SECTOR OUTLOOK

31st March, 2011

AUTOMOBILE: OVERWEIGHT India continues to consolidate its position on the global front, being one of the worlds top 10 auto-producing countries. India, the seventh largest vehicle producing nation in the world, now accounts for 5% of global auto production, up from 1.4% at the beginning of 2000. The investment in the industry is expected to be up to USD 17bn in fresh capacity over the next four years and the investment in automotive components is expected to be USD 12bn over the next six years. Society of Indian Automobile Manufacturers (SIAM) has laid out its Automotive Mission Plan vision of automobile output of USD 145bn accounting for more than 10% of the GDP and providing employment to 25 million people by 2016. This would be driven by rising per capita income and increased economic activity. Indias auto market grew at 32.69% in 2010, marginally better than Chinas 32.44%. According to the annual forecast of the SIAM, passenger vehicle sales in the country will be 2.2mn units in FY11 as compared to 1.9mn units in FY10. While two-wheeler sales are expected to be up 910% at 10.3mn units from 9.3mn units in FY10, commercial vehicle sales in India will grow 1718 per cent at 0.62mn units vis--vis 0.53mn units last financial year. Sales of three-wheelers are expected to go up 7-8% at 0.47mn units in the current financial year as against 0.44mn units in 2009-10. The two-wheeler industry has seen robust growth throughout the year with a 29% YTD growth. Commercial vehicles grew by 35% YTD and a budgetary push in infrastructure activities will help volume growth in the future. For Q3FY11, Bajaj recorded flat sequential volume growth, 1.7% average realization increase while the management has guided 20% volume growth for FY12. Hero Honda reported its highest ever quarterly volume; 11% sequential growth and 2.1% average realization growth and management expects to retain its market share in the coming quarters. In the four-wheeler space, Maruti recorded its highest quarterly sales volume; M&M reported strong 12% Q-o-Q volume growth and Tata Motors reported strong set of numbers helped by JLR numbers. The key risks for the sector include spike in raw material prices as raw material to sales ratio is in the range of 60-75%. Further increase in input price such as steel, aluminum, rubber will affect the margins. On the demand side, any steep increase in interest rates will affect the demand and defer sales thereby reducing the volume growth. Standard rate of excise duty remained unchanged at 10%. Removal of concessional excise duty was expected by the industry. However, in an effort to fortify the sector in terms of volume growth, the budget did not increase excise duty. Also Exemption of customs duty and special CVD for the critical parts imported by domestic hybrid vehicles were proposed in the budget. Top Picks: Tata Motors (CMP-Rs 1247, TP-Rs1434), M&M (CMP- Rs 710, TP- Rs 809), Hero Honda (CMP-Rs1552, TP: Rs - 1910) Indian Auto sector grew at 32% in 2010 2-wheelers grew 29% and CV grew 35% Raw material prices & Interest rates are key risks

Automobile production
2,500 2,351 2,000 1,778 1,839 1,500 1,210 1,000 500 275 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Passenger Vehicles Commercial Vehicles 354 990 520 549 567 417 1,309 1,545

('000)

391

Two-Wheelers sales
12,000 10,000 8,000 8,467 7,609 6,530 5,623 8,027 10,513 8,420

('000)

6,000 4,000 2,000 0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Passenger vehicle marketshare (Jan'11)

4.3% 6.8% 13.9% 14.5% 15.3% Maruti 45.2% Hyundai Tata Motors M&M GM others

SECTOR OUTLOOK
31st March, 2011

IT SECTOR: OVERWEIGHT IT sector saw strong recovery in FY10 and increased its share substantially in FY11 and the growth was primarily led by IT services. IT-BPO service is estimated to aggregate revenue of USD 88bn for FY11 with the IT software and services accounting for USD 76bn of the revenue. IT export revenues are expected to gross USD 59.4bn, a growth of 18.6% over the previous year and contribute 67.3% of the total IT revenue. The potential growth drivers include a thrust on platform BPO, Analytics, Remote Infrastructure Management, ADM and Cloud services. According to NASSCOMs report Perspective 2020: Transform Business, Transform India the export component of the industry is expected to reach USD 175bn in revenue by 2020 while the domestic component is expected to contribute USD 50bn in revenue by 2020 which translates to a CAGR of 12.8% for IT exports. India is likely to see its internet users triple to 237mn by 2015 from 81mn as on September 2010 while moving the penetration level to 19%. PC market sales touched 2.79mn units during July-Sept quarter 27% Y-o-Y increase while desktop contributed two-third of total PC sales. Tier-1 IT companies have widened the gap with other players in the industry growing at two and a half times higher growth rate than the other players while increasing its market share to 47% driven by vendor consolidation by clients, end-to-end service offered by tier-1 players and higher process excellence along with scalability. Client mining has helped in revenue growth in the absence of winning multiple mega deals. Top-tier Indian IT vendors have largest exposure to BFSI which has been the primary growth driver. New industry verticals such as energy utilities and healthcare have strong growth potential. On the supply side, FY11 saw hiring of approx 240,000 people in the IT industry and considering the growth expected in FY12, manpower addition is expected to be on the higher side. The employee expense to sales ratio is in 40-53% range and wage inflation is a key risk to the margins. Currency fluctuation is also a key risk for the industry as the USD-INR range has been volatile between 44.2-47.2 in the last one year. The utilization levels for large IT firms are in the range of 70-80%. NASSCOM has projected exports to grow at 16-18% while domestic IT to grow at 15-17% for FY12. Top Picks: TCS (CMP Rs -1151, TP: Rs - 1484), Infosys (CMP - Rs 3170, TP - Rs 3562), Wipro (CMP - Rs 472.9, TP - Rs 482)
IT-BPO sector growth
100 90 80 70 28.8 21.9 22.0 16.2 59.4 40.9 31.7 10 0 FY07 FY08 FY09 FY10 FY11e 47.5 50.1 23.8

Potential growth drivers include Cloud services, RIM, ADM services

NASSCOM expects IT sector to touch USD 225bn by 2020 from current USD 88bn

Q3FY11 pricing growth for top IT companies has been in the range of 1-2% Q-o-Q

Client mining, BFSI, end-toend service & new industry verticals drive revenue

IT sector Revenue

17%

14%

Hardware
19%

IT services BPO
50%

software products

Infosys Q3 FY11 Q-o-Q USD Revenue growth Volume growth Rupee revenue growth Q4 FY11 Q-o-Q Rupee revenue growth est. USD revenue growth management guidance Rupee revenue consensus FY12 Revenue growth est. Revenue growth consensus 5.9% 3.1% 2.3% 3.4% 1-2% 4% 19% 23%

