3QFY2012ResultPreview January2012

3QFY2012 Results Preview | January 3, 2012
Table of Contents
Strategy 3QFY2012 Sectoral Outlook Automobile Banking Capital Goods Cement FMCG Infrastructure Metals Oil & Gas Pharmaceutical Power Real Estate Software Telecom Watch Stock Watch 8 11 15 18 20 22 26 29 32 35 37 39 42 45
Note: Stock prices as on December 30, 2011 Refer to important Disclosures at the end of the report
2-6
Strategy
3QFY2012 Sensex earnings - Margin woes likely to lead to sub-10% profit growth
We expect Sensex companies to maintain healthy top-line growth momentum, with projected growth of 18.5% yoy in sales. However, growth is likely to be slower than the ~23% growth witnessed in 2QFY2012. On the bottom-line front, margin woes are likely to continue, leading to low 7.7% yoy earnings growth for Sensex companies. Ex. ONGC, Sensex earnings growth is likely to be ~11%, as ONGC's earnings are expected to decline 37% due to higher subsidy-sharing burden. Across the board, margin compression, as witnessed over the past few quarters, is likely to continue in 3QFY2012 as well. On a yoy basis, operating margin is expected to contract by a rather steep 300bp to 22.3%. On a sequential basis, margin compression is expected to be 40bp. Net profit margin is expected to come in lower at 12.4%, implying a decline of 176bp yoy (40bp qoq). We expect strong numbers to be posted by BFSI and IT stocks in 3QFY2012, accounting for ~83% of Sensex' net profit growth. Top-line growth is likely to be dominated by auto and oil and gas stocks, accounting for combined top-line growth of ~58%. Sensex IT companies are expected to report strong 31.3% yoy sales growth, partly aided by the recent sharp INR depreciation. On the back of sharp depreciation of INR vis-vis the USD, profitability of companies such as TCS, Infosys and Wipro is expected to rebound by healthy 25.1%, 23.4% and 12.8% yoy, respectively, resulting in combined PAT growth of 21.6% yoy. Sensex pharmaceutical companies are expected to buck the trend of margin compression, with a strong 574bp yoy OPM expansion on the back of 14.8% yoy top-line growth, partly aided by the recent depreciation of the INR vs. USD. Bottomline growth is expected to be healthy at 23.5% yoy. We expect Sensex BFSI companies to post healthy 16.9% yoy bottom-line growth on the back of stable to improving margins and healthy performance of private banks. Ex. BFSI, growth in Sensex profit is expected to be weak 5.2% yoy. While oil and gas stocks are expected to contribute a sizeable ~31% to the top-line growth of the Sensex, operating margins are expected to decline rather steeply. Operating margin for ONGC is expected to fall sharply by 13.5% yoy and 11.6% qoq, resulting in a sharp 37.1% yoy fall in earnings despite a relatively lower (17.3%) decline in sales. The sharp compression is expected on account of higher subsidy-sharing burden. For RIL, we expect strong 31% yoy top-line growth on the back of rise in prices of petrochemical products. However, margin compression is expected to limit the bottom-line expansion to 22.2% yoy.
Exhibit 1: Sensex earnings summary

