, we estimate INRrevenue growth to be at 15.5-19.0%, higher than USD revenuegrowth, which is expected to be at 12.2-15.0% for tier-1 ITcompanies, with TCS leading the pack. Going ahead in FY2013,growth will be led because of increased offshoring, acceptabilityof outsourcing/offshoring in Continental Europe and growthfrom Asia Pacific region.


Exhibit 1: INR revenue growth trend

24.1

16.5

32.4

19.022.2

15.8

29.5

15.7

0

5

10

15

20

25

30

35

40

45

FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

(%)

Infosys TCS Wipro HCL Tech

USD revenue growth to moderate in the near term

Worldwide economic trends

In June 2011, the IMF had forecasted that global GDP is setto grow by 4.3% and 4.5% for CY2011 and CY2012, respectively.However, rising sovereign debt due to quantitative easing (QE)measures and bailouts led to gross debt to GDP of developedeconomies such as U.S., U.K. and Eurozone surge to an alarminglyuncomfortable zone. Further, as the effect of QE measures isgradually fading, economic data points for developed economiesare also moving back into the alarming zone. As a result, theIMF has marginally downgraded its global GDP growth forecastto 4.2% and 4.3% for CY2011 and CY2012, respectively. Thisforecast is again expected to be downgraded further, giventhe contraction in manufacturing activities across the globe.The downgrade has, however, been steep for the U.S., from2.5% and 2.7% for CY2011 and CY2012 to 1.6% and 2.0%,respectively. In case of Eurozone, the forecast has been trimmedmarginally from 2.0% and 1.7% to 1.9% and 1.4% for CY2011and CY2012, respectively. However, the recent key economicdata points of the U.S. have turned mixed with industrial production,consumer confidence, employment and PMI indicating somestability, which we believe would help Indian IT services playersin covering up the risk of slower demand in the European region.

Technological indicators

The recent financial results of Oracle, the global enterprise giantfor the quarter ending November 2011, raised questions aboutthe health of the technology sector, as the company's new softwaresales grew by merely 2% yoy because of delays in decisionmaking by clients, which led to deals not being closed. In addition,recently Gartner has lowered its global technology spendinggrowth forecast because of the sluggish economy and the eurocrisis. Gartner now expects worldwide spending on technologyto grow by 3.7% to US$3.8tn in CY2012, down from its earlierforecast of 4.6% growth. In 2011, global tech spending grewby 6.9% to US$3.7tn compared to 2010.

Our take

Given the current economic uncertainties, we see a moderationin IT budgets for CY2012 and expect volume growth of tier-IIndian IT companies to scale down to sub-15% from 20% plusin FY2012E. However, we do not foresee any pricing erosionas of now because the current pricing is still at a discount topeak levels and risks are lower as compared to what they werein CY2008, when Lehman bankruptcy was filed.

The relative stability of consensus forecasts of S&P 500 earningsin 2011 also corroborates the same thing, as earnings forecastsof the S&P 500 have declined by just 4.0% in 2011, well belowthe 23.5% erosion in 2008. Even the recent data of 3QCY2011from TPI indicated that the total contract value of IT contractsin the global markets jumped by 31% qoq and 41% yoy toUS$25.1bn (an all-time high), largely driven by mega deals relatedto M&A, with HCL Tech and TCS dominating in all the regions.Thus we believe the expected moderation in demand is a cyclicalblip and is basically due to delays in decision making from clients'end; so on a longer-term basis, we expect the Indian IT industryto grow by 12-14%, with tier-I IT players surpassing these ratesas the Indian IT-BPO industry is expected to reach US$200bnby 2020 from US$88.1bn in 2011.


Exhibit 2: USD revenue growth trend

16.4

13.1

24.9

15.013.5

12.2

17.8

14.8

0

5

10

15

20

25

30

35

40

FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

(%)


Industry-wise trends: The BFSI segment (the major contributorwith a 45-50% share in exports) is expected to continue tolead in terms of value due to persistent work related to 1) regulatorycompliance, 2) data analytics, 3) operational efficiency and4) risk and fraud prevention. BFSI was leading the growth ofall the tier-1 IT companies since 2HFY2010, specially for Infosysand TCS; however, now incremental growth is tapering off slightlyfrom 6.5-7.0% qoq to 3-3.5% qoq for tier-1 IT companies.


Software

For the retail and CPG segment, IT spend continues to growon account of multi-channel integration to encash on the digitalconsumer behavior, with HCL Tech and TCS being the highestgainers averaging above 6.0% qoq growth since the past fourquarters. Also, retail clients are spending on digital marketingand mobile and social technology to provide multi-channelexperience, retail commerce and mobile marketing to increasedigital consumers' engagements.


Exhibit 3: Revenue growth trend - BFSI industry

(10)

(5)

0

5

10

15

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

2Q

FY1

1

3Q

FY1

1

4Q

FY1

1

1Q

FY1

2

2Q

FY1

2

(% q

oq)



Exhibit 4: Revenue growth trend - Retail and CPG industry

(10)

0

10

20

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

2Q

FY1

1

3Q

FY1

1

4Q

FY1

1

1Q

FY1

2

2Q

FY1

2

(% q

oq)


The manufacturing segment, which came back with higher spendon IT post the recession, especially with industries such ashi-tech and semiconductor looking at immediate go-to-marketstrategies and, thus, spending on product engineering, supply-chainmanagement and consulting to drive cost efficiencies, is now seeingsome signs of slowdown, but no project cuts are being seen.


Exhibit 5: Revenue growth trend - Manufacturing industry

(10)

(5)

0

5

10

15

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

2Q

FY1

1

3Q

FY1

1

4Q

FY1

1

1Q

FY1

2

2Q

FY1

2

(% q

oq)



Exhibit 6: Revenue growth trend - Energy and utilities industry

(20)

(10)

0

10

20

30

40

50

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

2Q

FY1

1

3Q

FY1

1

4Q

FY1

1

1Q

FY1

2

2Q

FY1

2

(% q

oq)


Service-wise trends: Changed business needs of variousindustries after coming out of 2008 slowdown had led to asurge in demand for discretionary services such as enterpriseapplication (EAS) and engineering and R&D (ERD). Investmentsin EAS are mostly on the back of simplifying internal processesand harmonizing business processes across the enterprise tomake organizations smarter and leaner - primarily focusing onincreasing efficiencies and reducing throughput. Even ERD serviceswere witnessing a spurt in demand, with product companiesgetting aggressive and trying to launch a series of new productsby shortening the go-to-market cycle. Currently, due to uncertainmacroeconomic behavior, clients are delaying discretionary spendsand have become prudent in spending on IT.

Geography-wise trends: Geographically, U.S., traditionally thelargest market for IT companies, has been going very stronglyas far as clients' spending on IT is concerned, though the macrodata points at a bleak outlook. The U.S. has been the frontrunnerin awarding transformational deals. Growth is very muchbroad-based for the U.S. and is driven across industries andservices. Europe is back to spending - manufacturing and energyand utilities have returned to normalcy, with clients spendingon higher value-added services. European clients are primarilyspending on IT to drive cost efficiencies by outsourcing run-the-business (RTB) type of work and through rationalization ofexisting multiple applications and systems. European companiesare now opening up to offhsoring their work, and the biggestbeneficiaries emerging from these trends are TCS and HCLTech. Rest of the World, on the other hand, is witnessing moreof greenfield projects, relating to clients of developed economieslooking out for expansion in these regions.

However, the energy and utilities vertical is gaining strong traction,especially for businesses relating to oil and gas and smart gridand safety, mostly for cost-cutting measures with Wipro andHCL Tech being the highest beneficiary companies amongstthe tier-1 IT space. The telecom vertical is still a very soft spenderand continues to witness weak client budgets. This verticalwas heavily impacted for Infosys and TCS due to one of theirtop clients, British Telecom, cutting down heavily on its capexand downsizing its operations. Managements of both the companiesmaintain that the client-specific issue has taken a back seat,and they foresee a slow recovery in the sector. We believetelecom service providers of matured markets will start spendingto migrate to next-generation networks such as 4G to supportthe heavy voice and burgeoning data traffic.



Exhibit 8: EBIT margin profile


29.7 30.4 29.5 29.3 29.1

23.726.5 28.0 28.2 27.9

21.023.4 22.7

21.0 20.8

17.816.6 15.1 15.9

14.912

17

22

27

32

FY2009 FY2010 FY2011 FY2012E FY2013E

(%)

Outlook and valuationThe global macro data is pointing towards a bleak outlook forfuture global corporate profits, and there is now cautiousnesscoming from few IT players in terms of IT budgets for CY2012.However, as per TPI's recent report, deal pipelines of IT companieswas higher in 3QCY2011, but few project ramp ups are gettingdelayed. Thus, we expect tier-I IT companies (except Wipro) toreplicate growth of 20% plus in FY2012. Further, we expectmoderation in volumes to sub-15% only in FY2013. However,in INR terms, we expect growth to be higher due to INR depreciationassumed. We remain cautiously optimistic on the IT sector, ason one hand global uncertainties are prevailing along with concernsregarding IT budgets for CY2012, while on the other softwarecompanies are deriving benefits from steep INR depreciation.We prefer diversified players such as TCS, Infosys, andHCL Tech (top pick) in tier-I IT companies. In case of tier-II ITcompanies, we like MindTree and Hexaware Technologies.

Margins to be mixedIT companies are going to benefit on the operating margin frontdue to INR depreciation, as generally every 1% depreciationin INR leads to a 35-40bp increase in the OPM of an IT company.However, going ahead from FY2012 to FY2013, we expectmargin of tier-1 IT companies (except HCL Tech) to remainalmost flat, as most of the impact of INR depreciation will comein FY2012 itself - as assuming INR/USD rate of ̀ 51 for 4QFY2012,the average rate of INR/USD for FY2012 comes at `48.5, andwe are assuming an average rate of `50 for FY2013, whichimplies 3.1% depreciation. All the benefit of INR depreciation

Software


Exhibit 7: Hiring trendNet additions FY2010 FY2011 1QFY12 2QFY12 3QFY12

Infosys 8,946 17,024 2,740 8,262 3,266

TCS 16,668 38,185 3,576 12,580 11,981

Wipro 10,261 14,314 4,105 5,240 5,004

HCL Tech 4,103 15,291 3,626 3,474 2,556

Total employees

Infosys 113,796 130,820 133,560 141,822 145,088

TCS 160,429 198,614 202,190 214,770 226,751

Wipro 108,071 122,385 126,490 131,730 1,36,734

HCL Tech 58,129 73,420 77,046 80,520 83,076

Hiring intactIT players got into the hiring mode from 2HFY2010, with highlateral hiring to tap the sudden increase in demand. With astrengthening demand landscape, Infosys and TCS had earlierindicated initial robust gross hiring targets yet again for FY2012of 45,000 and 60,000, even on the total employee base of1,30,820 and 1,98,614 respectively. TCS recently increasedits gross hiring target for FY2012 to 66,000 employees. Thesehiring numbers are much higher than the initial hiring numbersof 30,000 each indicated in FY2011 by Infosys and TCS. Also,due to the unanticipated pent-up demand as well as higherattrition rates of 20-25% annualized, gross hiring numbers forFY2011 stood much higher at 43,120 and 69,685 for Infosysand TCS, respectively. Even though the macro landscape remainsweak, tier-I companies are on track to meet their hiring guidancefor FY2012, so that if there is any spurt in demand (as it happenedwhen the economy came out of the downturn), these companieshave their resources ready and can address incremental demand.

Companies are now looking at planned hiring to address thestrengthening demand pipeline as well as to flatten their employeepyramids. Infosys and TCS have already given campus offersto 28,000 and 43,600 people (most of which have already beengiven), respectively, indicating that majority of the hiring in FY2012will be of freshers. Also, with cooling attrition rates, we do notexpect attrition to be a spoilsport anymore, as companies resortback to planned hiring.

is case of HCL Tech is expected to flow in FY2012 itself, as itis a June-ending company. So for FY2013, we expect marginof HCL Tech to decline to 14.9% due to headwinds of wageinflation and SG&A investments.


Source: Company, Angel Research; Note: * June ending; ^ October ending; # December ending

Exhibit 9: Recommendation summaryCompany Reco CMP Tgt Price Upside Target FY2013E FY2013E FY2011-13E FY2013E FY2013E

( `̀̀̀̀) ( `̀̀̀̀) (%) P/E (x) EBITDA (%) P/E (x) EPS CAGR (%) RoCE (%) RoE (%)

Large Caps

TCS Buy 1,076 1,262 17.3 19.5 29.9 16.6 20.6 32.1 33.3

Infosys Buy 2,592 3,047 17.6 18.0 32.0 15.3 18.9 25.8 23.8

Wipro Accumulate 404 425 5.2 15.3 19.7 14.6 13.1 15.3 20.6

HCL Tech* Buy 419 520 24.1 13.0 17.5 10.5 22.1 20.9 23.1

Mid Caps

Tech Mahindra Accumulate 608 666 9.5 8.0 16.8 7.3 29.9 14.6 20.0

Mahindra Satyam Accumulate 72 82 13.4 11.0 14.8 9.7 33.0 11.7 13.8

Mphasis^ Accumulate 347 387 11.7 10.5 16.6 9.4 (3.1) 14.0 14.2

Mindtree Accumulate 441 502 13.8 10.0 14.7 8.8 42.1 20.3 17.4

Infotech Entp. Neutral 135 - - 8.5 16.0 8.6 11.9 16.2 13.1

Hexaware# Buy 81 96 19.0 11.0 18.7 9.3 74.1 21.4 19.8

KPIT Cummins Accumulate 146 163 11.6 10.0 15.4 8.9 19.9 19.5 16.9

Persistent Neutral 319 - - 9.5 23.0 9.1 0.1 19.3 14.2

330 January 2012 Please refer to important disclosures at the end of this report

Company BackgroundTCS is Asia's largest IT services provider and is amongst the top 10 technologyfirms in the world. The company has a global footprint with an employeebase of over 2lakh professionals, offering services to more than 1,000 clientsacross various industry segments. The company has one of the widest portfoliosof services offerings, spanning across the entire IT service valuechain - from traditional application development and maintenance to consultingand package implementation to products and platforms.

Structural SnapshotGrowth opportunity: Penetration of Indian IT companies in the total outsourcingmarket remains fairly low at ~6% vis-à-vis other large global players such asIBM and Accenture, indicating the enormous growth potential for the IndianIT industry to leverage its low-cost advantage and proven skills; and reachan estimated US$200bn by FY2020. Hence, TCS, with its expanding footprintin untapped geographies like France, Germany, and other emerging nations,can potentially report incremental revenue growth of 14-15% annually.

Competitive position: TCS is India's largest IT services company, enjoyingan ~11% share of the total Indian IT industry's revenue. TCS has a strongpresence in the BFSI vertical (highest revenue generator for the IT industry).Also, TCS has precisely expanded its presence in emerging verticals aswell as in geographies, which are now becoming its main growth streamsdue to the current underpenetration.

Nature of business: High RoE business, as it requires skilled workforcerather than heavy capex; Exposed to currency fluctuations and, to an extent,any severe slowdown in the U.S. and Europe.

Current Investment ArgumentsWell placed for long-term growth: TCS has expanded its service lines andnetwork in various geographies, which led to TCS becoming a large-scaleplayer, outperforming Infosys since the last five quarters. Also, the keyIT spend-thrift industry segments - BFSI (44%) and retail and CPG (12%)- are expected to continue to be the company's growth drivers. Going ahead,with demand likely to come from the emerging verticals, we expect TCSto further gain market share and post USD revenue CQGR of 3.4% over3QFY2012-4QFY2013.

Margins to be remain upbeat: TCS has shown considerable margin improvementof ~230bp over the past nine quarters, with current EBIT margin at 29.0%.Going ahead, the headwinds of wage inflation on operating margins will bemore or less absorbed by INR depreciation, so we expect the company'sEBIT margin for FY2012 and FY2013 to be at 28.2% and 27.9%, respectively.

Valuations attractive: The stock is trading at attractive valuations of 16.6xFY2013E EPS. We recommend a Buy rating with a target price of `̀̀̀̀1,262,valuing the stock at 19.5x FY2013E EPS.

Software CMP/TP/Upside: `1,076 / `1,262 / 17%


PROMOTERS (TATA SONS) 74.1

FII 13.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TCS 2.6 (9.9) 63.3 10.9 -

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 36.6 24.3 18.2 23.0 -

PAT GROWTH* 23.0 26.7 20.3 24.3 -

OPM# 31.0 30.0 28.2 27.6 -


ANGEL ESTIMATES


PAT GROWTH (%) 23.6 17.6

ROE (%) 34.9 33.3

P/E 19.5 16.6

RATING BUY

52 WEEK HIGH / LOW 1,247 / 903

MARKET CAP (`̀̀̀̀ CR) 210,587

LIQUIDITY HIGH

TOPPICKTCS


BUY / HOLD / SELL 35 / 25 / 6


BALANCE SHEET

CASH AND CASH EQUIVALENTS 1,025 1,554 1,119 2,560

OTHER CURRENT FIN.ASSETS 3,653 3,934 6,297 8,900

ACCOUNTS RECEIVABLE 5,810 8,201 10,424 12,404

UNBILLED REVENUES 1,201 1,349 1,760 2,094

OTHER CURRENT ASSETS 2,127 1,449 1,700 2,000

PROPERTY AND EQUIPMENT 4,171 5,200 6,560 7,684

INTANGIBLE ASSETS 3,242 3,379 3,380 3,380

INVESTMENTS 3,784 1,839 1,500 1,500

OTHER NON CURRENT ASSETS 2,610 2,575 2,600 3,618

TOTAL ASSETS 27,621 32,788 41,465 51,031


SHORT TERM BORRROWINGS 231 33 30 -

REDEEMABLE PREF. SHARES 100 100 100 100

LONG TERM DEBT 11 6 4 4

OTHER NON CURRENT LIAB. 673 1,097 1,499 1,827






NET SALES 30,028 37,324 49,412 58,798

% CHG 8.0 24.3 32.4 19.0

COST OF REVENUE 15,724 19,937 26,060 31,752

GROSS PROFIT 14,303 17,387 23,352 27,046

SGA EXPENSES 5,625 6,189 8,476 9,477

EBITDA 8,679 11,198 14,876 17,568

% OF NET SALES 28.9 30.0 30.1 29.9

DEP. AND AMORTIZATION 721 721 939 1176

EBIT 7,958 10,477 13,936 16,392

% OF NET SALES 26.5 28.1 28.2 27.9

OTHER INCOME, NET 226 532 394 936


PROVISION FOR TAX 1,209 2,174 3,442 4,505

% OF PBT 14.8 19.7 24.0 26.0

PAT 6,975 8,835 10,888 12,823


FINAL PAT 6,873 8,715 10,776 12,669

% CHG 32.9 26.7 23.6 17.6


KEY RATIOS

VALUATION RATIO(X)

P/E 30.6 24.2 19.5 16.6

P/BV 10.1 8.3 6.8 5.5

EV/SALES 6.7 5.4 4.1 3.4

EV/EBITDA 23.3 18.2 13.6 11.2

EV/TOTAL ASSETS 7.3 6.2 4.9 3.9


EPS 35.1 44.5 55.1 64.7

CASH EPS 38.8 48.2 59.9 70.7

BOOK VALUE 107.0 129.8 157.9 194.6

RETURN RATIOS (%)

ROCE (PRE-TAX) 28.8 32.0 33.6 32.1

ANGEL ROIC 41.5 41.1 42.8 43.1

ROE 32.8 34.3 34.9 33.3

TURNOVER RATIOS (X)

ASSET TURNOVER (FIXED ASSETS) 7.2 7.2 7.5 7.7

RECEIVABLES DAYS 71 80 77 77


CASH FLOW STATEMENT

PRE TAX PROFIT FROM OPS. 7,958 10,477 13,936 16,392


OTHER INCOME/PRIOR PERIOD AD 226 532 394 936

TAX 1,209 2,174 3,442 4,505

CASH PROFITS 7,593 9,437 11,714 13,845

NET TRADE WORKING CAPITAL 1,489 (5,448) (2,518) (3,201)

CASHFLOW FROM OPERATING ACTV. 9,081 3,989 9,196 10,644

(INC)/DEC IN FIXED ASSETS (1,142) (1,750) (2,300) (2,300)

(INC)/DEC IN INVESTMENTS (5,709) 5,597 339 -

(INC)/DEC IN NET INTANGIBLE ASST 177 (138) (1) -

(INC)/DEC IN NON CURRENT ASST (925) (3,275) (2,839) (1,785)

CASHFLOW FROM INVESTING ACTV. (7,600) 435 (4,801) (4,085)

INC/(DEC) IN DEBT (397) 419 400 327

INC/(DEC) IN EQUITY/PREMIUM 571 328 - -

DIVIDENDS (2,158) (4,580) (5,267) (5,496)

CASHFLOW FROM FINANCING ACTV. (1,920) (3,895) (4,831) (5,118)

CASH GENERATED/(UTILIZED) (438) 529 (435) 1,441

CASH AT START OF THE YEAR 1,463 1,025 1,554 1,119

CASH AT END OF THE YEAR 1,025 1,554 1,119 2,560




Company BackgroundInfosys is the second largest IT company in India, employing over 1,45,000professionals. The company services more than 650 clients across variousverticals, such as financial services, manufacturing, telecom, retail and healthcare.Infosys has the widest portfolio of service offerings amongst Indian IT companies,spanning across the entire IT service value chain - from traditional applicationdevelopment and maintenance to consulting and package implementationto products and platforms.

Structural SnapshotGrowth opportunity: Penetration of Indian IT companies in the total outsourcingmarket remains fairly low at ~6% vis-à-vis other large global players such asIBM and Accenture. This indicates an enormous growth potential for theIndian IT industry to leverage its low-cost advantage and proven skills; andgrow to an estimated US$200bn by FY2020. Hence, Infosys, with its expandingfootprint in untapped geographies like France, Germany, China, and otheremerging nations, can potentially report incremental revenue growth of13-15% annually.

Competitive position: Infosys, the bellwether of the Indian IT industry, hasa broad-based service portfolio, superior client proposition in terms of qualityof service, state-of-the-art technology and a strong product bouquet. Thecompany enjoys ~8% share of the total Indian IT industry's revenue andbest-in-class EBIT margin of ~30%.


Current Investment ArgumentsBeneficiary of a diversified portfolio: Infosys enjoys a diversified revenueportfolio - non-discretionary services contribute ~60% to its overall revenue.Also, the company's focus on key IT spend-thrift verticals like BFSI (35%),manufacturing (20%) and retail and CPG (16%) is expected to continue toaid its growth. But due to delays in ramp up of the projects, we expectmoderation in its volume growth in the near term and expect a revenue CQGRof 2.9% over 3QFY2012-4QFY2013 vis-à-vis 4.0% in 9MFY2012.

Strong client addition, hiring intact: Infosys has been consistently addinga robust number of clients in its portfolio, despite a weak macro landscape.In fact, the company is on track to hire 45,000 gross employees on its totalemployee base of 130,820 (FY2011), in-line with its FY2012 guidance, anddespite fears of an economic slowdown.

Valuations attractive: Revenue momentum of the company has weakenedsince the past few quarters due to declining revenue from BT, one of itsmajor clients. This trend is set to alter soon, as revenue contribution fromBT has already declined significantly. The stock is trading at attractive valuationsof 15.3x FY2013E EPS of ̀ 169. We recommend a Buy rating with a targetprice of `̀̀̀̀3,047, valuing the stock at 18x FY2013E EPS.

Software CMP/TP/Upside: `2,592 / `3,047 / 18%


PROMOTERS 16.0

FII 51.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

INFOSYS (5.0) (20.3) 27.6 3.7 18.6

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 30.8 20.9 18.1 23.6 30.6

PAT GROWTH* 33.3 9.7 13.6 22.7 27.0

OPM# 33.7 32.6 33.4 32.7 33.6


ANGEL ESTIMATES


PAT GROWTH (%) 22.5 15.5

ROE (%) 25.1 23.8

P/E 17.7 15.3

RATING BUY

52 WEEK HIGH / LOW 3,317 / 2,169

MARKET CAP (`̀̀̀̀ CR) 148,832

LIQUIDITY HIGH

TOPPICKInfosys


BUY / HOLD / SELL 46/18/5


BALANCE SHEET

ASSETS


TRADE RECEIVABLES 3,494 4,653 5,403 6,319

UNBILLED REVENUE 841 1,243 1,496 1,743

OTHER CURRENT ASSETS 641 917 1,194 1,392

TOTAL CURRENT ASSETS 20,928 23,689 29,478 36,220

PROPERTY, PLANT AND EQUP. 4,439 4,844 5,113 5,140

GOODWILL 829 825 830 830

OTHER NON-CURRENT ASSETS 1,426 1,905 2,070 2,632

TOTAL ASSETS 27,622 31,263 37,491 44,822

LIABILITIES

CURRENT INCOME TAX LIAB. 724 817 850 900

UNEARNED REVENUE 531 518 528 540

EMPLOYEE BENEFIT OBLIGATIONS 131 140 150 140

OTHER LIABILTIES 1,707 2,012 2,135 2,135


SHARE CAPITAL 3,333 3,368 3,368 3,368

RETAINED EARNINGS 20,668 23,826 29,847 37,165

TOTAL LIABILTIES AND EQUITY 27,622 31,263 37,491 44,822



NET SALES 22,742 27,501 34,120 39,767

% CHG 4.8 20.9 24.1 16.5

COST OF REVENUE 12,078 15,054 18,900 21,936

GROSS PROFIT 10,664 12,447 15,220 17,831

SELLING AND MKTG EXP. 1,184 1,512 1,776 2,177

% OF NET SALES 5.2 5.5 5.2 5.5

GENERAL AND ADMIN EXP. 1,628 1,971 2,510 2,922

EBITDA 7,852 8,964 10,933 12,732

% OF NET SALES 34.5 32.6 32.0 32.0

DEP. AND AMORTIZATION 942 862 931 1,173

EBIT 6,910 8,102 10,002 11,559

% OF NET SALES 30.4 29.5 29.3 29.1

OTHER INCOME 990 1,211 1,680 1,946



% OF PBT 21.3 26.7 28.5 28.5

PAT 6,219 6,823 8,358 9,656

% CHG 3.8 9.7 22.5 15.5


KEY RATIOS

VALUATION RATIO (X)

P/E 23.7 21.7 17.7 15.3

P/CEPS 20.7 19.3 16.0 13.7

P/BV 6.2 5.4 4.4 3.6

EV/SALES 5.8 4.8 3.7 3.1

EV/EBITDA 16.9 14.7 11.6 9.6



EPS 109 119 146 169

CASH EPS 125 134 162 189

DIVIDEND 25.0 34.9 34.9 34.9

BOOK VALUE 421 477 583 710

RETURN RATIOS (%)

ROCE (PRE-TAX) 25.0 25.9 26.7 25.8

ANGEL ROIC 58.7 56.1 61.8 63.6

ROE 25.8 25.0 25.1 23.8

TURNOVER RATIOS(X)




CASH FLOW STATEMENT



OTHER INCOME 990 1,211 1,680 1,946

TAX 1,681 2,490 3,324 3,849

CASH PROFITS 7,161 7,685 9,289 10,828

(INC)/DEC IN NET TRADE WC 230 (1,360) (1,069) (1,392)


(INC)/DEC IN FIXED ASSETS (716) (1,267) (1,200) (1,200)

(INC)/DEC IN INVESTMENTS (3,746) 3,602 99 (40)

(INC)/DEC IN DEFERRED TAX ASST. (302) (348) (29) (370)

(INC)/DEC IN NON CURRENT ASS. (243) (104) (141) (192)

CASHFLOW FROM INVESTING ACTV. (4,933) 1,823 (1,269) (1,808)

INC/(DEC) IN DEBT - - - -

INC/(DEC) IN EQUITY/PREMIUM 333 (1,256) - -

DIVIDENDS 1,673 2,337 2,337 2,337

CASHFLOW FROM FINANCING ACTV. (1,340) (3,593) (2,337) (2,337)

CASH GENERATED/(UTILIZED) 1,118 4,555 4,614 5,291






Company BackgroundWipro is one the leading Indian companies, majorly offering IT services.The company is also engaged in the IT hardware (11% of slaes) and consumercare and lighting (10% of slaes) businesses. Wipro's IT arm is India's fourthlargest IT firm, employing more than 1,30,000 professionals, offering a wideportfolio of services such as ADM, consulting and package implementation,and servicing more than 300 clients.

Structural SnapshotGrowth opportunity: Low penetration of Indian IT companies in the totaloutsourcing market (~6%) offers an enormous growth potential for Indian ITplayers to increase their revenue pie. Also, Wipro's strong foothold in theshort-term growth areas of remote infrastructure management (RIM) cangive Wipro the capability to crack large IMS deals.

Competitive position: Wipro enjoys ~6.5% of the total Indian IT industry'srevenue. The company is present in emerging verticals and geographies,which are now becoming its main growth streams due to the currentunderpenetration. Further, Wipro has a low presence in the BFSI industry(highest revenue generator for the IT industry) and in the EAS vertical, ascompared to its peers - this can drag the company's incremental revenuegrowth.


Current Investment ArgumentsBenefits of restructuring exercise to flow: Wipro started the restructuringof its organizational structure a couple of quarters back and structured it asvertical-focused, whereby P/L responsibility lies only with the verticals. Postthis, there has been a consistent improvement in Wipro's contract win rates.Also, the company managed to increase its clients in the US$100mn+ revenuebracket from one in 3QFY2011 to five in 2QFY2012, with employee attritionrates declining. That said, we expect Wipro to post USD revenue CQGR of2.6% over 3QFY2012-4QFY2013.

Margins levers limited: At the operating front, Wipro has headwinds suchas wage inflation and low utilization level as the company targets ~70% ofits gross hires as freshers, which are expected to pull down its margins. Theonly tailwind for Wipro is INR depreciation; thus, we expect EBIT margin ofthe IT services business to be at 21.2% and 20.5% for FY2012 and FY2013,respectively, from 22.0% in 1QFY2012.

Valuations: The stock is trading at reasonable valuations of 14.6x FY2013EEPS; lower valuation as against Infosys and TCS due to muted 9MFY2012performance, FY2013 revenue growth expected to remain lesser than peersand weak OPM. We recommend an Accumulate rating on the stock witha target price of `̀̀̀̀425, valuing it at 15.3x FY2013E EPS.

