Академический Документы
Профессиональный Документы
Культура Документы
2010 Outlook
NOMURA FINANCIAL ADVISORY AND
SECURITIES (INDIA) PRIVATE LIMITED
Prabhat Awasthi +91 22 4037 4180 prabhat.awasthi@nomura.com
And the India Research Team TOP
DOWN
R E P O R T
A N C H O R
c Inflation and monetary rebalancing — the proverbial puddle (see inside front cover)
India Alok Kumar Nemani (Associate) Metals & Mining +91 22 4037 4193 alokkumar.nemani@nomura.com
India Anil Sharma Oil & Gas +91 22 4037 4338 anil.sharma.1@nomura.com
India Harish Venkateswaran (Associate) Infrastructure & Construction +91 22 4037 4028 harish.venkateswaran@nomura.com
India Jamil Ansari Media, Basic materials +91 22 4037 4192 jamil.ansari@nomura.com
India Kapil Singh Auto & Auto Parts +91 22 4037 4199 kapil.singh@nomura.com
India Nipun Prem (Associate) India Strategy +91 22 4037 5030 nipun.prem@nomura.com
India Ravikumar Adukia (Associate) Oil & Gas +91 22 4037 4232 ravikumar.adukia@nomura.com
d Growth rebalancing — investment to join the mix And the India Research Team
The 2H FY09 (fiscal year-ending 31 March, 2009) saw demand reeled in. We (see inside front cover)
expect better growth in FY11F, underpinned by a turn in the investment cycle. Firm
signs of a demand recovery are evident. Capacity shortages that had been masked
by absent demand are now back to the fore, creating conditions for a capex revival.
Back to reforms? 18
What has been the broad thrust of reforms? 18
Sector strategy 23
Appendix 24
Appendix 118
Rebalancing
We expect this year to be one of rebalancing: 1) of growth as investment makes a Long domestic cyclicals to play
comeback after being on the backburner in FY09; 2) of a move away from an ultra growth, but short rate-sensitives
until inflation overhang abates
expansionary fiscal policy as the government attempts to fix its finances and as
economic buoyancy boosts revenues; 3) of a reversal of loose monetary stance as
excessive liquidity is reined in followed by policy tightening, and; 4) finally and most
importantly, of risk-taking as growth in investment resumes in earnest after a hiatus
following the crisis in mid-2008.
But, every path has its puddle. Early on this path to risk-taking and growth lies the
proverbial puddle in the guise of a quick rise in inflation, which when it elicits a
response by the central bank, should cause a market correction and an
underperformance of rate cyclicals, especially banks. Please see the Exhibits below
for how the market and banks have underperformed during episodes of high inflation
(when the WPI exceeds 8%, which we think is round the corner).
We would recommend that investors tactically tilt their portfolios towards defensive and Sensex target of 19,600 for
non-rate sensitive sectors in the shorter term as the overhang of inflation and RBI December-end 2010
policy action abates. A correction of about 10% would offer a better entry point into
rate cyclicals, in our view.
We are revising our Sensex target from 18,800 for September-end to 19,600 for
December-end 2010. Our new target implies about 13% potential upside from current
levels.
Exhibit 1. Market underperforms during episodes of Exhibit 2. Banks underperform the market when
high inflation inflation rises above 8%
(y-y %) Sensex 6m-6m (LHS) WPI (RHS) (y-y %) (y-y %) WPI (LHS) (Jan '02 = 100)
80 14 Bankex/Sensex (RHS)
Circles highlight episodes of WPI > 8% 14 Circles highlight episodes of WPI > 8% and Banks 210
60 and market underperformance 12 12 underperformance
190
10 10
40
8 170
20 8
6 6 150
0
4 4
130
(20)
2 2
(40) 110
0 0
(60) (2) (2) 90
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Exhibit 3. Sensex consensus-based 12m forward P/E Exhibit 4. Sensex earnings yield minus 10-year
nominal govt bond yield
(x) (%)
16
30
25 12
8 Undervaluation territory
20
15 4
10 0
0 (8)
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Aug-98
Aug-99
Aug-00
Aug-01
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research
This extraordinary rise in food prices is mirrored in consumer price inflation, which has Manufacturing prices are rising
remained high compared to other regional economies. amid strong domestic activity,
capacity shortages and rising
The overall inflation picture in India is being exacerbated by rising global commodity global commodity prices
prices — in the backdrop of a sharp rise in food prices (as seen in the slope of the agri
spot price curve in the Exhibit overleaf) as mentioned above — which, along with the
strong momentum in economic activity and industrial acceleration, is likely to feed into
pricing pressures in the wider manufacturing sector. The Exhibits on the following page
provide clear evidence of global commodity prices working their way through to
domestic manufacturing prices with a lag. Evidence from the BSE100 ex-bank and Oil
& Gas group of companies (Exhibit on next page) reveals that raw material price
pressure has started to show up in the manufacturing sector with the raw
material/sales ratio picking up strongly in 2Q FY10.
Exhibit 5. Primary articles inflation and agri spot Exhibit 6. India CPI vs regional peers
prices
Nov-06
Mar-07
Nov-07
Mar-08
Nov-08
Mar-09
Jul-08
Jul-09
Jul-05
Jul-06
Jul-07
Mar-07
Mar-08
Mar-09
Dec-06
Jun-07
Sep-07
Dec-07
Jun-08
Sep-08
Dec-08
Jun-09
Sep-09
Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research
Exhibit 7. Manufacturing WPI index and CRB Exhibit 8. Raw material prices as % of net sales
commodity prices (BSE100 ex-banks and oil & gas)
4Q FY08
1Q FY09
3Q FY09
4Q FY09
1Q FY10
2Q FY09
2Q FY10
Jan-01
Jan-03
Jan-05
Jan-07
Jan-08
Jan-09
Jan-02
Jan-04
Jan-06
Investment outlook
Exhibit 9. BSE500 ex-banks corporate capex Exhibit 10. India investment-to-GDP ratio
(INRbn) (%)
3,000 35
2,500 34
2,000 33
32
1,500
31
1,000
30
500
29
0
28
FY1993
FY1995
FY1997
FY1999
FY2001
FY2003
FY2005
FY2007
FY2009
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Source: Capitaline, Nomura research Source: CSO, Nomura research
Exhibit 11. Capacity utilisation (%) Capex was strong in 1H FY09 and
its slight decline in the full year
(%) Manufacturing Industry Mining and Quarrying (%) happened entirely because of the
Electricity All industries (RHS) slowdown in capex in 2H FY09,
85 post crisis
95
84
90 83
82
85
81
80
80
79
75 78
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: Reserve Bank of India (RBI), Nomura research
The sudden disappearance of demand in the wake of the crisis happened despite
inherent shortages in the economy, which existed pre-crisis and manifested
themselves in the capacity tightness of FY08. Capacity utilisation in the manufacturing
sector, along with non-oil imports, fell sharply post crisis. We believe the average
capacity utilisation rate of 79.3% in FY09 (vs 82.5% in FY08) subsumed a much lower
rate for the second half of FY09. Assuming that capex was relatively buoyant up until
the crisis (as demand conditions were strong), we suspect all of the capex slowdown
came through in the second half of FY09. Anecdotal evidence suggests that several
companies froze capex plans in the wake of the crisis.
It is only in the past few months that firm signs of a demand recovery have become Capacity shortages have returned
evident. First, we have seen a major acceleration in industrial growth, even on a
pre-crisis base, as manufacturing responds to growing demand. Second, despite
strong domestic production growth, non-oil imports have started rising sharply,
suggesting a spill-over of demand onto imports. Anecdotally, most of our covered
companies are running at full capacity. We, therefore, believe that the capacity
shortages of FY08, which were masked by the fall in demand in FY09, are back to the
fore again, creating conditions for a revival of industrial capex in India.
Exhibit 12. Cap utilisation and industrial production Exhibit 13. Non-oil imports and cap utilisation
(%) Cap utilisation (LHS) (%) (%) Non oil import growth (LHS) (%)
85 IIP growth (RHS) 14 cap utilisation (RHS)
45 85
84 12 40 84
83 35 83
10
82 30
8 82
81 25
81
6 20
80
80
FY08: Rising cap util and falling IP 4 15
79
10 Given capacity shortages, imports rose 79
78 2
5 to fill the gap in FY08 78
77 0
0 77
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Note: We have assumed 9.5% IIP growth in FY10 Source: Business Beacon, Nomura research
Source: Business Beacon, Nomura research
110 Non-oil imports (Index Base Jul '08 =100) (%) IIP growth
12
100
10 Despite sharply rising domestic
90 Non-oil imports are up sharply supply
from the bottom 8
80
6
70 4
60 2
0
50
-2
40
May-09
Mar-09
Nov-08
Sep-08
Jan-09
Sep-09
Jul-08
Jul-09
May-09
Nov-08
Mar-09
Jan-09
Jul-08
Sep-08
Jul-09
Source: Business Beacon, Nomura research Sep-09 Source: Business Beacon, Nomura research
The rapid normalisation of credit markets has meant that stalled financial closures Stalled financial closures of many
have now accelerated in earnest. The table below shows some of the recent financial big power projects have
closures in the power sector. The two important points to note here are: 1) several of completed since March 2009
these financial closures were expected last year but were delayed due to the crisis.
The majority of the closures happened after March this year, and; 2) there will be a
time lag between financial closure and physical implementation. We believe that these
closures will have a very positive impact on the economy in terms of physical activity in
FY11F.
The experience has been similar in the Indian road sector. In our meetings with the
National Highway Authority of India (NHAI), we learned that the numbers of bidders
expressing interest in toll projects saw a quantum jump between March 2009 and
October 2009.
Exhibit 17. Net capital inflows and capex Exhibit 18. Investment and capital inflows
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
FY 2003
FY 1995
FY 1996
FY 1997
FY 1998
FY 2000
FY 2001
FY 2002
FY 2003
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 1999
The coffers
Exhibit 19. Central revenue receipts vs industrial Exhibit 20. Central non-plan revenue expenditure
production
(Y-Y %) Central govt. revenue receipts (LHS) (Y-Y %) 300 FY06 FY07 FY08
50 14 FY09 FY10
IIP (RHS)
40 250
12
30
10 200
20
10 8
150
0 6
(10) 100
4
(20)
(30) 2 50
(40) 0
Sep-00
Sep-09
Dec-05
Sep-03
Sep-06
Dec-99
Dec-02
Dec-08
0
Jun-98
Jun-04
Jun-07
Jun-01
Mar-99
Mar-02
Mar-05
Mar-08
Mar
Nov
Apr
Jun
Jan
Jul
Aug
Sep
Feb
Oct
Dec
May
Source: Business Beacon, Nomura research Note: April expenditure, Base = 100
Source: Business Beacon, Nomura research
There are a few significant one-off items in the expenditure budget, which we expect
will tail off in FY11F:
z INR240bn of the Sixth Pay Commission pay hike arrears (60% of total arrears were
paid in FY10F and 40% were paid in FY09).
z INR200bn was spent directly in FY09 as part of the fiscal stimulus. This might not
be rolled back.
z INR150bn of the farm loan waiver that was paid in FY10 (of the total INR600bn
farm loan waiver programme, INR250bn was paid in FY09, INR120bn is to be paid
in FY11F and INR80bn in FY12F.
z On the subsidy front, while we see upside risk on the budgeted INR525bn food
subsidy for FY10 because of the drought this year, we expect a normal monsoon
and a rebound in agricultural output next year to shave off approximately INR150bn
of the food subsidy bill in FY11F.
z As shown in the chart below, while landed prices of fertilisers have declined to
2006-07 levels, we estimate that budgeted fertiliser subsidy for FY10 of INR500bn
could be higher by about INR100bn to INR150bn. So while the downside risk to
fertiliser subsidy could get offset by upside risk to food subsidy, we expect both to
decline in FY10F by as much as INR250-INR300bn.
FY99
FY02
FY05
FY97
FY98
FY00
FY01
FY03
FY04
FY06
FY07
FY08
FY09
FY10
z Disinvestment: It is difficult to pin down a firm figure on how much the government Disinvestment proceeds of
can raise from disinvestment this year, as valuation issues plague unlisted as well INR46bn in FY10 so far. In
as illiquid listed government-controlled companies. Of the INR968bn budgeted over pipeline are stake sales in REC,
NTPC, SJVN and NMDC
FY92-FY05, the government only managed to raise about half (INR447bn) of its
disinvestment targets; it has not budgeted any targets since FY06.
Based on our analysis, we estimate that the potential pool of disinvestment proceeds
available to the government if it disinvests its stakes in listed PSUs down to 51% are:
As a benchmark, the budget estimate for the fiscal deficit in FY10 is close to US$86bn.
In the current fiscal year, the government has raised INR46bn from disinvesting its
stakes in National Hydroelectric Power Corporation Ltd (NHPC) (NHPC IN, INR421bn
market cap, 13.6% free float) and Oil India Limited (OIL) (OINL IN, INR301bn market
cap, 12.4% free float), and the current pipeline of PSUs lined up for disinvestment in
FY10 includes Rural Electrification Corporation (REC) (RECL IN, INR202bn market
cap, 18.2% free float, 5% stake sale, 15% fresh equity), National Thermal Power
Corporation (NTPC) (NATP IN, INR1,896bn market cap, 10.5% free float, 5% stake
sale), Satluj Jal Vidyut Nigam Ltd (SJVN) (unlisted, 10% stake sale) and National
Mineral Development Corporation (NMDC IN, INR1650bn, 1.6% free float, 8.38%
stake sale).
Exhibit 22. Slope of the yield curve (10-yr govt yield minus 1-yr govt yield)
Sep-04
Aug-06
Nov-07
Nov-08
Sep-09
Oct-02
Aug-03
Dec-03
Oct-05
Apr-09
May-01
May-02
May-04
May-05
May-08
Jan-02
Jan-05
Jun-07
Jan-01
Jan-07
Mar-03
Mar-06
Gearing up
We expect to see re-leveraging and the investment cycle make a comeback as a key
theme in FY11 following a period of de-leveraging by corporates and households —
the government had to leverage up as it administered the fiscal stimulus — that
happened post crisis, and which seems to be continuing as suggested by weak bank
credit growth in FY10 so far.
Exhibit 23. Bank credit and deposit growth Exhibit 24. Non-food bank credit growth (no. of
weeks since beginning of fiscal year)
8 65 95
Sep-09
Dec-07
Sep-08
Dec-08
Jun-08
Jun-09
Mar-08
Mar-09
90
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37
Exhibit 25. Industry capex and cost in FY08 and FY09 Exhibit 26. BSE500 ex-banks capex (y-y %)
FY08 FY09
No of % No of % (Y-Y %)
projects share projects share
Infrastructure 129 40.9 115 50.5
70
Power 64 31.0 68 29.4 60
Telecom 8 1.9 9 16.4
Ports & Airports 6 0.8 4 2.1 50
Roads, Storage & Water mgmt 4 2.0 5 0.1
SEZ, Industrial, Biotech & IT Parks 47 5.1 29 2.6
40
Sugar 16 1.2 22 1.0 30
Textiles 118 4.3 48 1.4
Paper & Paper Products 17 0.8 25 1.1 20
Coke & Petroleum Products 5 7.0 5 1.2
Chemicals & Petrochemicals 26 1.0 27 1.2
10
Pharma & Drugs 38 2.1 31 0.5 0
Rubber & Plastic Products 16 1.1 18 0.4
Cement 24 5.5 28 4.4 (10)
Metals & Metal Products 123 16.5 108 19.8
Transport Equipment 38 3.3 31 2.3
(20)
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Construction 38 3.7 30 7.9
Hotels & Restaurants 52 3.7 60 2.3
Transport Services 17 1.3 15 0.8
Hospitals 28 1.2 17 0.4 Source: Capitaline, Nomura research
Others 194 6.2 170 4.8
Total 879 100.0 750 100.0
Exhibit 27. Higher leverage of companies that Exhibit 28. BSE500 ex-financials net profits (y-y %)
recapitalised through QIPs
140 40
120
30
100
20
80
60 10
40 0
20
(10)
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
This availability of capital is setting the stage for the next leg of growth and we expect
it to start showing up in the coming four to six months.
Exhibit 30. External commercial borrowings Exhibit 31. Primary market issuances
(US$mn) Others (INRmn)
QIPs
Refinancing of old loans / Repayment of ealier ECB 250,000
5,000 Rights issues
Overseas acquisition
4,500 Public issues
Financial lease 200,000
4,000
FCCB Buyback
3,500
Capex
3,000 150,000
2,500
2,000 100,000
1,500
1,000 50,000
500
0 0
Sep-08
Sep-09
Jan-08
Nov-08
Jan-09
Jul-08
Jul-09
Mar-08
Mar-09
May-08
May-09
Jan-08
Jan-09
Apr-07
Jul-07
Oct-07
Apr-08
Jul-08
Oct-08
Apr-09
Jul-09
Oct-09
Exhibit 32. Uses of rights issues Exhibit 33. Uses of IPO proceeds
(actual and pipeline)
0.4 0.4
0.2 0.2
0.0 0.0
Jul Aug Sep Oct Nov Dec May Jun Aug Sep Oct Nov
Total loan book of banks 6,169 6,695 7,644 10,409 14,458 18,482 22,473 26,485
% of total loan book 14.9 14.4 16.2 23.5 24.5 24.5 22.8 21.2
Source: RBI, Nomura research
Political backdrop
Back to reforms?
We see the first term (2004-2009) of the incumbent United Progressive Alliance (UPA), The first term of the UPA
led by the Indian National Congress, as insipid in terms of progress made on reforms. government was insipid on the
While the government did not regress too much on the reform agenda — it can be reforms front
argued that the UPA was hamstrung because of the left parties in government — most
of the path-breaking reforms were mooted during the tenure of the National
Democratic Alliance (NDA), led by the Bhartiya Janta Party or the BJP, from 1999 to
2004. Of course, there have been follow-up actions in many cases, such as in the
power sector, of the basic reforms process started during the tenure of the NDA.
However, the general buoyancy seen in the economy on account of the reforms
process can largely be traced back to decisions made during the NDA rule.
Fiscal reforms: The Indian government, through its borrowing, directly influences the Past reforms have emphasised
level of risk-free interest rates in the economy. Hence, fiscal consolidation becomes fiscal consolidation, greater
necessary to encourage risk-taking. The key reforms here have been the broadening private sector participation,
reduction of structural rigidities,
of the tax base and a generally controlled growth in expenditure. The passage of the
and creating and streamlining
Fiscal Responsibility and Budget Management (FRBM) Act had kept the government asset markets
in check until FY08, and great success was achieved on this front. However, leading
up to elections in April 2009 and as a response of the crisis, much of what was
achieved to FY08 has been lost. We believe this should be one of the most important
focus areas of reforms. Speedy tax reforms and expenditure control (especially related
to oil and fertiliser subsidies as well as rollback of fiscal giveaways) will be imperative
in 2010, in our opinion.
Broader role for the private sector: The government of India, along with state-owned
companies, still controls the majority of social (health and education included)
infrastructure, resources and many other important sectors in the economy. For
example, up until 1995 the entire telecom sector was operated by the government and
up until 2000 the entire oil sector was in the government’s domain. The inefficiency of
government-run organisations, along with poor financial management, has conspired
to seriously constrain the supply side response of the government. A case in point is
telecoms, where the entry of the private sector has transformed the teledensity of the
country in a relatively short span of time. As emerges from the timeline of reforms
(please see Appendix), the NDA government laid down several frameworks across
many sectors to attract private capital and the UPA has largely just followed up on
most of these. However, a slowdown was seen in roads in the past two years of the
UPA regime. No new initiatives in terms of framework revamps have taken place to
attract large scale capital in health and education sectors. Urban infrastructure remains
very constrained and even though the Urban Renewal Mission is trying to address this,
the response has been relatively slow, largely as this remains a state subject. Similarly,
the transmission sector has seen very slow progress in private sector participation.
Reducing structural rigidities: In several cases (labour markets, for example), this is
a very thorny issue. Subsidies have grown despite a general policy umbrella that has
always intended to reduce them. The agriculture sector is plagued by structural
rigidities that have played their part in stoking the current bout of food price inflation,
and long intended reforms through the introduction of the APMC (Agricultural Produce
Marketing Committee) Acts have not happened. Issues related to land acquisition have
ensured that large scale capacity has been very slow to come about, slowing down
system response to a demand surge. A glaring example of this is India’s net imports of
coal, steel and aluminium in the face of large scale reserves of these resources.
However, there have been a few successes too — the creation of independent
regulators has led to fair and quick decision-making in sectors such as telecom, power
and insurance, and these sectors have thrived as a result.
Market reforms: These reforms have essentially been aimed at creating new markets
for tradable assets and improving efficiencies of various pre-existing markets. Over the
past 10 years, India has developed a thriving derivatives market, strong commodities
exchanges and significantly eased direct access to Indian equity markets for foreign
investors. However, its bond markets remain quite underdeveloped, especially given
India’s requirement for diverse avenues to finance growth capital.
So far, the market has given the benefit of the doubt to the new “left
free” government
The Sensex rose more than 17% on 18 May, 2009, following the announcement of the
results of the central elections, as the markets cheered the prospects of a stable
government in the centre, unfettered by the support of the left parties, and a move
towards “massification” of the political structure as opposed to the fragmentation of the
past 10-15 years.
However, the jury is still out on whether the government will actually
deliver incremental reforms
Significant sops to farmers (farm loan waiver and major increases in minimum support Bold reforms are most likely to be
prices) and government pay hikes were not necessarily at the behest of the left parties. made during the first three years
of government
The fact that the government has made a significant departure from the Fiscal
Responsibility and Budget Management (FRMB) Rules and has not yet returned to a
well laid-out road map for fiscal consolidation (to be provided by the Thirteenth
Finance Commission) is worrisome to us. This is especially important given that most
policy action in India typically happens in the first three years of a government coming
into power, after which populism dictates policy in light of upcoming elections. This lack
of willpower to take bold decisions on reforms was also true for the last two years of
NDA rule (1999-2004) (especially notable were cancellations of disinvestments and
backtracking on free market pricing of oil).
While we do believe that we will make progress on the reforms front this year, we
choose not to get overexcited about their pace. But then, are reforms necessary for the
markets to perform?
