Вы находитесь на странице: 1из 32

IndiaEquityResearch

January09,2012

Strategy
Earlyraysofarecoveryarevisible

Amidst the pervasive gloom, a few signs are pointing to better times returning sooner rather than later. The rapid fall of the Nifty PEG has Keyindices January06,2012 1m 3m 6m broughtittowithin10%ofthebandwhereitstabilizedin2009,before Sensex(INR) 15,868 5.6% 0.5% 15.3% the next rally began. A timecorrection could pull down the PEG to Sensex(USD) 301 7.8% 8.9% 29.3% 0.7x in 1Q2012. The yieldgap is down to near its threeyear mean. In Nifty(INR) 4,754 5.7% 0.1% 15.5% Nifty(USD) 90 7.9% 9.3% 29.4% therealeconomy,twoleadindicatorsElectricitygenerationandLCVs BSE Midcap(INR) 5,259 8.7% 10.5% 24.5% are pointing to a rebound in Manufacturing. The missing element BSE Midcap(USD) 100 10.6% 17.7% 36.8% lower interest rates may be back soon, as seen in the recent fall in Sectorearningsgrowthandweights bond yields. Shifts in earnings momentum suggest that sectors with (%) FY13EPS+/ Sectorweight strong links to the recovery are more likely to outperform in 2012. We yoy Contribution Jan12 Proposed advise cuts in allocations to Twowheelers and Consumer, and Automobiles 13.9 9.5 8.1 8.8 2Wh 12.4 1.9 2.5 2.3 increases in Commercial vehicles, Passenger vehicles, Cement, CV 9.9 3.4 2.6 3.0 Pharmaceuticals,Telecom,MetalsandITServices.
PV Cement Construction Consumer Engineering Financials PSU Privatebanks NBFC ITServices Metals Oil&Gas Pharma. Telecom Utilities RealEstate Total 22.1 9.8 16.0 17.5 8.3 20.2 23.7 20.5 14.8 15.6 12.8 8.1 21.5 56.1 11.1 18.9 15.5 4.2 1.6 4.5 5.6 1.2 33.0 10.9 17.0 5.1 10.6 10.2 9.2 3.7 7.3 3.2 0.4 100.0 3.0 2.6 4.5 10.3 1.8 24.9 3.7 14.3 6.9 15.7 7.1 13.1 4.4 3.0 4.1 0.4 100.0 3.5 3.0 4.5 8.0 1.5 23.5 4.7 12.5 6.3 17.0 7.5 13.0 5.0 3.7 4.0 0.5 100.0

Steepfallinvaluation;Niftywithin10%,threemonthsofstablelevel
Afterfallingfrom2.0xto0.8xinninemonths,theNiftyPEGiswithin10%ofthe range where the Nifty stabilized in 2009, before the next rally began. If prices and FY13 earnings forecasts stay at endDec11 levels, the timecorrection could push down the PEG to that range within three months. The yieldgap to the 1year government bond too has fallen close to its threeyear mean, partly duetothefallintheNifty,butmoreduetothelargefallinthebondyielditself.

Latentsignssuggestmanufacturingrecoverymaybeimpending
PreviouscyclessawtheElectricitysegmentoftheIIPreboundaboutsixmonths beforeManufacturing.AstrongreboundinElectricityhasnowbeenunderway for 14 months. Another similar lead indicator has been growth in sales of LCVs. Despitetheleadingindicatorsbeing flashed,thereboundinManufacturinghas not commenced. We believe the missing element in this cycle, that was active in the previous economic cycle, is a low interest rate regime. The fall in food inflation in Dec11 is significant as the food segment contributed over half the rise in wholesale inflation during 2011. The fall in the oneyear government bondyieldhasbeenastrongindicatorofthefallintheRepo.

Source:Bloomberg,AvendusResearch

Tiltawayfromdefensivesmayhavebegun
Late2011sawsectoralperformancesbegintoshiftfromprevioustrends.There isatiltawayfromdefensivesectorsandtowardsstockswithstrongerlinkages to the next rebound. These changes are linked to the shifts in earnings momentum and have signaled the revival of normal sectors such as Cement and Commercial vehicles. For 2012, we advise cuts in allocations to Two wheelers and Consumer and increases in Commercial vehicles, Passenger vehicles,Cement,Pharmaceuticals,Telecom,MetalsandITServices.Ourtop10 stocksfor2012areBhartiAirtel(BHARTIIN,Buy),HindalcoIndustries(HNDLIN, Buy), HCL Technologies (HCLT IN, Buy), ICICI Bank (ICICIBC IN, Buy), Larsen and Toubro (LT IN, Hold), LIC Housing Finance (LICHF IN, NR), Maruti Suzuki (MSIL IN,NR),StateBankofIndia (SBININ,Buy),SunPharmaceuticals(SUNPIN,Add) andUltraTechCement(UTCEMIN,Add).
AnandShanbhag,+9102266842851 anand.shanbhag@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

India Equity Research

Strategy

Investmentsummary
The steep fall in the Nifty PEG during 2011 makes it cheaper than at end of 2008, despite a smaller fall in the index. At 0.83x, it is within 10% of the range where the Nifty stabilized in 2009, before thenext rally began. The PEG could reach that range within three months even if prices stay constant, and if FY13 earnings forecasts hold stable. The large fall in bondyieldsinrecentweekshaspusheddowntheyieldgapnearitsthreeyearmean.Twopromisingsignsfromthereal economyarethereboundingrowthofLCVsandofElectricityproduction.BothhaveledtherecoveryofManufacturing by about six months in previous cycles. The missing element in this cycle low interest rates is likely to be ushered in by the fall in inflation. Though the concerns over equity valuation and economic growth persist, late 2011 saw a tilt away from defensives and towards stocks with stronger linkages to the next rebound. Revisions to earnings forecasts have signaled the revival of normal sectors such as Cement and Commercial vehicles. For 2012, we advise cuts in allocations to Twowheelers and Consumer and increases in Commercial vehicles, Passenger vehicles, Cement, Pharmaceuticals,Telecom,MetalsandITServices.

SteepfallinPEG,yieldgapbringNiftytowithin10%ofstablelevel
Niftymaybewithin10% orthreemonthsof bottomingout. Yieldgappusheddown closertoitsthreeyear meanafterthelargefallin theoneyearbondyield.

Thec18% fall intheNifty duringAug11Dec11 mayappearmildincomparisonwiththe36% fallduring Aug08Dec08.However,theP/EatendDec11wasonlyabitabovethatinDec08.ThePEGhasdropped steeplyinthepastninemonthstoanestimated0.83xatendDec11,lowerthanthePEGatendDec08. Assuming the forecasts for FY13 growth of the Nifty stabilize near the current level of 15.5%, the potential downside to the Nifty would be 10%. Should the Nifty stay unchanged at its endDec11 level, the P/E and PEG would drift down to 11.0x and 0.7x by end Mar12. This means that by the end of the first quarter of 2012, the Nifty PEG could reach the middle of the range where it had stabilized after the sharp correction in 20082009. The yieldgap too points to a rapid fall in the valuation of the Nifty. Itisdownbyc1%,closertoitsthreeyearmeanpartlyduetothelargefallintheoneyeargovernment bondyieldaleadindicatorofachangeintheRepo.

ReboundinElectricityand LCVsimplyarecoveryin Manufacturingisdue.The missingelement,low interestrates,couldbe providedbytheincipient declineininflation.

IIPpoisedtorise;Electricity,interestratesmaycatalyzerebound
Two indicators from the real economy suggest a recovery in industrial production may be round the corner. The growth of Electricity production and sales of light commercial vehicles (LCV) begin their rebound about six months before the turning point in Manufacturing. For some time now, both have signaled that a recovery is due. Electricity growth is likely to stay in high single digits till FY13f. The missing element, that was active in the previous economic cycle, is a low interest rate regime. The recentfallinfoodinflationissignificantasoverhalftheriseinpricesin2011wasdrivenbyfooditems. Exhibit1: GrowthinElectricityandLCVs
11% Electricity LCV(RHS) 8% 30.0% 1.40 49.0%

Electricityproductionand LCVsaleshavebeen growingafterSep10and Jun11,respectively.In previouscyclestheyhave ledtheinflectionpointsin Manufacturing. NiftyPEGdownsharply afterApr11.

Exhibit2: NiftyPEG
2.10

5%

11.0%

0.70

2% 8.0% Oct06 Nov07 Nov08 Nov09 Dec10 Dec11

Dec05 Dec07 Dec09 Jan12

Source:Bloomberg,SIAM,AvendusResearch

Source:Bloomberg,AvendusResearch

India Equity Research

Strategy

Revisionstoearningsforecastspointtoneedtochurnallocations
Shiftsinearnings momentumareseenin bothdefensiveand normalsectors.Theyare leadindicatorsofrelative outperformanceand underperformance.

Even as consensus forecasts for growth in FY12 and FY13 earnings continue to fall, there are sectors suchasCementwheretheforecastshavebeenholdingfirm,orarebeingraised.Thetrendofadecline hasreversedinafewsectorsduringthelasttwoquartersof2011.Wemeasuretheseshiftsinearnings momentum and find they correlate with and are often the lead indicators of the performance of sectors within the Nifty. Within Automobiles, the outlook for Commercial vehicles and Passenger vehicles has brightened even as that for Twowheelers appears to have plateaued. The best sector of 2011,Consumer,appearslesspromisinggiventheforecastdeclineinitsearningsmomentum.

Tiltawayfromdefensivesbeginningtobevisibleinlate2011
LargevalueandhighP/E stocksdidwellinboth risingandfallingperiods. Dividendyieldandcash hadlittleinfluence.

Our study of three spells of large fall and two spells of large rise from Jul11 to Dec11 reveals that outperformers during both phases were concentrated in large value, relatively high P/E stocks. Dividend yield did not have a significant link with performance during the rising spells. Neither did the proportionofcash/marketvaluehaveasignificantlink.Duringtherisingspell,relativeoutperformance was seen in a group of large value stocks with high net gearing, i.e. low cash. Large value stocks in Consumer, Cement, Pharmaceuticals and Telecom outperformed in the falling periods, but underperformed in the rising spells. Large value Financials were the prominent outperformers in the risingspells(SeeAnnexure1).

Overweight: Commercialvehicles Passengervehicles Pharmaceuticals Cement Telecom Metals ITServices Underweight: Twowheelers Consumer Toppicks: 1. BhartiAirtel(Buy) 2. HindalcoInds.(Buy) 3. HCLTech.(Buy) 4. ICICIBank(Buy) 5. Larsen&Toubro(Hold) 6. LICHousingFin.(NR) 7. MarutiSuzuki(NR) 8. StateBkOfIndia(Buy) 9. SunPharma(Add) 10.UltraTechCem.(Add)

2012outperformersmaybedispersedacrosssectors
Relative to the sector weights within the Nifty, we advise higher allocations mainly in Automobiles (excluding Twowheelers), Cement, Pharmaceuticals, Telecom, Metals and IT Services. We advise pruning of allocations to Twowheelers and Consumer. We stay cautious on Construction and Financials,despiteforecastspointingtoarevivalorextensionofearningsmomentum. Exhibit3: EarningsgrowthofNiftysectorsandweights
FY12f Earnings Contributionto growth Niftygrowth 0.5 0.7 20.3 4.2 6.8 3.1 1.6 17.8 9.2 18.0 24.5 16.5 13.7 17.7 11.3 14.8 15.9 6.2 5.6 0.8 8.1 5.3 3.1 2.9 1.0 1.0 9.9 2.4 51.7 18.8 24.4 8.6 21.1 21.0 30.2 4.9 1.8 3.2 0.0 100.00 FY13f Earnings Contributionto growth Niftygrowth 13.9 9.5 12.4 9.9 22.1 9.8 16.0 17.5 8.3 20.2 23.7 20.5 14.8 15.6 12.8 8.1 21.5 56.1 11.1 18.9 15.5 1.9 3.4 4.2 1.6 4.5 5.6 1.2 33.0 10.9 17.0 5.1 10.6 10.2 9.2 3.7 7.3 3.2 0.4 100 Weight Jan12 Recommended 8.1 2.5 2.6 3.0 2.6 4.5 10.3 1.8 24.9 3.7 14.3 6.9 15.7 7.1 13.1 4.4 3.0 4.1 0.4 100 8.8 2.3 3.0 3.5 3.0 4.5 8.0 1.5 23.5 4.7 12.5 6.3 17.0 7.5 13.0 5.0 3.7 4.0 0.5 100

Automobiles TwoWheelers CommercialVehicles PassengerVehicles Cement Construction Consumer Engineering Financials PSUbanks Privatebanks NBFCs ITServices Metals Oil&Gas Pharmaceuticals Telecom Utilities RealEstate Total

Source:Bloomberg,AvendusResearch

India Equity Research

Strategy

TableofContents

Investmentsummary......................................................................................................................... 2
SteepfallinPEG,yieldgapbringNiftytowithin10%ofstablelevel....................................................2 IIPpoisedtorise;Electricity,interestratesmaycatalyzerebound.......................................................2 Revisionstoearningsforecastspointtoneedtochurnallocations......................................................3 2012outperformersmaybedispersedacrosssectors .........................................................................3

SteepfallinPEG,yieldgapbringNiftytowithin10%ofstablelevel................................................ 5
RelativelygentledeclineinP/E,butsteepfallinPEG ...........................................................................5 YieldgappushedfurtherdownbyfallinbondyieldinearlyJan12......................................................6 Significantpotentialupsideover2012 ..................................................................................................6