Software CMP/TP/Upside: `404 / `425 / 5%Wipro


PROMOTERS (AZIM H. PREMJI) 79.2

FII 7.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

WIPRO 13.0 (14.9) 42.6 1.6 9.8

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 27.7 14.7 15.6 23.8 26.0

PAT GROWTH* 10.4 15.3 17.7 21.0 22.9

OPM# 19.8 21.2 20.9 22.3 24.6


ANGEL ESTIMATES


PAT GROWTH (%) 6.8 20.4

ROE (%) 20.2 20.6

P/E 17.5 14.6


BUY / HOLD / SELL 26 / 27 / 12

RATING ACCUMULATE

52 WEEK HIGH / LOW 491 / 311

MARKET CAP (`̀̀̀̀ CR) 99,339

LIQUIDITY HIGH


BALANCE SHEET

GOODWILL 5,781 5,837 6,550 6,550

PROPERTY, PLANT AND EQUIP. 5,346 5,509 5,484 5,327

OTHER NON-CURRENT ASSETS 878 898 1,200 1,400

INVENTORIES 793 971 1,197 1,325

TRADE RECEIVABLES 5,093 6,163 8,017 8,790


AVAILABLE FOR SALE INVST. 3,042 4,928 6,093 9,293


TOTAL ASSETS 32,993 37,144 42,139 49,072


SHARE PREMIUM 2,919 3,012 3,012 3,012

RETAINED EARNINGS 16,579 20,325 24,258 29,346

TOTAL EQUITY 19,655 24,037 27,970 33,058

LONG TERM LOANS 1,811 1,976 2,025 2,025

NON-CURRENT TAX LIABILITY 307 502 580 700

BANK OVERDRAFT 4,440 3,304 3,716 3,978

TRADE PAYABLES 3,875 4,405 5,121 5,904

OTHER CURRENT LIABILITIES 650 591 545 700

TOTAL EQUITY AND LIABILITIES 32,993 37,144 42,139 49,072



NET SALES 27,124 31,099 38,004 43,949

% CHG 6.2 14.7 22.2 15.6

COST OF REVENUES 18,630 21,285 26,701 30,785

GROSS PROFIT 8,494 9,814 11,303 13,165

SELLING AND MKTG. EXP. 1,861 2,218 2,781 3,271

GENERAL AND ADMIN. EXP. 1,482 1,829 2,027 2,389

DEP. AND AMORTIZATION 783 821 1,026 1,156

EBITDA 5,934 6,588 7,521 8,661

% OF NET SALES 21.9 21.2 19.8 19.7

EBIT 5,151 5,767 6,495 7,504

% OF NET SALES 19.0 18.5 17.1 17.1



PROVISION FOR TAX 929 971 1,342 1,707

% OF PBT 16.8 15.4 19.1 20.0

PAT 4,612 5,332 5,675 6,826


FINAL PAT 4,594 5,297 5,656 6,810

% CHG 18.5 15.3 6.8 20.4


KEY RATIOS

VALUATION RATIO (X)

P/E 21.4 18.6 17.5 14.6

P/BV 4.5 4.1 3.5 3.0

EV/SALES 3.4 2.9 2.4 1.9

EV/EBITDA 15.4 13.7 12.0 9.7



EPS 18.9 21.7 23.1 27.8

CASH EPS 44.3 45.1 49.5 58.3

DIVIDEND 4.0 6.0 6.0 6.0

BOOK VALUE 89.3 98.0 114.0 134.7

RETURN RATIOS (%)

ROCE (PRE-TAX) 15.6 15.5 15.4 15.3

ANGEL ROIC 29.1 28.5 26.5 29.2

ROE 23.4 22.0 20.2 20.6

TURNOVER RATIOS (X)



PAYABLE DAYS 79 71 65 65


CASH FLOW

PRE TAX PROFIT FROM OPERATIONS 5,204 5,832 6,542 7,560

DEPRECIATION 783 821 1,026 1,156


TAX (929) (971) (1,342) (1,707)

NET TRADE WORKING CAPITAL (840) (2,101) (2,568) 608


(INC)/DEC IN FIXED ASSETS (1,150) (985) (1,000) (1,000)

(INC)/DEC IN INTANGIBLES 182 (56) (713) -

(INC)/DEC IN INVESTMENTS (1,455) (1,951) (1,265) (3,200)

INC/(DEC) IN NON-CURRENT LIAB. (436) 103 193 274

(INC)/DEC IN NON-CURRENCT ASSETS (70) (20) (302) (200)

CASHFLOW FROM INVESTING ACTV. (3,107) (3,616) (3,569) (4,234)

INC/(DEC) IN DEBT (157) 165 49 -


DIVIDENDS (679) (1,558) (1,723) (1,723)

CASHFLOW FROM FINANCING ACTV. 146 (775) (1,674) (1,723)

CASH GENERATED/(UTILIZED) 1,576 (374) (1,129) 2,618






Company BackgroundHCL Tech is India's fifth largest IT services companies, with over 80,000employees catering to more than 450 clients. The company's service offeringsinclude enterprise application (EAS), custom applications, engineering andresearch and development (ERD) and infrastructure management (IMS).In December 2008, HCL Tech acquired U.K.-based SAP consulting company,Axon, which now contributes ~11% to its consolidated revenue.

Structural SnapshotGrowth opportunity: Low penetration of Indian IT companies in the totaloutsourcing market (~6%) offers an enormous growth potential to IT companiessuch as HCL Tech. Further, the company's leading position in the high-growtharea of remote IMS (~25% of revenue) will aid it to win largeinfrastructure-led application development contracts. Hence, HCL Tech, withits expanding client base and footprint, can potentially report average growthof 15-20%.

Competitive position: HCL Tech is strongly positioned in the EAS and IMSverticals, which places it well for short-term as well as long-term growth.In addition, strong consulting experience derived from Axon gives the companyan edge over other players in the high-margin consulting business.


Current Investment ArgumentsStrategic portfolio offers real growth and warrants relative strength: Postthe recovery in the global environment, HCL Tech has displayed anindustry-leading growth trajectory and has a strong position in IMS. Also,verticals like manufacturing and BFSI recorded robust order bookings ofUS$1.9bn (FY2011 revenue - US$972mn) and US$750mn (FY2011 revenue- US$905mn) in FY2011 and delivered CQGR (past four quarters) of 6.5%and 5.0%, respectively. We believe such a strategic portfolio should limitclient budget erosion for the company vis-à-vis its peers during a downturnand expect HCL Tech to be the outperformer among tier-I IT companies,with USD revenue to report a 3.5% CQGR over the next four quarters onthe back of its high-value services portfolio.

Margins to remain almost flat: All the benefits of INR depreciation in theEBIT margin of HCL Tech are expected to flow in FY2012 itself, as it is aJune-ending company. To cushion this, HCL Tech has some margin leverssuch as managing SG&A costs, expanding utilization levels and turnaroundin the BPO segment. Thus, we expect the company's EBIT margin to be at14.9% in FY2013 from 15.1% in FY2011.

Valuations attractive: The stock is trading at attractive valuations of10.5x FY2013E EPS, a steep 33% discount to Infosys, which we believe isunjustified due to industry-leading growth rates and improving profitability.We recommend Buy on the stock with a target price of `̀̀̀̀520, valuing itat 13x FY2013E EPS.

Software CMP/TP/Upside: `419 / `520 / 24%HCL Technologies


PROMOTERS 64.2

FII 18.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HCL TECH 3.3 (17.1) 53.7 5.0 12.8

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 34.9 27.6 28.0 28.5 27.6

PAT GROWTH* 43.3 43.0 21.3 22.1 14.4

OPM# 18.5 18.2 20.3 21.0 21.5


ANGEL ESTIMATES


PAT GROWTH (%) 25.5 18.8

ROE (%) 23.5 23.1

P/E 12.4 10.5


BUY / HOLD / SELL 51 / 10 / 8

RATING BUY

52 WEEK HIGH / LOW 526 / 359

MARKET CAP (`̀̀̀̀ CR) 28,936

LIQUIDITY HIGH


BALANCE SHEET

CASH AND CASH EQUIVALENT 469 520 370 420

ACCOUNT RECEIVABLES, NET 2,514 2,591 3,584 4,139

UNBILLED RECEIVABLES 536 816 993 1,120

DEPOSIT WITH BANKS 1,091 1,079 769 871

INVESTMENT SECURITIES 782 643 458 519

OTHER CURRENT ASSETS 885 1,255 1,385 1,599

TOTAL CURRENT ASSETS 6,376 6,902 7,560 8,668

PROPERTY AND EQUIPMENT 1,849 2,217 2,741 2,942

INTANGIBLE ASSETS, NET 4,312 4,188 4,137 4,085

FIXED DEPOSITS WITH BANKS - 110 78 89

INVESTMENT SECURITIES HTM 50 95 68 77

OTHER ASSETS 964 1,039 1,108 1,202

TOTAL ASSETS 13,571 14,624 15,750 17,127


BORROWINGS 2,663 2,124 1,884 1,222

OTHER LIABILTIES 739 689 608 577


TOTAL STOCKHOLDER EQUITY 7,037 8,435 10,060 12,124

TOTAL LIABILITIES AND EQUITY 13,571 14,624 15,750 17,127

Y/E JUNE (`̀̀̀̀ CR) FY2010 FY2011 FY2012E FY2013E


NET SALES 12,564 16,034 20,767 23,979

% CHG 18.2 27.6 29.5 15.5

COST OF REVENUES 8,188 10,749 13,917 16,458

GROSS PROFIT 4,377 5,285 6,850 7,520

SG&A EXPENSES 1,796 2,371 2,993 3,327

EBITDA 2,581 2,914 3,857 4,193

% OF NET SALES 20.5 18.2 18.6 17.5


EBIT 2,080 2,416 3,295 3,572

% OF NET SALES 16.6 15.1 15.9 14.9

OTHER INCOME, NET (55) 26 30 10


PROVISION FOR TAX 240 485 831 860

% OF PBT 11.9 19.9 25.0 24.0

PAT 1,785 1,956 2,494 2,723

FOREX LOSS (476) (82) (133) 81

FINAL PAT 1,310 1,874 2,361 2,804

% CHG 2.6 43.0 25.5 18.8


KEY RATIOS

VALUATION RATIO(X)

P/E 22.0 15.6 12.4 10.5

P/CEPS 15.9 12.3 10.0 8.5

P/BV 4.1 3.5 2.9 2.4

EV/SALES 2.3 1.8 1.4 1.2

EV/EBITDA 11.3 9.9 7.6 6.8


PER SHARE DATA(`̀̀̀̀)

EPS 19.0 26.8 33.7 40.0

CASH EPS 26.3 34.1 42.1 49.3

DIVIDEND 8.0 8.0 8.0 9.0

BOOK VALUE 102.2 121.4 144.8 174.4

RETURN RATIOS(%)

ROCE (PRE-TAX) 15.3 16.5 20.9 20.9

ANGEL ROIC 18.8 19.9 23.6 23.6

ROE 18.6 22.2 23.5 23.1

TURNOVER RATIOS(X)



Y/E JUNE FY2010 FY2011 FY2012E FY2013E

CASH FLOW STATEMENT



EXPENSES (DEFFERED) (476) (82) (133) 81

OTHER INCOME 117 182 194 130

TAX (240) (485) (831) (860)

NET TRADE WORKING CAPITAL (290) (484) (1,479) (890)


(INC)/DEC IN FIXED ASSETS (652) (797) (1,035) (770)

(INC)/DEC IN INTANGIBLES 109 56 - -

(INC)/DEC IN INVESTMENTS (528) 45 568 (188)

INC/(DEC) IN NON CURRENT LIAB. (25) (50) (81) (31)

(INC)/DEC IN NON CURRENT ASSETS (103) (75) (69) (94)

CASHFLOW FROM INVESTING ACTV. (1,199) (821) (617) (1,083)

INC/(DEC) IN DEBT (314) (539) (241) (662)


DIVIDENDS (640) (615) (656) (656)

CASHFLOW FROM FINANCING ACTV. (272) (1,016) (975) (1,402)

CASH GENERATED/(UTILIZED) 49 51 (149) 50

CASH AT START OF THE YEAR 420 469 520 370

CASH AT END OF THE YEAR 469 520 371 420




Company BackgroundTech Mahindra was founded in 1986 as a joint venture between MahindraGroup and British Telecom (BT). Later on, it started servicing other externalclients as well (solely in the telecom industry), though still it derives ~40%of its revenue from BT. In June 2009, Tech Mahindra acquired a 42.7%stake in erstwhile Satyam Computers (now Mahindra Satyam).

Structural SnapshotGrowth opportunity: Trends such as the advent of 4G technology, superfastbroadband and telecom ventures and M&As present numerous prospectsfor Tech Mahindra to capture IT spend coming from these areas. Also,Tech Mahindra can leverage the skills of Mahindra Satyam in the enterprisesolutions space to expand its service offerings. Tech Mahindra, by acquiringMahindra Satyam, has effectively tried to achieve diversification of its revenueportfolio (eventually to be merged with itself).

Competitive position: Tech Mahindra has a strong proposition in terms ofservice, technology and product bouquet in the telecom industry in which ithas marquee clientele such as AT&T, Airtel, Alcatel and Vodafone.


Current Investment ArgumentsMahindra Satyam, a feather in the cap: Mahindra Satyam has now reacheda stage of stability and is showing robust growth traction on the back of itsdiversified portfolio. Increasing revenue visibility of Mahindra Satyam andmanagement's capability of maintaining margins have led to an overall upgradeof Mahindra Satyam's earnings.

Non-BT business to drive the company's growth, but BT retenderingcontracts: Management is witnessing traces of demand revival from telecomservice providers and foresees them to return to spending on 4G technologyand cloud only in FY2013. We expect the non-BT business to report a CQGRof 2.5% and 2.6% in 2HFY2012E and FY2013E, respectively, with BT'squarterly revenue expected to be flat from here. However, there is a caveatthat BT's revenue may see a downside if the company loses out its marketshare in the retendering process initiated by BT. In fact, even if the companymanages to hold the share or increase it, it can be margin dilutive as theclient has initiated this retendering process as part of its cost-cutting drivewith lower pricing expectations. Thus, we expect the company to post a9.2% CAGR in its USD revenue over FY2011-13E.

Valuations: The stock is trading at reasonable valuations of 7.3x FY2013EEPS, which we believe over-discount in the negatives from the BT business.Also, after the merger of Tech Mahindra and Mahindra Satyam, the share ofBT’s revenue in the combined entity will come down to 18-20%. We recommendan Accumulate rating on the stock with a target price of `̀̀̀̀666, valuingit at 8x FY2013E EPS.

Software CMP/TP/Upside: `608 / `666 / 9%Tech Mahindra



FII 4.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TECH MAHINDRA 5.2 (11.7) 36.5 (19.2) -

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 8.0 11.1 10.9 32.8 -

PAT GROWTH* 113.8 10.9 4.1 27.4 -

OPM# 15.3 19.5 23.7 24.2 -


ANGEL ESTIMATES


PAT GROWTH (%) 35.5 3.2

ROE (%) 24.0 20.0

P/E 7.2 7.3


BUY / HOLD / SELL 10 / 15 / 12

RATING ACCUMULATE

52 WEEK HIGH / LOW 798 / 525


LIQUIDITY MEDIUM


BALANCE SHEET

EQUITY CAPITAL 122 126 126 126

SHARE PREMIUM 237 233 233 233

PROFIT AND LOSS 1,783 2,365 3,355 4,376

OTHER RESERVES 744 627 726 747

NET WORTH 2,887 3,351 4,439 5,482

TOTAL DEBT 2,135 1,223 907 407


TOTAL CAPITAL EMPLOYED 5,035 5,174 5,362 5,904

GROSS BLOCK 1,131 1,273 1,433 1,588

ACCUMULATED DEPRECIATION (527) (670) (845) (1,031)

CAPITAL WIP 321 125 140 160

INVESTMENTS 3,015 2,908 2,909 2,932

SUNDRY DEBTORS 1,042 1,247 1,249 1,371

CASH AND CASH EQUIVALENTS 219 267 448 715

LOANS AND ADVANCES 673 832 901 1,026

SUNDRY CREDITORS (461) (510) (542) (574)

OTHER LIABILITIES (129) (53) (65) (15)

PROVISION (277) (308) (338) (342)

TOTAL CAPITAL DEPLOYED 5,035 5,174 5,362 5,904



NET SALES 4,625 5,140 5,629 6,215

% CHG 3.6 11.1 9.5 10.4

COST OF REVENUES 2,871 3,403 3,731 4,150

GROSS PROFIT 1,754 1,737 1,898 2,065

SG&A EXPENSES 622 734 923 1,019

EBITDA 1,133 1,003 975 1,046

% OF NET SALES 24.5 19.5 17.3 16.8


EBIT 999 860 800 859

INTEREST EXPENSE 218 100 140 54




PAT 712 746 699 728

SHARE FROM ASSOCIATES 44 368 373

EXCEPTIONAL ITEM (9) (143) - -

FINAL PAT 700 643 1,065 1,099

ADJ. PAT 709 786 1,065 1,099

% CHG (25.1) 10.9 35.5 3.2


KEY RATIOS

VALUATION RATIO (X)

P/E 11.3 12.3 7.2 7.3

P/BV 2.7 2.4 1.8 1.5

EV/SALES 2.1 1.7 1.5 1.2

EV/EBITDA 8.7 8.9 8.6 7.3

EV/TOTAL ASSETS 10.6 12.2 11.5 10.6

PER SHARE DATA (‘)

EPS 53.6 49.3 84.5 83.3

CASH EPS 64.0 60.3 93.9 97.4

DIVIDEND 3.3 4.0 4.0 4.0

BOOK VALUE 221.4 257.0 336.6 415.6

RETURN RATIOS (%)

ROCE (PRE-TAX) 19.8 16.6 14.9 14.6

ANGEL ROIC 22.2 18.0 16.8 17.1

ROE 24.6 23.5 24.0 20.0

TURNOVER RATIOS (X)





CASH FLOW STATEMENT

PRE TAX PROFIT FROM OPERATIONS 780 760 660 805



TAX (144) (132) (203) (217)

CASH PROFITS 834 788 1,241 1,287

NET TRADE WORKING CAPITAL (539) (358) 3 (261)

CASHFLOW FROM OPERATING ACTV. 295 429 1,244 1,026

(INC)/DEC IN FIXED ASSETS (407) 54 (175) (176)

(INC)/DEC IN INVESTMENTS (2,580) 107 (1) (23)

(INC)/DEC IN DEFERRED TAX ASSET (8) (36) (11) (3)

CASHFLOW FROM INVESTING ACTV. (2,995) 125 (186) (202)

INC/(DEC) IN DEBT 2,135 (912) (316) (500)

INC/(DEC) IN EQUITY/PREMIUM 5 - - -

RESERVES ON AMALGAMATION 288 (117) 99 21

DIVIDENDS (50) (61) (75) (77)

CASHFLOW FROM FINANCING ACTV. 2,381 (504) (876) (556)

CASH GENERATED/(UTILIZED) (319) 49 181 267






Company BackgroundMahindra Satyam (Satyam) was incorporated by Raju brothers in 1987, witha strong focus on the manufacturing industry and the enterprise businesssolutions (EBS) vertical. The Mahindra Group acquired Satyam in April 2009after the erstwhile founders reported financial irregularities in January 2009and it is now back on its growth track after two years of metamorphosisundertaken by Tech Mahindra's management. The company's new managementtook over its reins and has again put the company on the map of the IndianIT industry (sixth largest Indian IT services provider) with improved businessflow, strong client mining and better margins.

Structural SnapshotGrowth opportunity: Low penetration of Indian IT companies in the totaloutsourcing market (~6%) offers an enormous growth potential for Indian ITplayers to increase their revenue pie. Hence, Satyam, with its restored reputation,diversified portfolio, expanding footprint in untapped geographies and strongmanagement competence, can potentially get incremental revenue growthof 12-14% annually.

Competitive position: Satyam has a broad-based service portfolio, with itsmajor strength in enterprise solutions, application development and maintenance.Post the restatement of FY2009 and FY2010 financials, the company hasbeen able to demonstrate a sharp improvement in its business traction.


Current Investment ArgumentsAnchor verticals boosting growth: Satyam has a strong presence in EBS(~40% of its revenue) and manufacturing (~32% of its revenue), which areshowing modest traction. The company expects this service and vertical,respectively, to augment growth, which is coherent with the demand colorgiven by most other tier-I IT companies. We expect the company's corecompetence in EBS to supplement the 15.3% CAGR in USD revenue overFY2011-13E.

Adequate margin levers to bolster earnings growth income: Satyam hasadequate margin levers such as 1) employee pyramid rationalization (employees< 3 years of experience are very less at ~20% vis-à-vis industry at ~40 to45%); 2) strong volume growth expected on the back of a strengtheningdeal pipeline expected to improve utilizations to 75% by FY2013 from thecurrent 74%; 3) better pricing on the back of improvement in business mix;and 4) current SGA at 20.5% of sales, which can be brought down to 19.0%by FY2013.

Valuations attractive: The stock is trading at attractive valuations of 9.7xFY2013E EPS. We recommend an Accumulate rating on the stock witha target price of `̀̀̀̀82, valuing it at 11x FY2013E EPS.

Software CMP/TP/Upside: `72 / `82 / 13%Mahindra Satyam



FII 23.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MAHINDRA SATYAM 2.3 9.0 41.6 (31.7) (6.2)

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 27.0 (6.1) (15.3) 1.4 13.8

PAT GROWTH* 651.5 68.9 (33.6) (12.4) 14.5

OPM# 15.3 8.8 9.2 15.8 20.6


ANGEL ESTIMATES


PAT GROWTH (%) 74.4 1.4

ROE (%) 15.7 13.8

P/E 9.9 9.7


BUY / HOLD / SELL 11 / 7 / 5

RATING ACCUMULATE



LIQUIDITY MEDIUM


BALANCE SHEET



TOTAL SHAREHOLDERS' FUNDS 4,630 4,621 5,484 6,358


LOAN FUNDS 42 32 28 28


INVESTIFATION SUSPENSE ACC. 1,230 1,230 1,230 1,230

TOTAL CAPITAL EMPLOYED 5,927 5,913 6,772 7,646

FIXED ASSETS 987 950 1,104 1,162


SUNDRY DEBTORS 923 1,159 1,437 1,634

CASH AND BANK BALANCES 2,177 2,754 2,154 2,671

OTHER CURRENT ASSETS 496 379 389 403

LOANS AND ADVANCES 385 378 602 729

LIABILITIES 882 1,546 1,220 1,418

PROVISIONS 1,540 1,558 1,652 1,841


PROFIT AND LOSS ACCOUNT 2,749 2,896 3,530 3,793

TOTAL CAPITAL DEPLOYED 5,927 5,913 6,772 7,646



NET REVENUES 5,481 5,145 6,477 7,365

% CHG (37.8) (6.1) 25.9 13.7

EMPLOYEE COSTS 3,981 3,594 4,123 4,792

GROSS PROFIT 1,500 1,551 2,355 2,573

SG&A EXPENSES 1,043 1,096 1,376 1,484

EBITDA 457 455 979 1,089

% TO NET SALES 8.3 8.8 15.1 14.8


EBIT 243 270 808 898

% TO NET SALES 4.4 5.3 12.5 12.2

INTEREST CHARGES 33 10 16 17

OTHER INCOME 106 294 260 238

PBT 315 555 1,053 1,119

TAX 22 58 188 242

% OF PBT 7.0 10.4 17.9 21.7

EXCEPTIONAL ITEM 417 641 - -

FINAL PAT (125) (147) 862 874

ADJ. PAT 292 494 862 874

% CHG (258.2) 68.9 74.4 1.4


KEY RATIOS

VALUATION RATIO (X)

P/E 28.9 17.2 9.9 9.7

P/BV 1.8 1.8 1.5 1.3

EV/SALES 1.2 1.1 1.0 0.8

EV/EBITDA 13.9 12.7 6.5 5.4



EPS 2.5 4.2 7.3 7.4

CASH EPS 0.8 0.3 8.8 9.1

BOOK VALUE 39.4 39.3 46.7 54.1

RETURN RATIOS (%)

ROCE (PRE-TAX) 4.1 4.6 11.9 11.7

ANGEL ROIC 6.5 8.6 17.5 18.0

ROE 6.3 10.7 15.7 13.8

TURNOVER RATIOS (X)





CASH FLOW STATEMENT

PRE TAX PROFIT FROM OPS. 210 260 792 881


OTHER INCOME 106 294 260 238

TAX 22 58 188 242

CASH PROFITS 507 679 1,034 1,066

NET TRADE WORKING CAPITAL 62 510 (747) 50

CASH FLOW FROM OPERATING ACTV. 569 1,189 287 1,116

(INC)/DEC IN FIXED ASSETS 38 (148) (325) (250)

(INC)/DEC IN INVESTMENTS (627) 192 76 (86)

(INC)/DEC IN DEFERRED TAX (1) 1 (2) -

(INC)/DEC IN NON CURRENT ASST. (125) (147) (634) (263)

INC/(DEC) IN MINORITY INTEREST 1 3 2 -

CASH FLOW FROM INVESTING ACTV. (714) (99) (883) (599)

INC/(DEC) IN DEBT (772) (11) (4) -

INC/(DEC) IN EQUITY/PREMIUM 2,593 (503) - -

CASH FLOW FROM FINANCING ACTV. 1,821 (513) (4) -

CASH GENERATED/(UTILIZED) 1,676 577 (600) 517

CASH AT START OF THE YEAR 501 2,177 2,754 2,154





Company BackgroundMphasiS is a mid-tier Indian IT company formed by the acquisition of MphasiSby BFL in 1999. In 2006, EDS acquired a majority stake in MphasiS andsubsequently HP bought EDS in May 2008, thereby making MphasiS anHP company. The company provides application, infrastructure and BPOservices to clients in the banking, capital markets, insurance, telecommunicationand manufacturing industries. MphasiS is one of the largest BPO serviceproviders in India, providing voice as well as transaction-based services.

Structural SnapshotGrowth opportunity: MphasiS derives ~65% of its revenue from HP channel,out of which 10% is directly from HP as a client. The revenue growth outlookfrom HP as a client is sluggish and the rest of the revenue derived from HPchannel always faces risk of price cuts. Rest ~35% of the company's revenuecomes from the direct channel, which is now the focus area of the company.Low penetration of Indian IT companies (~6%) in the total outsourcing marketoffers enormous potential for MphasiS to increase its focus on the directchannel business.

Competitive position: MphasiS is strongly positioned in the enterprise servicesand infrastructure services verticals, thus placing it well for short-term aswell as long-term growth - provided the company expands its footprint anddiversifies its client portfolio.


Current Investment ArgumentsRevenue growth expected to come from non-HP channel: MphasiS iswitnessing modest growth from the non-HP channel business. The company'sITO business is witnessing modest growth, with open billable employee positionstanding at 300 on the total billable employee base of 6,500 in ITO. In fact,this business segment has reported a 7.6% CQGR over 2QFY2010-4QFY2011and is expected to continue as a growth driver for the company. However,continued sluggish performance of the HP-ES business has begun to hurtMphasiS' revenue from the HP channel. Also HP's long-term direction towardshaving six worldwide offshore development centers, including India, may posea threat to MphasiS' volumes. Over FY2011-13E (October ending), we expectMphasiS to record USD and INR revenue CAGR of 5.9% and 8.9%, respectively.

Cash pile to support inorganic growth: MphasiS is looking at an inorganicstrategy to supplement its growth further. Recently, management acquiredWyde, an international software vendor and creator of Wynsure - an insurancepolicy administration IP solution - to scale up its insurance portfolio. Also, inour view, there is a good possibility that the company may use its cash pile(~`2,000cr) to announce a buyback.

Valuations: The stock is trading at 9.4x FY2013E EPS. We recommend anAccumulate rating on the stock with a target price of `̀̀̀̀387, valuing it at10.5x FY2013E EPS.

Software CMP/TP/Upside: `347 / `387 / 12%MphasiS


PROMOTERS (HP) 60.5

FII 20.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MPHASIS 5.6 (49.2) 31.7 3.6 23.3

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (2.3) 1.2 28.1 40.2 45.4

PAT GROWTH* (35.4) (24.6) 47.7 40.6 51.8

OPM# 17.9 19.3 22.0 20.0 20.8


ANGEL ESTIMATES


PAT GROWTH (%) (0.2) (5.9)

ROE (%) 17.3 14.2

P/E 8.9 9.4


BUY / HOLD / SELL 12 / 13 / 16

RATING ACCUMULATE

52 WEEK HIGH / LOW 712 / 277


LIQUIDITY MEDIUM


BALANCE SHEET



TOTAL SHAREHOLDERS FUNDS 3,300 4,023 4,745 5,419

TOTAL DEBT 45 292 286 286


GROSS BLOCK - FIXED ASSETS 1,026 1,134 1,309 1,484

ACCUMULATED DEPRECIATION 784 850 1,043 1,242


GOODWILL 389 870 870 870

INVESTMENTS 1,460 1,777 1,927 2,200

DEFERRED TAX ASSET 75 98 95 95

DEBTORS AND UNBILLED REV. 1,198 1,307 1,338 1,421


INTEREST RECEIVABLE 0 0 0 0

LOANS AND ADVANCES 945 1,130 1,185 1,208


PROVISIONS 350 495 277 307

TOTAL ASSETS 3,345 4,315 5,031 5,705

Y/E OCTOBER (`̀̀̀̀ CR) FY2010 FY2011 FY2012E FY2013E


NET SALES 5,036 5,098 5,679 6,030

% CHG 17.9 1.2 11.4 6.2

COST OF REVENUE 3,352 3,698 4,063 4,546

GROSS PROFIT 1,684 1,400 1,616 1,484

SELLING AND MKTG EXP. 220 232 275 268

GENERAL AND ADMIN EXP. 199 184 220 217

EBITDA 1,265 985 1,121 999

% OF NET SALES 25.1 19.3 19.7 16.6


EBIT 1,101 830 928 800

INTEREST INCOME, NET 1 (2) - -


FOREX GAIN 58 66 (27) (11)



% OF PBT 9.8 18.2 23.0 23.0

PAT 1,091 822 820 772

% CHG 19.0 (24.6) (0.2) (5.9)


KEY RATIOS

VALUATION RATIO (X)

P/E 6.7 8.8 8.9 9.4

P/BV 2.2 1.9 1.5 1.3

EV/SALES 1.1 1.1 0.9 0.8

EV/EBITDA 4.5 5.6 4.6 4.6



EPS 52.0 39.2 39.1 36.8

CASH EPS 59.8 46.6 48.4 46.3

BOOK VALUE 157.4 186.1 227.3 259.4

RETURN RATIOS (%)

ROCE (PRE-TAX) 32.9 19.8 18.4 14.0

ANGEL ROIC 91.3 60.6 54.1 43.1

ROE 33.1 20.4 17.3 14.2

TURNOVER RATIOS (X)




Y/E OCTOBER FY2010 FY2011 FY2012E FY2013E

CASH FLOW STATEMENT

PRE TAX PROFIT FROM OPERATIONS 1,160 894 901 789



NET CASH FROM OPERATIONS 1,374 1,160 1,259 1,201

TAX (119) (183) (245) (231)

NET TRADE WORKING CAPITAL (275) 4 (367) (162)

CASHFLOW FROM OPERATING ACTV. 979 981 646 809

(INC)/DEC IN FIXED ASSETS (86) (198) (186) (173)

(INC)/DEC IN INTANGIBLES (94) (481) - -

INC/(DEC) IN DEFERRED TAX LIAB. (6) (22) 3 -

(INC)/DEC IN INVESTMENTS (699) (317) (151) (273)

CASHFLOW FROM INVESTING ACTV. (884) (1,018) (334) (446)

INC/(DEC) IN DEBT 42 247 (6) -

INC/(DEC) IN EQUITY/PREMIUM (38) - - -

DIVIDENDS 98 98 98 98

CASHFLOW FROM FINANCING ACTV. (94) 148 (104) (98)







Company BackgroundEstablished in 1999 by 10 industry professionals, MindTree is amid-tier Indian IT services company employing over 10,000 professionals.The company has so far managed to keep up with its performance despiteits main founder, Mr. Ashok Soota, exiting the company on March 31, 2011.MindTree offers a range of services spread across two businesses - IT services(ITS) and product engineering services (PES).