Even as reforms over the past decade have been aimed at enhancing social welfare, …and might continue to do so
creating markets for better resource allocation and easing supply-side constraints, this year, too
challenges of a high fiscal deficit and capacity bottlenecks will need to be addressed
on a priority basis in the short term. In our opinion, fiscal consolidation and
infrastructure development remain two key areas that will concern the market the most
in the shorter term.
Having said that, we believe that might not be necessary in 2010. Strong GDP growth
and general economic buoyancy can by themselves distract the market’s attention
away from reforms long enough, just as they did during the 2004-2009 period.
Themes
Re-leveraging in the economy: While credit growth has remained slow in 2009, we
expect a significant pick-up to happen in 2010F. First, the recent tilt of corporate capex
towards infrastructure will mean a high use of debt to finance overall capital
expenditure. Second, a significant amount of equity capital has been raised y-t-d for
either de-leveraging or for growth capital. The next phase would be re-leveraging as
capex picks up. We also believe that a strong job market and rising incomes will
ensure that risk-taking by households also goes up.
Strong capital flows: A major side-effect of the pick-up in capex this year will be a
rise in capital flows into the country, as poor disintermediation of savings — an
underdeveloped long-end corporate bond market and comparatively low level of
savings through the equity route — has meant increasing inflows into the country to
finance long-term capex projects.
Exit from monetary stimulus: A significant reversal of the hitherto loose monetary
stance, with its attendant policy rate hikes and extraction of liquidity, will put rate-
cyclicals under pressure early this year. However, given our expectation of a return of
growth, pressure on rate-cyclicals will be a good opportunity to buy, we think.
Reforms: As we have said earlier in this report, we are not pinning too much hope on
this. However, the government’s policy of continuing to invite private sector
participation in infrastructure should continue to generate significant opportunities for
several sectors such as construction, developers and banks, among others.
Rupee appreciation: We expect the rupee to appreciate this year as capital inflows
increase with rising capex. This will likely be negative for sectors such as IT, as tight
labour markets would create upward pressure on input costs and a stronger rupee
would hold down any gains that come from traction in volumes.
Strategic view
Sector strategy
Our sector allocation is driven by our view of a bifurcated outcome for the market this Short-term weakness, long-term
coming year: short-term weakness but longer-term strength. We expect the market to strength
correct in the first few months of 2010 amid rising inflation and reactionary monetary
rebalancing — policy tightening and the withdrawal of liquidity — even as we expect
the positive forces of stronger consumption and rising capex continuously at play in the
background, solidifying the foundation of growth and risk taking. We recommend a
defensive tilt in the portfolio during the correction phase and say a correction of 10% or
more signals a good buying opportunity.
Exhibit 36. Relative strategy calls within the Indian market — tactical sector allocation
Strategy stance
Autos Margin pressure from higher raw Strong consumer incomes and NEUTRAL NEUTRAL
material prices and possible roll-back of improving labour market, industrial
excise duty cuts production
Banks Higher inflation, short-term monetary Strong credit growth on back of return of UNDERWEIGHT OVERWEIGHT
rebalancing re-leveraging and growth capital
Cement New capacity additions and pricing A pick-up in infra-related activity UNDERWEIGHT UNDERWEIGHT
pressure, higher raw material prices
(coal)
Consumer Margin pressure from higher raw Strong rural and urban consumption OVERWEIGHT NEUTRAL
material prices and ad spends due to
greater competition
Electrical Equipment Margin pressure from increasing Exposure to capex in power sector NEUTRAL OVERWEIGHT
competition and higher raw material
prices
Infra & Construction Execution risk; raw material price Re-leveraging; a recovery in order NEUTRAL OVERWEIGHT
increases inflows in infra (especially power and
roads) and industrial capex
Insurance Lukewarm growth, very low persistency, Potentially positive regulation and OVERWEIGHT OVERWEIGHT
operating cost overruns and regulatory listings of insurance companies
risk
IT Services Rupee appreciation, higher labour costs Higher discretionary spending in the US NEUTRAL UNDERWEIGHT
from tighter labour market conditions upon economic recovery
Metals & Mining Delays in greenfield capacities Rising steel prices and volumes, captive OVERWEIGHT OVERWEIGHT
raw materials
Oil & Gas Under-recoveries and sharing Ramp-up of oil & gas production from NEUTRAL NEUTRAL
mechanism; gas litigation new projects
Pharma Rupee appreciation; regulatory risk Patent expiries; increasing generic OVERWEIGHT OVERWEIGHT
penetration; collaboration with big
pharma
Transport infrastructure Regulatory risk A recovery in domestic and international NEUTRAL OVERWEIGHT
growth and trade
Source: Nomura estimates
Appendix
Appendix
Exhibit 37. Disinvestment proceeds from 1991-92 through 2009-10 (INR mn)
Receipts
through sale of Receipts from
Receipts through majority Receipts sale of residual
sales of minority shareholding of through Receipts from shareholding in
Budgeted shareholding in one CPSE to strategic related disinvested Total
Year receipts CPSEs another CPSE sale transactions CPSEs/cos receipts Transactions
FY92 25,000 30,377 - - - - 30,377 Minority shares sold in Dec 1991
and Feb 1992 by auction method
in bundles of “very good”, “good”
and “average” companies.
FY93 25,000 19,125 - - - - 19,125 Shares sold separately for each
company by auction method.
FY94 35,000 - - - - - - Equity of six companies sold by
auction method but proceeds
received in 94-95.
FY95 40,000 48,431 - - - - 48,431 Shares sold by auction method.
FY96 70,000 1,685 - - - - 1,685 Shares sold by auction method.
FY97 50,000 3,797 - - - - 3,797 GDR – VSNL
FY98 48,000 9,100 - - - - 9,100 GDR – MTNL
FY99 50,000 53,711 - - - - 53,711 GDR-VSNL; Domestic offerings
of CONCOR and GAIL; Cross
purchase by 3 Oil sector
companies ie, GAIL, ONGC and
IOC.
FY00 100,000 14,793 - 1,055 2,754 - 18,601 GDR-GAIL; Domestic offering of
VSNL; capital reduction and
dividend from BALCO; Strategic
sale of MFIL.
FY01 100,000 - 13,172 5,540 - - 18,713 Sale of KRL, CPCL and BRPL to
CPSEs; Strategic sale of BALCO
and LJMC.
FY02 120,000 - - 30,901 25,676 - 56,577 Strategic sale of CMC, HTL,
VSNL, IBP, PPL, hotel properties
of ITDC and HCI, slump sale of
Hotel Centaur Juhu Beach,
Mumbai and leasing of Ashok
Bangalore; Special dividend from
VSNL, STC and MMTC; sale of
shares to VSNL employees.
FY03 120,000 - - 22,527 10,953 - 33,480 Strategic sale of HZL, IPCL, hotel
properties of ITDC, slump sale of
Centaur Hotel Mumbai Airport,
Mumbai; Premium for
renunciation of rights issue in
favour of SMC; Put Option of
MFIL; Sale of shares to
employees of HZL and CMC.
FY04 145,000 127,416 - 3,421 - 24,637 155,474 Strategic sale of JCL; Call Option
of HZL; Offer for Sale of MUL,
IBP, IPCL, CMC, DCI, GAIL and
ONGC; Sale of shares of ICI Ltd.
FY05 40,000 27,001 - - 648 - 27,649 Offer for Sale of NTPC and spill
over of ONGC; sale of shares to
IPCL employees.
FY06 No target fixed - - - 21 15,676 15,697
FY07 No target fixed - - - - - - Sale of MUL shares to Indian
public sector financial institutions
& banks and employees
FY08 No target fixed 18,145 - - - 23,669 41,814 Sale of MUL (INR23,669.4mn)
shares to public sector financial
institutions, public sector banks
and Indian mutual funds and sale
of PGCIL (INR9,948.2mn) and
REC (INR8,196.3mn) shares
through Offer for Sale.
FY09 No target fixed - - - - - -
FY10 No target fixed 42,599 - - - - 42,599 (INR20,128.5mn - NHPC and
INR22,470.5mn - OIL)
Source: Ministry of Disinvestment, Nomura research
FY2000 Comments
• RBI introduces an Interim Liquidity Adjustment Facility (ILAF) in place of the General Refinance Facility with Minor
effect from 21 April,1999.
• Relaxation of listing requirement in respect of securities in the IT sector by reducing the stipulated minimum Minor
offering of securities from 25% to 10%.
• The passing by Parliament of the Securities Laws (Amendment) Bill, 1999, incorporating derivative Major
instruments in the definition of securities in the Securities Contract (Regulation) Act, 1956.
• Introduction of rolling settlement for 10 select scrips with effect from 10 January, 2000. Minor
• Insurance Regulatory and Development Authority (IRDA) Bill passed by the Parliament in December, 1999 Major
which, inter alia, gives statutory status to the interim Insurance Regulatory Authority, opens up the insurance
sector to private providers, allows foreign equity in domestic insurance companies subject to a maximum of
26% of the total paid-up capital.
• Reduction of long-term capital gains tax from 20% to 10% for resident Indians. Minor
• Reduction in the existing seven major ad valorem rates of customs to 5 basic rates and rationalisation of both Minor
import duty and excise duty structures.
• Free Trade Zones (FTZ) to replace export processing zones and to be treated as outside the country’s Minor
customs territory.
• Far-reaching rationalisation of the excise duty structure by reducing the existing eleven rates to only three. Minor
• Tax incentives for facilitating industrial restructuring through mergers and amalgamations. Minor
• Extension of infrastructure sector tax holiday to power transmission. Major
• The scope of the automatic approval scheme of the RBI significantly expanded. Minor
• FDI up to 74%, under the automatic route, in bulk drugs and pharmaceuticals. Minor
• Restructuring the US 64 scheme of UTI (Unit Trust of India), a favourable tax treatment of incomes earned Minor
through mutual funds.
• A new Department of Disinvestment created for expediting disinvestments in PSEs. Major
• Uniform tax holiday of 15 years for all infrastructure sector projects. Major
• Mega Power Project policy announced. Major
• Accelerated Power Development and Reforms Programme (APDRP) introduced. Major
• Restructuring of SEBs to be encouraged; new transmission and distribution systems to get fiscal benefits Major
given to infrastructure sector.
• Domestic long distance calls to be opened up. Major
• Department of Telecom Services (DTS) to be corporatised by 2001. Major
• DTS/MTNL to enter as third cellular operators. Minor
• TRAI (Telecom Regulatory Authority of India) reconstituted through an ordinance. Major
• Existing licence holders of basic and value added services allowed to switch over to a revenue sharing Major
agreement.
• A new cess of Re.1 per litre on HSD (High Speed Diesel) imposed to generate funds to be transferred to Major
Central Road Fund. Most of it to be used for development and maintenance of State Roads and National
Highways.
• Model Concession Agreement for BOT (Build Operate Transfer) for road project of more than INR100 crore Major
and less than Rs. 100 crore finalised.
• Indian Railway Catering & Tourism Corporation (IRTC) Ltd. incorporated as a government company with the Minor
objective of upgrading and managing rail catering and hospitality.
• Ministry of Petroleum and Natural Gas crafts the New Exploration License Policy (NELP) in 2000, which Major
permits foreign companies to hold 100% equity possession in oil and natural gas projects. To date, only a
handful of oil fields controlled by foreign firms.
FY2002
• The coverage of service tax at the rate of 5% on the value of taxable service expanded to include fifteen new Follow up
services.
• Decision taken that all States and Union Territories will implement VAT from April, 2003. Follow up
• Level playing field to private insurers accorded by allowing similar benefits to them and their clients as are Follow up
available to LIC, GIC and their clients.
• Government of India draws up a scheme called the States' Fiscal Reforms Facility (2000-01 to 2004-05). Incentive Follow up
Fund of Rs.10,607 crore earmarked over a period of five years to encourage States to implement monitorable fiscal
reforms. Three areas emphasised - Fiscal consolidation, PSE Reforms and Power sector reforms.
• Income tax at source made deductible at the rate of 10%. Major
• Freedom for banks to lend at interest rates below their respective PLRs (Prime Lending Rates) to exporters Minor
and other creditworthy borrowers (including public enterprises).
• VRS (Voluntary Retirement Scheme) implemented by 26 out of 27 public sector banks in 2000-2001 Follow up
• Clearing Corporation of India Limited (CCIL) set up. Minor
• Negotiated Dealing System (NDS) introduced in phases to supplement or replace the current telephone mode Minor
used in trading on the fixed income market.
• Rolling settlement extended to all stocks and all exchanges. Cycle shortened to T+3. Follow up
• Peak level of customs duties to decline marginally from 38.5% to 35%. Follow up
• Extension of the concessions available for infrastructure by way of 10-year tax holiday to the developers of Minor
Special Economic Zones (SEZs) on the same lines as developers of industrial parks.
• Further impetus on SEZ. Follow up
• Quantitative restrictions on exports of agricultural items like wheat, wheat products, coarse grains, butter and Follow up
non-basmati rice and packaging restrictions on exports of pulses were in February, 2002.
• Ten-Year tax holiday for the core sector of infrastructure, namely, roads, highways, water-ways, water supply, Follow up
sanitation and solid waste management systems, which may be availed of during the initial 20 years.
• In the case of airports, ports, inland ports, industrial parks and generation and distribution of power, which Minor
also become commercially viable only in the long run, a tax holiday of 10 years allowed to be availed of
during the initial fifteen years.
• Tax incentives have been provided for the investors providing long-term finance or investing in the equity Minor
capital of the enterprises engaged in infrastructure facility. Any income by way of interest, dividends or long-
term capital gains from such investments fully exempt.
• Electricity Bill 2001 introduced in Parliament. Major
• Central Government to accelerate the program of reforms for State Electricity Boards (SEBs) anchored in Major
Centre-State partnership on the following: 1) A time bound program for installation of 100 percent metering; 2)
Energy audit at all levels; 3) Commercialisation of distribution; 4) SEB restructuring.
• Competition introduced in all service segments of telecoms. Major
• The total outlay for the road sector enhanced. Follow up
• INR2,500 crore assistance out of Pradhan Mantri Gram Sadak Yojana (PMGSY) to provide connectivity of Major
every village with a population of over 1000 persons through good all weather roads by year 2003 and those
with a population of up to 500 persons by 2007.
• Pradhan Mantri Gramin Yojna (PMGY) extended to cover rural electrification. Major
• Continued de-reservation for small scale industry. Follow up
FY2004 — change of the government takes place to UPA late in FY2004 Comments
Pre UPA with left • Fiscal Responsibility and Budget Management (FRBM) bill 2003 introduced and made into an Act in August Major
2003. Specified revenue and fiscal deficit targets. Borrowing from RBI not allowed for bridging deficit. RBI not
to subscribe to primary issuances of government paper from FY07. Review of fiscal policy every year.
Quarterly review of fiscal situation.
• Shift from contribution pension system to defined pension benefit for central government employees Major
• Introduction of risk based supervision in the banking sector. Minor
• Issuance of guidelines for "Securitisation, Reconstruction of Financial Assets and Enforcement of Security Follow up
Interest Act.
• FDI in banking increased to 74% from 49%. Foreign banks allowed to operate in India through 1) branches, 2) Follow up
wholly owned subsidiary, and 3) a subsidiary with aggregate foreign investment up to a maximum of 74% in a
private bank.
• Commodity futures trading allowed. Recognition granted to various commodity exchanges including MCX, Major
NCDEX etc.
• New regulator for pension sector - PFRDA (Pension Fund Regulatory and Development Authority) created Major
with intent to efficiently manage pension funds and expected to develop a new class of institutional investors.
• ECB policy liberalised further. All sectors except banks and financial institutions allowed in the ECB market. Follow up
• Five states enact fiscal responsibility legislations. Follow up
Pre UPA with left • Disinvestment in Maruti, Jessop, HZL, ICIL, IBP, IPCL, CMC, DCIL, GAIL, ONGC. Follow up
Pre UPA with left • Electricity act notified in June 2003. Follow up
Pre UPA with left • 28 States sign the tripartite agreement for onetime settlement of the dues of State Electricity Boards (SEBs) to Major
Central Public Sector Undertakings (CPSUs), and, after securitisng the dues, 27 states issued bonds
amounting to INR28,983.85 crore, August 2003 onwards.
Pre UPA with left • Unified Access Service License regime introduced in October 2003. Follow up
Pre UPA with left • Pradhan Mantri Bharat Jodo Project for development of 10,000 kms of roads connecting state capitals with Follow up
National Highways launched in January 2004.
Pre UPA with left • Rail Vikas Nigam set up in January 2003. Major
FY2006 Comments
• The corporate income tax rate for domestic companies and firms reduced from 35% to 30%. However, a Follow up
surcharge of 10% applies.
• Service tax rate increased from 8% to 10%. Minor
• Rural Electricity Infrastructure and Household Electrification introduced in April, 2005. Rural thrust
• National Rural Employment Guarantee bill passed in August 2005. Rural thrust
• Viability gap funding schemes introduced on generalised basis. Major
• Peak rate of customs duty for non-agricultural products reduced from 20% to 15%. Follow up
• The emphasis on infrastructure development continued with the decision to set up a special purpose vehicle Follow up
(SPV) for large infrastructure projects.
• The Special Economic Zone (SEZ) Bill passed by Parliament in June 2005. Follow up
• Five sites including three coastal sites, one each in Karnataka, Gujarat and Maharashtra identified for Major
development of Ultra-Mega Power plants (UMPP) with capacity of 4,000 MW each.
• An All-India power grid, also called the “National Grid”, envisaged to be developed in a phased manner – first Major
by integrating a cluster of regions, and subsequently all the regions by the year 2012.
• NHDP (National Highway Development Project) Phase V, VI and VII proposed. All future phases to be taken Follow up
up on a PPP (Public Private Partnership) basis.
FY2008 Comments
• The peak rate of customs duty on non-agricultural products reduced from 12.5% in 2006-07 to 10% in 2007- Follow up
08, with a few exceptions.
• Further increase in services eligible for service tax. Follow up
• De-tariffing of the general insurance industry. Follow up
• Appointment by PFRDA (Pension Fund Regulatory and Development Authority) of three sponsors for pension Follow up
funds for managing the corpus under the New Pension System for the Government employees after due
consideration. These were the State Bank of India, UTI Asset Management Company Private Limited and Life
Insurance Corporation of India.
• 3 UMPPs (Ultra Mega Power Plants) awarded. Follow up
z We expect GDP growth to rebound from 7.0% in FY10F to 8.0% in FY11F. This
rebound underlines a shift in growth drivers from industry to services and from
government to private demand.
z Higher demand and rising input cost pressures have set the foundation for greater
cost pass-through or margin pressures for firms in the coming quarters. We expect
WPI inflation at 8.0% y-y by end-FY10F and an average of 6.8% in FY11F.
z The centre’s fiscal deficit should fall as a percentage of GDP owing to revenue
buoyancy and higher disinvestments. However, gross borrowings are likely to stay
high, which could push long-term yields above 8%.
z Downside risks to our view: sharply higher commodity prices, negative global
developments, geo-political risks. Upside risk: virtuous dynamics.
Exhibit 39. Contribution to GDP growth Exhibit 40. Employment and private consumption
Forecasts
10 8
15
6 6
5
2 4
(2) (5) 2
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Dec-02 Feb-04 Apr-05 Jun-06 Aug-07 Oct-08 Dec-09
Source: CEIC and Nomura Global Economics estimates Source: RBI, CEIC and Nomura Global Economics
A credit-led recovery: Unlike in 2009, we expect private credit growth to clock growth We expect credit growth to pick
of more than 20% y-y by end-FY11F. The lack of private credit growth last year was a up in FY11F as investment plans
result of companies tapping non-banking sources of debt and equity financing. This come to fruition
can be gauged by the divergent credit off-take for micro and small enterprises (MSE)
and larger firms: while credit growth to medium and large corporates slowed to 14.9%
y-y as of August 2009, credit to MSEs was still growing at a strong 27.4%. This reflects
the easier access of larger corporates to alternative (and less expensive) sources of
capital market financing. As domestic liquidity tightens and the capex cycle
strengthens, we expect firms to take greater recourse to bank financing. Retail credit
should pick up, backed by lower interest rates and robust consumer demand growth,
while rising industrial activity and higher commodity prices suggest an improvement in
working capital loans in the coming quarters.
Reform stimulus to continue: We expect incremental reforms to continue over 2010, Political opposition to incremental
lending support to growth: implementation of the goods and services tax by end-FY11F; reforms is much more mild today
disinvestment of public sector enterprises to partly finance the government’s capital
investment in social sectors; implementation of financial sector reforms such as
allowing repo in the corporate bond market and insurance and pension reforms to
deepen financial markets; implementation of the direct tax code and unique identity
number and encouraging infrastructure investments, to name a few. Ongoing internal
battles within opposition parties and a long haul before the next elections imply that
there will be less coherent political opposition to incremental reforms put forth by the
current administration.
Food inflation is a concern. We believe food prices could remain high in early-2010 …this should fuel demand-side
due to hoarding until there is clarity on the next monsoons. Non-food inflationary inflation or increase margin
pressure for firms
pressures are also building due to higher oil and other commodity prices much of
which has yet to be passed on to consumers or reflected in the index, but which is
adding to input cost pressures for firms. A sustainable demand recovery and rising
input cost pressures are setting the foundation for greater cost pass-through in the
coming quarters, in our view. Already, our estimates of core inflation have started
rising and we expect a further acceleration in 2010 (see Exhibit “Various measures of
core WPI inflation”). If cost pressures are not passed through, firms will see higher
margin pressure vis-à-vis the margin expansion that benefitted them in early-FY10F.
Separately, the launch of the new monthly WPI index with a wider basket and base
year of 2004-05 will be an important event to watch for in 2010. Past base revisions
have led to a structurally lower inflation rate due to substitution effect. This is because
commodities that gain in weight will be the ones whose relative prices fall due to
increased production and trade. Consumers prefer goods with lower relative prices,
increasing the weight of such goods in the revised inflation index. However, since the
new index will substantially alter the composition of the basket and include items that
have much better quality, and therefore higher prices, the historical evidence may not
set the correct precedent. Risks, therefore, lie on either side.