(` Net Sales (` cr) Company Finance IT Oil & Gas FMCG Auto Engineering Metals Telecom Power Pharma Mining Real Estate Construction Sensex Sensex# Source: Company, Angel Research; Note: On free-float adjusted basis
#
Profit (` Net Profit (` cr) % chg 16.1 31.3 18.5 16.8 21.9 12.8 6.6 15.1 22.0 14.8 39.2 9.6 12.0 18.5 18.9 3QFY2012E 7,223 6,620 10,728 2,344 4,813 2,332 2,985 1,445 2,825 720 3,650 414 70 46,169 3QFY2011 6,244 5,445 12,219 1,962 4,783 2,244 3,640 1,304 2,782 583 2,626 466 233 44,530 % chg 15.7 21.6 (12.2) 19.5 0.6 3.9 (18.0) 10.9 1.6 23.5 39.0 (11.1) (70.2) 3.7 7.7
Weightage (%) 23.4 18.1 13.5 11.9 9.2 6.0 5.6 3.6 3.2 2.9 1.6 0.6 0.5 100.0
3QFY2012E 25,149 32,307 95,564 12,241 68,269 23,044 49,547 18,133 21,757 3,562 17,664 2,719 3,304 373,263
3QFY2011 21,657 24,598 80,613 10,481 56,004 20,436 46,470 15,756 17,834 3,102 12,692 2,480 2,949 315,072
Refer to important Disclosures at the end of the report
Strategy
Though Sensex auto companies are expected to contribute a significant 26.8% to Sensex' top-line growth, their contribution to earnings growth is expected to be just 2.8%. Healthy revenue growth is expected to be led by strong volume growth, price increases along with better product mix and favorable currency movement (primarily on the JLR front). Operating margins are expected to contract by 194bp yoy, led by a yoy increase in raw-material prices. Further, higher discounts offered by most companies (except two-wheeler makers) to prop-up sales are also likely to weigh on margin performance. Overall, we expect revenue growth of ~22% for Sensex auto companies and a marginal 0.6% yoy increase in net profit. We expect Sensex FMCG companies to post decent 16.8% yoy growth in sales, aided by modest volume growth coupled with price hikes taken by companies. Margins are expected to improve by ~60bp yoy for FMCG companies, on the back of better product mix and cut in ad spends. Bottom-line growth for Sensex FMCG companies is expected to be healthy at 19.5% yoy. From the telecom pack, Bharti Airtel is expected to report 15.1% yoy top-line growth on the back of modest improvement in KPIs and decent growth in subscriber base. While operating profit growth is expected to be healthy at 24% yoy, net profit growth is expected to be relatively lower at 10.9% yoy partly on account of further depreciation of the INR during the quarter. Metal companies are expected to witness an 18% yoy decline in their net profit, despite 6.6% yoy top-line growth due to a 220bp and 180bp compression in operating and net profit margins, respectively. While sales are expected to increase due to higher realizations, relatively higher raw-material costs and other environmental clearance issues are likely to hamper earnings growth. For Coal India, we expect strong growth of 39% yoy in net profit on account of the sharp price increase taken during February 2011. Although the capital goods sector is expected to witness reasonable sales growth of 12.8% yoy, PAT margin is estimated to fall by 86bp yoy, resulting in muted bottom-line growth of 3.9% yoy. In the construction sector, we expect JP Associates to report disappointing performance with a 70.2% yoy decline in the bottom line due to abysmal OPM of the cement segment and higher interest costs.
Earnings growth of Angel coverage universe likely to moderate to ~4%.

Earnings growth trajectory for our coverage universe is also expected to moderate considerably in 3QFY2012, as higher input costs and interest rates continue to hamper margins and the overall profitability of corporates. For our coverage universe as a whole, we expect top-line growth to remain healthy at close to 17% levels. However, the compression in OPM is likely to restrict operating profit growth to just ~6% and net profit (primarily due to higher interest costs) is likely to rise at an even slower pace of 3.5% yoy. Standout performers among the sectors under our coverage are likely to be IT, FMCG and pharma companies. FMCG and pharma companies being the typical defensives have been least impacted by the ongoing domestic as well as the global slowdown. The FMCG sector's earnings growth trajectory remains healthy, backed by the ever-growing consumer demand and relative price inelasticity of their products. For 3QFY2012, we expect our FMCG coverage universe to register healthy ~18% top-line growth, backed by modest volume growth and price hikes. OPMs are likely to expand on the back of better product mix and cut in ad spends, resulting in healthy ~20% growth in operating as well as net profit. IT companies are expected to reap the benefits of depreciating INR vs. the USD. Demand for IT solutions also remains better than expected, leading to modest volume growth. While tier-I IT companies are expected to register strong earnings growth, earnings for mid-tier IT companies are likely to be a mixed bag. Overall, we expect our IT coverage universe to register earnings growth of 23% on the back of strong ~31% top-line growth. Pharma companies under our coverage universe are expected to register strong ~47% earnings growth (ex. Ranbaxy at ~11%) on the back of reasonable top-line growth and lower forex losses for Ranbaxy. On the flip side, cyclical sectors viz. capital goods, construction and real estate are likely to face the brunt of higher interest costs at the time of overall demand slowdown. For our capital goods universe, we expect moderate 12.7% yoy top-line growth. However, on the bottom-line front, we expect most companies to post a decline mainly on account of margin pressure and, in some cases, due to higher interest costs. The adverse impact of slowdown coupled with higher interest rates is likely to be more prominent on infrastructure companies, with
3
Strategy
earnings expected to decline by ~16% yoy despite ~10% revenue growth. Even for our real estate coverage universe, we project earnings to decline by ~9% yoy, despite a ~12% topline growth. For our financials coverage universe, reasonable growth in earnings of large private sector banks is likely to be mainly offset by weak growth for most public sector banks, especially the smaller ones. Overall, we expect large private banks to post ~16% yoy growth in net interest income (NII), while PSU banks are expected to register ~11% yoy growth. On the net profit front, the picture becomes even starker with earnings growth of large private banks at ~19% vis--vis weak ~3% growth expected for public sector banks.
Exhibit 2: Angel universe estimates summary