Driversofearningsrevisionsarechangingandshapingperformance.............................................. 7
Downgradesextend,butafewchangesindrivers................................................................................7 Sectorperformancesareinsyncwithearningsmomentum ................................................................8

IIPpoisedtorise;electricity,interestratesmaycatalyzerebound................................................. 11
Leadindicatorssuggestindustrialrecoverymayberoundthecorner ...............................................11 Inflationengineisfinallycoolingoff....................................................................................................12 ImpendingfallininterestratescouldreviveManufacturing ..............................................................13

Annexure1:PerformanceduringriseandfallfromJul11toDec11................................................ 14 Annexure2:AssumptionsforElectricitygrowthinFY12fFY13f ..................................................... 16 Annexure3:ContributiontoSensexandNiftypointsandFIIactivity............................................. 17 Automobiles..................................................................................................................................... 18 Banks................................................................................................................................................ 19 Cement ............................................................................................................................................ 20 Construction .................................................................................................................................... 21 Engineering ...................................................................................................................................... 22 ITServices ........................................................................................................................................ 23 MetalsandMining........................................................................................................................... 24 NonbankingFinancials.................................................................................................................... 25 Oil&Gas .......................................................................................................................................... 26 Pharmaceuticals............................................................................................................................... 27 Telecom ........................................................................................................................................... 28 Utilities............................................................................................................................................. 29

India Equity Research

Strategy

SteepfallinPEG,yieldgapbringNiftytowithin10%ofstablelevel
ThefallintheNiftyinAug11Dec11mayappeardeceptivelyslower,ifitissimplycomparedwiththatin2008.Whilethe indexfellfasterinthelastfourmonthsof2008,thefallin2011issteeperifmeasuredbythePEG.TheNiftyPEGwasin declinefromApr11andthesteepfallinthepastninemonthshasbroughtitwithin10%ofabottom.Wefindthatifthe Nifty stays unchanged at its endDec11 level, the forecast growth in FY13 earnings would pull down the PEG to 0.7x at end Mar12. This is well below the level where the market stabilized in 2009. The large fall in bond yields also makes equitiescheaper.Theoneyeargovernmentbondyieldhasfallenbyc70bpafterendofNov11.Togetherwiththefallin theNiftyP/E,itpushesdowntheyieldgapclosetoitsthreeyearmean.
Exhibit4: NiftyandtheP/E
6,300 28

Exhibit5: NiftyP/EandPEG
27.0 2.1

4,500

21

21.0

1.4

2,700 Nifty P/E(RHS) 900 Dec05 Dec06 Jan08 Jan09 Jan10 Jan11

14

15.0 PE PEG

0.7

7 Jan12

9.0 Dec05

Dec06

Jan08

Jan09

Jan10

Jan11

Jan12

Source:Bloomberg,AvendusResearch

Source:Bloomberg,AvendusResearch

RelativelygentledeclineinP/E,butsteepfallinPEG
PEGisdownfrom2.1xto 0.8xineightmonths.

Acomparisonofthefallinequityvaluesin2H2011with2H2008indicatesthatthefallwasrapid(36% between Aug08 and Dec08) in the latter case compared with 2011 (17.9%). However, the erosion in P/Ein2011islargerthantheerosioninmarketcapitalization.ThePEGhasfallensteeplyin2011andis nowwithin10%oftherangewherethePEGstabilizedin2009.

Within10%ofthesupportlevelforthePEGin2009
Exhibit6: ChangeinNifty,P/EandPEGbetweenAugustandDecember
PEGisnowatthelevel wheretheNiftystabilized in2009.
2008 11Aug 31Dec Change Nifty 4,620 2,959 36.0% NiftyP/E 18.4 11.1 39.8% NiftyPEG 2.0 22Jul 0.92 30Dec 1.08 Change 2011 Nifty 5,634 4,624 17.9% NiftyP/E 15.0 11.5 22.8% NiftyPEG 1.42 0.83 0.59

Source:Bloomberg,AvendusResearch

At end Dec11, the Nifty (4,624) had an estimated oneyear rolling forward P/E of 11.5x and a correspondingPEGof0.83x.AsseeninExhibit3,theP/Eafterfivemonthsofcorrectionisclosetothat at the end of Dec08, despite the larger fall in the Nifty back in 2008. The PEG at end Dec11 is within 10%oftherange(0.63to0.99)wherethePEGstabilizedin2009.
ThePEGwouldfallto0.7x atendMar12,evenifthe Niftystayedatitsend Dec11level.

Couldalsobereachedinthreemonths,ifearningsgrowthstabilizes
Should the Nifty stay unchanged at its endDec11 level, the P/E and PEG would drift down over the course of the next 12 months to reach an estimated 11.2x and 0.71x, respectively. This means that by endofthefirstquarterof2012,thevaluationoftheNiftywouldreachthemiddleoftherangewhereit hadstabilizedafterthesharpcorrectionin20082009.

India Equity Research

Strategy

Exhibit7: EstimatedP/EandPEG,iftheNiftyweretostayattheendDec11levelforallof2012
P/E growth PEG(RHS) Dec11 11.6 13.8% 0.84 Jan12 11.8 14.3% 0.82 Feb12 11.3 14.9% 0.76 Mar12 11.2 15.5% 0.72 Apr12 11.0 15.4% 0.72 May12 10.9 15.3% 0.71 Jun12 10.8 15.2% 0.71 Jul12 10.7 15.1% 0.71 Aug12 10.5 15.0% 0.70 Sep12 10.4 14.9% 0.70 Oct12 10.3 14.8% 0.70 Nov12 10.2 14.7% 0.69 Dec12 10.1 14.6% 0.69

Source:AvendusResearch

Exhibit8: Yieldgap:OneyeargovernmentbondandSensex
4.5 Nov07,3.93 Jul08,4.06 Dec10 1.66 0.0 Jan12,(0.08)

Exhibit9: Yieldgap:OneyeargovernmentbondandNifty
4.5 Dec07,3.44 Jul08,3.63 Dec10 1.57 Jan12,(0.38) Dec11 6,423 5,506 12x 4,588 Dec12 0.0

5yearmean 0.33 3year mean


0.69

5yearmean 0.17 3year mean


0.68

4.5

4.5

9.0 Jan01

Apr03

Jun05

Aug07

Oct09

Dec11

9.0 Jan01

Apr03

Jun05

Aug07

Oct09

Source:Bloomberg,AvendusResearch

Source:Bloomberg,AvendusResearch

YieldgappushedfurtherdownbyfallinbondyieldinearlyJan12
Thelargefallintheone yearbondyieldinearly Jan12haspusheddown theyieldgapclosertoits threeyearmean.

The gap between the oneyear government bond yield (8.47% at end Dec11, after rising by 118bp for theyear)andtheyieldonthe Nifty(inverseofP/E)hadstayednear1.5%fromApr11toJul11.Despite the large fall in Aug11 and Sep11, it stayed above its fiveyear mean. The rebound in Oct11 lifted it to 1.3%,butthefallinDec11pulleditbelowthefiveyearmean. The fall in Dec11 was also the result of a 29bp fall in the bond yield. The anticipation of a cut in the Repo rate by the RBI has pulled down the bond yield even more in the first week of Jan12. This takes theyieldgapclosesttoitsthreeyearmeanafterJun10.

Significantpotentialupsideover2012
Exhibit10: SensexforecastsatvariousP/Es
AnendDec12,aP/Eof 12.0xwouldimplya potentialupsideof15%to 19%intheSensexandthe Nifty.
21,000 20,665 14x 18,000 12x 17,713 5,600 14x

Exhibit11: NiftyforecastsatvariousP/Es
6,600

15,000

10x 14,761

4,600 10x 3,600 Jan12

12,000 Jan12

Apr12

Jul12

Oct12

Dec12

Apr12

Jul12

Oct12

Source:Bloomberg,AvendusResearch

Source:Bloomberg,AvendusResearch

India Equity Research

Strategy

Driversofearningsrevisionsarechangingandshapingperformance
EvenastheconsensusforecastsforgrowthinFY12andFY13earningscontinuetofall,therearesectorssuchasCement whereforecastshavebeenholdingfirm,orarebeingraised.Thetrendofadeclinehasreversedinafewsectorsduring the last two quarters of 2011. We measure these shifts in earnings momentum and find they correlate with and are often the lead indicators of performance of sectors within the Nifty. Within Automobiles, the outlook for Commercial vehicles and Passenger vehicles has brightened, even as that for Twowheelers appears to have plateaued. The best sectorof2011,Consumer,appearslesspromising,giventheforecastdeclineinitsearningsmomentum.
Exhibit12: ConsensusforecastsgrowthinNiftynetprofits
24.0% Dec10 21.6%

Exhibit13: ConsensusforecastsgrowthinSensexnetprofits
22.5% Dec10,20.9%

20.0%

19.0%

16.0% Jun11 15.0% 12.0% FY11 8.0% May10 Aug10 FY12 FY13 8.1% Nov10 Jan11 Apr11 Jul11 Sep11 Dec11

15.5% Jun11 14.9% 12.0% FY11 8.5% May10 Aug10 FY12 FY13 9.0% Sep11 Dec11

Nov10

Jan11

Apr11

Jul11

Source:Bloomberg,AvendusResearch

Source:Bloomberg,AvendusResearch

Downgradesextend,butafewchangesindrivers
4Q2011 ended with consensus forecasts for growth of FY12 earnings of the Nifty falling to 8.2%. Each quarterof2011sawearningsgrowthforecastsfallby3.4%.However,thecontributorstotheerosionin FY12earningsforecastshavechanged. Exhibit14: LargestcontributorstoerosioninFY12fearnings
Metals,PSUbanksand Constructionhave contributed60%to90%of theerosioninNiftyFY12f earningsoverthepast twoquarters.
Dec10Jun11 Contribution Weight Metals Privatebanks Construction NBFC Comm.Vehicle Pass.Vehicle Utilities 35.5% 14.3% 13.9% 11.4% 7.9% 6.8% 5.6% 6.9% 13.7% 4.2% 6.9% 2.4% 3.1% 4.1% Jul11Sep11 Oct11Dec11 Contribution Weight Contribution Weight Metals Comm.Vehicle PSUbank Oil&Gas Telecom ITServices Construction 33.0% 24.4% 12.9% 11.0% 9.5% 7.9% 5.2% 6.9% 2.4% 3.7% 13.2% 3.3% 15.8% 4.2% Metals Oil&Gas PSUbanks Pass.Vehicle Construction Utilities 59.0% 16.9% 14.4% 9.7% 6.8% 1.8% 6.9% 13.2% 3.7% 3.1% 4.2% 4.1%

Source:Bloomberg,AvendusResearch

Upgradesinaselectfewsectors
Earningsmomentum reversesinCommercial vehiclesandCement. SignificantupgradeinIT Services.

f 1H2011hadseenupgradestoFY12earningsforecastsforConsumer,PSUbanksandOil&Gas. f 3Q2011sawupgradesinPrivatebanksandNBFCs. f 4Q2011 saw upgrades to forecasts for Twowheelers, Commercial vehicles, Cement, Consumer, Privatebanks,NBFCsandITServices.

India Equity Research

Strategy

Exhibit15: Assessmentofearnings,P/EandpricechangesintheNiftysectorsduring2011
Contributionto Niftygrowth Automobiles TwoWheelers Comm.Vehicles Passenger Vehicles Cement Construction Consumer Engineering Financials PSUbanks Privatebanks NBFCs ITServices Metals Oil&Gas Pharma. Telecom Utilities RealEstate Earnings Revisions P/E Marketcapitalisation(+/) Relative toNiftyweight Supportat14x Outperformancepeakedin3Q2011, continuedin4Q2011 FelltillSep11,reboundin4Q2011 Underperformanceoverin3Q2011,large outperformancein4Q2011 NolongeratdiscounttoNifty Mixedtrend;largeo/pin3Q2011reversedin 4Q2011 Reboundfor2quartershasinjectedpremium Largeo/pin2H2011afteru/pin1H2011 overNiftyP/E ExtendederosionhaspulledP/EbelowNifty U/pintensifiedin2H2011 Stableatc25xallthrough2011;nowlarge O/pindeclinein2H2011 premiumtoNiftyP/E ExtendederosionhaspulledP/EbelowNifty U/pintensifiedin2H2011 in4Q2011 DiscounttoNiftyhasexpanded U/pintensifiedin2H2011 ExtendederosionhaspulledP/EbelowNifty Smallo/pin1H2011,butlargeu/pin2H2011 in4Q2011 PremiumtoNiftyerodedin4Q2011 U/ppeakedin3Q2011,smallo/pin4Q2011 PremiumtoNiftyexpandedin4Q2011 Largeo/pin4Q2011,afteru/pin2Q2011and 3Q2011 FelltillSep11,reboundin4Q2011 U/ppeakedin3Q2011,butpersists Stable,c20%discounttoNiftyP/E Mixedtrend;mildu/pin2011 DeclineinabsoluteP/E,butsteadyrisein Sustainedandrisingo/pafter1Q2011 premiumoverNiftyP/E P/EexpansiontillJun11reversedin2H2011, Outperformancein2Q2011and3Q2011; butpremiumoverNiftyexpands reversedin4Q2011 Steadyfallin2011haspulledP/Etoasmall Mixedtrend;mildu/pin2011 discountrelativetoNifty P/Eseeminglystablein2011;creates O/pinallquartersof2011,except3Q2011 premiumoverNifty

Source:Bloomberg,AvendusResearch

Sectorperformancesareinsyncwithearningsmomentum
Cementisaclassic exampleofearnings momentumrevival precedingthe outperformanceofthe sector.