Exhibit 41. Incremental credit to infrastructure Exhibit 42. WPI inflation projections
20
5
10
2
0 (1)
Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10
Source: CEIC and Nomura Global Economics Source: CEIC and Nomura Global Economics estimates
On the revenue side, disinvestment is likely to play a key role in lowering the fiscal
deficit. Selective roll-back on excise and services tax rates are likely, while export sops
may continue a while longer. With higher nominal GDP growth likely to increase overall
revenue buoyancy, our worry is that the government will bank on this to lower the fiscal
deficit rather than pruning wasteful expenses.
On an absolute basis, we expect gross borrowings to remain high, at slightly above the With continued large borrowings
INR4.5tn expected in FY10F (see Exhibit “Centre’s market borrowings and yields”), in FY11 and no RBI support, long-
term yields could rise sharply
which should continue to put upward pressure on long-term yields and push the
benchmark 10-year bond yield to 8% and above. Unlike last year, when the Reserve
Bank of India (RBI) accommodated the higher deficit by open-market operations
purchase and unwinding the market stabilisation scheme (MSS), these facilities will not
be available in FY11F. Yields may also be pressured by rising inflation and a reversal
in the accommodative policy stance. Therefore, while fiscal consolidation will occur,
management of the government’s higher borrowing will remain as much of a challenge
in 2010 as it was in 2009.
Exhibit 43. Various measures of core WPI inflation Exhibit 44. Centre’s market borrowings and yields
9 8
3
6 7
2
3 6
1
0 5
(3) 0 4
May-05 Feb-06 Nov-06 Aug-07 May-08 Feb-09 Nov-09 FY01 FY03 FY05 FY07 FY09 FY11E
Source: CEIC and Nomura Global Economics estimates Source: Budget documents, CEIC and Nomura Global Economics estimates
The larger debate concerns policy comfort on rupee appreciation. So far, with sluggish Rupee should appreciate due to
external demand and rising job losses, policy bias has been to let the currency remain higher capital inflows and easing
undervalued. We expect this to shift gradually in favour of letting the rupee appreciate. policy resistance
First, export growth has rebounded sharply to positive territory in November. Second,
export-oriented sectors such as textiles, information technology and gems & jewellery
have reported increased net hiring in 2H09, according to a Labour Bureau survey.
Third, we expect the RBI to accept some monetary tightening through rupee
appreciation due to inflation concerns. Aggressive intervention, if left unsterilised, will
only fuel domestic liquidity and inflation, or if sterilised, raise interest rates as the RBI
sterilises this liquidity. The impossible ‘trinity dilemma’ lurks around the corner. Fourth,
Nomura’s forex strategists expect cyclical superiority and recommencement of
renminbi appreciation to facilitate a greater acceptance of forex appreciation across
Asia. This should reduce the RBI’s fear of Indian exporters losing their relative
competitiveness. And finally, if demand is truly weak globally, then keeping the price
low (weaker exchange rate), will make no difference to export demand, but only
aggravate inflation.
credit growth absorb all the liquidity. Initially, therefore, we expect the reverse repo to
be the key “signalling” tool for the RBI to indicate a turn in the rate cycle. Since there
will be a lag between RBI rate hikes and tighter systemic liquidity, bank lending rates
are likely to respond to tighter monetary policy with a lag, delaying the policy
transmission mechanism when the rate cycle is moving up.
Second, to tackle capital inflows, the RBI is likely to partially intervene to prevent rapid We expect 125bps of CRR hikes in
rupee appreciation and build up its forex reserve buffer. This excess liquidity is likely to 2010 to withdraw excess liquidity
be mopped up using cash reserve ratio hikes, dollar sell-buy swaps and issuance of
market stabilisation securities. We are pencilling in 125bps of CRR hikes in 2010F.
Third, to prevent too-rapid asset price inflation, the RBI is likely to tighten the
provisioning norms on standard assets, increase risk weightages (in the bank capital
adequacy requirement) on loans for commercial real estate, unrated corporate claims
and non-banking finance corporations and keep a strict vigil on banks’ capital market
exposures. A bigger concern for the RBI will arise if the asset price inflation is fuelled
by credit, but we do not expect this to be the case owing to strict regulatory controls.
Fourth, the RBI is likely to follow counter-cyclical capital account liberalisation. If capital RBI is likely to follow counter-
inflows rise rapidly, as we expect, tighter end-use restrictions could be re-imposed on cyclical prudential and capital
external commercial borrowings, where lower interest rates abroad may result in large liberalisation norms
borrowing by corporates. Interest rates on NRE deposits may also be lowered to slow
the pace of debt capital inflows. Policymakers have to balance the need to attract
sufficient foreign inflows to ensure the success of the government’s disinvestment
agenda and meet India’s investment needs, without complicating RBI’s monetary
policy management. Therefore, punitive capital controls are unlikely.
Fifth, to ensure that the government’s borrowing programme progresses smoothly, the
RBI is likely to continue to issue floating rate bonds and possibly hike the hold-to-
maturity limit for banks. Open market purchase of government bonds may not be the
ideal solution, since it will only counter liquidity absorption operations by the RBI.
Exhibit 45. Components of balance of payments Exhibit 46. Policy rate projections
(US$bn) Current account (%) CRR Repo rate Reverse repo
110 Debt capital 9 Forecast
Equity capital
90 Forecast
8
70
7
50
6
30
5
10
(10) 4
(30) 3
FY01 FY03 FY05 FY07 FY09 FY11 Mar-03 Oct-04 May-06 Dec-07 Jul-09 Mar-11
Source: CEIC and Nomura Global Economics estimates Source: CEIC and Nomura Global Economics estimates
M3 money supply 19.8 18.6 18.1 18.0 18.5 18.4 17.3 18.8 18.0 17.3
Non-food credit 14.7 11.1 14.8 15.2 17.3 19.7 21.1 17.4 15.5 21.5
Wholesale price index (0.1) 4.0 7.5 7.4 6.3 6.7 7.0 8.4 3.0 6.8
Consumer price index 11.8 11.5 11.3 10.4 5.8 5.3 5.5 10.9 6.6 6.0
Merchandise trade balance (% GDP) (7.7) (9.6) (7.0) (6.7) (6.6) (9.7) (5.5) (10.4) (7.8) (6.9)
Current account balance (% GDP) (2.6) (0.8) (1.1)
Centre’s fiscal balance (% GDP) (6.0) (6.8) (6.2)
Repo rate (%) 4.75 4.75 5.00 5.25 5.50 6.00 6.25 5.00 5.00 6.25
Reverse repo rate (%) 3.25 3.25 3.50 3.75 4.00 4.50 4.75 3.50 3.50 4.75
Cash reserve ratio (%) 5.00 5.25 5.50 5.75 6.00 6.25 6.50 5.00 5.50 6.50
10-year bond yield (%) 7.34 7.00 7.25 7.30 7.50 7.75 8.00 7.04 7.25 8.00
Exchange rate (INR/US$) 48.0 45.8 46.2 45.0 43.7 42.3 40.5 51.0 46.2 40.5
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. CPI is for
industrial workers. Table last revised on 24 December, 2009.
Source: CEIC and Nomura Global Economics estimates
Autos NEUTRAL
~ Action Stocks for action
With the economic revival, we believe that growth in FY11F is likely to remain We maintain Mahindra and
strong. We believe that cars and commercial vehicles will deliver strong volume Mahindra as our top BUY, given the
growth of 15% and 20%, respectively, and tractors will see growth of 10% in outlook of structural improvement in
FY11F. While there are concerns regarding increases in duties and material costs, tractor demand and new launches in
we believe that these will ease due to strong demand. commercial vehicles. We maintain
a Catalysts REDUCE on Tata Motors, given the
cashflow concerns from JLR.
We believe that strong volume growth and stable margins are potential key
catalysts for the sector.
Price
Anchor themes Price target
Stock Rating (INR) (INR)
We believe that strong growth in automobiles will be fuelled by a revival in Mahindra & Mahindra BUY 1,061.85 1,232
(MM IN)
economic growth, which leads to job creation, benefits coming from the Sixth
Tata Motors (TTMT IN) REDUCE 779.95 419
Central Pay commission, and increased affordability due to increases in incomes.
Prices as of 24 December 2009
We also believe that weak monsoons will not have a significant impact on demand.
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10F
FY11F
Source: Business Beacon, Society of Indian Automobile Manufacturers (SIAM), Nomura estimates
0 0
Malasiya
Mexico
Germany
Indonesia
Sri Lanka
Korea
Japan
India
China
Thailand
South
Phillippines
UK
USA
Brazil
Banks
NEUTRAL
~ Action Stocks for action
We see negative drivers for India banks in the short term, although the sector looks SBI is our preferred sector pick.
poised for strong long-term structural growth. Rising inflation, higher policy rates, Improving NIMs and a pick-up in
low credit growth and uncertainty over incremental provisioning policy pose short- loan growth are key catalysts.
term risks. We expect banks to revise down loan growth guidance for FY10F. After
slow growth in FY10F, a pick-up in credit growth could be a driver in FY11F on Price
Price target
pent-up housing and infrastructure demand. Asset quality likely to remain benign. Stock Rating (INR) (INR)
Axis (AXSB IN) BUY 990 1,185
a Catalysts ICICI (ICICBC IN) BUY 875 910
We see a pick-up in fortnightly credit growth, listing guidelines for life insurance and PNB (PNB IN) NEUTRAL 911 960
SBI (SBIN IN) BUY 2,215 2,590*
clarity from the RBI on new provisioning norms as key catalysts.
* PT under review; Prices as of 24 December, 2009
Anchor themes
SBI remains our top pick. We believe banks will underperform in the short term.
Specific finance companies, especially the power financiers, will likely outperform.
unlikely. Banks are already in discussion with the RBI and we expect the RBI to phase
out the provisioning guidelines.
f Capital requirements
Most large Indian banks appear to have adequate capital to support growth for the
next year and a half. Among the large banks, we expect SBI to raise fresh capital in
the next 12-18 months.
(INR/bag)
300
250
200
150
100
50
0
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Consumer BULLISH
~ Action Stocks for action
We believe that investors in India should look to shift from mid-cap consumer Our top sector pick is ITC, where we
companies that have had a fairly decent run in the past few months to large-cap see strong tailwinds for its core
names. Our top pick in the consumer sector is ITC, where we see very strong business. Our top sector REDUCE
tailwinds in the core cigarettes business and attractive valuations. is Colgate-Palmolive, which we
believe will face growing competition
a Catalysts
in the near term.
A steady demand outlook for the urban markets and acceleration in the rural
markets are likely to be key catalysts in the near to medium term. Price
Price target
Anchor themes Stock Rating (INR) (INR)
ITC Ltd (ITC IN) BUY 256 309
We believe that the growth outlook remains robust on sustained demand pull from Colgate-Palmolive
the rural markets. Consumer companies have increased focus on smaller-sized (CLGT IN) REDUCE 663 600
packs, as they look to play on consumer aspirations in these markets. Prices as of 24 December 2009
(%)
20 17.0 17.5
16.5
15
10.7
10 8.0
7.0
3.7 z
5 3.0
(1.0)
0
(2.5)
(5)
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Exhibit 56. India: steady agri output growth Exhibit 57. India: minimum support prices
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
(12)
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: Business Beacon, Nomura research Source: Ministry of Agriculture, Nomura research
Exhibit 58. India: domestic polymer prices Exhibit 59. India: domestic LAB prices
(INR/kg) (INR/te)
100 130,000
90 120,000
80 110,000
100,000
70
90,000
60
80,000
50
70,000
40 60,000
30 50,000
20 40,000
May-02
May-09
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
Nov-05
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Mar-01
Mar-08
Feb-04
Dec-02
Sep-04
Jan-07
Dec-09
Oct-01
Jul-03
Apr-05
Jun-06
Aug-07
Oct-08
market shares of existing leaders. In contrast, we see new opportunities in hitherto Prices as of 24 December 2009
e … while T&D equipment orders suffer lack of near-term visibility Cummins India (KKC IN) 20.0 15.9
Thermax Ltd (TMX IN) 28.9 20.5
Even as the long-term opportunity appears robust, near-term order inflow for the Source: Nomura estimates
sector has been a concern. Key players such as ABB India that have more
exposure to industrial capex are the ones affected the most. With little visibility
on a pick-up in the commodity cycle currently, we believe industrial capex will still
take a couple of quarters to pick up. Meanwhile, stocks in the space have run up
on the back of expectations of a strong recovery and are unlikely to offer value in
the near term, in our view.
12 1
8 0
4 (1)
0 (2)
Mar-96 Jul-98 Nov-00 Mar-03 Jul-05 Nov-07 Mar-10
Exhibit 61. BHEL: order flows are peaking Exhibit 62. Thermax: benefitting from power orders
Mar-08
Sep-09
Jun-09
Dec-08
Sep-08
Jun-08
Dec-07
Sep-07
Jun-07
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
Exhibit 63. ABB: segmental revenue still declining … Exhibit 64. … thus pressurising margins
(40) 4
2
Mar-07
Mar-08
Mar-09
Mar-06
Mar-07
Mar-08
Mar-09
Jun-07
Sep-07
Jun-08
Jun-09
Jun-08
Jun-09
Dec-07
Sep-08
Dec-08
Sep-09
Jun-06
Jun-07
Sep-06
Dec-06
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Source: ABB India, Nomura research Source: ABB India, Nomura research
Length (Km)
11,947
11,721
12,000
10,000
8,000
4,740
6,000
3,476
2351
2148
1,726
4,000
1614
1,305
1,202
1318
895
754
671
636
639
480
2,000
391
342
310
262
105
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
Source: NHAI, Report on “Private Participation in Infrastructure” by Committee on Infrastructure, June 2009
Insurance BEARISH
~ Action Stocks for action
We continue to advocate a very conservative stance in valuing insurance We maintain REDUCE on RCFT, as
companies in India, as we believe that they continue to face headwinds from we believe that its life insurance
lukewarm growth, very low persistency, operating cost overruns and regulatory risk. business faces the twin risks of
higher operating costs and high
lapsation.
a Catalysts
Enhanced disclosure from companies should bring operating metrics into focus.
expanded their distribution networks just before the onset of the downturn still face a
significant challenge in terms of operating efficiency. We highlight Reliance Life and
Max New York Life as two companies with exposure to this risk. A key valuation
parameter for these companies in FY11F will be their ability to gain market share while
maintaining costs, in our opinion.
Reliance Capital. Using SOTP, we value RCFT at INR834/share. We value the life Using SOTP, we value RCFT at
insurance business at 15x FY11F NBAP, asset management business at 4.5% FY11F INR834/share
AUM and RMoney at 14x FY11F earnings. The key upside risk to our valuation is if
margins in the insurance business come in higher than we are forecasting.
a Catalysts Price
A return of discretionary spending could boost earnings. The risk of a sharp Price target
Stock Rating (INR) (INR)
appreciation in the rupee remains a downside risk. TCS (TCS IN) NEUTRAL 749 785
HCL Tech (HCLT IN) BUY 375 397*
Anchor themes
Patni (PATNI IN) BUY 473 540
Client IT budgets are not expected to increase dramatically and the combination of Tech Mahindra BUY 1,003 1,250
(TECHM IN)
a higher offshore mix and lower pricing could restrain companies from achieving Infosys (INFO IN) NEUTRAL 2,592 2,600
historic revenue growth rates. Wipro (WPRO IN) NEUTRAL 694 740
* PT under review; Prices as of 24 December 2009
Exhibit 67. Q-Q US$ revenue growth in +ve territory Exhibit 68. Net employee adds also trending upward
4.0 8,000
2.0 6,000
0.0 4,000
(2.0) 2,000
(4.0) 0
(6.0) (2,000)
(8.0) (4,000)
3Q FY09 4Q FY09 1Q FY10 2Q FY10 2Q FY09 3Q FY09 4Q FY09 1Q FY10 2Q FY10
Source: Company data, Nomura research Source: Company data, Nomura research
Exhibit 69. EBITDA margins have improved y-y Exhibit 70. Valuation sensitivity to rupee
appreciation
(%) Infosys TCS Wipro 140 Infosys premium (%) to Sensex P/E (LHS) 46
36 120 US$/INR rate (RHS) 45
34 44
100
32 43
80
30 42
60
28 41
26 40
40
24 20
39
22 0 38
20 (20) 37
18
(40) 36
2Q FY09 3Q FY09 4Q FY09 1Q FY10 2Q FY10
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08
Exhibit 71. One-year forward P/E trend for Infosys, HCL Tech and the Sensex
in the past three years
(x)
Infosys Sensex HCL Tech.
32
28
24 23.0
20
16.2
16
15.7
12
8
4
May-07
May-08
May-09
Nov-06
Nov-07
Nov-08
Nov-09
Mar-07
Mar-08
Mar-09
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09
Sep-09
Jan-10
Jul-07
Jul-08
Jul-09
Media BULLISH
~ Action Stocks for action
We expect advertising spending in the industry to bounce back in 2010F. At the Zee Entertainment is our top pick as
same time, consolidation within the industry may cap cost elements like staff and we expect it to benefit from a
carriage costs. This combination should result in a better operating environment for recovery in ad-spending and recent
the broadcasters, leading to improved sector profitability. We remain Bullish. restructuring.
a Catalysts
We think strong recovery in advertising revenue growth and reasonable growth in
subscription income fuelled by direct to home (DTH) revenue growth are key Price
Price target
catalysts for the sector in 2010F. Stock Rating (INR) (INR)
Anchor themes Zee Entertainment BUY 265.5 292
(Z IN)
Competitive intensity in the sector is showing signs of a revival, with the weaker Sun TV BUY 336.25 355*
(SUNTV IN)
players getting bought out by stronger names. Any significant change in the
* PT under review; Prices as of 24 December 2009
competitive landscape would prompt us to revisit our stance.
(%)
35
30
25
20
15
10
5
0
(5)
(10)
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10F FY11F
Metals BULLISH
~ Action Stocks for action
In an environment of higher raw material costs and increased steel prices, we We recommend BUY on Tata Steel
believe steel producers, vertically integrated into raw materials, are likely to benefit and SAIL. However, Tata Steel is
the most. Therefore, we see Indian steel companies as being the largest our top pick as 1) it is a much better
beneficiaries, as we expect limited cost increases owing to captive iron ore volume play; 2) its raw material
production. costs are expected to decline owing
a Catalysts to captive coal; and 3) Corus is
expected to turn around.
We expect inventory restocking in developed economies to begin in 1Q10, which
should result in higher steel prices. This, in our opinion, should act as the main
Price
catalyst for the sector. Price target
Anchor themes
Stock Rating (INR) (INR)
TATA Steel BUY 615.6 926
We believe Indian steel companies are well placed to enjoy the recovery in global SAIL BUY 237 250
steel prices, owing to captive iron ore and strong domestic demand. We expect Prices as of 24 December 2009.
50% one-year returns for Tata Steel and 5.5% for SAIL.
With increasing steel production, we believe even coking coal prices should
rebound after a more than 50% contraction in FY10. We expect coking coal
contract prices to increase to US$180/tonne in FY11 from US$129 in FY10.
Exhibit 73. Global steel production has picked up over the past six months
120
100
80
60
40
Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep-
08 08 08 08 08 08 09 09 09 09 09
15
10
(5)
FY05 FY06 FY07 FY08 FY09F FY10F FY11F FY12F
Exhibit 75. India has turned into a net importer of steel since 2004
(Tonnes) (Tonnes)
Capacity (LHS) Crude steel production (LHS)
70,000 3,000
Consumption (LHS) Net imports (RHS)
60,000 2,000
50,000 1,000
40,000 0
30,000 (1,000)
20,000 (2,000)
10,000 (3,000)
0 (4,000)
FY04 FY05 FY06 FY07 FY08 FY09
Anchor themes
There are growing expectations that the Expert Group will provide a dynamic
solution to long-pending critical issues such as pricing & subsidies on petro fuels.
An early end to gas litigation would draw attention back to large growth at RIL.
Exhibit 76. India: at current retail prices, large Exhibit 77. India: per unit under-recoveries and
under-recoveries are expected to continue underlying Brent prices at current retail prices
FY07 FY08 FY09 FY10F FY11F FY12F Under- Underlying
Brent price (US$/bbl) 64.4 82.3 84.8 69.4 72.0 75.0 Retail recoveries Brent
Product Unit prices (INR) (INR) (US$/bbl)
Exchange rate (INR/US$) 45.3 40.2 46.0 47.2 45.0 45.0
MS per litre 44.5 2.6 67.0
Gross U/R per unit Diesel per litre 32.9 2.3 68.0
Petrol (INR/ltr) 1.6 5.2 0.1 3.1 2.2 3.3 PDS Kerosene per litre 9.1 16.8 18.0
Diesel (INR/ltr) 3.9 6.2 6.2 1.2 1.2 2.0 Domestic LPG per cylinder 321.3 304.0 35.0
Domestic LPG (INR/cyl) 169 220 247 196 209 231 Note: Based on prices and exchange rates as of the first fortnight of December
2009
Gross under-recoveries (INRbn) Source: Nomura estimates
Petrol 20 73 52 46 38 60
Diesel 188 353 523 59 77 141
PDS Kerosene 179 191 282 175 196 206
Domestic LPG 107 156 176 130 144 163
Total 494 773 1033 411 455 571
Exhibit 78. India oil production: Cairn’s Rajasthan Exhibit 79. India gas production: RIL’s KG-D6 to
block and RIL’s KG-D6 contribute to large increase double gas production by FY11
(MMT) (mmscmd)
50 200
45 175
150
40
125
35
100
30
75
25 50
FY10F
FY11F
FY12F
FY10F
FY11F
FY12F
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY09
FY01
Source: Petroleum Planning & Analysis Cell, Nomura estimates Source: Petroleum Planning & Analysis Cell, Nomura estimates
Exhibit 80. India’s refining capacity and Exhibit 81. India: key new projects in 2010
consumption — product exports likely to increase
75
FY04 FY06 FY08 FY10F FY12F * October 2010 (With Compressor)
Source: Company data, Nomura estimates
Source: Petroleum Planning & Analysis Cell, Nomura estimates
Pharmaceuticals BULLISH
~ Action Stocks for action
Our pharma coverage universe has re-rated y-t-d from 14.4x to 18.9x. Despite this Among the stocks in our coverage
re-rating, we remain Bullish on the sector, given comfortable relative valuations and universe, Dr. Reddy’s is our top pick.
improved fundamentals. We recommend a stock-specific approach given the
dominance of company-specific issues. Our top BUY in the sector is Dr. Reddy’s. Price
Price target
a Catalysts Stock Rating (INR) (INR)
Dr. Reddy’s BUY 1,186 1,329
Visibility on product-specific upside in the US, with an increase in patent expiries (DRRD IN)
and value-accretive tie-ups with global pharma, particularly in innovation R&D. Ranbaxy (RBXY IN) REDUCE 520 261
Prices as of 24 December 2009
Anchor themes
Improved fundamentals are based on: 1) intent to improve profitability; 2) interest in
Indian companies on the global stage; 3) renewed focus on the domestic market; 4)
expanding opportunities in the US; 5) increased traction in CRAMS and end of
inventory de-stocking; and 6) potential upside from innovation R&D.