(` Net Sales (` cr) Company Auto & Auto Ancillary Capital Goods Cement Construction Financials FMCG IT Metals Mining Oil & Gas Pharmaceuticals Power Real Estate Telecom Angel Universe 3QFY2012E 82,262 21,340 11,775 24,389 64,659 24,559 44,423 75,893 17,664 108,068 14,740 17,701 3,421 22,991 533,884 3QFY2011 68,118 18,940 9,917 22,247 57,325 20,878 33,979 69,562 12,692 93,409 13,492 14,650 3,060 19,712 457,977 % chg 20.8 12.7 18.7 9.6 12.8 17.6 30.7 9.1 39.2 15.7 9.3 20.8 11.8 16.6 16.6 Profit (` Operating Profit (` cr) 3QFY2012E 9,699 3,087 2,335 3,395 37,437 4,907 11,354 13,199 4,328 23,051 2,888 4,335 1,585 7,444 129,043 3QFY2011 9,236 3,104 1,938 3,302 33,317 4,107 8,393 14,216 3,445 25,827 3,080 4,075 1,522 5,930 121,491 % chg 5.0 (0.6) 20.5 2.8 12.4 19.5 35.3 (7.2) 25.6 (10.8) (6.2) 6.4 4.2 25.5 6.2 Profit (` Net Profit (` cr) 3QFY2012E 5,570 1,960 1,028 1,218 17,971 3,534 8,144 7,282 3,650 13,769 2,484 2,407 698 1,599 71,314 3QFY2011 5,557 2,001 932 1,453 16,658 2,958 6,622 8,327 2,626 15,197 1,686 2,542 768 1,547 68,874 % chg 0.2 (2.0) 10.3 (16.1) 7.9 19.5 23.0 (12.6) 39.0 (9.4) 47.3 (5.3) (9.1) 3.4 3.5
Source: Company, Angel Research; Note: Only for coverage stocks for which quarterly results are estimated
Valuations de-rated due to slowdown fears

Indian markets fell by one-fourth in CY2011 and were one of the worst performers across the globe due to fears of global slowdown and slowing domestic growth trends hampering the India growth story. The recent spate of economic data, namely GDP growth falling below 7%, industrial production contracting for the first time in more than two years and marginal exports growth point towards the entrenchment of the current economic slowdown.
Exhibit 3: India's underperformance vs global markets in CY2011

110 100
90
80
70
Feb-11
Jun-11
Aug-11
Jan-11
Mar-11
Sep-11
Apr-11
May-11
MSCI - India
MSCI - EM
MSCI - World
Source: Bloomberg, Angel Research
Nov-11
Dec-11
Jul-11
Oct-11
Strategy
Exhibit 4: Sensex one-year forward P/E
27.0 24.0 21.0 18.0 15.0 12.0 9.0
Jul-01 Apr-02 Jan-03 Oct-03 Apr-99 Apr-05 Jan-09 Oct-06 Oct-97 Oct-00 Oct-09 Apr-96 Jan-06 Jan-97 Jan-00 Apr-08 Apr-11
6.0
Jul-98
Sensex 1 year forward P/E
15 year Avg
5 year Avg
Source: IMF, Angel Research
Exhibit 5: Earnings yield vs. Bond yield