Structural SnapshotGrowth opportunity: According to Nasscom, the Indian IT industry is expectedto grow by 10-11% annually, given its under penetration in the global outsourcingmarket. This endows huge opportunities for a fairly diversified mid-cap playerlike MindTree to increase its reach and scale of operations. In addition, asper IDC, the offshore product development (OPD) market in 2010 crossedthe US$10bn mark and is expected to report a 19% CAGR to US$16bn by2013. Given MindTree's niche focus of PES, it can easily average14-15% growth in the PES business.

Competitive position: MindTree is a fairly diversified mid-cap IT player, withsuperior client mining skills and higher repeat business as compared toother mid-cap players.


Current Investment ArgumentsNiche focus on resurging PES along with robust traction from IT services:MindTree is gaining traction in its PES business (~36% of its revenue) forits wireless, android-related space. Management is confident that the companywill be able to grow its other accounts except Kyocera - wireless handsetmanufacturing business, which the company exited in October 2011. Alongwith that, the company's ITS business is continuously showing strong tractionwith a 6.3% revenue CQGR over the last four quarters.

Adequate margin levers in place: On the margin front, MindTree has beendoing well since past few quarters to rationalize its employee pyramid andcut down on SG&A. These steps by the company as well as INR depreciationhelped MindTree to move its EBIT margin from 7.1% in FY2011 to 13.9% in3QFY2012. Going ahead, for FY2013, Mindtree faces headwinds of wageinflation, which can be partially absorbed by tailwinds such as improvingutilization level, effort shift offshore and lowering SG&A expenses from currentlevels. Hence, we expect EBIT margin of MindTree to move to 11.3% inFY2012 and 10.5% in FY2013 from 7.1% in FY2011.

Valuations attractive: MindTree has been one of the good performers in theIndian IT mid-cap space, reporting 21.5% yoy revenue growth in FY2011. Fearsof operational mayhem that took place post the company entered wireless handsetmanufacturing are behind, as the company exited the business. We recommendan Accumulate rating on the stock with a target price of `̀̀̀̀502, valuing it at10x FY2013E EPS.

Software CMP/TP/Upside: `441 / `502 / 14%MindTree


PROMOTERS 24.1

FII 17.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MINDTREE 11.9 (18.4) 23.0 - -

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 35.0 16.4 26.8 - -

PAT GROWTH* 99.2 (52.6) 0.3 - -

OPM# 17.3 11.8 13.5 - -


ANGEL ESTIMATES


PAT GROWTH (%) 107.9 (2.9)

ROE (%) 21.5 17.4

P/E 8.5 8.8


BUY / HOLD / SELL 18 / 4 / 6

RATING ACCUMULATE

52 WEEK HIGH / LOW 555 / 321


LIQUIDITY MEDIUM


BALANCE SHEET


RESERVES AND SURPLUS 631 736 937 1,133

TOTAL SHAREHOLDERS' FUNDS 671 776 977 1,173

TOTAL DEBT 3 5 4 4


GROSS BLOCK - FIXED ASSETS 515 562 614 666

ACCUMULATED DEPRECIATION 253 262 337 432


TOTAL FIXED ASSETS 286 303 289 254

GOODWILL 15 - - -


DEFERRED TAX ASSETS, NET 21 22 18 20

SUNDRY DEBTORS 237 283 317 374

CASH AND BANK BALANCE 52 46 228 331


TOTAL CURRENT ASSETS 484 579 856 1,122


PROVISIONS 49 53 68 80

TOTAL ASSETS 674 781 981 1,177



NET SALES 1,296 1,509 1,931 2,278

% CHG 4.7 16.4 28.0 18.0

SOFTWARE DEVELOPMENT EXP. 798 1,015 1,270 1,509

GROSS PROFIT 498 495 661 769

% OF NET SALES 38.4 32.8 34.2 33.8

SG&A EXPENSES 252 317 368 435

EBITDA 246 178 293 334

% OF NET SALES 18.9 11.8 15.2 14.7


EBIT 180 107 218 239

INTEREST EXPENSE, NET 3 - - -




% OF PBT 15.6 22.1 17.3 20.0

FINAL PAT 215 102 210 204

% CHG 310.8 (52.6) 107.9 (2.9)


KEY RATIOS

VALUATION RATIO (X)

P/E 8.1 17.7 8.5 8.8

P/BV 2.6 2.3 1.8 1.5

EV/SALES 1.3 1.1 0.8 0.6

EV/EBITDA 6.6 9.3 5.0 4.0



EPS 54.4 24.9 51.7 50.2

CASH EPS 70.9 42.3 70.3 73.5

BOOK VALUE 170 190 241 288

RETURN RATIOS (%)

ROCE (PRE-TAX) 26.8 13.7 22.2 20.3

ANGEL ROIC 39.7 17.2 35.5 35.4

ROE 32.0 13.1 21.5 17.4

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




NET CASH FROM OPERATIONS 320 202 329 350

TAX 40 29 44 51

NET TRADE WORKING CAPITAL (59) (127) (18) (105)



(INC)/DEC IN INVESTMENTS (26) 16 (19) (20)

(INC)/DEC IN DEFERRED TAX ASSETS (2) - 4 (2)

(INC)/DEC IN INTANGIBLES 131 15 - -

CASHFLOW FROM INVESTING ACTV. 15 (57) (76) (82)

INC/(DEC) IN DEBT (136) 2 (1) -

INC/(DEC) IN EQUITY/PREMIUM (82) 15 - -

DIVIDENDS (14) (12) (9) (9)

CASHFLOW FROM FINANCING ACTV. (232) 5 (9) (9)

CASH GENERATED/(UTILIZED) 3 (6) 182 103






Company BackgroundInfotech Enterprises (Infotech), a mid-cap Indian IT company, specializes ingeographical spatial solutions and engineering design services with a focuson the aerospace, rail and hi-tech segments. Infotech has entered intolong-term strategic relationships with global clients, such as Bombardier,Boeing, Hamilton Sunstrand and Alstom Transport, and has signedmulti-million dollar contracts with them. The company's offerings are spreadacross two verticals - network and content engineering (NCE, contributing~31% to revenue) and engineering manufacturing and industrial products(ENGG, contributing ~69% to revenue).

Structural SnapshotGrowth opportunity: Currently, India accounts for ~12% of the total offshoreengineering services market. As per Nasscom, Indian IT players are wellpositioned to increase their market share in engineering offshoring to 30%by 2020. Infotech, being a leader in aerospace engineering, has strongrelationships with clients in this space and, hence, can capitalize on thisopportunity.

Competitive position: Strong foothold in the geospatial solutions area, whereonly few Indian players like Rolta and Wipro are present.


Current Investment ArgumentsRevenue momentum to continue: Infotech has been witnessing a 5.2%CQGR in its revenue over 2QFY2011-3QFY2012 because of inorganic growthdue to the acquisition of Daxcon and Wellsco. Management had guided for22-25% yoy growth in INR revenue in FY2012, which is already achieved in9MFY2012 due to sharp INR depreciation. Also, the company has got priceincrease from some of its selective clients, which instills confidence in thecompany's performance going ahead. So, over FY2011-13E, we expect thecompany to post a USD and INR revenue CAGR of 17.6% and23.2%, respectively.

Margins to increase, courtesy INR depreciation: Infotech's EBIT marginimproved in 3QFY2012 after a declining trajectory seen since 3QFY2010-2QFY2012, despite management's repetitive indications of focusing on improvingmargins. This year, management expects EBIT margin to exit at ~13%, whichcan be easily achieved now, given the sharp INR depreciation. We expectEBIT margin to go move up to 13.3% for FY2012 and then decline to 12.0%in FY2013 due to wage inflation and fresher hiring, which will lead to lowerutilization level.

Valuations: The stock is trading at fair valuations of 8.6x FY2013E EPS.We recommend Neutral on the stock.

Software CMP/TP/Upside: `135 / - / -Infotech Entreprises


PROMOTERS 23.0

FII 23.0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

INFOTECH 17.5 (21.4) 44.0 (5.7) 14.9

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 32.7 24.6 20.8 26.8 42.8

PAT GROWTH* (8.5) (18.3) 18.4 22.6 29.8

OPM# 20.6 15.2 19.0 19.0 21.7


ANGEL ESTIMATES


PAT GROWTH (%) (0.3) 25.7

ROE (%) 11.9 13.1

P/E 10.8 8.6



RATING NEUTRAL

52 WEEK HIGH / LOW 174 / 101


LIQUIDITY LOW


BALANCE SHEET


SHARE PREMIUM ACCOUNT 363 334 334 334

RESERVES AND SURPLUS 516 655 782 944


BORROWINGS 4 - - -

TOTAL CAPITAL EMPLOYED 911 1,046 1,172 1,334

GROSS BLOCK 494 560 620 680

ACCUMULATED DEP. 239 288 352 424

CWIP 61 65 65 65

DEFERRED TAX ASSET 3 1.5 1.7 2.0






SUNDRY CREDITORS 66 79 92 113



TOTAL CAPITAL DEPLOYED 911 1,046 1,172 1,334



NET SALES 953 1,188 1,562 1,802

% CHG 7.1 24.6 31.5 15.4

COST OF REVENUES 543 735 950 1,108

GROSS PROFIT 410 453 612 694

SELLING AND MKTG EXP. 87 119 140 171

GENERAL AND ADMIN EXP. 115 154 200 234

EBITDA 208 180 272 288

% MARGIN 21.9 15.2 17.4 16.0


EBIT 165 132 208 216

% MARGIN 17.3 11.1 13.3 12.0

OTHER INCOME 46 30 (13) 30



% OF PBT 24.3 16.9 33.0 33.0

PAT 158 133 131 165

MINORITY INTEREST (13) (7) (8) (10)

FINAL PAT 171 140 139 175

% CHG 85.0 (18.3) (0.3) 25.7


KEY RATIOS

VALUATION RATIO (X)

P/E 8.8 10.7 10.8 8.6

P/BV 1.7 1.4 1.3 1.1

EV/SALES 1.1 0.9 0.6 0.5

EV/EBITDA 5.1 5.9 3.6 2.9



EPS 15.4 12.6 12.5 15.8

CASH EPS 19.3 17.0 18.3 22.3

DIVIDEND 1.0 1.3 1.0 1.0

BOOK VALUE 81.6 94.2 106.5 121.3

RETURN RATIOS (%)

ROCE (PRE-TAX) 18.1 12.6 17.8 16.2

ANGEL ROIC 39.8 24.4 35.7 35.1

ROE 18.9 13.4 11.9 13.1

TURNOVER RATIOS (X)

ASSET TURNOVER(GROSS BLOCK) 1.9 2.1 2.5 2.6




CASH FLOW STATEMENT



EXPENSES DEFFERED (13) (7) (8) (10)

OTHER INCOME 46 30 (13) 30


TAX 51 27 65 81


CASHFLOW FROM OPER. ACTV. 157 79 155 203



(INC)/DEC IN DEFERRED TAX ASSET 14 1 - -

CASHFLOW FROM INVESTING ACTV. (207) 42 (67) (67)

INC/(DEC) IN DEBT (15) (4) - -

INC/(DEC) IN EQUITY/PREMIUM (22) 16 - -

DIVIDENDS (13) (16) (13) (13)

CASHFLOW FROM FINANCING ACTV. (50) (4) (13) (13)







Company BackgroundHexaware is a mid-cap Indian IT company and is the 18th largest Indiansoftware exporter according to Nasscom 2010 rankings. Under the leadershipof Chairman Mr. Atul Nishar and Vice Chairman and CEO Mr. Chandrashekar(ex-Wipro Technologies), Hexaware has differentiated itself from its peersand built a niche position in the airlines vertical and in PeopleSoft implementation.Hexaware offers its services to clients mainly in the BFSI and travel andtransportation industries.

Structural SnapshotGrowth opportunity: Having established a strong position in the BFSI andtravel and transportation space, Hexaware can now look at expanding itsfootprint to other high-growth areas like retail, lifesciences and healthcare,which can even help in de-risking the company's product portfolio.

Competitive position: Hexaware has niche capabilities in multiple areas,such as capital markets and travel and transportation. The company, in ourview, is best placed in the mid-cap IT space to capture growth in the enterpriseservices area.


Current Investment ArgumentsRecent deal wins provide strong revenue visibility: Hexaware has beenreporting strong growth on account of robust performance of its anchorservice verticals - enterprise solutions and business intelligence.The company managed to outperform the entire IT pack with a 7.5%CQGR over 2QCY2010-3QCY2011. Hexaware has won six large deals(all above US$25mn) in the past six quarters. Of these, three dealswere more than US$100mn; so on a cumulative basis, these deals are overUS$600mn, which gives incremental revenue visibility for the company.So, we expect Hexaware to report a strong CAGR of 24.8% in its USDrevenue over CY2010-12E.

Margins to head northwards: Hexaware has adequate levers to expand itsmargins, such as 1) strong volume growth and improvement in utilizationlevel (currently at 70.6%), 2) broadening of the employee pyramid (~17% ofthe total employees having below three years of experience), 3) ability togrow even with maintaining SGA at absolute levels, and 4) enterprise solutionsand business intelligence offering improved business mix. All these are expectedto increase the company's EBIT margin to 15.5% and 16.7% for CY2011and CY2012, respectively, from 6.6% in CY2010.

Valuations attractive: The stock is trading at reasonable valuations of 9.3xCY2012E EPS. We recommend a Buy rating on the stock with a targetprice of `̀̀̀̀96, valuing it at 11x FY2013E EPS.

Software CMP/TP/Upside: `81 / `96 / 19%Hexaware


PROMOTERS 28.2

FII 50.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HEXAWARE (9.7) 33.6 101.1 (1.6) 28.2

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 29.9 1.5 0.5 9.2 8.3

PAT GROWTH* 283.9 (36.4) (8.2) (1.4) 0.5

OPM# 18.7 8.9 13.5 14.6 14.1


ANGEL ESTIMATES


PAT GROWTH (%) 187.0 5.6

ROE (%) 21.9 19.8

P/E 9.8 9.3


BUY / HOLD / SELL 19 / 1 / 3

RATING BUY



LIQUIDITY MEDIUM


BALANCE SHEET

LIABILITIES


RESERVES 861 934 1,065 1,262

FOREX MTM (41) 26 - -

TOTAL SHAREHOLDERS' FUNDS 850 989 1,124 1,320

BORROWINGS 16 11 60 56


ASSETS

GROSS FIXED ASSETS 576 560 610 650

ACCUMULATED DEP. 140 152 178 214

NET FIXED ASSETS 436 408 431 436

CASH AND CASH EQUIVALENT 426 475 516 652

DEBTORS 153 192 230 277

OTHERS 111 163 251 315

TOTAL CURRENT ASSETS 690 830 997 1,244

CURRENT LIABILITY - FOREX MTM 44 - - -


DEFERRED TAX 11 17 20 23

TOTAL ASSETS 866 1,000 1,184 1,376



REVENUES 1,039 1,055 1,435 1,772

% CHG (9.8) 1.5 36.1 23.5

DIRECT COSTS 564 692 889 1,094

GROSS PROFIT 474 363 546 678

SG&A EXPENSES 272 269 297 347

EBITDA 202 94 249 331

% TO REVENUES 19.5 8.9 17.4 18.7


EBIT 175 70 223 295

% TO REVENUES 16.9 6.6 15.5 16.7


FOREX GAIN (62) (25) 24 (10)

PBT 145 95 291 339

TAX 10 9 45 78

% OF PBT 7.2 9.8 15.3 23.0

PAT 134 85 247 261

EXCEPTIONAL ITEM - 22 - -

FINAL PAT 134 108 247 261

% CHG 127.2 (36.4) 187.0 5.6


KEY RATIOS

VALUATION RATIO (X)

P/E 17.7 28.1 9.8 9.3

P/BV 2.8 2.4 2.1 1.8

EV/SALES 1.9 1.8 1.3 1.0

EV/EBITDA 9.6 20.2 7.6 5.3



EPS 4.6 2.9 8.2 8.7

CASH EPS 5.5 4.5 9.3 10.1

DIVIDEND 0.7 1.5 4.0 2.2

BOOK VALUE 29.1 33.8 38.4 45.1

RETURN RATIOS (%)

ROCE (PRE-TAX) 20.2 6.9 18.8 21.4

ANGEL ROIC 39.8 13.2 33.4 40.8

ROE 15.8 10.9 21.9 19.8

TURNOVER RATIOS(X)


DEBTOR DAYS 63 60 59 57


CASH FLOW STATEMENT



OTHER INCOME (31) 25 68 44

TAX 10 9 45 78

CASH PROFITS 161 109 273 297


CASH FLOW FROM OPERATING ACTV. 107 2 158 247

(INC)/DEC IN FIXED ASSETS (13) 4 (50) (40)

(INC)/DEC IN DEFERRED TAX ASSET (3) (6) (3) (3)

INC/(DEC) IN NON CURRENT LIAB. 83 67 (26) -

CASH FLOW FROM INVESTING ACTV. 67 64 (79) (43)

INC/(DEC) IN DEBT (3) (5) 49 (4)

INC/(DEC) IN EQUITY/PREMIUM (6) 39 30 -

DIVIDENDS (24) (51) (116) (65)

CASH FLOW FROM FINANCING ACTV. (33) (17) (37) (69)

CASH GENERATED/(UTILIZED) 141 49 41 136






Company BackgroundKPIT Cummins (KPIT), a mid-tier Indian IT company, specializes in themanufacturing segment, with a focus on automotive and industrial solutionsand services. The company focuses on three areas of solutions - enterpriseservices, auto and engineering and SAP. KPIT has been growing strongly,both organically and inorganically. The company has successfully acquiredeight companies in eight years, which scaled up KPIT's revenue many fold.

Structural SnapshotGrowth opportunity: KPIT has a strong foothold in the manufacturing spaceand can look to expand it further to emerging geographies. The company, inour view, can expand its footprints into other growth areas like energy andutilities and lifesciences and healthcare, which can even help in de-riskingits product portfolio.

Competitive position: KPIT is a niche IT services company; It is a leader inthe auto engineering space and is amongst the largest offshore vendors inthis space in India. KPIT faces huge client concentration risk as it derives~22% of its revenue from Cummins.


Current Investment ArgumentsNiche focus on the manufacturing industry segment: During 4QFY2010-2QFY2012, KPIT reported a stellar revenue CQGR of 8.7% on the back ofrecovery in its anchor vertical, manufacturing. Currently, KPIT is well placedto benefit from fundamental changes in the auto industry and increasinguse of electronics in the auto industry's end-products. However, the company'sentire focus on the manufacturing vertical makes us slightly cautious aboutits FY2013 growth outlook, if any slowdown kicks in developed economies.Thus, we expect organic USD revenue to grow by 8.5% yoy in FY2013.Also, we have not built in any impact of Revolo (hybrid technology solutionfor automobiles to be developed in a JV with Bharat Forge) in our estimatesdue to poor visibility.

Margin improvement looks challenging: Even though the company is growingahead of other IT companies in terms of its revenue, on the operating frontit is displaying a muted performance since the past few quarters even aftermanagement's repeated commentary of trying to improve it. Also, due tolimited margin levers in hand other than INR depreciation (as employee pyramidis almost rationalized and SG&A costs are optimal), the company's EBIT isexpected to remain at 12.0% and 11.5% for FY2012 and FY2013, respectively,from 11.0% in FY2011.

Valuations: The stock is trading at moderate valuations of 8.9x FY2013EEPS. We recommend Accumulate with a target price of `̀̀̀̀163, valuingthe stock at 10x FY2013E EPS.

Software CMP/TP/Upside: `146 / `163 / 12%KPIT Cummins


PROMOTERS 26.7

FII 22.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

KPIT CUMMINS (11.6) (5.1) 87.5 1.6 29.5

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 38.3 37.6 19.9 25.9 51.3

PAT GROWTH* 53.3 10.6 22.1 23.8 39.4

OPM# 13.6 15.1 20.1 18.5 15.6


ANGEL ESTIMATES


PAT GROWTH (%) 46.1 6.8

ROE (%) 18.8 16.9

P/E 9.6 8.9


BUY / HOLD / SELL 15 / 5 / 1

RATING ACCUMULATE

52 WEEK HIGH / LOW 199 / 133


LIQUIDITY MEDIUM


BALANCE SHEET



SHARE PREMIUM - 128 128 128

TOTAL SHAREHOLDERS' FUNDS 387 603 736 877

TOTAL DEBT 111 111 121 101

DEFERRED TAX LIABILITY, NET 5 6 6 6





GOODWILL 95 130 150 150








TOTAL ASSETS 503 720 863 984



NET SALES 732 1,007 1,409 1,672

% CHG (7.8) 37.6 39.9 18.7

COST OF REVENUE 409 644 902 1,072

GROSS PROFIT 323 363 506 599

S&M EXPENSES 66 76 113 130

G&A EXPENSES 95 134 180 211

EBITDA 161 152 214 258

% OF NET SALES 22.1 15.1 15.2 15.4


EBIT 131 111 170 192

INTEREST EXPENSE, NET 3 3 5 5

OTHER INCOME, NET (25) 3 8 7



% OF PBT 16.5 14.0 22.9 24.0

PAT 86 95 133 148

SHARE IN PROFIT OF ASSOCIATES - - 5 -

FINAL PAT 86 95 139 148

% CHG 30.3 10.6 46.1 6.8


KEY RATIOS

VALUATION RATIO (X)

P/E 13.5 12.8 9.6 8.9

P/BV 3.0 2.0 1.6 1.4

EV/SALES 1.6 1.1 0.8 0.6

EV/EBITDA 7.4 7.2 5.4 4.2



EPS 10.8 11.4 15.3 16.3

CASH EPS 14.7 16.7 21.7 26.2

BOOK VALUE 48.8 73.9 90.2 107.4

RETURN RATIOS (%)

ROCE (PRE-TAX) 26.0 15.4 19.7 19.5

ANGEL ROIC 47.6 32.0 33.9 35.0

ROE 22.2 15.7 18.8 16.9

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



OTHER INCOME/PRIOR PERIOD AD (25) 3 8 7

TAX (17) (15) (40) (47)

CASH PROFITS 117 136 183 214


CASHFLOW FROM OPERATING ACTV. (18) 37 135 180



INC/(DEC) IN DEFERRED TAX LIAB. (1) 1 - -

(INC)/DEC IN INTANGIBLES (67) (35) (20) -

CASHFLOW FROM INVESTING ACTV. (174) (54) (182) (103)

INC/(DEC) IN DEBT (8) - 10 (20)


DIVIDENDS 6 7 7 7

CASHFLOW FROM FINANCING ACTV. 131 121 5 (27)

CASH GENERATED/(UTILIZED) (62) 105 (43) 49






Company BackgroundPersistent is a leading player in the global outsourced software productdevelopment (OPD) market and has service offerings across the variousstages of product lifecycle. The company primarily focuses on the infrastructure,telecom and lifesciences industry segments. Persistent has over 18 yearsof experience working with software product companies and has developedand released more than 3,000 products till now. The company has investedand plans to continuously invest in new technologies and frameworks in theareas of cloud computing, analytics, enterprise collaboration and enterprisemobility.

Structural SnapshotGrowth opportunity: Persistent has a dominant market share of ~16% (inCY2010) in the Indian OPD market. As per IDC, of the global size of US$40bnin 2010 for R&D and product engineering, the Indian OPD market accountedfor ~US$1bn. The offshore segment of the global OPD market in 2010crossed the US$10bn mark and is expected to report a 19% CAGR toUS$16bn by 2014. Hence, Persistent, with its existing capabilities, can potentiallyaverage 10-15% growth annually.

Competitive position: Persistent is a leading player in the niche OPD marketwithin the IT industry. The company caters to ISVs across the entire productdevelopment chain. As the company's revenue profile is entirely discretionaryin nature, Persistent faces higher risk than its peers to its revenue profile incase of any slowdown.


Current Investment ArgumentsEstablished footprint in the resurging OPD market: Persistent is witnessinga strong uptick in its deal pipeline, as clients are flocking to generate newproducts in a shorter time to capture market share. This is driving manyISVs and wireless equipment manufacturers to spend on R&D and engineeringservices. Thus, Persistent is expected to post USD revenue CAGR of 14.8%over FY2011-13E. But these spends are highly discretionary in nature, thusexposing the company to a number of risks in case of any economic slowdown.

Optimal margin levers in hand: On the operating front, Persistent has adequatemargin levers, such as 1) employee pyramid rationalization; 2) higher revenueproductivity due to the expected increase in IP-led revenue contribution;3) a gradual increase in utilization to 74.7% in FY2013 from 74% in 3QFY2012;and 4) INR depreciation against USD. We expect the company’s EBIT marginto increase to 16.9% and 17.0% for FY2012 and FY2013, respectively,from 14.9% in FY2011.

Valuations attractive: The stock is trading at fair valuations of 9.1x FY2013EEPS. We recommend a Neutral rating on the stock, valuing it at 9.5xFY2013E EPS, owing to risks to its revenue profile in case of any economicslowdown.

Software CMP/TP/Upside: `319 / - / -Persistent


PROMOTERS 39.0

FII 5.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

PERSISTENT 0.6 (26.9) - - -

BSE IT INDEX (0.7) (17.3) 36.3 0.7 13.0



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 37.3 29.1 - - -

PAT GROWTH* 12.0 21.5 - - -

OPM# 26.0 20.4 - - -


ANGEL ESTIMATES


PAT GROWTH (%) (6.9) 7.5

ROE (%) 15.1 14.2

P/E 9.8 9.1


BUY / HOLD / SELL 27 / 4 / 3

RATING NEUTRAL

52 WEEK HIGH / LOW 451 / 281


LIQUIDITY LOW


BALANCE SHEET



HEDGE RESERVES 16 8 8 8

TOTAL SHAREHOLDERS' FUNDS 639 747 861 984

DEFERRED PAYMENT LIABILITY 5 3 3 3













TOTAL ASSETS 644 750 864 987



NET SALES 601 776 1,003 1,122

% CHG 1.2 29.1 29.3 11.9

DIRECT COSTS 337 472 595 671

% OF NET SALES 56.1 60.9 59.4 59.8

GROSS PROFIT 264 304 407 451

% OF NET SALES 43.9 39.1 40.6 40.2

S&M EXPENSES 46 62 69 81

G&A EXPENSES 71 83 111 112

EBITDA 146 158 228 258

% OF NET SALES 24.3 20.4 22.7 23.0


EBIT 113 116 169 191


FOREX GAIN/(LOSS) 3 17 (1) (6)



% OF PBT 7.3 7.1 29.5 32.0

PAT 115 140 130 140

% CHG 74.0 21.5 (6.9) 7.5


KEY RATIOS

VALUATION RATIO (X)

P/E 10.0 9.1 9.8 9.1

P/BV 1.8 1.7 1.5 1.3

EV/SALES 1.5 1.2 1.0 0.9

EV/EBITDA 6.3 5.8 4.4 3.7



EPS 32.1 34.9 32.5 35.0

CASH EPS 41.4 45.5 47.2 51.8

DIVIDEND 0.6 5.5 3.5 3.5

BOOK VALUE 178.1 186.8 213.8 245.1

RETURN RATIOS (%)

ROCE (PRE-TAX) 17.5 15.5 19.6 19.3

ANGEL ROIC 45.7 34.1 32.6 31.5

ROE 18.0 18.7 15.1 14.2

TURNOVER RATIOS (X)



PAYABLE DAYS 120 104 103 103


CASH FLOW STATEMENT





TAX 9 11 54 66

NET TRADE WORKING CAPITAL 7 (44) (22) (7)



(INC)/DEC IN INVESTMENTS (68) (94) - -

(INC)/DEC IN DEFERRED TAX ASSETS 1 (5) (15) 2

INC/(DEC) IN DEFERRED PAYMENT LIAB. 5 (2) - -

CASHFLOW FROM INVESTING ACTV. (110) (198) (220) (143)

INC/(DEC) IN DEBT - - - -

INC/(DEC) IN EQUITY/PREMIUM 132 (6) - -

DIVIDENDS (2) (26) (16) (16)

CASHFLOW FROM FINANCING ACTV. 129 (32) (16) (16)

CASH GENERATED/(UTILIZED) 175 (92) (69) 41





354 December 2011 Please refer to important disclosures at the end of this report



Telecom


Bharti Airtel 342 - Neutral

Idea Cellular 85 - Neutral

Reliance Comm. 92 - Neutral

Data-based revenue to be the next growth driverThe Indian telecom sector is the second largest telecom market in the worldafter China with over 800mn subscribers and 14 operational service providerscurrently. In the past few years, the industry has witnessed accelerated growthof 31% in its subscriber base due to scorching growth in the wireless space.

Investment argumentsData-based revenue - Next leap of growth for Indian telecom players:Globally, introduction of 3G services in various economies has resulted in asurge in data traffic of mobile operators. We expect this trend to replicate inIndia post the launch of 3G services. Currently, non-voice revenue contributesmerely 10% to the overall industry's revenue in India, which is much lowerthan other countries where the contribution of data-based revenue is 20-35%.We expect contribution of non-voice revenue in the Indian telecom industry toreach 20-22% by FY2015, which is expected to improve the current ARPUprofile of telecom operators. Growth in voice-based services is expected tostabilize at 5-6% from here on, but non-voice services are expected to growby 10-15%.

Regulatory uncertainty persists: TRAI has deemed that any spectrum heldbeyond 6.2MHz in a circle is 'excess spectrum' and has levied a one-time feeon the excess spectrum held by any operator based on a market-based valueof the spectrum for each circle. As per TRAI's recommendations, the liabilityfor Bharti due to the above-said issue arises to ~`2,870cr, while the impactfor Idea boils down to ~`1,085cr. Also, telecom licenses in India will startcoming for renewals from 2014, which will again pose a financial liability infront of telecom companies. In FY2015 and FY2016, license renewals forBharti and Idea are due in eight and nine circles, respectively. These renewals,as per TRAI's recommendations, will require Bharti and Idea to shell out ̀ 5,500crand `5,300cr, respectively, for the contracted spectrum (up to 6.2MHz).

Outlook and valuationThe Indian telecom sector is currently experiencing heat due to a number ofpolicy uncertainties related to spectrum and license fee payments. Also, INRhas depreciated sharply by ~10-12% against USD in the past four months,which has increased the liabilities of telecom companies like Bharti and RComin INR terms due to huge forex debt in their books.

In our view, the telecom sector is poised for improvement in its revenue mix,as data revenue starts to pick post the launch of 3G. Tariff war in voice-basedservices, which was launched by new players, has turned into a curse fortheir own sustainability. We do not expect further price war amongst telecomcompanies, as evidenced by the rational pricing move by various telecomplayers for 3G services. We prefer Bharti amongst telcos due to its low-costintegrated model (owned tower infrastructure), potential opportunity to scaleup in Africa, established leadership in revenue and subscriber market share,and relatively better KPIs. However, overall due to the risk of increasing licenseand spectrum charges, slowing voice growth, higher debt/interest burden (adjustedfor forex movement) as well as expensive valuations (especially for Bharti),we remain Neutral on the sector.

NEUTRAL



Exhibit 5: Impact of excess spectrum chargesOperator No. of Charges Per share

circles ( `̀̀̀̀ cr) impact (`̀̀̀̀)

Bharti 13 2,870 8.7

Idea 7 1,085 3.3

Data-based revenue - Next leap of growth for Indiantelecom players

Launch of 3G services

Globally, data has started to dominate revenue growth of largetelecom players post the launch of 3G. Introduction of 3G servicesin various economies has resulted in a surge in data traffic ofmobile operators. We expect this trend to be replicated in Indiapost the launch of 3G services. Currently, non-voice revenuecontributes merely 10% to the overall industry's revenue in India,which is much lower than other countries where contributionof data-based revenue is 20-35%.