TCS 7.0% 5.7% 4.1% 6.9% NA

Wipro 5.6% 1.5% 1.3% 3.0% 3-5%

USD billion

60 50 40 30 20

5% 2.70% 22% 24% 17% 19%

SECTOR OUTLOOK
31st March, 2011

OIL & GAS: OVERWEIGHT Indian oil and gas industry plays an important role in fuelling the rapid growth of the domestic economy. The sector meets over 45% of the demand for primary commercial energy in the country and also contributes nearly 3% to the gross domestic product. However the industry in recent years has been characterized by rising consumption of oil products, declining crude production and low reserve accretion. The availability of limited domestic resources led the country to import more than 75% of its oil consumption and to exploit new resources such as coal bed methane, shale gas and gasification of underground coal. During the year, Indias production of oil is expected to grow at a robust rate of about 12.5%, from 34.8MMT produced in FY10. This is supported by increase in crude oil production mainly from Rajasthan, the KG-D6 block and enhanced oil recovery techniques by national oil companies. Even gas production is anticipated to grow at the same level in the current year from 47.5BCM produced in FY10 due to increase in production from KG-D6 blocks. This move will significantly reduce our dependence on high price imported LNG and increase the availability of gas to industries of strategic importance such as fertilizer and power. In oil and gas transportation sector, there is a planned addition of over 8,000km of pipelines by 2013-14 and LNG terminals being planned to come up along Indias coastline. These investment plans are expected to bring significant opportunities for both public and private players present across the value chain. In the downstream sector, India is well on its way to becoming a refining hub with substantial export capacity. Indias annual crude refining capacity is expected to rise to 240mmt by the end of 2011-12 and to 260mmt by 2016. The PNGRB is pursuing city gas distribution bidding aggressively with an aim to cover 200 cities by 2015. Even the Government is offering 34 E&P blocks under the NELP IX to boost oil production in the coming years. This augurs well for the general public as it will enhance the availability of natural gas & oil and reduce costs for consumption. However the sector faces major obstacles due to volatility in international oil prices, high subsidy burden, high tax rates on petrol and diesel, low rate of exploration success, limited pipeline infrastructure etc. The ongoing political unrest has led global crude oil prices to touch a two year high of USD 110 per barrel. Higher crude oil prices will increase subsidy burden for oil companies. But the oil firms had withheld raising petrol prices in anticipation of a cut in customs and excise duty in the recent Budget. However, the FinMin in the recent budget has provisioned only Rs 23,640crore in 2011-12 as oil subsidy, lower than Rs 38,386crore of current fiscal and even has not clarified on the Government's contribution to the subsidy. Even he has not addressed the point of reducing customs and excise duty to tackle the impact of spurt in global crude oil prices. Due to this, we expect a hike in fuel price in the near term which will help the companies to lessen the impact of higher subsidy burden and unchanged customs and excise duty. In spite of all these negatives, fuelled by the insatiable domestic demand for energy, dynamic activities by both public sector and private players and venturing of international companies with technical expertise, the oil and gas sector has significant growth prospects in the years to come. During Q3FY11, most of the upstream companies recorded decent revenue and margin growth due to increase in oil and gas production. Even the recent deregulation in oil prices helped the companies to witness a gradual increase in net oil realization. Moreover, gas price realization also improved as a result of increase in APM gas prices in June 2010 Top Picks: Reliance Industries (CMP-Rs1033, TP-Rs 1098), GAIL (CMP- Rs 461.2, TP-Rs 545), OIL (CMP-Rs 1297.4, TP-Rs 1429), Petronet LNG (CMP-Rs 118, TP-Rs126), ONGC (CMP- Rs 282.3, TP-Rs 351) Oil production is expected to grow at 12.5%

Annual crude refining capacity is expected to rise to 260mmt in FY12

Volatility in international crude prices and burden of oil subsidies will remain crucial factors

Lower subsidies will compel oil companies to raise prices

Deregulation of petrol prices helped companies mitigate losses

SECTOR OUTLOOK
31st March, 2011

TELECOM: NEUTRAL The Indian telecommunications industry is the fastest growing in the world. Industry added an average 18mn subscriber per month over the Oct 2009-Oct 2010 period. Total subscriber base is over 771mn by January 2011 and total industry revenue stood at Rs. 1,580bn in FY10. The sectors operational key indicators have changed dramatically due to increased competition, falling tariffs and uncertain regulatory environment. Thus, revenue growth and profitability of the sector is under pressure and investor interest in the sector is low with the sector underperforming the broader market in the last three years. The sector is currently plagued by regulatory uncertainty due to the alleged scam in the 2008 spectrum allocation. CBI is investigating the case and specifically looking for four issues: 1) Allotment of universal access services (UAS) licenses to new entrants in 2008 at 2001 prices; 2) Alleged irregularities in the allotment process; 3) Award of incremental 2G spectrums beyond the limit of 6.2MHz; and 4) Allowing dual technology services. These issues have led to a change in the top rung of the Union Telecom Ministry (DoT) with Mr. Kapil Sibal taking over from Mr. A. Raja. So far DoT has already issued show cause notices to 85 licensees for not meeting the eligibility criteria for the UAS licenses. It has also issued notices to 119 licenses for not meeting the rollout obligations. A committee made up of a former judge of the Supreme Court of India has also been set up to understand the procedures that the DoT followed while allocating spectrum over the years. For Q3FY11, all the telecom operators reported decline in key operating metrics, except Idea Cellular, whose operating performance was above its peers. In the current fiscal, there was successful auction of 3G spectrum, which has given around Rs. 650bn to the GoI and MNP implementation. According to a TRAI, at the end of February, only 3.8 million subscribers, or less than 1% of the total reported user base, had opted for MNP. As the number increases, telcos' expenditure may escalate as they try to retain postpaid customers. The initial positive response to the 3G services has been encouraging with Bharti Airtel reporting a net addition of 5-6lakh 3G subscribers since its initial launch in January. It is, however, unlikely to have a significant impact on the ARPUs. Besides this the impact of Budget 2011-12 is negative for the sector. There was no clarification on the treatment of spectrum fees despite marginal increase in MAT and no incentive for rolling out services in rural areas. In next few quarters, DoT is expected to formulate new telecom policy. It is expected that, there will be 1) Onetime fees for excess spectrum held by operators beyond 6.2MHz; 2) Cancellation of ineligible licenses; 3) Repricing of UAS licenses given in 2008; and 4) Repricing of spectrum given to dual technology service providers. Thus if there is re-pricing of licenses, then it will be beneficial for the GoI, as it will increase the Governments ability to charge a market determined rate for all future transactions. Taking this in consideration, it is estimated that, the financial impact on account of excess spectrum held by operators; Bharti Airtel (Rs. 43.4bn), Idea Cellular (Rs. 13.5bn) and RCom (Rs. 256mn). The re-pricing of UAS licenses given in 2008 will have the following impact: (1) Bharti Airtel (Nil), Idea Cellular (Rs43.9bn) and RCom (Rs74bn). Going forward, the share of VAS in wireless revenue is likely to increase to 12-13 per cent by FY11, against 10% in FY10, on the back of increased operator focus on VAS due to continuous fall in voice tariffs, increasing penetration of feature rich handsets, availability of vernacular content and increased user adoption of VAS applications. Currently, India is the world's second largest wireless market after China in terms of mobile connections and is expected to have a subscriber base of more than 770mn by 2013. Top Picks: Bharti Airtel (CMP-Rs 359, TP-Rs 383), Idea (CMP-Rs 65.9, TP-Rs 75), Reliance Communications (CMPRs 109.9, TP-Rs 123) Increased competition, falling tariffs put the sector under pressure