13.0 11.0 9.0 7.0 5.0 3.0
The primary growth drivers of Sensex EPS over FY2011-13E are expected to be the BFSI, oil and gas and IT sectors, with the BFSI sector expected to contribute more than 30% (31.7%) to the overall growth in Sensex EPS during the period, while contribution from the oil and gas and IT sectors is estimated to be at 19.9% and 15.5%, respectively. Strong performance by the BFSI sector highlights the sustained earnings outlook for HDFC Bank and a low base effect for SBI, which has not posted growth in PAT over FY2009-11. IT companies are expected to do well, backed by the recent sharp depreciation of the INR vis-vis the USD and higher volumes. On the other hand, sectors such as telecom, power and FMCG are expected to underperform the others. The combined contribution of these three sectors to Sensex EPS growth is expected to be 11.8% over FY2011-13E.
Jul-04
Jul-07
Jul-10
Exhibit 7: BFSI, Oil & Gas and IT to dominate growth

(%) 100.0 19.9 7.8 15.5 7.0 31.7 40.0 20.0 4.3 2.8 1.4 0.3 3.4 100.0
Jul-01
Apr-02
Jan-03
Oct-03
Apr-99
Apr-05
Jan-09
Oct-06
Oct-00
Oct-09
Jan-06
Jan-00
Apr-08
Apr-11
Jul-04
Jul-07
Jul-10
80.0 60.0
Earnings Yield
10Yr G-Sec Yield
Source: IMF, Angel Research
The earnings growth trajectory for Indian corporates has moderated due to higher raw-material costs and interest rates hurting margins over the past few quarters. Consequently, valuations of Indian equities have got de-rated; and companies are now trading at a substantial discount to their long-term trading range. Based on one-year forward earnings, the Sensex is trading at 12.5x, which translates into a 26% and 11% discount to its five and 10-year trading average. The signaling of peaking interest rates by the Reserve Bank of India (RBI) and cooling, albeit moderately, inflation levels provide some silver linings. Hence, while FY2012 earnings growth is likely to be modest, cooling inflation and interest rates should underpin healthier growth in FY2013. We expect Sensex companies to deliver EPS growth of 9.5% in FY2012 and improve it further to 16.2% in FY2013, translating into a reasonable 12.8% CAGR over FY2011-13E.
5.4
0.5
IT
Oil & Gas
Engg.
Auto
FMCG
Finance
Pharma
Constr.
Metals
Power
Real Estate
Source: Angel Research
Exhibit 6: FY2012 EPS growth to be sub-10%