ContributiontoNiftyearningsgrowthisanindicatorofmomentum
A classic example of a shift in earnings momentum, for the better, is Cement. At end Dec10, Cement was forecast to contribute 0.4% of the growth in FY12 earnings of the Nifty. By end Sep11, this contribution was forecast to rise to 0.7% (seeExhibit 16). By end Dec11, this contribution was forecast to rise even further to 1.0%. The contribution to FY13 earnings growth of the Nifty is forecast to rise evenhigherto1.6%.Thetrendsintheseforecastspointtotheimprovingassessmentofthesector. The contribution to forecast earnings growth, and revisions, depend upon revisions to earnings forecasts of all sectors within the Nifty. The relative and absolute changes in prices of stocks in these sectorsarenoticeablyinfluencedbytheserevisions. Two other indicators we study in our assessment of earnings momentum are the actual revisions to forecasts and the extent to which the contribution to earnings growth varies from the weight of the sectorintheNifty. AlsovisiblewithinAutomobilesandinTelecom Commercial vehicles and Passenger vehicles, within Automobiles, are both forecast to expand their contribution to FY13 earnings growth of the Nifty well above their respective contributions for FY12. Telecom too is forecast to have a large rise in its contribution. In all three of these cases, the FY13 contributionisforecasttoexceedthecurrentweightoftherespectivegroupintheNifty.

India Equity Research

Strategy

Mayalsobealeadindicatorofwaningoutperformanceinasector
Consumer has been the best performer within the Nifty with an estimated 20.8% rise during 2011, compared with a 23.8% fall in the Nifty. Its P/E held in a stable band near 24x all through the year, while the P/E of every other sector dropped by up to 50%. However, the earnings momentum of Consumer is less promising. Even though forecasts for earnings for FY12 and FY13 have both been raised all through 2011, the contribution to earnings growth for these years was forecast at 9.8% and 5.5%, respectively, at end Dec11. Not only is the contribution forecast to fall sharply, both these numbersarelowerthantheweightofthesector(10.7%atendDec11).

Maynotalwaysapplyinallsectors
Financials,inparticular,isanotablesectorwherethereportedearningsgrowthhasusuallystayedwell abovethatoftheNiftyandthecontributiontoNiftyearningsgrowthstayswellabovetheweightinthe Nifty.However,thevaluationofthesestocksissignificantlyinfluencedbyothermeasuressuchasbook value,NPLsandrestructuredloans. A few sectors may also be in the midst of earnings revisions that are not fully implemented. This is partly the result of large changes in external parameters such as exchange rates and interest rates. At times,this mayalsoreflectalongerlagbetweenthechangeinsuchaparameteranditbeingreflected inconsensusforecasts. Exhibit16: ContributiontoFY12andFY13earningsgrowthandrevisions(%)
Automobiles Twowheelers CommercialVehicle PassengerVehicle Cement Construction Consumer Engineering Financials PSUBanks Privatebanks NBFC ITServices Metals Oil&Gas Pharmaceuticals Telecom Utilities RealEstate Total 8.1% 2.5% 2.6% 3.0% 2.6% 4.5% 10.3% 1.8% 24.9% 3.7% 14.3% 6.9% 15.7% 7.1% 13.1% 4.4% 3.0% 4.1% 0.4% 100% FY12 FY13 Indexweight EndofSep11 0.1 2.3 3.1 0.9 0.7 1.4 6.3 2.3 42.9 17.8 18.1 7.1 11.4 0.6 26.9 3.5 2.2 2.8 0.2 100.0 +/9mths 8.2 0.7 7.3 1.6 0.3 3.8 2.9 1.5 14.9 7.3 5.0 2.6 2.3 15.3 9.7 1.3 1.4 0.6 0.6 0.0 Dec11 0.7 5.3 3.1 2.9 1.0 1.0 9.9 2.4 51.7 18.8 24.4 8.6 21.1 21.0 30.2 4.9 1.8 3.2 0.0 100.0 +/3mths EndofSep11 0.8 3.1 0.0 3.9 0.4 2.4 3.6 0.2 8.7 1.0 6.2 1.5 9.7 20.3 3.3 1.3 3.9 0.4 0.2 0.0 8.0 1.5 3.1 3.4 1.6 5.4 4.8 2.0 32.8 11.0 16.1 5.6 9.9 10.6 10.6 2.9 6.9 4.3 0.4 100.0 +/9mths 2.0 0.4 1.6 0.0 0.8 1.2 0.4 0.1 4.7 0.1 4.0 0.8 1.3 3.4 0.1 0.3 1.7 0.9 0.7 0.0 Dec11 9.5 1.9 3.4 4.2 1.6 4.5 5.6 1.2 33.0 10.9 17.0 5.1 10.6 10.2 9.2 3.7 7.3 3.2 0.4 100.0 +/3mths 1.5 0.4 0.3 0.9 0.1 0.9 0.8 0.8 0.3 0.1 0.8 0.5 0.7 0.3 1.5 0.8 0.5 1.1 0.0 0.0

Source:Bloomberg,AvendusResearch

India Equity Research

Strategy

Exhibit17: Rolling12monthforwardearningsgrowth,rollingP/Eandchangeinmarketcapitalisation
Automobiles Twowheelers CommercialVehicle PassengerVehicle Cement Construction Consumerproducts Engineering Financials PSUbanks Privatebanks NBFC ITServices Metals Oil&Gas Pharmaceuticals Telecom Utilities RealEstate Total Rolling12mthsfwd.earningsgrowth Dec10 24.1 15.9 36.0 13.4 1.2 26.6 15.9 43.2 23.0 25.4 22.8 19.3 18.4 33.7 15.1 25.4 3.7 13.4 36.4 21.4 Mar11 15.0 14.7 14.7 15.7 4.5 21.3 17.1 21.0 21.9 26.7 18.9 22.3 21.7 21.6 17.5 17.0 22.6 15.7 24.0 19.2 Jun11 9.7 13.6 9.0 8.4 5.6 10.1 16.1 14.0 21.0 35.7 17.7 9.7 17.2 10.1 18.0 17.3 27.4 12.0 21.8 15.6 Sep11 6.2 11.8 1.7 10.0 6.4 11.4 16.1 13.4 20.8 27.7 19.1 16.1 14.9 6.5 13.7 17.2 29.9 11.3 13.7 14.0 10.3 14.2 6.2 14.5 8.2 11.5 17.6 8.5 20.0 23.9 20.1 14.5 16.0 6.8 9.9 19.2 39.8 9.8 14.7 13.9 Rolling12mthsforwardP/E Dec11 9.1 14.0 5.5 11.5 12.5 11.1 24.7 9.7 10.7 5.7 11.8 15.1 17.4 6.6 9.1 18.3 14.6 10.9 16.4 11.5 1Q 8.9 12.1 5.2 9.2 1.3 15.8 0.4 7.7 1.9 3.7 0.1 16.5 1.6 6.8 4.4 11.3 5.0 4.9 8.0 4.6 12.2 16.3 8.6 15.3 16.1 22.8 25.7 20.3 17.9 9.9 21.1 24.3 23.5 9.6 13.1 22.2 16.3 15.8 17.5 16.4 10.5 13.9 7.4 13.7 13.6 18.8 24.3 17.3 16.4 9.5 18.8 21.8 21.4 8.9 12.6 20.2 16.0 15.1 19.5 15.0 9.4 14.6 5.7 12.4 11.1 19.6 26.1 15.6 15.3 8.2 18.1 19.7 19.7 8.3 11.0 20.6 17.0 14.0 16.9 14.1 9.7 15.4 5.1 13.2 12.2 14.7 24.7 12.7 12.5 6.7 14.6 15.5 16.9 6.3 10.1 18.3 15.6 11.4 19.2 12.3 Pricechange(2011) 2Q 6.1 5.6 20.4 3.6 11.8 6.8 13.6 0.2 3.8 31.1 2.2 4.6 5.8 8.3 9.8 7.4 7.5 3.6 21.6 3.9 3Q 1.6 6.4 21.3 5.3 12.8 23.4 1.6 16.8 15.3 47.6 34.5 34.5 14.0 27.5 7.2 7.6 6.7 15.4 4.0 11.9 4Q 2.6 1.0 13.1 15.3 4.7 26.9 7.7 26.2 12.3 39.6 36.8 2.3 11.0 13.6 7.7 3.2 8.5 4.3 16.3 5.7 Dec11 Dec10 Mar11 Jun11 Sep11

Source:Bloomberg,AvendusResearch

10

India Equity Research

Strategy

IIPpoisedtorise;electricity,interestratesmaycatalyzerebound
Twoindicatorsfromtherealeconomysuggestarecoveryinindustrialproductionmayberoundthecorner.Thegrowth in Electricity production and sales of LCVs begin their rebound about six months before the turning point in Manufacturing. For some time now, both have signaled that a recovery is due. Electricity growth is likely to stay in high singledigitstillFY13f.Themissingelement,thatwasactiveinthepreviouseconomiccycle,isalowinterestrateregime. The recent fall in food inflation is significant as over half the rise in prices in 2011 was driven by food items. Lead indicatorsarealreadysignalingafallintheReporate.
Exhibit18: TTMgrowthofElectricityandManufacturing
21% Manufacturing 6m 13% 6m 7.0% 13% 5m 30.0% Electricity 8m 9.5%

Exhibit19: TTMgrowthofLCVsandManufacturing
21% 49.0%

5%

4.5%

5% Manufacturing

11.0%

3% Mar07

8m Apr08 Apr09 Apr10 May11

LCV 2.0% 3% Oct06 Nov07

7m 8.0% Dec11

Nov08

Nov09

Dec10

Source:http://mospi.nic.in,AvendusResearch

Source:http://mospi.nic.in,AvendusResearch

Leadindicatorssuggestindustrialrecoverymayberoundthecorner
GrowthintheElectricity segmenthasbeenonthe upswingafterOct10.In previouscycles,thiswas followedbyareboundin Manufacturingwithin8 months.

ReboundinElectricityprecedesrecoveryinManufacturing
The trailingtwelvemonths (TTM) growth of Electricity (weight of 10.2%) has been a lead indicator of theinflectionpointsinthegrowthoftheManufacturingsegment,whichhasaweightof79.4%.Exhibit 18indicatesthatthepeakandtroughinElectricitygrowthhaveprecededthoseinManufacturingby6 8 months. Electricity growth bottomed out at 4.6% in Sep10 and has since risen to 8.1% in Oct11. Manufacturinggrowthreachedapeakof10.7%inNov10(sixmonthsafterElectricity).However,inthe current cycle, Manufacturing growth has continued to fall for 15 months after the recovery in Electricity.

ManufacturingreboundfollowswithinsevenmonthsofthatinLCVs
LCVstoohaveledthe inflectionpointsin Manufacturingby58 months.

Another lead indicator of past inflection points in the Manufacturing segment has been the TTM growthinsalesofLCVs.ThepeakintheTTMgrowthofLCVsinFeb07andJun10werefollowed,within eight months, by a peak in the Manufacturing segment within the IIP. The bottom in LCV sales growth in Mar09 was followed, after seven months, by a rebound in Manufacturing. The most recent bottom inLCVsaleswasinJun11.

Largeadditionsto generationcapacityare likelytosustainhigh growthinElectricityin FY13.

Electricitygrowthlikelytostaynear8%inFY12fandFY13f
The momentum in Electricity generation is likely to extend till the end of FY13f. We estimate the growth for FY12f to be 8.6% and that for FY13f to be between 7.1% and 7.7% (see Exhibit 30). The sustained rebound in the Electricity segment of the IIP follows the acceleration in generation capacity that began in FY08. While the pace of implementation of several projects has lagged expectations, enough of the new capacity is now being commissioned to sustain high growth in generation. Our estimates indicate that despite the wellknown constraints in production of coal from local mines, the productionofelectricitywouldgrowthankstoimportofcoal(SeeAnnexure2).

11

India Equity Research

Strategy
Exhibit21: ContributionoffoodtoriseinWPI(%)
60 19.0%

Exhibit20: ChangeinFoodArticlesitemwithinWPI(yoy)
24%

16%

24

8.0%

8%

12 ContributionofFood +/ WPI(annualised)

3.0%

0% 02Jan10 01May10 28Aug10 25Dec10 23Apr11 20Aug11 17Dec11

+/ Food(RHS) 48 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11

14.0% Sep11 Dec11

Source:http://eaindustry.nic.in

Source:http://eaindustry.nic.in,AvendusResearch

FoodandFuelcategories contributedc90%ofrisein theWPIin2011.The sharpfallinfoodinflation islikelytoholddown wholesaleinflationin 2012.

Inflationengineisfinallycoolingoff
Close to 90% of the rise in the wholesale price index (WPI) during 2011 was contributed by two categories within the WPI, viz. Food (combined weight of 24.3%) and Fuel (15.8%). Late 2011 saw a sharpfallinfoodinflation.Thoughpartlytheresultofthehighbaseinthepreviousyear,thereisalsoa distinct longerterm trend of a decline in wholesale food inflation. There is also a decline in fuel inflation.FoodarticlesandfoodproductscontributedoverhalftheriseintheWPI. The very large part of the high inflation (measured by WPI) in the past two years was contributed by foodarticles(14.3%weightinWPI)andfoodproducts(10.0%weight);seeExhibit21.Intwoofthepast sixquarters,theFoodbasket(includingfoodproductsandfoodarticles)contributedoverhalfthetotal rise in the WPI. Hence, the fall in food inflation starting from midNov11 is likely to exert a cooling effectontheoverallriseintheWPI.