Source: Glenmark
Property BULLISH
~ Action Stocks for action
We believe that investors should keep their faith in developers with a focus on Our picks are Unitech and Indiabulls
growing volumes rather than increasing prices. Developers with a good mix of Real Estate, which are trading below
residential and commercial developments and with repaired balance sheets should NAV. Our top REDUCE is DLF,
outperform, in our view. Our top pick is Unitech, trading at a 27% discount to NAV. which is trading 12% above NAV.
a Catalysts
We think improvement in residential volumes from here, accompanied by Price
Price target
increasing office leasing and visible execution, could act as a catalyst. Stock Rating (INR) (INR)
Anchor themes
Unitech (UT IN) BUY 82 112
Indiabulls Real
Estate (IBREL IN) BUY 216.5 339
Residential volume revival has been a mirage so far, with a limited and localised
DLF Ltd (DLFU IN) REDUCE 371 330
recovery. We believe that CY10/FY11F will be crucial in deciding whether the
Prices as of 24 December 2009
Indian property sector can move closer to its volume potential through rational
pricing. A recovery in commercial space leasing is likely in CY10F.
May-09
Nov-07
Mar-08
Nov-08
Mar-09
Sep-09
Sep-07
Jan-08
Sep-08
Jan-09
Jul-09
Jul-07
Jul-08
May-09
Nov-07
Mar-08
Nov-08
Mar-09
Jan-09
Sep-09
Sep-07
Jan-08
Sep-08
Jul-09
Jul-07
Jul-08
While demand is weak, inventory levels are down substantially, offering support for
prices at current levels. Given an increasing possibility of policy rate hikes in India on
rising inflation, we think that developers will have to keep prices subdued to achieve
volumes. Hence, we look for price consolidation at least over the next six months.
e Stock picks
Amid a faltering residential revival and a nascent commercial space recovery, we
believe that investors should keep their faith in developers with a focus on growing
volumes over increasing prices. Also, we think that developers with a good mix of
residential and commercial developments should outperform as both segments are
likely to improve from here. Again, developers that have managed to strengthen their
balance sheets by raising capital through equity or selling land and reducing debt in
FY10 should be much more comfortable going into CY10/FY11F. In this sense, our top
pick is Unitech, which is clearly focused on increasing residential volumes (11.5mn sq
ft sold between March and October 2009) and has a reasonable mix of residential and
commercial developments, with a much stronger balance sheet to boot (raised almost
US$1bn in equity). The company also trades at an attractive 27% discount to NAV, on
our estimate.
On the flip side, our top REDUCE is DLF, where valuation appears to be stretched, at
a 12% premium to NAV. Given its status as the largest pan-India property developer,
we think the company has failed to lead the residential revival, relying solely on sales
from its Capital Greens project in Delhi to shore up revenues. The restructuring of DLF
Assets through a merger with DLF may help to monetise its commercial assets through
a REIT listing in CY10F, but this is unlikely to affect valuations, on our reading.
Telecoms NEUTRAL
~ Action Stocks for action
We see little respite from price-wars in 1H; in fact, 3G and MNP will create more Our NEUTRAL rating for Bharti is on
volatility. Neither do we see any new-comers packing up or consolidating anytime account of valuations that are not
soon. Large established players may look to consolidate, but regulations are inexpensive, in our view. We have a
unclear and so are various permutations. 2H should see greater stability on REDUCE rating for RCOM.
competition as the market moves from initial promotions to sustainable plans.
a Catalysts
Price-stability, 3G and MNP decisions and consolidation.
Price
Anchor themes Price target
Stock Rating (INR) (INR)
The subscriber growth cycle is by no means over; however, the returns on an Bharti Neutral 321 330
incremental subscriber are uncertain. RCOM Reduce 175 154
Prices as of 24 December 2009
Most key carrier launches have occurred, at least in select circles with pan-India
expansion over 2010. Etisalat DB and S Tel are the two pending near-term
launches. With subscriber traction, companies could potentially begin to look
beyond price differentiation. Headline tariffs may not rise, but companies could
strive to boost overall realisation. With 3G and MNP also implemented in 1H, 2H
could see more stability. However, an asymmetric 3G outcome whereby one or
two incumbents lose out significantly could again trigger market irrationality.
Exhibit 86. Bharti, RCOM — revenue outlook Exhibit 87. Bharti, RCOM — margin outlook
Mar-09
Mar-08
Mar-09
Sep-09
Dec-07
Sep-08
Dec-08
Sep-09
Dec-07
Sep-08
Dec-08
Jun-08
Jun-09
Jun-08
Jun-09
Source: Telecom Regulatory Authority of India (TRAI), Company data, Nomura research
Mar-09
Sep-07
Dec-07
Jun-08
Sep-08
Dec-08
Jun-09
Sep-09
Mar-08
Mar-09
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Jun-08
Jun-09
0.5%
MTNL
Aircel Idea
0.9%
5.5% 11.0%
Source: Telecom Regulatory Authority of India (TRAI), Company data, Nomura research
Exhibit 90. Visible uptrend in industrial activity… Exhibit 91. …leads to expectation of revival in air
traffic
(% y-y) (% m-m) (mn pax) HYD (LHS) DEL (LHS) (% y-y)
16 IIP (3mma) (LHS) 2 BOM (LHS) HYD (RHS)
30 50
DEL (RHS) BOM (RHS)
OECD CLI for India (6-month lead)
25 40
12 1
30
20
20
8 0 15
10
10
4 (1) 0
5 (10)
0 (2) 0 (20)
Mar-96 Jul-98 Nov-00 Mar-03 Jul-05 Nov-07 Mar-10 FY04 FY05 FY06 FY07 FY08 FY09F FY10F
Source: OECD, CEIC and Nomura Global Economics Source: Airports Authority of India, Nomura estimates
Exhibit 92. Both US and Euro zone PMI on the rise Exhibit 93. Port traffic has historically mirrored IIP
May-09
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Mar-08
Nov-08
Mar-09
Nov-09
Jan-08
Jul-08
Sep-08
Jan-09
Jul-09
Sep-09
Exhibit 94. Container traffic at ports already rising… Exhibit 95. …led by rising imports; exports to follow
(indexed to 1)
May-09
Nov-07
Mar-08
Nov-08
Mar-09
Nov-09
Sep-07
Jan-08
Jul-08
Sep-08
Jan-09
Jul-09
Sep-09
May-09
Nov-08
Mar-09
Jul-08
Aug-08
Sep-08
Oct-08
Jan-09
Feb-09
Apr-09
Jun-09
Aug-09
Sep-09
Dec-08
Jul-09
Oct-09
MM’s auto business is trading at only 10x FY11F EPS (vs 14x for our coverage Price target INR1,232
(set on 30 Oct 09)
universe), we think on concerns over tractor demand due to below-normal rainfall in
Upside/downside 16.0%
India in 2009. We expect a structural improvement in tractor demand due to the Difference from consensus 10.5%
National Rural Employment Guarantee Act (NREGA), continued success of Xylo FY11F net profit (INRmn) 21,044
and potential upside from new commercial vehicle launches.
Difference from consensus 12.1%
a Catalysts
Source: Nomura
Delivery of tractor growth and success of new commercial vehicle launches by the
company are potential key triggers for the stock. Nomura vs consensus
Anchor themes We are more upbeat than the street,
MM has been a big beneficiary of the Indian government’s focus on rural areas. as we expect structural improvement
Under the NREGA, not only has farm labour become expensive, but worker in tractor volumes due to labour
shortages have also surfaced. We see this as a key catalyst for increased shortages, and only limited impact on
mechanisation at farms. tractor demand from weak monsoons.
Mar09
May09
Sep09
Nov09
Apr09
Jun09
Oct09
Dec08
Feb09
Jul09
Aug09
It will launch a light commercial vehicle and a full range of medium and
heavy commercial vehicles. Having a solid nationwide distribution 1m 3m 6m
network should be a key advantage, in our view. Absolute (INR) (0.5) 23.4 47.0
Absolute (US$) (1.1) 26.9 52.9
The company also plans to launch its entry-level pick-up trucks in the Relative to Index (2.3) 17.9 23.4
US, targeting 2,000-3,000 units per month. We have not assigned any Market cap (US$mn) 6,387
Estimated free float (%) 67
value to this venture at this stage. 52-week range (INR) 1,080/255.8
3-mth avg daily turnover (US$mn) 28.28
e Standalone business trading at only 10x Stock borrowability Hard
Major shareholders (%)
MM’s standalone business is trading at only 10x FY11F EPS (ex M&M Group 33.27
LIC 17.52
dividend) of INR66.9, versus an average of 14x for the other India auto
Source: Compa ny, Nomura e stimate s
stocks under our coverage. We continue to value MM at 12x FY11F
EPS, which is the mid-point of its historical trading range of 10-14x
during up-cycles. Our tech analyst Harmendra Gandhi values Tech
Mahindra (TECHM IN) at INR250/share. We value the rest of the
subsidiaries at market capitalisation. We roll forward the target price at 11.6% cost of
equity to November 2010. At our target price, the implied EV/EBITDA ratio for the
standalone business is about 8x. Note that we have not assigned any value to the
Mahindra International and Mahindra-Renault joint ventures.
Key risks include: 1) slow growth in rural incomes due to bad monsoons; 2) a complete
rollback of excise duties could affect volume growth and margins; and 3) a sharp
increase in raw material costs could erode margins.
60 58.3
48.5 46.6 48.5
50 44.3
41.3 43.4
40
30
22.4 22.1
20.0 20.0 20.8 19.8
20
12.8
10
0
FY04 FY05 FY06 FY07 FY08 FY09 FY10-ytd
Exhibit 97. MM: tractor SAAR Exhibit 98. MM: UV + LCV SAAR
(Nos) (Nos)
250,000 300,000
200,000 250,000
200,000
150,000
150,000
100,000
100,000
50,000 50,000
0 0
Nov-07
Nov-08
Nov-09
Mar-08
Mar-09
Jan-08
Jan-09
Oct-07
Oct-08
Oct-09
Jul-07
Jul-08
Jul-09
Jul-07
Apr-08
Jul-08
Apr-09
Jul-09
Source: Society of Indian Automobile Manufacturers (SIAM), Nomura research Source: Society of Indian Automobile Manufacturers (SIAM), Nomura research
Financial statements
Income statement (INR mn)
Y ear-end 31 Dec FY08 FY 09F FY10F FY 11F
Revenue 115,914 131,860 157,196 187,930
Cost of goods sold (79,648) (95,657) (104,139) (125,350)
Gross profit 36,266 36,202 53,057 62,580
SG&A (15,882) (17,022) (20,243) (24,012) Robust revenue growth of
Employee share expense (8,525) (10,246) (11,783) (13,668) around 20% in FY11F
Operating profit 11,860 8,934 21,031 24,900
- - - -
EBITDA 14,248 11,849 24,984 29,908
Depreciation (2,389) (2,915) (3,954) (5,008)
Amortisation - - - -
EBIT 11,860 8,934 21,031 24,900
Net interest expense (242) (453) (194) (335)
Associates & JCEs - - - -
Other income 803 1,780 2,903 3,320
Earnings before tax 12,420 10,262 23,740 27,886
Income tax (3,034) (1,997) (5,906) (6,842)
Net profit after tax 9,386 8,265 17,835 21,044
Minority interests - - - -
Other items - - - -
Preferred dividends - - - -
Normalised NPAT 9,386 8,265 17,835 21,044
Extraordinary items 1,652 (396) 694 -
Reported NPAT 11,038 7,869 18,529 21,044
Dividends 3,211 3,121 5,559 6,313
Transfer to reserves 14,249 10,990 24,087 27,357
Growth (%)
Revenue 15.1 13.8 19.2 19.6
EBITDA 10.7 (16.8) 110.9 19.7
EBIT 10.1 (24.7) 135.4 18.4
Normalised EPS (1.3) (11.9) 115.8 18.0
Normalised FDEPS (1.3) (11.9) 115.8 18.0
Per share
Reported EPS (INR) 40.4 28.8 67.9 77.1
Norm EPS (INR) 34.4 30.3 65.4 77.1
Fully diluted norm EPS (INR) 34.4 30.3 65.4 77.1
Book value per share (INR) 179.0 188.5 251.6 302.6
DPS (W) (13.2) (11.2) (19.3) (21.9)
Source: Nomura estimates
Liquidity (x)
Current ratio 1.12 1.06 0.91 0.91
Interest cover 48.93 19.74 108.68 74.40
Leverage
Net debt/EBITDA (x) 1.2 2.1 0.8 0.6
Net debt/equity (%) 39.7 47.1 26.5 21.1
Activity (days)
Days receivable 26.9 28.4 26.6 26.7
Days inventory 45.1 40.9 43.3 45.1
Days payable 97.0 109.3 117.3 104.1
Cash cycle (25.0) (40.1) (47.4) (32.4)
Source: Nomura estimates
TTMT’s free cashflow generation remains at risk due to severe financial strain from Price target INR419
(set on 30 Nov 09)
Jaguar and Land Rover (JLR). Even though accounting under Indian standards
Upside/downside -39.2%
means that JLR should report profits, the cashflow situation is bleak, in our view. Difference from consensus -30.3%
We estimate JLR will have a cash loss of ~INR70/share in FY10F. REDUCE. FY11F net profit (INRmn) 25,082
May09
Nov09
Feb09
Mar09
Apr09
Jun09
Aug09
Sep09
Oct09
Dec08
Jul09
f Domestic MHCV business to remain slow after FY11F 52-week range (INR)
3-mth avg daily turnover (US$mn)
780/ 130.8
70.8
While FY10F and FY11F should see strong growth in medium and Stock borrowability Hard
Major shareholders (%)
heavy commercial vehicles amid a recovery in the domestic market,
Tata Sons 27.13
we think volume growth is likely to slow to 10% after FY11F. Even this LIC 11.50
forecast may face downside risk due to competition from new entrant Source: Co mpany, Nomura esti mates
We have used an EV/EBITDA multiple of 8.5x, which is close to the upper end of the
stock’s trading band (as we estimate a strong recovery).
z Very strong growth in industrial production for the next few years, leading to high
demand for medium and heavy commercial vehicles.
20,000
15,000
10,000
5,000
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Financial statements
Income statement (INR mn)
Year-end 31 Dec FY08 FY09F FY10F FY11F
Revenue 283,622 254,712 326,164 399,722
Cost of goods sold (208,755) (194,506) (226,859) (280,664)
Gross profit 74,867 60,207 99,305 119,058
S G&A (39,351) (38,321) (50,025) (57,524)
E mployee share expense (15,446) (15,514) (17,743) (19,773)
Operating profit 20,071 6,372 31,537 41,761
- - - -
E BITDA 26,594 15,117 41,841 53,766
Depreciation (6,523) (8,745) (10,304) (12,004)
A mortisation - - - -
E BIT 20,071 6,372 31,537 41,761
Net interest expense (2,824) (6,737) (9,907) (9,214)
A ssociates & JCEs - - - -
Other income 3,444 4,585 8,255 1,391
E arnings before tax 20,691 4,219 29,885 33,938
Income tax (5,476) (125) (4,804) (4,923)
Net profit after tax 15,216 4,094 25,082 29,016
Minority interests - - - -
Other items - - - -
P referred dividends - - - -
Normalised NPAT 15,216 4,094 25,082 29,016
E xtraordinary items 5,073 5,918 - -
Reported NPAT 20,289 10,013 25,082 29,016
Dividends (6,597) (3,457) (8,660) (10,018)
Transfer to reserves 13,692 6,556 16,422 18,997
P er share
Reported EPS (INR) 47.4 19.5 46.1 53.3
Norm EPS (INR) 35.6 8.0 46.1 53.3
Fully diluted norm EPS (INR) 35.6 8.0 46.1 53.3
B ook value per share (INR) 203.3 237.9 287.0 322.0
DPS (W) 17.1 6.7 15.9 18.4
Source: Nomura estimates
Cashflow (INR m n)
Year-end 31 Dec FY08 FY09F FY10F FY11F
E BITDA 26,594 15,117 41,841 53,766
Change in working capital 48,163 (4,944) 6,423 7,521
Other operating cashflow 219 3,641 (6,455) (12,746)
Cashflow from operations 74,976 13,814 41,810 48,541
Capital expendi ture (46,067) (49,634) (25,943) (25,537)
Free cashflow 28,909 (35,821) 15,866 23,004
Reduction in investments (24,333) (80,579) (76,804) -
Net acquisitions - - - -
Reduction in other LT assets - - - -
A ddition in other LT liabilities 40 1,682 - -
A djustments 40 40 40 -
Cashflow after investing acts 4,657 (114,677) (60,897) 23,004
Cash dividends (6,597) (3,457) (8,660) (10,018)
E quity issue (3,995) 39,580 17,402 -
Debt issue 21,681 67,680 55,080 (10,501)
Convertible debt issue - - - -
Others - - - -
Cashflow from financial acts 11,089 103,804 63,822 (20,519)
Net cashflow 15,746 (10,873) 2,925 2,485
B eginning cash 8,268 23,973 11,418 14,303
E nding cash 24,013 13,100 14,343 16,788 Net cashflow of standalone
E nding net debt 38,832 120,237 172,433 159,447 business remains very low,
Source: Nomura estimates even in FY11F
Liquidity (x)
Current ratio 0.89 0.83 0.83 0.82
Interest cover 7.11 0.95 3.18 4.53
Leverage
Net debt/EBITDA (x) 1.5 8.0 4.1 3.0
Net debt/equity (%) 49.5 98.3 110.4 91.0
Activity (days)
Days receivable 11.9 19.1 17.4 15.5
Days inventory 43.2 43.6 38.6 35.8
Days payable 123.6 160.7 155.0 148.2
Cash cycle (68.6) (97.9) (99.1) (96.9)
Source: Nomura estimates
We believe that SBI is well poised to improve NIM and acquire loan market share, Price target INR2,590
given its strong balance sheet and focus on improving its loan/deposit ratio through (set on 8 Oct 09)
Upside/downside 10.9%
competitive pricing strategies. We reiterate our BUY call. Price target under review,
Difference from consensus 16.9%
with an upward bias.
FY10F net profit (INRmn) 100,403
a Catalysts Difference from consensus 1.3%
Continuous NIM expansion in the forthcoming quarterlies, listing guidelines for life Source: Nomura
insurance, and clarity from RBI on new provisioning norms are potential catalysts. Note: Price target under review
Nomura vs consensus
Anchor themes
Our earnings are broadly in line with
Strong growth in loans, NIM and fees will be key stock drivers, in our view. SBI is
consensus. We believe the composition
trading at 1.8x FY11F P/adjusted BV on the core banking business, which we
is different, however, with consensus
believe is undemanding in the context of its growth potential and risk profile. We
assuming higher NIMs and lower non-
have already adjusted for the provisioning shortfall in our price target.
interest income.
Apr09
May 09
J un09
Nov09
FY10F, which should help to reduce the total cost of funds. As such,
Dec 08
Jan09
Jul09
Aug09
Sep09
O ct09
we expect the NIM decline in FY10F to settle at 40bps y-y, versus the
YTD decline of 70bps, indicating that margins will improve by 30bps in 1m 3m 6m
Absolute (INR) (3.8) 2.4 29.3
2H FY10F from current levels. Absolute (US$) (4.3) 5.3 34.4
Relative to Index (5.5) (3.8) 4.9
f Acquisition of home loan M/S, proactive management of Market cap (US$mn) 30,195
treasury portfolio Estimated free float (%) 30.4
52-week range (INR) 2,471/895
SBI has ramped up its market share in home loans over the past four 3-mth avg daily turnover (US$mn) 155.5
quarters. It is now the largest home loan financier, with a 35% market Stock borrowability Easy
Major shareholders (%)
share of all housing loans. Similarly, its treasury operations have
Govt of India 59.3
strengthened in recent years. Despite the rise in bond yields in 2Q,
the bank avoided mark-to-market losses owing to active reshuffling of Source: Co mpany, Nomura esti mates
g Valuation
We value SBI at 1.8x FY11F P/BV for the core banking business, based on
sustainable ROE of 17%. Our fair value for the core business works out to INR2,356.
We have valued subsidiaries at INR231 per share. The subsidiary valuation is driven
by life insurance, which we have valued at 18x NBAP FY11F.
Investment risks: A faster-than-expected rise in rates or slower-than-expected loan
growth are key risks to price target and earnings forecast.