Telecom

Launch of 3G in any country has aided in the growth of datarevenue considerably. For most of the large telecom players allover the world, data-based revenue is growing in high teensand mid-twenties. However, overall growth of companies is inhigh single digits or low double digits. We expect contributionof non-voice revenue in the Indian telecom industry to reach20-22% by FY2015, which is expected to improve the currentARPU profile of telecom operators.

Source: Delloite Assocham MVAS study paper

Exhibit 2: Revenue growth of large telecom operators (yoy, June 2011)

-

3.3 4.1

(0.8)

24.026.3

15.2

25.5

4.1

9.97.3

1.9

(5)

0

5

10

15

20

25

30

Verizon AT&T China Mobile Vodafone

(%)

Voice based revenue growth Data based revenue growth Overall revenue growth

Low internet penetration

Internet penetration in India stands very low at merely 7% asagainst other countries where internet penetration is above 25%.Also, mobile internet user base in India is very less as comparedto other countries. With the increasing affordability of smartphones after the launch of 3G services, we expect internetusers on mobile phones to grow in tandem with this. Also, mobilehandset manufacturing companies are trying to expand theirapplication store to tap more and more customers. Based onthese factors, we expect the Indian telecom sector's revenuegrowth to be led by data-based services. We expect the system

Key concerns

Regulatory concerns

The telecom sector in India is currently surrounded by a numberof policy uncertainties related to spectrum and license fee payments.TRAI released the much-awaited new telecom policy in October2011, which was a qualitative extension of the proposed draftin February 2011. The draft just laid the background for theforthcoming strategies to be adopted by the Department ofTelecom (DoT); however, it lacked details on spectrum and license-related issues as well as on M&A policies in the sector.Following are few regulatory issues looming around the playersin the sector:

Excess spectrum: TRAI has deemed that any spectrum heldbeyond 6.2MHz in a circle is 'excess spectrum' and has levieda one-time fee on the excess spectrum held by any operatorbased on a market-based value of the spectrum for each circle.These prices are for spectrum in the 1,800Mhz band for a periodof 20 years. Also, TRAI has suggested that the price of 800MHzshould remain same as 900MHz, i.e., 1.5 times the price of1,800MHz spectrum. The impact of the currently given pricingon telecom companies is as follows:

Source: BCG report: The Internet's new billion

Exhibit 3: Internet penetration in various countries

7470

33 31 28

127

81

73 74

55

47

37

19

0

10

20

30

40

50

60

70

80

90

Japan US Brazil Russia China Indonesia India

(%)

2009 2015E

Source: BCG report: The Internet's new billion

Exhibit 4: Penetration in mobile internet users

30

126 5

2

61

54

17

29

15

0

10

20

30

40

50

60

70

China Russia Brazil Indonesia India

(%)

2009 2015E

Source: Delloite Assocham MVAS study paper

Exhibit 1: Contribution of non-voice revenue to the telecom sector’s revenue32

3027 27 26

2123

10

0

5

10

15

20

25

30

35

Sin

gap

ore US

Chi

na

Jap

an

Ko

rea

UK

Ave

rag

e

Ind

ia

(%)

to move towards high data usage with 3G services roll-outand smart handsets available at cheaper rates.


Telecom

License renewals: Telecom licenses in India were issued witha validity of 20 years, so licenses will start coming up for renewalsfrom 2014. In FY2015 and FY2016, license renewals for Bhartiand Idea are due in eight and nine circles, respectively; andthis time, as per TRAI's recommendations, licenses will be givenfor a period of 10 years. These renewals, as per TRAI'srecommendations, will require Bharti and Idea to shell out ̀ 11,500crand ̀ 9,100cr, respectively, for the total spectrum these companieshave, out of which `5,500cr and `5,300cr, respectively, wouldbe for contracted spectrum (up to 6.2MHz).

License fee: In India, telecom operators give a fraction of theiraggregate gross revenue (AGR) as license fees. Currently, licensefee is 10% for Metro and A circle, 8% for B circle and 6% forC circle. TRAI has recommended a uniform license fee of 6%across all circles, to be achieved gradually over the next fouryears. However, DoT has come up with a suggestion to levy auniform license fee of 8%. This, if implemented, will be EBITDAaccretive for all incumbents, as a major part of their revenuecomes from Metro and A circles.

Heavy debt and adverse forex movements

The balance sheet of all major telecom operators is highly stretcheddue to heavy debt in it, raised mainly to pay the 3G spectrumfees. In addition to that, Bharti raised US$9.7bn loan when itacquired Zain in June 2010. Due to this, the balance sheet oftelecom players is exposed to interest rate scenarios and foreignexchange fluctuations. Players in the telecom sector (especiallyBharti) continue to be haunted by sharp INR depreciation dueto huge forex debt in their books. Bharti has foreign currencydenominated loans worth ~US$11.5bn in its books. Given therecent INR depreciation against USD, the company is sufferingfrom higher interest outgo and higher principal repayments,which are negatively affecting its profitability.

Bharti, as per its accounting policy, is accounting for forex lossoccurred on interest being paid on forex debt in the profit andloss statement; however, the forex loss on balance sheet items(revaluation losses) is included in the foreign currency translationreserve. Due to the steep INR depreciation over the past fourmonths (~15%), even after reporting ~`2,240cr of profit in1HFY2012, the company’s net worth is standing almost flatfrom FY2011 (`51,623cr) to 2QFY2012 (`51,258cr), as theforeign currency translation reserve is taking a hit, moving from`1,402cr to –`736cr.

Currently, the effective interest cost of Bharti is ~5.4%, whichis much lower than the domestic interest cost. Bharti, due tohuge forex debt in its books, is always exposed to the risk thatthe effective interest costs might turn out to be higher thanreported costs in the long run, courtesy foreign currency movement,if interest rate parity kicks in. Keeping this scenario in mind, ifwe were to assume effective interest costs to be ~10.5% (nearerto domestic borrowing cost), the interest outgo of Bharti wouldincrease manifold. This would increase Bharti's interest costby 100% and FY2013E EPS would be reduced to `15.9 from`22.2, thus implying that Bharti would be trading at very expensivevaluations of 22-23x PE.

Industry trends

Momentum in net subscriber addition declines

Over the past six months, net subscriber addition run rate acrossall operators has declined significantly. Over September-November2011, subscriber net addition was weak (lowest since the lastfew years) across all telecom operators. Indian subscriberbase grew at an average rate of merely 0.7% mom, led byincumbents such as Idea, which added 3.8mn subscribers fromSeptember-November 2011. Idea was followed by RCom, Bharti,Vodafone and Aircel, which added 2.0mn, 1.9mn, 1.8mn and1.2mn subscribers over September-November 2011, growingat an average rate of 0.7%, 0.6%, 0.6% and 1.0% mom,respectively. Amongst new entrants, Uninor emerged as a surpriseby adding 4.5mn subscribers over September-November 2011,leaving behind all other telecom players.

Source: COAI, AUSPI, Angel Research

Exhibit 6: Total subscriber baseCompany (mn) Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11

Bharti 169.2 170.7 171.8 172.8 173.7 174.7

RCom 143.3 144.8 146.1 147.1 148.1 149.1

Vodafone 141.5 143.0 144.1 145.0 145.9 146.8

BSNL 88.5 90.2 90.6 91.1 91.6 92.1

Idea 95.1 96.1 98.4 100.2 101.8 104.0

TTSL 91.0 88.3 88.6 88.7 87.7 83.3

Aircel 58.0 58.6 59.2 59.8 60.3 61.0

MTNL 5.2 5.3 5.3 5.3 5.4 5.4

Loop Mobile 3.2 3.2 3.2 3.2 3.2 3.2

HFCL 1.4 1.4 1.4 1.2 1.2 1.2

Shyam Telelink 11.7 12.3 12.8 13.3 14.0 14.5

S Tel 3.3 3.5 3.4 3.5 3.5 3.6

Uninor 26.3 27.4 27.7 29.7 32.3 34.2

Videocon 6.9 7.0 6.4 6.3 6.1 5.5

DB Etisalat 1.4 1.4 1.5 1.5 1.6 1.6

Total 845.9 853.2 860.7 868.5 876.4 880.1

VLR data points favorable for tier-I companies, led by Idea

As per the recent VLR data released for November 2011, ofthe total 884.4mn subscribers, 71.8% i.e., 635.4mn subscribers,were active subscribers on the date of peak VLR. Service providerwise, Idea leads the tally with a share of 92.3%, followed byBharti with 89.5%, Vodafone with 83.3% and RCom with 64.9%,whereas S Tel is at the bottom with 31.4%.

Source: TRAI, Angel Research

Exhibit 7: VLR data of incumbents

88.9

81.0

91.6

62.7

52.8 52.4

89.5

83.3

92.3

64.9

53.054.4

50

60

70

80

90

100

Bharti Vodafone Idea Rcom BSNL Aircel

(%)

Aug-11 Sep-11 Oct-11 Nov-11


Outlook and valuationThe Indian telecom sector is currently experiencing heat dueto a number of policy uncertainties related to spectrum andlicense fee payments. Also, INR has depreciated sharply by~15% against USD in the past four months, which has increasedthe liabilities of telecom companies like Bharti and RCom inINR terms due to huge forex debt in their books. This has ledto a sharp correction in the stock prices of Bharti, Idea andRCom.

In our view, the telecom sector is poised for improvement in itsrevenue mix, as data revenue starts to pick post the launch of3G. Tariff war in voice-based services, which was launched bynew players, has turned into a curse for their own sustainability.We do not expect further price war amongst telecom companies,as evidenced by the rational pricing move by various telecomplayers for 3G services. We prefer Bharti amongst telcos dueto its low-cost integrated model (owned tower infrastructure),potential opportunity to scale up in Africa, established leadershipin revenue and subscriber market share, and relatively betterKPIs. However, overall, due to the risk of increasing licenseand spectrum charges, slowing voice growth, higher debt/interestburden (adjusted for forex movement) as well as expensivevaluations (especially for Bharti), we remain Neutral on the sector.

Telecom

RMS vs. SMS

As per the revenue market share (RMS) data for 2QFY2012,Bharti leads at 30.8% with subscriber market share (SMS) of19.9%, whereas Idea has its RMS and SMS at 14.0% and11.5%, respectively. RMS for Bharti and Idea is higher thanSMS, which indicates that the quality of subscribers added bythese companies is good. On the contrary, in case of RCom,SMS is at 16.9%, which is much ahead of RMS that is only at8.2%. This is evident from the ARPU profile of these companies;also, RCom has peak VLR of merely 63.5% (in September 2011)as posed to its peers Bharti, Idea and Vodafone - the peakVLR of these companies varies from 80-92% (for September2011). Thus, though the pace of subscriber addition sportedby each of the companies remains modest, additions made byBharti and Idea are value additions, whereas those by RComare more of volume additions.

Source: TRAI, Angel Research

Exhibit 8: RMS vs. SMS of incumbents (as of 2QFY2012)

30.8

21.0

14.0

8.27.7

4.9

19.9

16.7

11.5

16.9

10.5

6.9

0

5

10

15

20

25

30

35

Bharti Vodafone Idea Rcom BSNL Aircel

(%)

RMS SMS


Exhibit 9: Recommendation summaryCompany Reco CMP Tgt Price Upside FY2013E FY2013E FY2011-13E FY2013E FY2013E

( `̀̀̀̀) ( `̀̀̀̀) (%) P/BV (x) P/E (x) EPS CAGR (%) RoCE (%) RoE (%)

Bharti Airtel Neutral 342 - - 2.1 15.4 18.2 11.7 13.7

Idea Cellular Neutral 85 - - 2.0 27.3 6.7 10.0 7.3

RCom Neutral 92 - - 0.4 15.9 (5.7) 3.3 2.8


Company BackgroundBharti Airtel (Bharti) is India's leading telecommunication service provider,offering mobile services in all the 22 circles of the country and having asubscriber base of 175mn. In 2010, Bharti acquired Zain's telecom businessin 15 countries of Africa and is currently present in 17 African countries(48.4mn subscribers). The company is also present internationally, inSri Lanka (1.5mn subscribers) and Bangladesh (4.3mn subscribers). Bhartialso holds a 42% stake in Indus Towers, a JV between Bharti, Vodafone andIdea Cellular.

Structural SnapshotGrowth opportunity: The Indian telecom industry draws only 10% of itsrevenue from non-voice/data services, while telecom industries in the restof the world derive 20-35% of their revenue from non-voice services. Thus,we expect data revenue to pick up for Indian players, taking India closer toworld averages after the recent launch of 3G services. Bharti, having higherpaying subscribers (indicated by its ARPU profile), is likely to see quicker3G conversions in its subscriber base. For voice-based services,we expect MOU growth to moderate to 5% yoy for FY2013 due to lowersubscriber addition.

Competitive position: Having the largest network and market share is aproven competitive advantage in the telecom business globally - Bharti beingthe largest player with a subscriber market share of 19.9% and revenuemarket share of 30.8% (indicating higher ARPU customers) clearly enjoysthis advantage, reflected in its higher margins.

Nature of business: Stable demand (moderately defensive sector); Highbarriers for new players to achieve viable scale of operations due to entrenchednetworks of established players.

Current Investment ArgumentsTurnaround in Africa operations: Bharti is on its way to turnaround itsAfrica business by bringing down network operating expenditure. In termsof KPIs, Bharti has managed to increase its minutes of usage (MOU) forAfrica to 128min in 2QFY2012 from 115min in FY2011 and is expectingprices to remain stable. Thus, we expect OPM of the Africa business toimprove to 26.6% and 27.0% by FY2012 and FY2013, respectively, from25.3% in FY2011.

Adverse forex movements: Bharti remains one of the key losers in thedepreciating INR scenario due to huge forex debt (~US$11.5bn) in its books.The company is always exposed to the risk that the effective interest costsmight turn out to be higher than reported costs in the long run, courtesyforeign currency movement, if interest rate parity kicks in, thereby leading toeffective costs nearer to domestic borrowing costs, which is much higher.

Valuation: In our view, the stock is trading at reasonably fair valuations of6.4x FY2013E EV/EBITDA and 15.4x FY2013E EPS. We remain Neutralon the stock owing, to uncertain regulatory environment and risk ofadverse forex movements.

Telecom CMP/TP/Upside: `342 / - / -Bharti Airtel


PROMOTERS 68.5

FII 17.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BHARTI AIRTEL (11.1) (0.6) 1.9 0.1 -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 13.5 42.1 30.1 38.5 -

PAT GROWTH* (38.2) (33.7) (1.7) 24.5 -

OPM# 33.7 33.7 38.5 39.6 -


ANGEL ESTIMATES


PAT GROWTH (%) (11.7) 58.6

ROE (%) 9.9 13.7

P/E 24.4 15.4

P/BV 2.4 2.1


BUY / HOLD / SELL 41 / 11 / 5

RATING NEUTRAL

52 WEEK HIGH / LOW 445 / 305

MARKET CAP (`̀̀̀̀ CR) 129,857

LIQUIDITY HIGH


BALANCE SHEET

SHARE CAPITAL 1,899 1,899 1,899 1,899




TOTAL DEBT 10,190 61,671 68,201 57,731

OTHER LIABILITIES 5,300 4,665 3,000 3,500



ACCUMULATED DEPRECIATION 21,462 31,668 44,464 58,257

GOODWILL 5,989 63,732 64,893 64,893

OTHER NON-CURRENT ASSETS 1,825 1,918 3,751 3,753

INVESTMENTS 5,236 622 1,315 1,315

SUNDRY DEBTORS 3,571 5,493 7,012 7,751

CASH AND CASH EQUIVALENTS 2,532 958 1,488 3,509




NET DEFERRED TAX 1,249 4,506 6,987 8,044

TOTAL ASSETS 60,212 117,959 127,335 125,366



NET SALES 41,847 59,467 71,094 80,835

% CHG 13.2 42.1 19.6 13.7

ROAMING AND ACCESS CHRG. 4,481 7,499 9,800 11,123

NETWORK OPERATING EXP. 8,912 12,993 15,751 16,975

LICENSE FEE 4,088 5,166 5,996 6,732

OTHER EXPENSES 7,513 13,774 15,487 17,564


EBITDA 16,854 20,035 24,060 28,441

% OF NET SALES 40.3 33.7 33.8 35.2

DEP. AND AMORTIZATION 6,284 10,206 12,797 13,793

EBIT 10,589 9,719 11,263 14,648

INTEREST CHARGES 18 2,182 3,944 3,435



% OF PBT 12.6 23.2 27.7 25.0

PAT 9,295 5,887 5,294 8,410

MINORITY INTEREST 187 (148) (32) (36)

ADJ. PAT 9,108 6,035 5,326 8,446

% CHG 5.7 (33.7) (11.7) 58.6


KEY RATIOS

VALUATION RATIO (X)

P/E 14.2 21.5 24.4 15.4

P/BV 3.1 2.7 2.4 2.1

EV/SALES 3.2 3.2 2.7 2.3

EV/EBITDA 7.8 9.5 8.1 6.4



EPS 24.0 15.9 14.0 22.2

CASH EPS 40.6 42.8 47.7 58.6

DIVIDEND 1.0 1.0 1.0 1.0

BOOK VALUE 111.2 128.5 141.3 162.4

RETURN RATIOS (%)

ROCE (PRE-TAX) 17.6 8.2 8.8 11.7

ANGEL ROIC 22.8 18.5 18.9 26.3

ROE 21.6 12.4 9.9 13.7

TURNOVER RATIOS (X)



PAYABLE DAYS 158 263 249 248


CASH FLOW STATEMENT


DEPRECIATION 6,284 10,206 12,797 13,793


TAX (1,345) (1,778) (2,026) (2,803)

NET TRADE WORKING CAPITAL (851) 14,038 504 1,256

CASHFLOW FROM OPERATING ACTV 14,546 30,279 18,626 23,495


(INC)/DEC IN INTANGIBLES (1,953) (57,743) (1,161) -

(INC)/DEC IN INVESTMENTS (1,431) 4,614 (692) -

(INC)/(DEC) IN MINORITY INTR. 1,458 328 - -

(INC)/DEC IN NON-CURRENT ASST. (801) (94) (1,832) (3)

CASHFLOW FROM INVESTING ACTV. (17,608) (83,237) (22,147) (11,059)

INC/(DEC) IN DEBT (1,690) 51,481 6,530 (10,470)

INC/(DEC) IN EQUITY 3,131 982 - -

DIVIDENDS 444 444 444 444

CASHFLOW FROM FINANCING ACTV. 4,480 51,384 4,050 (10,414)

CASH GENERATED/(UTILIZED) 1,418 (1,575) 530 2,022

CASH AT START OF THE YEAR 1,115 2,532 958 1,488

CASH AT END OF THE YEAR 2,532 958 1,488 3,509




Company BackgroundIdea Cellular (Idea), part of the Aditya Birla Group, is the third largesttelecommunication service provider in India in terms of revenue. The companyprovides mobile services in all the 22 circles of the country and has 104mnsubscribers. Idea had won 3G licenses in 11 out of the 22 circles in Indiaand is currently providing 3G services in 20 circles (in seven circles by 3Groaming agreements). The company also holds a 16% stake in Indus Towers,which is a JV with Bharti, Vodafone and Idea.

Structural SnapshotGrowth opportunity: The Indian telecom industry draws only 10% of itsrevenue from non-voice/data services, while telecom industries in the restof the world derive 20-35% of their revenue from non-voice services. So,we expect data revenue to pick up for Indian players, taking India closer toworld averages after the recent launch of 3G services. Idea, having higherpaying subscribers (indicated by ARPU profile as compared to most of itspeers), would see quicker 3G conversions in its subscriber base.

Competitive position: Idea enjoys subscriber market share of 11.5% andrevenue market share of 14.0%. Over the past three months, though theindustry's subscriber net additions have declined sharply, Idea's subscribergrowth has been higher than the industry's. However, the company’s OPMis at ~26%, which is lagging industry leader Bharti Airtel's OPM of32-33%.


Current Investment ArgumentsRobust revenue growth; ahead of its peers: Idea has reported a revenueCAGR of 32% over FY2008-11 as compared to its peers Bharti and RCom,which reported CAGRs of 30% and 6%, respectively. Modest growth innetwork minutes coupled with tariff hike undertaken by Idea in the prepaidsegment is expected to help Idea to maintain its revenue growth momentum,aiding the company in improving its operating margin. We expect Idea topost a revenue CAGR of 20.3% over FY2011-13E.

Regulatory uncertainty persists: Idea's financial performance is relativelymore susceptible to regulatory uncertainties due to less free cash flow generation,which exposes it to relatively higher risks, if any unanticipated financial liabilitykicks in on the back of regulatory requirements. Also, in FY2015 and FY2016,license renewals are due for nine circles for Idea, which will again requirethe company to shell out more cash to fulfill the requirements.

Valuation: The stock is trading at fair valuations of 6.4x FY2013E EV/EBITDA.We remain Neutral on the stock owing to the highly uncertain regulatoryenvironment.

Telecom CMP/TP/Upside: `85 / - / -Idea Cellular


PROMOTERS (ADITYA BIRLA GROUP) 46.0

FII 11.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

IDEA CELLULAR (9.9) 22.9 24.3 - -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 26.3 24.6 32.1 39.2 -

PAT GROWTH* (41.2) (9.4) (4.9) 32.7 -

OPM# 25.7 24.5 26.5 30.2 -


ANGEL ESTIMATES


PAT GROWTH (%) (20.1) 48.1

ROE (%) 5.3 7.3

P/E 40.5 27.3

P/BV 2.2 2.0


BUY / HOLD / SELL 27 / 18 / 11

RATING NEUTRAL


MARKET CAP (`̀̀̀̀ CR) 27,882

LIQUIDITY HIGH


BALANCE SHEET

SHARE CAPITAL 3,300 3,301 3,301 3,301



TOTAL DEBT 7,859 12,023 12,800 11,900

DEFERRED TAX LIABILITIES 214 310 320 320




NET BLOCK 18,168 22,485 24,118 24,959

CAPITAL WIP 547 3,647 2,572 1,592

TOTAL FIXED ASSETS 18,714 26,132 26,690 26,551

INVESTMENTS 1,130 - - -

DEBTORS 466 555 628 738

CASH 290 1,478 1,384 1,567

LOANS AND ADVANCES 2,556 3,560 3,819 4,740



PROVISIONS 223 264 325 404

TOTAL ASSETS 19,950 24,632 26,109 26,231



NET SALES 12,447 15,503 19,093 22,440

% CHG 22.9 24.6 23.2 17.5

NETWORK OPERATING EXP. 3,127 4,013 4,709 5,489

LICENSE AND WPC CHARGES 1,347 1,773 2,147 2,563

ROAMING AND ACCESS CHRGS. 1,800 2,475 3,196 3,636

OTHER EXPENSES 2,766 3,451 4,085 4,769


EBITDA 3,407 3,791 4,955 5,982

% OF NET SALES 27.4 24.5 26.0 26.7


EBIT 1,392 1,359 2,089 2,623

% OF NET SALES 11.2 8.8 10.9 11.7

INTEREST EXPENSE 401 396 1,128 1,119

OTHER INCOME 84 - - -

PROFIT BEFORE TAX 1,075 963 960 1,504


% OF PBT 11.3 10.2 28.1 32.0

PAT 954 864 690 1,022

% CHG 8.3 (9.4) (20.1) 48.1


KEY RATIOS

VALUATION RATIO (X)

P/E 29.3 31.1 40.5 27.3

P/BV 2.4 2.3 2.2 2.0

EV/SALES 2.9 2.5 2.1 1.7

EV/EBITDA 10.4 10.2 7.9 6.4



EPS 2.9 2.7 2.1 3.1

CASH EPS 9.0 10.0 10.8 13.3

BOOK VALUE 36.0 37.2 39.3 42.4

RETURN RATIOS (%)

ROCE (PRE-TAX) 7.0 5.5 8.0 10.0

ANGEL ROIC 7.3 7.0 9.4 11.4

ROE 8.0 7.0 5.3 7.3

TURNOVER RATIOS (X)


DEBTOR DAYS 12 12 12 12

PAYABLE DAYS 156 173 171 169


CASH FLOW STATEMENT

PRE TAX PROFIT FROM OPS. 991 963 960 1,504

DEPRECIATION 2,015 2,432 2,867 3,359

OTHER INCOME 84 - - -

TAX 121 98 270 481

CASH PROFITS 2,969 3,296 3,557 4,382

NET TRADE WORKING CAPITAL (1,059) 2,288 (1,012) (79)



(INC)/DEC IN INVESTMENTS 915 1,130 - -

INC/(DEC) IN DEFERRED TAX ASSET 101 96 10 -

(INC)/DEC IN PROFIT AND LOSS ACC. 23 504 - -

(INC)/DEC IN NON-CURRENCT ASSTS 2,240 - - -

CASHFLOW FROM INVESTING ACTV. (784) (8,119) (3,416) (3,220)

INC/(DEC) IN DEBT (1,053) 4,164 776 (900)

INC/(DEC) IN EQUITY/PREMIUM (2,869) (441) - -

CASHFLOW FROM FINANCING ACTV. (3,923) 3,723 776 (900)

CASH GENERATED/(UTILIZED) (2,797) 1,188 (94) 183

CASH AT START OF THE YEAR 3,086 290 1,478 1,384





Company BackgroundReliance Communications (RCom), part of the Anil Dhirubhai Ambani Group,is India's fourth largest telecommunication service provider (TSP). The companyoffers GSM and CDMA wireless services in the country, with a subscriberbase of 149mn. Other than mobile services, RCom offers broadband, wireline, DTH and passive infrastructure services. The company owns 50,000towers to provide passive infrastructure services.

Structural SnapshotGrowth opportunity: In India, internet penetration is only at ~7%. RCom,being one of the leading players in offering broadband services, has a numberof opportunities to tap in this underpenetrated market. Improvement in wirelessrevenue and reduction in free network minutes are expected to provide someimpetus to RCom's growth.

Competitive position: RCom enjoys subscriber market share (SMS) of 16.9%but has revenue market share (RMS) of only 8.2%, as it offers numerousintra-network free minutes to its subscribers, due to which its ARPU is lowerthan peers. In addition, on account of huge duplication of capex on CDMAand GSM license and spectrum, the company has poor asset utilization asits revenue are 0.28x its total balance sheet size vis-à-vis Bharti having 0.63x.


Current Investment ArgumentsDecent revenue growth: RCom has hiked voice tariffs on both on-net andoff-net calls for GSM subscribers; and on CDMA, the company has raisedtariffs on only off-net calls. Since the hike has been undertaken largely onthe GSM subscriber base, the impact of the same will be less as comparedto its peers, as the company is primarily CDMA based. Going forward,we expect RCom's mobile segment's subscriber base to record a 10.3%CAGR over FY2010-13E and ARPM to stabilize at `0.46/min in FY2013.

Highly leveraged balance sheet: As of 2QFY2012, RCom had gross debtof `33,700cr in its books, which translates to gross debt/equity of 0.95x.In March 2011, RCom signed an agreement with China Development Bankto raise ̀ 6,000cr (US$1.33bn) for refinancing 3G spectrum debt and reducinginterest expenditure. Also, RCom has raised debt to fund its FCCB amountingto US$1.1bn due in March 2012. The recent INR depreciation could resultin higher cash outgo for this as well, posing a risk to RCom's balance sheet.

Valuation: Currently, RCom is striving to reduce the debt in its books andhas again made the announcement to sell stake in its tower assets, whichmight help the company to deleverage its balance sheet and can be a positivetrigger to the stock price. We remain Neutral on the stock owing tothe highly uncertain regulatory environment and dreary outlook ofits financials.

Telecom CMP/TP/Upside: `92 / - / -Reliance Comm.


PROMOTERS (ADAG) 67.9

FII 8.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

RELIANCE COMM. 20.5 (30.1) (20.9) (27.2) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (4.6) 3.8 2.9 - -

PAT GROWTH* (43.5) (71.4) (30.6) - -

OPM# 28.3 37.5 38.7 - -


ANGEL ESTIMATES


PAT GROWTH (%) (46.9) 66.2

ROE (%) 1.7 2.8

P/E 26.5 15.9

P/BV 0.5 0.4


BUY / HOLD / SELL 9 / 21 / 12

RATING NEUTRAL


MARKET CAP (`̀̀̀̀ CR) 18,669

LIQUIDITY HIGH


BALANCE SHEET

SHARE CAPITAL 1,032 1,032 1,032 1,032


TOTAL SHAREHOLDERS' FUNDS 43,361 40,749 41,259 42,241


TOTAL DEBT 29,715 37,376 32,200 29,200

DEFERRED TAX LIABILITY 99 - 100 295





GOODWILL 4,998 4,998 4,998 4,998

INVESTMENTS 4,160 109 100 100

SUNDRY DEBTORS 3,312 4,002 3,245 3,777

CASH AND CASH EQUIVALENTS 819 5,327 2,015 4,202


LOANS AND ADVANCES 5,410 5,086 4,540 5,170

CURRENT LIAB 14,708 12,686 13,546 14,983

PROVISIONS 4,027 2,490 1,757 1,838

TOTAL ASSETS 73,834 78,950 74,383 72,561



NET SALES 21,614 22,430 19,740 22,978

% CHG (2.8) 3.8 (12.0) 16.4

NETWORK EXPENDITURE 6,173 5,472 5,585 6,035

LICENSE FEE 1,145 1,157 1,120 1,217

ACCESS CHARGES 2,138 2,648 2,739 2,998

OTHER EXPENSES 4,907 4,750 4,484 5,198


EBITDA 7,251 8,404 5,813 7,530

% OF NET SALES 33.5 37.5 29.4 32.8


EBIT 3,504 1,900 1,511 2,430

INTEREST CHARGES (1,186) 1,072 1,166 1,243




% OF PBT 8.4 0.8 6.6 18.0

PAT 4,843 1,506 919 1,367


FINAL PAT 4,704 1,346 714 1,187

% CHG (20.6) (71.4) (46.9) 66.2


KEY RATIOS

VALUATION RATIO (X)

P/E 4.0 14.2 26.5 15.9

P/BV 0.4 0.5 0.5 0.4

EV/SALES 2.0 2.3 2.5 1.9

EV/EBITDA 6.0 6.0 8.4 5.8



EPS 23.0 6.5 3.5 5.8

CASH EPS 40.9 38.0 24.3 30.5

DIVIDEND 1.0 0.6 1.0 1.0

BOOK VALUE 210 197 200 205

RETURN RATIOS (%)

ROCE (PRE-TAX) 4.7 2.4 2.0 3.3

ANGEL ROIC 6.7 3.8 3.2 5.6

ROE 10.8 3.3 1.7 2.8

TURNOVER RATIOS (X)



PAYABLE DAYS 390 356 344 337


CASH FLOW STATEMENT

PRE TAX PROFIT FROM OPES. 4,653 841 345 1,187

DEPRECIATION 3,747 6,504 4,302 5,100


OTHER INCOME 636 677 639 480

TAX (445) (12) (65) (300)

NET TRADE WORKING CAPITAL 347 (2,971) (69) 221



(INC)/DEC IN INTANGIBLES 224 - - -

INC/(DEC) IN DEFERRED TAX LIAB. 71 (99) 100 195

(INC)/DEC IN INVESTMENTS 5,406 4,051 9 -

CASHFLOW FROM INVESTING ACTV. 3,406 (4,239) (2,879) (1,116)

INC/(DEC) IN DEBT (9,447) 7,660 (5,176) (3,000)

INC/(DEC) IN EQUITY/PREMIUM (3,419) (3,836) - -

DIVIDENDS 205 121 205 205

CASHFLOW FROM FINANCING ACTV. (13,067) 3,869 (5,380) (3,205)

CASH GENERATED/(UTILIZED) (864) 4,509 (3,312) 2,187

CASH AT START OF THE YEAR 1,683 819 5,327 2,015

CASH AT END OF THE YEAR 819 5,327 2,015 4,202




Mid-Cap


Company BackgroundAbbott India (AIL) is a step down subsidiary of Abbott Laboratories, USA.The company has a strong distribution network with 18 distribution points,which cater to 11,000 stockists and 70,000 retailers. The company has aformulation facility at Verna, Goa. As of December 2010, AIL had an employeebase of 1,747. The company caters to five main segments - primary care,specialty care, hospital care, consumer healthcare and super specialty care,with brands such as Brufen, Cremaffin, Digene, Zolfresh, Thyronorm, Pediasure,Forane and Heptral. AIL merged with Solvay Pharma India Ltd. (SPIL) inCY2011, which was acquired by Abbott Laboratories.