Contributiontoinflationfromfuelishigh,butindecline
During 2011, Fuel & Power (14.9%) and Crude (0.9%) together contributed between 30% and 40% of the rise in the WPI. The annualized rise in the prices of this group has fallen from c20% in mid2011 to themidteensbyDec11. Exhibit22: ContributionofFuel,PowerandCrudetotheriseintheWPI(%)
48 ContributionofFuel &Power (incl.crude) Annualisedchange inFuel&Power (incl.crude)(RHS) 36 16.5% 22.0%

24

11.0%

12

5.5%

0 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11

0.0%

Source:http://eaindustry.nic.in,AvendusResearch

12

India Equity Research

Strategy
Exhibit24: Yieldson1year,10yearsGOIbondsandReporate
9.6

Exhibit23: Yieldon1yeargovernmentbondandReporate
10.0 1y Repo

10

8.0

6.4

6.0

3.2

6 1y 10y Repo(RHS)

4.0 Jan01

Aug02 Mar04 Oct05 Apr07 Nov08 Jun10 Dec11 Jan04 Mar05 May06 Jun07 Aug08 Sep09

4 Nov10 Dec11

Source:Bloomberg,AvendusResearch

Source:Bloomberg,AvendusResearch

ImpendingfallininterestratescouldreviveManufacturing
Leadindicatorsalreadyreflectthelikelyfallinrates
The yield on the oneyear government bond has been a lead indicator of the likely change in the Repo over the past decade. Dec11 saw the oneyear bond yield fall 29bp to 8.47%, just below the Repo (8.50%). Another lead indicator of an inflection point in the Repo has been the convergence of yields onthe1yearand10yeargovernmentbonds.

DeclineinratescouldcatalyzeaManufacturingrecovery
A key enabling element of a recovery in the Manufacturing sector in 2009 was the prevalence of relativelylow interestrates.InMar09,whenthegrowth of LCVsbottomedout,theRepo hadbeencut by 400bp in the preceding six months. This period had also seen the yield on the 1year BBB bond fall by270bp. This is the missing element of the past six months. The yield on the BBB bond has stayed near 12% in the second half of 2011, about 180bp higher than that in Mar09. More significant is the uncertainty over rates, largely caused by the stubbornly high inflation. The slowly visible signs of the longawaited fall in inflation may begin to restore the conditions that could support a revival in the Manufacturing sector. Exhibit25: GrowthofManufacturingintheIIP,yieldonBBBoneyearbondandRepo
Recoveryin Manufacturingin2009 wassupportedby relativelylowinterest rates.Incontrast,ratesin 2H2011werec200bp higher.
21.0% BBB1y Manufacturing 14.0%

Repo(RHS)
13.0% 10.5%

5.0%

7.0%

3.0% Mar07

3.5% Mar08 Feb09 Feb10 Jan11 Dec11

Source:http://mospi.nic.in,Bloomberg,AvendusResearch

13

India Equity Research

Strategy

Annexure1:PerformanceduringriseandfallfromJul11toDec11
The period from Jul11 to Dec11 saw three spells of a large fall in the Sensex and two of a large rise. They were 25Jul 25Aug(14.5%),5Oct28Oct(+12.7%),28Oct25Nov(11.8%),25Nov7Dec(+7.5%)and7Dec28Dec(10.1%).Exhibits26 to 29 studythe change in market capitalization of stocks across segments defined by the sectors, market capitalization, P/E(trailing), dividendyieldandcash/MCap.Largestocksoutperformedsmallstocksinbothphasesandacross sectors. Similarly high P/E stocks outperformed the low P/E stocks. Dividend yield does not correlate with outperformance and neither does a high proportion of cash relative to market value. Outperformers in the fall periods were Consumer, Cement, Telecom and Pharmaceuticals; most of these sectors have underperformed during the rising periods. Financials,andparticularlythelargestocks,weresignificantoutperformersduringtheriseperiods.
Exhibit26: PerformanceacrossP/Erangesandsectors
No.ofStocks %ofTotalMcap (ason6Jan12) AllSectors Automobiles Cement Chemicals Construction Consumerproducts Engineering Financials ITServices Media Metals Oil&gas Pharmaceuticals RealEstate Telecom Textiles Utilities Others SensexReturn No.of Stocks 592 30 16 33 29 43 43 71 43 16 31 21 37 23 10 14 21 111 Mcap (INRbn) 49,812 2,835 1,203 1,079 1,045 4,523 1,914 8,012 5,861 472 3,795 7,416 2,601 776 1,825 157 3,307 2,991 %ofTotal TTMPrice/Earningsranges Mcap <0 08 814 1430 >30 All <0 08 814 1430 >30 All 100% 6% 2% 2% 2% 9% 4% 16% 12% 1% 8% 15% 5% 2% 4% 0% 7% 6% 56 5% 1.2 10.0 1.4 5.7 12.4 20.4 9.1 3.7 12.4 2.2 4.7 6.8 0.1 NA 7.3 0.1 16.9 2.7 164 8% 2.8 1.3 5.2 1.8 12.2 6.0 4.8 2.4 4.4 NA 3.7 0.2 3.0 12.1 2.2 3.5 5.6 2.5 146 28% 0.6 2.7 8.6 4.0 6.4 1.9 3.5 5.2 4.2 18.4 5.9 2.0 5.4 9.1 1.9 0.3 0.2 4.0 153 44% 1.6 4.4 7.3 4.1 6.7 6.3 1.6 3.1 2.6 4.3 1.0 2.5 6.5 4.0 3.9 5.1 2.1 1.2 73 15% 0.3 4.4 6.4 6.3 5.9 7.5 0.5 1.6 0.6 0.2 10.0 14.4 5.5 5.2 10.0 4.6 6.3 7.0 0.5 2.2 7.0 4.2 6.9 7.2 2.6 2.6 2.4 3.0 2.5 2.3 5.7 6.8 3.3 0.6 0.3 3.4 12.1 56 164 5% 146 153 44% 2.0 0.6 1.8 8.1 3.7 2.8 6.8 1.3 0.1 4.7 0.1 8.3 6.8 1.8 6.2 14.2 1.7 5.6 73 15% 5.2 7.5 6.5 9.0 2.4 5.3 1.4 2.0 6.3 8.0 4.8 18.9 4.9 0.7 12.9 5.5 2.3 7.3 2.4 1.0 2.4 8.1 4.0 4.2 5.6 1.2 0.3 4.9 1.2 2.7 6.9 0.9 6.8 4.6 2.4 6.2 10.1 8% 28% 2.1 2.1 6.9 5.5 7.9 1.4 5.2 1.9 4.7 2.7 1.2 1.9 6.9 2.6 NA 1.6 3.3 5.1

FallPeriodAverageRR

RisePeriodAverageRR 2.8 2.7 0.3 6.3 6.9 6.4 5.9 7.9 1.5 1.7 7.2 2.3 0.5 8.7 6.2 3.9 5.9 0.5 5.0 9.0 NA 1.9

0.9 4.6 8.5 6.2 NA 3.2 0.7 9.0 2.0 4.6 6.6 0.9 5.0 5.4

Source:Bloomberg,AvendusResearch

Exhibit27: Performanceacrossrangesofcash/MCapandMCapranges
No.ofStocks %ofTotalMcap (ason6thJan'12) Total <INR10bn INR10bnINR40bn INR40bnINR100bn >INR100bn SensexReturn No.of Mcap%ofTotal Stocks (INRbn) Mcap 518 197 180 64 77 43,602 916 3,682 4,043 34,961 100% 2% 8% 9% 80% NetCash/Mcap(%) <50 50to0 0to25 25to75 216 13% 3.7 5.2 3.3 8.4 2.6 149 34% 0.5 1.7 1.6 2.4 0.8 120 49% 3.7 0.3 2.3 6.0 3.6 30 5% 2.1 0.1 2.5 4.1 2.6 >75 3 0% 2.3 9.2 14.2 1.0 NA 1.2 3.4 1.2 1.6 1.5 12.1 All <50 50to0 0to2525to75 180 13% 1.8 5.6 5.5 0.6 0.1 185 34% 3.3 5.0 6.3 5.7 2.4 131 49% 3.4 4.7 7.6 6.6 3.0 20 5% 4.2 7.6 6.8 7.8 3.0 >75 2 0% 6.2 6.8 6.2 NA NA 3.2 5.4 6.3 5.3 2.5 10.1 All

FallPeriodAverageRR

RisePeriodAverageRR

Source:Bloomberg,AvendusResearch

14

India Equity Research

Strategy

Exhibit28: Performanceacrossmarketcapitalizationrangeswithinsectors


No.ofStocks %ofTotalMcap (ason6Jan12) AllSectors Automobiles Cement Chemicals Construction Consumerproducts Engineering Financials ITServices Media Metals Oil&gas Pharmaceuticals RealEstate Telecom Textiles Utilities Others SensexReturn

No.of Mcap Stocks (INRbn)

%of Total Mcap

McapRanges(INR) <10bn 219 2% 3.3 0.8 2.2 0.1 9.9 12.7 2.8 0.3 5.4 9.3 5.8 5.4 1.7 7.0 5.2 2.4 14.1 1.1 10bn 40bn 216 8% 1.1 4.0 0.4 2.7 8.4 0.6 0.3 2.1 0.5 1.0 5.2 4.6 3.2 3.5 7.4 0.2 8.3 1.2 40bn 100bn 87 10% 0.8 1.9 10.7 2.9 2.8 5.3 4.2 3.1 5.0 4.6 1.6 3.5 4.3 7.9 8.8 NA 0.5 4.1 >100bn 95 80% 0.7 2.5 8.1 10.0 6.5 8.6 2.9 2.6 2.5 5.8 2.3 2.5 6.7 7.6 3.8 NA 0.0 7.7 0.5 2.2 7.0 4.2 6.9 7.2 2.6 2.6 2.4 3.0 2.5 2.3 5.7 6.8 3.3 0.6 0.3 3.4 12.1 All <10bn 219 2% 5.7 4.3 3.4 9.8 3.0 2.7 7.7 5.7 1.8 5.3 8.8 6.1 9.5 2.8 11.6 7.8 9.1 5.9 10bn 40bn 216 8% 6.0 6.3 4.1 9.7 6.8 7.3 5.5 4.3 5.0 7.4 5.4 1.3 7.1 3.4 5.0 4.1 8.3 5.6 40bn 100bn 87 10% 4.4 2.5 7.5 4.5 2.9 4.3 6.4 1.1 4.0 3.0 9.3 10.2 6.4 0.2 4.8 NA 2.4 9.1 >100bn 95 80% 1.6 0.2 1.7 11.1 3.6 3.8 5.2 2.1 0.1 4.0 0.8 2.5 6.9 5.4 6.8 NA 2.1 5.3 2.4 1.0 2.4 8.1 4.0 4.2 5.6 1.2 0.3 4.9 1.2 2.7 6.9 0.9 6.8 4.6 2.4 6.2 10.1 All


617 33 17 35 30 43 43 77 43 17 34 21 39 23 12 14 21 115


54,252 2,872 1,213 1,120 1,051 4,523 1,914 10,180 5,861 475 5,867 7,416 2,653 776 1,840 157 3,307 3,028


100% 5% 2% 2% 2% 8% 4% 19% 11% 1% 11% 14% 5% 1% 3% 0% 6% 6%

FallPeriodAverageRR

RisePeriodAverageRR

Source:Bloomberg,AvendusResearch

Exhibit29: PerformanceacrossrangesofdividendyieldandMCapranges
No.ofStocks %ofTotalMcap (ason6Jan12) Total <INR10bn INR10bnINR40bn INR40bnINR100bn >INR100bn SensexReturn No.of Mcap%ofTotal Stocks (INRbn) Mcap 588 208 202 85 93 51,671 978 4,102 5,285 41,305 100% 2% 8% 10% 80% DividendYield(%) <1 193 27% 0.8 4.2 2.1 0.5 0.7 1to2 146 44% 0.5 3.4 0.4 1.9 0.5 2to4 164 25% 1.9 2.1 0.4 0.7 2.4 4to8 77 4% 4.6 0.9 0.6 2.7 7.3 >8 8 0% 6.1 2.5 3.6 15.7 NA All 0.5 3.1 1.3 0.7 0.7 12.1 <1 193 27% 3.5 5.6 6.0 4.8 2.8 1to2 2to4 4to8 146 44% 1.6 3.3 6.7 4.2 1.1 164 25% 2.6 6.0 5.8 2.5 2.3 77 4% 4.1 6.2 4.6 5.9 2.1 >8 8 0% 5.5 0.4 6.8 NA NA All 2.5 5.4 6.1 4.1 1.9 10.1