Financial statements
Profit and Loss (INRmn)
Y ear-end 31st March FY07 FY08 FY 09 FY 10F FY11F
Interest income 372,421 489,503 637,884 750,320 884,345 Net interest income likely to
Interest expense (230,580) (319,291) (429,153) (515,046) (591,494) grow by 13% y-y in FY10F
Net interest income 141,842 170,212 208,731 235,274 292,851 and 24% y-y in FY11F
Net fees and commissions 48,045 59,143 76,172 89,883 103,366
Trading related profits 5,678 16,498 25,673 20,000 10,000
Other operating revenue 13,918 11,308 25,063 30,612 33,118
Non-interest income 67,641 86,949 126,908 140,495 146,484
Operating income 209,483 257,162 335,639 375,769 439,335
Depreciation na na na na na
Operating expenses (118,235) (126,086) (156,487) (179,332) (199,023)
Employee share expense na na na na na
Op. profit before provisions 91,248 131,076 179,152 196,437 240,312
Provisions for bad debt (14,295) (20,009) (24,750) (52,080) (56,149)
Other provision charges (9,255) (4,490) (2,045) 6,729 (5,770)
Operating profit 67,697 106,576 152,357 151,086 178,393
Amortisation na na na na na
Other non-operating income na na na na na
Associates & JCEs na na na na na
Pre-tax profit 67,697 106,576 152,357 151,086 178,393
Income tax (31,036) (39,285) (61,145) (50,683) (60,237)
Net profit after tax 36,661 67,291 91,212 100,403 118,156
Minority interests na na na na na
Other items na na na na na
Preferred dividends na na na na na
Normalised NPAT 36,661 67,291 91,212 100,403 118,156
Extraordinary items na na na na na
Reported NPAT 36,661 67,291 91,212 100,403 118,156
Dividends (8,620) (15,235) (20,892) (20,892) (20,892)
Transfer to reserves 28,041 52,056 70,320 79,511 97,264
Growth (%)
Net interest income (9.0) 20.0 22.6 12.7 24.5
Non-interest income (9.0) 28.5 46.0 10.7 4.3
Non-interest expenses 0.8 6.6 24.1 14.6 11.0
Pre-provision earnings (19.2) 43.6 36.7 9.6 22.3
Net profit (16.8) 83.5 35.5 10.1 17.7
Normalised EPS (16.8) 53.0 34.8 10.1 17.7
Normalised FDEPS (16.8) 53.0 34.8 10.1 17.7
Source: Nomura estimates
Growth (%)
Loan growth 28.9 23.5 30.2 20.0 15.0
Interest earning assets 14.8 25.1 37.0 23.3 14.2
Interest bearing liabilities 18.2 24.2 35.3 20.5 14.0
Asset growth 14.7 27.4 33.7 22.9 14.3
Deposit growth 14.6 23.4 38.1 22.0 15.0
Per share
Reported EPS (INR) 69.7 106.5 143.7 158.1 186.1
Norm EPS (INR) 69.7 106.5 143.7 158.1 186.1
Fully diluted norm EPS (INR) 69.7 106.5 143.7 158.1 186.1
DPS (INR) 16.0 21.5 29.0 18.0 18.0
PPOP PS (INR) 173.4 207.5 282.2 309.4 378.5
BVPS (INR) 594.7 776.4 912.7 1,027.1 1,176.2
ABVPS (INR) 594.7 776.4 912.7 1,027.1 1,176.2
NTAPS (INR) 594.7 776.4 912.7 1,027.1 1,176.2
Source: Nomura estimates
We expect the profitability of Ambuja Cements to come under significant pressure Price target INR67
(set on 10 Jul 09)
in 2010F as cement realisations continue to fall on the back of new capacity
Upside/downside -32.6%
additions. We expect the company’s quarterly performance, which to date has been
Difference from consensus -25.0%
very strong, to reflect this change in operating environment from calendar 4Q10F FY09F net profit (INRmn) 11,183
onward. Thereafter, we expect severe pressure on earnings. REDUCE reaffirmed.
Difference from consensus -11.0%
a Catalysts Source: Nomura
Weakness in cement realisations due to new capacity additions and an increase in
cost elements such as coal strike us as the stock’s key catalysts in 2010F. Nomura vs consensus
Anchor themes We are much more pessimistic in our
estimates for 2010F, as we expect
Although the 2010F outlook for the company appears bleak, prevailing valuations the cement price correction to be
have the stock at a mid-cycle EV/tonne multiple. Ambuja Cements, at much more severe than the market
US$140/tonne, appears to be one of the most expensive cement stocks in India. anticipates.
Challenging times
Key financials & valu ations
31 Dec (INRmn) FY 08 FY09F FY10F FY 11F
Revenue 62,347 68,400 70,400 na
c Business outlook appears bleak Reported net profit 14,023 11,183 9,264 na
Normalised net profit 10,939 11,183 9,264 na
The outlook for India’s cement sector appears bleak. Cement prices Normalised EPS (INR) 7.2 7.3 6.1 na
have started correcting significantly (especially in the country’s Norm. EPS growth (%) 11.2 2.2 (17.2) na
Norm. P/E (x) 13.8 13.5 16.3 na
southern regions). Demand for cement has held firm until recently,
EV/EBITDA (x) 7.5 7.2 8.2 na
with signs of weakness emerging in recent months. We note that the Price/book (x) 2.7 2.4 2.2 na
sector will add significant new capacity in the near future, putting Dividend yield (%) 2.2 2.2 2.2 na
further pressure on pricing. ROE (%) 21.2 18.5 13.9 na
Net debt/equity (%) (9.9) (4.4) (0.0) na
Earnings revisions
d Quarterly performance to deteriorate Previous norm. net profit 11,183 9,264 na
Change from previous (%) - - -
Although the recent quarterly results of most Indian cement
Previous norm. EPS (INR) 7.3 6.1 na
companies have been good, we believe the operating environment for Source: Co mpany, Nomura esti mates
the sector will worsen in the quarters ahead, as capacity additions put
further pressure on realisations. Moreover, we expect cost pressures, Share price relative to MSCI India
Pri ce
including those from coal costs, to resurface shortly, weighing on
118 R el MSC I India 120
profitability at Ambuja.
108 110
98 100
e Valuations still high 88 90
Prevailing valuations do not appear to reflect the likely significant 78 80
68 70
deterioration in profitability at Ambuja. Indeed, valuations have not
58 60
corrected much at all, which dictates our negative view of the stock.
J an09
May09
Nov09
Feb09
Mar09
Apr09
Jun09
Aug09
Sep09
Oct09
Dec08
Jul09
2) the stock could find support if parent Holcim goes for majority control.
Financial statements
Income statement (INRmn)
Year-end 31 Dec FY08 FY09F FY10F
Revenue 62,347 68,400 70,400
Cost of goods sold 32,121 35,072 37,752
Gross profit 30,226 33,328 32,648
SG&A 12,446 14,317 15,774
Employee share expense - - -
Operating profit 17,779 19,012 16,874
Growth (%)
Revenue 10.7 9.7 2.9
EBITDA (12.7) 5.3 (10.4)
EBIT (15.4) 3.3 (15.9)
Normalised EPS 11.2 2.2 (17.2)
Normalised FDEPS
Per share
Reported EPS (INR) 9.2 7.3 6.1
Norm EPS (INR) 7.2 7.3 6.1
Fully diluted norm EPS (INR) 7.2 7.3 6.1
Book value per share (INR) 37.2 42.0 45.5
DPS (INR) 2 2 2
Source: Nomura estimates
Cashflow (INRmn)
Year-end 31 Dec FY08 FY09F FY10F
Pre-tax profit 19,698 16,843 13,952
Depreciation 2,598 3,067 3,708
Tax paid (5,676) (5,659) (4,688)
Chg in working capital (2,464) (1,926) 185
Other operating activities 0 0 0
Cash flow from operations (a) 14,157 12,324 13,157
Capital expenditure (17,263) (11,246) (12,000)
Chg in investments 9,566 0 0
Chg in associates 0 0 0
Other investing activities 0 0 0
Cash flow from investing (b) (7,698) (11,246) (12,000)
Free cash flow (a+b) 6,459 1,078 1,157
Equity raised/(repaid) (0) 0 0
Chg in minorities 0 0 0
Debt raised/(repaid) (418) 6,918 (2,500)
Dividend (incl. tax) (3,919) (3,919) (3,919)
Other financing activities 0 0 0
Cash flow from financing (c) (4,527) 2,483 (7,030)
Net chg in cash (a+b+c) 1,932 3,561 (5,873)
Beginning cash 6,508 8,518 12,595
Ending cash 8,518 12,595 7,336
Ending net debt (5,632) (2,791) (31)
Source: Nomura estimates
Liquidity (x)
Current ratio 2 3 2
Interest cover 53 27 19
Gearing is much more
comfortable compared with
Leverage
earlier downcycles
Net debt/equity (%) (10) (4) (0)
Activity (days)
Days receivable 13 13 14
Days inventory 55 53 56
Days payable 82 73 73
Source: Nomura estimates
We believe that ITC should enjoy strong tailwinds in the core cigarette business in Price target INR309
(set on 28 Oct 09)
the near to medium term. After two difficult years, demand is steadily returning and
Upside/downside 20.8%
strong pricing power means ITC is likely to see margins expand from current levels. Difference from consensus 7.0%
We reaffirm our BUY rating and price target of INR309. FY10F net profit (INRmn) 39,884
a Catalysts
Difference from consensus 4.0%
Strong growth in the cigarette business along with a revival in the hotels business Source: Nomura
should be key catalysts.
Anchor themes Nomura vs consensus
We believe that the cigarette business in India is poised for strong growth in the We believe the market is still
near to medium term. Demand at the bottom end has been fairly strong from the underestimating potential growth in
rural markets, on the back of a steady increase in rural incomes and government the cigarette business and has yet to
factor in the revival in other
support.
businesses, such as hotels.
Among the other key businesses, we think the outlook looks fairly
Share price relative to MSCI India
strong for the hotels business. In the aftermath of the recent macro
(Rs) Price
economic turbulence, average room rates and occupancy have begun 280 Rel MSCI India 130
to climb steadily in the past few months. We believe that this business 260 120
240 110
is poised for a strong revival in FY11F, which the market has yet to
220 100
factor in. 200 90
180 80
Nov09
Mar09
Dec08
Jan09
Feb09
Jun09
Apr09
Aug09
Sep09
Oct09
Jul09
The company has guided for a 25% y-y reduction in losses in the non-
cigarette FMCG business in FY10F and breakeven by FY12F. This, in
1m 3m 6m
our view, augurs well for ITC. Absolute (INR) (3.0) 10.0 28.7
Absolute (US$) (3.6) 13.1 33.9
f Valuation relatively inexpensive; BUY reaffirmed Relative to Index (4.8) 4.1 4.4
Market cap (US$mn) 20,789
At 20.1x FY11F EPS of INR12.7, we believe that the risk-reward is Estimated free float (%) 67.0
favourable given a strong earnings outlook and relatively inexpensive 52-week range (INR) 268.9/158.4
3-mth avg daily turnover (US$mn) 24.78
valuation. We value ITC using sum-of-the-parts methodology. We
Stock borrowability Easy
value the core cigarette business at INR227/share, based on 19x Major shareholders (%)
FY11F earnings of INR11.9. The other core businesses are valued at Life Insurance corp. of India 13.59
around INR71/share. We value the net cash at book value. As for Unit Trust of India 11.84
Source: Company, Nomura estimates
risks to our call, we note that any structural change in regulations
could hamper the growth trajectory of the core cigarette business.
Financial statements
Income statement (INRmn)
Y ear-end 31 Mar FY08 FY09 FY10F FY11F FY12F
Revenue 147,877 164,655 178,186 207,881 236,259
Cost of goods sold 59,430 63,946 62,892 71,324 79,229 Strong revenue growth aided
Gross profit 88,447 100,709 115,294 136,557 157,030 by robust growth across all
SG&A 41,280 48,043 52,569 60,999 68,824 businesses
Operating profit 47,168 52,666 62,725 75,558 88,206
Growth (%)
Revenue 16.0 11.3 8.2 16.7 13.7
EBITDA 13.6 9.5 20.2 19.4 15.6
Normalised EPS 10.5 7.0 23.1 20.3 16.3
Normalised FDEPS 10.5 7.0 23.1 20.3 16.3
Per share
Reported EPS (INR) 8 9 11 13 15
Norm EPS (INR) 8 9 11 13 15
Fully diluted norm EPS (INR) 8 9 11 13 15
Book value per share (INR) 33 37 42 47 51
DPS (W) 4 4 5 7 10
Source: Nomura estimates
Cashflow (INRmn)
Year-end 31 Mar FY08 FY09 FY10F FY11F FY12F
EBITDA 47,168 52,666 62,725 75,558 88,206
Change in working capital (1,077) (2,888) (1,852) (3,906) (3,909)
Other operating cashflow (10,657) (13,264) (16,325) (20,285) (24,441)
Cashflow from operations 35,434 36,514 44,548 51,367 59,856
Strong cashflow to sustain
Capital expenditure (23,051) (18,200) (15,000) (7,569) (5,000)
ambitious expansion plans
Free cashflow 12,383 18,315 29,548 43,798 54,856
Reduction in investments (1,020) 1,008 - - -
Net acquisitions
Reduction in other LT assets
Addition in other LT liabilities
Adjustments
Cashflow after investing acts 11,363 19,323 29,548 43,798 54,856
Cash dividends (15,568) (16,452) (20,640) (30,336) (41,704)
Equity issue 6 6 - - -
Debt issue 240 (383) - - 189
Others (148) (180) - - (304)
Cashflow from financial acts (15,469) (17,009) (20,640) (30,336) (41,820)
Net cashflow (4,107) 2,314 8,908 13,462 13,036
Beginning cash 10,865 7,768 13,183 22,091 35,554
Ending cash 7,768 13,183 22,091 35,554 48,705
Ending net debt 2,249 1,867 1,867 1,867 1,867
Source: Nomura estimates
Nagarjuna Construction (NJCC) has recorded strong order inflows and we expect it Price target INR197
(set on 2 Oc t 09)
to benefit from a pick-up in award activity, particularly in the infrastructure segment.
Upside/downside 18.8%
A diversified orderbook allows NJCC to participate in a pick-up in corporate capex Difference from consensus 7.6%
as well. Lower expectations and an improving outlook are key reasons to BUY. FY10F net profit (INRmn) 2,172
Nov09
Mar09
Dec08
Jan09
Feb09
Jun09
Apr09
Aug09
Sep09
Oct09
Jul09
Financial statements
Income statement (INRmn)
Year-end 31 Mar FY08 FY09 FY10F FY11F FY12F
Revenue 34,729 41,514 47,989 54,453 64,161
Operating profit 3,171 3,245 4,203 4,764 5,650 Potential for upside in
revenues in FY11F on the
EBITDA 3,598 3,737 4,799 5,445 6,416 back of strong order inflow in
Depreciation (482) (533) (626) (711) (797) FY10 to date
Amortisation - - - - -
EBIT 3,116 3,204 4,173 4,734 5,620
Net interest expense (719) (964) (982) (989) (1,172)
Associates & JCEs - - - - -
Other income 56 42 30 30 30
Earnings before tax 2,452 2,282 3,222 3,776 4,478
Income tax (811) (743) (1,049) (1,230) (1,458)
Net profit after tax 1,641 1,539 2,172 2,546 3,020
Minority interests - - - - -
Other items (22) - - - -
Preferred dividends - - - - -
Normalised NPAT 1,619 1,539 2,172 2,546 3,020
Extraordinary items - - 406 - -
Reported NPAT 1,619 1,539 2,578 2,546 3,020
Dividends (348) (295) (295) (295) (295)
Transfer to reserves 1,271 1,244 2,284 2,251 2,725
Growth (%)
Revenue 21.0 19.5 15.6 13.5 17.8
EBITDA 33.4 3.9 28.4 13.5 17.8
EBIT 29.9 2.8 30.3 13.4 18.7
Normalised EPS 8.0 (6.2) 41.2 17.2 18.6
Normalised FDEPS 8.0 (6.2) 41.2 17.2 18.6
Per share
Reported EPS (INR) 6.31 6.00 10.05 9.92 11.77
Norm EPS (INR) 6.40 6.00 8.47 9.92 11.77
Fully diluted norm EPS (INR) 6.40 6.00 8.47 9.92 11.77
Book value per share (INR) 61.3 65.7 88.9 97.7 108.3
DPS (INR) 1.3 1.1 1.1 1.1 1.1
Source: Nomura estimates
Cashflow (INRmn)
Year-end 31 Mar FY08 FY09 FY10F FY11F FY12F
EBITDA 3,653 3,778 4,829 5,475 6,446
Change in working capital (4,292) (4,485) (2,211) (2,207) (3,315)
Other operating cashflow (2,778) (4,559) (2,714) (2,597) (3,920)
Cashflow from operations (3,416) (5,266) (96) 671 (789)
Capital expenditure (1,588) (1,613) (1,082) (1,000) (1,000)
Free cashflow (5,004) (6,879) (1,178) (329) (1,789)
Reduction in investments (2,104) (1,290) (1,210) (1,000) (1,000)
Net acquisitions - - - - -
Reduction in other LT assets - 1,538 - - -
Addition in other LT liabilities - - - - -
Adjustments (0) 0 - - - Cash outflow for investments
Cashflow after investing acts (7,108) (6,631) (2,388) (1,329) (2,789) could be higher than expected
Cash dividends (228) (348) (295) (295) (295) in FY11F if stake sale/listing
Equity issue 4,050 0 3,673 - - does not happen
Debt issue 2,569 3,501 - - 2,000
Convertible debt issue - - - - -
Others - - - - -
Cashflow from financial acts 6,390 3,153 3,379 (295) 1,705
Net cashflow (718) (3,478) 991 (1,623) (1,084)
Beginning cash 2,434 2,330 1,345 2,754 1,113
Ending cash 2,330 1,345 2,754 1,113 819
Ending net debt 6,608 11,094 9,685 11,325 13,620
Source: Nomura estimates
Liquidity (x)
Current ratio 1.66 1.68 1.82 1.79 1.71
Interest cover 4.3 3.3 4.3 4.8 4.8
Leverage
Net debt/EBITDA (x) 1.84 2.97 2.02 2.08 2.12
Net debt/equity (%) 42.0 65.8 42.5 45.2 49.0
Activity (days)
Days receivable 91.2 90.2 90.2 90.2 90.2
Days inventory 57.7 65.9 65.9 65.9 65.9
Days payable 63.3 55.9 55.9 55.9 55.9
Cash cycle 79.3 104.9 116.2 117.2 115.2
Source: Nomura estimates
HCL Tech has grown revenues faster than peers such as Infosys and TCS in the Price target INR397
(set on 28 O ct 2009)
past few quarters, and we believe the company will continue to outperform peers in
Upside/downside 5.8%
q-q volume growth in the near term, owing to its focus on infrastructure services Difference from consensus 19.2%
and total outsourcing. We reaffirm our BUY call and price target of INR397. FY11F net profit (INRmn) 18,955
a Catalysts
Difference from consensus 14.5%
IT budgets for calendar 2010F should be firmed up by end-December, and we Source: Nomura
believe HCL Tech will be able to sustain its momentum in deal wins. Note: price target under review
HCL Tech’s EBITDA margin has widened in the past two quarters and, Previous norm. net profit 12,784 12,973 18,955
Change from previous (%) na na na
at 22.7% currently is back to the level of a year ago. We think this is
Previous norm. EPS (INR) 19.1 19.4 28.3
impressive considering HCL Tech has acquired and integrated large Source: Company, Nomura estimates
companies such as Axon during this period.
Share price relative to MSCI India
e EPS growth to improve significantly in FY11F (Rs) Price
411 Rel MSCI India 190
The forex overhang that has affected EPS growth will likely be over by 361 170
the next four quarters, on our reading. Moreover, debt was recently 311 150
261
restructured, with the average cost of debt coming down to around 6%. 211
130
110
We see the improved picture on forex and debt supporting robust EPS 161
111 90
growth at HCL Tech in FY11F; our forecasts call for an EPS CAGR of 61 70
around 22% in FY09-11F.
May09
Mar09
Dec08
Feb09
Jul09
Aug09
Sep09
Oct09
Nov09
Jan09
Apr09
Jun09
f BUY reaffirmed 1m 3m 6m
Absolute (INR) 10.4 8.1 96.2
HCL Tech is trading at discounts of 35% and 40% to Infosys on one- Absolute (US$) 9.7 11.1 104.0
year forward and two-year forward P/E multiples, respectively. On Relative to Index 8.5 2.0 74.5
Market cap (US$mn) 5,127
FY11F EV/EBITDA, the stock is at a 50% discount to Infosys, on our
Estimated free float (%) 30.0
estimate. We believe this discount will narrow. Our DCF-based price 52-week range (INR) 374.9/89.7
target of INR397 is calculated using an 11% discount rate and 5% 3-mth avg daily turnover (US$mn) 10.12
terminal growth rate assumption and implies 14x one-year forward Stock borrowability Easy
Major shareholders (%)
P/E, which marks a 30% discount to the one-year forward multiple Shiv Nadar 60.00
implied by our price target for Infosys. Sharp appreciation of the rupee
against the US dollar stands as a risk to our BUY call. Source: Company, Nomura estimates
Financial statements
Income statement (INRmn)
Y ear-end 30 Jun FY07 FY08F FY09F FY10F FY11F
Revenue 60,332 74,772 106,311 122,354 138,037
Cost of goods sold (39,616) (48,285) (69,071) (82,083) (91,502)
Gross profit 20,716 26,487 37,240 40,271 46,535
SG&A (9,887) (12,903) (18,260) (18,701) (22,343) Significant improvement in
Employee share expense - - - - - Net profit for FY11F
Operating profit 10,829 13,584 18,980 21,569 24,192
Growth (%)
Revenue 37.5 23.9 42.2 15.1 12.8
EBITDA 41.0 23.9 41.8 15.4 10.5
EBIT 46.0 25.4 39.7 13.6 12.2
Normalised EPS 73.9 (20.3) 14.4 1.5 46.1
Normalised FDEPS 73.9 (20.3) 14.4 1.5 46.1
Per share
Reported EPS (INR) 21 17 19 19 28
Norm EPS (INR) 21 17 19 19 28
Fully diluted norm EPS (INR) 21 17 19 19 28
Book value per share (INR) 77 78 85 102 125
DPS (W) 9 10 11 5 5
Source: Nomura estimates
Cashflow (INRmn)
Y ear-end 30 Jun FY07 FY08F FY09F FY10F FY11F
EBITDA 13,361 16,549 23,467 27,083 29,938
Change in working capital (3,296) 2,227 401 (1,099) (1,058)
Other operating cashflow 685 (4,598) (13,902) - -
Cashflow from operations 10,750 14,178 9,966 25,984 28,881
Capital expenditure (4,320) (6,200) (6,400) (7,000) (8,000)
Free cashflow 6,430 7,978 3,566 18,984 20,881
Reduction in investments (2,068) (1,520) 5,718 197 -
Net acquisitions - - (30,932) - -
Reduction in other LT assets - (2,714) (3,542) (7,661) (7,055)
Addition in other LT liabilities - 4,667 1,675 1,420 1,543
Adjustments - - - - -
Debt-to-equity position to
Cashflow after investing acts 4,362 8,411 (23,515) 12,940 15,369
improve in FY11F
Cash dividends (5,853) (6,375) (7,156) (3,138) (3,138)
Equity issue 2,080 409 202 - -
Debt issue - 27,060 - -
Convertible debt issue - - - - -
Others 710 (2,192) 3,771 (7,071) (3,481)
Cashflow from financial acts (3,063) (8,158) 23,878 (10,209) (6,619)
Net cashflow 1,299 253 363 2,731 8,750
Beginning cash 2,288 3,587 3,840 4,203 6,934
Ending cash 3,587 3,840 4,203 6,934 15,685
Ending net debt (3,587) (3,840) 25,568 21,895 13,144
Source: Nomura estimates
Liquidity (x)
Current ratio 3.62 2.36 1.74 1.85 1.98
Interest cover na na na 29.2 157.3
Leverage
Net debt/EBITDA (x) net cash net cash 1.09 0.81 0.44
Net debt/equity (%) net cash net cash 45.0 32.2 15.7
Activity (day s)
Days receivable 78.0 76.4 79.0 83.5 82.9
Days inventory - - - - -
Days payable 85.0 84.6 95.6 95.8 93.2
Cash cycle (7.0) (8.2) (16.6) (12.3) (10.3)
Source: Nomura estimates
We expect the improvement in the operating environment for Zee Entertainment Price target INR292
(set on 30 O ct 2009)
(ZEEL), which started a quarter ago, to continue through 2010F, on robust growth
Upside/downside 10.0%
in advertising and stringent cost management. Moreover, we believe the benefits of Difference from consensus 11.0%
the company’s recent restructuring will start playing out in 2010F, resulting in FY10F net profit (INRmn) 4,832
incremental growth and profitability. BUY maintained.