(`)
1,350 1,150 950 750 550 350 FY2010 FY2011 FY2012E FY2013E
th row %g 21.6
9.5% gro wth
th row %g 16.2
1,290 1,110
1,014
834
We remain confident on the long-term prospects of the Indian growth story due to benefits of demographic dividend, a primarily internal consumption-driven economy, its relative better positioning globally, reasonable earnings growth trajectory and reasonable valuations vis--vis India's structurally positive outlook. The peaking of inflation and interest rate cycle bode well for Indian Inc., which has been battered with twin pressures of higher raw-material costs and decadal high interest rates. As inflation peaks out, we expect the interest rate cycle to peak out with expected policy rate cuts from CY2012 to stimulate the slowing domestic growth momentum. The recent sharp depreciation of the INR vis--vis the USD is likely to improve the competitiveness of Indian exports in overseas markets. Accordingly, we continue to like export-oriented IT and pharma stocks. We also maintain our positive stance on large private sector banks on the back of attractive valuations and structural positives. We maintain our 12-18 months Sensex target of 18,000, assigning a conservative multiple of 14x FY2013E earnings. Our target implies an upside of ~17% from current levels, which is likely to be back-ended.
Telecom
Total
Strategy
Exhibit 8: Earnings estimates for Sensex companies
(` Net Sales (` cr) Company Bajaj Auto Bharti Airtel BHEL Cipla Coal India DLF HDFC HDFC Bank Hero Honda Hindalco HUL ICICI Bank Infosys ITC 3QFY2012E 4,720 18,133 10,873 1,662 17,664 2,719 1,553 4,468 6,012 5,909 5,815 4,544 9,222 6,427 3QFY2011 4,028 15,756 9,023 1,501 12,692 2,480 1,328 3,905 5,118 5,918 5,027 4,061 7,106 5,453 3,168 2,949 11,413 6,074 9,277 13,421 20,804 59,809 12,364 8,294 1,601 31,506 4,413 29,089 9,663 7,829 315,072 % chg 17.2 15.1 20.5 10.7 39.2 9.6 17.0 14.4 17.5 (0.1) 15.7 11.9 29.8 17.8 21.5 12.0 6.6 31.4 (20.9) 20.6 (17.3) 31.0 18.0 6.1 18.7 34.0 26.2 6.5 37.2 25.5 18.5 18.9
#
Profit (` Net Profit (` cr) 3QFY2012E 791 1,445 1,465 295 3,650 414 1,047 1,419 629 480 663 1,644 2,197 1,681 1,005 70 867 654 179 2,223 4,454 6,274 3,113 771 425 2,560 603 729 2,936 1,487 46,169 3QFY2011 667 1,304 1,403 233 2,626 466 891 1,088 509 460 573 1,437 1,780 1,389 951 233 841 617 565 2,371 7,083 5,136 2,828 1,105 350 2,425 410 1,123 2,346 1,319 44,530 % chg 18.6 10.9 4.4 26.7 39.0 (11.1) 17.5 30.5 23.6 4.3 15.7 14.4 23.4 21.0 5.7 (70.2) 3.1 6.0 (68.3) (6.3) (37.1) 22.2 10.1 (30.2) 21.4 5.6 46.8 (35.1) 25.1 12.8 3.7 7.7
Weightage (%) 1.7 3.6 1.6 1.3 1.6 0.6 7.2 6.3 1.4 1.2 3.4 6.3 10.8 8.5 1.5 0.5 4.4 2.4 1.1 2.1 3.5 10.0 3.7 1.1 1.6 2.5 1.2 1.8 5.4 1.9 100.0
% Contribution to Sensex growth# 3.9 3.1 1.4 2.5 6.4 (0.8) 9.3 16.6 3.8 0.9 2.8 13.0 22.2 12.8 1.5 (5.6) 1.5 1.7 (12.1) (1.9) (32.9) 39.2 8.0 (9.4) 1.9 5.5 8.4 (17.3) 11.1 2.6 100.0
Jindal Steel & Power 3,848 JP Associates L&T M&M Maruti Suzuki NTPC ONGC RIL SBI Sterlite Sun Pharma Tata Motors Tata Power Tata Steel TCS Wipro Total Sensex
#
3,304 12,171 7,981 7,335 16,187 17,200 78,364 14,584 8,798 1,900 42,221 5,570 30,992 13,256 9,829 373,263
Source: Angel Research; Note: based on free-float weightages
3QFY2012 Sectoral Outlook
Automobile
Healthy volume growth despite macro concerns
The Indian automotive industry sustained its healthy volume momentum, registering 15.4% yoy growth YTD in FY2012 despite slowdown in economic growth, high interest rate environment and rising fuel prices. Volume growth continues to be driven by two-wheelers (up 17.9%), light commercial vehicles (LCV, up by an impressive 30.9%) and three-wheelers (up 15.5%); however, interest-rate sensitive segments such as medium and heavy commercial vehicles (M&HCV, up 8.4%) and passenger vehicles (PV, up marginally by 2.7%) continued to report moderate growth. During 3QFY2012, Bajaj Auto (BJAUT), Hero MotoCorp (HMCL), Mahindra and Mahindra (MM) and Tata Motors (TTMT) surprised positively on the volume front, while Maruti Suzuki (MSIL), Ashok Leyland (AL) and TVS Motor (TVSL) posted lower-than-expected volumes. Going ahead, we expect two-wheeler and LCV sales to continue to grow at a healthy rate; however, macroeconomic concerns are likely to plague PV and M&HCV performance. In the long run though, volume outlook is expected to be positive, aided by rising income levels, easy availability of finance, new product launches and improved outlook for exports. For 3QFY2012, we expect our auto universe to witness strong revenue growth of ~21% yoy, led by healthy volume growth, price increases along with better product mix and favorable currency movement (primarily on the JLR front). We expect EBITDA margins to contract by ~140bp yoy (flat qoq) to 12%, led by a yoy increase in raw-material prices. Further, higher discounts offered by most of the companies (except two-wheeler makers) to prop-up sales are also likely to weigh on margin performance. While commodity prices still remain at higher levels on a yoy basis, they have stabilized sequentially, indicating improvement in margins going ahead. Led by operating margin pressures, adjusted net profit (excluding forex loss) is likely to register modest ~3% yoy growth.
Exhibit 1: Interest rates vs. auto sales

