Nomura's - India Strategy 2010 - 4th Jan 2010

Strategy | I N D I A
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
The Indian rebalancing trick Stocks for action

We expect the overarching story in India this year to be of re-leveraging and the return Price Price
(24 Dec) target
of risk-taking, as a combination of easy capital and capacity shortages work to create Stock Rating (INR) (INR)
Tata Steel (TATA IN) BUY 615.6 926
an ideal platform for the investment cycle to take off. Growth is likely to accelerate as
SBI (SBIN IN) BUY 2,215 2,590*
an autonomous pick-up in industrial investment is fortified by a policy push on M&M (MM IN) BUY 1,061.85 1,232
infrastructure. Meanwhile, the government, bereft of its ability to actively deploy capital NJCC (NJCC IN) BUY 165.85 197
in light of its stretched finances, should move away from ultra-loose fiscal policy and Unitech (UT IN) BUY 82 112
Tata Motors (TTMT IN) REDUCE 779.95 419
share risk-taking with the private sector through increased public-private partnerships.
Ranbaxy (RBXY IN) REDUCE 520 261
But, every path has its puddle. Early on this path to risk-taking and growth lies the * PT under review
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 Analysts
underperformance of rate cyclicals, especially banks. We believe that investors should Prabhat Awasthi
use this opportunity to buy into the Indian market. Sector-wise, we believe that +91 22 4037 4180
prabhat.awasthi@nomura.com
domestic cyclicals, such as banks, infra & construction and real estate, are the best
way to play the India growth story that we expect to unfold in the year ahead. Short Nipun Prem (Associate)
term, we would position away from rate cyclicals. Our top BUYs this year are Tata +91 22 4037 5030
Steel, SBI, M&M, NJCC and Unitech. Our top REDUCE calls are Tata Motors and nipun.prem@nomura.com
Ranbaxy.
And the India Research Team
c Inflation and monetary rebalancing — the proverbial puddle (see inside front cover)
d Growth rebalancing — investment to join the mix
e Return of risk-taking — from de-leveraging to re-leveraging

Don’t miss our companion outlook
f Fiscal rebalancing — a marginal move towards consolidation reports on Asia and ASEAN,
also published today.
Nomura Anchor Reports examine the key themes and value drivers that underpin our
sector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated.
See the important disclosures and analyst certifications on pages 125 to 128.
Nomura 4 January 2010
CONTACTS
Asia Ex-Japan Coverage Telephone Email
India Aatash Shah Property +91 22 4037 4194 aatash.shah@nomura.com
India Alok Kumar Nemani (Associate) Metals & Mining +91 22 4037 4193 alokkumar.nemani@nomura.com
India Amar Kedia Electrical Equipment, +91 22 4037 4182 amar.kedia@nomura.com

Conglomerates
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 Harmendra Gandhi IT services +91 22 4037 4181 harmendra.gandhi@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 Mahrukh Adajania Banks +91 22 4037 4157 mahrukh.adajania@nomura.com
India Manish Jain Consumer +91 22 4037 4186 manish.jain@nomura.com
India Neeraja Natarajan (Associate) Telecoms +91 22 6723 5231 neeraja.natarajan@nomura.com
India Nipun Prem (Associate) India Strategy +91 22 4037 5030 nipun.prem@nomura.com
India Pinku Pappan (Associate) IT services +91 22 4037 4360 pinku.pappan@nomura.com
India Prabhat Awasthi India strategy, +91 22 4037 4180 prabhat.awasthi@nomura.com

Auto & Auto Parts,
Metals & Mining and Media
India Ravikumar Adukia (Associate) Oil & Gas +91 22 4037 4232 ravikumar.adukia@nomura.com
India Saion Mukherjee Pharmaceuticals / +91 22 4037 4184 saion.mukherjee@nomura.com

Infrastructure & Construction
India Sanjay Kadam Database analyst +91 22 4037 4187 sanjay.kadam@nomura.com
India Sonal Varma Economics +91 22 4037 4087 sonal.varma@nomura.com
India Sreekanth Akula (Associate) Banks +91 22 4037 4361 sreekanth.akula@nomura.com
Singapore Roshan B. Raj Telecoms +65 6433 6961 broshan.raj@nomura.com
Singapore Sachin Gupta, CFA Telecoms +65 6433 6968 sachin.gupta@nomura.com
Singapore Srikanth Vadlamani Financials +65 6433 6957 srikanth.vadlamani@nomura.com

Strategy | I N D I A
And the India Research Team TOP
DOWN
~ Action Stocks for action

This year’s over-arching story in India will be the return of risk-taking in the system, Our top BUYs for 2010F, among
as a combination of easy capital and shortage in capacity works to create an ideal stocks in our coverage, are Tata
platform for the investment cycle to take off. We believe this will accelerate, as an Steel, SBI, M&M, NJCC and Unitech.
autonomous pick-up in industrial investment is fortified by a policy push on Our top Sell-style calls are Tata
infrastructure. We see domestic cyclicals as the best play into this growth story. Motors and Ranbaxy.
a Catalysts Price
Price as on target
In the short term, rising inflation and a tightening policy response should lead to a Stock Rating 24 Dec (INR) (INR)
market correction and underperformance by rate cyclicals. We believe that Tata Steel BUY 615.6 926
investors should use this opportunity to buy into the Indian market. SBI BUY 2,215 2,590*
M&M BUY 1,061.85 1,232
Anchor themes NJCC BUY 165.85 197
Unitech BUY 82 112
Return of growth and risk-taking; renewal of the capex cycle; exit of loose monetary Tata Motors REDUCE 779.95 419
policy; consolidation of fiscal deficit; strong capital inflows; an appreciating rupee. Ranbaxy REDUCE 520 261
* Price target under review
The Indian rebalancing trick Analysts

c Inflation and monetary rebalancing — the proverbial puddle Prabhat Awasthi
+91 22 4037 4180
We stand Bullish on a one-year horizon. While valuations do not seem frothy we do prabhat.awasthi@nomura.com
feel they remain vulnerable to excessive inflation and ensuing monetary tightening.
We would see a correction of some 10% as offering a more attractive entry point Nipun Prem (Associate)
into a solid growth story. We revise our Sensex target from 18,800 for September- +91 22 4037 5030
end to 19,600 for December-end 2010F. Our new target implies ~13% upside. nipun.prem@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.
e Return of risk-taking — from de-leveraging to re-leveraging

Re-leveraging in 2010 is a key theme, following as it does de-leveraging by
corporates and households; the government had to leverage up as it administered
fiscal stimulus. The tilt of corporate capex into infrastructure spells debt. Meanwhile,
a strong job market and rising incomes imply households can bear more risk.
f Fiscal rebalancing — a marginal move towards consolidation

The government stepped up and infused risk-capital into the economy post-crisis
when the private sector was in de-leveraging mode. We expect strong growth this
year and expect FY11F to move towards consolidation of government finances as
a pick-up in revenues is augmented by slowing expenditure, a tapering-off of
extraordinary items and a move towards disinvestment.
g Strong capital flows and an appreciating rupee

The high tide of capex will draw capital inflows as poor disintermediation of savings
(underdeveloped long-end corporate bond market and comparatively low level of
savings via equity) implies increasing external inflows to finance long-term capex.
This will have implications for monetary policy and the rupee.
h Reforms — hope springs eternal

We are not pinning too much hope on reform in 2010F. But government policy of
inviting private sector participation in infrastructure should continue to generate
significant opportunities for developers, banks, and bystanders.
Nomura 1 4 January 2010

Strategy | India Prabhat Awasthi
Contents Also see our Asia Strategy 2010

Outlook report, 4 January, 2010
The proverbial puddle: monetary rebalancing 4

Valuations not excessive, but not immune to monetary rebalancing 5
Rising inflation is a short-term overhang on markets 5
Early rate tightening will curb core inflation and manage inflationary expectations 6
Growth rebalancing: investment to join the mix 7

Industrial capex suffered on account of the crisis 7
Capacity shortages are back 7
Stalled financial closures have restarted 9
Pick-up in capex will translate into greater capital inflows and rupee appreciation 10
Fiscal rebalancing – a marginal move towards consolidation 11

Revenue buoyancy and potential rollback of stimulus should help rein in the
deficit 11
Significant one-offs should roll off this year 11 Also see our ASEAN Strategy 2010
Outlook report, 4 January, 2010
Implications of better fiscal and monetary tightening – flattening of the yield curve 13
Return of risk-taking: from de-leveraging to re-leveraging 14

From government to private risk-taking 14
De-leveraging by corporates following the crisis 14
Back to reforms? 18
What has been the broad thrust of reforms? 18
Key themes for 2010F 21
Sector strategy 23
Appendix 24
India economic outlook 30

Also see our 2010 Global Economic
Outlook report, 16 December, 2009
India sector views
Autos 36
Banks 38
Building materials 40
Consumer 42
Electrical equipment 44
Infrastructure & Construction 46
Insurance 48
IT Services & Software 50
Media 52
Metals & Mining 54
Oil & Gas / Chemical 56
Pharmaceuticals 58
Property 60
Telcos 62
Transport Infrastructure 64

India stock picks

Mahindra and Mahindra 66
Tata Motors 70
State Bank of India 74
Ambuja Cements 78
ITC Limited 82
Nagarjuna Construction 86
HCL Technologies 90
Zee Entertainment 94
Tata Steel 98
GAIL 102
Dr. Reddy’s Laboratories 106
Ranbaxy 110
Unitech Ltd 114
Appendix 118

Rebalancing
The proverbial puddle: monetary

rebalancing
The over-arching story in India this year will be the return of risk-taking in the system, The market will have to navigate
as a combination of easy capital and shortages in capacity work to create an ideal the proverbial puddle of inflation
platform for the investment cycle to take off. We believe that growth will accelerate, as in the short term
an autonomous pick-up in industrial investment will be fortified by a policy push on

infrastructure. We believe that domestic cyclicals are the best way to play this growth
story.
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.
We provide a detailed sector allocation strategy later on in this report.
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
Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research

Valuations not excessive, but not immune to monetary

rebalancing
We remain Bullish on India on a one-year horizon. With the 12-month forward P/E A market correction of 10% or
multiple at 15.8x, we do not think that valuations are too stretched at current levels, more would offer an attractive
especially in the context of strong relative growth differentials in favour of India, and entry point
also in comparison to a three-year average multiple of 15.6x. However, we believe that
valuations at present remain vulnerable to excessive inflation and ensuing monetary
tightening. In our opinion, a correction of about 10% from current levels would offer a
more attractive entry point to partake in the solid growth story, which we expect to
unfold a bit later in the year.
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
5 (4) Overvaluation territory
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
Rising inflation is a short-term overhang on markets

The current bout of food price inflation in India can be attributed to a host of factors, Rising food prices have
largely supply side, led by drought and attendant loss of farm output, inefficient food exacerbated India’s inflation
problem
supply management, high support prices, hoarding and speculation. The misfortune of
a drought year — about 50% of cultivated land in India is irrigated — and the ensuing
pressure on agricultural prices have been compounded by the large systemic liquidity
sloshing around because of expansionary monetary policy.
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.

Early rate tightening will curb core inflation and manage

inflationary expectations
It can be argued that monetary tightening in the form of rate hikes will have little impact Rate hikes early in the cycle
on food price inflation, which is largely a supply-side problem. However, we believe should stymie building core
that an early rate tightening response by the central bank will be an advance strike inflation and manage inflationary
expectations
against building core inflationary (ex food and energy) pressures that will surface down
the line — it takes time for monetary policy to work through the system, 12 to 18
months typically, and it probably takes longer in India — and to help manage
inflationary expectations early on in this up-cycle, which is not a bad thing. We remain
sanguine about India’s growth prospects and believe that early rate tightening will not
jeopardise the recovery of growth. Meanwhile, a normal monsoon this year (we hope!)
and a good winter crop will, combined with a withdrawal of liquidity, cap short-term
food price pressures.
Exhibit 5. Primary articles inflation and agri spot Exhibit 6. India CPI vs regional peers
prices
370 Primary articles WPI Index 3,500 (%) India China

(6 weeks fwd) (LHS) 14 South Korea Thailand
350
Agri spot index (RHS) Indonesia Malaysia
330 3,000 12
310 10
8
290 2,500
6
270
4
250 2,000
2
230 0
210 1,500 (2)
190 (4)
170 1,000 (6)
Nov-05
Mar-06
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
Exhibit 7. Manufacturing WPI index and CRB Exhibit 8. Raw material prices as % of net sales
commodity prices (BSE100 ex-banks and oil & gas)
(Y-Y %) CRB index (RHS) (Y-Y %) (%)

50 Mfg WPI (LHS) 14 30
40
12
30 29
20 10
10 8 28
0
6
(10)
27
(20) 4
(30) 2 26
(40)
0
(50)
(60) (2) 25
3Q FY08
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
Source: Bloomberg, Nomura research Source: Capitaline, Nomura research

Investment outlook
Growth rebalancing: investment to join

the mix
Industrial capex suffered on account of the crisis
The second half of FY09 was characterised by a sudden slowdown in demand, led by The sudden drop in demand and
a pullback of liquidity in the economy. As a result, FY09 was the first year in the current pullback in liquidity in 2H FY09
cycle since FY03 to witness a slowdown in capex. We believe that most of the caused corporate capex to fall in
FY09
slowdown in capex would have taken place in the second half of FY09, as a mix of a
sudden drop in demand and a lack of funding caught corporate India on the wrong foot.
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
Capacity shortages are back

The most important driver of capex is demand visibility. We believe that indications of a Domestic production was unable
significant tightness of capacity are now visible in the Indian economy. to meet demand in FY08, causing
capacity utilisation to peak,
As the chart below shows, capacity utilisation in the manufacturing sector rose to a industrial production to drop and
high of 82.5% in FY08, the highest in nine years. The inability of manufacturing to imports to rise
respond to demand is evident from the slowdown in industrial production, which is
symptomatic of a lack of capacity in the system rather than of demand weakness. This
is evidenced by: 1) capacity utilisation, which rose sharply even as production slowed
down, and; 2) a significant rise in non-oil import growth in FY08. In other words,
domestic demand had to be met by imports, given that capacity utilisation was at an
all-time high in the manufacturing sector and wider industry.

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

Exhibit 14. Non-oil imports Exhibit 15. Industrial production (y-y %)
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
Stalled financial closures have restarted

The other important point is that infrastructure has come to account for an increasingly
larger share in India’s overall capex. These infrastructure projects typically rely on
significant leverage in terms of funding structures. After the crisis, banks clamped
down on incremental lending, which led to significant payment and execution delays
for construction companies. In addition, financial closures for several large projects
came to a halt, especially in the infrastructure sector, which relies on significant
leverage for funding. A lack of funding also made it difficult for the Indian government
to hawk infrastructure projects to the private sector on a public private partnership
(PPP) basis.
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.
Exhibit 16. Financial closures in the power sector

Project Company Capacity (MW) Date
Rosa Power Reliance Power 1,200 Jul-09
Bina Power Jaiprakash Power Ventures 1,250 Nov-09
Tuticorin Power Coastel Energen 1,200 Jul-09
Orissa Project Sterlite Power 2,400 Jul-09
Butibori Power Project Reliance Power 300 Jul-09
GMR Kamalanga Energy GMR Group 1,050 May-09
Jhjjar Power Plant CLP India 1,320 Oct-09
Salaya Power Plant Essar Power 1,200 Oct-09
Tiroda Phase I Adani Power 1,980 Jan-09
Mundra Phase IV Adani Power 1,980 Jun-09
Sasan Reliance Power 3,960 Apr-09
Phata-Byung Lanco 152 Aug-09
Amravati Indiabulls Power 1,320 Jun-09
Talwandi Sabo Sterlite Power 1,980 Dec-09
Jegurupadu IPP GVK 200 Nov-09
Source: Nomura research

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.
Pick-up in capex will translate into greater capital inflows and

rupee appreciation
As can be judged from the relationship between corporate capex and capital flow in A renewal in capex will translate
the Exhibit below, a major side-effect of the pick-up in capex this year will be a rise in into higher capital inflows, with
capital flows into the country as poor disintermediation of savings — underdeveloped implications for monetary policy
and the rupee
long-end corporate bond market and a comparatively low level of savings through the
equity route — has implied increasing capital inflows into the country to finance long-
term capex projects. This has implications for both monetary policy and the rupee. Do
note that the second half of FY09 saw significant outflows of the capital account, which
led to very minimal net inflows.
Exhibit 17. Net capital inflows and capex Exhibit 18. Investment and capital inflows
(INRmn) Capex (LHS) (INRmn) (%) CA/GDP (LHS) (%)

25,000 35,000 20 Capital flow/GDP (LHS) 50
Net capital inflows (RHS)
30,000 Investment/GDP (RHS) 45
20,000 15 Gross capital inflow/ investment 40
25,000
35
15,000 20,000
10 30
15,000 25
10,000 10,000 5 20
15
5,000
5,000 0 10
0 5
0 (5,000) (5) 0
FY 1995
FY 1996
FY 1997
FY 1998
FY 1999
FY 2000
FY 2001
FY 2002
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
Note: Excludes portfolio flows Note: Excludes portfolio flows

Source: Business Beacon, Nomura research Source: Business Beacon, Nomura research

The coffers
Fiscal rebalancing – a marginal move

towards consolidation
The fiscal deficit is a counter-cyclical policy tool and the government used it suitably We expect FY11F to see a move
post crisis, stepping up and infusing risk-capital into the economy when the private towards consolidation of
government finances
sector (both corporates and households) was in de-leveraging mode. As we expect
growth to be strong this year, we think FY11F will see a move towards consolidation of
government finances, as a pick-up in revenues is augmented by slowing expenditure.
Revenue buoyancy and potential rollback of stimulus should

help rein in the deficit
Our expectation of a rebound in revenue receipts due to a cyclical pick-up in tax Buoyancy in growth should
collections is underpinned by our positive stance on growth next year, which along with impart a cyclical boost to
revenues
a likely rollback (partial or full) of the excise and services tax cuts that were
implemented by the government in FY09, should impart solidity to revenue collections
in FY11F.
The 6% reduction in the central excise duty and the 2% cut in service tax rate in While a potential roll-back of
FY09 — a 2% CENVAT cut in December 2008 followed by a 4% cut in February excise and service tax cuts could
raise revenues
2009 — cost the Indian government INR300bn in lost revenues, about 5% of FY10’s
budgeted revenue receipts. Given the strong resurgence in growth since April, which
makes for a larger tax base, we estimate that when the likely roll-back in tax rates does
happen next year, it could add between 7% and 8% to revenue receipts.
Significant one-offs should roll off this year

On the expenditure side, a combination of direct fiscal stimulus, increased welfare and
social sector spending, arrears from the Sixth Pay Commission, farm loan waiver,
subsidies, and higher oil and fertiliser bond issuances (off-budget) conspired to keep
expenditure at cyclical highs in FY09, as was expected of a counter-cyclical and
expansionary fiscal policy, which has continued into FY10F.
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

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.
Exhibit 21. Fertiliser subsidy and landed prices
(INR/tonne) Fert subs (RHS) (INRmn)

50,000 800,000
Urea (LHS)
45,000 700,000
40,000 DAP (LHS)
600,000
35,000
30,000 500,000
25,000 400,000
20,000 300,000
15,000
200,000
10,000
5,000 100,000
0 0
FY96
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:
a) Including PSU banks: US$105bn
b) Excluding PSU banks: US$98bn
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).
Implications of better fiscal and monetary tightening –

flattening of the yield curve
We note that fiscal rebalancing should, in the longer term, counter the pressures on We expect the yield curve to
long-end rates caused by the RBI tightening. As can be seen in the chart below, flatten
India’s yield curve currently is at its steepest ever. Meanwhile, a withdrawal of liquidity
should put upward pressure on short-end rates, thus causing the yield curve to flatten.
There could be a knee jerk reaction on 10-year yields in the short term amid inflation
worries, but this should eventually settle down at lower levels, in our view.
Exhibit 22. Slope of the yield curve (10-yr govt yield minus 1-yr govt yield)
(bps) 10 yr-1 yr spread (LHS) Govt 1-yr bond (RHS) (%)

400 Govt 10-yr bond (RHS) 12
350
300 10
250 8
200
150 6
100
50 4
0 2
(50)
(100) 0
Sep-01
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
Source: Bloomberg, Nomura research

Gearing up
Return of risk-taking: from de-leveraging

to re-leveraging
From government to private risk-taking
The massive spending push by the Indian government has helped the demand side of We expect significant rebalancing
the economy get back on its feet relatively quickly. Unfortunately, given its fiscal of risk-taking away from the
position, the government has gone to the limit of risk-taking. We believe there will be a government to the private sector
significant rebalancing in terms of risk-taking in the economy from the government to

the private sector this year.
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.
De-leveraging by corporates following the crisis

The system-wide rise in risk aversion following the crisis in September 2008 has led to De-leveraging by corporates in 2H
a strong dose of de-leveraging by corporates. Companies put on hold their capex FY09 showed up in falling capex
plans, especially in the infrastructure sector, which accounted for half of investment
intentions for loans sanctioned by banks and term finance institutions in FY09. This led
to a reduction in loan disbursals by banks and resulted in weak credit expansion, as
can be seen in the Exhibit below.
Exhibit 23. Bank credit and deposit growth Exhibit 24. Non-food bank credit growth (no. of
weeks since beginning of fiscal year)
(Y-Y %) Bank credit (LHS) (%) 135 FY06 FY07 FY08

32 Aggregate deposits (LHS) 79
Credit deposit ratio (RHS) 130
FY09 FY10
29 77 125
26
75 120
23
73 115
20
71 110
17
69 105
14
11 67 100
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

Note: Base 100 = Total bank credit outstanding on the first week of the fiscal year

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
Source: RBI, Nomura research
Companies with high leverage sought to recapitalise quickly through

QIPs
The slower pace of expansion of bank credit has coincided with a pick-up in fund QIPs picked up in March 2009
raisings through the Qualified Institutional Placement (QIP) route, predominantly after after the markets bottomed
March 2009 when the markets bottomed. The increase in the leverage ratios of those
non-financial companies that raised capital through this route compared to the
leverage of the larger BSE500 ex-financials universe provides further corroborating
evidence of corporate de-leveraging. As shown in the chart below, the average net
debt/equity ratios of the companies who availed themselves of QIPs rose to a high of
151% in FY09 compared with 60.5% for those who did not, thus prompting them to
reduce leverage amid falling profits.
Exhibit 27. Higher leverage of companies that Exhibit 28. BSE500 ex-financials net profits (y-y %)
recapitalised through QIPs
(%) BSE500 ex-fin Net Debt/Equity (Y-Y %) Adj net PAT

160 QIPs ex-fin Net Debt/Equity 50
140 40
120
30
100
20
80
60 10
40 0
20
(10)
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
Source: RBI, Nomura research Source: SEBI, Nomura research
De-leveraging by households showed up in weak retail credit growth

As can be seen in the Exhibit below, de-leveraging by households in response to the
crisis has translated into weak demand for personal loans, which make up about 22%
of total outstanding bank credit. Among that, demand for home loans — the biggest
retail segment comprising 11% of outstanding bank credit — came off amid general
job and income losses, a decline in affordability and volatility in property prices.