Clouds of scams are hanging around the sector Uncertainty about spectrum allocation price remains major negatives

Budget 2011 failed to clarify treatment of spectrum fees by telecom companies

Repricing of spectrum fees may result in more outflows for telecom firms

Share of value added services in wireless revenue is likely to increase to 13% by FY11

SECTOR OUTLOOK
31st March, 2011

METALS: OVERWEIGHT India became the fourth largest producer of crude steel in the world in 2010 as against the eighth position in 2003 and is expected to become the second largest producer of crude steel in the world by 2015. India also maintained its lead position as the worlds largest producer of direct reduced iron (DRI) or sponge iron. Led by strong demand from robust growth in infrastructure, auto, construction and engineering services, the domestic steel demand in India remains robust. As India is net importer of steel, the outlook for the domestic operating environment is positive. India produced 50.1 million tons (mt) crude steel for 9 months ended FY11. Capacity for crude steel production expanded from 51mtpa in FY06 to 73mtpa in FY10. Crude steel production grew at 8% annually from 46mt in FY06 to 65mt in FY10. As per the latest estimates, the crude steel capacity in the country is likely to reach 120 MT by FY12 from 73mt in the FY10. In non ferrous segment, the outlook for Zinc and Aluminum is bullish which is driven by 1) higher infrastructure spending and automobile demand led by economic recovery in North America/Europe and continued demand in emerging economies and 2) expected decline in inventory/surplus levels backed by a rising consumption trend. Copper prices are expected to remain firm on account of a) lower availability of refined metal b) higher demand and c) declining inventory levels. Zinc consumption is expected to grow by 7% in FY11E and FY12E, due to rising demand by robust infrastructure spending. In our view, rising metal-consumption along with lower availability of zinc concentrate could result in higher zinc prices and may even lead to a deficit in the supply-demand balance over the near-term. We expect zinc prices to increase over the next 23 years to US$ 2,2002,400/ton. Aluminum fundamentals are improving with declining inventory levels and rising consumption trends. With most economies, especially Europe and North America bouncing back from their lows, aluminum consumption is likely to grow 7% in FY11E and FY12E, leading to strengthening of prices. While prices may be volatile in the near term, we expect a bullish trend over the medium term with prices likely to stay above US$ 2,300/ton. Copper mining production is expected to decline in FY11E on account of mining shut-downs and lower quality of ore at some mines. Custom smelters are likely to push for higher TcRcs on rising demand for copper. Also, in the long term, availability of copper concentrate is likely to remain subdued on account of depleting resources of copper and prolonged execution of mining projects. We expect TcRc margins to increase by 2030% in FY11E. During Q3FY11, the sector reported declining margins, due to increased cost of production, which was mainly contributed by the rise in cost of coal. Coal prices are expected to remain high till Q1FY12. Only fully integrated players reported improved margins. In coming years, capacity addition is expected in all the segments, taking into account the future requirement, which will help in revenue growth. Besides this the impact of Budget 2011-12 is negative for those companies which are involved in iron ore export. Government has increased the export duty for iron ore export, but provided full exemption of export duty for iron ore pellets in order to encourage the value addition process for fines. Besides this, there is no imposition of mining tax (26% at PBT) on mining companies, thus it is a positive for mining companies as well as metal companies with captive mines. Top Picks: Tata Steel (CMP- Rs 616.4, TP-Rs 790), Hindalco Industries (CMP-Rs 205.4, TP-Rs 262), Sterlite Industries (CMP-Rs 171.8, TP-Rs 208), Sesa Goa (CMP-Rs 288, TP-Rs 312), Jindal Steel & Power (CMP-Rs 688, TP-Rs 796) India became the fourth largest producer of crude steel in the world in 2010

The outlook on coal prices is positive on potential global shortages & rising demand in China & India

Margins declined during Q3FY11 on the back of rising coal prices

SECTOR OUTLOOK
31st March, 2011

POWER NEUTRAL Outlook for the Indian power sector for 2011 is Neutral, in spite of the demand-supply imbalance and policy support from the Government. The negative factors, including difficulties in passing power purchase costs on to end-customers, the slow progress of the State power utilities (SPUs) in reducing commercial and technical losses and the delays faced by the power sector companies in implementing capex programme. The delays are due to bottlenecks relating to fuel supply, water allocation, land availability, environmental approval and capital equipment shortages. Short-term power prices are expected to face upward pressure during the peak summer season. The development of the short-term power market, involving contracts spanning less than a year, has proved to be very useful by providing alternative to over drawing from the grid and reducing peaking shortages. Fuel is becoming another limitation in the wake of a severe domestic coal shortage. Most generation utilities, led by power major NTPC Ltd, are said to be better placed in 2011 in terms of having a coal import strategy in place. This includes tying-up supplies through firm contracts abroad or picking up stakes in mines in countries such as Indonesia, Australia, and South Africa. Besides, increased gas availability is expected to boost generation from projects using gas as feedstock. With progress picking up on solar power schemes, the coming year could see greater inroads being made by green' electrification projects. The Government has already selected 37 companies to develop new solar projects late this year, as the country moves forward with an ambitious plan that seeks to significantly scale up production from near zero to 20 GW by 2022. It is likely to be a tough road ahead for future hydro projects, especially in the wake of some high-profile projects being scrapped due to environmental concerns. These include NTPC's 600-MW Loharinag Pala hydropower project in Uttarakhand, where work was in advanced stages. The transition to a new regime, under which power projects will be awarded to prospective developers offering the most competitive tariffs, is the most anticipated change in the power sector as we move into the year 2011. The step is expected to usher in greater competition and eventually translate into lower electricity bills for the end-consumer. The year could also see some progress on the awarding of at least a couple of new Ultra Mega Power Projects (UMPPs) proposed in Orissa and Chhattisgarh, especially those which have been stuck through the current year for want of clearance. Q3FY11 earnings remained under pressure due to lower realization in merchant power rates. Merchant power rates declined by more than 25% for the same period. Also higher cost of raw materials such as coal resulted in lower than expected margins of the companies. Going forward, however we think revenues will improve due to expected rise in merchant power rates. Top Picks: Tata Power (CMP- Rs1325.8, TP - Rs1441), Adani Power (CMP-Rs 112, TP- Rs 136), NTPC (CMP-Rs 188.9, TP- Rs 194) and Reliance Power (CMP Rs 124.6, TP- Rs 128). Difficulties in cost passing, execution delays of power projects are crucial factors