FallPeriodAverageRR

RisePeriodAverageRR

Source:Bloomberg,AvendusResearch

15

India Equity Research

Strategy

Annexure2:AssumptionsforElectricitygrowthinFY12fFY13f
Exhibit30: GrowthingenerationcapacityandforecastsforgrowthinElectricityproduction
InstalledCapacity(GW) Coal Total Capacityaddition(GW) Coal Total Generation(000GWh) Coal Total yoychangeingeneration(%) Coal Total PLF(%) Coal Total Coalrequirement(mtpa) Domestic Imported Total Source:AvendusResearch 77.6 148.0 480.4 723.8 70.6 55.8 309 38 348 7.2 6.5 69.8 55.2 312 56 368 65.1 53.3 6.5 11.4 514.7 771.2 4.0 5.2 535.3 811.1 Mar09 84.2 159.4 9.7 14.2 Mar10 93.9 173.6 Mar11 Mar12f 108.5 191.6 14.6 18.0 582.0 881.1 8.7 8.6 61.2 52.5 331 70 400 Scenario1 Mar13f 116.2 200.4 7.8 8.8 638.5 943.4 9.7 7.1 62.7 53.7 343 94 437 343 98 441 61.4 53.1 10.6 7.7 643.6 948.5 11.2 12.2 119.6 203.8 Scenario2 Mar13f

16

India Equity Research

Strategy

Annexure3:ContributiontoSensexandNiftypointsandFIIactivity
Exhibit31: ContributionofsectorstothechangeinSensexandNifty
Sector Automobiles Cement Construction Consumerproducts Engineering Financials ITServices Metals&Mining Oil&Gas Pharmaceuticals Telecom Textiles Utilities RealEstate Total Sensex Nifty Apr11Jun11 Jul11Sept11 Oct11Dec11 Total 46 1 68 1 13 51 41 40 33 24 11 0 16 4 345 29 14 30 53 0 21 51 27 91 9 12 0 7 6 144 7 14 86 8 23 225 105 126 64 16 12 0 45 1 702 12 6 70 28 28 152 63 58 74 9 15 0 11 4 94 6 194 74 64 449 134 251 262 22 26 0 80 13 Jan11Mar11 Apr11Jun11 Jul11Sept11 Oct11Dec11 Total Jan11Mar11 157 0 247 18 57 102 123 119 93 32 38 0 41 13 1,005 124 0 103 215 3 66 251 92 377 6 52 0 47 31 615 24 0 347 28 90 710 405 498 220 55 37 0 111 5 2,519 23 0 275 134 94 300 185 256 45 53 0 38 18 328 0 765 338 243 479 894 947 35 76 0 237 57

452 1,330

915 5,054

319 1,510

Source:Bloomberg,AvendusResearch

Exhibit32: FIIpurchaseandsales(USDmn)acrossrangesoftheSensex
Sensexrange 20013000 30014000 40015000 50016000 60017000 70018000 80019000 900110000 1000111000 1100112000 1200113000 1300114000 1400115000 1500116000 1600117000 1700118000 1800119000 1900120000 2000121000 Total Source:SEBI,AvendusResearch 2002 157 889 732 2003 113 1,998 2,774 1,793 6,679 8,474 10,782 8,087 113 5,842 2,518 3,644 3,640 1,586 1,912 18 1,697 900 1,341 2,912 1,254 213 961 4,474 4,277 1,895 1,945 1,478 732 1,687 17,236 2004 2005 2006 2007 2008 871 1,502 427 1,458 402 1,684 2,598 842 2,152 1,064 79 1,051 703 13,428 2009 1,153 1,011 1,327 2,051 570 1,066 2,713 2,184 5,278 4,288 17,313 444 2,082 12,661 3,538 3,910 11,778 29,362 1,749 1,720 891 2,260 1,356 387 358 2010 2011

17

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company MarutiSuzuki TataMotors AshokLeyland EicherMotors Rating NR NR NR NR MCAP (INRbn) 274 596 62 40 Allocation FF withinsector (%) (%) 36 35 57 25 50 20 36 20

Automobiles
EarningsgrowthlikelytorecoverforCVandPVcompanies
Commercial and passenger vehicle companies are likely to witness a recovery in earnings growth in FY13 due to the positive fallout of the likelyreversalintheinterestratecycle.Robustsalesvolumegrowth in diesel vehicles is likely to positively impact earnings for passenger vehicle companies. Twowheeler companies are likely to witness a moderation in earnings growth in FY13 due to lower sales volume growth in the rural segment and increasing competition. Our top picks are Maruti Suzuki India (NR) and Tata Motors (NR) for the next 12 months. Risk factors are adverse foreign exchange rates, government policiesondieselvehiclesandhighinterestratesandinputcosts. Twowheelercompaniesmaywitnessmoderationinearningsgrowth

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP P/E EPSCAGR(%) (INR) FY13f FY13fFY14f MarutiSuzuki 949.8 11.2 25.6 TataMotors 203.6 6.7 8.6 AshokLeyland 23.5 8.5 16.8 EicherMotors* 1,493.7 11.4 15.7
Source:Bloomberg *FY13correpspondsto2012

Stockperformanceason06Jan12(%) Company 1m 3m MarutiSuzuki 5.0 12.5 TataMotors 6.3 38.1 AshokLeyland 11.3 4.7 EicherMotors 5.6 7.6 BSEAutoIndex 7.1 1.1
Source:Bloomberg

Twowheeler companies have outperformed the market by 7% in the Dec11 quarter on account of strong sales volume growth. Going forward, these companies may not outperform due to moderation in earnings growth. This 1yr 30.9 moderation is likely to be on account of lower demand growth in the rural 19.3 segment and increasing competition. Earnings growth is likely to moderate to 28.0 12% in FY13,after likely growth of 20% in FY12, based on consensus estimates. 23.5 17.7 Rising valuations are also a concern; twowheeler companies were trading at 14.0x oneyear forward P/E, which is higher than 11.5x and 5.5x for passenger vehicle (PV) and commercial vehicle (CV) companies, respectively, based on consensusestimatesatendDec11.

EarningsgrowthtorecoverforCVandPVcompanies
In the Dec11 quarter, PV companies have underperformed the market by 9% due to weak sales volume growth, whereas CV companies have outperformed the market by 19% due to recovery in sales volume growth. Going forward, CV and PV companies are likely to outperform the market over the next 12 months, led by strong earnings growth. Earnings growth is likely to recover to 10% and 22% in FY13, after a likely fall of 4% and 7% in FY12 for CV and PV companies, respectively, based on consensus estimates. This recovery is the positive fallout of the likely reversal in the interest rate cycle. Robust sales volume growth in diesel vehicles is likely to positively impact earnings for PV companies.

MSILandTTMTarethetoppicksfornext12months
Toppicksforthenext12monthsareMarutiSuzukiIndia(MSILIN,NR)andTata Motors (TTMT IN, NR). Earnings growth is likely to recover to 31% and 10% in FY13, after a likely fall of 19% and 4% in FY12 for MSIL and TTMT, respectively, based on consensus estimates. MSILs sales volume growth is likely to rebound on launches and higher production of diesel vehicles in the next few months. TTMTs overseas subsidiary, Jaguar and Land Rover, is likely to continue witnessing robust volume growth led by growing demand from developing countries and a healthy order book. Robust growth in Tata Ace is likely to continue driving CV volumes. Risk factors are adverse foreign exchange rates, governmentpoliciesondieselvehiclesandhighinterestratesandinputcosts.
SriRaghunandhanNL,+9102266842863 raghunandhan.nl@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

18

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company ICICIBank AxisBank StateBankofIndia ShriramTransportFin LICHousingFinance HDFC PunjabNationalBank Rating Buy Buy Buy Buy NR NR Buy MCAP (INRbn) 866 352 1,062 109 107 988 257 Allocation FF withinsector (%) (%) 57 30 90 25 32 15 53 10 59 10 90 5 37 5

Banks
NPLtrendtostaylargestinfluenceonstockperformance
The continuing downgrades to consensus forecasts for FY12 and FY13 earnings of the CNXPSBK create a significant obstacle for a rebound in valuation. During the past 12 months, consensus net profit growth of PSBs for FY12 has been lowered by 13%. A reversal in the earnings trend, driven by improvement in asset quality, is likely to be the largest influence on the valuation of banks. A reversal in the interest rates is likely to be a near termtrigger. While new banks are superior in asset quality, their underperformance in 2011 was driven by concerns on its sustainability. The gap in the net NPL/networth between PSBs and new banks is at its widest in four years and rising. We prefer ICICI Bank (Add), Axis Bank (Buy), State Bank of India (Buy) and Punjab National Bank (Buy), while HDFC Bank (Add) continues to stayaneartermdefensive. ValuationgapofCNXPSBKwiththeNiftyat2.5yearhigh
At end Dec11, the premium of the Nifty P/E over the CNXPSBK increased to 143.9%, a 2.5year high. Also, the valuation gap between the Sensex and the Bankex, at c41%, was widest in the past 12 months. While the extent of underperformance of PSBs fell in the past three months, it increased for new banks. Sustaining the trend would require a reversal in the earnings trend; this dependsonstabilizationofassetquality.Consensusnetprofitgrowthforecasts of the CNXPSBK for FY12 fell by 13% in 2011. New banks saw their earnings downgradedtoalesserextent,by8%.

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP P/E EPSCAGR(%) (INR) FY13f FY13fFY14f ICICIBank 751.7 10.8 15.7 AxisBank 853.5 7.2 20.9 StateBankofIndia 1,672.8 6.3 16.8 ShriramTransportFin 480.8 6.8 14.4 LICHousingFinance 225.3 8.1 29.4 HDFC 670.4 20.5 18.1 PunjabNationalBank 812.3 4.4 16.7
Source:Bloomberg

Stockperformanceason06Jan12(%) Company 1m 3m ICICIBank 3.6 3.5 AxisBank 17.3 10.3 StateBankofIndia 12.5 2.7 ShriramTransportFin 15.7 19.3 LICHousingFinance 3.3 6.0 HDFC 1.2 7.3 PunjabNationalBank 12.4 10.6 BSEBankIndex 8.2 2.7 NBFCIndex 4.6 1.8
Source:Bloomberg,AvendusResearch

1yr 28.6 34.6 36.2 35.0 23.8 5.2 31.8 24.5 15.7

Reversalininterestratescycleaneartermtrigger
Thefallinginterestrateislikelytostaytheneartermtriggerforbankingstocks. Whilethepositiveimpactonassetqualitymaybevisiblewithalag,anincrease in the trading gains is likely to support the profitability in the nearterm. However, a fall in NIM in the initial phase of falling rates may partly offset tradinggains.

NPLtrendmaycontinuetostaylargestinfluenceonstockperformance
NPL trend may be a larger influence on stocks than interest rates. The gap in thenetNPL/networthbetweenPSBsandnewbanksiscurrentlyatitswidestin fouryearsandrising.PSBssawa3.3%sequentialriseintheirnetNPL/networth to 16.7%, while it remained stable for new banks at 2.9% at endSep11. The recent underperformance of new banks has been driven by concerns on sustainability of their superior asset quality. Stock performance in the next 12 monthsislikelytoaligntotheassetqualitytrendinthebanksegments.

Largepotentialupsideover12monthhorizon
Over the next six months, stocks with relatively superior asset quality and consistent growth in profitability are more likely to withstand negative forces. We prefer ICICI Bank (ICICIBC IN, Add), Axis Bank (AXSB IN, Buy) among new banks; State Bank of India (SBIN IN, Buy) and Punjab National Bank (PNB IN, Buy) among PSBs. HDFC Bank (HDFCB IN, Add) continues to stay a near term defensive.
ChandanaJha,+9102266842854 chandana.jha@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

19

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company UltratechCement ACC Rating Add Hold Allocation MCAP FF withinsector (INRbn) (%) (%) 315 34 70 207 39 30

Cement
PricingpowerlikelytoprevailinallregionsbesidesSouth
The Cementindex has outperformedthe Nifty by9.2% during 4Q2011. The outperformance has been driven by companies with a presence in the northern and the western market as consumption growth of 34.7% yoy in Nov11 was better than industry growth of 21.3% and improvement in cement realizations. With utilization of c80% or more in all regions except the South we do not estimate average cement pricestoweakeninFY13f.Consumptionislikelytoincreaseby7.0%in FY13f and 8.2% in FY14f, driven by a reversal in the interest rate trend in 2012. We prefer ACC (Hold) and UltraTech Cement (Add) due to theirlowervaluationscomparedtoAmbujaCements(Hold). Outperformanceduetohighercementpricesandvaluations
The Cement index outperformed the Nifty by 9.2% during 4Q2011 due to an increaseincementpricesbyuptoINR40/bagsinceOct11.Theoutperformance hasbeendrivenbycompanieswithapresenceinthenorthernandthewestern market as consumption growth of 34.7% yoy in Nov11 was better than industry growth of 21.3%. Consumption increased by 3.3% yoy during Apr11 Nov11

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP (INR) UltratechCement 1,150.6 ACC* 1,103.1


Source:Bloomberg *FY13correpspondsto2012

P/E EPSCAGR(%) FY13f FY13fFY14f 13.8 14.4 16.1 17.2

Stockperformanceason06Jan12(%) Company UltratechCement ACC CementIndex


Source:Bloomberg,AvendusResearch

1m 3.3 8.4 4.3

3m 4.0 0.4 3.1

1yr 13.8 8.7 5.5

Likelyimprovementincapacityutilizationtoprovidepricingpower
Capacity utilization for the industry stood at 70.5% during Apr11Nov11. We forecast utilization to improve from 72.1% in FY12 to 73.8% in FY13 due to an improvement in utilization across all regions. However, the improvement is likely to be largely driven by the western region, with utilization increasing from81%inFY12ftoc86%inFY13f.Weestimatepricingpowertoprevailinall regionsexcepttheSouthinFY13fasithasthelowestutilization(c61%).