Exhibit 29. Sectoral deployment of bank credit

% change of amount outstanding
As % of total as 19 Dec 08 until 27 27 Feb 09 until 22 22 May 09 until 28 28 May 08 until 28
Sector of Aug 09 Feb 09 May 09 Aug 09 Aug 09
Non-Food Gross Bank Credit (1 to 4) 100.0 0.9 2.6 2.6 13.3
Agriculture & Allied Activities 12.6 2.9 10.7 0.0 25.6
Industry (Small, Medium and Large) 41.8 2.1 0.1 5.4 17.9
Personal Loans 21.5 (2.3) 0.4 1.3 2.3
Housing 10.9 0.3 1.2 3.3 5.4
Advances against Fixed Deposits 1.7 (8.5) 0.0 (2.3) 0.7
Credit Cards Outstanding 0.9 (1.5) (6.7) (15.2) (14.3)
Education 1.2 4.0 3.1 11.6 34.5
Consumer Durables 0.3 (10.0) (2.6) (2.1) (16.7)
Services 24.1 1.0 5.2 0.3 11.0
Transport Operators 1.5 1.3 1.0 0.6 9.1
Professional & Other Services 1.8 (2.0) 12.1 3.8 20.5
Trade 5.6 (1.4) 2.8 3.7 13.9
Real Estate Loans 3.7 18.7 4.1 2.3 41.5
NBFCs 3.9 5.1 4.6 7.0 30.8
Signs of re-leveraging by corporates are now visible

The simultaneous rise in alternative sources for financing for firms suggests to us that Corporates are raising growth
while some of this capital is being used to retire old debt (we pointed this out for QIPs capital
earlier on in this section), bolster working capital and supplement general expenses,
the major proportion of these fresh funds is being deployed for investments as
previously stalled projects come back on line, new long-term projects gets sanctioned,
and as firms modernise and expand their facilities.
The charts overleaf provide evidence from four quarters: 1) external commercial
borrowings have picked up since June and are at 2007-08 levels. The majority of these
funds are being earmarked for capex; 2) funds raised in the primary equity market
through public (IPOs and FPOs) and rights issues have picked up since June. We
reckon that the majority of QIP issues were used for the purpose of de-leveraging;
3) the amount of funds raised through rights issues has been low this year, but the
majority of the proceeds between May and September were used for repaying loans,
augmenting working capital and bolstering capital adequacy ratios; and 4) data on the
use of proceeds from IPOs that have been completed or are in the pipeline suggests
that capex is the main area earmarked for funds.
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
Source: RBI, Nomura research Source: SEBI, Nomura research

Exhibit 32. Uses of rights issues Exhibit 33. Uses of IPO proceeds
(actual and pipeline)
Distribution of IPO proceeds in 2009 Uses of rights issues

(Actual and pipeline) Repayment of loans
Capex Working Capital
1.2 Repayment of debt 1.2 Capital adequacy
Working capital Capex
1.0 Acquisitions / Corp investments
1.0 Acquisitions/Inter-corporate investments
Expenses
Issue expenses Others
0.8 General corporate purposes 0.8
Disinvestment
0.6 0.6
0.4 0.4
0.2 0.2
0.0 0.0
Jul Aug Sep Oct Nov Dec May Jun Aug Sep Oct Nov
Source: SEBI, Nomura research Source: SEBI, Nomura research
And households should join them soon

One of the factors responsible for the economic acceleration since FY03 relates to An improving labour market and
increased risk-taking by households through income leveraging. However, this came falling marginal cost of funds for
off significantly since FY08, as tightening by the RBI led to a significant slowdown in banks will help households to
re-leverage
personal loans in the second half of FY08 — retail loans have grown slower than
nominal GDP and significantly slower than ex-agri nominal GDP. We expect
household re-leveraging to resume as the labour market continues to pick up, incomes
continue to rise and the job outlook improves. The fact that marginal funding costs for
banks are still falling implies that banks will be more aggressive in lending to
households.
Exhibit 34. Retail loans slowed down before crisis

(INRbn) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Consumer durables 69 72 83 91 88 92 88 82
Housing 346 366 520 1,287 1,864 2,310 2,578 2,770
Advances against fixed deposits 227 227 263 299 349 408 450 487
Advances against shares/bonds 18 20 20 41 51 49 42 23
Credit cards NA NA NA 58 92 183 264 280
Education NA NA NA 51 101 152 205 286
Other personal loans 261 279 352 624 993 1,334 1,507 1,698
Total retail loans 920 964 1,238 2,451 3,538 4,528 5,134 5,625
Growth (%) 4.8 28.4 98.0 44.4 28.0 13.4 9.6
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
The government has to transfer risk-taking to the private sector

Finally, even though the government’s ability to directly deploy risk-capital of its own
has been impaired because of the difficult state of its finances, we expect the
government to share risk-taking with the private sector through more PPP projects. We
expect a continued push on roads and power sectors through greater participation of
the private sector. For instance, four more Ultra Mega Power Plants (UMPPs) are
expected to be awarded this year and there is a pressing urgency to expedite
implementation in the road sector (please see a recent report on the road sector by our
infrastructure and construction analyst, Saion Mukherjee, The Road Ahead, 14
December 2009).

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.
What has been the broad thrust of reforms?

We take a detailed look at the timeline of reforms in India since 1999 in the Appendix.
Broadly, reforms have been of the following types:
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.
Exhibit 35. Centre and state deficits as % of GDP

Oil, fertiliser, food
as % of GDP Centre State Consolidated and other bonds Total liability
FY01 5.65 4.18 9.51 0.04 9.55
FY02 6.19 4.14 9.94 0.46 10.40
FY03 5.91 4.06 9.57 0.09 9.67
FY04 4.48 4.38 8.51 0.09 8.61
FY05 3.99 3.42 7.45 0.01 7.46
FY06 4.08 2.51 6.68 0.50 7.17
FY07 3.40 1.90 5.58 0.98 6.56
FY08 2.70 1.45 4.17 0.81 4.98
FY09 (RE) 6.00 2.64 8.66 1.76 10.43
FY10 (BE) 6.80 3.34 10.09 0.17 10.27
Note: RE: Revised estimates, BE: Budget estimates
Source: Budget papers, Nomura research
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).
We think there will be reforms, but their pace might be slow

There have been policy announcements in key areas, which hold out the potential of
translating into significant reforms in the coming year: taxes, both direct (the new direct
tax code) and indirect (GST, Goods and Services Tax), disinvestment, pension reforms
and consolidation in the banking sector, legal reforms to expedite the judicial process,
among others.

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?
Are reforms necessary for the markets to perform?

This is a fairly important question, especially because the performance of the Indian The market performed strongly in
stock market in the past has been rather independent of the dosage of reforms 2004-2009, despite lack of major
reforms
administered to the economy. The previous tenure of the UPA government (2004-2009)
has been rather light on major reforms, yet the markets have continued to do well. This
suggests that either growth has remained independent of the reforms process or that
reforms undertaken earlier on were still bearing fruit.
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
Key themes for 2010F

While we see inflation, and the policy response to it, dominating in the short term, we
expect the following themes to emerge over a one-year horizon.
Significant improvement in investment cycle: We expect both infrastructure and

industrial capex to see significant growth over the rather lacklustre 2009. Infrastructure
capex is playing an increasingly important role in overall investment and a pick-up in
infrastructure lending should be accompanied by higher bank lending in 2010F.
Strong labour market and consumer incomes: We expect to see multiplier effects
of salary hikes to government employees — pay hikes for state government and PSU
employees will follow after central pay hikes in 2008 and 2009 — continue to boost
incomes and drive consumption this year. Meanwhile, a normal monsoon and
continued support from social welfare and employment generation schemes should
support rural incomes and consumption.
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.
Disinvestment: There are two types of disinvestments: 1) A sell-off of the

government’s stake in companies, and; 2) Public Private Partnerships (PPP).
The complete disinvestment of government companies in favour of the private sector
was jettisoned as soon as the UPA government came to power in 2004. Even now, the
government seems to be clear about retaining majority stakes in listed PSUs.
The more palatable form of disinvestment is through: 1) public private partnerships,
which involve giving existing government assets to the private sector though a
commercial arrangement (for example, airports through joint ventures and roads
through BOT projects), and; 2) through a gradual retreat of the government from
sectors by inviting private participation on a incremental basis (telecom, power, coal
mining, etc).
We are more excited by the second type of disinvestment, as it creates non-linear
opportunities for value creation (while the government continues to retain a majority
holding in listed companies, higher floating stock alone will not lead to any
fundamental change in company behaviour).
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.
Improving fiscal situation: As we have mentioned earlier in this report, we expect an

improvement in the fiscal situation at the margin. This would likely cause a flattening of
the yield curve, as a move towards consolidation of the fiscal deficit will keep long-end
borrowing costs under control even as short-end interest rates rise due to a withdrawal
of liquidity.
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
Sector Headwinds Tailwinds Short-term One-year
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
Media Tough competitive environment A recovery in advertising revenues NEUTRAL NEUTRAL
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
Real Estate Short-term monetary rebalancing Re-leveraging; improvement in UNDERWEIGHT OVERWEIGHT

residential volumes and a recovery in
office leasing
Telcos Tough competitive environment; Strong subscriber growth UNDERWEIGHT UNDERWEIGHT

regulatory risk
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

Exhibit 38. Time-line of reforms from FY99-10

FY1999 Comments
• De-licensing of coal, lignite, petroleum, bulk drugs and sugar. Major
• Coal, lignite and mineral oils removed from sole purview of public sector. Major
• Announcement of disinvestment of IOC, GAIL, CONCOR, VNSL. Major
• Buybacks by corporates permitted. Minor
• Automatic route FDI limits enhanced. Minor
• 100% foreign equity permitted in electricity generation, transmission and distribution. Major
• 100% foreign equity permitted in construction & maintenance of roads, highways, bridges, ports and Major
harbours.
• No prior approval of RBI for FDI/NRI/OCB after FIPB/Govt approval. Minor
• Electricity Act of 1948 amended for private investment in power transmission. Minor
• Setting up of central electricity regulatory commission, provisions for state ERCs. Major
• Additional tax at the rate of one rupee per litre on petrol imposed. To generate INR790 crore in a year and the Minor
proceeds to be utilised to augment the corpus of the National Highways Authority of India (NHAI).
• A National Integrated Highway Project merging the golden quadrilateral connecting Delhi, Mumbai, Chennai Major
and Calcutta with the East-West (Silchar to Saurashtra) and North-South (Kashmir to Kanya Kumari)
corridors launched.
• The Government announces that five cities will be identified for developing world class international airports. Major
• IDFC on par with other All India Public Financial Institutions regarding fiscal incentives and the fund raising Minor
benefits extended to these institutions.
• The repeal of the Urban Land (ceiling and regulation) Act, 1976. Major
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.

Exhibit 38. Time-line of reforms from FY99-FY10 (continued)

FY2001 Comments
• A new programme called “Sarva Siksha Abhiyan” announced to enable all children to enrol by 2003 and Major
expand the coverage of District Primary Education Programme.
• To fulfil critical needs of the rural people, a new scheme, “Pradhan Mantri Gramodya Yojna” launched with an Major
outlay of INR5,000 crore.
• The system of central excise drastically overhauled with the introduction of a single Central Value Added Tax Major
(CENVAT) of 16% ad valorem on all manufactured goods with a few exceptions.
• States/Union Territories encouraged to implement their agreed programme for converting their sales taxes Major
into VAT by 1 April, 2002.
• The peak rate of import duty scaled down further from 40% to 35%. Minor
• The Budget proposed to bring out an institutional mechanism embodied in the “Fiscal Responsibility Act”. Major
Accordingly, the Fiscal Responsibility and Budget Management Bill (FRBM), 2000 introduced in Lok Sabha in
December, 2000. The Bill provides for elimination of revenue deficit and reduction of the fiscal deficit to not
more than 2% of gross domestic product within a period of five financial years.
• Transition to a full-fledged Liquidity Adjustment Facility (LAF) involving injection and absorption of liquidity via Minor
variable rate reverse Repo auctions and variable rate Repo auctions respectively.
• Legislative initiative to reduce the proportion of Government holding in the equity of nationalised banks. Major
• Permission to raise FII equity limit to 40% through a special resolution by shareholders. Minor
• Removal of cap on investment in the power sector. Major
• 100% FDI permitted in oil refining. Major
• 100% FDI allowed in Special Economic Zones (SEZs) for all manufacturing activities. Major
• 100% FDI allowed in Telecom Sector for certain activities with some conditions. Minor
• The States of Orissa, Haryana, Andhra Pradesh, Uttar Pradesh, Karnataka, Delhi and Rajasthan enact their Follow up
Electricity Reforms Acts. Madhya Pradesh Legislative Assembly passes Electricity Reforms Bill. Gujarat also
drafts Reforms Bill.
• A fourth cellular operator in all the circles permitted. Follow up
• Limited mobility to fixed service providers in the form of Wireless In local loop (WILL). Follow up
• 20 BOT road projects awarded. Major
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


FY2003 Comments
• To reduce the interest burden of States, a debt swap scheme enabling States to swap their high cost Central Major
Government loans bearing a coupon rate of 13% and above with relatively
low cost market borrowings and loans from NSSF, put in place.
• Enactment of “Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act Major
2002”. Act enabled setting up of ARCs (Asset Restructuring Companies). Enabled debt recovery by taking
possession of assets. Paved the way for enhanced power of banks in default situations.
• Further enhancement of SEBI's power. Follow up
• Corporate disclosures made widely available through Electronic Data Information Filing and Retrieval. Follow up
• Further concession given to SEZs in terms of procurement of duty free equipment, raw materials and Follow up
components.
• Continued de-reservation from small scale industry. Follow up
• Reduction in peak import duty from 35% to 30%. Follow up
• Significant reduction in ECB usage restrictions. Follow up
• 100% FDI permitted in advertising, film, tea, township development including housing, commercial premises, Follow up
hotels, resorts and regional urban infrastructure, in manufacturing of SEZs.
• 26% FDI allowed in print media. Follow up
• Disinvestment of Hindustan Zinc, Maruti, IPCL, Modern Foods and eleven government-owned hotels. Major
• Infrastructure Equity Fund set up for providing equity investment in infra projects. Major
• IDFC to act as coordinating agency for coordinated debt syndication for infrastructure. Minor
• 20 state government sign MOUs (Memorandum of Understanding) with centre for time bound reforms. Follow up
• State level electricity regulatory commissions start to function. Follow up
• SEB (State Electricity Board) de-bundling starts. Follow up
• APDRP (Accelerated Power Development and Reform Programme) given further thrust. Follow up
• Airport modernisation started. Major
• Mass rapid transport thrust introduced. Urban Delhi Metro project slated for completion in 2005.. Minor
• Monitoring of government project strengthened to reduce delay. Starts to show results. Minor
• Electricity distribution privatised in Delhi in July 2002. Follow up
• The Ministry of Agriculture circulates a model Agriculture Produce Marketing Committee (APMC) Act, 2003, Major (not
and suggests amendments to the State APMC Acts so as to promote investment in marketing infrastructure, completed)
motivating corporate sector to undertake direct marketing and to facilitate a national integrated market.
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


FY2005 Comments
• Disinvestment agenda largely scuttled. Retrograde
• FRBM effective from July 2005 with the following targets -1) Reduction of revenue deficit by an amount Follow up
equivalent of 0.5% or more of the GDP at the end of each financial year, beginning with 2004-05. 2)
Reduction of fiscal deficit by an amount equivalent of 0.3% or more of the GDP at the end of each financial
year, beginning with 2004-05. 3) No assumption of additional liabilities (including external debt at current
exchange rate) in excess of 9% of GDP for the financial year 2004-05 and progressive reduction of this limit
by at least one percentage point of GDP in each subsequent year. 4) No guarantees in excess of 0.5% of
GDP in any financial year, beginning with 2004-05. 5) Specifies four fiscal indicators to be projected in the
medium term fiscal policy statement. These are, revenue deficit as a percentage of GDP, fiscal deficit as a
percentage of GDP, tax revenue as percentage of GDP and total outstanding liabilities as percentage of GDP.
• The universally accepted formula of exempt exempt tax (EET) adopted, that is, the contributions will be Minor
excluded from income for tax purposes; the accruals will also be exempt from tax; and only the terminal
benefits will be taxed at the applicable rate in the year of receipt.
• Three more states likely to enact fiscal responsibility legislations. Follow up
• States entered into debt swap to reduce the cost of debt. Process complete for 20 states. Follow up
• Agreement to implement State level VAT from 1 April, 2005. Follow up
• Development of mechanism for debt restructuring for medium enterprises on the lines of corporate debt Follow up
restructuring.
• Resident individuals already permitted to remit freely up to US$ 25,000 per calendar year for any current or Follow up
capital account transaction.
• Abolition of long term capital gains tax. Reduction in short term capital gains tax from 30% to 10 per cent. Major
Introduction of STT (Securities Transactions Tax).
• Indian corporates and partnership firms allowed to invest overseas up to 100% of their net worth. Minor
• Banks to draw a road map for moving towards Basel II by 31 December, 2004. Minor
• Increase in the FDI limits in “Air Transport Services (Domestic Airlines)” up to 49% through automatic route Follow up
and up to 100% by non-resident Indians (NRIs) through automatic routes. (No direct or indirect equity
participation by foreign airlines allowed).
• Foreign investment in the banking sector further liberalised by raising FDI limit in private sector banks to 74% Follow up
under the automatic route including investment by FIIs. The aggregate foreign investment in a private bank
from all sources a maximum of 74% of the paid up capital of the bank and at all times, at least 26% of the paid
up capital held by residents except in regard to a wholly owned subsidiary of a private bank. Further, the
foreign banks permitted to either have branches or subsidiaries, not both. Foreign banks regulated by a
banking supervisory authority in the home country and meeting Reserve Bank’s licence criteria will be allowed
to hold 100% paid up capital to enable them to set up wholly-owned subsidiary in India.
• FDI ceiling in telecom sector in certain services (such as basic, public mobile radio trunked services (PMRTS), Follow up
global mobile personal communication service (GMPCS) and other value added services), increased from
49% to 74%, in February 2005. The total composite foreign holding 160 Economic Survey 2004-2005
including but not limited to investment by FIIs, NRI/OCB, FCCB, ADRs, GDRs, convertible preference shares,
proportionate foreign investment in Indian promoters/investment companies including their holding companies
etc, not to exceed 74%.
• Generally, profit-making companies not to be privatised. Retrograde
• NHDP (National Highway Development Project) Phase IV, a new initiative proposed with a view to providing Follow up
balanced and equitable distribution of improved/widening highway network throughout the country by
upgrading 21,000 kilometre of single - lane roads to 2-lane roads with paved shoulders, and for strengthening
of 17,000 kilometre of the existing 2-lane highways and construction of paved shoulders.
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.


FY2007 Comments
• The peak rate of duty on non-agricultural products reduced from 15% to 12.5 per cent. Ambit of service tax to Follow up
include several new categories.
• Union Budget for 2006-07 announced interest rate relief at two percentage points on the principal amount up Rural Thrust
to INR1 lakh on crop loans availed of by the farmers for Kharif and Rabi seasons 2005-06.
• PAN has been made mandatory with effect from January 1, 2007, for operating a Beneficiary Owner account Minor
and for trading in the cash segment.
• The application process of FII investment simplified and new categories of investment (insurance and Minor
reinsurance companies, foreign central banks, investment managers, international organizations) were
included under FII.
• UMPP numbers expanded to 9 in total. Follow up
• For encouraging competition in development of transmission projects, Ministry of Power notified Tariff-Based Follow up
Competitive Bidding Guidelines for Transmission Service under Section 63 of the Electricity Act, 2003.
• The Ministry of Power issuance on approach and guidelines on development of merchant power plants Major
(MPPs). Unlike traditional utilities, MPPs compete for customers and absorb the full market risk.
• On 23 August, 2006, Government notified Rural Electrification Policy under section 4 & 5 of the Electricity Act, Rural Thrust
2003.
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
FY2009 and interim budget for FY2010 Comments

• Additional plan expenditure up to INR20,000 crore for social sector schemes during financial year 2008-09. Populist
• An amount of INR85,942 crore authorised by way of bonds in 2008-09 for FCI, oil and fertilizer units. Populist
• Across the board cut of 4pp in ad valorem CENVAT rate except for petroleum products. Response to
crisis
• Farm loan waiver (0.3% of GDP). Populist
• Significant customs duty exemptions announced to address the slowdown. Response to
crisis
• Implementation of the Sixth Pay Commission award (0.65% of GDP). Populist
• Higher levels of food and fertiliser subsidy (1.03% of GDP). Populist
• 49% FDI in credit information companies allowed. Follow up
• FDI up to 26% and FII up to 23% in commodity exchanges, subject to no single investor holding more than Follow up
5% allowed.
• FDI up to 100% under the automatic route allowed both in setting up and in established industrial parks. Follow up
• FDI cap in the civil aviation sector, which includes 74% FDI in non-scheduled airlines, chartered airlines and Follow up
cargo airlines, relaxed. 100% FDI in maintenance and repair organizations, flying training institutes, technical
training institutions, and helicopter services/seaplane services allowed.
• FDI up to 100% (with prior government approval) in mining and mineral separation of titanium-bearing Follow up
minerals and ores, its value addition, and integrated activities allowed.
• One more UMPP awarded. Follow up
• Under NELP-VII, the award of 44 blocks has been approved. Follow up
Note: 10 lakh = 1 million; 1 crore = 10 million
Source: Budget documents, Nomura research

The macro balancing act
India: high-growth high-inflation paradox

Sonal Varma
A rebound in private demand, rising inflation and a surge in capital inflows have set the
stage for policy reversal in 2010. However, managing the fiscal deficit will remain a
challenge.
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 We expect Indian rupee/US dollar to touch 42.3 by end-2010F, due to capital

inflows. Rising domestic inflation, improving export demand and appreciation of
other Asian currencies should lessen the policy resistance against rupee
appreciation.
z We expect the RBI to use multiple tools in 2010F: repo/reverse repo rate hikes
starting in January, CRR hikes to tackle liquidity, tighter prudential norms and
countercyclical capital account norms.
z Downside risks to our view: sharply higher commodity prices, negative global
developments, geo-political risks. Upside risk: virtuous dynamics.
Back to an 8% economy, but underlying shift in growth drivers

India has weathered not just the global crisis, but also weak monsoons, and is likely to A rebound in private sector
post a robust GDP growth rate of 8% in FY11F (year ending March 2011) from an demand should offset lower fiscal
estimated 7% in FY10F. The rebound underlines a structural shift in the growth drivers: stimulus in 2010F
first, the recovery will shift to services-led growth from the manufacturing-led recovery
so far; and second, the demand baton is likely to be passed from the government to
the private sector (see Exhibit “Contribution to GDP growth”). In our view, this
rebalancing will be supported by an improvement in a number of fundamental drivers
of the economy.
Improving consumption prospects: Rising income and stable employment should
boost consumer demand. Various survey data suggest that employment prospects
have improved in 4Q09 and we expect them to improve further (see Exhibit
“Employment and private consumption”). This, together with lower interest costs, and
rising confidence, should support a strong recovery in urban consumption demand.
Assuming a normal monsoon, the structural uptick in rural demand should remain
underpinned by income support from higher food prices and rural employment and
social spending schemes by the government.
Roads-led infrastructure push: India has major infrastructure bottlenecks. We expect Consumer demand and
investments to rebound in FY11F, led by infrastructure, with the largest policy thrust on infrastructure investment to drive
roads. Nomura’s construction sector analysts estimate the government has already this pick-up
awarded orders for US$4.5bn worth of road projects in FY10-to-date and another
US$35bn is planned by end-FY11F. The multiplier impact from investment in roads,
including greater construction activity, employment in rural and semi-urban areas and
demand for raw materials, should provide the necessary fillip to manufacturing capex
as well. Rural infrastructure and power are other areas of policy focus. Currently, more
than 30% of incremental bank credit is for infrastructure, reflecting the hectic pace of
activity in this sector (see Exhibit “Incremental credit to infrastructure”).

Exhibit 39. Contribution to GDP growth Exhibit 40. Employment and private consumption
(%) Government Private demand (%) Employment survey (LHS) (% y-y)

14 Others GDP 25 10
Real private consumption (3qma)
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.
From supply- to demand-led inflation; more margin pressures

We expect higher-than-consensus inflation by end-FY10F and in FY11F. Wholesale Inflationary pressures are
price index (WPI) inflation rose to 4.8% y-y in November and we expect it to inch building up…
towards 8.0% by March 2010 and average at 6.8% in FY11F (see Exhibit “WPI
inflation projections”). We expect the fundamental driver of inflation to shift from
supply-side to demand-side inflation. India is experiencing accelerating inflation, which
is at odds with the slack in the global economy, but reflects the supply-constrained
nature of India’s economy combined with the rapid recovery in domestic demand.
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
(%) (% y-y) Primary Fuel

14 Manufacturing WPI
40 Forecasts
Share of infrastructure in incremental credit
11
30
8
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
Fiscal deficit to fall; but borrowings remain a risk

Fiscal consolidation is likely in FY11F, with the centre’s fiscal deficit likely to fall to Fiscal consolidation is likely to be
around 6.2% of GDP in FY11F from 6.8% in FY10F. However, much of this left to revenue buoyancy rather
than expenditure control
consolidation is likely to be a result of higher revenues rather than expenditure control.
While one-off expenses such as pay arrears are unlikely to be a burden in FY11F,
most other government expenses such as interest expenses, pensions and wages are
sticky and will remain high. In addition, we expect plan expenditure to be increased in
FY11F, in line with the government’s greater social-sector focussed efforts. Therefore,
we expect overall expenditure to be increased moderately in FY11F, from an already
high INR10.2tn in FY10F.
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.