Slack progress on distribution reforms

Earnings during Q3FY11 remained under pressure due to lower realization in merchant power rates

Power projects will be awarded through competitive bidding process

SECTOR OUTLOOK
31st March, 2011

FMCG - NEUTRAL The 201112 Union Budget was largely positive for most companies in FMCG sector with peak excise duty remaining unchanged, despite a marginal hike in MAT rate (from 18% to 18.5%). Excise on most consumer products has been left unchanged, at 10%. Excise duty on cigarettes, too, has been unchanged. However, excise has been increased, by 1%, on some categories such as soups, ketchups, margarine, ready-to-eat products, toothpowders, etc. We believe the increase in allocation for the rural sector and on infrastructure spending would bring medium-term benefits to the consumer sector. The Indian FMCG sector is the fourth-largest sector of the economy accounting for 5% of the total factory employment in the country. A combination of changing lifestyles, higher disposable income, greater product awareness and affordable pricing have been instrumental in changing the pattern and amount of consumer expenditure leading to robust growth of the consumer durables industry. Penetration level of consumer goods in rural areas comprising 70% of Indias population is still low indicating the untapped market potential. During Q3FY11, the strong sales volume led to reasonably strong revenue growth for most FMCG companies. HUL reported highest Domestic consumer segment volumes in past four quarters at 14% Y-o-Y and an overall volume growth of 13% Y-o-Y.ITC reported better than expected results for Q3FY11.Its core cigarettes business reported a 2% volume growth despite of the shutdown of its cigarettes factory for about three weeks due to lack of clarity on the new pictorial warning. Input cost inflation continues to remain the key concerns for the FMCG sector in the near term, with most commodities seeing a sharp uptick in prices, with very little respite seen M-o-M. Commodities like Safflower oil, copra, coffee, vanaspati and other edible oils have seen sharp inflation off late, and will hurt gross margins of FMCG companies. Revenue growth in the next few quarters can expect a boost from the price hikes implemented in select categories by FMCG companies. Furthermore, a good monsoon could boost rural demand, while urban demand has already shown signs of improvement. The input costs would be a key factor to watch, considering the recent spike in food inflation. We however, retain our Neutral stance on the sector on rich valuations. Top Picks: Godrej Consumer Products (CMP Rs 360, TP Rs 424), ITC (CMP -Rs 177.7, TP Rs 197), HUL (CMP Rs 277.7, TP Rs 288). Peak Excise duty remained unchanged for the year 2011-12

Lower penetration within rural markets leaves more opportunities for FMCG firms

Q3FY11 witnessed strong growth in revenue and volumes

Going forward, Inflation and input cost increase will put pressure on margin

SECTOR OUTLOOK
31st March, 2011

MEDIA NEUTRAL Indian M&E (Media & Entertainment) industry can be classified under the following segments Television, Films, Radio, Print, Online, OOH, Music and Animation & Gaming. The Indian M&E Industry continues to be dominated by TV, Print & Filmed Entertainment and stood at USD 12.9 billion in 2009 registering a 1.4 per cent growth over last year, according to a report by KPMG. Over the next five years, the industry is projected to grow at a CAGR of 13 per cent to reach the size of USD 24.04 billion by 2014. A snapshot of the size and the revenue contribution of the industry segments is given below:
Revenue (Rs. bn) Industry Television Print Film Radio Music Animation Gaming Internet Advertising Outdoor Total 2006 183 139 78 6 8 12 3 2 12 443 2007 211 160 93 7 7 14 4 4 14 514 2008 241 172 104 8 7 17 7 6 16 578 2009 257 175 89 8 8 20 8 8 14 587 Composition of Total (%) 2009 43.78 29.81 15.16 1.36 1.36 3.41 1.36 1.36 2.39 100

Indian media industry is expected to grow at CAGR of 13% to USD 24bn by 2014

Rising digitalization, increase in penetration of media segments, organized funding and deregulation would be some of the key growth drivers for the industry

Media spend in India as a percent of GDP is 0.41 percent. This ratio is almost half of the worlds average of 0.80 percent and is much lower compared to developed countries like US and Japan indicating the potential for growth in media spends. This is largely due to some of the media platforms being in a relatively nascent stage. Going forward, as penetration increases and more audiences come in the fold of M&E industry, it is expected to see higher growth. Indian M&E industry went through a tough phase in the last two years due to the economic slowdown which impacted businesses in the country. Rising digitalization (as content creation and as a distribution platform), increase in penetration of media segments, narrowcasting (niche segmentation of target audience), regionalization (strategy to capture untapped potential of tier 2 and tier 3 cities), consolidation, expanding international markets for Indian content and entry of foreign players, organized funding and deregulation would be the key growth drivers for the industry. Further increasing competition is likely to positively impact the M&E industry leading to expansion of the overall market size. Companies like UTV Software, Dish TV, DB Corp posted better Q3FY11 results, thanks to the increase in Ad spending by FMCG, BFSI, Auto etc. The Ad market in FY12 will see a busy cricket calendar, and the largest advertiser on televisionthe FMCG industrywill face margin pressures. This will have varied impact across sub segments of the media industry. DTH players are set to benefit, as sporting events accelerate migration from cable to DTH. Print media remains largely insulated, on account of the large revenue contribution from local advertisements. Broadcasters, on the other hand, face a likely moderation in ad revenues, though the impact will be cushioned by an increase in the share of subscription revenues. In the recent Budget, the extension of concessional basic customs duty of 5% and a CVD of 5%, to mailroom equipment used to bundle newspapers at the completion stage will benefit all print media companies. In addition, full exemption from excise duty provided to colour, unexposed cinematographic film in jumbo rolls of 400 feet and 1,000 feet will benefit film-processing companies like Reliance Media Works. There can be some pass on of the benefit to film production houses like UTV and Eros.
Top Picks. UTV Software Communications (CMP- Rs 580, TP- Rs 662)