Difference from consensus 11.0%
a Catalysts
Source: Nomura
Recovery in advertising revenue growth and synergies from the merger of regional
channels from the Zee News stable should be key drivers of ZEEL’s stock price in Nomura vs consensus
2010F.
We believe the street is under-
Anchor themes estimating the recovery in advertising
ZEEL’s P/E multiple tends to be highly correlated with growth in advertising rates and the effectiveness of
revenue. With advertising revenue set for a rebound in 2010F, we expect Zee’s ZEEL’s cost management.
multiple to be re-rated from current levels.
Recovery play
Key financials & valuations
31 Mar (INRmn) FY09F FY10F FY11F FY12F
Revenue 21,773 23,722 33,139 38,695
c Operating environment improving Reported net profit 5,124 4,832 6,719 7,976
Normalised net profit 3,673 4,832 6,719 7,976
We believe that with the operating environment showing clear signs of Normalised EPS (INR) 8.5 10.8 13.9 16.5
improvement, earnings visibility for ZEEL has improved considerably. Norm. EPS growth (%) (4.9) 27.9 28.2 18.7
Norm. P/E (x) 31.4 24.5 19.1 16.1
Our view is that this will be reflected in positive earnings momentum
EV/EBITDA (x) 16.9 14.3 10.2 8.6
for the company from 3Q FY10F. As we see it, the market is Price/book (x) 3.3 3.2 3.2 2.9
underestimating the cost savings that ZEEL will realise, such that Dividend yield (%) 0.5 0.4 0.5 0.5
earnings could surprise consensus expectations to the upside. ROE (%) 11.4 13.3 17.2 18.7
Net debt/equity (%) 11.0 (5.9) (11.7) (14.8)
Earnings revisions
d Multiples highly correlated with ad revenue growth Previous norm. net profit 4,832 6,719 7,976
Change from previous (%) na na na
We note that ZEEL’s P/E multiple tends to be highly correlated with
Previous norm. EPS (INR) 10.8 13.9 16.5
the company’s advertising revenue growth. Since we see clear signs Source: Company, Nomura estimates
of a recovery in advertising revenue growth in the medium term, we
look for ZEEL shares to be re-rated in the near term. Share price relative to MSCI India
(Rs) Price
e Key triggers in 2010F — restructuring benefits and ad 322 Rel MSCI India 110
Nov09
Mar09
Dec08
Jan09
Feb09
Apr09
Jun09
Aug09
Sep09
Oct09
Jul09
Financial statements
Income statement (INR mn)
Y ear-end 31 Mar FY08 FY09F FY10F FY11F FY12F
Revenue 18,354 21,773 23,722 33,139 38,695
Cost of goods sold 7818 9810 10176 12463 14331
Gross profit 10,536 11,963 13,546 20,676 24,364
SG&A 5113 6483 7570 13262 15553
Employee share expense - - - - -
Operating profit 5,423 5,480 5,976 7,414 8,811
Growth (%)
Revenue 21.1 18.6 9.0 39.7 16.8
EBITDA 66.0 7.5 12.1 36.5 17.6
EBIT 68.0 6.5 11.1 35.6 18.2
Normalised EPS 62.4 (4.9) 27.9 28.2 18.7
Normalised FDEPS 62.4 (4.9) 27.9 28.2 18.7
Per share
Reported EPS (INR) 8.9 8.5 10.8 13.9 16.5
Norm EPS (INR) 8.9 8.5 10.8 13.9 16.5
Fully diluted norm EPS (INR) 8.9 8.5 10.8 13.9 16.5
Book value per share (INR) 68.6 80.5 84.0 84.2 92.2
DPS (W) 2.0 4.0 5.0 6.0 7.0
Source: Nomura estimates
Liquidity (x)
Current ratio 3.4 4.7 4.3 4.4 4.1
Interest cover 12.3 5.0 19.2 28.2 33.4
Leverage
Net debt/EBITDA (x) 0.3 0.5 (0.3) (0.5) (0.6)
Net debt/equity (%) 7.4 11.0 (5.9) (11.7) (14.8)
Activity (days)
Days receivable 117 119 120 136 133
Days inventory 1 1 1 1 1
Days payable 83 80 80 80 80
Cash cycle
Source: Nomura estimates
Tata Steel T A T A I N
S TE E L | I N D I A Maintained
NOMURA FINANCIAL ADVISORY AND
SECURITIES (INDIA) PRIVATE LIMITED
Prabhat Awasthi +91 22 4037 4180 prabhat.awasthi@nomura.com
Alok Kumar Nemani (Associate) +91 22 4037 4193 alokkumar.nemani@nomura.com
BUY
We reiterate our BUY call on Tata Steel as we believe: 1) it is a much better volume Price target INR926
(set on 16 Dec 09)
play relative to peers; 2) its raw material costs are set to decline on account of
Upside/downside 50.4%
captive coal; 3) it has the best product mix in the country, enabling the highest Difference from consensus 66.8%
realisations and hence the highest profitability in the domestic steel industry; and 4) FY10F net profit (INRmn) -23,487
with improved efficiency at Corus, we look for substantial earnings growth.
Difference from consensus -165.4%
a Catalysts
Source: Nomura
Two potential triggers for the stock are: 1) increasing steel prices in 1Q10F; and 2)
a return to profit at Corus in 3Q10F. Nomura vs consensus
Anchor themes We are more bullish than the street
With a turnaround expected at Corus, 3mtpa expansion in India and higher captive on Tata Steel, owing to our optimistic
coal capacity, we rate Tata Steel a BUY even at current steel prices. At CMP, view on steel prices, driven by strong
Corus acquires negative equity value, which we believe is unjustified given that the demand growth in China and a
worst appears to be over for Corus and we expect results to improve. recovery in developed economies.
Aug09
May09
Nov 09
Jan09
Dec08
Feb09
Mar09
Jun09
Jul09
Sep09
Oct09
g Appealing valuation
We believe current valuations do not fully take into account the improved performance Current valuations provide an
of Corus, nor the 3mn tonne capacity expansion at Jamshedpur. Given the high attractive opportunity, in our view
visibility on the turnaround at Corus, as well as the completion of the 3mn tonne
expansion, we believe current valuations provide an attractive opportunity.
Risks to price target. Key risks include: 1) persistent steel price weakness; 2)
delayed economic recovery; and 3) higher-than-expected raw material prices.
Exhibit 107. Tata Steel: change in value of domestic business vs steel price
Steel price (US$/tonne)
(INR/share) 750 700 650 600 550
12 1,148 980 811 643 474
11 1,053 898 744 589 435
P/E multiple 10 957 816 676 535 395
9 861 735 608 482 356
8 765 653 541 428 316
Financial statements
Income statement (INR mn)
Y ear-end 31 Dec FY08 FY09 FY10F FY11F FY12F Turnaround at Corus should
Revenue 1,316,463 1,512,646 1,067,038 1,236,746 1,390,256 drive FY11F EBITDA growth,
Cost of goods sold 1,182,621 1,372,647 1,036,890 1,104,068 1,223,972 while 3mn tonne expansion
Gross profit 133,842 140,000 30,149 132,678 166,284 should drive FY12F EBITDA
SG&A growth
Employee share expense
Operating profit 133,842 140,000 30,149 132,678 166,284
Growth (%)
Revenue 14.9 (29.5) 15.9 12.4
EBITDA 5.6 (58.9) 134.1 20.1
EBIT 23.3 (127.0) n/a 45.2
Normalised EPS 21.9 (105.8) n/a 34.7
Normalised FDEPS (36.5) (146.5) n/a 34.7
Per share
Reported EPS (INR) 109 69 (26) 90 121
Norm EPS (INR) 103 125 (7) 90 121
Fully diluted norm EPS (INR) 90 57 (26) 90 121
Book value per share (INR) 336 383 373 445 549
DPS (W) 16 16 13 13 13
Source: Nomura estimates
Liquidity (x)
Current ratio 2.04 1.88 1.90 1.77 1.93
Interest cover 3.7 4.3 1.2 5.2 7.0
Leverage
Net debt/EBITDA (x) 2.91 2.90 6.23 2.47 1.66
Net debt/equity (%) 207.2 190.8 142.8 111.1 72.8
Activity (days)
Days receivable 48.5 29.2 28.0 28.6 28.1
Days inventory 55.6 46.3 48.5 48.3 48.8
Days payable 76.3 66.1 63.3 68.6 70.2
Cash cycle 56.2 28.6 30.2 28.9 27.1
Source: Nomura estimates
GAIL’s gas transmission volumes have increased sharply by ~40mmscmd over the Price target INR500
past nine months compared with only ~23mmscmd over the previous nine years. (set on 16 Dec 09)
Upside/downside 19.0%
Apart from growth in gas volumes, its petchem business is resilient. Newsflow should
Difference from consensus 39.0%
be positive — GAIL is likely to be given marketing margins for APM gas, and subsidy FY11F net profit (INRbn) 41
burden could ease. GAIL remains our top pick in the Indian oil & gas space.
Difference from consensus 18.0%
a Catalysts
Source: Nomura
Gas volume ramp-up, new tariff determination by PNGRB and recommendations of
the expert group headed by Dr Kirit Parikh (likely by end-January 2010). Nomura vs consensus
Anchor themes We expect GAIL to re-rate as a utility
play as share of transmission
GAIL’s re-rating as a utility appears to be playing out well. With its earnings mix
earnings goes over 70%. GAIL’s
shifting towards regulated ROCE-based transmission earnings (allowed a pre-tax
transmission business deserves a
ROCE of 18%), we believe that the re-rating could continue.
higher valuation multiple, in our view.
Propelled by gas
Key financials & valuations
31 Mar (INRbn) FY08 FY09 FY10F FY11F
Revenue 180 238 255 365
c Strong gas transmission growth Reported net profit 26 28 31 41
Normalised net profit 26 28 31 41
GAIL is a key beneficiary of increased domestic gas production Normalised EPS (INR) 21 22 25 32
volumes. Its gas transmission volumes have already increased by Norm. EPS growth (%) 27 8 11 32
Norm. P/E (x) 20 19 17 13
about 40mmscmd over the past nine months to around 120mmscmd,
EV/EBITDA (x) 13 13 11 9
compared with an increase of 23mmscmd in the past nine years from Price/book (x) 4 4 3 3
FY00 to FY09. Compared with an average of 83 mmscmd in FY09 Dividend yield (%) 2 2 2 3
ROE (%) 20 19 19 22
and 102 mmscmd in 1HFY10, we expect average gas volume to
Net debt/equity (%) (25) (15) 4 8
increase to 122 mmscmd in 2HFY10F. While we remain concerned Earnings revisions
about likely bottlenecks in GAIL’s transmission network in 1H FY11F, Previous norm. net profit 26 28 31 41
we believe that our average transmission volume assumption of Change from previous (%) - - - -
Previous norm. EPS (INR) 21 22 25 32
136mmscmd for FY11F is conservative, with potential upside.
Source: Company, Nomura estimates
Nov09
Mar09
Dec08
Jan09
Feb09
Apr09
Jun09
Aug09
Sep09
Oct09
Jul09
Exhibit 108. GAIL: gas transmission volume Now in a rapid growth phase
mmscmd
160
Next 3 yea r CAGR of 21%
140
120
100
Last 9 years CAGR of 3.7%
80
60
40
20
2HFY10E
FY11E
FY12E
1QFY10
2QFY10
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
Exhibit 109. GAIL: subsidy sharing Lower sharing could offer respite
Financial statements
Income statement (INRbn)
Year end 31 March 2008 2009 2010F 2011F 2012F
Revenue 180.1 237.8 255.2 365.0 420.8
Operating cost 140.6 197.2 207.6 306.0 356.3
EBITDA 39.5 40.5 47.6 58.9 64.5
Depreciation 5.7 5.6 6.5 7.8 9.4
Amortisation 0.0 0.0 0.0 0.0 0.0
EBIT 33.8 34.9 41.1 51.1 55.0
Net interest expense 0.8 0.9 1.1 1.9 2.3
Others income 5.6 8.0 5.0 5.5 6.0
Earnings before tax 38.5 42.0 45.0 54.7 58.8
Income tax 12.5 14.0 13.8 13.7 14.7
Net profit after tax 26.0 28.0 31.1 41.0 44.1
Minorities 0.0 0.0 0.0 0.0 0.0
Normalised NPAT 26.0 28.0 31.1 41.0 44.1
Exceptionals 0.0 0.0 0.0 0.0 0.0
Reported NPAT 26.0 28.0 31.1 41.0 44.1
Dividends 9.9 10.4 12.7 16.8 18.1
Transfer to reserves 16.1 17.6 18.4 24.2 26.1
Growth (%)
Revenue 12% 32% 7% 43% 15%
EBITDA 32% 3% 17% 24% 9%
EBIT 39% 3% 18% 24% 8%
PAT 27% 8% 11% 32% 8%
Normalised EPS 27% 8% 11% 32% 8%
Normalised FDEPS 27% 8% 11% 32% 8%
Per share
Reported EPS 20.5 22.1 24.5 32.3 34.8
Norm EPS 20.5 22.1 24.5 32.3 34.8
Fully diluted norm EPS 20.5 22.1 24.5 32.3 34.8
Book value per share 101 114.7 129.2 148.3 168.9
DPS 6.7 7.0 8.6 11.3 12.2 Strong earnings growth in
Source: Nomura estimates FY11F, mainly on growth in
gas transmission volumes
Cashflow (INRbn)
Year end 31 March 2008 2009 2010F 2011F 2012F
EBITDA 39.5 40.5 47.6 58.9 64.5
Change in WC (0.4) (5.6) (4.0) 12.8 4.8
Other operating cashflow (5.0) (9.2) (10.0) (10.1) (10.9)
Cashflow from operations 34.1 25.8 33.5 61.7 58.4
Capex (12.7) (28.0) (50.1) (53.5) (50.1)
Free cashflow 21.4 (2.2) (16.5) 8.2 8.3
Other Investing cash flow 4.2 5.5 0.0 0.0 0.0
Cashflow after investing acts 25.6 3.3 (16.5) 8.2 8.3
Cash dividends (5.9) (11.9) (12.7) (16.8) (18.1)
Equity issue 0.0 0.0 0.0 0.0 0.0
Debt issue (0.7) (0.7) 10.0 15.0 1.0
Others (0.8) (0.9) 0.0 0.0 0.0
Cashflow from financial acts (7.5) (13.4) (2.7) (1.8) (17.1)
Net cash flow 18.1 (10.2) (19.3) 6.4 (8.7)
Beginning cash 26.6 44.7 34.6 15.3 21.7
Ending cash 44.7 34.6 15.3 21.7 12.9
Ending net debt (32.1) (22.6) 6.7 15.3 25.1
Leverage
Net debt/EBITDA (x) (0.8) (0.6) 0.1 0.3 0.4
Net debt/equity (%) -25% -15% 4% 8% 12%
Activity (days)
Days receivable 21.8 23.1 19.7 18.2 17.9
Days inventory 11.5 9.2 9.4 7.2 6.8
Days payable 36.4 30.3 38.4 41.1 40.8
Cash cycle (3.1) 2.0 (9.3) (15.8) (16.1)
Source: Nomura estimates
We believe investor scepticism is high, resulting from execution slippage and poor Price target INR1,329
(set on 27 Nov 09)
profitability in the past. However, given increased focus on profitability and a clear
Upside/downside 12.0%
road map for execution, we believe there is lower probability of slippage. In our Difference from consensus 18.0%
view, near-term weakness on account of Betapharm would not be a cause for FY09F net profit (INRmn) 8,410
concern but an opportunity to get in on lower valuations; maintain BUY.
Difference from consensus 3.0%
a Catalysts
Source: Nomura
News flow on product-specific opportunities, clarity on upside from the Glaxo deal
and improvement in profitability. Nomura vs consensus
Anchor themes Our estimates and PT are ahead of
This is a play on two themes: 1) patent expiries and product-specific opportunities consensus. We believe the street is
in the US — DRRD will participate in many of these, not only as a finished dose sceptical given past execution slips.
player but also as a bulk supplier; and 2) collaboration with big pharma — the deal We expect a positive surprise for the
with Glaxo is likely to scale up substantially over the next two years. US, India and API businesses.
pharma market by improving its sales reach and therapeutic coverage. The Indian
pharmaceutical market presents the potential of secular, profitable growth. We have
already witnessed acceleration in new product introductions in the recent past.
Management expects growth in the high-teen levels in India in the near future,
compared with 5% growth in FY09.
However, given increased focus on profitability and a clear road map for execution,
there is a lower probability of slippage, in our view. We maintain a BUY with a price
target of INR1,329 based on SOTP valuation. Base business (ex-Betapharm, one-offs)
at INR1,217 (18x one-year forward adjusted earnings) + Betapharm at INR32/share
(1x FY11F sales estimate) + one-off product-specific opportunities at INR80/share.
The stock is trading at the lower end of peers’ average multiple. Adjusted for one-off
earnings, DRRD is trading at 14.4x FY12F EPS, compared with 13-17x for peers.
Financial statements
Income statement (INRmn)
Year-end 31 Mar FY08 FY09F FY10F FY11F FY12F
Revenue 50,006 69,441 71,203 82,578 95,695
Our estimates build in upside
Cost of goods sold 24,598 32,941 34,373 39,690 46,891
from Prilosec OTC, Arixtra.
Gross profit 25,408 36,500 36,830 42,888 48,804
We have not built in upside
SG&A 15,247 19,517 20,680 22,186 24,833
from Lotrel and other potential
Other expenses 3,131 4,291 4,130 4,656 5,244
launches with low competition
Operating profit 7,030 12,692 12,021 16,046 18,727
Growth (%)
Revenue -23% 39% 3% 16% 16%
EBITDA -45% 70% -1% 31% 16%
EBIT -58% 106% -6% 38% 18%
Normalised EPS -40% 27% -5% 42% 22%
Normalised FDEPS -40% 27% -5% 42% 22%
Per share
Reported EPS (INR) 22.8 (30.6) 49.9 71.0 86.4
Norm EPS (INR) 41.2 52.5 49.9 71.0 86.4
Fully diluted norm EPS (INR) 41.2 52.5 49.9 71.0 86.4
Book value per share (INR) 281 249 292 355 435
DPS (INR) 4.4 7.3 7.3 7.3 7.3
Source: Nomura estimates
Cashflow (INRmn)
Year-end 31 Mar FY08 FY09F FY10F FY11F FY12F
EBITDA 8,804 15,003 14,890 19,512 22,646
Change in working capital (2,675) (8,267) 2,978 (3,451) (4,262)
We expect cashflows to
Other operating cashflow 399 (2,231) (1,787) (2,782) (3,394)
remain strong resulting in
Cashflow from operations 6,528 4,505 16,082 13,279 14,990
DRRD becoming net debt-free
Capital expenditure (6,716) (8,224) (6,000) (4,500) (4,000) by FY11
Free cashflow (188) (3,719) 10,082 8,779 10,990
Reduction in investments (2,651) 4,752 475 800 1,050
Net acquisitions
Reduction in other LT assets
Addition in other LT liabilities
Adjustments
Cashflow after investing acts (2,651) 4,752 475 800 1,050
Cash dividends (737) (738) (1,232) (1,232) (1,232)
Equity issue 15 5 - - -
Debt issue (6,015) (662) (3,501) (4,135) (5,740)
Convertible debt issue
Others (1,128) (1,132) (799) (592) (305)
Cashflow from financial acts (7,865) (2,527) (5,532) (5,959) (7,277)
Net cashflow (10,704) (1,494) 5,025 3,619 4,763
Beginning cash 18,588 7,421 5,596 10,621 14,240
Ending cash 7,421 5,596 10,621 14,240 19,003
Ending net debt 11,931 14,105 5,579 (2,175) (12,678)
Source: Nomura estimates
Liquidity (x)
Current ratio 1.73 1.47 1.51 1.65 2.36
Interest cover 25.0 20.3 32.5 NA NA
Leverage
Net debt/EBITDA (x) 1.36 0.94 0.37 (0.11) (0.56)
Net debt/equity (%) 25% 34% 11% -4% -17%
Activity (days)
Days receivable 49.8 76.7 50.3 50.4 52.0
Days inventory 81.3 69.5 77.8 78.6 79.8
Days payable 42.1 34.8 34.7 33.3 32.8
Cash cycle 89.0 111.4 93.4 95.8 98.9
Source: Nomura estimates
A run-up in the stock price leaves little room for slippage in realising upside from Price target INR261
(set on 17 Sep 09)
product-specific opportunities in the US and synergy benefits from Daiichi Sankyo,
Upside/downside -50.0%
in our view. The current USFDA investigation could lead to lower-than-expected Difference from consensus -32.0%
upside from exclusivity and the base business still appears to be struggling. The FY09F net profit (INRmn) 1,110
risk/reward is therefore unfavourable, and we maintain our REDUCE call.