Rupee appreciation to continue

Fundamental factors continue to point towards rupee appreciation: India’s higher
growth and interest rate differentials, which should attract capital inflows; a more
hawkish central bank in the region and an undervalued currency. India’s vulnerability is
mainly through higher oil prices, but on our house view that oil prices will average at
US$72bbl in FY11F, we expect the current account deficit to be easily offset by a
surge in net capital inflows to US$50bn in FY11F. While equity capital flows have
already rebounded, we expect debt capital flows to follow suit, attracted by rising
interest rate differentials (see Exhibit “Components of balance of payments”). We
expect the rupee/US dollar to touch 42.3 by end-2010F.
Exhibit 43. Various measures of core WPI inflation Exhibit 44. Centre’s market borrowings and yields
(% y-y) Trimmed mean (20%) INR tr (%)

Gross market borrowing, lhs
15 Core WPI (ex-food, fuel) 5 10
Net market borrowing, lhs
Mean +/- 1.5 S.D
10-year bond yield, rhs 9
12 4
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.
Multiple tools to tackle multiple policy objectives

We expect the RBI to use multiple tools to tackle its often-conflicting short-term
objectives of controlling inflation without hurting growth, preventing rupee appreciation
without fuelling liquidity and asset price inflation, withdrawing liquidity without
disrupting the government’s borrowing programme.
First, with both growth and inflation heading towards 8%, we expect the RBI to start Policy normalisation should start
normalising its policy rates in January by delivering 25bps hikes to its repo and reverse in January with 125bps of policy
repo rates followed by further 100bps hikes each through the remainder of 2010F (see rate hikes in 2010
Exhibit “Policy rate projections”). Excess systemic liquidity suggests that reverse-repo
will remain the effective rate at least until mid-2010, when RBI rate actions and higher

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.
Risks to our view

We see four key downside risks for India. First, sharply higher commodity prices could Downside risks: commodity
widen India’s trade and fiscal deficits, putting upward pressure on inflation. Second, prices, global double-dip,
geo-political factors
India remains vulnerable to negative global developments, such as a double-dip in
developed economies. Third, a new capex cycle depends on continuation of positive
business confidence and availability and cost of capital. Any setback in these factors
could delay a pick-up in the capex cycle. Fourth, India remains vulnerable to geo-
political risks, such as a border conflict with China or Pakistan. The main upside risk is
the virtuous dynamic of rising consumption, higher investment, higher capital flows,
asset price inflation and rising wealth effect that can all lead to positive feedback loops,
strengthen domestic demand and lead to sharply higher growth in 2010F.
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

Exhibit 47. Details of forecast

y-y- growth (%) unless otherwise stated 3Q09 4Q09F 1Q10F 2Q10F 3Q10F 4Q10F 1Q11F FY09F FY10F FY11F
Real GDP (sa, q-q, %, annualised) 11.4 2.4 9.7 8.5 10.9 4.7 6.9
Real GDP 7.9 6.5 7.5 7.9 8.1 8.3 7.7 6.7 7.0 8.0
Private consumption 5.6 5.0 6.0 6.5 7.0 7.0 7.6 2.9 4.6 7.0
Government consumption 26.9 5.0 5.0 5.0 3.5 6.0 5.0 20.2 9.9 5.0
Fixed investment 7.3 6.0 8.0 7.8 8.2 9.2 9.5 8.2 6.4 8.7
Exports (goods and services) (15.0) 3.0 6.0 14.5 14.9 9.5 9.0 12.8 (4.0) 11.7
Imports (goods and services) (29.8) (2.0) 9.0 14.0 8.4 11.5 10.5 17.9 (11.2) 11.1
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

Strategy | India Kapil Singh
Autos NEUTRAL
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.
Strong growth set to continue Analysts

Kapil Singh
c Economic revival to fuel growth +91 22 4037 4199
kapil.singh@nomura.com
Historically, there has been a strong relationship between periods of high
industrial growth and high automotive demand growth. This is because Prabhat Awasthi
companies tend to invest and new jobs are created during these periods. With IIP +91 22 4037 4180
estimated to pick up from 2.7% in FY09 to 9.5% in FY10F and 8% in FY11F, we prabhat.awasthi@nomura.com
expect demand across different categories of automobiles to remain strong. For
FY11F, we estimate demand growth for cars at 15%, commercial vehicles at 20%
and two-wheelers at 10%.
d Benefits from Sixth Central Pay Commission to continue

Automobile demand benefited from the Sixth Central Pay Commission in FY10,
and we see more benefits to come. Although 3mn central government employees
received pay hikes, a number of employees from the remaining 15mn state and
quasi-state government employees have yet to see a pay rise take effect. Note
that these employees will also be getting back-pay from 2006.
e Only nine cars per thousand people

India had about nine cars per 1,000 people at the end of FY09. This is nearly one-
fourth the equivalent figure for China. We estimate that demand for cars in India
will witness a CAGR of 14% over the next five years, if it replicates the China path,
with a slower GDP growth rate of 7.5%. Based on forecasts by the National
Council for Applied Economic Research (NCAER), we estimate the addressable
segment for cars will post a CAGR of 15% over the next five years.
f Weak rainfall not an important factor; even tractor demand is

likely to remain strong
Historically, we find little correlation between weak monsoons and automobile
demand. The only category where there is some correlation is tractors. However,
we highlight that the minimum support price of agri commodities increased less
than 5% in the previous weak monsoon cycle (FY03), compared with a 20%
CAGR in the past two years. In addition, schemes such as the National Rural
Employment Guarantee Act (NREGA) have created a shortage of farm labour,
which should lead to increased mechanisation at farms.

Strategy | India Kapil Singh
Exhibit 48. Relationship of IIP growth to automobile growth
(%) Cars (LHS) Two wheelers (LHS) (%)

100 20
Commercial vehicles (LHS) IIP (RHS)
80 18
16
60
14
40 12
20 10
8
0
6
(20) 4
(40) 2
FY94
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
Exhibit 49. Relationship of GDP/capita and car penetration
50,000 GDP PPP in 2006 (LHS) 600
Cars/1000 (RHS) 500

40,000
400
30,000
300
20,000
200
10,000 100
0 0
Malasiya
Mexico
Germany
Indonesia
Sri Lanka
Korea
Japan
India
China
Thailand
South
Phillippines
UK
USA
Brazil
Exhibit 50. Relationship of weak monsoons and auto demand in India
(%) 2W (LHS) Cars (LHS) (%)

MHCVs (LHS) Exide (LHS)
60 Rainfall deviation (RHS) 5
50
40 0
30
20 (5)
10
(10)
0
(10) (15)
(20)
(30) (20)
(40)
(50) (25)
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Strategy | Banks Mahrukh Adajania
Banks
NEUTRAL
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.
Loan growth is key Analysts

Mahrukh Adajania
c Credit growth +91 22 4037 4157
mahrukh.adajania@nomura.com
Credit growth in the system looks unusually weak in FY10F at 4.6% YTD, versus
9-10% YTD over the past seven years. We believe volatility in property prices and Sreekanth Akula (Associate)
delays in financial closure of infrastructure projects are the culprits. We expect +91 22 4053 3685
banks to revise down their credit growth numbers for the next three months. On sreekanth.akula@nomura.com
our estimates, credit growth for FY10F could be as low as 13% y-y, versus our
current forecast of 15% y-y, if we do not see a pick-up in the next several weeks.
We expect FY11F to see strong credit growth of 18-19% y-y, driven by pent-up
demand for housing loans and financial closure of infrastructure projects.
d Reversal of the rate cycle

We expect the RBI to hike CRR in its January 2010 credit policy. Given strong
cashflows in the corporate sector and pent-up housing demand, we do not see a
rising rate cycle hurting credit demand. Bank bond portfolios are better hedged
than they used to be, with durations of 1.5-2.5 years for mark-to-market portfolios.
This has reduced the sensitivity to rate hikes of bank bond portfolios. For every
50bps rise, we estimate a 5-7% drop in FY11F earnings for banks, compared with
earlier sensitivity of 13-18% in FY04-07. Historical price performance suggests
banks generally outperform in a rising rate cycle when accompanied by strong
credit growth. The coincidence of high inflation, driven mainly by food inflation,
weak credit growth, stiff competition in mortgages, rising rates and uncertain
provisioning norms, will likely put pressure on bank stock price performance over
the next few months. However, strong credit growth and higher lending rates in 2H
FY11F should revive core earnings in FY11F, in our opinion.
e Proposed provisioning norms: a possible dampener

The RBI, in its October policy, proposed a minimum provisioning cover of 70% for
banks effective September 2010. Banks are currently mandated to provide
according to the age of the bad loan — 10-15% provisioning in the first year. The
new guidelines imply a sharp rise in credit costs and pressure on near-term ROE.
While this is negative, bank stocks have not reacted negatively as most investors
seem to believe that implementation of the guidelines in their current form is

Strategy | India Mahrukh Adajania
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.
g Unlocking value through life insurance

Over the next 12-18 months, we look for ICICI Bank, Reliance Capital and HDFC to list
their life insurance companies, which should be positive for these stocks.
h Major bank reforms unlikely; no M&A among state banks

We do not see any major sector reform for banks. The government seems less than
keen to bring down its stake in state banks from the current 51% or to relax the FII limit
for state banks. Recently, there have been fresh reports of possible M&A activity
among state banks (eg, “India finmin: state banks have to decide on mergers”, Reuters,
7 December 2009). However, this looks unlikely given protests from bank unions, as
well as overlapping branch networks. The government, however, may align the
minimum government stake in SBI to that of the other state banks – ie, bringing down
the minimum government stake in SBI from 55% to 51%.
Exhibit 51. India: incremental loan/deposit ratio

(%) Nov (% y-y) Apr-Nov Apr-Sep Apr-Jun Jan-Mar
FY03 69.4 62.5 56.0 53.3 109.5
FY04 55.7 23.6 4.7 (48.9) 74.2
FY05 112.3 195.9 100.2 23.4 100.6
FY06 98.1 103.7 87.0 38.7 106.3
FY07 90.7 72.5 68.8 27.8 77.8
FY08 66.0 46.0 37.8 (37.1) 99.0
FY09 93.7 86.8 77.6 76.3 52.5
FY10 39.9 36.2 35.6 5.4 NA
Source: RBI
Exhibit 52. India banks: valuation comparison

Axis BOI HDFC HDFC Bank ICICI PNB SBI Union Bank
Ticker AXSB IN BOI IN HDFC IN HDFCB IN ICICIBC IN PNB IN SBIN IN UNBK IN
Price (INR) 937 363 2,609 1,693 823 891 2,153 263
Rating BUY REDUCE REDUCE NEUTRAL BUY NEUTRAL BUY NEUTRAL
P/E core business (x)
FY08 31.3 9.5 24.7 37.7 17.2 13.7 20.0 9.6
FY09 18.5 6.4 26.4 32.1 19.0 9.1 14.9 7.7
FY10F 15.0 9.6 23.3 26.5 16.6 8.4 13.4 7.1
FY11F 12.0 7.2 20.2 20.3 13.8 7.1 11.4 5.9
P/BV core business (x)
FY08 3.9 2.2 12.3 5.2 1.7 2.6 1.9 2.3
FY09 3.4 1.8 9.7 4.8 1.7 2.1 1.7 1.8
FY10F 2.3 1.6 5.6 3.6 1.6 1.8 1.5 1.5
FY11F 2.0 1.3 4.9 3.2 1.5 1.5 1.4 1.3
P/adjusted BV core business (x)
FY08 3.8 2.5 12.3 5.2 1.7 3.2 2.2 3.2
FY09 3.3 1.9 9.7 4.8 1.7 2.5 1.9 2.4
FY10F 2.2 1.7 5.6 3.6 1.6 2.0 1.7 1.9
FY11F 2.0 1.4 4.8 3.2 1.5 1.6 1.5 1.5
Note: pricing as of 24 December 2009
Source: Company data, Nomura estimates

Strategy | India Jamil Ansari
Building materials BEARISH

Action Stocks for action
We expect 2010 to be the most painful year in the current downcycle for India’s We have a REDUCE rating on both
cement sector. In our opinion, the demand-supply mismatch will be most severe in stocks in the sector. We are
2010, as incremental demand could fall far short of incremental new capacity particularly negative on Ambuja
added. We expect operating rates to hit their lowest level of the past 10 years. Cement and ACC due to high
valuation. Ambuja Cement is our top
a Catalysts REDUCE.
The commissioning of significant amounts of new capacity in mid-2010F and a rise
in input costs for elements such as coal could be key catalysts.
Anchor themes Price
Price
target
The outlook for profitability in 2010 appears bleak but valuations for most of the
Ambuja Cement REDUCE 99.45 67
companies in the sector do not reflect this, in our view. Stocks are at mid-cycle (ACEM IN)
EV/tonne valuations even though a severe downcycle in 2010-11F seems likely. ACC (ACC IN) REDUCE 859.7 609
A tough year ahead Analyst

Jamil Ansari
+91 22 4037 4192
Demand-supply mismatch expected in 2010F
jamil.ansari@nomura.com
We expect the cement sector in India to witness a substantial demand-supply
mismatch in 2010 as the new capacity additions are commissioned. We believe
the situation will be particularly bad after April when a large amount of the
capacity will come online.
Significant new capacity due to be added in 2010
Exhibit 53. Cement capacity additions

45 42
40
35 31
29
30
25
20
20 17
15 12
10 7
4 5
5 2
0
FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F FY13F FY14F
Source: Crisil, Nomura estimates
Demand is steady but not strong enough to absorb new capacity

Cement demand continues to be steady across most parts of the country, except
for some regions in southern India, according to the Cement Manufacturers’
Association. We expect overall cement demand to grow by 9% in FY10F. In
FY11F, we expect cement demand to continue to be robust due to heightened
activity in the infrastructure development area. However, we think this level of
growth is not sufficient to absorb all the new capacity and operating rates will
decline to their lowest levels in at least a decade in 2010F.

Prices — the big fall is yet to come

Cement prices have declined in recent months, though the fall has been patchy and Price correction has been limited
prices in most regions have fallen markedly. Even though the price correction has to only a few regions in the South
been as severe as -35% in states like Andhra Pradesh, the average all-India price is
down by less than 10% from the recent peak. We believe with the bulk of capacity
lined up to be commissioned in mid-2010, cement prices will continue to be under
pressure and fall significantly.
Exhibit 54. Cement prices: all-India average
(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
Source: CMA, Nomura Research Jan-09
Profitability outlook bleak; valuations not reflecting this

With the outlook for cement prices remaining bleak and signs of input cost pressures We expect a 20-30% decline in
returning (coal costs specifically), we expect profitability in the cement sector to decline EBITDA / tonne in 2010
substantially in 2010F. We expect profitability per tonne (EBITDA/tonne) for most
players to decline by 20-30% y-y in 2010F. Players that concentrate on southern India
may be hit hardest. Valuations across the sector still look high, with most companies at
mid-cycle EV/tonne valuation.
Maintain Bearish stance on the sector

We expect 2010 to be a challenging year for the cement sector, with the sector likely to Dual pressure likely in 2010: lower
reel under the dual pressure of lower cement prices and higher costs. Valuations are cement prices and higher costs
still high and we foresee a correction. Given this scenario, we maintain a Bearish
outlook. Our top REDUCE call is Ambuja Cement.

Strategy | India Manish Jain
Consumer BULLISH
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
Demand outlook remains steady Analyst

Manish Jain
c Growth outlook remains strong… +91 22 4037 4186
Despite all the economic turbulence witnessed in the past few months, growth manish.jain@nomura.com
has remained strong in the Indian consumer sector across all major segments,
such as beverages, alcohol, tobacco and personal products. The overall sector
has registered steady growth of 16-17% pa over the past three years in value
terms, driven by accelerating rural demand.
While growth has remained strong, there has been apprehension in the market
over potential down-trading by consumers, given high food inflation. However,
we have yet to witness any early signs of consumers cutting back on
consumption, either in terms of quantity or quality.
Over the next couple of years, we expect the demand outlook to remain steady,
with the current growth trajectory maintained on the back of steady demand from
both the rural and urban markets.
d …driven by robust demand in rural markets

Growth for consumer products in India over the past couple of years has been
driven by a marked acceleration in rural demand. Rural incomes have seen a
boost from: 1) a steady 10-25% increase in minimum support prices (MSPs); 2)
four consecutive years of positive output growth; and 3) union government
programmes, such as the National Rural Employment Guarantee Act. We see no
let-up in rural demand in the coming months.
e But margins may come under pressure

We think one of the key highlights for FY10F is margin expansion to all-time
highs at most consumer companies in India. But we believe that margins will
incrementally come under pressure, given: 1) a steady increase in input prices;
and 2) an increase in advertising spend in response to rising competition.
f ITC is our top consumer pick

We select ITC as our top pick in the consumer space. We are also bullish on
Asian Paints (APNT IN, INR1,756.7, BUY) and Tata Tea (TT IN, INR949.95,
BUY).

Strategy | India Manish Jain
Exhibit 55. India consumer sector: sales growth remains strong
(%)
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
(%) (INR/quintal) Paddy Wheat Jute Jowar

12 10.0 1,300
1,200
8 6.3 6.3 5.9
4.6 1,100
3.8
4 2.7 1,000
1.6
(0.1) 900
0 800
(0.3) 700
(4) (2.6)
600
(8) 500
(7.2)
400
2002-03
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

Strategy | India Amar Kedia
Electrical equipment BEARISH

While a pick-up in industrial activity is imminent, near-term pain for T&D equipment ABB and TMX have run up
manufacturers (ABB) will be a key overhang, while competition pressure and significantly over the past six months
margin risks will likely play out in the generation equipment space (BHEL). Niche in anticipation of capex revival; we
segments such as BOP, captive and back-up power offer better opportunities expect slowing growth and margin
(Cummins India and Thermax), in our view. risks for BHEL.
a Catalysts
Steady earnings disappointment vs Street expectations and delay in corporate
capex revival may drive down the stock prices of BHEL, ABB and TMX.
Price
We believe India’s power equipment sector promises a huge opportunity unfolding BHEL REDUCE 2,368 1,850
over the coming years. However, rising competition will hurt margins and the ABB Ltd REDUCE 771 535
market shares of existing leaders. In contrast, we see new opportunities in hitherto Prices as of 24 December 2009
under-penetrated segments such as BOP and captive/back-up power equipment.
Waiting for capex revival Analyst

Amar Kedia
c Opportunity in the power equipment sector +91 22 4037 4182
amar.kedia@nomura.com
We believe the Indian electrical equipment sector is poised to benefit from a
strong pipeline of potential order inflows in the power sector, under the Eleventh
and Twelfth plans. Of the planned addition in the Eleventh Plan, very little has Rating summary
actually materialised, which leaves a wide gap to be covered over the remaining
Price
three years. Also, in order to be able to meet the full target of the Twelfth Plan Price target
(initial estimates: 100,000MW), ordering activity has to commence now. Typically, Stock (INR) (INR) Rating
BHEL (BHEL IN) 2,368.00 1,850 REDUCE
generation equipment orders precede T&D orders and, thus, even as BHEL is
ABB Ltd (ABB IN) 771.00 535 REDUCE
now amid the best order-intake cycle in its lifetime, T&D equipment
Cummins India 405.50 450 BUY
manufacturers are still reeling under recession woes. (KKC IN)
Thermax Ltd 592.55 515 NEUTRAL
d Growth and margin concerns for BTG manufacturers … (TMX IN)
BHEL is already benefiting from a historically high book-to-bill ratio, which
provides strong visibility on near-term growth; however, we are concerned about Valuation summary
market share loss and margin risk due to growing competition in the sector.
FY10F P/E FY11F P/E
Several new players, including L&T, are now eyeing the market, and there is the Stock (x) (x()
threat of Chinese and Korean imports; both will likely exert pressure on margins. BHEL (BHEL IN) 28.9 23.5
ABB Ltd (ABB IN) 26.3 21.0
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.
f Niche segments offer better value

We like companies in niche segments such as Balance of Plants (BOP), captive
power and back-up power, which offer better value compared with their larger
counterparts. We prefer Cummins India in this space – a strong candidate for a
recovery play in India and the export markets. We also like Thermax, a dominant
player in the captive power space with a diversified presence in BOP and
environment-related products; it is also diversifying into the utility boiler space.

Exhibit 60. Industrial activity on the rise

(% y-y) (% m-m)
IIP
IIP (3mma), lhs
(3mma) (LHS)
16 2
lead) (RHS)
OECD CLI for India (6-month lead), rhs
12 1
8 0
4 (1)
0 (2)
Mar-96 Jul-98 Nov-00 Mar-03 Jul-05 Nov-07 Mar-10
Source: IPA, Nomura research
Exhibit 61. BHEL: order flows are peaking Exhibit 62. Thermax: benefitting from power orders
order Orderbook - Consolidated (%)

Order inflow
inflow (LHS)
60,000 Order inflow - Consolidated 200
700,000 order
Order book
book coverage
coverage (RHS) 5.0
% YoY Growth inflow (RHS)
4.5
600,000 50,000 150
4.0
500,000 3.5 40,000 100
400,000 3.0
2.5 30,000 50
300,000 2.0
20,000 0
200,000 1.5
1.0 10,000 (50)
100,000
0.5
0 0.0 0 (100)
Mar-09
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
Source: BHEL, Nomura estimates Source: Thermax, Nomura research
Exhibit 63. ABB: segmental revenue still declining … Exhibit 64. … thus pressurising margins
(%) Power systems (%) Power systems Power products

100 Power products 20 Process automation Automation products
Process automation 18
80
Automation products 16
60
14
40
12
20 10
0 8
(20) 6
(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

Strategy | India Saion Mukherjee
Infrastructure and construction NEUTRAL

We expect construction companies to benefit from a pick-up in order inflows in the Among the stocks in our coverage
infrastructure segment. An increasing backlog and pick-up in execution should universe we rate Nagarjuna
result in acceleration in growth. We have a BUY on Nagarjuna, HCC, IVRCL and Construction our top pick.
L&T. We prefer construction companies over road developers, particularly at
current valuations, and hence we rate IRB REDUCE.
a Catalysts
Price
Announcement of large orders, quarterly results exhibiting pick-up in execution. Price target
L&T (LT IN) BUY 1,682 1,867
Anchor themes IVRCL (IVRC IN) BUY 357 451
Nagarjuna (NJCC IN) BUY 165.85 197
We expect a pick-up in order inflow, particularly in power and roads. Corporate
HCC (HCC IN) BUY 151 157*
capex-related inflows are also expected to record y-y growth in FY11. We expect
Punj Lloyd (PUNJ IN) NEUTRAL 202 228
execution rates to improve. Unlocking value for subsidiaries through stake sales or IRB Infra (IRB IN) REDUCE 242 193
listings may also emerge as a theme. * PT under review; Prices as of 24 December 2009
Key trends for 2010 Analysts

Saion Mukherjee
+91 22 4037 4184
c Pick-up in order inflows saion.mukherjee@nomura.com
Order inflows have slowed down over the past three-four quarters because of the
financial crisis and general elections in the country. However, there is a pick-up in Harish Venkateswaran (Associate)
order activity as projects achieve financial closure and the government takes +91 22 4037 4028
harish.venkateswaran@nomura.com
initiatives to expedite infrastructure investments. Among the infrastructure
segments, roads and power will be the key growth drivers for construction
companies. In the power segment we expect increased inflows from across
chain-power equipment, BOP and transmission. Roads award activity is expected
to witness a steep jump in award activity under the National Highway
Development Program as more than 10,000km are planned for award in FY10F
and FY11F. With the rise in commodity prices on an increase in demand, we
expect a pick-up in corporate capex as well.
Exhibit 65. Expected pick-up in award activity in road sector
Length (Km)
11,947
11,721
Contracts awarded (Km) Contracts completed (Km)

14,000
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

d Execution rate set to rise

Execution slowed following the financial crisis. Companies were cautious on managing
receivables and working capital. With improvement in liquidity and likely improvement
in the government’s fiscal position, we expect the execution rate to rise again in 2010.
e Unlocking of value for infrastructure subsidiaries

We expect the construction companies under our coverage to continue to focus on
infrastructure development. Most of the companies are likely to participate in BOT road
projects. Some, like NJCC, have also added large power projects in their portfolio. This
implies there can be additional funding requirements over and above funds raised so
far. We expect companies to explore opportunities to list infrastructure development
subsidiaries and sell stakes in projects to mobilise funds. Such actions could
potentially lead to an unlocking of value for infrastructure projects. We do not expect
any significant rise in investment in real estate subsidiaries. The volume increase in
real estate has been limited only to certain cities such as Mumbai and Delhi and, with a
potential rise in interest rates in 2010, demand is unlikely to revive substantially.
Demand for commercial real estate is still weak and there are no signs of revival yet.
f Attractive valuation particularly for mid-tier construction companies

Adjusted for subsidiary valuations, we find mid-tier construction companies are trading
at 9-11x FY11F. These are attractive valuations, in our opinion, given the expected rise
in order inflows and backlog ratio. We expect the backlog ratio to remain at 3x; hence,
companies can deliver 20%-plus growth over the next two years. NJCC is our top pick
in the sector. L&T is relatively expensive at 22x FY11F P/E, which is in line with the
historical range. We expect significant positive surprises on order inflows and
execution in FY11 and, therefore, believe current valuations can hold. We maintain a
BUY rating on L&T.