Likelyreversalofinterestratecycletospurdemand
AnincreaseininterestratessinceDec10hasledtoaslowdowninConstruction and Housing activities. Housing, construction and infrastructure together constitute over 90% of cement demand. The likely trend reversal in interest rates during 2012 is likely to provide a fillip to construction and infrastructure activities, boosting demand for the cement sector. We estimate consumption toincreaseby7.0%inFY13fandby8.2%inFY14f.

PreferUltraTechCementandACC
We prefer ACC (ACC IN, Hold) and UltraTech Cement (UTCEM IN, Add) due to their lower valuations compared to Ambuja Cements (ACEM IN, Hold). The premium valuation for ACEM accounts for its dominant position in the western and northern markets and better capacity utilization compared to its peers. ACC and UTCEM trade at an EV/tonne of USD114 (2012f) and USD127 (FY13f) with Nov11 capacity utilization of 72% and 75%, respectively, providing it with an opportunity to grow faster than the industry in case of revival in cement demand. Reduced political uncertainty in Andhra Pradesh is also likely to boost consumption. Weak cement prices and lower than estimated consumption growtharelikelytoadverselyimpactvaluationsandstockperformance.

JimeshSanghvi,+9102266842859 jimesh.sanghvi@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

20

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company Larsen&Toubro IRBInfrastructure NCC Rating Hold Add Buy Allocation MCAP FF withinsector (INRbn) (%) (%) 662 68 80 41 24 10 9 52 10

Construction
Ratereversalwithoutpolicypushmaybeinadequate
Facing a tough operating environment, the construction sector continuedto underperform in 4Q2011. Rising interest costs have put a large dent in profitability. A sharp rate reversal may alleviate pressure on net margins and lead to a rebound in earnings of small and mid sizedcompaniesinFY13.Orderinflowgrowthislikelytoremaintepid, which may see competitive intensity remain at elevated levels and revenue growth subdued for the next 12 months. For the sector to revive/accelerate, mere rate reversal is likely to be inadequate and additionally require a speed up in government approvals and renewed policy push in the infrastructure sector. In the absence of the above, valuations remainsusceptibledespite thesharpcorrection. Larsen and Toubro (Hold), IRB Infrastructure Developers (Add) and NCC (Buy) are ourtoppicksinthesector. Profitabilitydentedbyfallinggrowthandrisinginterestcosts
The sector has been mired by multiple headwinds. The lack of government focusoninfrastructurespendinghasledtoadecliningrateofinvestmentinthe economy. Rising interest rates have put a large dent in profitability, even as companies have been grappling with slowing execution and bloating working capital. New policies in the works such as the Lokpal bill and the Land Acquisition bill raise concerns of a further slide in the investment rate. Even though the rolling 12month forward earnings growth (based on consensus estimates)indicatesbottomingoutofgrowth,valuationscontinuetoshrink.

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP (INR) Larsen&Toubro 1,081.5 IRBInfrastructure 124.5 NCC 35.3
Source:Bloomberg

P/E EPSCAGR(%) FY13f FY13fFY14f 12.1 15.5 7.7 10.0 5.1 28.8

Stockperformanceason06Jan12(%) Company 1m Larsen&Toubro 17.8 IRBInfrastructure 20.1 NCC 11.0 BSECapitalGoodsIndex 13.8
Source:Bloomberg

3m 19.5 23.2 38.8 17.9

1yr 42.4 45.9 75.0 43.2

FY13earningsmayreboundafterthecapitulationandlowFY12base
ManysmallandmidsizedconstructioncompaniesareseeingalargefallinPAT mainly on account of an increase in interest costs. A rate reversal may help arrest the fall in net margins and lead to a rebound in earnings on a very low base. Overall, sector earnings growth, though, may remain depressed as large project companies suffer on account of order and execution slowdown. Order inflow growth is likely to remain tepid, leading to competitive intensity remaining at elevated levels. Resolution of some of the current policy logjams and a large thrust on infrastructure spending could help improve the operating environment.

Preferlessgearedcompaniestillthesectorturnsarounddecisively
Many stocks appear deep in value compared to historical valuations. However, in the absence of adequate policy push, the operating environment may continue to deteriorate and valuations remain subdued. We prefer stocks with adequate resilience or with valuations at a discount. Larsen and Toubro (LT IN, Hold), IRB Infrastructure Developers (IRB IN, Add) and NCC (NJCC IN, Buy) are our top picks in the sector. LT has a commanding market share and comfortable gearing. IRB enjoys stable cash flow earnings from its portfolio of operating assets. NJCC is the preferred pick amongst similarsized large contractors given its diversified portfolio and large value in BOT assets, which arecurrentlyundervalued.
DevangPatel,+9102266842861 devang.patel@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

21

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company BharatHeavyElectricals CromptonGreaves Thermax Allocation MCAP FF withinsector (INRbn) (%) (%) Reduce 611 26 60 Buy 81 52 30 Hold 50 34 10 Rating

Engineering
EarningstodeceleratefurtherinFY13
The engineering sectors underperformance has accelerated on the backoflackofpolicydirectionthathasledtofurtherdeepeningofthe sector slowdown. The project pipeline has shrunk significantly; this is likely to result in a further slowdown in revenue growth in the coming 12 months and raises the risk of yoy earnings decline. Despite the sharp fall, valuations may remain under pressure due to deteriorating earnings growth. A sharp fall in interest rates may improve sentiment, butmaynotsignificantlyimprovethesectorsgrowth,whichismarred by broader policylinked slowdown. Bharat Heavy Electricals (Reduce), CromptonGreaves(Buy)andThermax(Hold)areourtoppicks. Newprojectactivityweakonaccountofpolicyuncertainties
1yr 45.9 58.5 50.5 43.2

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP P/E EPSCAGR(%) (INR) FY13f FY13fFY14f BharatHeavyElectricals 249.6 8.6 1.9 CromptonGreaves 126.4 10.8 24.1 Thermax 415.9 11.3 8.2
Source:Bloomberg

Stockperformanceason06Jan12(%) Company 1m 3m BharatHeavyElectricals 13.6 20.4 CromptonGreaves 7.7 14.4 Thermax 12.1 1.4 BSECapitalGoodsIndex 13.8 17.9
Source:Bloomberg

The weak operating environment has extended from power projects to other industrial projects due to uncertainty on the policy front and deteriorating macro cues. Issues of fuel availability have brought new power project development activity to a grinding halt and have raised the execution risk for projects currently under construction. The IIP for Capital Goods swung sharply into the red (26% yoy) for the month of Oct11, indicating the deepening slowdown in the sector. The rolling 12month forward earnings growth based on consensus estimates continues to trend down. The sectors relative underperformance has continued and increased in magnitude on the back of weakearningsandcontinuingrisksoffurtherdecline.

Growthdecelerationtocontinueasprojectpipelineshrinks
With a slowdown in new project take offs, the project pipeline for the sector has been declining raising the likelihood of a yoy decline in earnings going forward.Inaddition,powerprojectscurrentlyunderexecutionarelikelytoface delays,primarilyonaccountoffuelunavailability.Onaccountoftheabove,the sector is likely to face further a slowdown in revenue growth over the coming 12 months. A continuing slowdown in consumer spending may further reduce the demand for engineering goods. The interest rate reversal may improve the sentiment, but may not increase new project take offs if the lack of policy direction continues. INR depreciation is likely to exert pressure on margins for many companies. The continuing slide in earnings growth is likely to sustain pressureonthesectorsvaluations.

Prefercompanieswithalargerdiscountonvaluations
We prefer stocks where valuations have corrected significantly or which could surprise in the near term on earnings growth. Our top picks are Bharat Heavy Electricals (BHEL IN, Reduce), Crompton Greaves (CRG IN, Buy) and Thermax (TMX IN, Hold). BHELs earnings are comparatively better insulated from global events; it is trading at a large discount to other large companies in the sector. CRG stands to gain from INR depreciation as it earns c50% of its consolidated revenuefromoverseasthehighestamongstpeers.TMXenjoyscomparatively higherearningsgrowthcurrentlyandwithitsdiversifiedpresence,wouldbean earlybeneficiaryofanyturnaroundindemandforthesector.
DevangPatel,+9102266842861 devang.patel@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

22

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company TataConsultancyServ HCLTechnologies Rating Add Buy Allocation MCAP FF withinsector (INRbn) (%) (%) 2,289 23 35 288 29 20

ITServices
Opportunitiesfromglobalcrisismayoutweighrisks
The CNXIT Index outperformed the Nifty in the past three months, drivenpartlybyINRdepreciationandlargelybyrelativelystableglobal demand. The relative stability of consensus forecasts of S&P500 earnings in 2011 suggests that the risks are lower compared to 2008. Indian firms are likely to continue adding to their global market share, astheybenefitfromseculartrendssuchasariseinoffshoringinSIand Consulting.Thepotentiallystrongerearningsgrowthandtheincreased contribution of the CNXIT to Nifty profits are likely to drive further outperformancebytheCNXIT,withseculartrendsfavoringTierIfirms. HCL Technologies (Buy) is our preferred pick, given the attractive valuationsrelativetotheearningsgrowthpotential. Opportunitiesfromtheglobalcrisisoutweightherisks
The relative stability of consensus forecasts of the S&P500 in 2011 suggests that risks are lower compared to 2008. Key sectors in the US such as Financials and Manufacturing, that drive revenues of the Indian IT industry, have shown greater resilience. Consensus earnings forecasts of the FTSE and Stoxx also suggest a better outlook for Europe than in 2008. The changing attitude towards outsourcing by European firms may provide an opportunity for Indian IT. The 20082009 recession had seen Indian IT firms add an estimated 2% to their global market share against global peers. The market share is likely to expand even further as Indian firms continue to benefit from secular trends such as vendor consolidation and deal churn, owing to their large scale and diverse offerings. Indian vendors are wellpoised to gain from a rise in offshoring in System Integration (SI) and Consulting. A tilt in the revenue mix towards nonlinear pricing models is also likely to help sustain pricing and overcomecostpressures.

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP P/E EPSCAGR(%) (INR) FY13f FY13fFY14f TataConsultancyServ 1,169.4 18.6 15.3 HCLTechnologies 417.6 11.2 15.3
Source:Bloomberg

Stockperformanceason06Jan12(%) Company 1m TataConsultancyServ 1.0 HCLTechnologies 2.6 BSEITIndex 3.0


Source:Bloomberg

3m 12.1 6.1 14.5

1yr 0.2 12.2 13.8

INRweaknesspartlydrivesrally,businessoutlookastrongerforce
The outperformance of the CNXIT in late 2011 is largely attributed to the c8% depreciation in the INR in the past three months. We believe that while it is partly true, the relative stability in global demand is a larger force. Similar INR depreciation in 2008 was followed by underperformance of the CNXIT. Moreover, there has not been any meaningful upward revision in EPS in the past three months. These two factors indicate that a weak INR cannot offset theweaknessinultimatedemand.

Sectoroutperformancelikelytocontinue
TheCNXITIndexhasoutperformedtheNiftyby16.0%inthepastthreemonths and the contribution of IT Services to Nifty earnings growth for FY12 has gone up by 9.7% since Aug11. The potentially stronger earnings growth is likely to support the outperformance of the CNXIT Index relative to the Nifty. We also believethatTierIcompaniesarelikelytooutperformtheirmidcappeers,both in terms of earnings growth as well as P/E valuation. We prefer HCL Technologies(HCLTIN,Buy)aswebelievethecompanyislikelytobenefitfrom its focus on the highgrowing IMS segment, and its leadership position in ProductEngineeringandEnterpriseApplicationServices.
PriyaSunder,+9102266842862 priya.sunder@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

23

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company HindalcoIndustries MOIL Rating Buy Add Allocation MCAP FF withinsector (INRbn) (%) (%) 227 70 70 40 20 30

MetalsandMining
Policyactionlikelytoboostearnings,reducecost
The Metal index continued its underperformance in 4Q2011 due to earningsdowngradeandcontractioninvaluationmultiplesonaccount of rising uncertainty on growth. The sectors underperformance is likely to reverse in case of government action such as environment clearance for projects and resolution of the mining ban. Easing of interest rates, which have an inverse corelation to metal demand, is likely to be an additional driver for future growth in earnings. We prefer Hindalco Industries (Buy) and MOIL (Add) due to their strong cashflowgenerationandbalancesheetstrength. Underperformancedrivenbyc15%downgradeinearningssinceSep11
3m 1.2 9.5 5.2 1yr 52.8 47.1 44.8

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP (INR) HindalcoIndustries 118.7 MOIL 237.2


Source:Bloomberg

P/E EPSCAGR(%) FY13f FY13fFY14f 6.9 14.1 8.0 0.7

Stockperformanceason06Jan12(%) Company 1m HindalcoIndustries 13.0 MOIL 2.7 BSEMetalIndex 9.3


Source:Bloomberg

The Metal index has underperformed the Nifty by 9% in 4Q2011 on account of earnings downgrade and contraction in valuation multiples. Rise in input cost and lowerthanestimated realizations adversely impacted consensus earnings forecasts, which declined by c15% since Sep11. Increased uncertainty on procurementofrawmaterialforproductionoffinishedgoodsanddelayinproject clearanceshasledtouncertaintyongrowthforthenexttwoyears.