15.0 14.0 13.0 20.0 12.0 11.0 10.0
May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 Oct-07 Oct-08 Apr-07 Apr-08
80.0 60.0 40.0
0.0 (20.0) (40.0)
SBI PLR
yoy change in CV+PV volume (RHS)
Auto Index outperforms the Sensex

The BSE Auto Index performed better than the Sensex (1.9% outperformance) during the quarter; however, on an absolute basis, it registered a decline of 4.2%. Concerns regarding volume growth in the sector due to increasing macro-economic issues weighed on investor sentiments and, therefore, affected the stock price performance. Among the front runners, TTMT and BJAUT were the major gainers, led by better-than-expected volume performance; MM and MSIL, however, underperformed sharply during the quarter. While MSIL's performance suffered on account of labor issues (resulting in production losses) and impact of adverse currency movement on margins, correction in MM was triggered by weak 2QFY2012 results.
Exhibit 2: Stock price performance

Tata Motors Maruti Suzuki M&M Hero MotoCorp Exide Industries Bharat Forge Bajaj Auto Ashok Leyland Apollo Tyres (25.0) (20.0) (15.0) (10.0) (5.0) 0.0 5.0 (12.8) (8.7) (18.6) (14.4) (5.5) (14.9) (14.9) (10.7) (10.7) (1.9) (1.4) 3.8 8.0 2.3 14.3 18.5
6.5
10.7 15.0 20.0 25.0
10.0
Relative to Auto index (%)
Absolute (%)
Interest rates and fuel prices continued their upward trend

As most of the consumers in the auto industry rely on financing (PV: ~75% and CV: ~85%), a gradual increase in interest rates by the RBI over the past 18 months has resulted in higher EMI outflow for consumers, leading to postponement of new vehicle purchases. Further, increased fuel prices (petrol prices up by `7.6 and diesel prices up by `3.2 YTD in FY2012) have negatively affected sales.
Strong demand for LCVs driving CV sales

The CV segment continued its strong growth rate, reporting 20.5% yoy growth YTD in FY2012, led by robust growth in the LCV segment, which grew by 30.9% yoy. LCV demand continues to be driven by growth in the agriculture sector; increasing preference for low payload vehicles; structural factors such as proliferation of the hub and spoke model; and new launches. The M&HCV segment, however, witnessed 8.4% yoy growth mainly due to slowdown in industrial activity and higher financing rates. Going ahead, we expect the LCV segment to sustain its strong performance and grow at a CAGR of 16-18% over the next two years.
Automobile
During 3QFY2012, TTMT is likely to report robust ~34% yoy growth in net sales backed by strong volume growth (on the JLR as well as standalone level) and favorable currency movement, primarily on the JLR front. Adjusted net profit is, however, likely to report modest ~6% yoy growth mainly on account of margin pressures. AL is expected to post ~150% yoy growth in its adjusted net profit, largely due to low base and ~23% yoy growth in revenue. some lost ground by the end of 4QFY2012, led by new product launches (Ertiga and compact Dzire) and normalization in production levels at its Manesar plant.
Exhibit 4: MSIL and MM Quarterly volumes