Strategy | India Srikanth Vadlamani
Insurance BEARISH
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.
Anchor themes Price

Price target
We believe that the insurance industry is in the midst of a mid-term slowdown. We
Reliance Capital REDUCE 851 834
expect downward revision of profitability estimates, since companies may be (RCFT IN)
unable to realise cost efficiencies. We also expect companies to take on more Prices as of 24 December 2009
lapsation risk to make products more attractive to customers.
Unexciting outlook Analyst

Srikanth Vadlamani
c Growth: lukewarm despite revival in equity markets +65 6433 6957
srikanth.vadlamani@nomura.com
New premium sales growth has not picked up significantly, in spite of the equity
markets seeing a strong up-tick over the past six months. This slack in sales
growth is all the more noteworthy considering the positive base effect in play,
with FY09 not seeing any growth. We believe that the lukewarm sales growth
has been on account of three factors. First, penetration levels are no longer low.
Second, we note that the downturn in the equity markets in FY09 was the first
since the introduction of unit-linked products in India. Following this experience,
we believe that customers will not be as enthusiastic as before in making multi-
year commitments based on near-term stock market performance. The strong
growth in single premium sales this year supports this view. Third, geographical
expansion, which was a key growth driver during the boom years, is no longer
present. Based on these three factors continuing into 2010F, we expect new
premium sales growth for the private sector in FY11F of 13-15%.
d Persistency: remains at alarming levels

We highlight low persistency in the industry as our biggest concern in India’s
insurance sector. Persistency levels had nose-dived in FY09, in line with the
sharp slowdown in new premium sales. However, even before FY09, when the
industry was clocking fast growth rates in new premium sales, persistency levels
were well below acceptable levels. Importantly, data points up to 1H FY10
indicate that while persistency has improved from FY09 levels, it is only around
pre-FY09 levels. We attribute the low persistency to mis-selling. We believe that
there is significant regulatory risk on account of this low persistency, as the
regulator may force companies to bear the lapsation risk.
e Operating efficiency: management focus, but verdict still out

Another key concern is about the ability of companies to achieve the operating
cost efficiencies that they had built into their product pricing. With a rather
dramatic change in the growth outlook since FY09, a significant mismatch has
developed between the infrastructure that companies have built up and the sales
that they are now able to generate. We note that companies had started focusing
on cost efficiencies since the start of FY10. Indeed, the cost control being
exhibited has been a positive surprise. However, some of the companies that had

Strategy | India Srikanth Vadlamani
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.
f Regulations: impact of this year’s changes to be seen in FY11F

We flag several regulatory changes/proposals relating to the insurance industry, with Several regulatory
most of them having negative implications for the sector. We expect the margin impact changes/proposals for the
on account of the cap on ULIP to become apparent in FY11F. Enhanced and more insurance industry, most having
negative implications
periodic disclosures, which would start from 4Q FY10F, will be keenly awaited by
investors. With these disclosures, we expect an increased investor focus on hitherto
neglected operating metrics. Equally important, we expect clarity in FY11F on key
regulatory issues affecting the industry. We note that the draft direct tax code has
negative implications for the sector. Also, while the Swarup panel recommendation of
scrapping the present commission structure may not go through, there will be
increasing clamour to normalise insurance’s preferred status vis-à-vis other savings
products. The only positive regulatory change that we expect in FY11F is a hike in the
foreign ownership limit in insurance to 49%.
g Valuations: market becoming increasingly circumspect; we concur

We believe that the market is becoming increasingly circumspect of insurance We assume margins that are
company valuations. Of the three closest proxies to life insurance in the listed space, materially below what is being
declared by the companies
RCFT and BJFIN have significantly underperformed both the broader market and the
banking index since June this year, returning -15% compared to a SENSEX return of
14% and a BANKEX return of 18%. Even MAX has performed just about in line with
the market, returning 14%. RCFT’s underperformance is especially noteworthy, as
management has said that it will be going in for a value-unlocking exercise soon, either
through private placement or stock listing. We believe that investors are increasingly
focusing on the rather dismal operating metrics, and not just on new premium sales
growth. We concur with the market scepticism. We factor this into our valuations by
assuming margins that are materially below what is being declared by the companies.
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.
Exhibit 66. Persistency ratios
(%) ICICI Prudential Bajaj Allianz SBI life HDFC Standard

100 Reliance Life Kotak Max
90
80
70
60
50
40
30
20
10
0
FY06 FY07 FY08 FY09 1Q10 2Q10
Source: IRDA, company data, Nomura estimates

Strategy | India Harmendra Gandhi
IT Services & Software NEUTRAL

IT stocks have outperformed the Sensex by a wide margin on a YTD basis. We We maintain our BUY rating on HCL
maintain a Neutral stance on the sector as FY11F revenue growth is unlikely to top Tech, Patni and Tech Mahindra and
20% and margin upside appears difficult to achieve going forward. Among tier-1 NEUTRAL rating on Infosys, TCS
stocks we prefer TCS as we expect its near-term growth to be better than peers and Wipro.
and among tier-2 stocks we prefer HCL Tech due to strong deal win momentum.
a Catalysts Price
A return of discretionary spending could boost earnings. The risk of a sharp Price target
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
On the recovery path Analysts

Harmendra Gandhi
c Revenue growth steadily improving +91 22 4037 4181
hagandhi@nomura.com
Volume growth for all companies has trended into positive territory as clients
have become more open to spending, especially to improve business efficiency. Pinku Pappan
There have been gains from vendor consolidation and one-off work related to +91 22 4037 4360
M&A and compliance. BFSI and retail verticals have recovered well, while pinku.pappan@nomura.com
manufacturing and telecom still show signs of weakness. Meanwhile, companies
have resumed hiring and net employee adds are now trending upward after
declining over three quarters.
d Margins have improved on a y-y basis; further upside difficult

Compared to a year ago, most companies have improved margins by using a
variety of options — significantly reducing hiring, increasing the offshore revenue
mix and fixed price project mix. The weak rupee also aided margin improvement.
Going forward, further improvement seems difficult as the appreciating rupee,
wage inflation, and increase in hiring and onsite sales presence by companies
will exert pressure on margins.
e Stocks have run-up

IT stocks have outperformed the Sensex by a wide margin on a YTD basis,
especially tier-2 names. Currently, tier-1 stocks are trading at 21-23x and tier-2
12-16x one-year forward earnings. Our price targets imply one-year forward P/E
valuations of 18-20x for tier-1 companies and 12-14x for tier-2 companies.
f P/E de-rating risk due to rupee appreciation still looms

P/E valuations of IT companies are highly sensitive to US dollar/Indian rupee
rates and the premium to the Sensex could narrow if the rupee appreciates
against the US dollar, as seen in the past.

Strategy | India Harmendra Gandhi
Exhibit 67. Q-Q US$ revenue growth in +ve territory Exhibit 68. Net employee adds also trending upward
(%) Infosys TCS Wipro (Nos) Infosys TCS Wipro

6.0 10,000
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
Source: Company data, Nomura research Source: Bloomberg, Nomura research
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
Source: Bloomberg, Nomura research

Media BULLISH
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.
2010F — a year of recovery Analysts

Jamil Ansari
c Advertising revenue growth expected to bounce back +91 22 4037 4192
After a decline in advertising revenues in 2009, we expect growth in advertising jamil.ansari@nomura.com
revenues to return to positive territory in 2010F. In fact, due to a weak base, we
Prabhat Awasthi
expect the headline growth number to be strong for the industry. Most of the user
+91 22 4037 4180
industries (like consumer goods and automobiles) are witnessing better
profitability compared with 2009, which could ensure that money is ploughed
back by these businesses through investment in advertising. We expect the
industry to record advertising revenue growth of more than 20% in 2010F.
Exhibit 72. Zee Entertainment: ad-revenue growth
(%)
35
30
25
20
15
10
5
0
(5)
(10)
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10F FY11F
d DTH to ensure steady subscription revenue growth

Robust growth in DTH subscriber additions should help broadcasters register
reasonable growth in their subscription incomes. The 17mn subscriber-strong
DTH industry is expected to add another 7-8mn subscribers in 2010F, which
would translate into significant additional subscription income for the
broadcasters in the form of DTH revenues. We expect DTH revenues at most of
the large broadcasters to grow by more than 50% in 2010F; this should ensure
decent growth in subscription income for these companies.

e Consolidation in the industry underway

There are signs of consolidation in the Hindi general entertainment channel (GEC) Weaker players getting bought
out by stronger names
space. In early December 2009, Turner International bought a 92% stake in NDTV
Imagine (the number five player in the Hindi GEC arena), which was languishing with
low viewership. There are expectations that the other channels that were launched in
late 2007, and which have failed to garner significant viewership, are planning to cease
operations as investors are no longer interested in sustaining respective losses.
Though the closure of these channels may not be particularly positive for the leaders in
terms of viewership gains, it eases pressure on certain cost items like employee
expenses and carriage fees.
f Competitive intensity might increase

Sony Entertainment Television, which had been a distant number four player in the Competition in the Hindi GEC
Hindi GEC market (gap of more than 100GRPs [gross rating points] from the number space is increasing again
three player) has improved viewership in recent months, thereby closing the gap with
the top three. Sony has stated that it plans to revamp programming in January 2010
with the inclusion of a number of shows from the “Yashraj Films” production house (a
credible name in the Hindi movie space). We think these shows may help Sony to
break into the top three, thereby increasing the competitive intensity in the Hindi GEC
market. Also, with the change in ownership, NDTV Imagine might make another push
towards making it to a top three slot. These moves indicate that competitive intensity in
the Hindi genre space, which had eased in 2H09, might resurface in 2010F. We
believe this is a worrying development for Hindi GEC broadcasters such as Zee
Entertainment as profitability in broadcasting tends to be highly sensitive to competitive
intensity due to high fixed costs.
g Positive on the sector

The media sector, which underperformed broader Indian markets significantly in the 18 Moderately positive on the sector
months ending July 2009, fared relatively well in 2H09. Positive developments in the
operating environment have led to these stocks to outperform other sectors in the past
six months. We maintain our positive stance. We note that the profitability of most of
the companies is highly sensitive to competitive intensity in the genre, which is
increasing. Hence, we are slightly less positive on the sector now compared with six
months ago, although our stance remains Bullish. Zee Entertainment is our top pick.

Metals BULLISH
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
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.
Striking red hot Analysts

Prabhat Awasthi
c Indian steel companies are in a sweet spot +91 22 4037 4180
Our global steel team expects a strong recovery in steel prices. Consequently,
we expect Indian steel prices to also improve significantly. Since the global price Alok Kumar Nemani (Associate)
increase would be led by rising raw material prices, Indian steel makers would +91 22 4037 4193
benefit significantly given their captive raw material advantage. alokkumar.nemani@nomura.com
d China remains the key steel demand driver…

Our China economist believes that the investment boom in China will continue in
2010 and beyond, driven by the large number of projects announced by
provincial governments. While the stimulus package has played its part, we
believe the bigger thrust will come from fixed asset investments by projects that
were stalled earlier due to concerns about an overheating economy.
e …resulting in rising raw material prices

With China producing more than 600mn tonnes of steel annually, the market for
key raw materials such as iron ore and coking coal has remained firm.
Incremental capacities in China are dependent on imported iron ore, resulting in
spot iron ore prices increasing from close to US$60/tonne in early 2009 to
US$100/tonne in November 2009. We expect iron ore contract prices to rise by
nearly 30% in FY11, driven by heavy Chinese demand.
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.
f Threat of cheap Chinese exports overdone

We believe concerns about overcapacity in China are overdone and that strong
steel demand growth should be able to absorb the increased production in the
country. At the same time, we expect the marginal cost of production for Chinese
mills to be high (at around US$550/tonne) as shown above. Therefore, we see
little risks to global steel prices on account of cheap exports from China.

g We expect steel prices to remain strong in FY11

With the combined impact of higher raw material costs (resulting in high cost of We believe steel prices should
production) and strong demand from China, we believe steel prices should remain at remain at US$650-700/tonne for
HR coils in FY11-12
US$650-700/tonne for HR coils in FY11-12. We have built in domestic prices
corresponding to US$650/tonne and US$700/tonne for FOB prices.
Exhibit 73. Global steel production has picked up over the past six months
140 USA EU CIS China World
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
Source: World Steel Organization
Exhibit 74. Domestic steel demand vs fixed asset investments

(%) FAI growth Steel demand growth
20
15
10
(5)
FY05 FY06 FY07 FY08 FY09F FY10F FY11F FY12F
Source: Ministry of Steel, Nomura estimates
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
Source: Ministry of Steel, Nomura research

Strategy | India Anil Sharma
Oil & Gas / Chemicals NEUTRAL

2010F will be a year of consolidation and will see the ramp-up of many projects that GAIL is our top pick in the Indian oil
commenced operations in 2009. KG-D6 production will reach its initial peak; the and gas sector. A key beneficiary of
Mangala field in Cairn’s Rajasthan block will also reach its peak; Reliance’s new increased gas volume, GAIL is a re-
refinery will see the first full year of operations. The year will also see a few new rating story, in our view.
starts-ups, chiefly BPCL’s Bina Refinery and GAIL’s HVJ upgradation projects.
a Catalysts Price
Price target
Recommendations of the Expert Group headed by Dr Kirit S Parikh (likely by end- Stock Rating (INR) (INR)
January) would be a key event, with implications for PSU oil companies. Progress GAIL BUY 420 500
on gas litigation and the LyondellBasell deal would be key issues for RIL. Prices as of 24 December 2009.
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.
Raising the bar Analysts

Anil Sharma
c 2010F – year of consolidation and growth in domestic production +91 22 4037 4338
With several new projects commissioned in 2009, we believe 2010F will witness anil.sharma.1@nomura.com
large production increases. We expect gas production to increase by 47% to
132mmscmd in FY10F and 31% in FY11F to 173mmscmd. Oil production will Ravi Kumar Adukia (Associate)
+91 22 4037 4232
also rise by 5% in FY10F and 17% in FY11F. Similarly, we expect new refining
ravikumar.adukia@nomura.com
capacities of around 53mmtpa to come on line by FY12F, which should further
widen the existing gap between refining capacity and product demand.
d High expectations from the Kirit Parikh report

There are growing expectations from the Expert Group, and the industry expects
the Group will provide a much more dynamic report. More than the report itself,
we believe the key will be the government’s willingness to implement suggested
changes, introduce much-needed pricing reforms and remove ad-hoc/non-
transparency issues in the subsidy-sharing mechanism.
e Gas litigation and possible LyondellBasell acquisition

With the Supreme Court hearings continuing for a couple of months, we continue
to believe that the RIL-RNRL gas litigation has reached the end-stage, and the
that the Supreme Court ruling could be announced in early 2010F. Some clarity
should also emerge on Reliance’s plans to acquire LyondellBasell.
f GAIL is our top pick, BPCL our top REDUCE

GAIL remains our top pick in the Indian oil and gas space. The company’s gas
transmission volumes have increased sharply — by ~40mmscmd over the past
nine months, compared with only ~23mmscmd over the previous nine years. The
stock has also outperformed the SENSEX by 14%/29%/29% over the past
three/six/twelve months. Apart from growth in gas volumes, its petrochemicals
business remains resilient. Incremental news flow is likely to be positive; GAIL is
likely to be given marketing margins for administered pricing mechanism (APM)
gas, and its subsidy burden could also ease. We estimate GAIL’s earnings will grow
by a sharp 32% in FY11F, and expect the share of utility type earnings from its
transmission business to increase to 68% in FY10F/FY11F (vs 51% in FY09). With an
increased share of utility earnings, GAIL is likely to be re-rated as a utility play, in our
view.

Strategy | India Anil Sharma
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
PDS Kerosene (INR/ltr) 16 17 23 16 17 18 Overall 58.5
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
Source: Petroleum Planning & Analysis Cell, Nomura estimates
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
(MMT) Refining capacity Product demand Capex

Project Owner (INRbn) Timeline
250
Gas transmission pipelines
225 DVPL GREP upgradation GAIL
- Dahej- Vijaipur P has e II (48") 44 Dec-10
200
- Vijaipur - Dadri P pipeline (48") 58 Dec 2009*
175
Dadri - Bawana - Nangal GAIL 23 Oct-10
150
125 Bina Refinery BPCL 104 Apr-10
100 Naphtha Cracker (800kta) IOCL 144 May-10
75
FY04 FY06 FY08 FY10F FY12F * October 2010 (With Compressor)
Source: Petroleum Planning & Analysis Cell, Nomura estimates

Pharmaceuticals BULLISH
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
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.
Key trends for 2010F Analyst

Saion Mukherjee
c Intent to improve profitability +91 22 4037 4184
There is a clear intent shown by many Indian pharma companies to improve saion.mukherjee@nomura.com
profitability, as opposed to the aggressive revenue growth strategy employed
previously. This is reflected in consolidation of businesses and cut-backs in
investments toward acquiring assets and innovation R&D.
Exhibit 82. Clear intent to improve profitability

Company Steps taken to improve profitability
Dr. Reddy's Exited 31 emerging markets as part of its consolidation strategy. Signed deal with
GSK to tap emerging market opportunities, which should be less risky and more
profitable. Significant cut-backs witnessed in innovation R&D spend.
Glenmark Sharp cut-backs in acquisition-led growth (primarily in emerging markets) as
management focuses on improving cashflows and lowering leverage. Out-
licensing deals help limit innovation R&D spend.
Lupin Continues to expand geographically. However, it has not followed its larger peers
in making large acquisitions. Acquisitions have been opportunistic (eg, to gain a
foothold in a new market) and the targets have been relatively small.
Piramal Healthcare The last big-ticket acquisitions were made in 2005-06 (custom manufacturing
facilities in UK and Canada). No further plans for inorganic growth in custom
manufacturing. Divested innovation R&D venture into Piramal Life Sciences.
Ranbaxy Focus on improving profitability in Western Europe, even at the cost of top-line
growth.
Sun Pharma Divested innovation R&D venture into a separate company, SPARC.
Management has been historically conservative and shied away from aggressive
inorganic growth strategy.
Source: Company data, Nomura research
d Growing interest in Indian pharma companies on global stage

Partnerships have been struck with global players across the pharmaceutical
chain. We believe such strategic tie-ups can lead to substantial synergy benefits.
e Renewed focus on the domestic market

Some of the larger Indian pharma companies had lost their focus on the
domestic market as they expanded elsewhere. However, this trend has been
reversed over the past year. We note that the Indian pharma market offers
relatively steady secular growth rates and, more importantly, is a highly profitable
market.

f Expanding opportunities in the US

We believe the US market outlook has improved, with unfolding differentiated pipelines,
product-specific opportunities, and a significant increase in patent expiries.
Exhibit 83. Quantum jump in patent expiries expected over 2010-12F
(US$ bn) Patent expiries by value

30
28
26
24
22
20
18
16
14
12
10
2008 2009 2010 2011 2012
Source: Glenmark
g Custom manufacturing — fundamentals in place

The current slowdown in custom manufacturing is temporary, in our view, as we
believe that the underlying fundamentals remain strong. In fact, we are of the view that
the worst is behind us as we do not expect further inventory de-stocking by big pharma
companies.
h Potential upside from innovation R&D

We believe there is little value attributed to innovation R&D pipelines currently in stock
prices. As companies continue to invest in innovation R&D, we believe there is
potential for value creation, either through strategic tie-ups or out-licensing deals, in
the next two years.

Strategy | India Aatash Shah
Property BULLISH
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
Indian property sector can move closer to its volume potential through rational
pricing. A recovery in commercial space leasing is likely in CY10F.
Not yet out of the woods Analyst

Aatash Shah
c Residential revival yet to occur despite perceptions +91 22 4037 4194
Contrary to popular perception, the volume recovery in the residential sector has aatash.shah@nomura.com
been limited and localised in nature. Only the areas of Mumbai and National
Capital Region (NCR) have shown a semblance of recovery, while other cities
such as Bangalore and Chennai are struggling to pick themselves out of the
slowdown. Hyderabad and Kolkata are moving from bad to worse in terms of
residential transaction volumes. This makes CY10/FY11F one of the most crucial
years in deciding whether the Indian property sector can move from a high-
priced/low-volume model to a more desirable affordably-priced/high-volume
model. We believe that the latter model is more desirable, given the potential for
substantial volume increases in India with a small cut in pricing, as witnessed
from March to May 2009.
If volumes do not recover from here, we expect that NAVs of developers with
rapid build-up in volumes are likely to witness downgrades.
Exhibit 84. Mumbai: good upturn in residential property transactions
(mn sqft) Mumbai (mn sqft)

9 98
8 92
7 86
6 80
5 74
4 68
3 62
2 56
1 50
0 44
May-08
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
Total absorption (LHS) Unsold stock (RHS)
Source: Propequity, Nomura research

Strategy | India Aatash Shah
Exhibit 85. Bangalore: poor recovery in residential property transactions
(mn sqft) Bangalore (mn sqft)

8 84
7 80
76
6 72
5 68
64
4
60
3 56
2 52
48
1 44
0 40
May-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
Total absorption (LHS) Unsold stock (RHS)
Source: Propequity, Nomura research
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.
d Office space recovery on the way

Demand for office space has been very weak in the past year, while supply has been
relentless. This has resulted in vacancies increasing to 12% in Mumbai and NCR, and
to 22-25% in Chennai, Hyderabad and Pune. This has seen a rental correction of
about 25-35% in most cities. Only in the past quarter has there been a ray of light in
terms of leasing picking up pace, with rentals starting to consolidate. As per our
channel checks, Unitech and DLF have been successful in leasing more than 1mn sqft
of space each, while Brigade Developers is in talks with Oracle for the sale of its 1.1mn
sqft office development in Bangalore. Ishaan Plc leased out 0.6mn sqft of space in
Hyderabad in 3Q CY09. We expect CY10/FY11F to be a story of improving leasing
demand in the office space as the IT/ITeS industry recovers and hires, though the
significant oversupply will likely keep rentals at current levels.
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.