Structural SnapshotGrowth opportunity: As per PwC, the Indian pharmaceutical industry isexpected to grow by 15-20% over CY2010-15E, aided by increasing percapita income, growing health insurance penetration, better health awareness,higher government expenditure, rising number of chronic diseases, innovativeproduct launches due to product patents and expanded healthcare accessto rural and semi urban markets. The increase in product portfolio after themerger with SPIL and focus on therapeutic areas like nutrition and diagnosticswill help the company to report better growth.

Competitive position: AIL became the second largest pharmaceutical MNC(in revenue terms) in India post its merger with SPIL, overtaking Pfizer andAventis Pharma. The company is well placed in the industry because of itsstrong product portfolio.

Nature of business: High entry barriers.

Current Investment ArgumentsSynergies with SPIL to improve the business model: Amalgamation ofSPIL with AIL expanded the company's product portfolio, giving access tountapped therapeutic segments like women's health and vaccines, in additionto increasing exposure to its existing therapeutic segments. Besides increasedrevenue, the synergy between the two companies is expected to improveoperating efficiencies, thus leading to margin expansion.

Multiple revenue drivers to lead to a 24% CAGR in the top line: AIL'sadvertisement and employee costs as a percentage of sales have beencontinuously increasing since CY2006. Continued focus on these factorsis expected to drive the company's revenue going forward. Moreover, AIL'sfocus on therapeutic areas such as diagnostics and nutrition and its agreementwith Zydus Cadila (India) to market 25 products in emerging markets fromCY2013E could further add to its revenue.

Valuations attractive: AIL is a cash-rich company, hence we expect cashreserves and RoIC to increase to ̀ 594cr and 114.3%, respectively, by CY2013E.Due to excess cash in its books, we believe AIL may be a potential delistingcandidate. The stock is currently trading at PE of 14.5x its CY2013E (20%discount to its three-year median of 18.0x). We maintain our Buy view onthe stock with a target price of `̀̀̀̀1,852, based on target PE of 18.0x forCY2013E.

Mid-Cap CMP/TP/Upside: `1,490 / `1,852 / 24%



FII 0.3

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ABBOTT INDIA 1.8 21.6 53.2 23.4 20.1

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 61.2 30.5 18.5 15.4 11.1

PAT GROWTH* 82.6 (21.4) (2.8) 0.6 3.2

OPM# 15.5 6.7 9.6 10.7 13.0

ROE# 21.2 25.0 25.5 29.0NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 33.4 21.6

ROE (%) 28.4 27.7

P/E 17.6 14.5

P/BV 4.5 3.6



RATING BUY

52 WEEK HIGH / LOW 1,683 / 1,178


LIQUIDITY LOW

TOPPICKAbbott India


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - - -

DEFFERED TAX LIABILITY (NET) 0 (2) (2) (2)



GROSS BLOCK 118 199 219 240


NET BLOCK 50 88 92 96


INVESTMENTS - 37 37 37




MISC EXP NOT WRITTEN OFF - - - -

TOTAL ASSETS 306 564 699 873

Y/E DEC. (`̀̀̀̀ CR) CY2010 CY2011E CY2012E CY2013E



% CHG 30.5 46.2 14.4 14.1


OPERATING PROFIT 69 197 239 283

(% OF NET SALES) 6.7 13.0 13.8 14.3


INTEREST 0 0 - -



(% OF NET SALES) 3.5 1.3 2.6 3.1

PBT (REPORTED) 94 201 268 326

TAX 33 66 89 108

(% OF PBT) 35.2 33.0 33.0 33.0

PAT (REPORTED) 61 135 180 219





ADJ. PAT 61 135 180 219

% CHG (21.4) 120.8 33.4 21.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 51.9 23.5 17.6 14.5

P/CEPS 52.9 21.1 16.2 13.4

P/BV 10.4 5.6 4.5 3.6

EV/SALES 2.9 1.8 1.5 1.3

EV/EBITDA 42.9 14.2 11.2 9.0


EPS (BASIC) 44.6 63.4 84.6 102.9


CASH EPS 52.9 70.5 92.2 111.2

DPS 17.0 17.0 18.0 18.0

BOOK VALUE 223.3 266.6 330.2 412.1

RETURNS (%)

ROCE (PRE-TAX) 24.0 41.2 34.9 33.4


ROE 21.2 30.9 28.4 27.7

TURNOVER RATIOS (X)




Y/E DEC. CY2010 CY2011E CY2012E CY2013E

CASH FLOW STATEMENT




OTHERS (9) (20) (45) (61)





OTHERS (4) 20 45 61

CASH FLOW FROM INVESTING (16) (35) 25 39




OTHERS (0) 79 - -


INC./(DEC.) IN CASH 13 142 113 150






Company BackgroundBajaj Electricals Ltd. (BEL) is a 72-year old company with a turnover of`2,763cr. The company is part of the US$7bn (over `38,000cr) ShekharBajaj Group. BEL has six strategic business units - engineering and projects(~30% of revenue), lighting, luminaries (~23% of revenue), and consumerdurable (appliances, fans, Morphy Richards, contributing ~47% to revenue).The company has 19 branch offices spread in different parts of the country.The company is supported by a chain of about 1,000 distributors, 4,000authorized dealers, over 4,00,000 retail outlets and more than 282 customercare centers in the country.

Structural SnapshotGrowth opportunity: Currently, the domestic home appliances market isgrowing at ~20% annually on the back of rapid urbanization and improvingpurchasing power of Indian consumers. The current market size of irons,water heaters, ovens toasters grills, and mixers is estimated to be `6,000cr,which is growing at ~15% annually. The organized sector constitutes ~68%of the market share. The lighting sector is estimated at `3,600cr, which isgrowing 10% annually. The CFL market is around `1,900cr, growing ~30%annually. Market size for the luminaries segment is estimated at `2,500cr.Organized players account for 60-65% of the market.

Competitive position: BEL is a strong brand and is one of India's leadingcompanies in small appliances, fans, and lighting and luminaries. In India, BEL’Sluminaries segment maintains its No. 2 position with a ~17% market share inthe organized sector, after Philips. The company's fan segment is among thetop three in India, with a market share of ~16.5% in the organized sector.

Nature of business: Branded business contributes nearly 70% to total revenue.

Current Investment ArgumentsStrong brand image - Leveraging on strong brands and substantial marketshare: BEL has strong brand positioning and a well-spread distribution network.As per the company's internal estimates, it is the fastest growing player inthe domestic appliances market, which is growing at 20% per year. In thesmall appliances market, BEL enjoys a market share of over 15-30% acrossall product categories.

Future growth drivers - Rural markets, acquisitions and newer verticals:BEL plans to capitalize on growth in the rural markets. The company hasalso identified 7-8 potential acquisition candidates across businesses.Management expects about 15% of future sales to come from the acquiredbusinesses. The company also plans to foray into newer verticals, includingwater management, which is an underpenetrated and rapidly growing market.

Valuations cheap: With the recent sharp correction, the stock is available atattractive valuation on just 9.3x FY2013 earnings, against its five-year historicalaverage of 11x one-year forward earnings. We recommend Buy on the stockwith a target price of `̀̀̀̀201, valuing the stock at 11x FY2013 earnings.

Key concern: Pursuing growth in the asset-heavy and low entry barrier engineeringand projects segment.

Mid-Cap CMP/TP/Upside: `171 / `201 / 18%


PROMOTERS 65.6

FII 6.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BAJAJ ELECTRICAL(14.8) (18.3) 62.1 28.3 48.0

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 19.2 23.1 25.7 26.4 21.8

PAT GROWTH* 7.6 16.5 25.6 37.2 49.8

OPM# 7.5 8.7 9.8 9.6 8.2

ROE# - 26.2 28.0 31.8 19.1NOTE: ABOVE 1 YEAR- *ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) 8.0 29.7

ROE (%) 21.3 23.6

P/E 12.1 9.3

P/BV 2.4 2.0


BUY / HOLD / SELL 20 / 3 / 1

RATING BUY

52 WEEK HIGH / LOW 296 / 132


LIQUIDITY MEDIUM

TOPPICKBajaj Electricals


BALANCE SHEET

SOURCES OF FUNDS


PREFERENCE CAPITAL 0.2 - - -



TOTAL LOANS 152 116 116 106

DEFERRED TAX LIABILITY (NET) (1) (2) (2) (2)



GROSS BLOCK 170 230 248 281


NET BLOCK 102 153 157 175

CAPITAL WORK-IN-PROGRESS 0 - 2 3


CURRENT ASSETS 1,199 1,575 1,682 1,921



TOTAL ASSETS 646 726 819 940


PROFIT & LOSS


% CHG 26.1 23.1 17.6 13.5


OTHER 131 160 203 231

EBITDA 233 238 248 311

(% OF NET SALES) 10.5 8.7 7.7 8.5




(% OF PBT) 4.3 2.8 3.9 3.0



PBT (REPORTED) 195 219 214 277

TAX 75 74 74 95

(% OF PBT) 38.6 33.8 34.4 34.4

PAT (REPORTED) 120 145 140 182

PRIOR PERIOD ITEMS 8 - - -


ADJ. PAT 112 130 140 182

% CHG 22.4 16.5 8.0 29.7


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 14.6 11.6 12.1 9.3

P/CEPS 13.2 10.8 11.0 8.6

P/BV 3.4 2.8 2.4 2.0

EV/SALES 0.8 0.6 0.5 0.5

EV/EBITDA 7.5 7.4 7.1 5.5


EPS (BASIC) 12.0 14.7 14.1 18.3


CASH EPS 13.2 10.8 11.0 8.6

DPS 2.4 3.6 4.0 4.4

BOOK VALUE 50.7 61.8 70.9 84.0

RETURNS (%)

ROCE (PRE-TAX) 40.4 33.1 30.4 33.6

ANGEL ROIC 36.7 27.2 23.5 27.9

ROE 31.7 26.2 21.3 23.6

TURNOVER RATIOS (X)



PAYABLES (DAYS) 115 126 129 123


CASH FLOW STATEMENT



(INC.)/ DEC. IN WORKING CAPITAL (192) (64) (90) (89)









INC./(DEC.) IN LOANS (62) (35) - (10)


OTHERS 9.4 32.2 16.0 6.1


INC./(DEC.) IN CASH 7 (13) 13 20






Company BackgroundBlue Star is the largest central air-conditioning company in India. The companyclocked an annual turnover of `2,976cr in FY2011, a network of 29 offices,six manufacturing facilities and over 1,200 dealers across the country. Thecompany caters to corporate, commercial and residential customers andhas established leadership in the field of commercial refrigeration equipment,ranging from water coolers to cold storages. The company also offerscomprehensive electrical contracting, plumbing, fire fighting products, andservices. Blue Star's other businesses include marketing and maintenanceof hi-tech professional electronic and industrial products.

Structural SnapshotGrowth opportunity: We believe the surge in demand for the commercialspace and the increasing corporate and government thrust to set up anefficient cold chain infrastructure in the country are likely to boost demandfor centralized air-conditioning and cold storage in India. The cumulativenon-residential opportunity in air conditioners is estimated to be close to`38,000cr over the next five years. A number of opportunities are also expectedto arise due to the expansion and modernization of airports in the country.

Competitive position: The company has a strong brand and is India's largestcentral air-conditioning company.

Nature of business: Major presence in the commercial segment, which ishighly cyclical in nature and depends on economic growth. The companyoperates through fixed price contracts and, thus, is exposed to the risk ofany increase in raw-material prices.

Current Investment ArgumentsDemand slowdown and declining margins: There are still no signs of anypick-up in demand in the IT/commercial real estate sectors. The power sectoris also slowing down with no new projects being announced in the airportsor metro rail segments. Further, order finalizations continue to be deferred.Consequently, the company continues to witness a challenging environment,as reflected in its weak top-line growth during 2QFY2012. Overall, managementis not very optimistic and expects the current scenario to continue for thenext four-five quarters.

Copper fluctuation and forex to remain a concern: Blue Star, which hadentered into fixed price contracts, is expected to witness significant pressureon its EBIT margin going forward, due to forex volatility and copper pricefluctuations. The company has indicated healthy growth in the VRF and packagedair-conditioning markets; however, concerns on managing foreign exchangefluctuations continue to linger. Further, management expects OPM to contractby 3-5% on a yoy basis until 1QFY2013.

Valuations fair: The stock is currently trading at 19.6x and 10.2x its FY2012Eand FY2013E EPS, respectively. We expect a weak outlook for the companyuntil 1QFY2013. Hence, we maintain our Neutral view on the stock.

Mid-Cap CMP/TP/Upside: `172 / - / -Blue Star


PROMOTERS 40.1

FII 5.35

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

BLUE STAR (22.0) (57.0) 3.7 (4.8) 32.8

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (13.0) 17.9 10.2 20.5 19.5

PAT GROWTH* (153.8) (25.4) (3.1) 26.5 21.0

OPM# 2.3 8.5 9.9 9.3 7.7


ANGEL ESTIMATES


PAT GROWTH (%) (50.2) 91.8

ROE (%) 14.3 23.8

P/E 19.6 10.2

P/BV 2.6 2.3



RATING NEUTRAL

52 WEEK HIGH / LOW 450 / 151


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS








GROSS BLOCK 351 406 466 526


NET BLOCK 171 194 217 236



CURRENT ASSETS 1,393 1,957 2,005 2,252



MIS. EXP. NOT WRITTEN OFF - 1 - -

TOTAL ASSETS 499 955 1,034 1,021


PROFIT & LOSS

NET SALES 2,525 2,976 3,304 3,667

% CHG 0.9 17.9 11.0 11.0


EBITDA 275 254 163 236

(% OF NET SALES) 10.9 8.5 4.9 6.4




(% OF PBT) 16.3 14.6 27.1 16.8


EXTRAORDINARY EXPENSE/(INC.) - - 20 -

PBT (REPORTED) 277 231 105 201

TAX 65 73 26 50

(% OF PBT) 23.5 31.6 25.0 25.0

PAT (REPORTED) 211 158 79 151




ADJ. PAT 211 158 79 151

% CHG 12.7 (25.4) (50.2) 91.8


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 7.3 9.8 19.6 10.2

P/CEPS 6.3 8.1 13.4 8.0

P/BV 3.1 3.0 2.6 2.3

EV/SALES 0.6 0.5 0.5 0.4

EV/EBITDA 5.6 6.1 9.5 6.6


EPS (BASIC) 23.5 17.6 8.7 16.8


CASH EPS 27.4 21.2 12.8 21.4

DPS 8.0 7.0 - 6.0

BOOK VALUE 54.7 56.8 65.6 75.3

RETURNS (%)

ROCE (PRE-TAX) 53.8 30.6 12.7 18.9

ANGEL ROIC 58.7 33.4 13.5 20.1

ROE 49.3 31.5 14.3 23.8

TURNOVER RATIOS (X)



PAYABLES (DAYS) 134 143 134 132


CASH FLOW STATEMENT



(INC.)/ DEC. IN WORKING CAPITAL (114) (370) (101) 76



CASH FLOW FROM OPERATIONS 87 (214) (20) 234






INC./(DEC.) IN LOANS (15) 436 - (100)

DIVIDEND PAID (INCL. TAX) 84 74 - 63

OTHERS (4) (65) 1


INC./(DEC.) IN CASH 8 39 (50) 41






Company BackgroundCRISIL is India's largest credit rating agency, with a market share of around60%, and one of the biggest research houses in India. With the recent acquisitionof Pipal Research Corp. (Pipal), robust credit demand and strong infrastructurespend, the company has witnessed strong growth across all its segments.The company has also recently announced buyback of shares, which is thesecond time in a span of one year. The buyback will be carried out with amaximum price of `1,000/share and up to an aggregate amount of `80cr.

Structural SnapshotGrowth opportunity: CRISIL has been growing at ~2x India's credit growthsince CY2005. The company is expected to greatly benefit from strong creditgrowth in India. We believe credit demand will continue to grow at a fasterrate than India's nominal GDP, as financial depth continues to increase andwe expect credit demand to witness a 17% CAGR over CY2010-14.

Competitive position: Commands a premium position over other playersdue to first-mover advantage and a strong parent group (Standard and Poor's).

Nature of business: High RoE business as it requires skilled workforce;High entry barriers for new players.

Current Investment ArgumentsAcquisition of Pipal to boost research revenue: Pipal is a strong playerproviding offshore research services to the corporate sector, while CRISIL'sIrevna is a leading offshore research provider to the financial sector. Thesynergy between the two firms will help CRISIL to service its clients betterand further expand its client base, resulting in strong growth going ahead.Post the acquisition, with the combined strength of the two firms, we expecta 22% CAGR in the research segment's revenue over CY2010-12.

Asset-light business model: We expect CRISIL to post a 25% CAGR inits overall revenue over CY2010-12 and continue to maintain its leadershipposition. CRISIL benefits from its asset-light business model, which is highon intellectual assets (employee cost-to-sales is around 40%). Further, thecompany is debt free and has 50% plus RoE. Additionally, CRISIL enjoys astrong parentage.

Valuations Expensive: The stock is currently trading at 26.4x CY2012 earnings(as against its historical median of 22x one-year forward EPS). We remainNeutral on the stock .

Mid-Cap CMP/TP/Upside: `914 / - / -CRISIL


Promoters 52.4

FII 10.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

CRISIL 5.7 55.3 58.1 29.6 44.1

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -

Sensex (2.6) (12.3) 21.3 3.3 17.3NOTE: * ABOVE 1 YEAR ON CAGR BASIS


(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 38.3 17.5 16.0 35.1 33.9

PAT GROWTH* (20.2) (0.2) 34.9 53.0 35.8

OPM# 38.1 34.5 35.5 32.7 36.5


ANGEL ESTIMATES


PAT GROWTH (%) 29.9 17.8

ROE (%) 52.0 54.9

P/E 31.1 26.4

P/BV 15.9 13.3



RATING NEUTRAL

52 WEEK HIGH / LOW 977 / 562


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - - -




GROSS BLOCK 184 310 320 326


NET BLOCK 120 225 208 186






DEFERRED TAX ASSETS (NET) 10 14 14 14

TOTAL ASSETS 434 394 408 488


PROFIT & LOSS

NET SALES 537 631 819 990

% CHG 4.4 17.5 29.7 21.0


EBITDA 199 218 278 340

(% OF NET SALES) 37.1 34.5 34.0 34.3


INTEREST & OTHER CHARGES - - - -

ADJ.OTHER INCOME 23 68 20 20

(% OF PBT) 11.1 25.6 7.2 6.0



PBT (REPORTED) 207 264 271 332

TAX 47 59 62 86

(% OF PBT) 22.5 22.2 23.0 26.0

PAT (REPORTED) 161 205 209 246


EXTRAORDINARY INCOME POST TAX - 45 - -

ADJ. PAT 161 160 209 246

% CHG 14.4 (0.2) 29.9 17.8


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 41.1 31.6 31.1 26.4

P/CEPS 37.6 28.6 27.5 23.7

P/BV 15.2 16.4 15.9 13.3

EV/SALES 11.8 10.0 7.7 6.3

EV/EBITDA 31.7 29.0 22.7 18.3


EPS (BASIC) 22.3 29.0 29.4 34.7


CASH EPS 24.3 31.9 33.2 38.6

DPS 10.0 20.0 15.0 20.0

BOOK VALUE 60.0 55.6 57.5 68.8

RETURNS (%)

ROCE (PRE-TAX) 46.6 47.4 62.7 69.7


ROE 40.6 49.6 52.0 54.9

TURNOVER RATIOS (X)



WORKING CAPITAL CYCLE (21) (19) (8) (2)


CASH FLOW STATEMENT







INC./ (DEC.) IN FIXED ASSETS (54) (62) (10) (6)

INC./ (DEC.) IN INVESTMENTS 1 91 6 -

INC./ (DEC.) IN LOANS AND ADVANCES (9) 11 (5) (6)


CASH FLOW FROM INVESTING (40) 111 11 8

ISSUE/(BUY BACK) OF EQUITY - (79) (71) -


OTHERS (16) (3) - -








Company BackgroundFinolex Cables (Finolex) is the second largest power and telecom cablemanufacturer in India. The company has manufacturing facilities in Goa, Puneand Roorkee. Finolex specializes in PVC insulated cables, making its owncompounds from PVC resins. The company's business operations are carriedout through four broad divisions - electrical cables, communication cables,copper rods and others. The electrical cables division is the company's largestdivision. Recently, Finolex also entered the city distribution cable segment,with the commissioning of its high tension (HT) power cables manufacturingfacility near Pune.

Structural SnapshotGrowth opportunity: Unorganized players account for a market share of~50% in the cables industry in India. There is a growing inclination amongconsumers to use cables with a recognized brand name, as the cost ofcables is estimated to be only ~2.5% of a building's total construction cost.Also, greater urban development requirements and needs for aesthetics meanthat in future there would be increased usage of underground cables. Thesecables have to necessarily be coated by a layer of insulation. Finolex mainlymanufactures PVC insulated cables; hence, the company is suitably placedto exploit this opportunity going forward.

Competitive position: The company has low flexibility to pass on the increasein raw-material prices as the sector faces overcapacity.

Nature of business: Commodity business; Low entry barriers for new players.

Current Investment ArgumentsLT and HT cables segments to drive growth: Finolex is poised to registermoderate growth over the next few years, owing to growth in the existinglow lension (LT) cables segment and entry into the HT and extra high voltage(EHV) cables verticals. In the LT cables segment, we expect organized playersto gradually gain market share as their distribution reach expands and customersincreasingly demand high-quality and branded wires. Entry into the HT cablessegment gives accessibility to the generation and distribution segment, wherethe market opportunity is estimated at `37,000cr over the next 10 years.

Tax benefits from the Roorkee plant to help in the company's turnaround:Finolex has shifted a major chunk of production to its Roorkee plant, wherethe company would have to pay low excise duty and would avail income taxbenefits. Owing to this, we expect excise duty and tax rates for the companyto remain low at 12% and 22%, respectively, in FY2013E. The companyhas further increased the capacity of this plant by 50%. Proximity to thegrowing north Indian markets and tax benefits availed by this plant are expectedto boost the company's turnaround.

Valuations attractive: At the CMP, the stock is trading at 4.0x its FY2013EEPS. The company holds a 32.4% share in Finolex Industries, which at thecurrent market value works out to `17/share. We maintain our Buyrecommendation on the stock with a target price of `̀̀̀̀51.

Mid-Cap CMP/TP/Upside: `34 / `51 / 51%Finolex Cables


Promoters 35.4

FII 5.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

FINOLEX CABLES (10.6) (31.7) 12.0 (19.7) 1.7

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 1.7 25.8 13.7 22.2 14.5

PAT GROWTH* 4.2 (9.3) (0.8) 11.5 2.2

OPM# 8.0 8.4 9.4 10.1 11.8


ANGEL ESTIMATES


PAT GROWTH (%) (2.0) 19.5

ROE (%) 11.2 15.6

P/E 6.1 4.0

P/BV 0.7 0.6



RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 275 260 200 130




GROSS BLOCK 802 839 860 903


NET BLOCK 419 417 398 400







TOTAL ASSETS 950 1,009 1,015 1,050


PROFIT & LOSS


% CHG 20.7 25.8 2.2 12.5


EBITDA 197 172 167 200

(% OF NET SALES) 12.2 8.4 8.0 8.5




(% OF PBT) 14.6 18.3 21.3 17.7



PBT (REPORTED) 89 107 108 167

TAX 32 20 24 37

(% OF PBT) 35.4 19.0 22.0 22.0





ADJ. PAT 134 121 119 142

% CHG 63.8 (9.3) (2.0) 19.5


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 9.0 6.0 6.1 4.0

P/CEPS 5.4 4.1 4.2 3.0

P/BV 0.8 0.7 0.7 0.6

EV/SALES 0.3 0.3 0.2 0.2

EV/EBITDA 2.4 3.0 2.6 1.8


EPS (BASIC) 3.8 5.7 5.5 8.5


CASH EPS 6.2 8.2 8.1 11.2

DPS 0.6 0.7 1.0 1.4

BOOK VALUE 42.0 46.9 51.3 58.1

RETURNS (%)

ROCE (PRE-TAX) 17.1 13.6 12.6 15.3

ANGEL ROIC 18.2 16.2 13.9 16.9

ROE 9.3 12.8 11.2 15.6

TURNOVER RATIOS (X)





CASH FLOW STATEMENT






CASH FLOW FROM OPERATIONS (10) (7) 82 110


(INC.)/ DEC. IN INVESTMENTS 34 35 (10) -

(INC.)/ DEC. IN LOANS AND ADVANCES 1 (19) - (12)


CASH FLOW FROM INVESTING 30 18 (1) (25)

INC./(DEC.) IN LOANS (21) (15) (60) (70)


OTHERS 21 1 7 8


INC./(DEC.) IN CASH 9 (16) 10 (1)






Company BackgroundGoodyear India (GIL) is a subsidiary of Goodyear Tire and Rubber Company,U.S., which holds a 74% stake in the company. GIL is the sixth largest tyremanufacturing company in India, with an overall domestic market share of5.1%. The company has a manufacturing facility in Ballabgarh, which producesfarm tyres, wherein the company is a dominant player. GIL also trades inradial passenger and off-the-road bias tyres manufactured by Goodyear SouthAsia Tyres Pvt. Ltd. (GSATPL), Aurangabad, pursuant to an offtake agreement.

Structural SnapshotGrowth opportunity: Growing levels of farm mechanization have led to theIndian tractor industry's volumes witnessing a strong 26% CAGR over FY2009-11, leading to continued strong replacement demand for tractor tyre manufacturerslike GIL. The company also caters to the passenger radial tyre segment,which contributes ~23% to its total revenue. As per ICRA's estimates, passengercar penetration in India is at only 13 cars per 1,000 people compared toother emerging markets like Brazil (160), China (45) and Indonesia (42) -this presents a significant growth opportunity for the company.

Competitive position: GIL is the sixth largest tyre manufacturing companyin India with a market share of 5.1%. The company is a leader in the tractortyre segment, with a market share of 22.3% for tractor front tyres and 35.9%for tractor rear tyres.

Nature of business: Cyclical and rate sensitive; Low entry barriers.

Current Investment ArgumentsBrand in commodity business: GIL caters to two major segments - tractortyres and passenger vehicle tyres. The company is a market leader in thetractor tyre segment; while in the passenger vehicle tyre segment, GIL suppliesto high-end car companies like Audi, BMW, Land Rover, Mitsubishi and Porsch,for which demand is inelastic as compared to other manufacturers or segments.GIL has a brand name in the commodity business, reporting a stupendousRoIC of 412.8% for CY2010 compared to less than 20% for its peers.

Sale of Ballabgarh land - A trigger: In February 2011, GIL had announcedto the BSE that it would be selling a piece of land located in Ballabgarh,Faridabad, after it obtains necessary approvals. This may give an upsidetrigger to the stock.

Valuations attractive: GIL has cash reserves of ̀ 363cr for CY2013E; hence,we believe it may be a potential delisting candidate. Since the company isa cash-rich company, we have incorporated cash (at a 50% discount) in ourvaluations. The stock is currently trading at PE of 7.7x its CY2012E earnings,which is at a discount to its five-year median of 8.1x. We maintain our Buyrecommendation on the stock with a target price of `̀̀̀̀401, based ontarget PE of 9x for CY2012E.

Mid-Cap CMP/TP/Upside: `305 / `̀̀̀̀401 / 31%



FII 2.5

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

GOODYEAR (2.1) 25.0 61.7 11.7 25.1

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 15.8 27.6 13.4 13.5 10.0

PAT GROWTH* (15.8) 2.3 23.5 52.7 -

OPM# 7.1 8.7 8.9 8.5 6.0


ANGEL ESTIMATES


PAT GROWTH (%) (10.9) 37.6

ROE (%) 22.7 26.0

P/E 10.6 7.7

P/BV 2.2 1.8



RATING BUY

52 WEEK HIGH / LOW 376 / 203


LIQUIDITY LOW

TOPPICKGoodyear India



BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - 15 15

DEFFERED TAX LIABILITY (NET) 11 10 10 10



GROSS BLOCK 277 304 365 402


NET BLOCK 120 139 180 194


INVESTMENTS - - - -





TOTAL ASSETS 226 281 342 413




% CHG 10.5 27.6 20.5 17.5



(% OF NET SALES) 12.1 8.7 7.1 8.2


INTEREST 4 4 5 5



(% OF NET SALES) 0.5 1.3 0.8 0.8

PBT (REPORTED) 111 111 98 137

TAX 38 36 31 45

(% OF PBT) 34.4 32.6 32.0 33.0






ADJ. PAT 73 75 67 92

% CHG 127.0 2.3 (10.9) 37.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 9.6 9.4 10.6 7.7

P/CEPS 8.2 7.8 8.2 6.2

P/BV 3.3 2.6 2.2 1.8

EV/SALES 0.5 0.4 0.3 0.2

EV/EBITDA 4.4 4.3 4.0 2.4


EPS (BASIC) 31.7 32.4 28.9 39.8


CASH EPS 37.2 39.1 37.3 49.3

DPS 7.0 7.0 7.5 8.0

BOOK VALUE 93.1 117.4 137.5 168.0

RETURNS (%)

ROCE (PRE-TAX) 53.8 37.6 28.9 33.9


ROE 39.0 30.8 22.7 26.0

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




OTHERS (20) 10 (12) (14)





OTHERS 15 (15) 12 14



INC./(DEC.) IN LOANS - - 15 -


OTHERS (3) (3) - -


INC./(DEC.) IN CASH 104 59 54 91





Company BackgroundGraphite India Ltd. (GIL) is India's largest and the world's fifth largest manufacturerof graphite electrodes, which is a key input in steel production through theelectric arc furnace (EAF) route. The company accounts for ~6.5% of globalelectrode capacity and has over 40 years of technical expertise in the industry.GIL's manufacturing units have currently reached almost full capacity utilizationlevels. GIL's new expansion plan at Durgapur is progressing as per scheduleand is expected to be completed by FY2012-end. The company is well poisedin the global graphite electrode industry through its quality, scale of operationsand low-cost production base.

Structural SnapshotGrowth opportunity: The World Steel Association expects global steelconsumption to grow on a yoy basis by 6.5% in CY2011 and 5.4% in CY2012.These forecasts assume that developing economies would continue to driveglobal growth and the impact of European sovereign debt crisis on Asiandemand would be contained. Recovery of steel demand in developed countrieswill be relatively modest compared to the more robust growth across Asia.India's steel demand is projected to grow on a yoy basis by 4.3% in CY2011to 67.7mt and 7.9% to 73mt in CY2012. This coupled with higher contributionof EAF share to total crude steel production would directly benefit the graphiteelectrode industry.