Governmentpolicyactionlikelytotriggerfuturegrowth
Delay in receipt of environmental clearances for greenfield projects has led to a delay in project commissioning and adversely affected volume estimates. Resolution of the mining ban and increase in export duty on iron ore are likely to reduce input costs for domestic nonintegrated producers. Revival in the global demand, mainly in the US and Europe, could be an additional trigger that is likely to boost demand and investment in the sector. The sectors underperformance is likelytoreverseincaseofgovernmentactionsuchasenvironmentalclearancefor projectsandresolutionoftheminingban.

Impendingfallininterestrateslikelytoboostdemandformetal
Demand for metals is driven by Automobiles, Capital Goods, Infrastructure and Consumer Durables. Likely fall in interest rates is likely to boost demand for metals. These demand drivers have an inverse corelation with interest rates, andhencetheriseininterestratessinceDec10hasadverselyaffecteddemand during 2Q20113Q2011. Domestic steel consumption has increased by 3.9% yoy to 45mn tonnes over Apr11Nov11 compared to 10.3% yoy growth in FY11,reflectingthelikelyimpactofinterestratesonmetaldemand.

PreferHindalcoIndustriesandMOIL
Hindalco Industries (HNDL IN, Buy) overseas operations contributes c60% of consolidated EBITDA and is unlikely to be adversely impacted by commodity price volatility. Capacity addition in domestic operations over FY13fFY14f is likely to cushion the downside risk to earnings due to weak aluminium prices. MOIL (MOIL IN, Add) is likely to have cash and cash equivalents of cINR22bn at end Mar12, representing c57% of its current market capitalization. This is likely to restrict the downside in valuations. Hence, we prefer HNDL and MOIL. JSW Steel(JSTLIN,Hold)islikelytobepreferred,iftheuncertaintyontheKarnataka mining ban is resolved. Risk factors include weak aluminium and manganese orepricesandadelayinprojectcommissioning.
JimeshSanghvi,+9102266842859 jimesh.sanghvi@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

24

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company ICICIBank AxisBank StateBankofIndia ShriramTransportFin LICHousingFinance HDFC PunjabNationalBank Rating Buy Buy Buy Buy NR NR Buy MCAP (INRbn) 866 352 1,062 109 107 988 257 Allocation FF withinsector (%) (%) 57 30 90 25 32 15 53 10 59 10 90 5 37 5

Nonbankingfinancials
Earningsmomentuminselectsegmentsmaystaystrong
The underperformance of NBFCs waned over the past three months, due to receding regulatory headwinds. Consensus earnings forecasts have declined by c1% during the past three months, and are likely to moderate. Our forecasts amply reflect these adversities. Despite these headwinds, profitability of NBFCs is likely to stay above some banks, driven by structurally higher NIMs and lower operating costs. The P/B premiumofNBFCsimprovedfrom5%atendJun11to6%atendDec11. The P/B premium of NBFCs is likely to sustain. Within NBFCs, select pockets such as Housing and Retail Financials may extend their strong earnings momentum. We prefer Housing Financials such as Housing Development Finance Corporation (NR) and LIC Housing Finance (NR) andShriramTransportFinance(Buy)amongRetailFinancials. Waningunderperformanceonrecedingregulatoryrisks
The underperformance of NBFCs waned during the past three months, driven by receding regulatory headwinds. Consensus forecasts for FY13 net profit of NBFCs have declined by c1% between endSep11 and endDec11. While the earnings momentum is likely to further moderate based on a combination of cyclical and regulatory factors, the profitability of NBFCs may continue to stay abovethatofsomebanks.

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP P/E EPSCAGR(%) (INR) FY13f FY13fFY14f ICICIBank 751.7 10.8 15.7 AxisBank 853.5 7.2 20.9 StateBankofIndia 1,672.8 6.3 16.8 ShriramTransportFin 480.8 6.8 14.4 LICHousingFinance 225.3 8.1 29.4 HDFC 670.4 20.5 18.1 PunjabNationalBank 812.3 4.4 16.7
Source:Bloomberg

Stockperformanceason06Jan12(%) Company 1m 3m ICICIBank 3.6 3.5 AxisBank 17.3 10.3 StateBankofIndia 12.5 2.7 ShriramTransportFin 15.7 19.3 LICHousingFinance 3.3 6.0 HDFC 1.2 7.3 PunjabNationalBank 12.4 10.6 BSEBankIndex 8.2 2.7 NBFCIndex 4.6 1.8
Source:Bloomberg,AvendusResearch

1yr 28.6 34.6 36.2 35.0 23.8 5.2 31.8 24.5 15.7

Profitabilitytomoderate,thoughlikelytostayabovebanks
Despite higher incremental NPLs, slower growth and moderation in earnings, the profitability of NBFCs is likely to stay well above some banks, driven by the structurally higher NIMs than banks that most of them enjoy. With their operating cost structure lower than most banks, the ROA for NBFCs may moderate relative to their recent past, though it is likely to stay above that for somenewprivatebanks.

P/BpremiumofNBFCslikelytosustain
NBFCstypicallytradeatapremiumtobanksgiventheir higherprofitabilityand return profile. In recent months, this premium has shrunk on increased regulatory risks. While the Central bank could potentially further tighten the operating framework for NBFCs, profitability is unlikely to be impacted materially. The P/B premium of NBFCs to banks has shrunk from a peak of 60% to 5% during Jun11 and 6% as at end Dec11. With reducing headwinds, the trendofariseintheP/BpremiumofNBFCsislikelytosustain.

Earningsmomentuminselectsegmentsmaystaystrong
Within NBFCs, select segments such as Housing may continue to see strong earnings momentum driven by strong rural cash flows and latent demand for credit in rural areas. These segments have seen strong outperformance over thepastthreemonths.WecontinuetopreferselectHousingFinancialssuch as Housing Development Finance Corporation (HDFC IN, NR) and LIC Housing Finance (LICHF IN, NR) and Retail Financials such as Shriram Transport Finance (SHTF IN, Buy). Underperformance of SHTF may reverse as regulatory headwindsrecedeandthecorestrengthsofSHTFreceiveattention.
JayneeShah,+9102266842868 jaynee.shah@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

25

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company RelianceIndustries BharatPetroleumCorp Oil&NaturalGasCorp CairnIndia Rating NR NR NR NR MCAP (INRbn) 2,350 172 2,187 645 Allocation FF withinsector (%) (%) 49 50 30 30 13 10 13 10

Oil&Gas
Attractivevaluationsaftertheunderperformance
Sector underperformance in 4Q2011, along with rising oil under recoveriesduetodepreciatingINRanddropinrefiningmargins,hasled to attractive valuations at the start of 2012. However, with earnings growth expected to slow over FY13, we remain neutral on the sector. We prefer Reliance Industries (NR) and oil marketing companies over the next 1215 months. Within OMCs, our top pick is Bharat Petroleum Corporation (NR) due to its highest refining/marketing ratio as well as theupsidepotentialfromitsnaturalgasportfolio. Underperformancelesseningduetoupstreamcompanies
WhiletheoilandgassectorcontinuedtounderperformtheNiftyin4Q2011on the back of concerns of falling refining margins and rising underrecoveries for oil marketing companies (OMCs) due to the depreciating INR, the underperformance has lessened with upstream companies, namely Cairn India (CAIR IN, NR) and Oil and Natural Gas Corporation (ONGC IN, NR) performing well with crude prices remaining strong and the depreciating INR helping realizationsfurther.

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP P/E EPSCAGR(%) (INR) FY13f FY13fFY14f RelianceIndustries 717.6 9.7 8.8 BharatPetroleumCorp 476.5 8.8 28.4 Oil&NaturalGasCorp 255.7 7.2 2.4 CairnIndia 339.1 7.4 7.3
Source:Bloomberg

Stockperformanceason06Jan12(%) Company 1m 3m RelianceIndustries 11.1 6.4 BharatPetroleumCorp 14.2 28.8 Oil&NaturalGasCorp 5.1 3.1 CairnIndia 5.3 26.8 BSEOil&GasIndex 9.4 7.6
Source:Bloomberg

1yr 33.9 23.0 16.7 0.8 28.8

Valuationslikelytooutweighfallingearningsgrowth

At end Dec11, the sector was trading at 9.3x 12month forward earnings compared with 13.1x at end Dec10. We believe that this can be attributed to the fact that the rolling 12month forward earnings growth expectation has dropped from 15.1% yoy to 9.9% yoy during Dec10Dec11 (based on consensusestimates).However,webelievesubsidyconcernsforOMCsseemto be overdone and valuations look attractive. The government is likely to compensate OMCs at end FY12 through cash transfer and higher share from upstream companies for most of the underrecoveries during the year, in our view. As a consequence, we believe the losses reported by the three OMCs in 1HFY12arelikelytobereversed,leadingtooutperformance.

DepreciatingINRbiggestrisktoOMCs
ThedepreciatingINRalongwiththegovernmentpolicyoffixingthepriceofkey oil products such as diesel, kerosene and LPG is estimated to force OMCs to incurcINR1,330bnofunderrecoveriesforFY12.Inaddition,withtheupcoming elections in five states increasing political sensitivity, we do not estimate the governmenttomakeanymovetoreducesubsidiesfortheremainderofFY12.

RILandOMCslikelytoleadrecovery
We prefer Reliance Industries (RIL IN, NR) over the next 1215 months. With refining margins recovering so far in 2012 and expectation of better clarity on gas production from the KG D6 basin in the coming few months, we believe RILs fundamentals remain strong. In addition, we estimate the OMCs to significantly outperform in FY13 as clarity emerges on FY12 subsidy sharing. WithinOMCs,ourtoppickisBharatPetroleumCorporation(BPCLIN,NR)aswe believe that its upstream block in Mozambique as well as investments in LNG and citygas distribution businesses in India could provide better upside potential. Risk factors include crude price, benchmark refining margins, INR/USDexchangerateandgovernmentpolicyonfuelsubsidiessharing.
SaurabhBharat,+9102266842856 saurabh.bharat@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

26

IndiaEquityResearch

January09,2012

Topsectorpicksandallocation Company SunPharmaceuticalInds Dr.Reddy'sLaboratories Cipla Divi'sLaboratories Lupin CadilaHealthcare Rating Add NR Buy Buy Hold Hold MCAP (INRbn) 515 271 272 102 198 139 Allocation FF withinsector (%) (%) 53 20 66 20 51 20 45 20 58 10 22 10

Pharmaceuticals
WeakINRapositive;relativeimmunitytomacroconcerns
On relative immunity from global macro concerns, in 2011 the BSE Healthcare Index outperformed the Sensex by 12%. Despite a likely slowdown in earnings growth, this outperformance is likely to sustain. Growthindomesticformulationsislikelytopostasequentialrecovery over the near term, though may it continue to stay low. Opportunities from ParaIV/FTF launches in the US generic space are likely to dwindle; generic Lipitor, Zyprexa and Geodon being amongst the meaningful products likely to get captured in nearterm earnings. A depreciating INR is broadly beneficial for the industry and may direct earningsgrowthandestimates. Domesticgrowthstayslow,butsequentialrecoverycouldkickin
The domestic branded formulations business is amongst the most profitable and the strongest cash cow in the industrys revenue pie. In recent quarters, the segment has seen deceleration in growth fallout of inventory rationalizationandintense pricecompetition.However,thefallingrowthrates has slowed, and could be a sign of bottoming out. The low base impact may likely come into play, and we may see a sequential pick up in the trend in comingquarters.

Source:Bloomberg,AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP P/E EPSCAGR(%) (INR) FY13f FY13fFY14f SunPharmaceuticalInds 500.0 20.2 14.3 Dr.Reddy'sLaboratories 1,600.6 17.4 14.2 Cipla 338.5 20.0 18.6 Divi'sLaboratories 770.4 16.5 21.9 Lupin 442.9 16.4 17.7 CadilaHealthcare 680.4 14.9 21.6
Source:Bloomberg

Stockperformanceason06Jan12(%) Company SunPharmaceuticalInds Dr.Reddy'sLaboratories Cipla Divi'sLaboratories Lupin CadilaHealthcare BSEHealthcareIndex

1m 3m 4.7 8.4 1.3 7.8 2.8 20.4 1.1 7.5 5.0 5.7 2.6 11.8 2.2 2.6

1yr 0.0 6.7 6.9 16.7 9.5 11.5 12.4

Regulatoryissues,policychangesmovingtotheforefront
Regulatory and price policy changesin India and in the export marketsare likely to move to the forefront, and may have a direct bearing on nearterm sentiments, if not earnings. The proposed National Pharmaceutical Pricing Policy (NPPP) aims to increase the scope of price control and could impact valuations of domestic formulators. Price cuts in economies adopting austerity measures could hurt margins. Regulatory issues (including US FDA hurdles) couldalsoshapethesectorsvaluationsincomingyears.

Currencylikelytohaveapositiveimpactofgrowth,forecasts
While a meaningful upside is likely to flow in from generic Lipitor, Zyprexa and Geodonoverthenearterm;broadly,opportunitiesfromParaIV/FTFsintheUS generic space are likely to dwindle. On the other hand, continued investments inIndiacouldmaintainneartermpressureonoperatingmargins.However,the Indian pharma industry is a net exporter and the c19% depreciation of the INR against the USD in 2011 is likely to have a positive impact on earnings, particularly for companies with limited foreign currency liabilities. For companies involved in contract research and manufacturing (CRAMS), the US againranksamongstthedominantexportdestinations.