Higher ad spending during Q3FY11 led to higher than expected results

Union budget extended concessional custom duty to mailroom equipments

SECTOR OUTLOOK
31st March, 2011

BFSI: NEUTRAL We continue to remain bullish on banking sector considering healthy outlook on GDP at close to 9% growth, under penetrated financial system and strong credit off take targeted at 20% by RBI. Liquidity crunch and higher cost of funds remained major headwinds for CY ending 2010 Acute liquidity crunch and consequently higher cost of funds remained crucial factors for banks during Q2 and Q3FY11. Excess provisions for loan losses to adhere to provision coverage norms resulted in lower than expected margins for most of the banks. State owned banks like SBI, UCO Bank were the worst hit in terms of profit growth due to PCR norms. Liquidity in particular, remained tight during the quarter ended December 2010 as the daily borrowings under LAF window remained high at around Rs 900bn. 3 month CD rates also rose to 10% reflecting liquidity imbalance. We believe that liquidity will remain tight for Q4FY11 due to seasonally strong credit demand in the fourth quarter of the financial year. Liquidity imbalance will keep cost of funds on higher side and NIM will remain under pressure despite increase in yields on advances. Conducive union budget 2011 The union budget 2011 supported strong policy initiatives to boost banking sector. The Govt. reiterated to infuse Rs 60bn in the form of tier I equity capital in public sector banks. The move is expected to make banks more resilient and allow banks to augment credit portfolio. Financial institutions especially focused towards housing and infrastructure lending such as HDFC, IDFC are expected to perform well on the back of 1% interest subvention for small home loans up to Rs 15lac. Margins are expected to improve post H1FY12 The Govt. addressed liquidity issue in an impressive manner during its monetary policy review. While tackling inflation which led to 7 consecutive rate hikes, reduction in SLR by 1% and buyback of Govt. bonds worth Rs 480bn helped to resolve liquidity position to large extent. The banks like Axis bank, PNB, have raised deposit rates to reduce liquidity gap. As a result, the real interest rates have entered into positive territory which would drive deposit growth. Liquidity has improved as evident from falling Govt. cash balance with RBI and increase in Govt. spending. We expect credit growth will remain buoyant in FY12. Most of the major banks like SBI, PNB, and private banks like ICICI Bank, HDFC bank, have maintained guidance to achieve credit growth of more than 20% for FY12. We believe most of the banks will be in a position to achieve their guidance. Gains from treasury operations may be impacted due to higher yields, although that will be insignificant. Most banks have securitized their 2G exposure and hence not likely to be impacted. Key catalyst for the sector in FY12 Easing liquidity pressure will lower cost of funds. Hike in lending rates will allay an impact of higher cost of funds during FY11 and help maintain NIM. Improvement in fresh slippages and growth in bad loan recoveries will ensure better asset quality.
Top Picks. Axis bank (CMP-Rs 1424.7, TP -Rs 1582), HDFC (CMP Rs 697.8, TP -Rs730), SBI (CMP- Rs 2859, TP -Rs

Credit growth remained strong at 22.4% as against 20% target by RBI

Liquidity imbalance, higher cost of funds and loan loss provisions put pressure on NIM

Loan loss provisions hurt performance of banks like SBI, UCO Bank.

Govt. will announce Rs 60bn tier I equity capital infusion in public sector banks

Easing liquidity pressure and increase in yield on advances will maintain NIM in FY12

3129), PNB (CMP- Rs 1217, TP- Rs1375), Shriram Transport Finance (CMP- Rs 772, TP- Rs - 878), BOB (CMP- Rs 961, TP- Rs1087), Yes bank (CMP- Rs 320, TP- Rs 363).

SECTOR OUTLOOK
31st March, 2011

PHARMACEUTICALS & HEALTHCARE: NEUTRAL India's pharmaceutical industry is the third largest in the world in terms of volume and stands fourteenth in terms of value. The industry is highly fragmented with about 24,000 players, where the top ten companies make up for more than a third of the market. It grew by a robust 17% Y-o-Y in 2009 to USD 8.5bn and has nearly doubled since 2005. The industry accounts for about 1% of the world's pharma industry in value terms and 8% in volume terms. In addition to the domestic market, the sector earns a large chunk of revenue from exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets, others are focusing on custom manufacturing for innovator companies. India has more than 120 US FDA approved plants along with 84 UK MHRA approved plants, most of which have multiple approvals from regulatory authorities in Canada, Australia, Germany and South Africa. It is expected that the industry is about to grow manifold in the coming years supported by cheaper pricing, growth in overseas demand, etc. In the third quarter of the year, the sector witnessed a strong sales growth supported by inorganic growth and growth in US exports. However, high costs related to acquisitions, adverse currency fluctuation as well as a rise in staff and R&D costs hampered profitability. The small players were severely affected due to the cost pressure. Companies having presence in Germany were affected on account of the 16% rebate proposed by the government for three years. Even in the recent Union budget, key tax rates edged up for the companies and no major positive news has been announced in for the sector. Although maintenance in R&D deduction will encourage Pharma companies to increase R&D spending, but this has been offset by increase in MAT rates especially in SEZs. During the last quarter, Indian companies earned eight final approvals and four tentative approvals from the USFDA. Aurobindo and Dr Reddys Laboratories have received tentative approvals for two drugs each, whereas Alembic, Glenmark Pharma, Lupin, Natco, Torrent, Cadilla and Dr Reddys received final approval for their drugs. On the R&D front, Biocon reported discouraging results for its diabetic drug in phase III trials. Cadila formed a new JV with Bayer Healthcare to market its products from niche categories. Glenmark received an unfavourable verdict from a US jury regarding anti-hypertensive drug Tarka, which asked the company to stop sales of Tarka and also slapped a Rs 70cr penalty to be payable to Abbott. Recently, Aurobindo Pharma has received an alert warning from the US drug regulator for not meeting the compliance at one of its units in Hyderabad, which is about to cost the company USD 26mn. In spite of all the negatives, Indian pharmaceuticals remains robust and thus we maintain our positive view on the sector. We believe that the opportunities from the US are very lucrative. Strategic tie-ups, out licensing deals and exclusive product launches could result in a significant incremental profitability for the pharma companies and could surprise positively going into FY13-14. Further, the Indian players are stepping up efforts in the domestic market in view of steady revenue growth opportunities and relatively high margins, as they scale up operations in emerging generic markets. Domestic demand has also been robust due to increase in healthcare spending by the Government and should continue to do well due to further increase in allocation this year. We believe domestic pharma companies will continue to penetrate into lower tier cities which will help domestic market to grow at higher rates in the coming years. Top Picks CIPLA (CMP-Rs 327.7, TP- Rs 350), Glenmark (CMPRs 281.6, TP- Rs 368), Lupin (CMP-Rs 415, TP- Rs 496)