Strategy | India Sachin Gupta, CFA
Telecoms NEUTRAL
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
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
A tale of two halves Analysts

Sachin Gupta, CFA
c 1H — from voice to SMS to data +65 6433 6968
sachin.gupta@nomura.com
Virtually everyone, from operators to regulators, expects the market to remain
uncertain and volatile for the next three to six months. Price wars continue, on B. Roshan Raj
calling, roaming rates or SMS, which provides little certainty on APRU trends. +65 6433 6961
Resolution on 3G and MNP will at least remove some uncertainty but the broshan.raj@nomura.com
subsequent three to six months could see greater competition and churn. Further
charges on spectrum beyond 6.2Mhz also seem likely, and a change in M&A Neeraja Natarajan (Associate)
regulations is not imminent. The major disconnect still appears to be between +91 22 6723 5231
neeraja.natarajan@nomura.com
what TRAI and the operators are thinking. Operators are seeking an amendment
to M&A regulations, but we did not get the impression in recent industry meetings
that major changes are forthcoming. Some amendments could be announced in
Sector valuations
the next couple of months, but the regulator wants to see further investments Market cap EV/EBITDA
Stock (INRbn) P/E (x) (x)
made in the country (50% rollout obligation within three years). Therefore, Bharti 1,224 15.3 8.6
spectrum trading/sharing may not be permitted at this stage, in our view. RCOM 361 13.5 7.1
Based on closing price on 8th December
d 2H — a shift from launch plans to sustainable plans Source: Bloomberg, Nomura
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.
e Bharti — a solid franchise despite current hiccups

We like Bharti’s solid execution capability, its superior returns profile among
various Indian telcos and its strong balance sheet. The company should emerge
as one of the early and strong beneficiaries post this turbulent phase. Core Bharti
is cash flow positive, and on a consolidated basis, we still see potential for the
group to be free cash by FY11. Bharti remains focussed on expanding its
overseas’ footprint. However, in the absence of M&A, we see potential near-term
capital management, although the probability of this remains low. At 13-14x
FY11F EPS, we believe the stock is fairly priced.

Strategy | India Sachin Gupta, CFA
Exhibit 86. Bharti, RCOM — revenue outlook Exhibit 87. Bharti, RCOM — margin outlook
Bharti RCOM (%) Bharti RCOM

(INRmn) Bharti y-y chg % RCOM y-y chg % (%) 45
500,000 70
60 40
400,000
50
35
300,000 40
200,000 30 30
20
100,000 25
10
0 0 20
2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012
Source: TRAI, Nomura research Source: TRAI, Nomura research
Exhibit 88. India — subscriber and wireless revenue trends

(mn) Subscribers (LHS) q-q change (RHS) (%) (INRbn) Wireless gross revenues (LHS) (%)
500 14 300 q-q change (RHS) 12
250 10
12
400 8
10 200
300 6
8
150 4
200 6 2
100
4 0
100 50
2 (2)
0 0 0 (4)
Mar-08
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
Exhibit 89. India — subscriber share, pricing and usage trends

Tata (INR) Bharti RCOM (mins) Bharti RCOM
HFCL
Teleservices Vodafone 450 Idea Vodafone 600 Idea Vodafone
0.1%
10.0% 17.8% 550
Shyam 400
500
0.4% 350
Reliance 450
18.5% 300
400
BSNL Bharti 250 350
11.5% 23.7% 200 300
BPL
Mar-08
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

Transport Infrastructure BULLISH

Ports and logistics companies will likely benefit from an imminent recovery in Mundra Port & SEZ offers a strong
India’s trade. We highlight Mundra Port & SEZ and Container Corp of India to play and diversified play on rising traffic
the theme. While airports will also benefit from rising air traffic, we believe as well as capacity shortages at
regulatory challenges to aero-revenue pricing could pose downside risks and the major Indian ports. GMR Infra is our
market already seems to be pricing in the best-case for non-aero revenue potential. top REDUCE on account of steep
a Catalysts valuation as we believe the best-
case scenario is already factored in.
Continued strength in port traffic is the key to MSEZ and CCRI, while non-aero
revenue and real-estate monetisation will drive GVKP and GMRI, in our view.
Price
Pick-up in industrial activity will likely lead to a turnaround in EXIM traffic benefiting Mundra Port & SEZ BUY 560.50 615
(MSEZ IN)
port entities and container logistics companies. Similarly, an improving macro-
GMR Infrastructure REDUCE 67.15 47
economy will benefit air traffic and related revenue streams at the airports. The key (GMRI IN)
is to pick stocks that still offer value after a substantial run-up in 2009. Prices as of 24 December 2009
Play the recovery on rising traffic Analyst

Amar Kedia
c Recovery in the economy to pave way for EXIM traffic growth +91 22 4037 4182
amar.kedia@nomura.com
There are visible signs of a recovery in the manufacturing and construction
sectors. As such, our economics team has raised its FY10F average IIP growth
Recommendation summary
forecast to 9.5% from 7%. Historically, EXIM traffic growth numbers have
Target
mirrored IIP growth trends, which is a clear measure of activity levels in an Price price
economy. US PMI and Euro zone PMI also rose above 50.0 in August 2009 and Stock (INR) (INR) Rating
October 2009, respectively. Given that both these PMI act as leading indicators Container Corp of 1270.00 1,300 NEUTRAL
India (CCRI IN)
for container throughput growth in Asia, the continuing upward trend is seen as a Mundra Port & SEZ 560.50 615 BUY
positive indicator for EXIM volumes in 2010. (MSEZ IN)
GMR Infrastructure 67.15 47 REDUCE
(GMRI IN)
d Ports and logistics companies to benefit from rising traffic GVK Power & 47.60 24.3 REDUCE
Infrastructure
An upward trend has already been observed in railway freight data and port data, (GVKP IN)
including that for containers. We believe companies operating in the port space Price as of 24 Dec
and those directly involved in container cargo movement will benefit from the Source: Nomura
expected surge in 2010. We recommend Mundra Port & SEZ (MSEZ IN, BUY)
and Container Corp of India (CCRI IN, NEUTRAL) as our top picks in the space.
e Recovery to benefit traffic at airports as well

Traffic at privatised metro airports was growing at 15-30% pa until CY08 before
the recession. Following two years of negative growth, some key airports are
now witnessing revival and are expected to benefit further as international traffic
also rises, leading to higher passenger spend at duty free retail shops.
f Regulatory issues, real-estate and passenger spends are the key

A pick up in air traffic is just one of several things that need to fall in place for the
airport sector in India; the others being regulatory approval for a shift to RoCE
model for aero-revenues, monetisation of real-estate and commercialisation of
several potentially lucrative non-aero revenue contracts such as advertisement,
retail shops, etc. We believe the market is factoring in the best-case scenario for
airport valuations, but we remain sceptical of value-creation potential from these
projects in the medium term for conglomerates such as GMR Infrastructure
(GMRI IN, REDUCE) and GVK Power & Infrastructure (GVKP IN, REDUCE).

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
60 (%) Total commodity traffic at major ports ex oil (%)

US PMI Euro zone PMI
30 18
IIP (RHS)
55 25 16
20 14
50 12
15
10
45 10
8
5
6
40 0 4
(5) 2
35
(10) 0
30 (15) (2)
May-08
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
Source: Bloomberg Source: Business Beacon, Nomura research
Exhibit 94. Container traffic at ports already rising… Exhibit 95. …led by rising imports; exports to follow
(indexed to 1)
('000 TEUs) All

All Major
major Ports
ports (LHS) (% y-y) 1.1 Monthly Exports
800 Growth
% (RHS)
Growth YoY 10 Monthly Non-oil Imports
700 1.0
5 CRB Index
600 0 0.9
500
(5)
400 0.8
(10)
300
0.7
200 (15)
100 (20) 0.6

0 (25)
0.5
May-08
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
Source: IPA, Nomura research Source: Bloomberg, Nomura research

Mahindra and Mahindra M M I N
AU TO S | I N D I A Maintained
Kapil Singh +91 22 4037 4199 kapil.singh@nomura.com
BUY
~ Action Closing price on 24 Dec INR1,061.85
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.
Strong growth across segments Key financials & valuations

31 Dec (INR mn) FY08 FY09F FY10F FY11F
Revenue 115,914 131,860 157,196 187,930
c Structural improvement in tractor demand Reported net profit 11,038 7,869 18,523 21,040
Normalised net profit 9,386 8,265 17,829 21,040
We look for a structural improvement in tractor demand in India, mainly Normalised EPS (INR) 40.45 28.84 67.87 77.10
owing to farm labour shortages created under the NREGA. About 44mn Norm. EPS growth (%) 34.39 30.29 65.33 77.10
Norm. P/E (x) 35.8 40.7 18.9 16.0
people were employed under this scheme for three months last year. EV/EBITDA (x) 21.6 26.6 12.4 10.3
Hence, an average of 11mn people were employed at any one point, Price/book (x) 6.0 5.6 4.2 3.5
representing about 8% of rural households. In addition, the Indian Dividend yield (%) (1.2) (1.0) (1.8) (2.1)
ROE (%) 27.9 16.4 29.6 26.3
government focused on providing floor prices for agri commodities in Net debt/equity (%) 39.7 47.1 26.6 21.1
2009. We believe that the sharp price hikes will help to offset the impact Earnings revisions
Previous norm. net profit 8,265 17,829 21,040
of lower crop production attributable to weak monsoons. Tractor
Change from previous (%) - - -
demand is now growing at a 23% seasonally adjusted annualised run- Previous norm. EPS (INR) 28.84 67.87 77.10
rate (SAAR), ahead of our estimate of 15.6%. Source: Compa ny, Nomura e stimate s
Share price relative to MSCI India

d Launch of new UV — Xylo has been very successful Price
(Rs)
MM’s recent launch of its new utility vehicle (UV), Xylo, has been very 1,170 Rel MSCI India 220
200
successful, lifting its UV market share from 48% to 58%. The current UV 970
180
SAAR is at 37.6%, versus our estimate of just 20%. The company also 770 160
570 140
plans to launch an all-new SUV in 1Q11F. 120
370
100
MM plans to enter the commercial vehicle segment from January 2010. 170 80
Jan09
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

Mahindra and Mahindra Kapil Singh
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.
Exhibit 96. India: UV market share

(%) GM Toyota MM TTMT
70
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
Source: Society of Indian Automobile Manufacturers (SIAM), Nomura research
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
Valuation and ratio analysis

FD normalised P/E (x) 31.0 35.2 16.3 13.8
FD normalised P/E at price targe 35.8 40.7 18.9 16.0
Reported P/E (x) 26.3 36.9 15.7 13.8
Dividend yield (%) (1.2) (1.0) (1.8) (2.1)
Price/cashflow (x) 18.7 15.5 11.0 9.9
Price/book (x) 6.0 5.6 4.2 3.5
EV/EBITDA (x) 21.6 26.6 12.4 10.3
EV/EBIT (x) 26.0 35.3 14.7 12.4
Gross margin (%) 31.3 27.5 33.8 33.3
EBITDA margin (%) 12.3 9.0 15.9 15.9
EBIT margin (%) 10.2 6.8 13.4 13.2
Net margin (%) 9.5 6.0 11.8 11.2
Effective tax rate (%) 24.4 19.5 24.9 24.5
Dividend payout (%) (29.1) (39.7) (30.0) (30.0)
Capex to sales (%) 6.0 10.1 8.9 7.4
Capex to depreciation (x) 2.9 4.6 3.5 2.8
ROE (%) 27.9 16.4 29.6 26.3
ROA (pretax %) 15.0 8.2 15.4 15.6
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)

Cashflow (INR mn)

Year-end 31 Dec FY08 FY09F FY10F FY11F
EBITDA 14,248 11,849 24,984 29,908
Change in working capital 2,133 8,524 3,924 3,454
Other operating cashflow (822) (1,675) (2,575) (3,856) Solid free cashflow growth
Cashflow from operations 15,560 18,698 26,333 29,505
Capital expenditure (6,923) (13,380) (14,000) (14,000)
Free cashflow 8,637 5,318 12,333 15,505
Reduction in investments (19,776) (15,714) (8,333) (8,333)
Net acquisitions - - - -
Reduction in other LT assets - - - -
Addition in other LT liabilities - - - -
Adjustments - - - -
Cashflow after investing acts (11,139) (10,396) 4,000 7,172
Cash dividends (3,211) (3,121) (5,559) (6,313)
Equity issue 285 361 7,000 -
Debt issue 9,511 20,461 (9,082) 1,569
Convertible debt issue - - - -
Others - - - -
Cashflow from financial acts 6,585 17,701 (7,640) (4,744)
Net cashflow (4,554) 7,306 (3,640) 2,427
Beginning cash 13,261 8,612 15,744 12,177
Ending cash 8,706 15,918 12,104 14,604
Ending net debt 17,258 24,783 19,269 18,411
Balance sheet (INR mn)

As at 31 Dec FY08 FY09F FY10F FY11F
Cash & equivalents 8,612 15,744 12,177 14,604
Marketable securities - - - -
Accounts receivable 10,049 10,437 12,493 14,984
Inventories 10,841 10,607 14,098 16,851
Other current assets 7,052 13,842 11,957 13,535
Total current assets 36,554 50,629 50,726 59,973
LT investments 42,151 57,864 66,197 74,531
Fixed assets 23,609 32,143 42,190 51,182
Goodwill - - - -
Other intangible assets (432) 489 489 489
Other LT assets - - - -
Total assets 101,881 141,126 159,602 186,175
Short-term debt - - - -
Accounts payable 22,871 34,431 32,511 38,992
Other current liabilities 9,639 13,547 23,054 26,846
Total current liabilities 32,510 47,978 55,565 65,839
Long-term debt 25,871 40,528 31,446 33,014
Convertible debt - - - -
Other LT liabilities - - - -
Total liabilities 58,381 88,505 87,011 98,853
Minority interest - - - -
Preferred stock - - - -
Common stock 2,431 2,792 2,886 2,886
Retained earnings 41,070 49,829 69,705 84,435
Proposed dividends - - - -
Other equity and reserves - - - -
Total shareholders' equity 43,501 52,621 72,590 87,321
Total equity & liabilities 101,881 141,126 159,601 186,174
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)

Tata Motors T T M T I N
AU TO S | I N D I A Maintained
Kapil Singh +91 22 4037 4199 kapil.singh@nomura.com
REDUCE
~ Action Closing price on 24 Dec INR779.95
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
a Catalysts Difference from consensus 54.8%

Source: Nomura
We believe that management not delivering on its guidance to make JLR free
cashflow positive by FY11F could be a key negative catalyst for the stock.
Nomura vs consensus
Anchor themes Consensus is not adjusting
Cashflow generation at JLR remains clouded. Volume recovery in Europe is likely valuations for Tata Motors’ high R&D
to be weak and quality rankings slipped in 2009. The company needs to spend capitalisation policy and is assuming
about £600mn per year for R&D. Unless the volume recovery is strong, JLR looks free cashflow generation at JLR.
set to remain free cashflow negative.
Cashflow concerns remain at JLR

Key financials & valu ations
31 Dec (INR mn) FY 08 FY09F FY10F FY 11F
Revenue 283,622 254,712 326,164 399,722
c Much higher R&D capitalisation than peers Reported net profit 20,289 10,013 25,082 29,016
We believe that the street has ignored Tata Motors’ (TTMT) high R&D Normalised EPS (INR) 47.43 19.48 46.11 53.35
capitalisation compared with peers. In FY09, TTMT capitalised 96% of Norm. EPS growth (%) 35.57 7.96 46.11 53.35
Norm. P/E (x) 11.8 52.6 9.1 7.9
its R&D expenses in India, compared with peers’ ~55%. Moreover, it
EV/EBITDA (x) 17.4 36.0 14.3 10.9
expensed only 10% of R&D at JLR, compared with 60% for global Price/book (x) 3.8 3.3 2.7 2.4
peers. Hence, we believe the EBITDA numbers require adjustment for Dividend yield (%) 2.2 0.9 2.0 2.4
comparison with peers in order to give a clear picture of cashflows. ROE (%) 27.6 10.0 18.0 17.5
Net debt/equity (%) 49.5 98.3 110.4 91.0
Earnings revisions
d Weak recovery expected in Europe; falling quality Previous norm. net profit 4,094 25,082 29,016
rankings Change from previous (%) na na na
Previous norm. EPS (INR) 19.48 46.11 53.35
JLR’s biggest market is Europe, which contributes 50% of volume. Source: Co mpany, Nomura esti mates
Nomura’s auto analyst in Europe, Dorothee Cresswell, expects a
weak recovery in volumes in 2010F. In addition, JLR’s quality Share price relative to MSCI India
rankings were among the lowest in 2009, according to JD Power’s (Rs) Pri ce
865 R el MSC I Indi a 310
Initial Quality Study. We think this augurs badly for a premium car 765
260
maker. JLR’s volumes remain ~30% below 2007 levels, the only year 665
565 210
it was profitable in the past five years. 465
365 160
265
e High R&D requirements to cut emissions; cashflow 165
110
65 60
concerns
J an09
May09
Nov09
Feb09
Mar09
Apr09
Jun09
Aug09
Sep09
Oct09
Dec08
Jul09
We estimate JLR requires ~£600mn for R&D expenses. Even

assuming strong margin expansion of 6pp and 20% higher volumes 1m 3m 6m
Absolute (INR) 20.0 29.1 118.3
than current levels, the company will not break even on a cash basis,
Absolute (US$) 19.3 32.7 127.0
in our view. We believe the business will continue to destroy value for Relative to Index 18.0 23.7 97.5
TTMT shareholders through continued cash burn. Market cap (US$mn) 8,018
Estimated free float (%) 40
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
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
Mahindra and Mahindra, as well as dedicated freight corridor railways.

Tata Motors Kapil Singh
We value Tata Motors at INR419/share

We value Tata Motors on an EV/EBITDA basis. For the purpose of valuation, we have used
normalised EV/EBITDA (for comparison with other OEMs), assuming 2% of sales as
normalised R&D expense.
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).
Key risks to our call:
z A strong recovery in volumes in Europe, leading to JLR volumes touching 2007

levels.
z Very strong growth in industrial production for the next few years, leading to high
demand for medium and heavy commercial vehicles.
Exhibit 99. TTMT’s Indian business R&D capitalised

R&D capitalised as % of net sales FY05 FY06 FY07 FY08 FY09
TTMT 1.0 1.7 2.3 3.7 5.6
AL 1.2 0.9 1.1 1.2 2.5
MSIL 0.3 0.2 0.1 0.1 0.1
MM 0.2 0.1 0.3 0.3 2.2
Source: Companies, Nomura research
Exhibit 100. JD Power Initial Quality Study (IQS) rankings

2008 2009
JD Power Survey Defects/100 Rank (/ 37) Defects/100 Rank (/ 38)
Lexus 99 3 84 1
Porsche 87 1 90 2
Mercedes Benz 104 4 101 6
Jaguar 112 9 134 29
Land Rover 161 35 150 36
Industry average 118 NA 108 NA
Source: JD Power, Nomura Research
Exhibit 101. JLR volumes in Europe

(Numbers) 2007 2008 2009
25,000
20,000
15,000
10,000
5,000
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Auto data, Nomura research

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
V aluation and ratio analysis

FD normalised P/E (x) 21.9 97.9 16.9 14.6
FD normalised P/E at price target (x) 11.8 52.6 9.1 7.9
Reported P/E (x) 16.4 40.0 16.9 14.6
Dividend yi eld (%) 2.2 0.9 2.0 2.4
P ri ce/cashflow (x) 4.4 29.0 10.1 8.7
P ri ce/book (x) 3.8 3.3 2.7 2.4
E V/EBITDA (x) 17.4 36.0 14.3 10.9
E V/EBIT (x) 23.1 85.4 18.9 14.0
Gross margin (% ) 26.4 23.6 30.4 29.8
E BITDA margin (%) 9.4 5.9 12.8 13.5
E BIT margin (%) 7.1 2.5 9.7 10.4
Net margin (%) 7.2 3.9 7.7 7.3
E ffective tax rate (% ) 26.5 3.0 16.1 14.5
Dividend payou t (%) 32.5 34.5 34.5 34.5
Capex to sales (%) 16.2 19.5 8.0 6.4
Capex to depreciation (x) 7.1 5.7 2.5 2.1
ROE (%) 27.6 10.0 18.0 17.5
Substantial slowdown in EPS
ROA (pretax %) 9.7 2.1 7.6 8.7
growth in FY11F
Growth (%)
Revenue 3.0 (10.2) 28.1 22.6
E BITDA (8.2) (43.2) 176.8 28.5
E BIT (13.1) (68.3) 395.0 32.4
Normalised EPS (13.4) (77.6) 479.0 15.7
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

Cashflow (INR m n)
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
Bala nce sheet (INR mn)

As at 31 Dec FY08 FY09F FY10F FY11F
Cash & equivalents 23,973 11,418 14,303 16,788
Marketable securities - - - -
A ccounts receivable 11,149 15,499 15,620 18,334
Inventories 24,218 22,298 25,636 29,433
Other current assets 44,498 47,701 59,737 66,056
Total current assets 103,838 96,917 115,296 130,612
LT investments 49,103 129,681 206,485 206,485
Fixed assets 104,523 145,993 161,632 175,165
Goodwill - - - -
Other intangible assets - - - -
Other LT assets - - - -
Total assets 257,463 372,591 483,413 512,262
S hort-term debt - - - -
A ccounts payable 83,917 87,313 105,398 122,574
Other current liabilities 32,407 29,701 33,533 36,709
Total current liabilities 116,324 117,013 138,931 159,283
Long-term debt 62,805 131,656 186,736 176,235
Convertible debt - - - -
Other LT liabilities (61) 1,621 1,621 1,621
Total liabilities 179,068 250,290 327,288 337,139
Minority interest - - - -
P referred stock - - - -
Common stock 3,855 5,141 5,439 5,439
Reta ined earnings 74,540 117,161 150,686 169,684
P rop osed dividends - - - -
Other equity and reserves - - - -
Total shareholders' equity 78,395 122,302 156,125 175,123
Total equity & liabilities 257,463 372,591 483,413 512,262
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)

State Bank of India S B I N I N
B AN K S | I N D I A Maintained
Mahrukh Adajania +91 22 4037 4157 mahrukh.adajania@nomura.com
Sreekanth Akula (Associate) +91 22 4037 4361 sreekanth.akula@nomura.com
BUY
~ Action Closing price on 24 Dec INR2,215
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)
competitive pricing strategies. We reiterate our BUY call. Price target under review,
with an upward bias.
FY10F net profit (INRmn) 100,403
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.
Still our top pick Key financials & valu ations

31 Mar (INRmn) FY 08 FY09F FY10F FY 11F
PPOP 131,076 179,152 196,437 240,312
c Aggressive loan pricing strategies should benefit SBI Reported net profit 67,291 91,212 100,403 118,156
SBI is offering competitive rates on housing and auto loans to improve Normalised EPS (Rs) 106.5 143.7 158.1 186.1
its loan/deposit ratio, which has been the key drag on NIM in the past Norm. EPS growth (%) 53.0 34.8 10.1 17.7
Norm. P/E (x) 20.2 15.0 13.6 11.6
two quarters. SBI can price its loans lower than other banks because
Price/adj. book (x) 2.8 2.4 2.1 1.8
its incremental cost of funds is lower than other banks’, given its high Price/book (x) 2.8 2.4 2.1 1.8
CASA and rapid deposit rate cuts. Rate cuts will likely continue to Dividend yield (%) 1.0 1.3 0.8 0.8
improve loan/deposit ratios at SBI, which bodes well for margins. ROE (%) 16.7 17.0 16.3 16.9
ROA (%) 1.0 1.1 0.9 0.9
Earnings revisions
d Recent deposit rate cuts to help margins in long run Previous norm. net profit 91,212 100,403 118,156
SBI has been aggressive in cutting deposit rates, which should boost
its NIM in the long run. However, this is unlikely to help near-term Source: Co mpany, Nomura esti mates
margins given that the bank’s 1,000-day deposit scheme (effective
October 2008 to September 2009) increased the overall maturity Share price relative to MSCI India
profile of deposits. (Rs ) P ri ce
2,730 R e l M SC I In di a 105
100
e Continued NIM improvement 2,230 95
90
We expect incremental NIM to improve, with the bank’s improving 1,730
85
loan/deposit ratio, rapid deposit rate cuts and re-pricing of old high- 1,230 80
75
cost deposits. Around 16% of SBI’s total deposits will mature in 2H 730 70
Mar09
F eb09
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
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
securities between its mark-to-market and held-to-maturity portfolios.