Competitive position: GIL has a low-cost model on the back of lower employeecost. Thus, the company enjoys higher margin compared to competitors.The company has no pricing power over its products.

Nature of business: Commodity business; Strong entry barriers for newplayers.

Current Investment ArgumentsGIL set to ride on the industry's rebound: The graphite electrodes industryis expected to grow faster, compared to EAF steel production over the nextfew years, as destocking of graphite electrodes inventory at the steelmanufacturers' end is expected to reverse. GIL, with capacity expansionfrom 78,000mt/year to 98,000mt/year, to be completed by FY2012E, iswell poised to reap the benefits of this growth. We expect GIL's marketshare to increase to 9.7% by FY2013E and its top line to witness a 19.3%CAGR over FY2011-13E.

Strong labor cost advantages: GIL has strong labor cost advantages comparedto its global peers, as other companies have their plants in countries wherelabor costs are significantly higher compared to India. SGL Carbon SE, thelargest global player, has plants located mainly across Europe and NorthAmerica, while GrafTech Ltd., the second largest global player, has plantsin France, Spain, South Africa, Brazil and Mexico.

Valuations attractive: The stock is trading at attractive valuations of 0.9xand 0.8x its FY2012E and FY2013E BV, respectively. We have valued thestock on its five-year median of 1.1x one-year forward BV to arrive at a targetprice of `102. We countinue to maintain our Buy rating on the stock.

Mid-Cap CMP/TP/Upside: `77 / `102 / 33%Graphite


PROMOTERS 60.0

FII 15.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

GRAPHITE 1.7 (24.3) 38.7 5.8 34.2

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 42.5 7.2 2.7 13.4 27.4

PAT GROWTH* (32.4) (19.5) (14.9) (1.3) 15.3

OPM# 16.4 21.4 39.0 42.2 35.6


ANGEL ESTIMATES


PAT GROWTH (%) (1.3) 40.6

ROE (%) 11.9 15.3

P/BV 0.9 0.8

P/E 8.0 5.7



RATING BUY



LIQUIDITY Low


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 324 341 701 701

DEFERRED TAX LIABILITY (NET) 74 62 71 71



GROSS BLOCK 1,010 1,047 1,247 1,467


NET BLOCK 524 513 658 814



CURRENT ASSETS 1,230 1,448 1,709 2,012



TOTAL ASSETS 1,681 1,924 2,400 2,583


PROFIT & LOSS


% CHG (10.1) 7.2 19.2 19.3


EBITDA 397 308 324 463

(% OF NET SALES) 29.5 21.4 18.9 22.6




(% OF PBT) 8.8 12.0 12.4 8.8


% CHG 17.9 (21.4) (2.7) 40.6

EXTRAORDINARY EXPENSE/(INC.) 1 13 - -

PBT (REPORTED) 364 274 279 392

TAX 129 85 92 129

(% OF PBT) 35.5 30.9 33.0 33.0

PAT (REPORTED) 235 189 187 262



ADJ. PAT 235 189 187 262

% CHG 0.3 (19.5) (1.3) 40.6


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 7.2 7.9 8.0 5.7

P/CEPS 4.6 6.3 6.2 4.6

P/BV 1.0 1.0 0.9 0.8

EV/SALES 1.0 1.3 1.1 0.7

EV/EBITDA 3.5 6.3 6.0 3.2


EPS (BASIC) 13.7 9.7 9.6 13.4


CASH EPS 16.6 12.2 12.3 16.7

DPS 3.5 3.5 3.5 3.5

BOOK VALUE 58.5 77.9 83.3 92.7

RETURNS (%)

ROCE (PRE-TAX) 20.5 14.4 12.5 16.0

ANGEL ROIC 24.9 16.8 14.2 17.2

ROE 19.6 13.5 11.9 15.3

TURNOVER RATIOS (X)





CASH FLOW STATEMENT













INC./(DEC.) IN LOANS (204) 17 360 -


OTHERS 111 (169) (29) (58)


INC./(DEC.) IN CASH (97) (32) (8) (18)






Company BackgroundGreenply Industries Ltd. (Greenply) is India's largest interior infrastructurecompany. The company operates in the `13,000cr wood panels industry inIndia, with a 25% organized market share in plywood and 15% share inlaminates. The company has a strong retail network of 32 outlets, a distributionnetwork of over 15,000 dealers and presence in over 300 cities acrossIndia. The company is also present in 65 countries, through its flagship decorativelaminate brand Greenlam. Recently, the company has significantly increasedits capacity in the plywood and laminate segments and has ventured intothe MDF segment, which is expected to be the company's next growth driver.

Structural SnapshotGrowth opportunity: The total size of the Indian interior infrastructure industryis around `13,000cr. The industry is estimated to grow by 5-7% annually.The industry comprises - plywood (`7,800cr, 20% organized); laminates(`3,000cr, 50% organized); and MDF and particle boards (`2,200cr, of which90%+ is imported). The industry is witnessing a shift in consumer preferencetowards branded products and, thus, companies like Greenply have witnessedfar superior growth as compared to the industry's growth.

Competitive position: Greenply’s products command a premium over otherplayers due to the company’s strong brand and after-sales services.

Nature of business: High entry barriers for new players due to strict controlon the issue of new licenses.

Current Investment ArgumentsBanking on MDF: Greenply has forayed into the lucrative, high-growth MDFmarket, with the largest MDF plant in India (1,80,000m3/year capacity). TheMDF opportunity is especially huge as it constitutes 20% of wood panelconsumption in India, while plywood constitutes 80% - the reverse holdstrue globally. The MDF segment is expected to achieve 45% utilization inFY2012, which would lend a boost to the company's EBITDA margin andresult in higher PAT.

Capacity expansion and higher utilization to boost top line: Greenply'slaminate capacity increased by nearly two-folds in FY2010 and is expectedto achieve 100%+ utilization in FY2012. The company has further expandedits plywood capacity by 3.75mn sq. ft., which is expected to contribute ~`45crto its FY2012 top line.

Valuations attractive: The stock is currently trading 5.1x FY2013E earnings(as against its historical range of 3.3-9.3x one-year forward EPS). We maintainour Buy view on the stock with a target price of `̀̀̀̀284, valuing the stockat 8x FY2013E earnings.



PROMOTERS 55.0

FII 9.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

GREENPLY (14.4) (5.1) 57.3 13.3 23.7

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 43.1 39.6 31.0 36.4 25.9

PAT GROWTH* 537.4 (49.4) (13.5) 12.2 (14.6)

OPM# 8.9 9.0 10.5 11.6 10.8


ANGEL ESTIMATES


PAT GROWTH (%) 115.2 58.9

ROE (%) 15.5 20.8

P/E 8.1 5.1

P/BV 1.2 1.0



RATING BUY

52 WEEK HIGH / LOW 255 / 133


LIQUIDITY LOW

TOPPICKGreenply


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 407 520 510 440




GROSS BLOCK 632 724 775 810


NET BLOCK 539 601 605 591


GOODWILL 3 3 3 3

INVESTMENTS 4 9 9 9




MIS. EXP. NOT WRITTEN OFF 1 1 - -

TOTAL ASSETS 699 868 911 922


PROFIT & LOSS

NET SALES 871 1,217 1,426 1,574

% CHG 20.2 39.6 17.2 10.4


EBITDA 101 110 162 197

(% OF NET SALES) 11.6 9.0 11.4 12.5


INTEREST & OTHER CHARGES (24) (38) (48) (41)


(% OF PBT) 0.0 0.0 0.0 0.0


% CHG 28.5 (45.8) 118.7 58.9



TAX 7 6 14 21

(% OF PBT) 13.0 19.5 20.0 20.0




ADJ. PAT 50 25 54 86

% CHG 32.9 (49.4) 115.2 58.9


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 8.8 17.4 8.1 5.1

P/CEPS 5.6 6.6 4.3 3.2

P/BV 1.5 1.4 1.2 1.0

EV/SALES 0.9 0.8 0.7 0.5

EV/EBITDA 7.8 8.6 5.7 4.4


EPS (BASIC) 22.4 10.4 22.4 35.6


CASH EPS 32.4 27.4 41.7 55.8

DPS 1.5 1.5 1.5 1.5

BOOK VALUE 123.3 133.9 154.5 188.3

RETURNS (%)

ROCE (PRE-TAX) 13.7 8.8 13.0 16.1


ROE 21.9 8.4 15.5 20.8

TURNOVER RATIOS (X)

INVENTORY 77 64 66 70




CASH FLOW STATEMENT









(INC.)/ DEC. IN LOANS AND ADVANCES 13 (18) - -




INC./(DEC.) IN LOANS 149 112 (10) (70)


OTHERS 4 (2) 13 (4)


INC./(DEC.) IN CASH 3 (6) 2 (1)






Company BackgroundHoneywell Automation India Ltd. (HAIL) is an 81% subsidiary of HoneywellInternational, which is a diversified technology and manufacturing leader.HAIL is a leading provider of integrated automation and software solutions.The company operates through five business units, namely process solutions;building solutions; sensing and control; environmental and combustion control;and exports. HAIL imports its products (import cost is ~27% of its net sales)from its parent; the products are assembled in local markets to form a partof its engineering contracts.

Structural SnapshotGrowth opportunity: The automation industry is bound to register sustainablegrowth owing to a) increased dependence of the process industry oninstrumentation and automation and b) higher infrastructure spending acrossall sectors. For HAIL in particular, increased outsourcing contracts won byits parent would also add to its top-line growth. Assuming industry GDP (atfactor cost) to grow at CAGR of 12.2% over CY2011-13E, domestic sales(~63% of net sales) growth is expected to be at 5.2%, 5.5% and 10.6% forCY2011E, CY2012E and CY2013E, respectively.

The process industry (which constitutes ~65% of HAIL’s total revenue) hasbeen witnessing annual growth rate of 20-25% since 2008, is expected togrow in-line with India's GDP growth. The industry is currently undergoingautomation, to principally bring down costs and improve product quality,thereby increasing productivity.

Competitive position: HAIL caters to diverse segments with differing competitionlevels; however, due to its technological edge, the company is one of thepreferable vendors among peers.

Nature of business: Cyclical.

Current Investment ArgumentsClient base in the diversified sector to minimize the downside: HAILhas its presence in diversified products, industries and geographies. Thediverse client base of HAIL includes NTPC, Reliance Industries, Tata Steel,HCL and ITC in the domestic market, which provides fair growth visibility.HAIL also executes contracts won by its parent in the domestic as well asglobal market.

India seen as a global engineering base and a sourcing hub: India offerscost-effective manufacturing capabilities, which can successfully meetHoneywell's global requirements. Consequently, Honeywell is looking forwardto almost double its sourcing from India (partly from HAIL) over the next twoyears.

Valuations attractive: HAIL is trading at attractive TTM PE of 17.9x comparedto its peer average TTM PE of 26x and is at a significant discount of 35%to its five-year median PE. We recommend Buy on the stock with a targetprice of `̀̀̀̀2,510, based on target PE of 18x for CY2013E earnings.

Mid-Cap CMP/TP/Upside: `2,008 / `2,510 / 25%HAIL



FII 0.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HAIL (16.9) (17.2) 36.6 2.7 31.0

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 13.7 15.3 16.1 22.4 18.1

PAT GROWTH* (39.4) (20.8) 17.3 24.8 18.5

OPM# 6.5 10.5 12.6 12.5 11.7


ANGEL ESTIMATES


PAT GROWTH (%) 15.3 21.4

ROE (%) 15.4 16.2

P/E 17.5 14.4

P/BV 2.5 2.2


BUY / HOLD / SELL 1 / 0 /1

RATING BUY

52 WEEK HIGH / LOW 2,930 / 1,620


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS



SHAREHOLDERS FUND 533 613 705 820

TOTAL LOANS - - - -




GROSS BLOCK 147 169 194 223


NET BLOCK 75 82 90 99


INVESTMENTS - - - -




MISC EXP. NOT WRITTEN OFF - - - -

TOTAL ASSETS 502 578 670 785




% CHG 15.3 5.8 7.6 12.7



(% OF NET SALES) 10.5 8.9 9.4 10.0


INTEREST 0 1 1 1



(% OF NET SALES) 0.7 0.7 0.9 1.1

PBT (REPORTED) 139 122 141 172

TAX 34 34 40 49

(% OF PBT) 24.4 30.0 30.0 30.0

PAT (REPORTED) 105 88 102 123





ADJ. PAT 106 88 102 123

% CHG (20.8) (17.1) 15.3 21.4


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 16.7 20.1 17.5 14.4

P/CEPS 14.9 17.2 14.9 12.4

P/BV 3.3 2.9 2.5 2.2

EV/SALES 1.2 1.1 1.0 0.9

EV/EBITDA 10.9 12.5 10.6 8.5


EPS (BASIC) 120.3 99.7 114.9 139.4


CASH EPS 134.8 116.8 134.7 162.2

DPS 10.0 10.0 10.0 10.0

BOOK VALUE 603.3 692.9 797.8 927.3

RETURNS (%)

ROCE (PRE-TAX) 24.4 19.5 19.1 19.6


ROE 21.9 15.4 15.4 16.2

TURNOVER RATIOS (X)



PAYABLES (DAYS) 118 115 115 115

Y/E DEC. CY2010 CY2011E CY2012E CY2013E

CASH FLOW STATEMENT




OTHERS (86) (10) (9) (14)



(INC)/ DEC IN FIXED ASSETS 9 (22) (25) (29)

(INC)/DEC IN INVESTMENTS - - - -

OTHERS 61 6 5 6



INC/(DEC) IN LOANS 0 - - -


OTHERS (2) - 4 7


INC/(DEC) IN CASH 105 (35) 58 58






Company BackgroundHEG is a leading manufacturer and exporter of graphite electrodes used inthe EAF method of steel production. The company has the world's largestsingle-site plant of 80,000MT capacity for production of graphite electrodes.HEG is vertically integrated into power generation with a capacity of 77MW.The company has a diversified customer portfolio comprising POSCO,US Steel, Arcelor Mittal, Krupp Thyssen, Nucor, Usinor, SAIL, TISCO,Jindal and Hyundai.

Structural SnapshotGrowth opportunity: The graphite industry is highly consolidated with 75%capacity contributed by the top 10 major global players. Graphite electrodeis a non-replaceable raw material used in steel production through the EAFroute. Use of the EAF method for steel production has grown from 14% inCY1970 to 29% in CY2010 and is expected to rise to ~50% by CY2020;further, global demand for steel is expected to grow by 5.4% yoy (as perWSA) in CY2012. Hence, increased steel demand along with shift to theEAF method of production will drive the company's growth.

Competitive position: HEG enjoys an advantage over global players dueto its low-cost structure, since most of the top players are located in thehigh-cost regions of U.S., Europe and Japan.

Nature of business: Cyclical and sensitive to exchange rate since the companyhas net exports of ~33% (as a percentage of net sales); Significant entrybarriers for new players.

Current Investment ArgumentsProfit to grow by 136.7% yoy in FY2013E: Capacity expansion from 66,000MTto 80,000MT, which was expected to be operational soon, would drive thecompany's volumes going forward. Further, HEG's realization is expectedto increase by 17.7% yoy in FY2013E, subsequent to the 40-50% pricehike by global players during 3QCY2011. These factors would lead to a412bp yoy expansion in OPM from 13.2% in FY2012E to 17.3% in FY2013E,along with a 136.7% yoy increase in net profit from `48cr in FY2012E to`114cr in FY2013E.

Value addition through investment in BEL: HEG has a 25.8% stake inBhilwara Energy Ltd. (BEL), which operates in the power generation businesswith 270MW operational capacity. Based on IFC's investment in BEL for a10.8% stake (`230cr) in 2010, HEG's implied value of its stake in BELstands at ~`560cr. We have not incorporated the same in our valuations;however, it could provide a further upside to the stock.

Valuations attractive: The stock is currently trading at P/B of 0.9x for FY2013E,which is at a 37% discount to its five-year historical median of 1.4x. Wemaintain our Buy recommendation on the stock with a target price of`̀̀̀̀213, based on a target P/B of 1.0x for FY2013E.

Mid-Cap CMP/TP/Upside: `184 / `213 / 16%HEG


PROMOTERS 56.2

FII 1.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HEG (11.6) (18.1) 16.8 1.6 21.3

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 6.5 (1.5) 5.6 16.3 8.8

PAT GROWTH* (54.5) (34.9) (3.3) 27.7 12.0

OPM# 10.2 20.1 25.0 25.1 21.8

ROE# 14.1 21.4 22.2 20.0NOTE: ABOVE 1 YEAR - * ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) (60.7) 136.7

ROE (%) 5.7 14.0

P/E 15.2 6.4

P/BV 0.9 0.9



RATING BUY

52 WEEK HIGH / LOW 263 / 141


LIQUIDITY LOW

LATEST PROMOTER ACTION

PARTICULARS DATE % STAKE INVOLVED

BUY BACK OF SHARES 11-NOV-11 3.02


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 731 910 1,274 1,313




GROSS BLOCK 995 1,044 1,319 1,319


NET BLOCK 658 659 868 792



CURRENT ASSETS 912 1,108 1,275 1,509



MISC EXP NOT WRITTEN OFF 0 - - -

TOTAL ASSETS 1,638 1,894 2,132 2,236




% CHG 10.3 (1.5) 21.9 27.2



(% OF NET SALES) 29.9 20.1 13.2 17.3


INTEREST 59 37 65 90



(% OF NET SALES) 1.3 3.5 1.2 1.1

PBT (REPORTED) 242 168 64 152

TAX 71 39 15 38

(% OF PBT) 29.4 23.3 24.0 25.0

PAT (REPORTED) 171 129 48 114

SHARE OF EARNINGS OF ASSOCIATE 14 (8) - -





ADJ. PAT 189 123 48 114

% CHG 0.5 (34.9) (60.7) 136.7


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 3.9 6.0 15.2 6.4

P/CEPS 3.1 4.1 6.4 3.9

P/BV 0.9 0.8 0.9 0.9

EV/SALES 1.1 1.3 1.3 1.1

EV/EBITDA 3.8 6.4 10.1 6.2


EPS (BASIC) 44.3 29.7 12.1 28.6


CASH EPS 56.4 43.5 28.6 47.4

DPS 10.1 10.3 10.0 10.5

BOOK VALUE 195.4 219.9 196.3 212.7

RETURNS (%)

ROCE (PRE-TAX) 17.9 9.4 5.6 10.2


ROE 26.5 14.1 5.7 14.0

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




OTHERS 69 67 (16) (19)


CASH FLOW FROM OPERATIONS 304 53 (7) (7)

(INC.)/DEC. IN FIXED ASSETS (65) (70) (206) 5


OTHERS 101 (46) 16 19


ISSUE OF EQUITY 0 0 (3) -

INC./(DEC.) IN LOANS (151) 180 364 38


OTHERS (70) (46) (138) (13)


INC./(DEC.) IN CASH (2) 7 (8) (7)






Company BackgroundHitachi Home & Life Solutions (HHLS) is a subsidiary of Japan's HitachiAppliances, which holds a 68% stake in the company. HHLS manufacturesand sells air conditioners (AC) and is engaged in the trading of refrigerators,washing machines and chillers. The company has manufacturing facilities inKadi (north Gujarat) and Jammu, with a total capacity of 2,30,000 unitsper year. The AC segment includes room AC (RAC), commercial/ductableAC and telecom AC categories. HHLS is a leader in the AC market in thepremium category.

Structural SnapshotGrowth opportunity: Penetration of the RAC market in India is ~3%, whichis extremely low as compared to China (20%) and U.S. (90%); however, itis expected to increase to ~5% by FY2015E. Increasing per capita income,which posted a 15% CAGR over FY2006-11 and low penetration levelsoffer a huge opportunity to the company in the AC market.

Competitive position: HHLS is a leader in telecom ACs, with a 42% marketshare; while in commercial/ductable AC, it has a market share of 17%. Inthe RAC segment, with a 7% market share, HHLS ranks fourth after LG,Samsung and Voltas. The company has better pricing power due to whichit sells ACs at a 10-15% premium over most of its peers.

Nature of business: Cyclical and sensitive to exchange rate since the companyhas ECBs of JPY930mn from Japan; Low entry barriers.

Current Investment ArgumentsEntry into tier-II and tier-III cities with low-price products: HHLS, whichcaters to the premium segment, has also entered the low-price RAC segmentwith the launch of Kaze, with two-star and three-star rating to cater to themedium-class mass segment. The company has increased its presence from236 towns in June 2010 to ~300 towns currently and is expanding its dealerand distributer base.

Innovation and energy-efficient products to drive growth: HHLS continuouslyspends on R&D to come up with innovative products like its recently launchedi-Clean with automatic filter clean technology, higher energy efficiency andfive-star rating. Demand for such products has been increasing on accountof growing concerns about global warming, surging electricity prices andincreasing calls to use energy-efficient products by the government.

Valuations attractive: The stock is trading at attractive PE of 8.5x its FY2013E,which is much cheaper as compared to its peers BlueStar and Voltas, whichhave PE of 9.5x and 9.1x for FY2013E, respectively. Hence, we maintainour Buy rating on the stock with target price of `̀̀̀̀157, based on a targetPE of 12x for FY2013E.

Mid-Cap CMP/TP/Upside: `112/ `̀̀̀̀157 / 40%



FII 0

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

HITACHI (32.3) (44.9) 31.7 (0.4) 28.7

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (2.1) 19.3 19.6 24.4 10.3

PAT GROWTH* (255.0) (36.2) (11.5) 13.5 -

OPM# 1.6 7.4 (0.5) 0.9 (0.4)


ANGEL ESTIMATES


PAT GROWTH (%) (62.1) 170.2

ROE (%) 6.3 15.6

P/E 23.1 8.5

P/BV 1.4 1.2



RATING BUY



LIQUIDITY LOW

TOPPICKHitachi Home & Life


BALANCE SHEET

SOURCES OF FUNDS








GROSS BLOCK 159 199 209 229


NET BLOCK 105 131 124 125


INVESTMENTS - - - -





TOTAL ASSETS 207 262 279 308




% CHG 36.1 19.3 11.5 17.1



(% OF NET SALES) 9.1 7.4 5.3 6.4


INTEREST 2 6 13 3



(% OF NET SALES) 1.8 0.7 0.1 0.1


TAX 11 11 5 13

(% OF PBT) 19.2 26.6 30.0 30.0






ADJ. PAT 46 29 11 30

% CHG 113.3 (36.2) (62.1) 170.2


KEY RATIOSY/E MARCH FY2010 FY2011 FY2012E FY2013E

CASH FLOW STATEMENT




OTHERS (12) 9 0 0





OTHERS 2 9 1 1



INC./(DEC.) IN LOANS 10 30 9 -


OTHERS 5 (8) - -


INC./(DEC.) IN CASH 6 (26) 12 (4)





VALUATION RATIO (X)

P/E (ON FDEPS) 5.6 8.8 23.1 8.5

P/CEPS 4.5 5.7 9.0 5.2

P/BV 1.8 1.5 1.4 1.2

EV/SALES 0.5 0.5 0.4 0.3

EV/EBITDA 5.0 6.1 7.6 5.4


EPS (BASIC) 20.0 12.8 4.8 13.1


CASH EPS 25.2 19.8 12.4 21.4

DPS 1.5 1.5 1.5 1.5

BOOK VALUE 63.9 74.9 78.2 89.8

RETURNS (%)

ROCE (PRE-TAX) 25.2 16.9 10.1 15.1


ROE 36.6 18.4 6.3 15.6

TURNOVER RATIOS (X)



PAYABLES (DAYS) 133 156 156 156


Company BackgroundINEOS ABS India Ltd. (INEOS), an 83% subsidiary of INEOS Global Group,is India's leading manufacturer of an engineering plastic named acrylonitrilebutadiene styrene (ABS, constitutes ~86% of the company's total revenue).The company has three manufacturing plants in Gujarat, at Nandesari (ABSproduction), Katol (SAN production) and Moxi (to blend the resins manufacturedin the former two plants). Over CY2005-10, on the back of capacity expansionand inorganic growth, INEOS reported a 13% and 33% CAGR in its topline and bottom line, respectively.

Structural SnapshotGrowth opportunity: According to CRISIL Research, the domestic ABSindustry is expected to grow by 17% yoy to 127,000 TPA in CY2011 due tohealthy demand from the automobile and home appliances segments. Therehas been a consistent gap between the demand and supply of ABS in themarket. This provides INEOS a huge opportunity to grow going forward.

Competitive position: INEOS is the market leader and holds 60% share inthe ABS resins segment and 68% share in the SAN resins segment in thedomestic market, which comprises only two players.

Nature of business: Cyclical; Sensitive to exchange rate, since 80% of itsraw material is imported.

Current Investment ArgumentsTransfer of business to Styrolution: The business of INEOS along withINEOS Nova (sister concern) and BASF (styrene, ABS and polystyrenebusinesses) has been transferred to Styrolution, a 50/50 JV of INEOS Groupand BASF. INEOS has come up with an open offer for the remaining 16.7%stake, success of which may lead to delisting of the company. The JV will belaunched on a global scale and will be a globally competitive producer ofstyrene, ABS and polystyrene, with a leading position in North America,Asia and Europe. Styrolution is estimated to report annual sales of overEUR5bn for FY2012.

Capacity expansion: As per CRISIL Research, supply of ABS should posta 17% CAGR to meet the growing demand, which is expected to witness a10% CAGR, during CY2010-15E. Assuming the market share of INEOS toremain constant at 60%, volumes for INEOS's ABS resin are likely to growby 17%, for which the company has already expanded its capacity by ~33%to 80,000 TPA in 2011.

Debt-free and cash-rich position: INEOS had zero debt with a cash surplus(including investments) of around `147cr in June 2011, which enables thecompany to finance the extended capacity through internal accruals and/oreven assist in the buy back.

Valuations attractive: The stock is trading at attractive EV/EBITDA of 8xcompared to peer average of 10.2x and has delivered better RoEs of ~20%over peer average of ~16%. We maintain our Buy view on stock with atarget price of `̀̀̀̀694, based on target PE of 15x for CY2012E earnings.

Mid-Cap CMP/TP/Upside: `599 / `694 / 16%INEOS ABS



FII 0.4

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

INEOS 1.6 49.5 88.1 25.7 34.1

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 12.2 32.8 10.0 12.6 13.0

PAT GROWTH* (41.8) 43.0 26.7 33.4 26.8

OPM# 6.0 15.2 12.4 11.9 12.1


ANGEL ESTIMATES


PAT GROWTH (%) (1.6) 17.9

ROE (%) 18.9 18.9

P/E 15.3 12.9

P/BV 2.7 2.3



RATING BUY



LIQUIDITY LOW

LATEST PROMOTER ACTION

PARTICULARS DATE % STAKE INVOLVED

OPEN OFFER 22-OCT-11 16.7


BALANCE SHEET

SOURCES OF FUNDS



SHAREHOLDERS FUND 272 334 395 466

TOTAL LOANS - - - -

DEFERRED TAX LIABILITY (NET) 24 21 (8) (10)



GROSS BLOCK 310 318 327 337


NET BLOCK 142 136 131 124







TOTAL ASSETS 296 356 387 456



TOTAL OPERATING INCOME 559 742 896 1,049

% CHG (7.4) 32.8 20.7 17.0



(% OF NET SALES) 15.4 15.2 11.3 11.2


INTEREST 1 2 - -



(% OF NET SALES) 0.8 0.7 1.3 1.5

PBT (REPORTED) 75 103 98 116

TAX 26 33 30 35

(% OF PBT) 34.6 31.8 30.0 30.0





EXTRAORDINARY EXPENSE/(INC.) 0 (0) (0) (0)

ADJ. PAT 49 70 69 81

% CHG 171.2 43.0 (1.6) 17.9


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 21.5 15.0 15.3 12.9

P/CEPS 16.6 12.5 12.6 10.7

P/BV 3.9 3.2 2.7 2.3

EV/SALES 1.7 1.2 1.0 0.8

EV/EBITDA 10.9 8.0 8.8 7.1


EPS (BASIC) 27.9 39.8 39.2 46.2


CASH EPS 36.1 47.8 47.4 55.8

DPS 3.5 4.0 4.8 5.8

BOOK VALUE 154.9 190.1 224.5 265.0

RETURNS (%)

ROCE (PRE-TAX) 24.0 27.5 20.7 20.4


ROE 18.0 23.1 18.9 18.9

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




OTHERS (10) (8) (18) (13)



(INC)/ DEC IN FIXED ASSETS (3) (8) (10) (10)

(INC)/DEC IN INVESTMENTS (26) (21) (28) (36)

OTHERS 1 4 (6) 4



INC/(DEC) IN LOANS - - - -


OTHERS 1 (0) (6) 5


INC/(DEC) IN CASH 6 23 (23) 25






Company BackgroundITD Cementation is a subsidiary of Thailand-based Italian Thai DevelopmentPublic Company Ltd., which holds a 70% stake in the company. ITD Cementationprovides EPC services to infrastructure projects in India. The company'sbusiness operation areas include construction of maritime structures, massrapid transit systems, hydro power, tunnels, dams, industrial structures, airports,highways, bridges, flyovers, tube heading and foundation and specialistengineering. The company's order book comprises 40% private orders and60% government orders.

Structural SnapshotGrowth opportunity: While companies in the construction sector are witnessingnear-term challenges, the long-term outlook for the sector continues to remainencouraging. Earnings growth is likely to revive in the coming years, primarilyaided by a low base and reversal in the rate cycle. The sector's fortune islikely to pick up in FY2013E and beyond, as the government is gearing upfor the Twelfth Five-Year Plan (2012-17), releasing new infrastructure projectsand addressing concerns about the access to long-term financing and landacquisition.

Competitive position: Despite the competition faced from its peers, thecompany is able to maintain its leadership position in the foundation andpiling work in India, which contributes almost 45% to its revenue with agross margin of 12-13%.

Nature of business: Cyclical and rate-sensitive sector.

Current Investment ArgumentsStrong order book and completion of unprofitable project: ITD Cementationhas been reporting low profit in the past few years due to higher proportionof unprofitable NH I road projects in its order book. However, the companyexpects the share of NH I road projects to come down from 20% to just 5%of the current order book, which stood at `3,310cr as of March 2011. Thecompany is also planning to increase the share of high-margin projects inthe order book going forward. These factors together will help the company'sbottom line to reach `25cr in CY2012E from `9cr in CY2010.

Successful restructuring of loans to drive the bottom line: The companyis in the process of reducing its interest cost by switching some of its highinterest cost loans ( ~13%) to low interest cost loans (~11%). Successfulrestructuring of loans and reduction in cost will further drive the company'searnings.

Valuations attractive: The stock is currently trading at attractive valuationof 0.4x P/BV for CY2012E, which is at a 35% discount to its three-yearmedian of 0.6x. We recommend Buy on ITD Cementation with a targetP/BV of 0.5x for CY2012E and a target price of `̀̀̀̀171.