Indian pharmaceutical industry is the third largest in the world

Large chunk of revenue is derived from export markets

Growth during Q3FY11 was mainly driven by growth in US exports

Govt rolled back 5% service tax on highend hospitals and diagnostic services

SECTOR OUTLOOK
31st March, 2011

TEXTILES: NEUTRAL During 2009-10, the Indian textiles industry is pegged at US$ 55 billion, 64% of which caters to domestic demand. The textiles industry accounts for 14% of industrial production, employs 35 million people and accounts for nearly 12% share of the country's total exports basket. Fiscal FY10 saw the industry revive after facing unprecedented challenges in FY09 due to global economic slowdown, especially in the major export markets for India. The revival was supported by recovery in domestic demand followed by pick up in export demand since Q3FY10. Under the Technology Upgradation Fund Scheme (TUFS), projects worth Rs.276 billion were sanctioned in FY10 which was significantly lower as compared to Rs.557 billion in FY09. Though companies opted for more loans in FY11 with improving demand scenario, the Government has suspended the subsidy scheme in June 2010 as the total subsidy of Rs.8, 000crore earmarked under the 11th Plan has already been disbursed. The Government has fixed the export target at US$25.48 billion for the year 2010-11. During the six months ended September 2010, the actual textile exports from the country stood at US$11 billion. Budget Proposals Ready-made garments and made-ups of textiles are brought under mandatory excise duty at a unified rate of 10% from an optional excise duty regime. Credit of tax paid on inputs, capital goods and services would be available to manufacturers. Provision of Rs.3, 000cr to NABARD which would in turn benefit 15,000 co-operative societies and 3,00, 000 handloom weavers. Reduction of basic customs duty from 5% to 2.5% on certain textile intermediates. Reduction of basic customs duty on certain specified inputs for manufacture of certain technical fibre and yarn from 7.5% to 5%. Marginal increase in budgetary allocation under TUFS from Rs.2785cr in 2010-11 to Rs.2980cr in 2011-12. Impact on the industry Apparel manufacturers are already facing heat from rising yarn prices. Bid to reduce the cotton yarn prices by imposing export restrictions have not helped much. Under these circumstances, imposing mandatory excise duty of 10% on branded garments and made-ups from being an optional levy till now could put further pressure on their margins unless manufacturers are able to pass on the cost to end users. Proposal of Rs.3000cr to NABARD is expected to ease the financial burden of handloom weavers though details of the scheme are awaited. Top Picks: S Kumar Nationwide Ltd (CMP -Rs 56, TP Rs 89)

Recovery in domestic demand and pick up in export demand helped the sector

The govt. pegged the export target at USD24bn for FY11

Excise duty remained unchanged at 10%

Basic custom duty reduced from 5% to 2.5% on certain textile intermediaries

SECTOR OUTLOOK
31st March, 2011

CEMENT: NEUTRAL The Indian cement sector is the world's second largest with a current capacity of about 280 million tonnes (mt). The industry has seen strong capacity addition of nearly 70mt since FY09 and is expected to add another 30mt by the end of FY 2012 to cross the 300mt mark. The cement dispatch growth is expected to slow down at 5-7% Y-o-Y for FY11E impacted by sluggish infrastructure off-take and erratic climatic conditions. The outlook is stronger for FY12 on the back of elections in several states, when speedy completion of infrastructure projects leads to higher cement demand. Additionally higher real estate launches and increased government focus on project spending, as indicated in the increased Budgetary allocation also improves the demand outlook. Cement prices have increased by Rs 30-50 per bag across regions in the last two months on account of pricing discipline maintained by players after taking production cuts. Prices are further expected to remain firm in Q4FY11E and Q1FY12E on the back of a pick-up in demand during the period, which is one of the best for construction activities. On the input costs front, fuel cost has surged by ~30% over the last three months after the floods in Australia in December 2010 disrupted coal exports from the country. Indian cement manufacturers are highly dependent on imported coal due to the relatively low availability of coal linkages within India and from the e-auction markets. The larger manufacturers import 30-50% of their energy requirement. The recent civil unrest in the Middle East has pushed oil prices upward; coal prices too have risen as coal is a substitute for oil in many cases. The coal cost increase; post CILs 30% price hike, is also clearly negative for cement companies. The Union Budgets proposal to change the excise duty structure from 10% of MRP (retail prices over Rs190/bag) to 10% ad valorem + Rs160/MT would be neutral as the increase required would be nominal at Rs1-2/bag (as the basis for calculating ad-valorem is lower than MRP). The budget also reduced customs duty on certain raw materials (like gypsum, pet coke) to 2.5% from 5% previously. While the price outlook is strong till Q1FY12, the price discipline is likely to wane from June 2011 onwards due to the monsoons and higher supply pressures. We expect the stabilizing capacities, producer focus to capture market share and rising input costs to keep the operating margins of companies under pressure for FY12. Higher budgetary allocation of Rs 2,140bn, up 23%YoY, for investments in infrastructure sector / schemes and considering that the large players in the industry continue to trade near their replacement costs, we rate the sector as Neutral. Top Sell. ACC (CMP -Rs 1079, TP Rs 937), Ambuja Cements (CMP -Rs 150, TP Rs 122), Ultratech Cement (CMP -Rs 1126, TP Rs 985)

Cement Industry to cross 300mt of capacity by 2012

February 2011 dispatch growth stronger at 5-7% after 3 months of sluggish demand

South India companies reported sharp recovery in realizations in Q3 sequentially, after a very weak Q2

Operating margins would remain under pressure till FY12 on widening demandsupply gap & rising input costs