State Bank of India Mahrukh Adajania
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.
Continued NIM improvement

Exhibit 102. SBI: historical net interest margin
Period NIM (%)
9M FY07 3.32
FY07 3.09
1Q FY08 3.27
1H FY08 3.01
9M FY08 3.01
FY08 3.07
1Q FY09 3.03
1H FY09 3.16
9M FY09 3.15
FY09 2.93
1Q FY10 2.30
2Q FY10 2.50
Source: Company data
Exhibit 103. Home loan disbursements

(INRmn) 1Q FY10 FY09 FY08
ICICI Bank + ICICI Home Finance 11,000 102,000 185,000
HDFC 86,800 396,500 328,750
SBI 48,000 138,400 116,700
Axis Bank 9,200 NA NA
HDFC Bank 12,000 NA NA
LIC Housing Finance 24,300 87,620 70,715
Note: Disbursements for HDFC and LIC include developer loans

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

FD normalised P/E (x) 30.9 20.2 15.0 13.6 11.6
FD normalised P/E at price target (x) 37.2 24.3 18.0 16.4 13.9
Reported P/E (x) 30.9 20.2 15.0 13.6 11.6
Dividend yield (%) 0.7 1.0 1.3 0.8 0.8
Price/book (x) 3.6 2.8 2.4 2.1 1.8
Price/adjusted book (x) 3.6 2.8 2.4 2.1 1.8
Net interest margin (%) 2.83 2.82 2.63 2.29 2.41
Yield on interest earning assets (%) 7.43 8.11 8.03 7.32 7.29
Cost of interest bearing liabilities (%) 5.08 5.80 5.97 5.66 5.55
Net interest spread (%) 2.35 2.32 2.05 1.66 1.74
Non-interest/operating income (%) 32.3 33.8 37.8 37.4 33.3
Cost to income (%) 56.4 49.0 46.6 47.7 45.3
Effective tax rate (%) 45.8 36.9 40.1 33.5 33.8
Dividend payout (%) 23.5 22.6 22.9 20.8 17.7
ROE (%) 12.4 16.7 17.0 16.3 16.9
ROA (%) 0.69 1.04 1.08 0.93 0.93
Operating ROE (%) 23.0 26.5 28.5 24.5 25.5
Operating ROA (%) 1.28 1.65 1.81 1.41 1.40
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

Balance Sheet (INRmn)

As at 31st March FY07 FY08 FY09 FY10F FY11F
Cash and equivalents 25,301 32,203 42,955 54,320 62,468
Inter-bank lending 52,433 57,150 265,987 362,132 416,451
Deposits with central bank 265,463 483,143 512,507 555,430 633,650
Total securities na na na na na
Other interest earning assets 1,667,975 1,997,442 2,982,129 3,895,688 4,397,136
Gross loans 3,420,770 4,221,812 5,485,398 6,577,295 7,559,623
Less provisions (47,405) (54,130) (60,366) (67,256) (73,079)
Net loans 3,373,365 4,167,682 5,425,032 6,510,038 7,486,544
Long-term investments na na na na na
Fixed assets 28,189 33,735 38,378 44,135 50,756
Goodwill na na na na na
Other intangible assets na na na na na
Other non IEAs 252,923 444,170 377,333 433,933 499,023
Total assets 5,665,649 7,215,525 9,644,321 11,855,675 13,546,028
Customer deposits 4,355,211 5,374,039 7,420,731 9,053,292 10,411,286
Bank deposits, CDs, debentures 58,198 128,025 36,783 66,000 66,000
Other interest bearing liabilities 500,531 602,142 803,798 833,788 867,167
Total interest bearing liabilities 4,913,939 6,104,207 8,261,312 9,953,081 11,344,453
Non interest bearing liabilities 438,728 620,730 803,532 1,250,538 1,454,808
Total liabilities 5,352,667 6,724,937 9,064,844 11,203,618 12,799,261
Minority interest na na na na na
Common stock 5,263 6,316 6,349 6,349 6,349
Preferred stock na na na na na
Retained earnings 307,723 484,012 573,128 645,708 740,418
Proposed dividends na na na na na
Other equity na na na na na
Shareholders' equity 312,983 490,588 579,477 652,057 746,767
Total liabilities and equity 5,665,649 7,215,525 9,644,321 11,855,675 13,546,028
Non-performing assets (INRmn) 99,982 128,373 155,886 215,561 248,112
Balance sheet ratios (%)

Loans to deposits 78.5 78.6 73.9 72.7 72.6
Equity to assets 5.5 6.8 6.0 5.5 5.5
Balance sheet growth to pick
Asset quality & capital
up in FY11F
NPAs/gross loans (%) 2.9 3.0 2.8 3.3 3.3
Bad debt charge/gross loans (%) 0.42 0.47 0.45 0.79 0.74
Loss reserves/assets (%) 0.84 0.75 0.63 0.57 0.54
Loss reserves/NPAs (%) 47.4 42.2 38.7 31.2 29.5
Tier 1 capital ratio (%) 7.9 9.3 9.3 8.9 8.7
Total capital ratio (%) 13.2 14.0 14.8 14.1 13.5
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

Ambuja Cements A C E M I N
B U I L D I N G M ATE R I AL S | I N D I A Maintained
Jamil Ansari +91 22 4037 4192 jamil.ansari@nomura.com
REDUCE
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
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.
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
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
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
f Looks expensive relative to sector peers 1m 3m 6m

Absolute (INR) 10.3 1.3 10.6
Currently trading at an EV/tonne of US$140, Ambuja appears to be Absolute (US$) 9.7 4.2 15.0
one of the most expensive cement stocks in India. Relative to Index 8.4 (4.9) (14.5)
Market cap (US$mn) 3,223
Estimated free float (%) 53.6
g REDUCE call, PT of INR67 reaffirmed 52-week range (INR) 110.3/63.6
We value Ambuja on the basis of the long-term expected return on the 3-mth avg daily turnover (US$mn) 8.98
Stock borrowability Hard
replacement cost of assets. The long-term growth rate and pre-tax
WACC are assumed at 0% and 12%, respectively. Our PT of INR67 Holcim 46.45
implies potential downside of 33%. Risks to our call: 1) stronger-than-
expected demand growth could result in a strong pricing environment; Source: Co mpany, Nomura esti mates
2) the stock could find support if parent Holcim goes for majority control.

Ambuja Cements Jamil Ansari
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
EBITDA 17,779 19,012 16,874

Depreciation 2,598 3,067 3,708
Amortisation - - -
EBIT 15,182 15,945 13,166
Net interest expense 321 657 770 We expect net profit to decline
Associates & JCEs - - - by 17% in FY10F due to lower
Other income 1,754 1,555 1,555 cement realisation and higher
Earnings before tax 16,615 16,843 13,952 costs
Income tax 5,676 5,659 4,688
Net profit after tax 10,939 11,183 9,264
Minority interests - - -
Other items - - -
Preferred dividends - - -
Normalised NPAT 10,939 11,183 9,264
Extraordinary items 3,083 - -
Reported NPAT 14,023 11,183 9,264
Dividends
Transfer to reserves

FD normalised P/E (x) 13.8 13.5 16.3
FD normalised P/E at price target (x)
Reported P/E (x) 13.8 13.5 16.3
Dividend yield (%) 2.2 2.2 2.2
Price/cashflow (x) 11.2 10.6 11.7
Price/book (x) 2.7 2.4 2.2
EV/EBITDA (x) 7.5 7.2 8.2
EV/EBIT (x) 8.6 8.5 10.3
Gross margin (%) 48.5 48.7 46.4
EBITDA margin (%) 31.3 30.1 26.2
EBIT margin (%) 27.2 25.6 20.9
Net margin (%) 17.5 16.4 13.2
Effective tax rate (%) 28.8 33.6 33.6
Dividend payout (%) 35.8 35.0 42.3
Capex to sales (%)
Capex to depreciation (x)
ROE (%) 21.2 18.5 13.9
ROA (pretax %) 23.6 20.6 15.6
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

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)
Balance sheet (INRmn)

As at 31 Dec FY08 FY09F FY10F
Cash & equivalents 8,518 12,595 7,336
Marketable securities 0 0 0
Accounts receivable 2,246 2,489 2,697
Inventories 9,398 9,878 10,705
Other current assets 234 234 234
Total current assets 20,396 25,196 20,972
LT investments 3,324 3,324 3,324
Fixed assets 51,400 60,048 68,981
Goodwill 0 0 0
Other intangible assets 0 0 0
Other LT assets 2,999 3,117 3,420
Total assets 78,118 91,685 96,697
Short-term debt
Accounts payable 10,032 9,878 10,705
Other current liabilities 4,706 3,776 4,472
Total current liabilities 14,738 13,654 15,178
Long-term debt 2,887 9,804 7,304
Convertible debt 0 0 0
Other LT liabilities (43) 450 1,093
Total liabilities 17,582 23,908 23,575
Minority interest 0 0 0
Preferred stock 0 0 0
Common stock 3,045 3,045 3,045
Retained earnings 53,680 60,945 66,289
Proposed dividends 0 0 0
Other equity and reserves 3,811 3,788 3,788
Total shareholders' equity 60,536 67,777 73,122
Total equity & liabilities 78,118 91,685 96,697
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

This page has been intentionally left blank

ITC Limited I T C I N
CONSUMER | INDIA Maintained
Manish Jain +91 22 4037 4186 manish.jain@nomura.com

BUY
~ Action Closing price on 24 Dec INR256
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
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
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.
Strong tailwinds Key financials & valuations

31 Mar (INRmn) FY08 FY09 FY10F FY11F
Revenue 147,877 164,655 178,186 207,881
c Cigarettes: strong growth ahead Reported net profit 31,578 33,246 39,884 47,962
We believe that the core cigarette business (around 90% of Normalised EPS (INR) 8.38 8.81 10.57 12.71
consolidated EBIT in FY09) is on a strong growth path, given: 1) Norm. EPS growth (%) 10.5 7.0 23.1 20.3
Norm. P/E (x) 31.9 29.8 24.2 20.1
easing competition in India; 2) minimal regulatory risk, given that India
EV/EBITDA (x) 19.1 17.3 14.3 11.8
fully complies with tobacco control convention norms; 3) minimal Price/book (x) 7.8 6.8 6.0 5.4
taxation risk, given that a goods and services tax is likely to be Dividend yield (%) 1.4 1.4 1.9 2.7
implemented soon; and 4) the company enjoys strong pricing power. ROE (%) 26.1 24.4 26.4 28.3
Net debt/equity (%) na na na na
Our estimates show the business easily sustaining 10-12% pa Earnings revisions
Previous norm. net profit 32,411 39,884 47,962
revenue growth and 18-20% pa EBIT growth over the medium term.
d Hotels: strong revival ahead Source: Company, Nomura estimates
Among the other key businesses, we think the outlook looks fairly
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
e Shrinking losses from non-cigarette FMCG 160

140
70
60
May09
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
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
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.

ITC Limited Manish Jain
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
EBITDA 47,168 52,666 62,725 75,558 88,206

Depreciation 4,729 5,809 6,516 7,311 7,974
EBIT 42,439 46,858 56,209 68,247 80,233
Net interest expense 192 290 196 177 177
Other income 3,182 2,446 3,515 3,515 3,215
Earnings before tax 45,429 49,013 59,529 71,585 83,271
Income tax 14,970 16,254 19,644 23,623 27,479
Minority interests (204) (348) - - -
Normalised NPAT 30,255 32,411 39,884 47,962 55,791
Extraordinary items 1,323 835 - - -
Reported NPAT 31,578 33,246 39,884 47,962 55,791

Reported P/E (x) 30.6 29.1 24.2 20.1 17.3
Dividend yield (%) 1.4 1.4 1.9 2.7 3.8
Price/book (x) 7.8 6.8 6.0 5.4 5.0
EV/EBITDA (x) 19.1 17.3 14.3 11.8 10.1
Gross margin (%) 59.8 61.2 64.7 65.7 66.5
EBITDA margin (%) 31.9 32.0 35.2 36.3 37.3
Net margin (%) 20.6 19.9 22.4 23.1 23.6
Dividend payout (%) 51.0 51.0 52.0 63.0 75.0
ROE (%) 26.1 24.4 26.4 28.3 30.1
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
Nomura 83 4January 2010

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

As at 31 Mar FY08 FY09 FY10F FY11F FY12F
Cash & equivalents 7,768 13,183 22,091 35,554 48,705
Marketable securities 26,079 25,071 25,071 25,071 25,071
Accounts receivable 1,577 2,326 2,517 2,937 3,236
Inventories 42,683 47,943 51,883 60,371 71,201
Other current assets 21,312 21,669 23,449 27,357 31,070
Total current assets 99,419 110,192 125,012 151,289 179,283
Fixed assets 78,193 91,258 99,741 99,999 97,026
Total assets 177,611 201,450 224,753 251,288 276,309
Short-term debt 2,249 1,867 1,867 1,867 1,867
Accounts payable 29,708 32,147 34,789 40,587 48,546
Other current liabilities 16,213 17,252 18,669 21,781 24,754
Total current liabilities 48,170 51,266 55,325 64,234 75,167
Long-term debt - - - - -
Total liabilities 48,170 51,266 55,325 64,234 75,167
Minority interest 1,132 1,300 1,300 1,300 1,300
Common stock 3,769 3,774 3,774 3,774 3,774
Other equity and reserves 5,436 8,606 8,606 8,606 8,606
Total shareholders' equity 129,442 150,184 169,428 187,054 201,142
Total equity & liabilities 177,611 201,450 224,753 251,288 276,309


Nagarjuna Construction N J C C I N
E N G I N E E R I N G & C O N S TR U C TI O N | I N D I A Maintained
Saion Mukherjee +91 22 4037 4184 saion.mukherjee@nomura.com

BUY
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.
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

A positive surprise in order-booking for domestic and international markets, steady Source: Nomura
execution and unlocking value at subsidiaries.

Nomura vs consensus
Anchor themes
Nomura’s FY10F EPS is 10% above
Nagarjuna Construction has a diversified presence across many segments in consensus and FY11F EPS is 2%
infrastructure and corporate capex and is a play on a pick-up in investments. We above consensus.
expect companies such as NJCC to retain bargaining power, given the dearth of
large contracting companies.
Diversified presence Key financials & valuations

31 Mar (INRmn) FY08 FY09F FY10F FY11F
Revenue 34,729 41,514 47,989 54,453
c Well diversified orderbook Reported net profit 1,619 1,539 2,578 2,546
NJCC has a well diversified orderbook, with a presence across many Normalised EPS (INR) 6.40 6.00 8.47 9.92
segments. Unlike other mid-tier construction companies, aside from Norm. EPS growth (%) 8.0 (6.2) 41.2 17.2
Norm. P/E (x) 25.92 27.65 19.58 16.71
just being exposed to infrastructure, NJCC has a presence in the
EV/EBITDA (x) 14.9 14.4 11.2 9.9
industrial and international segments. As indicated in the Exhibit Price/book (x) 2.7 2.5 1.9 1.7
below, diversification has increased over the years with NJCC’s entry Dividend yield (%) 0.8 0.7 0.7 0.7
into new segments such as metals, oil & gas and the international ROE (%) 10.4 9.1 9.5 10.2
Net debt/equity (%) 42.0 65.8 42.5 45.2
market. Transportation / roads has witnessed a continuous decline, Earnings revisions
but that may change as award activity picks up in the road segment. Previous norm. net profit 1,539 2,172 2,546
Change from previous (%) na na na
Exhibit 104. Orderbook - diversified across segments Source: Company, Nomura estimates
(%) International Share price relative to MSCI India

100 Metals (Rs) Price
223 Rel MSCI India 150
Oil & gas
173 130
% 80
Power 110
123
% 60 Real estate 90
73 70
Irrigation & hydropower
% 40 23 50
Electrical
May09
Nov09
Mar09
Dec08
Jan09
Feb09
Jun09
Apr09
Aug09
Sep09
Oct09
Jul09
% 20 Water & environment

1m 3m 6m
Transportation Absolute (INR) (1.9) 14.1 32.9
% 0 Absolute (US$) (2.4) 17.3 38.3
Industrial structures & Relative to Index (3.7) 8.2 8.8
FY03 FY04 FY05 FY06 FY07 FY08 FY09 housing
Market cap (US$mn) 912
52-week range (INR) 177.7/37.10
Stock borrowability Hard
AVS Raju and related enitities 20.50
Blackstone GPV Capital Partners Mauritius V Ltd 8.33
HDFC Trustee Company Ltd A/c 6.05
HSBC Global Investment Funds A/c 6.00

Nagarjuna Construction Saion Mukherjee
d On track in order inflows

NJCC has reported strong new orders, worth INR53bn, so far for FY10, which is 82%
of its guidance of INR65bn for FY10F. We expect strong inflows from roads and the
international segment in the near term. The company is set to beat guidance for the
year, in our view.
e Margin pressures have eased

EBITDA margins are likely to return to FY07-08 levels. FY09 was an aberration on
account of provisioning for losses for road projects and (to an extent) higher
commodity prices. For 1H FY10, the company has reported a 41.2bps improvement in
the EBITDA margin year-on-year. We expect a substantial improvement in 2H, on
account of a low base. Management now expects an FY10F EBITDA margin of 10.25-
10.5%, higher than its earlier guidance of 9.5-10.0%.
f Unlocking value at subsidiary is a possibility

Unlocking value at its infrastructure subsidiary is a possibility. NJCC has one of the
largest portfolios of BOT assets, with an equity investment of INR4.6bn. Currently, the
company has nine BOT projects (excluding Gautami Power) that are in various stages
of development. Value unlocking can happen through a stake sale of assets or
potential listing of the subsidiary. We believe NJCC will require additional equity
funding and hence will explore stake sale and listing opportunities.
g Attractive valuations, in our view

On a standalone basis (excluding international orders), NJCC had a backlog ratio of The chief risk is macro risk, given
2.8x as of September 2009. We expect this backlog ratio to hold or even improve on the sector
the back of strong order inflows. Adjusted for the subsidiary valuation, the stock is
trading at 11.6x FY11F P/E and 12.0x one-year forward EPS, which we reckon is
attractive and is at the lower end of the fair value range of 10-15x. We value NJCC
using a sum-of-the-parts methodology. The core construction business is valued at
13.5x one-year forward earnings, to arrive at the value of INR146. We value NJCC's
construction business in-line with other mid-tier construction companies and at a 40%
discount to L&T (LT IN, INR1,682, BUY). We have valued the BOT segment at 2x
equity invested and NJCC Urban at its current book value. We have separately valued
the current orderbook in its international operations. Our 12-month price target is
INR197. The key risks to our call are a deterioration in the macro environment,
execution delays and a fall in subsidiary valuations.

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
Income tax (811) (743) (1,049) (1,230) (1,458)
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)

Reported P/E (x) 26.3 27.7 16.5 16.7 14.1
Dividend yield (%) 0.8 0.7 0.7 0.7 0.7
Price/cashflow (x) 21.9 22.4 16.4 14.1 12.0
Price/book (x) 2.7 2.5 1.9 1.7 1.5
EV/EBITDA (x) 14.9 14.4 11.2 9.9 8.4
EV/EBIT (x) 17.2 16.7 12.9 11.3 9.5
Gross margin (%)
EBITDA margin (%) 10.4 9.0 10.0 10.0 10.0
EBIT margin (%) 9.0 7.7 8.7 8.7 8.8 Management guides for
FY10F margin in the range
Net margin (%) 4.7 3.7 4.5 4.7 4.7
10.25-10.5%
Dividend payout (%) 21.5 19.1 13.6 11.6 9.8
Capex to sales (%) 4.6 3.9 2.3 1.8 1.6
Capex to depreciation (x) 3.3 3.0 1.7 1.4 1.3
ROE (%) 10.4 9.1 9.5 10.2 10.9
ROA (pretax %) 8.5 7.4 8.0 8.5 9.0
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
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

Cashflow (INRmn)
EBITDA 3,653 3,778 4,829 5,475 6,446
Cashflow from operations (3,416) (5,266) (96) 671 (789)
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

As at 31 Mar FY08 FY09 FY10F FY11F FY12F
Cash & equivalents 2,330 1,345 2,754 1,113 819
Inventories 5,493 7,495 8,664 9,832 11,584
LT investments 3,750 5,180 6,930 7,930 7,930
Fixed assets 5,339 4,873 5,330 5,619 5,822
Goodwill - - - - -
Other intangible assets - - - - -
Other LT assets 1,898 2,223 1,683 1,683 2,683
Total assets 41,274 45,891 53,817 58,034 65,712
Short-term debt 1,750 3,575 3,575 3,575 5,575
Long-term debt 7,188 8,864 8,864 8,864 8,864
Convertible debt - - - - -
Other LT liabilities 167 188 188 188 188
Minority interest - - - - -
Preferred stock - - - - -
Common stock 460 458 513 513 513
Proposed dividends - - - - -
Other equity and reserves 54 - - - -
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

HCL Technologies H C L T I N
S O F TW AR E & I T S E R V I C E S | I N D I A Maintained
Harmendra Gandhi +91 22 4037 4181 hagandhi@nomura.com
Pinku Pappan (Associate) +91 22 4037 4360 pinku.pappan@nomura.com
BUY
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
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
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
Anchor themes Nomura vs consensus

Our forecasts are above consensus,
HCL Tech has won a series of large deals despite a challenging environment for IT
since we expect HCL Tech’s top line
spending. Strong top-line growth and reduced forex losses should significantly
growth to be better than its peers’.
improve EPS in FY11F. We look for the stock’s 50% discount to Infosys in terms of
EV/EBITDA (FY11F) to narrow.
Good top-line growth

Key financials & valuations
30 Jun (INRmn) FY08 FY09F FY10F FY11F
Revenue 74,772 106,311 122,354 138,037
c Ahead of peers in revenue growth Reported net profit 11,136 12,784 12,973 18,955
HCL Tech’s revenues have grown faster than peers such as Infosys Normalised EPS (INR) 16.7 19.1 19.4 28.3
and Wipro in recent quarters, and it has done so by winning a series Norm. EPS growth (%) (20.3) 14.4 1.5 46.1
Norm. P/E (x) 22.5 19.6 19.4 13.3
of large deals despite the challenging environment for IT spending.
EV/EBITDA (x) 15.0 11.8 10.1 8.9
The company's focus on infrastructure services and total outsourcing Price/book (x) 4.8 4.4 3.7 3.0
has resulted in an order book of more than US$2bn. Dividend yield (%) 2.5 2.8 1.2 1.2
ROE (%) 21.8 23.5 20.8 25.0
d Improved margins Net debt/equity (%)

Earnings revisions
net cash 45.0 32.2 15.7
HCL Tech’s EBITDA margin has widened in the past two quarters and, Previous norm. net profit 12,784 12,973 18,955
at 22.7% currently is back to the level of a year ago. We think this is
impressive considering HCL Tech has acquired and integrated large Source: Company, Nomura estimates
companies such as Axon during this period.
e EPS growth to improve significantly in FY11F (Rs) Price
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$) 9.7 11.1 104.0
year forward and two-year forward P/E multiples, respectively. On Relative to Index 8.5 2.0 74.5
FY11F EV/EBITDA, the stock is at a 50% discount to Infosys, on our
estimate. We believe this discount will narrow. Our DCF-based price 52-week range (INR) 374.9/89.7
target of INR397 is calculated using an 11% discount rate and 5% 3-mth avg daily turnover (US$mn) 10.12
terminal growth rate assumption and implies 14x one-year forward Stock borrowability Easy
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

HCL Technologies Harmendra Gandhi
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
EBITDA 13,361 16,549 23,467 27,083 29,938