Segment
MSIL Domestic Exports MM Automotive - exports Tractor - domestic Tractor - exports
3QFY12
239,528 211,803 27,725 190,743 7,587 62,009 3,745
3QFY11 % chg
330,687 (27.6) 299,527 31,160 153,833 90,205 5,020 55,488 3,120 (29.3) (11.0) 24.0 30.2 51.1 11.8 20.0
9MFY12 9MFY12
773,361 684,892 88,469 531,714 327,897 20,543 173,519 9,755
9MFY11 9MFY11 % chg

927,665 (16.6) 820,350 (16.5) 107,315 (17.6) 423,710 255,965 13,480 145,492 8,773 25.5 28.1 52.4 19.3 11.2
Exhibit 3: TTMT and AL Quarterly volumes

Segment
TTMT M&HCV LCV Total CV Utility vehicles PC Total PV Exports (incl. above) AL
3QFY12
227,111 53,982 89,636 143,618 13,745 69,748 83,493 14,135 23,215
3QFY11 % chg
186,873 50,883 74,677 125,560 9,472 51,841 61,313 15,962 18,437 21.5 6.1 20.0 14.4 45.1 34.5 36.2 (11.4) 25.9
9MFY12 9MFY12
626,583 157,431 256,629 414,060 36,375 176,148 212,523 45,025 66,120
9MFY11 9MFY11 % chg

566,987 149,616 201,844 351,460 29,013 186,514 215,527 42,658 64,426 10.5 5.2 27.1 17.8 25.4 (5.6) (1.4) 5.5 2.6
Automotive - domestic 117,402
Source: Company; Angel Research
Two-wheeler sales volume remains strong

The two-wheeler segment sustained its strong performance, defying the economic slowdown, and registered 18% yoy growth YTD in FY2012. Two-wheeler sales continued to be benefitted by inadequate public transport system, rising income levels (particularly in rural areas) and strong replacement demand in urban markets. Domestic volumes grew by 16.1% yoy, while exports registered robust 31% yoy growth YTD in FY2012. The scooter and motorcycle segments maintained their strong growth traction, recording 25.1% and 17% yoy growth, respectively. We expect two-wheeler majors to witness top-line growth of 17-18% yoy during 3QFY2012, largely backed by volume growth. Led by strong sales growth, HMCL continued to regain its market share, which now stands at 40.3% (39.2%) compared to 26.6% (26.1%) and 14.3% (15%) for BJAUT and TVSL, respectively. Going ahead, we expect two-wheeler sales to maintain their volume momentum and register a 12-14% CAGR in volumes over the next couple of years. Exhibit 5: BJAUT, HMCL and TVSL Quarterly volumes
Segment
BJAUT BJAUT Motorcycles Three-wheelers
Source: Company; Angel Research
Festive season fails to boost PV sales

The PV industry continues to face the brunt of fuel price hikes and increased interest rates as most buyers are waiting on the sidelines and are postponing their purchases. As a result, market conditions remained challenging, resulting in modest volume growth of 2.7% yoy YTD in FY2012. Noticeably, volumes in the domestic PC segment (~75% of PV sales) registered a decline of 3.5% yoy during the period. The arbitrage between petrol and diesel prices has increased significantly in recent times (currently at ~`24 against five-year historical average of ~`14), leading to a shift in consumer demand in favor of diesel cars. Thus, demand for petrol cars has been severely affected and is expected to have declined by ~11% in 1HFY2012 as against a strong 24% increase for diesel cars. We expect the demand environment to remain challenging in 2HFY2012 as well; however, the likely easing of interest rates from 1QFY2013 will lead to revival in demand. We remain positive on the long-term prospects of the PV sector and estimate the segment to register a CAGR of 10-12% over the next two years. During 3QFY2012, MSIL's volume declined by 27.6% yoy (5% qoq), primarily led by the labor strike at its plants (Gurgaon and Manesar) in October 2011, resulting in a production loss of over 40,000 units. Consequently, MSIL's market share dropped significantly by ~775bp yoy to 41.4% in the PC market YTD in FY2012. We expect MSIL to report a ~68% yoy decline in its net profit during the quarter, led by lower production and adverse currency movement. However, we expect MSIL to regain
3QFY12
1,075,441 946,749 128,692
3QFY11 % chg
946,850 838,487 108,363 296,644 1,428,030 524,171 208,632 122,696 182,735 10,108 51,394
9MFY12 9MFY12
9MFY11 9MFY11 % chg