Mid-Cap CMP/TP/Upside: `134 / `171 / 28%ITD Cementation


PROMOTERS 69.6

FII -

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

ITD CEM. (11.1) (40.9) 16.1 (23.9) 3.5

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 18.0 8.7 10.5 15.8 15.5

PAT GROWTH* 315.4 72.0 7.9 15.1 5.0

OPM# 10.9 9.2 8.6 8.3 6.7


ANGEL ESTIMATES


PAT GROWTH (%) 16.9 135.9

ROE (%) 2.9 6.6

P/E 14.4 6.1

P/BV 0.4 0.4



RATING BUY

52 WEEK HIGH / LOW 270 / 113


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 497 525 577 646

DEFFERED TAX LIABILITY 2 0 - -



GROSS BLOCK 294 322 352 370


NET BLOCK 159 158 152 133



CURRENT ASSETS 956 1,014 1,170 1,370



DEFERRED TAX ASSETS 2 0 - -

TOTAL ASSETS 852 886 947 1,040




% CHG 1.5 8.7 19.4 21.1



(% OF NET SALES) 9.5 9.2 9.1 9.4



RECURRING PBT (10) (12) (7) 10


(% OF NET SALES) 1.8 2.3 1.8 1.7


TAX 2 3 5 11

(% OF PBT) 29.5 23.3 30.0 30.0






AD.J PAT 5 9 11 25

% CHG (275.0) 72.0 16.9 135.9


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 28.9 16.8 14.4 6.1

P/CEPS 4.3 3.9 3.4 2.5

P/BV 0.4 0.4 0.4 0.4

EV/SALES 0.6 0.6 0.5 0.5

EV/EBITDA 6.7 6.3 5.7 5.1


EPS (BASIC) 4.6 7.9 9.3 21.9


CASH EPS 31.2 34.6 39.9 54.0

DPS 1.0 1.5 1.5 1.5

BOOK VALUE 307.3 313.7 321.5 341.9

RETURNS %

ROCE (PRE-TAX) 7.2 7.5 8.4 10.2


ROE 1.5 2.6 2.9 6.6

TURNOVER RATIOS (X)



PAYABLES (DAYS) 120 127 135 135


CASH FLOW STATEMENT




OTHERS 56 59 64 70





OTHERS 14 17 23 26





OTHERS (72) (77) (87) (96)


INC./(DEC.) IN CASH (0) 24 (0) (6)






Company BackgroundLakshmi Machine Works (LMW) is one of the largest manufacturers of textilespinning machinery in the world. The company is a leader in India and oneof the only three players globally that manufactures the entire range of spinningmachinery. LMW diversified into the foundry segment where it manufacturesductile iron and grey iron castings in its state-of-the-art Nobake Foundry.The company also entered the CNC machine tools segment in a technicalcollaboration with M/s. Mori Seiki Co. Ltd., Japan, and is a brand leader inmanufacturing customized products currently.

Structural SnapshotGrowth opportunity: LMW is placed advantageously owing to the promisingfuture prospects of the textile industry in India. With an installed capacity of41.3mn spindles, India is the second largest player in the global textile spinningindustry, behind China with over 100mn spindles. The other countries aresmall compared to these two giants, with none of them having installedspindle capacity of more than 15mn. Being the largest player in the world'ssecond largest textile machinery market offers significant advantages to LMW,enabling it to compete effectively against the global majorsoperating in India.

Competitive position: LMW is the largest player in the India and one of theonly three players globally that manufactures the entire range of spinningmachinery. In India, the company has a high market share of around 70% inyarn spinning and preparatory machines. The company has been able tosustain this market share on the back of strong after-sales service coupledwith providing the world's best technology to customers at the cheapestrates. LMW also enjoys an edge over competition, as it caters to 1,300domestic textile players out of the total universe of around 1,600. The companyhas been innovating on technology for the past 15 years.

Nature of business: Engineering business, hence highly cyclical; Dependenton a single segment - textile spinning; High entry barriers for new players.

Current Investment ArgumentsStrong order book to translate into robust sales growth: LMW has astrong order book of `4,500cr at the end of 3QFY2012, which is 2.5x itsFY2011 net sales. Further, the upturn in the spinning industry has lent aboost to the company’s order inflow. Thus, we expect a low probability oforder deferments.

Valuations attractive: Currently, the stock is trading at 11.5x and 8.7x itsFY2012E and FY2013E EPS, respectively, against its five-year median of13x one-year forward earnings. At the end of 1HFY2012, LMW had netcash worth `642cr and investments worth `154cr. The combined value ofcash and investment works out to ̀ 707/share. We have a Buy recommendationon the stock with a target price of `̀̀̀̀2,214, valuing it at 12x FY2013 EPS.

Mid-Cap CMP/TP/Upside: `1,597 / `2,214 / 74%Lakshmi Machine


PROMOTERS 28.3

FII 1.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

LMW (18.1) (27.8) 40.0 (15.0) 36.6

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 9.6 58.7 (6.7) 6.6 13.0

PAT GROWTH* (13.5) 58.3 (14.1) 1.2 19.2

OPM# 12.8 12.4 13.5 14.9 12.7


ANGEL ESTIMATES


PAT GROWTH (%) 2.4 32.4

ROE (%) 18.2 21.1

P/E 11.5 8.7

P/BV 2.0 1.7



RATING BUY

52 WEEK HIGH / LOW 2565 / 1426


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS


RESERVES& SURPLUS 908 798 902 1,043

SHAREHOLDERS FUNDS 920 809 913 1,055

MINORITY INTEREST

DEFERRED TAX LIABILITY (NET) 33 28 28 28



GROSS BLOCK 1,371 1,465 1,565 1,670


NET BLOCK 449 442 428 416

CAPITAL WORK-IN-PROGRESS 3 - 8 10


CURRENT ASSETS 1,037 1,330 1,535 1,894



TOTAL ASSETS 954 836 940 1,082


PROFIT & LOSS


% CHG (15.5) 58.7 24.3 19.4


EBITDA 161 223 282 341

(% OF NET SALES) 14.2 12.4 12.6 12.8


INTEREST & OTHER CHARGES 1 - 4 5


(% OF PBT) 56.3 47.9 30.0 30.4



PBT (REPORTED) 146 227 236 310

TAX 46 73 79 102

(% OF PBT) 31.5 32.3 33.6 33.0

PAT (REPORTED) 100 153 157 208



ADJ. PAT 97 153 157 208

% CHG (9.3) 58.3 2.4 32.4


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 19.8 11.7 11.5 8.7

P/CEPS 10.1 7.0 6.7 5.5

P/BV 2.1 2.2 2.0 1.7

EV/SALES 1.1 0.6 0.4 0.2

EV/EBITDA 7.7 4.7 3.1 1.9


EPS (BASIC) 80.7 136.2 139.4 184.5


CASH EPS 158.5 229.4 238.7 290.7

DPS 15.0 30.0 40.0 50.0

BOOK VALUE 744.2 717.9 810.2 936.2

RETURNS (%)

ROCE (PRE-TAX) 7.0 13.2 19.1 21.9

ANGEL ROIC 7.8 16.0 22.5 26.7

ROE 11.3 17.7 18.2 21.1

TURNOVER RATIOS (X)



PAYABLES (DAYS) 225 184 189 181


CASH FLOW STATEMENT



INC./ (DEC.) IN WORKING CAPITAL (173) 163 152 120






(INC.)/ DEC. IN LOANS AND ADVANCES 138 (59) (103) (51)






OTHERS (15) (235) 1 (2)


INC./(DEC.) IN CASH 105 24 158 221






Company BackgroundMRF is a market leader in the tyre industry with a ~30% market share. Thecompany is present across all categories of tyres, with an installed capacityof 3.2cr tyres. MRF also exports tyres to over 65 countries in America, Europe,Middle East, Japan and the Pacific region.

Structural SnapshotGrowth opportunity: There is an industry shift towards radial tyres in thetruck segment, where capital expenditure for radial tyres is 3.2x that of cross-ply tyres. Thus, in order to generate normalized RoCE and RoE, tyre companieswould need to earn EBITDA margins of ~20% on radial tyres in comparisonto ~9% on cross-ply tyres, leading to a 20-25% higher pricing for radialtyres. As radialization in the tyre industry is already past the S-curve inflectionpoint of 8-10%, volumes of radial tyres are likely to witness a CAGR ofmore than 25% for the next five years.

Competitive position: MRF is a leader in passenger car tyres, two andthree-wheeler tyres and tractor front tyres, with a market share of 23.9%,27.5% and 25.9%, respectively; while in the tractor rear tyre segment, thecompany holds the second position, with a market share of 25.9%.

Nature of business: Rate sensitive; Sensitive to exchange rates since thecompany has net imports of ~16% (of net sales); Low entry barriers.

Current Investment ArgumentsStable rubber prices - A positive: Rubber prices have reduced by 21%from `258/kg in May 2011 to ̀ 203/kg in November 2011. We expect rubberprices to stabilize going forward, leading to a 100bp improvement in MRF'soperating margin, from 8.3% in SY2011 to 9.3% in SY2013E.

Reinvestment needs exceed current earnings: The debt-equity ratio ofthe tyre industry stood at 1.2x as of September 2011, leaving no scope forcompanies to raise further debt for capacity expansion. Also, consideringthe gloomy market conditions, raising equity would be difficult. Thus, it wouldbe challenging for companies to meet the rising radial tyre demand (over20% CAGR). Consequently, companies would increase tyre prices, so asto earn sufficient profit for funding the required capacity. Most companieshave already taken a price hike of 10-12% in 1HFY2012. Hence, we expectMRF's net profit to witness an 22.3% CAGR over SY2011-13E.

Valuations attractive: The stock is currently trading at PE of 6.0x its SY2013E,at a 21% discount to its five-year median of 8x. Hence, we maintain ourBuy recommendation on the stock with a target price of `̀̀̀̀9,647, basedon a target PE of 8x for SY2013E.

Mid-Cap CMP/TP/Upside: `7,192 / `9,647 / 34%MRF


PROMOTERS 26.9

FII 2.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

MRF 8.8 11.0 58.4 11.4 25.6

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 24.3 30.7 24.5 21.2 19.2

PAT GROWTH* 405.2 (1.7) 16.1 38.4 21.4

OPM# 7.2 8.3 10.5 9.8 9.0


ANGEL ESTIMATES

PARTICULARS SY2012E SY2013E

PAT GROWTH (%) 20.6 24.1

ROE (%) 16.5 17.3

P/E 7.4 6.0

P/BV 1.1 1.0



RATING BUY

52 WEEK HIGH / LOW 7,950 / 5,332


LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 1,362 1,492 1,716 1,973

DEFFERED TAX LIABILITY (NET) (15) (15) (15) (15)



GROSS BLOCK 3,368 4,210 5,052 6,062


NET BLOCK 1,329 1,923 2,468 3,127



CURRENT ASSETS 2,102 2,899 3,336 3,705




TOTAL ASSETS 3,038 3,775 4,399 5,155

Y/E SEPT (`̀̀̀̀ CR) SY2010 SY2011 SY2012E SY2013E



% CHG 31.6 30.7 16.7 11.6


OPERATING PROFIT 817 805 963 1,174

(% OF NET SALES) 11.0 8.3 8.5 9.3


INTEREST 63 93 112 130



(% OF NET SALES) 6.6 4.8 4.9 5.5

PBT (REPORTED) 535 489 589 730

TAX 181 274 177 219

(% OF PBT) 36.6 59.1 31.8 31.6

EXTRAORDINARY INCOME - 404 - -

PAT (REPORTED) 354 619 412 511

LESS: MINORITY INTEREST (MI) - 1 - -



ADJ. PAT 348 342 412 511

% CHG 39.7 (1.7) 20.6 24.1


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 8.8 8.9 7.4 6.0

P/CEPS 5.0 5.2 4.3 3.5

P/BV 1.8 1.3 1.1 1.0

EV/SALES 0.6 0.4 0.4 0.4

EV/EBITDA 5.2 5.1 4.5 3.9


EPS (BASIC) 819.6 806.0 972.1 1205.9


CASH EPS 1,434.6 1,390.0 1,672.9 2,035.2

DPS 50.0 25.0 30.0 30.0

BOOK VALUE 3,987.5 5,421.0 6,363.1 7,539.0

RETURNS (%)

ROCE (PRE-TAX) 21.9 14.7 16.2 17.2


ROE 22.8 14.9 16.5 17.3

TURNOVER RATIOS (X)




Y/E SEPT SY2010 SY2011 SY2012E SY2013E

CASH FLOW STATEMENT




OTHERS 34 (34) (34) (38)




(INC.)/DEC. IN INVESTMENTS 84 8 - -

OTHERS (26) 25 34 38



INC./(DEC.) IN LOANS 690 130 224 257


OTHERS (47) 404 - -


INC./(DEC.) IN CASH (7) 277 (16) 29






Company BackgroundFounded in 1981, NIIT is a comprehensive education and training servicesprovider to individuals and enterprises. The company is currently present in40 countries and offers services in three business segments - individuallearning solution (ILS - 62% to revenue), school learning solutions (SLS -18% to revenue) and corporate learning solutions (CLS - 20% to revenue).NIIT's training solutions in IT, BPO, banking, executive management educationand communication and professional life skills enroll five mn learners every year.

Structural SnapshotGrowth opportunity: The Indian private education sector is expected toreport at a CAGR of 19% over FY2011-15E, with growth across all thesegments, majorly led by higher education and K-12. Also, the country iswitnessing a rise in income levels, increased demand for education andgrowth in private sector participation. All this offers NIIT the potential toreport average growth of 15-20% per year.

Competitive position: NIIT is a leading IT training company in India andhas tie-ups with many foreign institutes.

Nature of business: Corporate and individual segment impacted by macroeconomic growth trends; Medium entry barriers for new players.

Current Investment ArgumentsILS and CLS business to drive growth: The ILS and CLS businesses areemerging to be NIIT's growth drivers. We expect enrollment growth for ILSto be stronger in FY2012, with strong recruitment plans announced by IndianIT majors (including Infosys and TCS), thereby resulting in demand for vocationalcourses and gross hiring targets of 45,000 and 66,000 in FY2012, respectively,leading to a revenue CAGR of 13.8% over FY2011-13E. CLS, which washeavily impacted by the downturn, has rebounded in terms of growth andhas managed to bag a strong order book of US$77.8mn (62% executablein the next three months).

Focus to improve profitability: NIIT is strategically moving towards turningasset-light by targeting more annuity-based revenue. Management aims to doso by being selective in government SLS contracts, which are highly capital-intensive and have long debtor cycles (thus impacting returns), targeting moreprivate schools in the SLS business. Also, annuity contracts bagged in CLS(related to learning products and training solutions) are expected to acceleraterevenue growth and improve margins. With the realignment of its focus, managementexpects to improve the company's profitability, reduce debtor cycle and reducedebt by ~`250cr from the proceeds of the transaction of divestment of Element-K business (NIIT's U.S. subsidiary operating in the areas of online productsfor corporates and e-learning libraries) in FY2012 itself. Hence, we expectthe company to post a PAT CAGR of 19.3% over FY2011-13E.

Valuations attractive: We value NIIT on an SOTP basis, arriving at a targetEV/EBITDA of 3.5x on FY2013E consolidated EBITDA of `176cr. Werecommend a Buy rating on the stock with a target price of `̀̀̀̀55.

Mid-Cap CMP/TP/Upside: `43 / `55 / 29%NIIT

SHAREHOLDING PATTERN (%) (%)

PROMOTERS 34.0

FII 26.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

NIIT (10.9) (23.8) 22.2 (10.9) 2.3

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M. 1Y 3Y 5Y 10Y

SALES GROWTH* (16.8) 4.1 7.4 22.6 6.2

PAT GROWTH* 215.2 31.2 6.7 18.9 2.0

OPM# 10.0 12.8 12.1 11.9 12.2


ANGEL ESTIMATES


PAT GROWTH (%) (7.5) 36.8

ROE (%) 14.0 17.1

P/E 8.3 6.0

P/BV 1.2 1.0



RATING BUY



LIQUIDITY LOW


BALANCE SHEET



NET WORTH 504 557 609 681

TOTAL DEBT 405 366 278 257


TOTAL CAPITAL EMPLOYED 911 925 890 941

GROSS BLOCK 814 877 837 797


CAPITAL WIP 45 62 60 60




CASH AT BANK 62 53 223 354






TOTAL CAPITAL DEPLOYED 911 925 890 941


PROFIT & LOSS

NET SALES 1,199 1,248 1,184 1,084

% CHG 4.4 4.1 (5.2) (8.5)

OPERATING EXPENSES 1,043 1,089 1,023 907

EBITDA 157 159 161 176

% OF NET SALES 13.1 12.8 13.6 16.3


EBIT 82 74 79 102

% OF NET SALES 6.8 5.9 6.7 9.5

OTHER INCOME (33) (18) (22) (6)



% OF PBT 22.2 16.0 26.4 31.8

PAT 38 47 42 66

SHARE IN PROFIT OF ASSOCIATES 32 45 43 50

FINAL PAT 70 92 85 116

% CHG 0.6 31.2 (7.5) 36.8


KEY RATIOS

VALUATION RATIO (X)

P/E 10.0 7.6 8.3 6.0

P/BV 1.4 1.3 1.2 1.0

EV/SALES 0.8 0.7 0.6 0.4

EV/EBITDA 5.9 5.4 4.1 2.8



EPS 4.3 5.6 5.2 7.1

CASH EPS 8.8 10.8 10.1 11.6

BOOK VALUE 30.6 33.8 37.0 41.4

RETURN RATIOS (%)

ROCE (PRE-TAX) 9.0 8.0 8.9 10.9

ANGEL ROIC 12.1 11.4 15.7 25.2

ROE 13.9 16.5 14.0 17.1

TURNOVER RATIOS (X)





CASH FLOW STATEMENT



OTHER INCOME/PRIOR PERIOD AD 4 (18) (22) (6)

TAX 11 9 15 31

SHARE OF PROFIT FROM ASSOCIATES 32 45 43 50

CASH PROFITS 145 143 166 190

NET TRADE WORKING CAPITAL (118) 20 17 (14)


(INC)/DEC IN FIXED ASSETS (38) (91) 42 40

(INC)/DEC IN INVESTMENTS (21) (37) 64 (20)

CASHFLOW FROM INVESTING ACTV. (55) (129) 107 20

INC/(DEC) IN DEBT 56 (39) (87) (21)

INC/(DEC) IN EQUITY/PREMIUM (16) 17 0 -

DIVIDENDS 27 22 33 45

CASHFLOW FROM FINANCING ACTV. 15 (43) (120) (66)

CASH GENERATED/(UTILIZED) (13) (9) 171 130



Y/E MARCH (` ` ` ` ` CR) FY2010 FY2011 FY2012E FY2013E



Company BackgroundPage Industries is the exclusive licensee of Jockey International, Inc. (USA).The company manufactures and distributes the JOCKEY® brand of innerwearand leisurewear for men and women in India, Sri Lanka, Bangladesh andNepal. Promoters of Page Industries and Jockey International have beenassociated in a business relationship for more than five decades. Page Industries'promoter, the Genomal family, was the sole licensee of Jockey Internationalfor 44 years in Philippines. Page Industries has extended its licensing agreementwith Jockey International, Inc. until December 31, 2030; further, in this agreement,U.A.E. was added as a new geography for the company.

Structural SnapshotGrowth opportunity: The apparel industry is valued at over `1,50,000cr, ofwhich the innerwear market accounts for ̀ 10,750cr. Further, the Indian leisurewearmarket is estimated at ̀ 4,860cr, with men's leisurewear market size at ̀ 4,500crand that of women at `360cr. According to McKinsey & Co., Indian incomelevels are expected to almost triple by 2025 and create strong 583mn potentialbuyers of branded innerwear and leisure wear belonging to the middle class.Further, India's aggregate consumption will quadruple by 2025, as Indianswould spend an average of 5% of their income per year on apparel necessities.

Competitive position: JOCKEY® is one of the most trusted and well-respectedinnerwear brands in India, with strong brand presence and leadership position,penetrating 17% and 8.6% of the potential premium and super-premiuminnerwear and leisurewear segments, respectively. The company's advertisingand branding budget is a good ~6% of its net sales. In addition, Page Industriescommands a wide, pan-India distribution network, encompassing 16,000retail outlets in 1,100 cities and towns. At present, Page Industries is themarket leader with a 14.4% market penetration level in these segments.

Nature of business: Branded business.

Current Investment ArgumentsEntering new segments to fuel growth: Page Industries has tied up withSpeedo International, a swimwear brand, to manufacture, market and distributethe brand in India. Under the exclusive licensing agreement, the companyhas started manufacturing swimwear, water shorts, apparel, equipment andfootwear in India. This segment is expected to contribute to the company'sgrowth going ahead.

Valuations Stretched: The stock is currently trading at rich valuations of30.5x and 25.1x its FY2012E and FY2013E EPS, respectively. We maintainour Neutral view on the stock.

Mid-Cap CMP/TP/Upside: `2505 / - / -Page Industries


PROMOTERS 59.7

FII 14.9

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

PAGE INDUSTRIES 1.3 61.6 100.9 - -

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (2.1) 44.8 36.7 37.2 33.0

PAT GROWTH* (27.1) 47.5 34.9 38.7 47.6

OPM# 14.1 18.4 17.0 18.0 17.6


ANGEL ESTIMATES


PAT GROWTH (%) 56.4 21.4

ROE (%) 65.8 64.2

P/E 30.5 25.1

P/BV 18.1 14.5



RATING NEUTRAL

52 WEEK HIGH / LOW 2,772 / 1,243


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS








GROSS BLOCK 101 126 168 188


NET BLOCK 78 93 120 124


GOODWILL - - - -

INVESTMENTS 3 3 3 3




TOTAL ASSETS 156 241 249 252


PROFIT & LOSS


% CHG 33.3 44.8 46.6 29.7


EBITDA 66 90 152 183

(% OF NET SALES) 19.4 18.4 21.1 19.6




(% OF PBT) 8.3 13.8 4.4 3.6


% CHG 25.0 49.2 56.3 21.4


PBT (REPORTED) 59 88 137 166

TAX 19 29 45 55

(% OF PBT) 32.3 33.3 33.0 33.0




ADJ. PAT 40 59 92 111

% CHG 25.4 47.5 56.4 21.4


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 70.4 47.7 30.5 25.1

P/BV 28.2 22.6 18.1 14.5

EV/SALES 8.4 5.9 4.0 3.0

EV/EBITDA 43.3 32.2 19.0 15.5


EPS (BASIC) 35.6 52.5 82.1 99.7


CASH EPS 43.6 61.3 94.6 113.9

DPS 21.0 30.3 54.6 65.9

BOOK VALUE 88.8 111.0 138.4 172.2

RETURNS (%)

ROCE (PRE-TAX) 39.6 40.6 56.3 66.9


ROE 42.7 52.6 65.8 64.2

TURNOVER RATIOS (X)





CASH FLOW STATEMENT

PRE TAX CASH FROM OPERATIONS 63 92 146 176


NET CASH BEFORE TAX 68 97 152 182

TAX 18 29 45 55

CASH PROFITS 49 68 107 127

NET TRADE WORKING CAPITAL (15) (95) 13 1

OPERATING ACTIVITIES 34 (26) 119 128



(INC.)/DEC. IN LOANS/ADVANCES (6) 27 - -

INVESTING ACTIVITIES (28) (1) (35) (20)

INC./(DEC.) IN DEBT 18 60 (23) (35)

DIVIDENDS (31) (34) (61) (74)

FINANCING ACTIVITIES (14) 26 (84) (109)

CASH GENERATED/(UTILISED) (7) (0) 0 (0)






Company BackgroundRelaxo Footwear (Relaxo) is a key player in the retail footwear industry. Thecompany has a strong foothold in the slippers market and a strong distributionchannel of 350 distributors and 30,000 retailers. The company currentlyhas 127 company-owned retail outlets across India, with a concentratedpresence in New Delhi, Punjab, Haryana, Uttar Pradesh and Gujarat. Withincreasing number of company-owned outlets and substantial increase inadvertisement expense for the recognition of its high-value brands (Fliteand Sparx), Relaxo has been successful in changing consumers' perceptiontowards the company from being a Hawaii slipper company to a brand providinga variety of choices to consumers, which include lightweight slippers, sportsshoes, canvas and sandals.

Structural SnapshotGrowth opportunity: Assuming that Relaxo's target customers are low-incomegroup people, including labor and urban BPL population, the company hasa potential target customer base of ~52cr. However, in FY2011, Relaxosold only 8.7cr pairs of footwear, which provides the company a huge scopefor further penetration. Also, Relaxo is over concentrated in Northern India,where it sells almost 65% of its products, which gives the company a significantgrowth potential in terms of geographical expansion.

Competitive position: Relaxo, with a major market share in Hawaii slippers,is positioned next to Bata, the largest listed player in the footwear segmentin terms of sales.

Nature of business: Both into retail and wholesale business.

Current Investment ArgumentsTop line expected to grow at an 18% CAGR: We expect Relaxo's top lineto register an 18% CAGR over FY2011-13E to `950cr on the back of a12% increase in realization and changing revenue mix (high-value brandsSparx and Flite contributing 60% to the company's revenue). We also expectthis to lead to an improvement in the company's operating margin by 225bpfrom 9.6% in FY2011 to 11.9% in FY2013E.

Flite PU-Fashion to add ~`̀̀̀̀50cr to the top line by FY2013E: Relaxo launchedFlite Pu-Fashion in June 2011, a product for fashion-conscious consumerswith special features such as longevity, skid-resistance and lightweight. Thecompany has also set up a new plant at Bahadurgarh, Haryana, for the productionof this product. Flite Pu-Fashion is expected to add ~`50cr to the company'stop line by FY2013E.

Valuations attractive: The stock is currently trading at attractive valuationsof 6x FY2013E earnings, which is at a 30% discount to its three-year historicalmedian of 8.6x. We recommend Buy on Relaxo with a target PE of 9x forFY2013E and a target price of `̀̀̀̀420.

Mid-CapTOPPICK

CMP/TP/Upside: `281 / `420 / 50%Relaxo Footwear


PROMOTERS 75.0

FII 1.7

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

RELAXO (39.2) (18.0) 102.1 45.6 32.9

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 10.1 23.9 31.0 27.9 17.2

PAT GROWTH* (52.4) (28.8) 35.4 52.6 14.1

OPM# 8.4 9.6 11.1 10.8 9.4


ANGEL ESTIMATES


PAT GROWTH (%) 25.0 66.6

ROE (%) 22.4 29.1

P/E 10.0 6.0

P/BV 2.0 1.5



RATING BUY

52 WEEK HIGH / LOW 474 / 215


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 147 186 197 198

DEFFERED TAX LIABILITY 22 27 27 27



GROSS BLOCK 286 353 399 451


NET BLOCK 222 268 292 318


INVESTMENTS 0 0 0 0





TOTAL ASSETS 279 347 390 444




% CHG 35.9 23.9 18.8 16.7



(% OF NET SALES) 13.8 9.6 9.8 11.9





(% OF NET SALES) 0.7 0.9 0.8 0.7


TAX 16 9 12 20

(% OF PBT) 30.0 24.7 26.8 26.8






ADJ. PAT 38 27 34 56

% CHG 160.2 (28.8) 25.0 66.6


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 8.9 12.5 10.0 6.0

P/CEPS 6.3 7.0 6.0 4.1

P/BV 3.1 2.5 2.0 1.5

EV/SALES 0.9 0.8 0.7 0.6

EV/EBITDA 6.3 7.8 6.7 4.7


EPS (BASIC) 31.4 22.4 28.0 46.6


CASH EPS 44.3 39.9 46.8 67.9

DPS 1.5 1.5 1.9 2.3

BOOK VALUE 91.6 112.2 138.3 182.6

RETURNS %

ROCE (PRE-TAX) 21.8 13.0 14.6 19.7


ROE 41.0 22.0 22.4 29.1

TURNOVER RATIOS (X)





CASH FLOW









OTHERS (5) (1) 7 7





OTHERS (26) (32) (18) (18)


INC./(DEC.) IN CASH (2) 1 1 1






Company BackgroundSintex is a dominant player in the plastics business in India. The companyhas moved on to providing technology-intensive products and complete businesssolutions based on plastics. The company is currently engaged in a varietyof plastic-related businesses, such as prefabricated structures and monolithicconstruction (contributes ~43% to FY2011 revenue) and custom moldingfor the automotive, electrical equipment and medical imaging industries(contributes ~47% to FY2011revenue). In textiles, the company's productsare skewed towards the high-end and design-intensive segment of the market,which gives it high operating margins and contribute ~10% to the revenue.The company has 36 manufacturing locations, of which 20 are outside Indiathrough inorganic expansion (U.S., Europe and North Africa).

Structural SnapshotGrowth opportunity: Increasing government spending on rural India, education,health, sanitation, army barracks, cold chain solution and work shelter willspur demand for the prefab segment, which has an estimated market opportunityof ̀ 10,000cr. Higher spending on mass housing (as there would be an estimatedshortage of more than 50mn houses) and slum rehabilitation, among others,will be the major growth drivers for the monolithic segment going ahead.The custom moulding industry also offers a market opportunity of over ̀ 1,500crglobally. Further, the global textile market is worth ̀ 20,000cr, and it is growingat ~5% annually. All this presents a huge growth potential for the company.

Competitive position: Sintex has developed a strong brand presence andis the market leader in the prefab segment. The company enjoys the flexibilityto pass on any increase in raw-material prices due to the pass-through clausein its contracts with clients.

Nature of business: Capital-intensive business and dependent on governmentorders.

Current Investment ArgumentsFCCB issue overdone: Sintex's stock has taken a harsh beating on thebourses due to sharp currency fluctuation, which can result in higher outflowwhen the FCCBs mature in March 2013; in our view, this concern is a bitoverdone. The company is in quite a comfortable position when it comes toFCCB repayment in March 2013. Of the US$278mn due, the company hasUS$170mn of USD-denominated cash deposits and the remaining US$110mnis most likely be refinanced through a USD-denominated ECB.

Future growth drivers: Sintex has a strong order book in excess of ̀ 3,000crin its building material segment providing reasonable revenue visibility inthe coming years. We believe the prefabs/monolithic segment continuesto benefit, as social spending on housing/education is unlikely to be cutsubstantially. Revenue is also distributed across states/clients such as army/police/postal services.

Valuations cheap: With the recent sharp correction, the stock is available atattractive valuation on just 4.7x FY2013E earnings, post factoring in most ofthe negatives in our estimates, against its five-year average of 11.7x one-yearforward earnings. We recommend a Buy rating on the stock with a targetprice of `̀̀̀̀126, valuing the stock at 8x FY2013E earnings, which is at adiscount to its historical average.