Depreciation (2,532) (2,965) (4,487) (5,514) (5,747)
EBIT 10,829 13,584 18,980 21,569 24,192
Net interest expense 985 1,672 1,626 (738) (154)
Associates & JCEs - - - - -
Other income 3,441 (2,842) (5,298) (4,926) (900)
Income tax (1,521) (1,258) (2,544) (2,919) (4,165)
Minority interests (58) (20) 29 - -
Other items (11) - (10) (14) (18)
Normalised NPAT 13,666 11,136 12,784 12,973 18,955
Extraordinary items
Reported NPAT 13,666 11,136 12,784 12,973 18,955
Dividends (5,853) (6,375) (7,156) (3,138) (3,138)

FD normalised P/E at price target (x) - - - - -
Reported P/E (x) 17.9 22.5 19.6 19.4 13.3
Dividend yield (%) 2.4 2.5 2.8 1.2 1.2
Price/cashflow (x) 22.8 17.7 25.2 9.7 8.7
Price/book (x) 4.9 4.8 4.4 3.7 3.0
EV/EBITDA (x) 18.6 15.0 11.8 10.1 8.9
EV/EBIT (x) 23.0 18.3 14.6 12.7 11.0
Gross margin (%) 34.3 35.4 35.0 32.9 33.7
EBITDA margin (%) 22.1 22.1 22.1 22.1 21.7
EBIT margin (%) 17.9 18.2 17.9 17.6 17.5
Net margin (%) 22.7 14.9 12.0 10.6 13.7
Dividend payout (%) 42.8 57.3 56.0 24.2 16.6
Capex to sales (%) 7.2 8.3 6.0 5.7 5.8
ROE (%) na 21.8 23.5 20.8 25.0
ROA (pretax %) na 20.0 19.1 17.0 17.4
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
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
DPS (W) 9 10 11 5 5

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) - -
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

As at 30 Jun FY07 FY08F FY09F FY10F FY11F
Inventories - - - - -
LT investments 96 101 370 369 369
Fixed assets 10,495 13,317 15,862 17,445 19,698
Goodwill - - - - -
Other intangible assets 8,061 9,585 45,325 44,111 42,373
Other LT assets 2,349 5,063 8,605 16,266 23,321
Total assets 63,247 80,338 126,939 138,545 161,483
Short-term debt - - - - -
Long-term debt - - 29,771 28,829 28,829
Other LT liabilities 1,292 5,959 7,634 9,054 10,598
Minority interest 145 57 16 16 16
Common stock 1,327 1,333 1,341 1,341 1,341
Other equity and reserves - - - - -
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)


Zee Entertainment Z I N
I N TE R N E T & M E D I A | I N D I A
Maintained
Jamil Ansari +91 22 4037 4192 jamil.ansari@nomura.com
BUY
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
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.
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
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
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
We note that ZEEL’s P/E multiple tends to be highly correlated with
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
revenue growth pick up 272 100

222 90
The proposed restructuring is a significant long-term positive for ZEEL,
172 80
on our reading, since it will give the company exposure to fast-
122 70
growing regional markets. We see improvement in advertising
72 60
revenue growth from 3Q FY10F and possible synergy benefits arising
May09
Nov09
Mar09
Dec08
Jan09
Feb09
Apr09
Jun09
Aug09
Sep09
Oct09
Jul09
from the recently announced restructuring as potential positive

triggers for the stock. 1m 3m 6m
Absolute (INR) 0.9 16.9 56.8
Absolute (US$) 0.4 20.2 63.1
f Valuations Relative to Index (0.9) 11.1 33.6
At the current price, ZEEL is trading at 19.1x FY11F EPS of INR13.9.
We value ZEEL at 21x FY11F estimated EPS, which is based on a 52-week range (INR) 272.0/90.5
30% premium to broader market multiples. Our price target of INR292 3-mth avg daily turnover (US$mn) 8.18
implies 10% upside from current levels. Key risks to our positive call Stock borrowability Hard
on Zee include: 1) a slowdown in economic activity in India, leading to Subhash Chandra 41.50
slower-than-expected growth in advertising spending and 2) higher-
than-anticipated competition in the Hindi GEC space. Source: Company, Nomura estimates

Zee Entertainment Jamil Ansari
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 - - - - -
EBITDA 5,423 5,480 5,976 7,414 8,811

Depreciation 232 310 348 383 421
EBIT 5,191 5,170 5,628 7,032 8,390 Impact of R-GEC restructuring
Net interest expense 516 1,339 391 360 360 will be fully visible in FY11
Associates & JCEs 5 1 0 0 0
Other income 1,138 1,572 1,562 1,719 1,890
Income tax 1,627 1,633 2,057 2,517 2,976
Minority interests (333) (99) (120) (140) (180)
Other items - - - - -
Normalised NPAT 3,858 3,673 4,623 5,733 6,764
Extraordinary items -26 1,451 0 0 0
Reported NPAT 3,833 5,124 4,623 5,733 6,764
Dividends

Reported P/E (x) 29.8 31.4 24.5 19.1 16.1
Dividend yield (%) 0.4 0.5 0.4 0.5 0.5
Price/cashflow (x) 28.1 28.9 22.6 17.5 14.9
Price/book (x) 3.9 3.3 3.2 3.2 2.9
EV/EBITDA (x) 17.9 16.9 14.3 10.2 8.6
EV/EBIT (x) 18.6 17.7 15.1 10.9 9.0
Gross margin (%) 57.4 54.9 54.8 54.9 55.3
EBITDA margin (%) 29.5 25.2 26.6 26.9 27.5
EBIT margin (%) 34.5 31.0 31.9 31.7 32.1
Net margin (%) 22.8 17.3 21.1 21.3 21.7
Dividend payout (%) 22.5 47.3 46.9 45.4 44.9
Capex to sales (%) 2.8 12.4 4.4 1.8 1.6
ROE (%) 15.3 12.0 13.5 15.5 16.8
ROA (pretax %) 19.8 18.2 17.6 20.8 23.0
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
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
DPS (W) 2.0 4.0 5.0 6.0 7.0

Cashflow (INR mn)

Year-end 31 Mar FY08 FY09F FY10F FY11F FY12F
Pre-tax profit 5,792 6,856 7,098 9,799 11,651
Depreciation 232 310 414 633 681
Tax paid (1,627) (1,633) (2,057) (2,517) (2,976)
Chg in working capital (1,551) (5,719) 3,599 (600) (1,726)
Other operating activities 0 0 0 0 0
Cash flow from operations (a) 2,847 (186) 9,054 7,315 7,630
Capital expenditure (923) (2,757) (481) (500) (750)
Chg in investments (190) 1,244 0 0 0
Chg in associates 5 1 0 0 0
Other investing activities 0 0 0 0 0
Cash flow from investing (b) (1,107) (1,511) (481) (500) (750)
Free cash flow (a+b) 1,740 (1,697) 8,574 6,815 6,880
Equity raised/(repaid) 0 0 (0) 0 0
Chg in minorities 299 (169) 120 140 180
Debt raised/(repaid) 640 1,891 (2,257) (1,000) (1,000)
Dividend (incl. tax) (498) (538) (503) (594) (673)
Other financing activities (168) 0 0 0 0
Cash flow from financing (c) 272 1,185 (2,640) (1,454) (1,493)
Net chg in cash (a+b+c) 2,012 (513) 5,934 5,361 5,388
Beginning cash 955 1,652 1,926 5,708 7,260
ZEEL expected to generate
Ending cash 1,652 1,926 5,708 7,260 8,112
significant free cash in the
Ending net debt 2,214 3,831 (2,208) (4,760) (6,612) next few years

As at 31 Mar FY08 FY09F FY10F FY11F FY12F
Marketable securities - - - - -
Accounts receivable 5907.2 6436.5 7158.3 8385.6 10060.4
Inventories 31.9 43.9 59.7 61.7 75.6
Other current assets 13917.2 18619.6 14951.8 14880.8 16418.8
LT investments 2,515 1,271 1,271 1,271 1,271
Fixed assets 15,605 18,093 18,225 18,342 18,671
Goodwill - - - - -
Other intangible assets - - - - -
Other LT assets 243.1 112.8 112.8 112.8 112.8
Total assets 39,872 46,503 47,487 50,314 54,721
Short-term debt - - - - -
Accounts payable 4152 4318 4772 4933 6051
Other current liabilities 2127 1486 1700 2098 2480
Long-term debt 3866 5757 3500 2500 1500
Other LT liabilities - - - - -
Common stock 433.6 434.0 434.0 434.0 434.0
Retained earnings 28177 33561 36014 39143 42869
Other equity and reserves - - - - -
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


CONVICTION CALL CONVICTION CALL CONVICTION CALL CONVICTION CALL
Tata Steel T A T A I N
S TE E L | I N D I A Maintained
Alok Kumar Nemani (Associate) +91 22 4037 4193 alokkumar.nemani@nomura.com
BUY
~ Action Closing price on 24 Dec 615.6
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
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.
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.
Showing its mettle Key financials & valuations

31 Dec (INRmn) FY09 FY10F FY11F FY12F
Revenue 1,512,646 1,067,038 1,236,746 1,390,256
c A turnaround story Reported net profit 50,509 (23,487) 79,721 107,396
Normalised net profit 91,510 (6,461) 79,721 107,396
We expect Tata Steel India to see significant earnings expansion Normalised EPS (INR) 125.2 (7.3) 89.9 121.0
on account of new capacity, lower raw material costs and an Norm. EPS growth (%) 21.9 (105.8) n/a 34.7
improving price cycle. With its European operations improving Norm. P/E (x) 4.9 6.9 5.1
EV/EBITDA (x) 5.3 11.6 4.9 3.7
rapidly, we believe the negative attribution to Corus will turn Price/book (x) 1.6 1.7 1.4 1.1
positive with a turnaround in earnings. This, in our view, makes Dividend yield (%) 3.3 2.6 2.5 2.5
Tata Steel one of the most attractive plays in India’s steel sector. ROE (%) 34.8 (2.1) 22.0 24.4
Net debt/equity (%) 190.8 142.8 111.1 72.8
Earnings revisions
d Sharp improvement in FY11F consolidated earnings Previous norm. net profit (23,487) 79,721 107,396
We expect Tata Steel to post consolidated losses for FY10F due
Previous norm. EPS (INR) (7.3) 89.9 121.0
to hefty losses at Corus attributable to low capacity utilisation, high Source: Compa ny, Nomura e stimate s
restructuring costs and increased raw material prices. However,

we look for a return to profit in FY11F, with the domestic Share price relative to MSCI India
(Rs) Price
operations remaining strong and a turnaround at Corus. We Rel MSCI India
700 170
forecast consolidated net profit of INR79.7bn for FY11F and 600 150
INR107.4bn for FY12F, up from a loss of INR23.5bn in FY10F. 500
130
400
110
e Corus likely to become a profit centre 300
200 90
After reporting losses for the past year, we believe Corus will 100 70
Apr09
Aug09
May09
Nov 09
Jan09
Dec08
Feb09
Mar09
Jun09
Jul09
Sep09
Oct09
return to profitability from 4Q10F (adjusted for one-offs), owing to:

1) falling coal costs; 2) the mothballing of the Teesside steel plant; 1m 3m 6m
3) cost cutting measures; and 4) improving capacity utilisation. Absolute (INR) 10.2 20.1 51.3
These factors should see total EBITDA rise from -US$375mn in Absolute (US$) 9.6 23.4 57.3
Relative to Index 8.3 14.4 27.8
2Q10F to US$250mn in 3Q10F and US$350mn in 4Q10F. Market cap (US$mn) 11,706
Moreover, with the full impact of the company’s restructuring and a Estimated free float (%) 72.8
stronger steel cycle, we expect EBITDA to improve further in 52-week range (INR) 616/151.8
FY11F to US$1.7bn. Stock borrowability Easy
Promoters 27.20
Source: Compa ny, Nomura e stimate s

Tata Steel Prabhat Awasthi
f Increased captive coal to boost domestic profitability

Tata Steel is also augmenting its coal mine capacity, along with the 3mn tonne
expansion at its Jamshedpur plant. After the 1.8mn tonne expansion completed earlier
this year, the company’s dependence on imported coking coal has risen from 30% to
50%.
However, with the ongoing capacity expansion of its coal mines, the company expects
to meet 60% of its overall coal requirement through domestic coal. This, we believe,
should bring the company considerable cost savings.
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.
We value Tata Steel on a sum-of-the-parts basis at INR926/share. We value Tata

Steel India at 9x FY12F EPS of INR92.3. We have discounted this back a year to
arrive at our valuation of INR735/share. Meanwhile, we value Corus at 5x FY11F
EV/EBITDA which derives a value of US$8.3bn or INR173/share. We value the South
East Asia business at US$364mn, contributing INR19/share to our price target. We
value the company at 5x FY11F EV/EBITDA, which implies a value of US$393mn.
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 105. Tata Steel: consolidated earnings forecast

(INRmn) FY08 FY09 FY10F FY11F FY12F
Tata Steel India 46,870 52,017 41,128 52,359 81,847
Corus 24,630 547 (63,482) 27,161 25,185
SE Asia business 7,994 (2,056) (1,133) 200 364
Total consolidated profit 79,494 50,509 (23,487) 79,721 107,396
EPS (INR) 108.8 69.1 (26.5) 89.9 121.0
Exhibit 106. Tata Steel: sum-of-the-parts valuation

Value Value/share (INR)
TATA steel standalone (INRmn) 651,876 735
EV of Corus (US$mn) 8,293
Corus equity value (US$mn) 2,882 173
South East Asia business (US$mn) 364 19
Price target (INR) 926
FY11F P/E (x) 10.3
Exhibit 107. Tata Steel: change in value of domestic business vs steel price
Steel price (US$/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

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
EBITDA 174,618 184,352 75,749 177,363 213,037

Depreciation 40,776 44,352 45,600 44,685 46,753
Amortisation
EBIT 62,658 77,228 (20,826) 83,949 121,922
Net interest expense 37,267 32,927 27,488 26,364 24,181
Associates & JCEs
Other income 3,350 3,083 4,000 4,000 4,000
Income tax 24,903 18,645 13,122 30,593 38,707
Net profit after tax 75,021 91,510 (6,461) 79,721 107,396
Minority interests
Other items
Preferred dividends
Normalised NPAT 75,021 91,510 (6,461) 79,721 107,396
Extraordinary items 4,473 (41,001) (17,026) - -
Reported NPAT 79,494 50,509 (23,487) 79,721 107,396
Dividends 13,714 13,830 13,572 13,495 13,495
Transfer to reserves 65,781 36,679 (37,059) 66,226 93,901

FD normalised P/E (x) 6.0 4.9 n/a 6.9 5.1
FD normalised P/E at price target (x) 9.0 7.4 n/a 10.3 7.6
Reported P/E (x) 5.7 8.9 n/a 6.9 5.1
Dividend yield (%) 3.1 3.3 2.6 2.5 2.5
Price/cashflow (x) 3.9 3.3 14.0 4.4 3.5
Price/book (x) 1.8 1.6 1.7 1.4 1.1
EV/EBITDA (x) 5.4 5.3 11.6 4.9 3.7
EV/EBIT (x) 7.0 6.9 27.0 6.5 4.7
Gross margin (%) 10.2 9.3 2.8 10.7 12.0
EBITDA margin (%) 13.3 12.2 7.1 14.3 15.3
EBIT margin (%) 10.8 6.7 1.6 11.1 12.2
Net margin (%) 6.0 3.3 (2.2) 6.4 7.7
Effective tax rate (%) 23.9 27.0 n/a 27.7 26.5
Dividend payout (%) 17.5 - n/a - -
Capex to sales (%) 23.2 3.5 5.3 5.6 3.8
ROE (%) 38.8 34.8 (2.1) 22.0 24.4
ROA (pretax %) 19.0 12.0 2.9 11.8 13.9
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
DPS (W) 16 16 13 13 13

Cashflow (INR mn)

Year-end 31 Dec FY08 FY09F FY10F FY11F FY12F
EBITDA 174,618 184,352 75,749 177,363 213,037
Change in working capital (134,277) 84,447 29,173 (9,035) (4,235)
Cashflow from operations (39,382) 174,387 47,287 111,370 145,914
Free cashflow (345,128) 121,427 (8,876) 42,147 93,506
Reduction in investments 5,809 (134,226) (5,326) 2,368 647
Net acquisitions
Reduction in other LT assets (180,500) - - - -
Adjustments 760 5,185 11,453 2,734 3,007
Cashflow after investing acts (519,058) (7,614) (2,749) 47,249 97,160
Cash dividends (13,936) (14,925) (14,028) (13,495) (13,495)
Equity issue 96,660 (2,790) 24,203 (0) (0) Company will generate
Debt issue 402,124 73,165 (33,868) (44,816) (30,000) operating cash of INR110-
Convertible debt issue 150bn in FY11-12F, which
Others even after capex should be
Cashflow from financial acts 484,848 55,450 (23,693) (58,311) (43,495) enough to pre-pay debt
Net cashflow (34,210) 47,837 (26,442) (11,061) 53,666 significantly
Beginning cash 78,594 44,384 92,221 65,779 54,718
Ending cash 44,384 92,221 65,779 54,718 108,384
Ending net debt 508,918 534,246 472,094 438,339 354,673

As at 31 Dec FY08 FY09F FY10F FY11F FY12F
Marketable securities
Inventories 200,520 191,915 141,809 163,733 186,025
LT investments 55,253 189,478 194,804 192,436 191,789
Fixed assets 375,896 384,504 395,066 419,604 425,259
Goodwill 180,500 180,500 180,500 180,500 180,500
Other intangible assets
Other LT assets 38,073 37,572 39,245 38,255 37,750
Total assets 1,135,239 1,243,129 1,135,431 1,182,527 1,273,284
Short-term debt
Long-term debt 498,577 571,742 537,874 493,058 463,058
Convertible debt
Minority interest
Preferred stock
Common stock 7,308 7,308 8,874 8,874 8,874
Retained earnings 65,781 36,679 (37,059) 66,226 93,901
Proposed dividends 13,714 13,830 13,572 13,495 13,495
Total equity & liabilities 1,135,239 1,243,129 1,135,431 1,182,527 1,273,284
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

GAIL G A I L I N
O I L & G AS | I N D I A Maintained
Anil Sharma +91 22 4037 4338 anil.sharma.1@nomura.com
Ravi Kumar Adukia (Associate) +91 22 4037 4232 ravikumar.adukia@nomura.com
BUY
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)
Apart from growth in gas volumes, its petchem business is resilient. Newsflow should
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.
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
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.
d Re-rating continues Share price relative to MSCI India

Price
We see GAIL’s earnings growing by 32% in FY11, and expect share of
utility-type earnings from transmission business to increase to 68% in
410 120
FY10/FY11 (51% in FY09). With an increased share of utility earnings 360
110
GAIL is likely to re-rate as a utility play, in our view. 310
100
260
e Continued resilience in petrochemicals 210 90
160 80
Since bottoming out in October 2009, prices and margins of key
May09
Nov09
Mar09
Dec08
Jan09
Feb09
Apr09
Jun09
Aug09
Sep09
Oct09
Jul09
polymers have rebounded strongly on improving demand and further

delays in new supply. 1m 3m 6m
Absolute (INR) 4.1 17.8 49.3
Absolute (US$) 3.6 21.1 55.3
f Valuation methodology and risks Relative to Index 2.3 12.1 25.8
Compared with 11-13x 2010F EV/EBITDA multiples for regional utilities,
and 10x FY11F EV/EBITDA for Indian power utilities, GAIL trades at 9x 52-week range (INR) 429.8/184.8
FY11F EV/EBITDA. We value GAIL’s gas transmission business at 10x 3-mth avg daily turnover (US$mn) 15.77
and the petchem business at 7x FY11F EV/EBITDA. Key risks include Stock borrowability Easy
a likely bottleneck in the HVJ network in the near term, a sharp tariff Government of India 57.34
cut by regulators (we do not assume any significant cuts), a sharper- Life Insurance Corporation of India 5.43
than-expected decline in polymer prices and a higher subsidy burden. Source: Company, Nomura estimates

GAIL Anil Sharma
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
Source: Company data, Nomura estimates FY09
Exhibit 109. GAIL: subsidy sharing Lower sharing could offer respite
INR bn FY06 FY07 FY08 FY09 1QFY10 2QFY10

Subsidy burden on GAIL has
Gross Under-recoveries 400.0 493.9 773.0 1032.9 54.4 104.2 increased from ~5%of total
Upstream share 140.0 205.2 257.1 329.4 5.6 34.4 upstream share in FY08/09 to
~13% in 1HFY10.
% share 35% 42% 33% 32% 10% 33%
GAIL's share 10.6 14.9 12.9 17.8 0.7 4.6

% of Gross U/R 2.7% 3.0% 1.7% 1.7% 1.4% 4.4%
% of Upstrem share 7.6% 7.3% 5.0% 5.4% 13.3% 13.3%
Exhibit 110. GAIL: EBIT breakdown Increasing utility-type earnings
FY09A FY10E FY11E FY12E

EBIT Break-down (%)
Transmisson & Trading 51% 68% 68% 70%
Petrochemicals 29% 24% 15% 14%
LPG & Liquid HC 20% 8% 17% 16%
Exhibit 111. GAIL: SOTP valuation

INRbn US$ bn INR / Share Com m ents
Gas Transmission 437 9.7 345 10x FY11 EBITDA
Petrochemicals 71 1.6 56 7x FY11 EBITDA
LPG & Liquid HC 63 1.4 49 6x FY11 EBITDA
E&P Upside 18 0.4 15
Investments 56 1.2 44
Enterprise Value 645 14.3 509
Less: Net Debt 15 0.3 12 FY11E
Equity Value 630 14.0 496
Target Price 500 Implied FY11 P/E multiple of 15.5x

GAIL Anil Sharma
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

FD normalised P/E at fair value (x) 22.6 20.4 15.5 14.4
Reported P/E (x) 20.5 19.0 17.1 13.0 12.1
Dividend yield (%) 2% 2% 2% 3% 3%
Price/cashflow (x) 15.6 20.6 15.9 8.6 9.1
Price/book (x) 4.2 3.7 3.2 2.8 2.5
EV/EBITDA (x) 12.7 12.6 11.3 9.3 8.6
EV/EBIT (x) 14.8 14.6 13.1 10.7 10.1
EBITDA margin (%) 22% 17% 19% 16% 15%
EBIT margin (%) 19% 15% 16% 14% 13%
Net margin (%) 14% 12% 12% 11% 10%
Effective tax rate (%) 33% 33% 31% 25% 25%
Dividend payout (%) 33% 32% 35% 35% 35%
Capex to sales (%) 7% 12% 20% 15% 12%
ROE (%) 20% 19% 19% 22% 21%
ROCE (%) 24% 23% 20% 21% 20%
ROA (pretax %) 16% 14% 15% 15% 15%
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

GAIL Anil Sharma
Cashflow (INRbn)
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
Balance sheet (INRbn)

Cash & equivalents 44.7 34.6 15.3 21.7 12.9
Accounts receivable 10.7 15.0 13.8 18.2 20.7
Inventories 5.7 6.0 6.6 7.2 7.8
Other current assets 42.9 66.8 67.0 67.2 67.5
Total current assets 104.1 122.4 102.6 114.2 108.9
LT investments 14.9 17.4 17.4 20.9 21.0
Fixed assets 97.5 114.8 158.2 200.4 241.0
Other LT assets 0.0 0.0 0.0 0.0 0.0
Total assets 216.5 254.5 278.3 335.5 370.9
Accounts payable 18.0 19.7 26.8 41.1 47.0
Other current liabilities 42.6 61.8 50.2 54.0 56.3
Total current liabilities 60.6 81.5 77.0 95.1 103.3
Long-term debt 12.7 12.0 22.0 37.0 38.0
Other LT liabilities 13.2 13.3 13.2 13.2 13.2
Total liabilities 86.5 106.8 112.2 145.2 154.5
Minority interest 0.0 0.0 0.0 0.0 0.0
Common stock 8.5 12.7 12.7 12.7 12.7
Retained earnings 119.5 132.9 151.3 175.5 201.5
Other equity & reserves 2.1 2.1 2.1 2.1 2.1
Total shareholder's equity 130.0 147.7 166.1 190.3 216.4
Total equity & liabilties 216.5 254.5 278.3 335.5 370.9
Strong balance sheet and
flexibility in capital structure
Liquidity (x)
Current ratio 1.7 1.5 1.3 1.2 1.1
Interest cover 42.5 40.2 37.7 26.9 24.5
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)