Relativeimmunitytomacroworries
In 2011, the BSE Healthcare Index outperformed the broader market by 12%. Despite a likely slowdown in earnings growth, the outperformance is likely to sustain as macroeconomic concerns of slowing economic growth, high inflation and interest rates may have a limited impact on earnings. Sun Pharmaceutical Industries (SUNP In, Add), Cipla (CIPLA In, Buy) and Divis Laboratories(DIVIIN,Buy)areourpreferredplays.
MonicaJoshi,+9102266842852 monica.joshi@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

27

IndiaEquityResearch

January09,2012

Top sectorpicksand allocation Company BhartiAirtel IdeaCellular Rating Buy Hold Allocation MCAP FF within sector (INRbn) (%) (%) 1,255 27 80 272 31 20

Telecom
3Grelatedconcernsledtounderperformancein4Q2011
Regulatoryheadwindspertainingto3Groamingpactsandconcernson a pick up in 3G services are likely to have led to the sectors relative underperformance of 3% over the Nifty in 4Q2011. The underperformanceislikelytoreverseasthebenefitsoftariffhikesare realizedandclarityonpolicyemergeswiththelikelyannouncementof the Telecom Policy in 1H2012. Softening of interest rates and INR appreciation against the USD are likely to reduce the cash outgo for interest payments and capital expenditure by telecom service providers. Bharti Airtel (Buy) is our top pick due to: (1) an EBITDA CAGR of 19% over FY12fFY14f; and (2) cash profit generation of INR700bn over FY12fFY14f, which is likely to lower the concerns on netdebtandregulatorylevies. 3Grelatedconcernsmayhaveledto3%underperformancein4Q2011
The telecom sector has underperformed the Nifty by 3% in 4Q2011. The

Source: Bloomberg, AvendusResearch

Stockvaluations(Bloomberg consensus) Company CMP (INR) BhartiAirtel 330.6 IdeaCellular 82.1


Source: Bloomberg

P/E EPSCAGR(%) FY13f FY13f FY14f 13.2 43.1 19.4 74.9

Stockperformanceas on 06Jan12(%) Company 1m BhartiAirtel 15.4 IdeaCellular 15.8 Telecom Index 14.3
Source: Bloomberg, AvendusResearch

3m 9.7 13.2 9.4

1yr 6.4 17.9 7.1

underperformance is likely to have been led by regulatory headwinds pertainingto3Groamingpactsandslowpickupin3Gservices.

Operationalperformanceandpolicyclaritylikelytobepositive
Strong operational performance, led by realization of benefits of tariff hikes and a pick up in data usage, is likely to lead to a CAGR of 19% in consolidated EBITDA for Bharti Airtel (BHARTI IN, Buy) over FY12fFY14f. Also the new Telecom Policy is likely to be announced in 1H2012. This is likely to reduce the uncertainty over regulatory levies for telecom service providers, leading to an improvementinvaluationmultiples.

Reversalininterestratesandcurrencymayimproveearnings
Softening of interest rates is likely to improve the outlook on earnings due to a reduction in cash outgo for interest payments. Similarly, INR appreciation against the USD is likely to lower the cash outgo for interest payments on foreign currency loans. INR appreciation may also lower the cash outgo for capital expenditure. BHARTI is likely to incur capital expenditure of USD2bn in theIndiaandSouthAsiabusinessinFY12f.

PreferBHARTIforstrongOCFandlesserheadwindscomparedtopeers
BHARTI is our top pick. We forecast BHARTIs EBITDA for India and South Asia to grow at a CAGR of 15% over FY12FY14 and for Africa to grow at a CAGR of 41%. Cash profit of INR700bn over FY12fFY14f may help reduce the net debt byagreaterextent.Strongoperatingcashflow islikelytoabsorbtheimpactof regulatory levies for excess spectrum and renewal of license. BHARTI faces lesserregulatoryheadwindscomparedtopeers.

AbhayMoghe,+9102266842857 abhay.moghe@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

28

IndiaEquityResearch

January09,2012

Top sectorpicksand allocation Company NTPC TataPower Rating NR NR Allocation MCAP FF within sector (INRbn) (%) (%) 1,294 12 60 218 61 40

Utilities
Earningsvisibilitymayhaveledoutperformancein4Q2011
The 1.4% outperformance by Utilities relative to the Nifty in 4Q2011 was largely due to higher earnings visibility for NTPC (NR) and Power Grid Corporation of India (NR). A key trigger for extension of the outperformance in 2012 could be implementation of reforms addressing the financial health of DISCOMs and allowing passthrough of the fuel price rise under PPA. This is likely to help boost earnings growth and enhance valuations for IPPs such as Tata Power (NR) and Reliance Power (NR). In the near term, we prefer NTPC as its earnings arelargelyinsulatedfromthefinancialhealthofDISCOMsandthefuel price rise. Consensus forecasts for NTPC imply a CAGR of 16% in revenueand13%inPAToverFY13FY14. Outperformanceof1.4%in4Q2011wasledbyearningsvisibility
Utilities outperformed the Nifty by 1.4% in 4Q2011. This is likely to be due to higherearningsvisibilityforNTPC(NTPCIN,NR)andPowerGridCorporationof India (PWGR IN, NR). The regulated equity business model largely insulates NTPCandPWGRfromheadwindsfacedbythepowersector.

Source: Bloomberg, AvendusResearch

Stockvaluations(Bloombergconsensus) Company CMP (INR) NTPC 157.0 TataPower 91.8


Source: Bloomberg

P/E EPS CAGR(%) FY13f FY13f FY14f 12.1 12.1 10.6 0.6

Stockperformanceason 06Jan12(%) Company 1m NTPC 10.8 TataPower 5.7 Utilities Index 9.0
Source: Bloomberg, AvendusResearch

3m 4.2 6.5 5.4

1yr 22.3 34.4 28.4

ReformsandpolicychangesforPPAmayextendtheoutperformance
Reforms addressing the financial health of Distribution Companies (DISCOMs) are likely to allow them to purchase more power at competitive prices. This is likely to boost revenue growth for power generating companies. Tata Powers (TPWR IN, NR) Mundra UMPP and Reliance Powers (RPWR IN, NR) Krishnapatnam UMPP are under the Power Purchase Agreement (PPA) model. Allowing passthrough of the fuel price rise under the PPA model may lower concernsonearningsgrowth.ThiscouldextendtheoutperformanceofUtilities relativetotheNifty.

Reversalininterestratesandcurrencylikelytoimproveearnings
Softening of interest rates is likely to improve the outlook on earnings due to a reduction in cash outgo for interest payments. Similarly, INR appreciation against the USD is likely to lower the cash outgo for interest payments on foreign currency loans. INR appreciation may also lower fuel costs for TPWR, NTPCandRPWR.

PreferNTPCduetohighearningsvisibility
In the near term, we prefer NTPC. The company largely operates under the regulatedequitymodel.Hence,RoEsaredeterminedonplantavailabilityfactor and not plant load factor. Thus, NTPC is largely insulated from the poor financial health of DISCOMs. Also, fuel costs for the company are a pass through; hence, a rise in fuel costs does not impact earnings. In the past, there havebeendelaysincapacityadditionduetovariousfactors.However,capacity addition is likely to be bunched up over FY13fFY14f. Consensus forecasts for NTPCimplyaCAGRof16%inrevenueand13%inPAToverFY13FY14.

AbhayMoghe,+9102266842857 abhay.moghe@avendus.com

Pleaserefertothedisclaimertowardstheendofthedocument.

29

India Equity Research


AnalystCertification

Strategy

We, Abhay Moghe, Anand Shanbhag, Chandana Jha, Devang Patel, Jaynee Shah, Jimesh Sanghvi, Monica Joshi, Priya Sunder, Raghunandhan N L and Saurabh Bharat, research analystsandauthorsofthisreport,herebycertifythatalloftheviewsexpressedinthisdocumentaccuratelyreflectourpersonalviewsaboutthesubjectcompany/companiesand its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document.

Disclaimer
ThisdocumenthasbeenpreparedbyAvendusSecuritiesPrivateLimited(Avendus).Thisdocumentismeantfortheuseoftheintendedrecipientonly.Thoughdisseminationtoall intended recipients is simultaneous, notall intended recipients may receive this document at the same time. This document is neither an offer norsolicitation for anoffer to buy and/or sell any securitiesmentioned hereinand/orofficialconfirmation of anytransaction.Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe, and must not be taken as, the sole basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as he deems necessary to arrive at an independent evaluation, including the merits and risks involved, for investment in the securities referred to in this document and shouldconsult hisownadvisorstodetermine themeritsandrisksofsuchinvestment.Theinvestmentdiscussed orviewsexpressedmaynotbesuitablefor all investors.This document has been preparedonthebasisof informationobtainedfrompubliclyavailable, accessibleresources.Avendushasnotindependentlyverifiedallthe informationgiven inthisdocument.Accordingly,norepresentationorwarranty,expressorimplied,ismadeastoaccuracy,completenessorfairnessoftheinformationandopinioncontainedinthis document. The information given in this document is as of the date of this document and there can be no assurance that future results or events will be consistent with this information.ThoughAvendusendeavourstoupdatetheinformationcontainedhereinonreasonablebasis,Avendus,itsassociatecompanies,theirdirectors,employees,agentsor representatives (Avendus and its affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that maypreventusfromdoingso.Avendusanditsaffiliatesexpresslydisclaimanyandallliabilitiesthatmayarisefrominformation,errororomissioninthisconnection.Avendusand itsaffiliatesshallnotbeliableforanydamageswhetherdirect,indirect,specialorconsequential,includinglostrevenueorlostprofits,whichmayarisefromorinconnectionwith the use of this document. This document is strictly confidential and is being furnished to you solely for your information. This document and/or any portion thereof may not be duplicated in any form and/or reproduced or redistributed without the priorwritten consent of Avendus. This document isnot directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of the United States or Canada or is located in any other locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Avendus and its affiliates to any registration or licensing requirements within such jurisdiction. Persons in whose possession this document comes should inform themselves about and observe any such restrictions. Avendus and its associate companies may be performing or seeking to perform investment banking and other services for any company referred to in this document. Affiliates of Avendus may have issued other reports that areinconsistentwithandreachadifferentconclusionfromtheinformationpresentedinthisdocument. Avendus generally prohibits its analysts and persons reporting to analysts from maintaining a financial interest in the securities or derivatives of any company that the analysts cover. Avendus and its affiliates may have interest/positions, financial or otherwise, in the companies mentioned in this document. In order to provide complete transparency to our clients, we have incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as an endorsement of the view expressed in the document. Avendus is committed to providing highquality, objective and unbiased research to our investors. To this end, we have policies in place to identify, consider and manage potential conflicts of interest and protect the integrity of our relationships with investing and corporate clients. Employee compliance with these policies is mandatory. AnycommentorstatementmadehereinaresolelythoseoftheanalystanddonotnecessarilyreflectthoseofAvendus.

DisclosureofInterestStatement(asofJanuary9,2012)

Analystownership ofthestock

Avendusoritsassociatecompanys ownershipofthestock

InvestmentBankingmandatewith associatecompaniesofAvendus

ACC AmbujaCement AshokLeyland AxisBank BajajAuto BharatPetroleumCorporation BhartiAirtel BharatHeavyElectricals CadilaHealthcare CairnIndia Cipla CromptonGreaves Divi'sLaboratories Dr.Reddy'sLaboratories

No No No No No No No No No No Yes No Yes Yes

No No No No No No No No No No No No No No

No No No No No No No No No No No No No No

30

India Equity Research

Analystownership ofthestock Avendusoritsassociatecompanys ownershipofthestock

Strategy
InvestmentBankingmandatewith associatecompaniesofAvendus

EicherMotors HCLTechnologies HousingDevelopmentFinanceCorp. HDFCBank HeroMotoCorp HindalcoIndustries HindustanPetroleumCorporation HondaMotorcycleandScooterIndia ICICIBank IdeaCellular IndianOilCorporation IndusIndBank IRBInfrastructureDevelopers JaguarLandRover JSWSteel LarsenandToubro LICHousingFinance Lupin Mahindra&Mahindra MarutiSuzuki MOIL NCC NTPC OilandNaturalGasCorporation PowerGridCorporationofIndia PunjabNationalBank RelianceIndustries ReliancePower ShriramTransportFinance StateBankofIndia SunPharmaceuticalIndustries TataConsultancyServices TataMotors TataPower Thermax UltraTechCement

No Yes Yes No No No No No Yes No No No No No No Yes No No No No No No No No No No No No No Yes No No No No No No

No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No

No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No No

31

India Equity Research


Strategy

OUROFFICES Corporateoffice IL&FSFinancialCentre, BQuadrant,5thFloor, BandraKurlaComplex Bandra(E),Mumbai400051 T:+912266480050 F:+912266480040 InstitutionalBroking IL&FSFinancialCentre, BQuadrant,6thFloor, BandraKurlaComplex Bandra(E),Mumbai400051 T:+912266480950

Bangalore TheMillenia,TowerA, #1&2,10thFloor,MurphyRoad, Ulsoor,Bangalore8.India. T:+918066483600 F:+918066483636

AvendusSecuritiesPrivateLimited SEBIRegistrationNo:

BSECMINB011292639|NSECMINB231294639|NSEF&OINF231294639

32

Вам также может понравиться