Mid-Cap CMP/TP/Upside: `74 / `126 / 70%Sintex


PROMOTERS 35.0

FII 30.6

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SINTEX (38.9) (51.7) 1.4 (6.5) 40.9

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (2.1) 34.8 24.6 39.3 31.7

PAT GROWTH* (27.1) 35.9 25.9 38.0 34.3

OPM# 14.1 18.0 17.0 18.0 17.8


ANGEL ESTIMATES


PAT GROWTH (%) (19.8) 16.5

ROE (%) 12.6 14.7

P/E 6.2 4.7

P/BV 1.9 1.7


BUY / HOLD / SELL 17 / 4 / 4

RATING BUY



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS




MINORITY INTEREST 19 - - -

TOTAL LOANS 2,630 2,774 2,774 2,774




GROSS BLOCK 2,558 3,328 3,678 3,978


NET BLOCK 1,783 2,412 2,569 2,659


GOODWILL 267 219 219 219

INVESTMENTS - 378 378 378

CURRENT ASSETS 3,345 3,301 3,486 3,900



TOTAL ASSETS 4,765 5,381 5,683 6,092


PROFIT & LOSS


% CHG 5.9% 34.8% 5.1% 11.0%


EBITDA 538 807 758 860

(% OF NET SALES) 16.2% 18.0% 16.1% 16.5%

DEPRECIATION& AMORTISATION 144.5 149.1 192.6 210.5



(% OF PBT) 27.4% 11.0% 13.1% 10.1%


EXTRAORDINARY EXPENSE/(INC.) - - (46.1) -

PBT (REPORTED) 408 609 443 569

TAX 71 151 121 141

(% OF PBT) 17.4 24.8 27.4 24.8

PAT (REPORTED) 337 458 321 428

LESS: MINORITY INTEREST (MI) (2) (0) - -

PRIOR PERIOD ITEMS (6) 2 - -


ADJ. PAT 337 458 367 428

% CHG 2.3 35.9 (19.8) 16.5


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 6.1 4.4 6.2 4.7

P/CEPS 4.2 3.3 3.9 3.1

P/BV 2.9 2.2 1.9 1.7

EV/SALES 1.9 1.4 1.3 1.2

EV/EBITDA 11.7 7.8 8.3 7.1



CASH EPS 17.5 22.5 19.0 23.6

DPS 0.6 0.6 0.6 0.6

BOOK VALUE 62.0 80.5 91.7 106.7

RETURNS (%)

ROCE (PRE-TAX) 12.5 16.5 14.2 15.1

ANGEL ROIC 17.1 17.8 13.7 14.9

ROE 18.0 21.2 12.6 14.7

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




ADD/LESS: OTHERS (6) - 57 -





INTEREST/DIVIDEND 27 - - -

OTHER ADJUSTMENTS (11) - - -



INC./(DEC.) IN LOANS 465 143 - -


OTHERS 18 103 (103) -


INC./(DEC.) IN CASH 33 (190) (12) 195

OPENING CASH BALANCES 1,144 1,177 986 974

CLOSING CASH BALANCES 1,177 986 974 1,169




Company BackgroundSiyaram Silk Mills (SSM) is one of the leading textile manufacturers in India.The company enjoys a strong brand presence across the country, with brandssuch as Siyaram, Mistair, J Hampstead and Oxemberg in its kitty. SSM hasbuilt a strong brand presence in the country through continuous advertisementand brand-building efforts over the past 30 years. The company has createda niche for itself in a highly competitive industry. SSM enjoys a dominantposition in its fabric segment under the Siyaram brand, which constitutesnearly 83% of its revenue.

Structural SnapshotGrowth opportunity: SSM generates 75% of its revenue through Tier-IIand III cities. Thus, the company is expected to greatly benefit from thegrowing middle-class population in the country, especially in small towns,and the shift in preference towards branded products. The company hasalso diversified into readymade garments, which are slowly gaining popularityup in Tier-I I and III cities.

Competitive position: SSM commands a premium over other players dueto its strong brand presence and wide distribution network.

Nature of business: Branded business, relatively more capital-intensive thanother branded companies due to in-house manufacturing operations.

Current Investment ArgumentsHigher utilization and capacity expansion to drive growth: SSM's yarnsegment achieved 57% capacity utilization in FY2011 compared to 41.9%in FY2009, which is further expected to improve to 80% in FY2012E. In thefabric segment, the company plans to add 286 looms (479 current looms)in a phased manner over FY2011-13. SSM has also added around 400machines in its readymade garment (RMG) segment. Consequently, SSMis expected to report a 15.7% CAGR in its revenue over FY2011-13.

Wide distribution network across India: SSM has one the largest distributionnetworks in Tier-II and III cities across the country. The company has a strongnetwork of over 1,500 dealers and 500 agents supplying to more than 40,000outlets across India. This enables the company to easily launch new productswith a high success ratio and low marketing cost, giving it an edge overcompetitors. The company spends significantly on advertising (`35cr in FY2011).SSM currently has Mahendra Singh Dhoni as its brand ambassador andhas signed Hrithik Roshan as the ambassador for its new campaigns.

Valuations attractive: The stock is currently trading at 3.8x FY2013E earnings(as against its historical median of 6x one-year forward EPS). We maintainour Buy recommendation on the stock with a target price of ̀̀̀̀̀ 426, valuingthe stock at 6x FY2013E earnings.



PROMOTERS 67.1

FII 0.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SIYARAM (3.3) (10.3) 73.6 3.9 28.3

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 13.5 30.2 20.9 16.9 12.1

PAT GROWTH* 16.9 71.2 82.4 29.9 14.8

OPM# 13.4 12.7 10.4 9.3 8.5


ANGEL ESTIMATES



ROE (%) 24.9 22.5

P/E 4.1 3.8

P/BV 0.9 0.8



RATING BUY

52 WEEK HIGH / LOW 464 / 224


LIQUIDITY Low

TOPPICKSiyaram Silk Mills


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 190 286 328 300




GROSS BLOCK 337 387 436 526


NET BLOCK 200 231 256 316






TOTAL ASSETS 378 522 613 639


PROFIT & LOSS

TOTAL OPERATING INCOME 660 859 982 1,150

% CHG 24.4 30.2 14.4 17.0

TOTAL EXPENDITURE 589 750 858 1,011

EBITDA 70 109 124 139

(% OF NET SALES) 10.6 12.7 12.7 12.1



ADJ.OTHER INCOME 11 10 10 11

(% OF PBT) 22.3 11.9 11.6 11.1




TAX 15 25 28 31

(% OF PBT) 31.3 30.5 31.5 31.5





ADJ. PAT 34 58 61 66

% CHG 194.2 71.2 5.3 9.5


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 7.4 4.3 4.1 3.8

P/CEPS 4.6 3.2 3.0 2.6

P/BV 1.5 1.1 0.9 0.8

EV/SALES 0.6 0.6 0.6 0.5

EV/EBITDA 5.8 4.7 4.6 3.9


EPS (BASIC) 35.9 61.5 64.8 70.9


CASH EPS 57.5 83.8 90.4 102.4

DPS 6 7 11 12

BOOK VALUE 181.2 234.6 286.6 343.9

RETURNS (%)

ROCE (PRE-TAX) 13.0 19.5 17.7 17.5


ROE 21.6 29.6 24.9 22.5

TURNOVER RATIOS (X)





CASH FLOW STATEMENT








(INC.)/DEC. IN INVESTMENTS (28) 10 15 -

(INC.)/DEC. IN LOANS AND ADVANCES (8) (29) - -



INC./(DEC.) IN LOANS (43) 96 42 (28)


OTHERS (2) (3) - -


INC./(DEC.) IN CASH 0.8 (0.1) (0.1) 0.2

OPENING CASH BALANCES 2.1 2.9 2.9 2.8

CLOSING CASH BALANCES 2.9 2.9 2.8 3.0




Company BackgroundSpiceJet is India's second largest low-cost carrier (LCC), after Indigo, andthe fourth largest airline overall with a market share of 15.5% (as of November2011). The company is the only listed airline to have reported profit in FY2010-11. The company, earlier a domestic airline, has recently diversified intointernational routes; the airline is flying to Colombo and Nepal and is waitingfor clearance to fly to nearby Asian countries. Despite a weak macroeconomicenvironment, the company has been expanding its fleet size.

Structural SnapshotGrowth opportunity: Long-term demand for air travel is expected to remainhigh due to the low penetration of air traffic in India. It is estimated that only43 travelers per 1,000 travel by air, which is 12 times lower when comparedto the U.S. (520/1,000), and nearly five times lower than China (215/1,000).The Indian aviation sector as a whole is going to experience enormous growthover the next 15-20 years. Airbus expects the sector to register a 10%CAGR over the next 20 years. However, the sector is witnessing low loadfactor due to excess capacity.

Competitive position: The aviation industry is a highly competitive industryand SpiceJet does not hold any sustainable competitive advantage. However,when sector load factors are low, being a 100% LCC enables higher loadfactor than full-cost carriers (FCCs); and opting for fleet addition throughoperating lease leads to a relatively healthier, flexible balance sheet for SpiceJet

Nature of business: Cyclical; Prone to over capacity due to easy availabilityof finance; Profitability impacted by higher fuel prices.

Current Investment ArgumentsStrong demand and capacity expansion to boost top line: Demand forthe aviation sector is expected to witness a 15% CAGR over FY2011-13.In the 11 months of CY2011, demand had grown by 17.6% yoy. SpiceJetcurrently has a fleet of 31 Boeing aircraft and seven Bombardier aircraft. ByFY2013-end, SpiceJet would have expanded its fleet size to 37 Boeingsand 15 Bombardiers. We expect net sales to post a 36.8% CAGR to ̀ 5,489crover FY2011-13.

High fuel cost and competition to dent margins: Due to the significantincrease in fuel cost and high competition, SpiceJet was unable to fullypass on its cost to the customer. This resulted in a significant decline in thecompany's margins, because of which the company has been reporting lossesover the past three quarters. We expect SpiceJet to report loss inFY2012 as well as in FY2013 due to high fuel cost and impractical ticketpricing by competitors.

Valuations in the near term: We value SpiceJet on P/E basis; and sincethe company is not expected to report profit, we remain Neutral on thestock. The key risk to our call is that any substantial fleet reduction by thelarger, deeply loss-making airlines could improve the operating environment forthe sector.

Mid-Cap CMP/TP/Upside: `21 / - / -SpiceJet


PROMOTERS 38.6

FII 6.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

SPICEJET (0.2) (67.8) 14.5 (17.7) -

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 22.0 34.5 31.3 56.7 -

PAT GROWTH* (2,4746) 64.7 (191.2) (225.1) -

OPM# (30.2) 3.9 (6.6) (12.4) -

ROE# - - - - -NOTE: ABOVE 1 YEAR- *ON CAGR BASIS, # ON AVERAGE BASIS

ANGEL ESTIMATES


PAT GROWTH (%) - -

ROE (%) - -

P/E - -

P/BV 5.8 22.0



RATING NEUTRAL



LIQUIDITY MEDIUM


BALANCE SHEET

SOURCES OF FUNDS


RESERVES& SURPLUS (584) (84) (281) (399)

SHAREHOLDERS FUNDS (342) 321 160 42

TOTAL LOANS 438 86 786 1,036



GROSS BLOCK 263 292 1,392 1,792


NET BLOCK 227 247 1,317 1,659


INVESTMENTS - - - -



NET CURRENT ASSETS (296) (291) (371) (581)

TOTAL ASSETS 96 407 946 1,078


PROFIT & LOSS

TOTAL OPERATING INCOME 2,181.1 2,934.4 4,164.6 5,489.1

% CHG 29.1 34.5 41.9 31.8


EBITDA 26 116 (256) (28)

(% OF NET SALES) 1.2 3.9 (6.1) (0.5)




(% OF PBT) 83 20 (13) (23)

RECURRING PBT 73 128 (292) (118)


PBT (REPORTED) 68 126 (292) (118)

TAX 6 25 - -

(% OF PBT) 9.4 19.6 - -

PAT (REPORTED) 61 101 (292) (118)



PAT AFTER MI (REPORTED) 61 101 (292) (118)

ADJ. PAT 61 101 (292) (118)

% CHG (117.4) 64.7 (388.7) (59.7)


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 14.0 8.5 (3.2) (7.9)

P/CEPS 7.4 7.8 (3.6) (15.6)

P/BV (1.5) 2.7 5.8 22.0

EV/SALES 0.2 0.3 0.4 0.3

EV/EBITDA 19.1 6.5 (6.0) (64.5)

EV/EBITDAR 1.2 1.4 5.0 2.8


EPS (BASIC) 2.5 2.5 (6.6) (2.7)

EPS (FULLY DILUTED) 1.5 2.5 (6.6) (2.7)

CASH EPS 2.9 2.7 (5.9) (1.4)

BOOK VALUE (14.1) 7.9 3.6 1.0

TURNOVER RATIOS (X)




WORKING CAPITAL CYCLE (104) (77) (46) (43)


CASH FLOW STATEMENT

PROFIT BEFORE TAX 73 128 (292) (118)


CHANGE IN WORKING CAPITAL 178 (52) 97 246

EXPENSES (DEFFERED)/WRITTEN OFF (32) (8) - -

DIRECT TAXES PAID 6 25 - -



(INC.)/ DEC. IN LOANS AND ADVANCES 42 (69) (34) (68)



INC./(DEC.) IN LOANS - 54 700 250

OTHERS 19 (154) (18) (55)


INC./(DEC.) IN CASH 143 (258) (5) (29)






Company BackgroundTAJGVK is a JV between Indian Hotels Co. Ltd. (IHCL) andHyderabad-based GVK Group. The company operates in Hyderabad withthree properties - Taj Krishna with 260 rooms, Taj Deccan with 151 roomsand Taj Banjara with 122 rooms. The company also operates Taj Chandigarhwith 149 rooms and Taj Mount Road in Chennai with 215 rooms. The companyis expected to soon commence operations of its new 189-room property inBegumpet, Hyderabad, which will take its owned rooms to 1,086. The companywill also start a new 275-room five-star deluxe hotel in Santacruz, near Terminal1C of the Mumbai International Airport, under the Taj brand and will invest~`110cr in the hotel project. The hotel project is expected to be commerciallyoperational by mid-2014.

Structural SnapshotGrowth opportunity: India is the second fastest growing economy in theworld. As a result, the country is witnessing increased business activities,thus leading to more number of business travelers, both domestic and international.In addition to domestic business travelers, the number of domestic leisuretravelers is also increasing because of the overall increase in income levelsin India. Over 2000-10, average annual growth in international tourism stoodat 3.4%, increasing from 674mn in 2000 to 940mn in 2010, with emergingmarkets (5.6%) strongly outpacing advanced economies (1.8%).Over 2011-21, India is expected to register 8.8% annual growth in traveland tourism's (WTTC-Travel & Tourism 2011).

Competitive position: TAJGVK has a strong brand presence. The companyhas a strong customer base and has a leadership position in Hyderabad.

Nature of business: Cyclical and capital-intensive business; Low entry barriersfor new players.

Current Investment ArgumentsStrengthening its foothold in the Hyderabad market: TajGVK is the marketleader in Hyderabad, where it has a share of nearly 30% in premium-segmentrooms. The company is coming up with a 189-room property in Begumpetto strengthen its foothold further and to tap mid-market room demand. Thecompany also plans to add service apartments and retail space in its existingTaj Krishna property. We believe TajGVK would emerge as a prime beneficiaryof the growth in demand in Hyderabad after the expansion.

Asset-light strategy to keep balance sheet healthy: TajGVK has built itsBegumpet property using an asset-light strategy. This would require a lowercapital outlay as compared to a greenfield expansion, and we expect thecompany's debt-equity ratio to be at a comfortable level of 0.2x in FY2013E,which provides TajGVK adequate room to plan further expansions, withouthampering its balance sheet quality.

Valuations attractive: The stock is currently trading at attractive valuationsof 9.6x and 7.6x its FY2012E and FY2013E EPS, respectively. We havevalued the stock at 12x its FY2013E earnings. We maintain our Buy viewon the stock with a revised target price of `̀̀̀̀121.

Mid-Cap CMP/TP/Upside: `76 / `121 / 59%Taj GVK


PROMOTERS 75.0

FII 2.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TAJ GVK (13.6) (36.4) 17.0 (19.6) 19.9

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (1.8) 13.6 0.2 6.5 17.3

PAT GROWTH* (42.0) 19.5 (14.9) (1.3) 25.1

OPM# 32.1 37.1 39.0 42.2 35.0


ANGEL ESTIMATES


PAT GROWTH (%) 14.7 27.2

ROE (%) 14.6 16.4

P/E 9.6 7.6

P/BV 1.3 1.2



RATING BUY



LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 125 141 131 81




GROSS BLOCK 483 492 667 707


NET BLOCK 375 364 514 525


INVESTMENTS 0 0 0 0



NET CURRENT ASSETS (27) (8) (25) (35)


TOTAL ASSETS 434 482 510 512


PROFIT & LOSS


% CHG (3.9) 13.6 19.6 16.0


EBITDA 86 96 110 131

(% OF NET SALES) 37.6 37.1 35.5 36.3




(% OF PBT) 2 2 2 1


% CHG (32.8) 19.7 14.6 27.2

EXTRAORDINARY INCOME/(EXP.) (0) - - -


TAX 19 22 26 33

(% OF PBT) 34.0 34.1 34.0 34.0


ADJ. PAT 36 43 50 63

% CHG (31.3) 19.5 14.7 27.2


KEY RATIOS

VALUATION RATIOS

P/E (ON FDEPS) 13.2 11.1 9.6 7.6

P/CEPS 8.6 7.5 6.5 5.2

P/BV 1.6 1.5 1.3 1.2

EV/ROOM (`̀̀̀̀ CR.) 0.7 0.7 0.6 0.5

EV/SALES 2.6 2.4 1.9 1.5

EV/EBITDA 7.0 6.4 5.5 4.3



CASH EPS 8.9 10.2 11.8 14.7

DPS 2.0 1.0 1.6 1.6

BOOK VALUE 46.7 51.3 57.4 65.7

RETURNS (%)

ROCE (PRE-TAX) 15.4 16.5 17.3 19.9


ROE 12.9 14.1 14.6 16.4

TURNOVER RATIOS (X)



PAYABLES (DAYS) 152 131 121 133


CASH FLOW STATEMENT



CHANGE IN WORKING CAPITAL 7 (12) 21 8



(INC)./ DEC IN FIXED ASSETS (36) (49) (70) (40)

(INC)./ DEC IN INVESTMENTS (0) - - -

(INC)/ DEC IN LOANS AND ADVANCES (2) (5) (2) -



INC./(DEC.) IN LOANS (14) 16 (10) (50)


OTHERS 2 (5) (1) (1)


INC./(DEC.) IN CASH 1 2 1 (2)






Company BackgroundTata Sponge Iron (TSIL) is an associate company of Tata Steel, which holdsa 39.7% stake in the company. TSIL is a leading manufacturer of spongeiron, which is used as a raw material in steel manufacturing through the EAFroute. The company has an installed capacity of 3,90,000 TPA and a 26MWcaptive power plant based on waste heat recovery from its kilns. The companyis trying to get into coal mining through its 45% stake in Talcher coal blockin Orissa, with estimated reserves of 120mn tonnes.

Structural SnapshotGrowth opportunity: Sponge iron is used as a substitute of scrap in themanufacturing of crude steel by EAF method, which is used in 60% of crudesteel production. Increasing scrap prices and declining supply have led tohigher demand for sponge iron. In addition, the company is in the processof backward integration into coal mining and power generation. Once miningactivities at Talcher block begin, the company's OPM will gradually improveas coal constitutes ~55% of its raw-material cost. TSIL also plans to expandits power-generation capacity to 51MW over the next two to three years.

Competitive position: TSIL is better placed in the industry owing to healthyrelations with its customers. Unlike TSIL, most major sponge iron manufacturersare forward integrated, as they are also involved in the manufacture of steel,thereby reducing competition for TSIL.

Nature of business: Cyclical; Low entry barriers.

Current Investment ArgumentsAssured supply of iron ore from Tata Steel: TSIL has a long-term supplyagreement with its associate company Tata Steel, for the assured supply ofiron ore, which insulates it from the price volatility in the spot market.

Approval on coal block - A trigger: TSIL has deposited money for the firstphase of land acquisition with the Orissa government and has receivedenvironmental clearance for the block (Talcher). However, forest clearancefor the block is currently pending. Progress on the same could be a potentialtrigger for the stock.

Attractive valuations: TSIL is a debt-free company with cash reserves of`188cr and RoIC of 57.6% for FY2011. We expect the company's revenueto witness a 16% CAGR over FY2011-13E, with cash reserves of `221crand RoIC of 44% for FY2013E. The stock is currently trading at attractivevaluations with P/B of 0.6x for FY2013E, which is at a ~28% discount to itsfive-year median of 0.9x. Hence, we maintain our Buy recommendationon the stock with a target price of `̀̀̀̀382, based on target P/B of 0.9x forFY2013E.



PROMOTERS 43.7

FII 6.8

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TSIL (16.1) (27.9) 23.2 17.6 30.1

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* (1.2) 30.0 14.1 28.5 19.6

PAT GROWTH* 108.7 19.9 3.1 35.6 28.1

OPM# 17.2 22.2 25.3 25.0 25.2


ANGEL ESTIMATES


PAT GROWTH (%) (13.6) 5.1

ROE (%) 16.1 15.0

P/E 4.5 4.2

P/BV 0.7 0.6



RATING BUY

52 WEEK HIGH / LOW 379 / 233


LIQUIDITY LOW

TOPPICKTata Sponge Iron


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 0 - 20 14




GROSS BLOCK 359 360 396 435


NET BLOCK 206 189 204 222







TOTAL ASSETS 466 546 632 701




% CHG (14.7) 30.0 2.6 14.6



(% OF NET SALES) 23.8 22.2 18.7 17.1


INTEREST 0 - 0 0



(% OF NET SALES) 4.2 2.8 3.0 3.0

PBT (REPORTED) 126 150 130 137

TAX 42 49 42 45

(% OF PBT) 33.0 32.6 32.6 33.0






ADJ. PAT 85 101 88 92

% CHG (30.0) 19.9 (13.6) 5.1


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 4.6 3.9 4.5 4.2

P/CEPS 3.8 3.3 3.6 3.4

P/BV 0.9 0.8 0.7 0.6

EV/SALES 0.6 0.2 0.2 0.2

EV/EBITDA 2.4 1.1 1.3 0.9


EPS (BASIC) 54.9 65.8 56.9 59.8


CASH EPS 67.5 77.8 70.3 73.9

DPS 8.0 9.3 9.0 10.0

BOOK VALUE 272.8 329.3 375.7 423.9

RETURNS (%)

ROCE (PRE-TAX) 24.0 25.7 18.4 16.9


ROE 22.0 21.9 16.1 15.0

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




OTHERS (15) (18) (26) (24)




(INC.)/DEC. IN INVESTMENTS - (34) (26) -

OTHERS 7 8 21 24



INC./(DEC.) IN LOANS 0 (0) 20 (6)


OTHERS (0) 2 - -


INC./(DEC.) IN CASH (21) 95 (5) 38






Company BackgroundTVS Srichakra (TVSSL), a part of the TVS Group, is a leading manufacturerof two and three-wheeler tyres in India with a market share of 25% (in FY2011).TVSSL manufactures a variety of tyres, including industrial pneumatic tyres,farm and implement tyres, skid steer tyres, multipurpose tyres and floatationtyres, for the export market, which constitutes 11% of its revenue. The companyhas increased its installed capacity of automotive tyres by 170% to 3.3crunits over FY2009-11 to meet the increasing demand for two and three-wheeler tyres. TVSSL earns 58% of its revenue from the OE segment, 30%from the replacement segment and the rest 11% from exports.

Structural SnapshotGrowth opportunity: The Indian two-wheeler industry is expected to growat a 13% CAGR over FY2011-13E, which is likely to drive volume at a 10%CAGR over FY2011-13E for TVSSL. In addition, the company is increasingits focus on the replacement and export segments, which are likely to driveits revenue. Also, TVSSL has increased its debt to `385cr in 1HFY2012 forthe expansion plan at the Madurai plant to increase its SKUs in order toincrease the number of segments it caters to.

Competitive position: The company is the second largest player with amarket share of 25% (in FY2011) in the two and three-wheeler tyre segments,next to MRF - who is the leader with a 28% market share.

Nature of business: Rate-sensitive sector; Dependent on the two and three-wheeler population growth.

Current Investment ArgumentsVolume growth to drive operating leverage and improve margins: Weexpect the company's volume to witness an 10% CAGR over 2011-13E,led by ramp-up in capacity utilization from 48% in FY2011 to 58% in FY2013E.The leverage benefits, along with expected softening of rubber prices goingforward, will lead to 99bp expansion in operating margin to 9.3% in FY2013Efrom 8.4% in FY2011.

Increase in promoters' stake - A positive for the company: TVSSL's promotershave increased their stake from 39.5% in September 2008 to 44.7% inDecember 2012. This is a positive signal for investors, as it demonstratesthe confidence of the promoters in the company's future growth outlook.

Valuations attractive: The stock is trading at attractive valuations of 4.0xFY2013E earnings, which is at a 24% discount to its five-year historicalmedian of 5.3x. We recommend Buy on TVSSL with a target PE of 6x forFY2013E and a target price of `̀̀̀̀478.

Mid-Cap CMP/TP/Upside: `317 / `478 / 51%TVS Srichakra


PROMOTERS 44.7

FII 0.1

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

TVSSL (19.2) 17.0 76.5 20.4 25.6

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 31.3 54.9 33.3 29.9 22.4

PAT GROWTH* 11.1 31.0 61.8 61.4 19.7

OPM# 9.3 8.4 18.1 23.1 7.6


ANGEL ESTIMATES


PAT GROWTH (%) 9.5 42.4

ROE (%) 32.8 35.3

P/E 5.7 4.0

P/BV 1.7 1.2



RATING BUY

52 WEEK HIGH / LOW 400 / 226


LIQUIDITY LOW



BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS 174 256 388 376

DEFFERED TAX LIABILITY 8 10 10 10



GROSS BLOCK 192 250 300 330


NET BLOCK 112 155 182 185


INVESTMENTS 3 3 3 3





TOTAL ASSETS 268 380 545 585




% CHG 21.6 54.9 31.2 13.2



(% OF NET SALES) 9.3 8.4 8.7 9.3





(% OF NET SALES) 0.8 1.1 0.9 1.0


TAX 14 18 19 27

(% OF PBT) 31.2 31.5 31.0 31.0






ADJ. PAT 30 39 43 61

% CHG 233.0 31.0 9.5 42.4


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 8.1 6.2 5.7 4.0

P/CEPS 5.8 4.4 3.7 2.8

P/BV 2.8 2.1 1.7 1.2

EV/SALES 0.6 0.5 0.4 0.4

EV/EBITDA 6.2 5.4 5.0 4.0


EPS (BASIC) 39.0 51.1 55.9 79.7


CASH EPS 54.4 71.7 85.7 114.6

DPS 10.0 12.5 12.5 12.5

BOOK VALUE 112.0 148.6 192.1 259.2

RETURNS %

ROCE (PRE-TAX) 19.9 19.7 18.5 21.2


ROE 39.6 39.2 32.8 35.3

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




OTHERS 19 20 39 35




(INC.)/DEC. IN INVESTMENTS (2) (7) - 0

OTHERS (5) 7 13 16



INC./(DEC.) IN LOANS 17 81 132 (12)


OTHERS (20) (20) (51) (52)


INC./(DEC.) IN CASH (5) (3) 3 (1)





Company BackgroundVesuvius India Ltd. (VIL) is a subsidiary of Vesuvius Group Ltd., U.K.(a wholly owned subsidiary of Cookson Group Plc.), which holds a 55.6%stake in the company. VIL provides refractory products and services for theconstruction and maintenance of industrial equipment and processes.The company caters to different industries such as iron and steel plant;CFBC and other boilers; aluminium calciner, aluminium melting and holdingfurnaces; and DRI plants and iron pellet plants. The company is a supplierof refractories to large companies such as SAIL, JSW Steel, Rashtriya IspatNigam, ESSAR and L&T.

Structural SnapshotGrowth opportunity: The refractory market in India constituted ~3.5% ofthe global refractory sales in FY2010, of which ~28% was imported fromChina. About 75% of the refractories produced are used in the iron andsteel industry. Global refractory demand is expected to witness a 5.3% CAGR(as per Freedoniea Group, a market research firm) over CY2009-14E. Asper World Steel Association (WSA) estimates, global steel demand is expectedto increase by 5.4% yoy in CY2012E, while India's steel demand is estimatedto grow by 7.9% yoy in CY2012 due to increased infrastructure demand.

Competitive position: VIL is a market leader in the Indian refractory market,with a market share of 25%. The company is well placed in the industry dueto its strong customer base.

Nature of business: High entry barriers.

Current Investment ArgumentsReduction in imports to provide huge opportunities: About 30-35% ofthe total refractories are imported in India, which we believe would reducegoing forward due to capacity expansion plans of ~15% in CY2011 by majordomestic players. This would lead to substitution of imports by domesticplayers.

Capacity expansion to drive revenue growth by CY2012E: VIL doubledthe capacity of its Kolkata plant from 400 pieces per day to 800 pieces perday, which was expected to be operational by CY2011. The company's revenueis expected to post a ~17.1% CAGR over CY2010-12E, primarily driven byimport substitution and higher steel demand.

Valuations: We expect the stock to rerate on the back of net profit reportinga 13.5% CAGR over CY2010-12E. The stock is currently trading at PE of10.6x its CY2012E earnings, which is attractive for an MNC with no debtand RoIC of 42.4% for CY2010. Thus, we maintain our Buy view on thestock with a target price of `̀̀̀̀401, based on a target PE of 13x for CY2012E.

Mid-Cap CMP/TP/Upside: `325 / `̀̀̀̀401 / 23%Vesuvius India


Promoters (MNC) 55.6

FII 10.2

STOCK RETURNS

(%) 3M 1Y 3Y 5Y 10Y

Vesuvius (17.3) 6.3 55.5 4.0 23.9

BSE MIDCAP (8.5) (20.9) 23.0 (1.4) -



(%) 3M 1Y 3Y 5Y 10Y

SALES GROWTH* 21.7 21.7 11.3 15.0 20.0

PAT GROWTH* 12.2 29.3 14.4 11.1 14.9

OPM# 18.1 18.1 16.9 17.1 18.9


ANGEL ESTIMATES


PAT GROWTH (%) 9.4 17.8

RoE (%) 19.4 19.5

P/E 12.4 10.6

P/BV 2.2 1.9



RATING BUY

52 WEEK HIGH / LOW 449 / 270


LIQUIDITY LOW


BALANCE SHEET

SOURCES OF FUNDS




TOTAL LOANS - - - -




GROSS BLOCK 161 181 254 254


NET BLOCK 82 92 145 125


INVESTMENTS - - - -





TOTAL ASSETS 218 259 302 352




% CHG 2.5 21.7 19.2 15.0



(% OF NET SALES) 17.7 18.1 17.4 17.6


INTEREST 1 1 1 1



(% OF NET SALES) 1.5 2.0 1.8 1.5


TAX 19 26 27 32

(% OF PBT) 33.2 34.7 34.0 34.0



SHARE IN PROFITS OF ASSOCIATES - - - -



ADJ. PAT 38 49 53 63

% CHG 18.8 29.3 9.4 17.8


KEY RATIOS

VALUATION RATIO (X)

P/E (ON FDEPS) 17.6 13.6 12.4 10.6

P/CEPS 6.5 5.3 9.1 8.0

P/BV 3.1 2.6 2.2 1.9

EV/SALES 1.7 1.4 1.1 0.9

EV/EBITDA 9.5 7.6 6.5 4.9


EPS (BASIC) 18.5 23.9 26.2 30.8


CASH EPS 24.8 30.3 35.7 40.6

DPS 3.7 4.0 4.0 5.0

BOOK VALUE 105.1 124.6 145.8 170.3

RETURNS (%)

ROCE (PRE-TAX) 25.1 28.0 25.7 26.5


ROE 18.9 20.8 19.4 19.5

TURNOVER RATIOS (X)





CASH FLOW STATEMENT




OTHERS (10) (0) (9) (9)



(INC.)/DEC. IN FIXED ASSETS (37) (19) (73) 15

(INC.)/DEC. IN INVESTMENTS 6 9 9 9

OTHERS 8 (10) (0) (1)





OTHERS 5 1 - -







Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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