Dr. Reddy’s Laboratories D R R D I N
H E AL T H C AR E & P H AR M AC E U TI C AL S | I N D I A Maintained

BUY
~ Action Closing price on 24 Dec INR1,186
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
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.
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.
Execution risks recede

31 Mar (INRmn) FY 08 FY09F FY10F FY 11F
Revenue 50,006 69,441 71,203 82,578
c US — potential surprises from product-specific Reported net profit 3,846 (5,168) 8,410 11,972
opportunities Normalised EPS (INR) 41.2 52.5 49.9 71.0
Growth in US generic sales should be driven by: 1) increase in patent Norm. EPS growth (%) (40) 27 (5) 42
Norm. P/E (x) 28.8 22.6 23.8 16.7
expiries, and; 2) product-specific opportunities — either Para IV-
EV/EBITDA (x) 23.5 14.2 13.8 10.1
related exclusivities or difficult-to-develop products presenting limited Price/book (x) 4.2 4.8 4.1 3.3
competition. Patent expiries are set to jump in the US over 2010- Dividend yield (%) 0.4 0.6 0.6 0.6
2012F. Key disclosed product-specific opportunities in the near term ROE (%) 8.0 (12.0) 17.0 20.0
Net debt/equity (%) 25 34 11 (4)
include: 1) Prilosec OTC; 2) Arixtra; 3) Allegra D 24; 4) Lotrel; and 5) Earnings revisions
Exelon. Furthermore, beyond the disclosed products there can be Previous norm. net profit na na na
additional surprises from products with limited competition. Some of Change from previous (%) na na na
Previous norm. EPS (INR) na na na
the products that could present upside over the next three years
Source: Co mpany, Nomura esti mates
include Accolate, Avandia, Geodon and Prograf.
d Growth in API business is underappreciated (Rs) Pri ce
1,280 R el MSC I Indi a 150
The API business segment has been a traditional stronghold for 140
1,080
DRRD, which is the largest generic API player globally after Teva and 130
880 120
has established relationships with many large generic companies. In 110
680 100
fact, DRRD is the largest third-party API supplier to Teva, the largest
480 90
generic company. Growth rates in the API segment are set to 80
280 70
accelerate, based on increased patent expiries and DRRD’s strong
Jan09
Feb09
Mar09
Apr09
May09
Jun09
Jul09
Aug09
Sep09
Oct 09
Nov09
Dec08
pipeline (over 150 filings to date). As per management, DRRD’s

pipeline covers 60-80% of the patent expiries over the next few years 1m 3m 6m
in the US. Furthermore, we note that DRRD’s API business is Absolute (INR) 6.7 32.7 59.2
Absolute (US$) 6.1 36.4 65.6
characterised by early DMF filings. Our analysis indicates that DRRD Relative to Index 4.9 27.4 36.1
figures among the first five filers in over half of its DMF filings. Market cap (US$mn) 4,282
e India — a renewed focus 52-week range (INR)

3-mth avg daily turnover (US$mn)
1,222/ 374.0
14.58
Compared with peers, DRRD’s focus on the India business had been Stock borrowability Easy
less intense, since resources were primarily dedicated to regulated Major shareholders (%)
Anji Reddy and related entities 25.80
markets. This resulted in fewer new product introductions by the
Life Insurance Corporation of India 12.80
company and DRRD eventually lost the spot among the top-10 Source: Co mpany, Nomura esti mates
domestic players. Management’s focus is back on India now. Its

strategy is to participate in the penetration-driven growth in the Indian

Dr. Reddy’s Laboratories Saion Mukherjee
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.
f Emerging markets — GSK deal a potential game changer

In an effort towards consolidating its operations and improving its profitability, DRRD A strategic retreat and a strategic
exited 31 emerging markets (that accounted for less than 5% of its revenues) towards tie-up make for a far more
profitable structure
the end of FY09. The subscale operation in these countries resulted in inefficient
usage of manufacturing and marketing infrastructure and, more importantly, large
unabsorbed overheads relating to front-end presence. In June 2009, DRRD tied up
with GSK to develop and market branded formulations across various emerging
markets, outside India. We believe this deal will enable DRRD to tap the emerging
market opportunity more efficiently. The tie-up will enable DRRD to gain economies of
scale in manufacturing and R&D, without incurring any overheads related to front-end
presence in these markets. Furthermore, DRRD will leverage on GSK’s extensive
marketing presence (with some 10,000 field force personnel) and premium pricing
power. According to management, this is a revenue-sharing deal and profit margins
will be similar to what DRRD would have been able to achieve post scale-up. The
revenue contribution is estimated to be significant (possibly in excess of US$100mn by
FY12F). Some of the key markets that will be addressed as part of the deal include
Brazil, Mexico and Turkey.
g Remain positive despite the run-up in stock price in 2009

DRRD has been one of the best performing stocks y-t-d. The stock is up 138% y-t-d, We see concrete drivers that can
significantly outperforming the healthcare index (BSETHC, up 58%) and the broader provide outperformance, even on
top of a rather strong run
market (SENSEX, up 70%). We believe the outperformance has been owing to
increased visibility of certain product-specific opportunities in the US and improving
profitability. Despite the strong run-up in the stock we remain positive and believe
there can be further upside driven by: 1) more product-specific opportunities in the US;
2) stronger-than-expected growth in the North American generics and API business on
patent expiries, and; 3) scale-up of the GSK deal and revival of growth in India. We
believe there is scepticism given slippages on execution and low profitability in the
past. We identify the possibility of slippage as the key risk in the shares.
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.

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
EBITDA 8,804 15,003 14,890 19,512 22,646

Depreciation 1,774 2,311 2,870 3,466 3,919
Amortisation 1,588 1,503 1,500 1,500 1,500
EBIT 5,442 11,189 10,521 14,546 17,227
Net interest expense 218 552 324 (208) (745)
Associates & JCEs (2) (24) (26) (26) (26)
Other income 739 (634) 160 - -
Income tax (972) 1,172 1,973 2,808 3,420
Minority interests (10) - - - -
Other items
Preferred dividends
Normalised NPAT 6,947 8,855 8,410 11,972 14,578
Extraordinary items (3,101) (14,023) - - -
Reported NPAT 3,846 (5,168) 8,410 11,972 14,578
Dividends 738 1,232 1,232 1,232 1,232
Transfer to reserves 3,108 (6,400) 7,178 10,740 13,346

Reported P/E (x) 52.0 (38.7) 23.8 16.7 13.7
Dividend yield (%) 0.4% 0.6% 0.6% 0.6% 0.6%
Price/cashflow (x) 19.4 15.8 15.7 11.8 10.0
Price/book (x) 4.2 4.8 4.1 3.3 2.7
EV/EBITDA (x) 23.5 14.2 13.8 10.1 8.3
EV/EBIT (x) 38.1 19.1 19.5 13.6 10.8
Gross margin (%) 51% 53% 52% 52% 51%
EBITDA margin (%) 18% 22% 21% 24% 24%
EBIT margin (%) 11% 16% 15% 18% 18%
Net margin (%) 14% 13% 12% 14% 15%
Effective tax rate (%) -16% 12% 19% 19% 19%
Dividend payout (%) 19% -24% 15% 10% 8%
Capex to sales (%) 13% 12% 8% 5% 4%
ROE (%) 8% -12% 17% 20% 20%
ROA (pretax %) 7% 12% 12% 16% 17%
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
DPS (INR) 4.4 7.3 7.3 7.3 7.3

Cashflow (INRmn)
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
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
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)

Marketable securities 4,753 530 530 530 530
Inventories 11,133 13,226 15,180 17,782 20,911
LT investments 237 262 262 262 262
Fixed assets 16,765 20,882 24,012 25,046 25,128
Goodwill 16,997 7,300 7,300 7,300 7,300
Other intangible assets 16,756 14,879 13,379 11,879 10,379
Other LT assets 891 1,459 1,459 1,459 1,459
Total assets 85,634 83,792 87,613 94,976 103,660
Short-term debt 6,654 9,569 10,203 11,808 6,077
Long-term debt 12,698 10,132 5,997 257 248
Convertible debt
Minority interest
Preferred stock
Common stock 841 842 842 842 842
Proposed dividends
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

Ranbaxy R B X Y I N
H E AL T H C AR E & P H AR M AC E U TI C AL S | I N D I A Maintained

REDUCE
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,
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.
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
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
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
e Slippage in FTF present significant risk 595 R e l MS CI Indi a 150

495 130
At the current price, we believe the market is assuming Ranbaxy will
395 110
realise one-off product specific exclusivity upside in the US. Sentiment
295 90
has improved post the Valtrex launch. We believe that the Valtrex
195 70
launch through a site transfer doesn’t imply resolution of pending
95 50
USFDA issues. The risks of FTFs filed, particularly from Poanta Sahib,
Nov 09
Jan09
Feb09
Mar09
Apr09
May09
Jun09
Jul09
Aug09
Sep09
Dec08
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$) 22.8 35.8 97.9
f Valuations rich Relative to Index 21.6 26.8 68.3
Our price target of INR261/share is based on a sum-of-the-parts
valuation: 1) base business valuation at INR141/share, using DCF 52-week range (INR) 530/ 134.7
valuation; and 2) one-off product specific upside at INR120/share. At 3-mth avg daily turnover (US$mn) 20.34
the market price of INR520, we believe the market is already building Stock borrowability Hard
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
INR400/share to RBXY’s base business — 2.7x FY10F base business

Ranbaxy Saion Mukherjee
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.
Realisation of product-specific opportunities (such as an extended period of low

competition in Lipitor) and greater-than-estimated synergy benefits from the Daiichi
Sankyo acquisition present a risk to our call.
Exhibit 112. Ranbaxy: declining emerging-market sales
(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)

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

FD normalised P/E (x) 28.7 (122.6) 99.5 28.2 27.5
FD normalised P/E at price target (x) 14.4 (61.5) 50.0 14.1 13.8
Reported P/E (x) 28.7 (23.3) 200.1 28.2 27.5
Dividend yield (%) 1.7% 0.0% 0.0% 0.0% 0.0%
Price/cashflow (x) 22.4 219.1 44.6 20.7 20.2
Price/book (x) 7.8 5.1 5.0 4.2 3.6
EV/EBITDA (x) 26.2 90.5 54.9 16.5 18.3
EV/EBIT (x) 34.4 (471.2) 193.8 21.4 24.1
Gross margin (%) 56% 50% 56% 59% 58%
EBITDA margin (%) 13% 3% 5% 15% 14%
EBIT margin (%) 10% -1% 2% 11% 10%
Net margin (%) 11% -3% 3% 9% 9%
Effective tax rate (%) 21% 77% 11% 20% 20%
Dividend payout (%) 48% 0% 0% 0% 0%
Capex to sales (%) 12% 8% 3% 2% 2%
ROE (%) 27% -22% 2% 15% 13%
ROA (pretax %) 11% -6% 2% 7% 7%
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
DPS (INR) 8.7 - - - -

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
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
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

As at 31 Dec FY08 FY09F FY10F FY11F FY12F
Inventories 16,409 19,643 18,293 20,950 23,410
LT investments
Fixed assets 45,619 49,607 49,357 48,001 46,566
Goodwill
Other intangible assets
Other LT assets 7,426 7,729 13,314 15,696 16,379
Total assets 92,782 121,961 128,831 140,868 150,699
Short-term debt
Long-term debt 24,071 21,735 21,735 21,735 46,834
Convertible debt 17,345 21,380 20,872 21,488 -
Other LT liabilities 1,434 (12,229) (12,229) (12,229) (12,229)
Preferred stock
Common stock 1,865 2,102 2,102 2,102 2,102
Retained earnings
Proposed dividends
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

Unitech Ltd U T I N
P R O P E R TY | I N D I A Maintained
Aatash Shah +91 22 4037 4194 aatash.shah@nomura.com

BUY

Unitech continues to focus on volumes, with forecast sales of 20mn sf in FY10F Price target INR112
and plans to launch 25-30mn sf in FY11F. We believe that a focus on generating (set o n 2 No v 09)
Upside/dow nside 32.4%
high volumes through affordable pricing is the model which will succeed in India,
and Unitech through its ‘Unihomes’ brand will be the prime exponent of the same. FY10F net profit (INRmn) 7,355
a Catalysts Difference from consensus -20.0%

So urce: No mura
We think improvement in residential volumes from here, accompanied by
increasing office leasing and visible execution, could act as a catalyst. Nomura vs consensus
Anchor themes Consensus believes the residential
Residential volume revival has been a mirage so far, with a limited and localised recovery is priced in, whereas we
believe the residential revival to date
recovery. We believe that CY10/FY11F will be crucial in deciding whether the
has been muted and a country-wide
Indian property sector can move closer to its volume potential through rational
revival will benefit Unitech.
pricing. A recovery in commercial space leasing is likely in CY10F.
Still the best option Key financials & valuations

31 Mar (INRm n) FY09 FY10F FY11F FY12F
Revenue 29,265 22,509 48,201 81,519
c Continued focus on volumes is the right way Repo rted net pro fit 11,964 7,355 15,108 29,296
No rmalised net pro fit 11,964 7,355 15,108 29,296
Unitech has led developers across India in terms of volumes in 1H
No rmalised EP S (INR) 7.37 3.01 5.78 11.21
FY10. The company has sold more than 10mn sf in the period, which No rm. EP S gro wth (%) (28.0) (59.2) 92.0 93.9
is its highest run-rate ever and possibly the highest volumes by a No rm. P /E (x) 11.1 27.3 14.2 7.3
single developer in the country. Unitech had targeted to launch 30mn EV/EB ITDA (x) 3.1 13.6 8.8 5.3
sf and sell 20mn sf in FY10F, and with launches of 21mn sf to date P rice/bo o k (x) 2.5 1.9 1.6 1.3
Dividend yield (%) 0.3 0.0 0.0 0.0
appears to be well on track to achieve its goal. The company plans to
ROE (%) 22.9 6.9 11.6 18.4
launch another 25-30mn sf in FY11F.
Net debt/equity (%) 160.8 42.0 21.8 3.8
In spite of larger populations, Indian cities register far lower volumes E a rnings re v is io ns
P revio us no rm. net pro fit 7355 15108 29296
than their counterparts across the developing world. We believe that a
Change fro m previo us (%) - - -
focus on generating high volumes through affordable pricing is the P revio us no rm. EP S (INR) 0.01 5.78 11.21
model which will succeed in India, and that Unitech through its Source: Company, Nomura est imat es
‘Unihomes’ brand will be the prime exponent of the same.
d Exposure to high-value Mumbai property increasing (Rs) Price
Over the past two years, Unitech has built up a development portfolio
115 180
of 40mn sf in Mumbai through its 50:50 joint venture with local player 160
95
Omkar. These projects, both residential and commercial, are mainly 75
140
120
based on the slum rehabilitation and redevelopment model. Given the 55 100
high capital values prevalent in Mumbai, this could prove to be a 35 80
substantial kicker to valuations if executed well. 15 60
May09
Nov09
Mar09
Dec08
Aug09
Sep09
Jan09
Feb09
Apr09
Jun09
Oct09
Jul09
e Balance sheet strengthening in FY10F

1m 3m 6m
The company, after nearing bankruptcy with a net debt/equity ratio of A bso lute (INR) 2.8 (25.0) 5.2
1.6x, has raised almost US$1bn (INR44bn) in equity through two QIP A bso lute (US$ ) 2.2 (22.9) 9.4
issues and warrants subscribed to by promoters. This has enabled Relative to Index 0.9 (31.9) (20.1)
repayment of INR24 bn of loans and investment of the rest in working M arket cap (US$ mn) 4,199
Estimated free flo at (%) 52.0
capital. The result has been a reduction in net leverage to 0.6x as of
52-week range (INR) 115.1/24.80
September 2009. Further cashflow from customers and future sales 3-mth avg daily turno ver (US$ mn) 116.0
should enable Unitech to meet its repayment and construction Sto ck bo rro wability Hard
obligations. The key here will be execution and continued selling. Any M ajo r shareho lders (%)
faltering here could lead to another cash shortfall. Ramesh Chandra and family 48.00
Source: Company, Nomura est imat es

Unitech Ltd Aatash Shah
f Valuations still attractive

Our NAV for Unitech is INR103/share, while we value its 32.75% stake in Unitech Attractive valuation considering
Wireless at INR9/share. The stock (ex-Unitech Wireless) is trading at a 27% discount improving residential volumes
to NAV, which we find attractive in an environment of improving commercial leasing and upcoming improvement in
commercial leasing
and residential volumes.
Exhibit 113. Unitech: valuation summary

(as of Sep 2010) Value (INR mn) Value (INR/share)
NAV 258,865 99
Existing commercial assets on book + retail assets 10,000 4
33% stake in Unitech Wireless 24,893 9
Price target 293,758 112
Implied discount to NAV 0%
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%
Source: Nomura estimates Source: Nomura estimates
Risks to price target. With increasing inflation in India, chances of monetary

tightening are increasing. Policy rate hikes could lead to higher mortgage rates and
reduced demand. We think that banks may not raise mortgage rates immediately
following a policy rate hike, while demand would depend more on economic and
income growth than interest rates. Other risks include inability to refinance debt or
generate cash to service debt, and inability to launch and sell projects at lower prices.

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)
EBITDA 22,291 15,888 11,446 21,129 39,528

Depreciation (205) (209) (295) (385) (492)
EBIT 22,085 15,679 11,151 20,744 39,036
Net interest expense (2,804) (5,546) (3,373) (4,413) (6,222)
Other income 1,397 4,259 1,846 3,439 5,364
Income tax (3,986) (2,424) (2,270) (4,662) (8,883)
Minority interests (79) (4)
Normalised NPAT 16,613 11,964 7,355 15,108 29,296
Reported NPAT 16,613 11,964 7,355 15,108 29,296
Dividends

Reported P/E (x) 8.0 11.1 27.3 14.2 7.3
Dividend yield (%) 0.3 0.3 - - -
Price/cashflow (x) (12.9) (92.8) (26.3) 14.4 7.3
Price/book (x) 3.6 2.5 1.9 1.6 1.3
EV/EBITDA (x) 2.8 3.1 13.6 8.8 5.3
EV/EBIT (x) 2.8 3.1 14.0 9.0 5.3
Gross margin (%) 69.2 77.3 54.4 46.3 50.0
EBITDA margin (%) 53.3 54.3 50.9 43.8 48.5
EBIT margin (%) 52.8 53.6 49.5 43.0 47.9
Net margin (%) 39.7 40.9 32.7 31.3 35.9
ROE (%) 44.7 22.9 6.9 11.6 18.4
ROA (pretax %) 9.8 6.0 4.1 7.2 12.8
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
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
Source: Nomura estimat es

Cashflow (INRmn)
EBITDA 20,678 14,392 11,151 20,744 39,036
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)
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)

Cash & equivalents 14,082.7 6,449.0 20,875.1 27,194.7 39,450.2
Total current assets 164,159.9 195,738.3 195,738.3 195,738.3 195,738.3
LT investments 14,164.5 15,808.1 15,808.1 15,808.1 15,808.1
Fixed assets 10,459.1 21,499.8 31,225.9 37,041.8 42,630.2
Goodwill 1,125.9 11,672.5 11,672.5 11,672.5 11,672.5
Other LT assets 20,983.4 11,757.7
Total assets 224,975.5 262,925.2 275,319.8 287,455.3 305,299.2
Short-term debt Cashflows should be strong in
Accounts payable 83,092.5 102,122.5 87,122.5 87,122.5 87,122.5 FY11-12F, enabling reduction
Other current liabilities in leverage
Total current liabilities 83,092.5 102,122.5 87,122.5 87,122.5 87,122.5
Long-term debt 85,523.7 90,558.4 65,558.4 55,558.4 45,558.4
Other LT liabilities 19,195.8 17,935.5 16,143.3 14,530.4 13,078.7
Total liabilities 187,812.0 210,616.4 168,824.2 157,211.3 145,759.6
Minority interest 1,158.7 614.1 614.2 614.1 614.1
Common stock 3,246.8 3,246.8 4,888.4 5,228.9 5,228.9
Total equity & liabilities 224,975.5 262,925.2 275,319.8 287,455.3 305,299.1
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

Valuations and risks
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)
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.

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.

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

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



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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
A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative
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
A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative
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.

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Strategy | I N D I A

The Indian rebalancing trick Stocks for action

d Growth rebalancing — investment to join the mix

e Return of risk-taking — from de-leveraging to re-leveraging

Asia Ex-Japan Coverage Telephone Email

India Aatash Shah Property +91 22 4037 4194 aatash.shah@nomura.com

India Amar Kedia Electrical Equipment, +91 22 4037 4182 amar.kedia@nomura.com

India Harmendra Gandhi IT services +91 22 4037 4181 harmendra.gandhi@nomura.com

India Mahrukh Adajania Banks +91 22 4037 4157 mahrukh.adajania@nomura.com

India Manish Jain Consumer +91 22 4037 4186 manish.jain@nomura.com

India Neeraja Natarajan (Associate) Telecoms +91 22 6723 5231 neeraja.natarajan@nomura.com

India Pinku Pappan (Associate) IT services +91 22 4037 4360 pinku.pappan@nomura.com

India Prabhat Awasthi India strategy, +91 22 4037 4180 prabhat.awasthi@nomura.com

India Saion Mukherjee Pharmaceuticals / +91 22 4037 4184 saion.mukherjee@nomura.com

India Sanjay Kadam Database analyst +91 22 4037 4187 sanjay.kadam@nomura.com

India Sonal Varma Economics +91 22 4037 4087 sonal.varma@nomura.com

India Sreekanth Akula (Associate) Banks +91 22 4037 4361 sreekanth.akula@nomura.com

Singapore Roshan B. Raj Telecoms +65 6433 6961 broshan.raj@nomura.com

Singapore Sachin Gupta, CFA Telecoms +65 6433 6968 sachin.gupta@nomura.com

Singapore Srikanth Vadlamani Financials +65 6433 6957 srikanth.vadlamani@nomura.com

~ Action Stocks for action

The Indian rebalancing trick Analysts

e Return of risk-taking — from de-leveraging to re-leveraging

f Fiscal rebalancing — a marginal move towards consolidation

g Strong capital flows and an appreciating rupee

h Reforms — hope springs eternal

Nomura 1 4 January 2010

Contents Also see our Asia Strategy 2010

The proverbial puddle: monetary rebalancing 4

Growth rebalancing: investment to join the mix 7

Fiscal rebalancing – a marginal move towards consolidation 11

Return of risk-taking: from de-leveraging to re-leveraging 14

Key themes for 2010F 21

India economic outlook 30

Nomura 2 4 January 2010

India stock picks

Nomura 3 4 January 2010

The proverbial puddle: monetary

an autonomous pick-up in industrial investment will be fortified by a policy push on

We provide a detailed sector allocation strategy later on in this report.

Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research

Nomura 4 4 January 2010

Valuations not excessive, but not immune to monetary

5 (4) Overvaluation territory

Rising inflation is a short-term overhang on markets

Nomura 5 4 January 2010

Early rate tightening will curb core inflation and manage

370 Primary articles WPI Index 3,500 (%) India China

(Y-Y %) CRB index (RHS) (Y-Y %) (%)

Source: Bloomberg, Nomura research Source: Capitaline, Nomura research

Nomura 6 4 January 2010

Growth rebalancing: investment to join

Capacity shortages are back

Nomura 7 4 January 2010

Nomura 8 4 January 2010

Exhibit 14. Non-oil imports Exhibit 15. Industrial production (y-y %)

Stalled financial closures have restarted

Exhibit 16. Financial closures in the power sector

Nomura 9 4 January 2010

Pick-up in capex will translate into greater capital inflows and

(INRmn) Capex (LHS) (INRmn) (%) CA/GDP (LHS) (%)

Note: Excludes portfolio flows Note: Excludes portfolio flows

Nomura 10 4 January 2010

Nomura's - India Strategy 2010 - 4th Jan 2010

Nomura's - India Strategy 2010 - 4th Jan 2010