Difference from consensus -51.0%
a Catalysts Source: Nomura
We see as potential catalysts: 1) fall in earnings in 2H CY10, when exclusivity-
related sales subside; and 2) delay in resolution of the standoff with the USFDA. Nomura vs consensus
We believe we are conservative on
Anchor themes
base business valuation vis-à-vis
The Application Integrity Policy invoked against Ranbaxy’s Poanta Sahib facility consensus.
puts at risk the key FTF filings.
Rich valuations
Key financials & valu ations
31 Dec (INRmn) FY 08 FY09F FY10F FY 11F
Revenue 69,822 70,852 71,471 84,571
c Base business performance uninspiring Reported net profit 7,745 (9,513) 1,110 7,888
Normalised net profit 7,745 (1,811) 2,231 7,888
The recent fall in sales and profitability is not entirely on account of Normalised EPS (INR) 18.1 (4.2) 5.2 18.5
regulatory issues and the product ban in the US. Even growth rates in Norm. EPS growth (%) (33) (123) (223) 254
Norm. P/E (x) 28.7 (122.6) 99.5 28.2
the non-US markets have been uninspiring, on our reading. Emerging
EV/EBITDA (x) 26.2 90.5 54.9 16.5
markets and Europe have witnessed stagnant to declining sales. Price/book (x) 7.8 5.1 5.0 4.2
Dividend yield (%) 1.7 0.0 0.0 0.0
d Resolution of Dewas facility to have marginal impact ROE (%) 27 (22) 2 15
Net debt/equity (%) 69 (5) (13) (21)
We believe resolution of the Dewas facility would result in incremental Earnings revisions
sales of just US$25mn, based on: 1) sales contribution of US$60mn Previous norm. net profit (1,811) 2,231 7,888
Change from previous (%) na na na
from Dewas (pre-ban); 2) a sharp drop in RBXY’s share of
Previous norm. EPS (INR) (4.2) 5.2 18.5
prescriptions for even non-banned products; and 3) hurdles in Source: Co mpany, Nomura esti mates
regaining market share. We believe such incremental sales are
unlikely to meaningfully revive the company’s EBITDA margin/RoE. Share price relative to MSCI India
(Rs) P rice
Oct09
remain. The two most important FTFs — Lipitor and Nexium — are
filed from the site. 1m 3m 6m
Absolute (INR) 23.5 32.1 90.2
Absolute (US$) 22.8 35.8 97.9
f Valuations rich Relative to Index 21.6 26.8 68.3
Market cap (US$mn) 4,686
Our price target of INR261/share is based on a sum-of-the-parts
Estimated free float (%) 36.1
valuation: 1) base business valuation at INR141/share, using DCF 52-week range (INR) 530/ 134.7
valuation; and 2) one-off product specific upside at INR120/share. At 3-mth avg daily turnover (US$mn) 20.34
the market price of INR520, we believe the market is already building Stock borrowability Hard
Major shareholders (%)
in: 1) no slippage in realisation of FTF P4 opportunities; and 2) a quick Daiichi Sankyo Company Ltd 63.90
revival in base business profitability (RoE). Adjusting for FTF P4 Life Insurance Corporation of India 7.03
opportunities, we estimate the market is ascribing a value of Source: Co mpany, Nomura esti mates
book value. These valuations imply a revival in base business profitability (RoE) levels
to 21-22% by FY14F, in our view, higher than even historical base business RoEs over
FY05-07.
(US$mn)
160
140
120
100
80
60
40
20
0
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Note: Emerging market (excludes India, includes Romania)
Source: Company data
Financial statements
Income statement (INRmn)
Y ear-end 31 Dec FY08 FY09F FY10F FY11F FY12F
Revenue 69,822 70,852 71,471 84,571 89,941
Cost of goods sold 30,570 35,188 31,100 34,569 37,428
Gross profit 39,252 35,664 40,370 50,002 52,513
SG&A 16,907 19,311 20,969 20,997 22,655
Other expenses 13,199 13,983 15,563 16,564 17,636 We have included Valtrex,
Operating profit 9,147 2,370 3,839 12,442 12,222 Flomax, Aricept and Nexium
upside in our estimates. We
haven't yet included Lipitor
EBITDA 9,147 2,370 3,839 12,442 12,222
and Caduet in estimates, but
Depreciation 1,752 2,232 2,108 2,213 2,292
they are included in valuations
Amortisation 431 593 643 643 643
EBIT 6,964 (455) 1,088 9,586 9,287
Net interest expense 1,412 2,055 1,087 1,087 1,714
Associates & JCEs
Other income 4,434 (4,788) 2,612 1,466 2,627
Earnings before tax 9,985 (7,298) 2,614 9,965 10,200
Income tax 2,119 (5,650) 299 1,993 2,040
Net profit after tax 7,867 (1,649) 2,315 7,972 8,160
Minority interests 122 84 84 84 84
Other items 78
Preferred dividends
Normalised NPAT 7,745 (1,811) 2,231 7,888 8,076
Extraordinary items - (7,702) (1,121) - -
Reported NPAT 7,745 (9,513) 1,110 7,888 8,076
Dividends 3,711 - - - -
Transfer to reserves 4,034 (9,513) 1,110 7,888 8,076
Growth (%)
Revenue 14% 1% 1% 18% 6%
EBITDA 4% -74% 62% 224% -2%
EBIT -8% -107% -339% 781% -3%
Normalised EPS -33% -123% -223% 254% 2%
Normalised FDEPS -33% -123% -223% 254% 2%
Per share
Reported EPS (INR) 18.1 (22.3) 2.6 18.5 18.9
Norm EPS (INR) 18.1 (4.2) 5.2 18.5 18.9
Fully diluted norm EPS (INR) 18.1 (4.2) 5.2 18.5 18.9
Book value per share (INR) 67 102 105 124 143
DPS (INR) 8.7 - - - -
Source: Nomura estimates
Cashflow (INRmn)
Year-end 31 Dec FY08 FY09F FY10F FY11F FY12F
EBITDA 13,581 (2,418) 6,451 13,908 14,849
Change in working capital 573 (2,387) 1,447 (4,374) (2,746)
Other operating cashflow (3,921) 3,257 (2,347) (3,176) (4,230)
Cashflow from operations 10,232 (1,549) 5,552 6,358 7,873
Capital expenditure (8,406) (5,751) (2,500) (1,500) (1,500)
Free cashflow 1,826 (7,299) 3,052 4,858 6,373
Reduction in investments (2) (1,217) 1,540 1,800 2,190
Net acquisitions
Reduction in other LT assets Expect cashflow to remain
Addition in other LT liabilities strong on back of product-
Adjustments specific upside
Cashflow after investing acts (2) (1,217) 1,540 1,800 2,190
Cash dividends (3,642) (2,620) - - -
Equity issue 92 35,944 - - -
Debt issue 4,333 (4,497) (0) (0) 0
Convertible debt issue
Others (1,176) (1,942) (1,087) (1,087) (1,714)
Cashflow from financial acts (392) 26,885 (1,087) (1,087) (1,714)
Net cashflow 1,433 18,369 3,505 5,571 6,849
Beginning cash 2,951 4,379 23,956 27,461 33,032
Ending cash 4,379 23,956 27,461 33,032 39,881
Ending net debt 19,692 (2,222) (5,726) (11,297) 6,952
Source: Nomura estimates
Liquidity (x)
Current ratio 1.86 1.36 1.23 1.35 1.59
Interest cover 4.9 (0.2) 1.0 8.8 5.4
Leverage
Net debt/EBITDA (x) 2.15 (0.94) (1.49) (0.91) 0.57
Net debt/equity (%) 69% -5% -13% -21% 11%
Activity (days)
Days receivable 78.1 68.6 65.6 66.2 66.2
Days inventory 85.8 101.2 93.4 90.4 95.0
Days payable 44.7 42.2 47.2 42.5 38.6
Cash cycle 119.1 127.6 111.8 114.1 122.6
Source: Nomura estimates
Nov09
Mar09
Dec08
Aug09
Sep09
Jan09
Feb09
Apr09
Jun09
Oct09
Jul09
Exhibit 114. Unitech: NAV breakdown by geography Exhibit 115. Unitech: NAV breakdown by segment
Bangalore
Mohali Others Retail
2%
Kochi 6% 3% Mumbai 13%
4% 14%
NCR-Noida
6%
NCR-
NCR-Delhi Residential
Gurgaon
6% 49%
26%
Kolkata
8% NCR- Chennai
Greater 11% Commercial
Noida Hyderabad 38%
3% 11%
Financial statements
Income statement (INRmn)
Y ear-end 31 Mar FY08 FY09F FY10F FY11F FY 12F
Revenue 41,826 29,265 22,509 48,201 81,519 Targeted sale volumes of
Cost of goods sold (12,887) (6,650) (10,263) (25,872) (40,792) 20mn sqft in FY10F should
Gross profit 28,939 22,615 12,246 22,329 40,727 support FY11-12F revenue
SG&A (6,649) (6,727) (800) (1,200) (1,199)
Operating profit 22,291 15,888 11,446 21,129 39,528
Growth (%)
Revenue (30.0) (23.1) 114.1 69.1
EBITDA (28.7) (28.0) 84.6 87.1
EBIT (29.0) (28.9) 86.0 88.2
Normalised EPS (28.0) (59.2) 92.0 93.9
Normalised FDEPS (28.0) (59.2) 92.0 93.9
Per share
Reported EPS (INR) 10.2 7.4 3.0 5.8 11.2
Norm EPS (INR) 10.2 7.4 3.0 5.8 11.2
Fully diluted norm EPS (INR) 10.2 7.4 3.0 5.8 11.2
Book value per share (INR) 22.9 32.2 43.6 49.8 61.0
Source: Nomura estimat es
Cashflow (INRmn)
Year-end 31 Mar FY08 FY09F FY10F FY11F FY12F
EBITDA 20,678 14,392 11,151 20,744 39,036
Change in working capital (26,985) (10,784) (16,792) (1,613) (1,452)
Other operating cashflow (4,035) (5,043) (1,974) (4,277) (8,391)
Cashflow from operations (10,342) (1,435) (7,616) 14,854 29,194
Capital expenditure (23,508) (1,988) 8,511 (2,140) (4,326)
Free cashflow (33,850) (3,423) 896 12,714 24,868
Reduction in investments
Net acquisitions (3,409) (13,537) - - -
Adjustments (4,957) 5,175 1,846 3,439 5,364
Cashflow after investing acts (42,216) (11,785) 2,742 16,153 30,232
Cash dividends (475) (475) - - -
Equity issue 53 3,825 46,832 8,640
Debt issue 45,935 1,263 (25,000) (10,000) (10,000)
Convertible debt issue
Others 560 (463) (10,148) (8,473) (7,977)
Cashflow from financial acts 46,073 4,151 11,684 (9,833) (17,977)
Net cashflow 3,856 (7,634) 14,426 6,320 12,255
Beginning cash 10,227 14,083 6,449 20,876 27,196
Ending cash 14,083 6,449 20,876 27,196 39,451
Ending net debt (71,657) (84,109) (44,683) (28,364) (6,108)
Source: Nomura estimates
Liquidity (x)
Interest cover 7.9 2.8 3.3 4.7 6.3
Leverage
Net debt/EBITDA (x) 3.21 5.29 3.90 1.34 0.15
Net debt/equity (%) 192.8 160.8 42.0 21.8 3.8
Appendix
Exhibit 116. Summary of price targets, valuation methodology and risks
Share price Nomura Price target
Companies Ticker (24 Dec) rating (INR) Valuation basis Investment risks
ABB Ltd ABB IN 771 REDUCE 535 We have valued the stock on end CY10E Extraordinary revival in corporate capex: the biggest
book value of INR145 and RoE of 22.3%. At risk to our price target will be a significant and swift
our target price of INR535, ABB will be valued recovery in corporate capex. Our economics team is
at 3.7x CY10E book. forecasting GDP growth of 6.3% in FY10.
ACC ACC IN 859.7 REDUCE 609 We have valued the company at 1.73x CY10E Our call is based on the strong likelihood of cement
book value of INR352. We get this multiple at prices falling because of a downturn in the cement
ROE of 15.4% and cost of equity of 11% and cycle. If cement demand growth is higher than
perpetual growth rate of 5%. expected or there is a considerable delay in
expansion of cement manufacturing capacities then
the cycle can extend and strong pricing will
continue. Company-specific risks: 1) strong pricing
environment in 2H FY09; 2) if the company can get
coal linkages then it can reduce its coal costs. We
believe that there is a high probability that
consensus will be negatively surprised on earnings.
This may pull down the stock price and is a
downside risk to our target price.
Ambuja Cement ACEM IN 99.45 REDUCE 67 We have valued the company on the basis of If cement demand grows more than expected or
long-term expected return on replacement capacity expansion gets delayed then the cement
cost of assets. Long-term growth rate and up cycle can extend in FY09 and FY10. This would
pre-tax WACC have been assumed as 0% mean a sustained strong pricing environment for the
and 12%, respectively. company. The stock could appreciate in this
scenario. Company-specific risks: 1) stronger-than-
expected demand growth can lead to strong pricing
environment and 2) the stock can find support if
Holcim, the company's parent, goes for majority
control.
Axis Bank AXSB IN 990 BUY 1,185 We value Axis Bank at 2.5x P/BV FY11 A faster-than-expected rise in interest rates and
(sustainable RoE of 19.4% and growth rate of higher delinquencies are key risks to our rating and
7%). price target for Axis Bank.
Bharti BHARTI IN 321 NEUTRAL 330 Our DCF-based price target of INR330 is Risks to our price target include stronger-than-
based on a WACC of 11.1% and a terminal expected competition and unfavourable regulatory
growth rate of 4%. developments related to various fees and charges.
BHEL BHEL IN 2,368 REDUCE 1,850 We value the company using DCF Upside risks emerge from an increase in BHEL's
methodology. Our key DCF assumptions are share in private sector projects.
a terminal growth rate of 5% and a cost of
equity of 11.45%. Our terminal operating
margin estimate is 16.6%.
Colgate- CLGT IN 663 REDUCE 600 Our 12-month price target of INR600 is based Cut in advertising and promotional spends: Colgate,
Palmolive on a P/E multiple of 24x FY10E EPS estimate relative to its size, is the biggest spender on
of INR25.00. advertising and promotion in the Indian consumer
sector. The company spends ~16% of sales on
A&P, compared with a sector average of 12%.
Container Corp CCRI IN 1,270 NEUTRAL 1,300 Our 12-month price target of INR1,300 is 1) While CCRI's business model generates
based on 15x trailing 12 months (December- attractive cashflow, the company has not been
11E) EPS of INR86.60. This also corresponds paying rich dividends, leading to significant cash
with an implied P/BV multiple of 3x one-year accumulation. As of FY09, almost 45% of assets
forward book, which is in line with the stock's were in the form of cash, leading to lower return
mean traded level since FY04. ratios. A continued policy of low cash payout will
likely further hurt return ratios. 2) CCRI is enjoying
section 80IA benefits, which will gradually start
tapering off from FY14, as the incremental eligible
asset base for these benefits will be lower, in our
view. We estimate this could push up tax rates by 3-
4pp by FY16-17E. 3) We remain cautious about the
long-term impact on CCRI's market share, as
several private players have now entered the
segment. Access to funds, warehouses at key
locations and customer tie-ups are likely to pose a
threat to CCRI in the long run. 4) We believe port
capacity at JNPT is saturating and the fourth
container terminal is still to be awarded. While we
believe ports in Gujarat such as Mundra Port & SEZ
and Pipavav will play a key role in leading growth,
they may not be able to ramp up at a faster rate.
Cummins India KKC IN 405.5 BUY 450 We value the stock at 15x TTM December- Appreciation of rupee will not only impact the
10E EPS, which is in line with historical one- margins on exports but also dampen the growth
year forward multiples. outlook as the competitive advantage of cheap
Indian products will be reduced to an extent. Diesel
prices pose risk to the demand for back-up power.
DLF Ltd DLFU IN 371 REDUCE 330 Our 12-month price target of INR330 per Upside risks to our call: 1) faster execution of
share is based on the net asset value of the projects and landbank development, 2) prices
current landbank at INR330 per share at a increasing faster than we expected, and 3) the
12.5% discount rate, without providing a listing of DAL Properties as a REIT in Singapore at
discount to NAV. lower-than-estimated cap rates.
Exhibit 116. Summary of price targets, valuation methodology and risks (continued)
Share price Nomura Price target
Companies Ticker (24 Dec) rating (INR) Valuation basis Investment risks
Dr. Reddy’s DRRD IN 1,186 BUY 1,329 Our price target of INR1,329 is based on a 1) Regulatory hurdles adversely impacting current
sum-of-the-parts valuation: we value DRRD's sales and future launches, 2) deterioration in sales
base business (ex-Betapharm, one-offs) at in Russia and Germany greater than our
INR1,217/share, based on 18x one-year expectations and 3) adverse movement in
forward adjusted earnings (average of FY11F, currencies.
FY12F adj earnings).
GAIL GAIL IN 420 BUY 500 We have used sum of the parts as our Key downside risks: Lower transmission volume
primary tool to value the diversified business growth; sharp cut in tariffs by regulator (we do not
of GAIL. We have valued its gas transmission assume any cut); sharper polymer price decline than
business (including gas trading) at 10x its our assumption and higher subsidy burden than our
FY11E EBITDA. We have assigned an assumptions.
EV/EBITDA multiple of 7x FY11 estimated
EBITDA to petrochemical and 6x FY11
estimated EBITDA to LPG business. We also
value E&P upside at a conservative
INR15/share. Our PT is INR500/share.
GMR GMRI IN 67.15 REDUCE 47 We have valued all GMR projects individually 1) An aero tariff regime that is more favourable than
Infrastructure to arrive at a fair value of INR44.4/share. We expected. DIAL and GHIAL have currently been
have assigned a 15% holding company allowed to levy ADF and UDF, respectively, to fund
discount to assets other than airports (and the development of the airport assets. Any upward
related real estate). Including the projected revision in these charges poses risks to our
cash balance as of Mar-10 (net of valuations as does an extension in the tenure of the
investments into the valued projects) we levy. 2) Upside from real estate development
arrive at our target price of INR47 for GMR. assets. We have currently assumed a bidder's cost
of about INR750mn/acre for Delhi land and
INR60mn/acre for Hyderabad area. Realisation
beyond these numbers could pose an upside risk to
our valuations. 3) Better rates. Non-aero revenue
contracts at DIAL and GHIAL could be re-negotiated
at better rates than we have assumed and pose an
upside risk to our call. 4) Power projects. We have
currently not factored in any of the power projects
under development except Kamalanga due to lack
of land acquisition, financial closure, etc. Any
material development on any of these projects might
necessitate a re-look into these assumptions posing
an upward risk to our call. 5) Road projects: We
have not assumed any new order win for road
projects. While new order wins could pose an
upward risk, they would require an equity
commitment from GMR.
GVK Power and GVKP IN 47.60 REDUCE 24.3 We have valued all GVK projects individually 1) An aero-tariff regime that is more favourable than
Infra to arrive at a fair value of INR24.30/share. we expect. MIAL has been allowed to levy the ADF
GVK had approximately INR90mn cash at the to fund the development of airport assets. Any
standalone entity level as of March 2009, revision in these charges poses risks to our
which it plans to use to fund the requirement estimates, as does an extension in the tenure of the
of subsidiaries. We have accordingly adjusted levy. 2) Risks from real estate development assets.
for estimated equity requirement into the We have assumed a bidders' cost of
valued projects to arrive at our 12-month price INR550mn/acre for Mumbai airport land.
target of INR24.30. Realisations different from these numbers could
pose risks to our valuations. 3) Better or lower rates
for non-aero revenue contracts. Non-aero revenue
contracts at MIAL could be re-negotiated at better or
even lower rates than we have assumed and thus,
pose a risk to our call. 4) Power project
developments. We have factored in two power
projects under development, Goindwal Sahib and
Alaknanda, for our valuation. Any material changes
in the status of their development and similarly any
development in the Goriganga power project would
pose risks to our call. 5) Road project wins. We
have not assumed any new order wins for road
projects. Road project wins would pose upward risk,
but would also entail equity commitment from GVK.
Hindustan HCC IN 151 BUY 157 (under We value HCC using a sum-of-the-parts The key risks are: 1) a substantial slowdown in
Construction review) methodology. We value its core construction order inflows; 2) execution delays and lower-than-
business at 13.5x one-year forward earnings estimated margins; and 3) a rise in interest rates
to arrive at a one-year forward value of and risk premium.
INR106. We have valued BOT projects at 2x
equity invested, the Lavasa project at 2x
equity invested and the 247 Park project
using a DCF methodology. Our 12-month
price target is INR157.
HCL Tech HCLT IN 375 BUY 397 (under Our DCF based price target is INR397 and is There are two risks to our target price: 1) lower
review) calculated using 11% discount rate and revenue ramp-up from the order book and 2)
terminal growth rate assumption of 5%. The greater-than-expected appreciation of the rupee
target price of INR397 also translates into a against the US dollar.
14x one-year forward P/E, which is a 26%
discount to the target price P/E multiple.
Exhibit 116. Summary of price targets, valuation methodology and risks (continued)
Share price Nomura Price target
Companies Ticker (24 Dec) rating (INR) Valuation basis Investment risks
ICICI Bank ICICIBC IN 875 BUY 910 We value ICICI Bank's core business at 1.7x Faster-than-expected growth is an upside risk to our
P/BV FY11F, life insurance at 20x one-year estimates. Downside risks include slower-than-
forward new business profit, asset expected economic growth, a rapid rise in bond
management at 7% of equity funds and 2% of yields owing to rising fiscal deficit, and increasing
debt funds, ICICI Ventures at 18x one-year global stress that could hurt ICICI's international
forward earnings, general insurance at 10x book.
one-year forward P/E, ICICI Securities at 18x
one-year forward P/E and I-Sec PD at 5x one-
year forward P/E. We also apply a 15%
subsidiary discount to arrive at our final
consolidated subsidiary value.