SECTOR OUTLOOK
31st March, 2011

INFRASTRUCTURE: OVERWEIGHT The Union Budget 2011-12 has provided nearly half of the proposed plan expenditure for 2011-12 to the infrastructure sector at Rs2.14 lakh crore, representing a significant 23% growth over the current year. Tax-free infrastructure bonds of Rs300bn to be issued by Railway Finance Corporation (Rs100bn), NHAI (Rs100bn), HUDCO (Rs50bn), Ports (Rs50bn) would further increase debt availability for infra projects. Progress on a new funding avenue was also announced in the form of takeout financing. The budget also announced capacity-building efforts to enable public-private partnerships, an important model for infrastructure investment. According to the Economic Survey for 2010-11, 293 projects or over 52 per cent of the ongoing 559 infrastructure projects are running behind schedule as on October, 2010 and added that the investment in the key infrastructure segments like power, roads, ports, airports among others, is expected to increase to 8.37 per cent of the GDP or over Rs 4 lakh crore in 2011-12. Moreover, the Government proposes to raise investment in infrastructure sector to USD 1tn in the Twelfth Five Year Plan (2012-17) from USD 500bn in the current plan. As many as 268 road projects, including 122 being implemented by the National Highways Authority of India (NHAI), have been delayed as on January 31 this year. Road Minister CP Joshi has attributed the same to delays in land acquisition, obtaining environment and forest clearances etc. With the liquidity support provided in the recent Budget to the NHAI, we expect the awarding activity to accelerate. Indian Railways also has increased the annual plan to Rs 576bn, up 43% Y-o-Y in the Railway Budget. In the road space, some companies that will benefit include Gammon Infrastructure Projects, Reliance Infrastructure, JP Associates and Madhucon Projects. The port traffic in India has roughly doubled in the last decade and currently stands at 530mt. As per a study, overall traffic is expected to grow to 1,008mt and container traffic, to grow at 20% CAGR to 15mn TEUs by FY12. NMDP, an ambitious programme conceived by the Shipping Ministry, had fixed a budget of Rs 55,803 crore for creating the additional capacity of 434 million tonnes (MT) in five years, over-and-above the existing 574.77mt. On the airport sector, the Ministry of Civil Aviation has envisaged creating infrastructure to handle 280 million passengers by 2020 with investment opportunities of USD 80-110bn in new aircraft and USD 30bn in development of airport infrastructure. Over the next five years, AAI has planned a massive investment of USD 3.07 billion for upgrading non-metro airports and modernizing the existing aeronautical facilities. In the airport sector, some companies that will benefit include GVK Power & Infrastructure, Reliance Infrastructure and GMR Infrastructure. A large number of Indian cities and towns need adequate quality infrastructure facilities, specifically, in the areas of water management, roads, transportation, housing, sanitation, sewage etc. Keeping this in mind, the government is targeting an investment of USD 20.38 billion over the next two years in this segment. Due to the recent concerns on macro issues such as rising inflation and an unfavorable interest-rate scenario, infrastructure stocks have corrected significantly. Sectoral headwinds like concerns on slow award activity by NHAI and regulatory overhang on airports have also impacted the sector. We believe that the order books of construction companies remain strong and the recent correction has made the valuations attractive. The acceleration in execution would also ease the working capital situation from here on. Top Picks: Reliance Infrastructure (CMP -Rs 676, TP Rs 968), IVRCL Infrastructure(CMP -Rs 83.8, TP Rs 139), Pratibha Industries(CMP -Rs 65.45, TP Rs 80), JP Associates(CMP -Rs 92, TP Rs 120), Gammon Infrastructure Projects(CMP -Rs 17.6, TP Rs 29.7)

Tax-free infrastructure bonds of Rs300bn to increase debt availability for infra projects.

Power and Transport sectors are expected to witness the highest allocation

With the liquidity support provided in the recent Budget to the NHAI, we expect the awarding activity to accelerate

Order Books of construction companies remain strong

SECTOR OUTLOOK
31st March, 2011

ENGINEERING & CAPITAL GOODS: OVERWEIGHT The macro environment remains favorable for the capital goods players as the outlook on capacity expansion across sectors is robust given that the capital availability has been encouraging, with strong equity issuances this year and a credit growth of 18-20%. The recent increase in budgetary allocations towards various social and infrastructure schemes augurs well for capital goods companies. The Q3FY11 results was better than expected as Larsen & Toubro & BHEL witnessed healthy revenue growth on improved revenue booking on current order backlog. BHEL also surprised positively on the margin front, where the EBITDA margins improved 38bps to 24.7% despite rising commodity costs. Post a 6.7% Y-o-Y growth in 3QFY11, Crompton Greaves management lowered its FY11 revenue guidance, and expects traction to improve by 2HFY12. Smooth execution of the current order book and traction in the short cycle business helped Siemens deliver 36% Y-o-Y revenue growth during the quarter. On the order inflow front, Larsen & Toubro & BHEL witnessed 24- 25% Y-o-Y decline in inflows, respectively although the inflows was strong for players like KEC International, Kalpataru, Siemens and Crompton. Greaves. The Union Budget 2011-12 was positive for the sector as the exemption of excise duty on equipments for UMPP projects is positive for power project developers and domestic equipment manufactures. This was a significant provision considering that Indian power equipment manufacturers have been demanding imposition of customs duty to ensure a level-playing field vis--vis foreign manufacturers, while power project developers have been lobbying against it on fears the move will dry up supply of cheaper equipment in the market. The Budget has also provided for full exemption from basic Customs Duty to bio-asphalt and specified machinery used in the construction of national highways. Tunnel-boring machines required for the construction of highways are also being included in this exemption. Increase in infrastructure spending would benefit large companies like L&T & BHEL. Further, increased focus on sectors like agricultural equipments and cold storage sector also augurs well for capital goods companies. In the last 5-6 months, the MoEF has awarded clearances the Rs 1.2tn Jaitapur nuclear power project (9,990MW in six phases), Rs 422bn of thermal power projects, Rs 345bn of road projects, the Rs 150bn Posco integrated steel project, and Rs 111bn of airport projects. The expected increase in road project awards as well as pick-up in construction activity would benefit road equipment providers, construction contractors and other engineering firms. Power Grid Corp, after tendering about Rs 25,400crore orders during first 3 years, plans to tender around Rs 12000crore and Rs 17000crore during 4th and 5th year respectively. The company has guided ordering to the tune of around Rs 4000crore before Mar'11. Top Picks: Larsen & Toubro(CMP -Rs 1656.7, TP Rs 2023), BHEL(CMP -Rs 2058, TP Rs 2720), Crompton Greaves(CMP -Rs 275, TP Rs 328), Elecon Engineering(CMP -Rs 69, TP Rs 100) The macro environment remains favorable in the medium to long term

Q3FY11 results witnessed healthy revenue growth although slower order inflow growth

MoEF cleared more than Rs 2tn of projects in the last 6 months

Robust project awards from Power Grid Corporation of India Ltd to benefit companies in the power T&D space

SECTOR OUTLOOK
31st March, 2011

REAL ESTATE: NEUTRAL According to the report of the Technical Group on Estimation of Housing Shortage, an estimated shortage of 26.53 million houses during the Eleventh Five Year Plan (2007-12) provides a big investment opportunity. Increasing population, urbanization, rising income levels and demographic changes translates into strong demand of residential space. According to the Confederation of Real Estate Developers' Associations of India (CREDAI), the affordable housing segment is set to play an important role in India's real estate sector in 2011 on the back of substantial demand ignited by economic recovery. In the near term, with liquidity concerns, higher interest rates and tighter LTV norms, we expect sanction and disbursal ratio to fall further. Home loan disbursals have tapered off and have shown a marginal downtrend in the past quarter. On the commercial segment, the growing service sector with IT/ITES industry expected to grow in double digit will result in strong demand of office space specifically SEZ areas. CRISIL Research has said that developers are planning to add 242 malls by 2013 to the 255 malls currently prevalent in top 10 cities which will add about 96 million sq ft of retail area to the existing 72 million sq ft. The excess supply coupled with the higher capex announcements by the retailers (the Future Group, Spencers Retail, Shoppers Stop, etc) will keep rentals stagnant in the retail segment. The Q3FY11 results were fairly decent with Mumbai-based developers (IBREL, Oberoi and HDIL) delivering a strong set of numbers. Approval delays were highlighted as a key challenge by all companies thereby impacting the new launch plans. DLF, the countrys largest developer launched a single project (1.8msf Alameda plots in Gurgaon) during the quarter. However, most companies expect the launches to gain momentum in FY12 (with approvals being in advanced stages) and have outlined an aggressive launch plan for next one year. Debt levels across all companies with the exception of Unitech remained largely stable or increased marginally during the quarter. We believe that affordable housing has huge market potential with 70% of the current population being rural & the wider acceptance of the nuclear family concept. In the recent Budget, the existing scheme of 1% interest subvention has now been extended to Rs 15lakhs for house costing up to Rs 25lakhs. Currently, the limit is Rs 10lakhs for house worth up to Rs 20lakhs. On account of increase in prices of residential properties in urban areas, the budget also proposed to increase the existing housing loan limit from Rs 20lakhs to Rs 25lakhs for dwelling units under priority sector lending. Focus on these affordable housing projects in general is a positive for mid cap real estate developers (Ansal Properties, Parsvanath Developers) which have a higher focus on this segment. The proposal to bring Special Economic Zone developers under the purview of Minimum Alternate Tax was as a setback. This would affect companies having exposure to SEZ projects like Anant Raj Industries. The Budget also did not accord the long-pending demand for industry status to the realty industry, a move which would have made bank financing easier and cheaper for companies. Top Picks: India Bulls Real Estate (CMP -Rs 123, TP Rs 197), DLF (CMP -Rs 263, TP Rs 332) The Outlook on residential real estate segment remains strong with an estimated shortage of 26.53 million houses during the Eleventh Five Year Plan

Broader macro economic factors such as high inflation, high asset prices and liquidity concern makes the near term environment challenging

Outlook for commercial segment good on continued business recovery and strong hiring targets in the IT space

Higher store addition targets by retailers and mall space addition will keep rentals stagnant

The proposal to bring Special Economic Zone developers under the purview of Minimum Alternate Tax was as a setback

SECTOR OUTLOOK
31st March, 2011

HOSPITALITY: NEUTRAL The current count of hotel rooms is 130,000, and the country is expected to require an additional 50,000 rooms over the next two to three years, according to World Travel and Tourism Committee (WTCC) estimates. The contribution of travel and tourism to Gross Domestic Product (GDP) is expected to increase from 8.6 per cent (USD 117.9bn) in 2010 to 9 per cent (USD 330bn) by 2020. Since the slowdown in the hotel industry was aggravated after the 26 November 2008 terrorist attacks, we believe that the sequential improvement in performance is significant, giving clear signals of an ongoing recovery in the industry. Foreign tourist arrivals (FTAs) in India went up by 15.1 per cent to 6.92lakh in February 2011 from 6.01lakh in the same month of last year. The FTAs in the first two months of this year added up to 12.30lakh, which was 12.7 per cent higher than the number of 10.92lakh in the January-February 2010. Indias hotel pipeline is the second largest in the Asia-Pacific region according to Jan Smits, Regional Managing Director, InterContinental Hotels Group (IHG) Asia Australasia. He added that the Indian hospitality industry is projected to grow at a rate of 8.8 per cent during 2007-16, placing India as the second-fastest growing tourism market in the world. The outlook for the sector remains strong going forward as economic growth gathers momentum and companies increase spending on travel. The industry has said that the bookings for the winter season have been better than expected to make it their best October-February season in three years and that the industry is on an upward cycle that will peak in 2012. Signs of improving demand are visible with occupancy rates improving, which would consequently be followed by higher ARRs in the coming quarters. We maintain our positive stance on the hotel industry, on the back of the improving dynamics. In the recent Budget, the Government has proposed a service tax of 5% on all the hotels with an ARR of over Rs1,000 per night, which is likely to be passed on. Various domestic and international hotel chains have announced significant hotel additions to address the expected demand. Roots Corporation, a subsidiary of Indian Hotels Company (IHC), plans to open 60 to 70 budget hotels, known as Ginger Hotel, in 23 locations across the country. ITC, the Kolkata-based cigarette major, also projected its plan to open 25 new hotels under the Fortune brand over the course of next 12-18 months. The US-based Marriott International Inc. plans to have 100 hotels under its portfolio in India by 2015. Top Picks. Taj GVK Hotels (CMP -Rs 93.4, TP Rs144) A service tax of 5% on all the hotels with an ARR of over Rs1,000 per night FTAs during the period January-October 2010 were 4.32 million, a growth rate of 9.9 per cent

India is expected to require an additional 50,000 rooms over the next two to three years

The outlook for the sector remains strong with the winter season bookings better than expected

SECTOR OUTLOOK
31st March, 2011

RETAIL: OVERWEIGHT The BMI India Retail Report estimates that the total retail sales will grow from USD 353 billion in 2010 to USD 543.2 billion by 2014. Moreover, for the 4th time in five years, India has been ranked as the most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, A T Kearney in its 8th annual Global Retail Development Index (GRDI) 2009. Retailing has played a major role the world over in increasing productivity across a wide range of consumer goods and services. In the developed countries, the organized retail industry accounts for almost 80% of the total retail trade. In contrast, in India, organized retail trade accounts for merely 5% of the total retail trade. Fast tracking of augmentation of storage capacity and cold chains and continued emphasis on the food processing sector in the recent Budget will enable bulk manufacturing and reduce costs, which is important for the supply chain of retailers. For Q3FY2011 retailers saw a robust revenue and earnings growth, largely driven by festivities and positive consumer environment. The rising commodity prices resulted in margin contraction for a majority of the players which was the highest for Pantaloon Retail (core business). Apart from the general inflationary pressure, the product mix deterioration in favour of low margin food and electronics business also played its role in denting the gross margin. Further, in an exception to the general trend, strong branded players like Titan and Provogue maintained their margins. In fact Titan showed a 70 basis point improvement in the gross margin levels. Going forward, key monitorables would include the demand resilience and the commodity prices. On the policy front, foreign investment in multi-brand retail is not allowed at present, but multinationals can invest up to 51% in single-brand retail. Foreign retailers such as Wal-Mart and Germanys Metro that operate in the wholesale segment have been lobbying hard to open up multi-brand retail. Although the Finance Minister cited the need to remove bottlenecks in distribution, which contribute the waste of an estimated 40% of Indias agricultural food production, he made no mention of FDI liberalization in the multi-brand retail, which would enable entry of global retailers would transform retail trade. The service tax on lease rentals introduced last year was also retained. Top Picks. Pantaloon Retail (India) Ltd. (CMP -Rs 268, TP Rs 379) Retail sales to grow from USD 353 billion in 2010 to USD 543.2 billion by 2014

Organized retail trade accounts for merely 5% of the total retail trade

Nearly 100 shopping malls are likely to come up by 2012 in seven major cities of India on expectation of increased demand from retailers

No commentary on FDI in multi brand retail in the recent Budget

Service tax on lease rentals is retained for the year 2011-12

The Budget also proposed a mandatory levy of 10 percent on branded apparel.