Indiabulls Real IBREL IN 216.5 BUY 339 Our 12-month target price of INR339 is based Downside risks include: 1) a reduction in liquidity
Estate on: a) gross asset value of the current and capital availability for developers, 2) stalled
landbank at INR190 per share with a discount economic growth recovery, 3) rising interest rates,
rate of 12.5% b) cash of INR32 per share c) 4) power projects facing implementation issues, 5)
Indiabulls Power Ltd. being valued at INR117 Nasik, Gurgaon and Panvel SEZ not getting notified,
per share at 2x post-money P/BV. and 6) an inability to convert ICDs into cash again.
We are also apprehensive about the fact that the
promoter's stake has gone down to about 17%.
Infosys INFO IN 2,592 NEUTRAL 2,600 Our 12-month price target of INR2,600 is There are two risks to our price target: 1) the
based on a DCF calculation, assuming a appreciation of the rupee against the dollar more
terminal growth rate of 5% and an 11% cost than what we expect; and 2) a double dip recession
of equity in rupee terms for Indian software in the global economy.
companies.
IRB Infra IRB IN 242 REDUCE 193 We use DCF to value the BOT projects. We Key risk to our call: a) higher-than-estimated traffic;
use a discount rate of 11.5%. We value the b) availability of cheap funding substantially
construction business at 8x one-year forward increasing companies' ability to bid for new projects
earnings. We are also assigning INR32 for and c) fall in risk premium and interest rates.
future asset accretion opportunities, assuming
16% equity IRR and INR3bn of equity
investment every year. The equity investment
assumption is in line with the current yearly
equity investment in BOT projects. Overall,
our valuation for the existing BOT is INR87,
INR70 for construction business, INR4 for real
estate and INR32 for the growth factor. Our
target price is hence INR193.
ITC Limited ITC IN 256 BUY 309 We value the company using a sum-of-the- Any structural change in regulations could hamper
parts valuation methodology. We value the the growth trajectory of the core cigarette business.
core cigarette business at INR227 per share
based on a P/E multiple of 19x FY11F
earnings of INR11.9. The other core
businesses are valued at around INR71 per
share. We have valued the net cash (after
deducting corporate expenses) at book value.
IVRCL IVRC IN 357 BUY 451 We value IVRCL using a sum-of-the-parts The risks to our call are a) deterioration in the macro
methodology. The core construction business environment resulting in rise in interest rates and
is valued at 13.5x one-year forward earnings, risk premium, adversely impacting base business
at 40% discount to L&T, which we value at and subsidiary valuations and b) slowdown in order
22.5x. We have valued BOT projects at 2x inflows and execution.
equity invested and IVR Prime and HDO at
the market cap (24 September 2009). Our 12-
month price target is INR451.
L&T LT IN 1,682 BUY 1,867 We value L&T's standalone business at 22.5x In our view, rise in interest rates and risk premium
one-year forward EPS (INR71.8 as on are the key risks to our valuations.
September 2010) and subsidiaries at
INR252/share.
Mahindra & MM IN 1,061.85 BUY 1,232 We have valued the core business at a Slower-than-estimated volume growth in utility
Mahindra multiple of 12x FY11F EPS of INR66.9. We vehicles. In case volume growth in UVs is lower
value the listed subsidiaries at a discount of than our estimates, MM could see its earnings fall
20% to their market cap. We have rolled as the company is in high capex mode.
forward our price target at 11.6% cost of
equity.
Mundra Port & MSEZ IN 560.5 BUY 615 Our 12-month price target of INR615 is based MSEZ's sub-concession agreement with MICT for
SEZ on a sum-of-the-parts analysis. We have CT1 is under dispute; this could also have
valued the core port business at INR391 per repercussions on the right to operate CT2. A
share, using a cost of equity of 11%, the substantial share of traffic is dependent on promoter
Container Terminal 2 (CT2) at INR79 per group companies and other few customers. MSEZ's
share, SEZ at INR108 per share (at a cost of tax liability could be different if it is allowed benefits
equity of 18%) and the Dahej Port at INR6 per under section 80IAB. The payout ratio assumed
share (1x P/BV). Projected cash on books might not be maintained, impacting implicit
adds another INR31/share. We have yet to assumptions of the DCF model.
assign any value to the logistics business, as
it is in its infancy.
Exhibit 116. Summary of price targets, valuation methodology and risks (continued)
Share price Nomura Price target
Companies Ticker (24 Dec) rating (INR) Valuation basis Investment risks
Nagarjuna NJCC IN 165.85 BUY 197 We value NJCC using a sum-of-the-parts The key risks to our call are a deterioration in the
Construction methodology. The core construction business macro environment; execution delays and a fall in
is valued at 13.5x one-year forward earnings subsidiary valuations.
to arrive at the value of INR146. We value
NJCC's construction business in line with
other mid-tier construction companies and at
40% discount to L&T. We have valued BOT
projects at 2x equity invested NJCC Urban at
its current book value. We have separately
valued the current order book in its
international operations. Our 12-month target
price is INR197.
Patni PATNI IN 473 BUY 540 Our price target of INR540 is based on a 12x High geographical and client concentration, and
one-year forward P/E, which we believe is a possibility of a large-scale value destructive
suitable multiple for an IT services company acquisition and steep appreciation of the rupee
of Patni's size and customer base. It is also at against major currencies such as the US dollar.
a 40% discount to our one-year forward P/E
multiple for Infosys' price target and at the
lower end of the 30-75% discount to Infosys
at which it has traded in the recent past.
Punj Lloyd PUNJ IN 202 NEUTRAL 228 Based on the sum-of-the-parts (SOTP) The key upside risk to our call is a) greater-than-
valuation, we arrive at a 12-month price target expected order inflows; b) higher-than-expected
of INR228. We value the company's core E&C margins — a 50bp increase in EBITDA margin
business at 11x FY10F earnings, 20% would increase our EPS estimates by 8% and c)
discount to mid-cap peers. We value its stake higher valuation for subsidiaries. The key downside
in Pipavav Shipyard at current market price risks are a) project-specific execution
and investments in Punj Lloyd upstream and issues adversely impacting margins; b) increase in
aviation at 1x invested capital. interest rate and risk premium and c) adverse ruling
on arbitrations related to payments from customers,
which the company has not yet accounted for and
classified as good receivables.
Punjab National PNB IN 911 NEUTRAL 960 We value Punjab National Bank's core Faster-than-expected loan growth and a slower-
Bank business at 1.8x P/BV based on a sustainable than-expected rise in rates are key upside risks to
RoE of 15.7% and a COE of 11.7%, which our price target and earnings forecasts. Higher
brings us to a price target of INR960. formation of new NPLs, poor performance of
restructured loans and tighter-than-expected
liquidity are downside risks.
Ranbaxy RBXY IN 520 REDUCE 261 Our 12-month price target of INR261/share is Realisation of product specific opportunities, above
based on a sum-of-the-parts valuation: a) our expectation.
base business valuation at INR141/share,
using DCF valuation; and b) one-off product
specific upsides at INR120/share.
Reliance Capital RCFT IN 851 REDUCE 834 Using SOTP, we value RCFT at The key upside risk to our valuation is if margins in
INR834/share. We value the life insurance the insurance business come in higher than we are
business at 15x FY11 NBAP, asset forecasting.
management business at 4.5% FY11 AUM
and RMoney at 14x FY11 earnings.
Reliance Comm RCOM IN 175 REDUCE 154 Our DCF-based price target of INR154 is Key upside risks to our ratings include competitive
based on a WACC of 12.7% and a terminal activity that is more benign than anticipated and
growth rate of 4%. faster-than-anticipated stability in pricing.
State Bank of SBIN IN 2,215 BUY 2,590 We value SBI at 1.8x FY11F P/BV for the A faster-than-expected rise in rates or slower-than-
India (under core banking business, based on sustainable expected loan growth are key risks to price target
review) ROE of 17%. Our fair value for the core and earnings forecast.
business works out to INR2,356. We have
valued subsidiaries at INR231 per share. The
subsidiary valuation is driven by life
insurance, which have valued at 18x NBAP
FY11F.
Steel Authority of SAIL IN 237 BUY 250 We have valued SAIL at 10x FY12F core Steel prices remain weak: 1) If steel prices remain
India Limited earnings and discounted it back. We have weaker than our expectation, there could be a risk to
added total capex expected until FY12 less our earnings estimates. 2) Raw material prices rise
net debt at its book value. significantly: We have built in a 30% increase in iron
ore prices and a 50% increase in coking coal prices
next year. If the price increase is higher, there could
be a risk to our numbers. 3) Delay in expansion
plans: We expect a full expansion and
modernisation plan to be completed by FY14. In
case of a delay in capex, there could be downside
risk to our estimates.
Sun TV SUNTV IN 336.25 BUY 355 (under We use a DCF method to value SUN TV and The risks are: 1) the radio business is an area of
review) arrive at our 12-month price target of INR355. concern for us, 2) the sub-optimal use of the high
Some of our key assumptions are: 1) an cash generated by the core business is also a cause
explicit earnings forecast from FY09-FY12, for concern, 3) new competition emerging across
FCFE growth of 12% during FY13-FY19F, a markets and 4) an increase in fees paid to directors.
terminal growth rate of 5% from FY20F and 2)
a discount rate of 11.5%.
Tata Motors TTMT IN 779.95 REDUCE 419 We have used normalised EV/EBITDA (for We have assumed the growth rate of IIP grows at
comparison with other OEMs), assuming 2% 7% in FY10F. If IIP growth is slower than this, there
of sales as normalised R&D expense. We may be downside risks to our estimates.
have used an EV/EBITDA multiple of 8.5x,
which is close to the upper end of the stock’s
trading band
Exhibit 116. Summary of price targets, valuation methodology and risks (continued)
Share price Nomura Price target
Companies Ticker (24 Dec) rating (INR) Valuation basis Investment risks
TATA Steel TATA IN 615.60 BUY 926 We value TATA Steel at INR926/share using Steel prices remain weak: 1) If steel prices remain
sum-of-the-parts valuation. We value TATA weaker than our expectation, there could be a risk to
Steel's India business at 9x FY12F EPS of our earning estimates. 2) Economic recovery is
INR92.3. We have discounted it back by a delayed: We are building in a significant
year to arrive at a valuation of INR735/share. improvement in steel prices and capacity utilisation
We have valued Corus at 5x FY11F at Corus in FY11E. If this does not happen, there
EV/EBITDA at US$8.3bn, contributing could be risk to our price target. Raw material prices
INR172/share and the SE Asia business at 5x rise significantly: We have built in a 30% increase in
EV/EBITDA at INR19/share. iron ore prices and a 50% increase in coking coal
prices next year. If the price increase is higher, there
could be a risk to our numbers.
Tata TCS IN 749 NEUTRAL 785 Our 12-month price target of INR785 is based There are two risks to our target price 1) greater-
Consultancy on a DCF calculation assuming a terminal than-expected appreciation of the rupee against the
growth rate of 5%, and 11% cost of capital in US dollar and 2) a double dip recession in the global
rupee terms for Indian software companies. economy.
Tech Mahindra TECHM IN 1,003 BUY 1,250 Our 12-month price target is INR1,250 based The three key investment risks to our price target
on 13x one-year forward P/E, a 30% discount are: 1) greater-than-expected appreciation of the
to our target one-year forward P/E for Infosys rupee against the US dollar and GBP, 2) lower
and in line with the historical average discount ramp-up in BTGS and other large deals and 3)
between the multiples of two companies. restated financials of Satyam leading to lower
revenue and margin figures than we have assumed.
Thermax Ltd TMX IN 592.55 NEUTRAL 515 Our price target is based on a DCF with (1) A slowdown in industrial capex would lead to a
11.45% cost of equity, second stage growth of slowdown in revenue growth. (2) A higher-than-
10% during FY13-17E and terminal growth anticipated increase in raw material costs could lead
rate of 6%. to a decline in margins. (3) Appreciation in Indian
rupee could hurt the company's exports.
Unitech UT IN 82.00 BUY 112 Our 12-month price target is INR112. We Downside risks include: 1) a reduction in liquidity
value the company in two parts: 1) net asset and capital availability for developers, 2) stalled
value of current land bank at INR103 per economic growth recovery, 3) an inability to
share; and 2) telecom stake valued at INR9 successfully sell projects or construct them, and 4)
per share. rising interest rates.
Wipro WPRO IN 694 NEUTRAL 740 Our 12-month price target of INR740 is There are two risks to our target price: 1) greater-
derived using a sum-of-the-parts valuation for than-expected appreciation of the rupee against the
its various businesses. This includes INR700 US dollar and 2) a double dip recession in the global
for the global IT services segment, and the economy.
rest from its other businesses (INR10 for IT
product, INR29 for consumer care and lighting
and INR1 for others). We assume a cost of
equity of 11% and a terminal growth rate of
5% after FY20F.
Zee Z IN 265.5 BUY 292 We value ZEEL on a relative P/E multiple Some of the key risks to our positive call on Zee
Entertainment based valuation technique. Our target multiple include: a) a slowdown in economic activity in India,
of 21x FY11 EPS of INR13.9 is roughly a 30% leading to slower-than-expected growth in
premium to the broader market multiples. advertising spending; b) higher-than-anticipated
competition in the Hindi GEC space; c) any further
deterioration in the ratings of ZEEL's flagship
channel Zee TV; and d) the stability of top
management at the helm of Zee Entertainment.
Note: local currency, 24 December closing
Source: Bloomberg, Nomura International (Hong Kong) Ltd
Any Authors named on this report are Research Analysts unless otherwise indicated
ANALYST CERTIFICATIONS
Each of the research analysts referenced on the cover page or in connection with the section of this research report for which he or she is
responsible hereby certifies that all of the views expressed in this report accurately reflect his or her personal views about any and all of the
subject securities or issuers discussed herein. In addition, each of the research analysts referenced on the cover page or in connection with the
section of this research report for which he or she is responsible hereby certifies that no part of his or her compensation was, is, or will be,
directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any
specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or by any other Nomura
Group company or affiliates thereof.
Conflict-of-interest disclosures
Important disclosures may be accessed through the following website: http://www.nomura.com/research/Disclosures/public/main.asp. If you
have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-
5752) or email researchportal@nomura.co.uk for assistance.
Distribution of Ratings:
Nomura Global Equity Research has 1724 companies under coverage.
41% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 42% of companies with this
rating are investment banking clients of the Nomura Group*.
40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 50% of companies with
this rating are investment banking clients of the Nomura Group*.
19% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 8% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 30 September 2009.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin
America for ratings published from 27 October 2008:
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.
Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management
discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate
valuation methodology such as discounted cash flow or multiple analysis, etc.
Stocks:
• A rating of "1", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.
• A rating of "2", or "Neutral", indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.
• A rating of "3", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.
• A rating of "RS-Rating Suspended", ” indicates that the rating and target price have been suspended temporarily to comply with applicable
regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic
transaction involving the company.
Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks
(accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research); Global Emerging Markets (ex-
Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.
Sectors:
A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.
A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months.
A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.
Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX® 600; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia.
Explanation of Nomura’s equity research rating system for Asian companies under coverage ex Japan
published from 30 October 2008 and in Japan from 6 January 2009:
Stocks:
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target – Current Price) / Current Price,
subject to limited management discretion. In most cases, the Price Target will equal the analyst’s 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.
• A "Buy" recommendation indicates that potential upside is 15% or more.
• A "Neutral" recommendation indicates that potential upside is less than 15% or downside is less than 5%.
• A "Reduce" recommendation indicates that potential downside is 5% or more.
• A rating of "RS" or "Rating Suspended" indicates that the rating and target price have been suspended temporarily to comply with applicable
regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic
transaction involving the subject company.
• Stocks labelled as "Not rated" or shown as "No rating" are not in Nomura's regular research coverage.
Sectors:
A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation.
A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
absolute recommendation.
A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative
absolute recommendation.
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and
ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008):
Stocks:
• A rating of "1", or "Strong buy", indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six
months.
• A rating of "2", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the
next six months.
• A rating of "3", or "Neutral", indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5%
over the next six months.
• A rating of "4", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15%
over the next six months.
• A rating of "5", or "Sell", indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.
• Stocks labeled "Not rated" or shown as "No rating" are not in Nomura's regular research coverage. Nomura might not publish additional
research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other
information contained herein.
Sectors:
A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.
A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.
A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.
Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector —
Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;
Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg
World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan
published prior to 30 October 2008:
Stocks:
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,
subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of
the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't
think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the
intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our
estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this
horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside
implied by the recommendation.
• A "Strong buy" recommendation indicates that upside is more than 20%.
• A "Buy" recommendation indicates that upside is between 10% and 20%.
• A "Neutral" recommendation indicates that upside or downside is less than 10%.
• A "Reduce" recommendation indicates that downside is between 10% and 20%.
• A "Sell" recommendation indicates that downside is more than 20%.
Sectors:
A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation.
A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
absolute recommendation.
A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative
absolute recommendation.
Explanation of CNS rating system for Thailand companies under coverage published from 2 March 2009:
Stocks:
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Fair Value will equal the analyst’s assessment of the current intrinsic fair value of
the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn’t
think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the
intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our
estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this
horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside
implied by the recommendation.
• A "Buy” recommendation indicates that potential upside is 15% or more.
• A "Neutral" recommendation indicates that potential upside is less than 15% or downside is less than 5%.
• A "Reduce" recommendation indicates that potential downside is 5% or more.
Price targets
Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.
DISCLAIMERS
This publication contains material that has been prepared by the Nomura entity identified on the banner at the top or the bottom of page 1
herein and, if applicable, with the contributions of one or more Nomura entities whose employees and their respective affiliations are specified
on page 1 herein or elsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the "Nomura
Group"), include: Nomura Securities Co., Ltd. ("NSC") Tokyo, Japan; Nomura International plc, United Kingdom; Nomura Securities
International, Inc. ("NSI"), New York, NY; Nomura International (Hong Kong) Ltd., Hong Kong; Nomura Singapore Ltd., Singapore; Nomura
Australia Ltd., Australia; P.T. Nomura Indonesia, Indonesia; Nomura Securities Malaysia Sdn. Bhd., Malaysia; Nomura International (Hong
Kong) Ltd., Taipei Branch, Taiwan; Nomura International (Hong Kong) Ltd., Seoul Branch, Korea; Nomura Financial Advisory and Securities
(India) Private Limited, Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli,
Mumbai- 400 018, India; SEBI Registration No:- BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034).
This material is: (i) for your private information, and we are not soliciting any action based upon it; (ii) not to be construed as an offer to sell or a
solicitation of an offer to buy any security in any jurisdiction where such offer or solicitation would be illegal; and (iii) based upon information that
we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.
Opinions expressed are current opinions as of the original publication date appearing on this material only and the information, including the
opinions contained herein, are subject to change without notice. If and as applicable, NSI's investment banking relationships, investment
banking and non-investment banking compensation and securities ownership (identified in this report as "Disclosures Required in the United
States"), if any, are specified in disclaimers and related disclosures in this report. In addition, other members of the Nomura Group may from
time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or
other business from, companies mentioned herein. Further, the Nomura Group, and/or its officers, directors and employees, including persons,
without limitation, involved in the preparation or issuance of this material may, to the extent permitted by applicable law and/or regulation, have
long or short positions in, and buy or sell, the securities (including ownership by NSI, referenced above), or derivatives (including options)
thereof, of companies mentioned herein, or related securities or derivatives. In addition, the Nomura Group, excluding NSI, may act as a market
maker and principal, willing to buy and sell certain of the securities of companies mentioned herein. Further, the Nomura Group may buy and
sell certain of the securities of companies mentioned herein, as agent for its clients.
Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be viewed as
identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision.
NSC and other non-US members of the Nomura Group (i.e., excluding NSI), their officers, directors and employees may, to the extent it relates
to non-US issuers and is permitted by applicable law, have acted upon or used this material prior to, or immediately following, its publication.
Foreign currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of,
or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign
currencies, effectively assume currency risk.
The securities described herein may not have been registered under the U.S. Securities Act of 1933, and, in such case, may not be offered or
sold in the United States or to U.S. persons unless they have been registered under such Act, or except in compliance with an exemption from
the registration requirements of such Act. Unless governing law permits otherwise, you must contact a Nomura entity in your home jurisdiction if
you want to use our services in effecting a transaction in the securities mentioned in this material.
This publication has been approved for distribution in the United Kingdom and European Union as investment research by Nomura International
plc ("NIPlc"), which is authorised and regulated by the U.K. Financial Services Authority ("FSA") and is a member of the London Stock
Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular investment objectives,
financial situations, or needs of individual investors. It is intended only for investors who are "eligible counterparties" or "professional clients" as
defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the FSA. This publication may be distributed in
Germany via Nomura Bank (Deutschland) GmbH, which is authorised and regulated in Germany by the Federal Financial Supervisory Authority
("BaFin"). This publication has been approved by Nomura International (Hong Kong) Ltd. ("NIHK"), which is regulated by the Hong Kong
Securities and Futures Commission, for distribution in Hong Kong by NIHK. Neither NIPlc nor NIHK hold an Australian financial services licence
as both are exempt from the requirement to hold this license in respect of the financial services either provides. This publication has also been
approved for distribution in Malaysia by Nomura Securities Malaysia Sdn. Bhd. In Singapore, this publication has been distributed by Nomura
Singapore Limited (“NSL”). NSL accepts legal responsibility for the content of this publication, where it concerns securities, futures and foreign
exchange, issued by its foreign affiliate in respect of recipients who are not accredited, expert or institutional investors as defined by the
Securities and Futures Act (Chapter 289). Recipients of this publication may contact NSL in respect of matters arising from, or in connection
with, this publication. NSI accepts responsibility for the contents of this material when distributed in the United States.
No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written
consent of the Nomura Group member identified in the banner on page 1 of this report. Further information on any of the securities mentioned
herein may be obtained upon request. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission
cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or
contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this publication, which may arise as
a result of electronic transmission. If verification is required, please request a hard-copy version.
IN80-90
Caring for the environment: to receive only the electronic versions of our research, please contact your sales representative.