15.9 15.2 21.5 32.8 18.1 10.5 5.3 20.3 9.9 15.8 40.0
13.6 3,332,393 2,875,734 12.9 2,937,157 2,550,350 18.8 395,236 325,357 927,875
Exports (incl. above) 380,912 HMCL TVSL Motorcycles Scooters Mopeds Three-wheelers Exports (incl. above) 1,589,286 529,681 194,922 136,550 189,268 8,941 68,881
28.4 1,232,410
11.3 4,663,178 3,948,012 1.1 1,672,078 1,512,965 (6.6) 11.3 3.6 (11.5) 34.0 651,047 412,205 576,569 32,257 230,140 617,996 342,538 524,568 27,863 164,337
Source:Company, Angel Research
Automobile
Auto ancillaries to track the auto sector
While the OE demand has witnessed a slowdown in 3QFY2012 on account of macro concerns like rising interest rates and slowdown in industrial activity, replacement sales have also seen weaker off-take due to general weakness in overall economic activity thereby negatively affecting ancillary manufacturers. We however, expect the demand scenario to improve in the OE as well as replacement segments from 1QFY2013 aided by likely easing of interest rates. During 3QFY2012, we expect auto ancillary companies to report moderate growth in net profit on account of slowdown in domestic auto sales and operating margin pressures. We expect a sequential contraction in the operating margins of Bosch and FAG Bearings, mainly due to INR depreciation as imports form a substantial portion of raw-material costs for both the companies. Motherson Sumi (ex. Peguform) is likely to witness yet another challenging quarter as the company's new plants are still in the process of ramping up. We expect Exide Industries to post improved performance sequentially; however, on a yoy basis, the company's results would be impacted due to increased competitive activity and slowdown in OE and replacement demand in the passenger vehicle segment. Apollo Tyres is likely to benefit from the strong performance of its European subsidiary, led by seasonal demand for winter tyres; domestic performance is expected to remain subdued due to sluggish demand for CV tyres in the OE and replacement segments. We expect Bharat Forge to report strong top-line growth driven by diversified business model (one-third of revenue from non-auto business); however, margins are expected to trend marginally lower due to cost pressures.
Outlook
Considering the near-term macroeconomic challenges, we expect the auto industry to register volume growth of 12-13% yoy for FY2012. However, we believe low penetration levels coupled with a healthy and sustainable economic environment and favorable demographics supported by increasing per capita income levels will drive long-term growth of the Indian auto industry. As such, we prefer stocks that have strong fundamentals, ability to deliver strong top-line performance and are available at attractive valuations. In the auto sector, we continue to prefer companies with a strong pricing power and high exposure to rural and exports markets. Among auto majors, we maintain our positive outlook on Leyland. Mahindra and Mahindra and Ashok Leyland.
Exhibit 6: Quarterly estimates Automobile

Company AL BJAUT HMCL^ MSIL MM TTMT* TVSL CMP (`) 23 1,593 1,905 920 683 178 52 Net Sales 3QFY12E 2,742 4,720 6,012 7,335 7,981 42,221 1,728 23.1 17.2 17.5 (20.9) 31.4 34.0 7.1 OPM (%) chg bp 265 (34) 124 (417) (313) (235) 40 10.1 20.0 12.4 5.3 12.0 11.8 6.5 Profit Net Profit 3QFY12E 108 791 629 179 654 2,560 60 149.7 18.6 23.6 (68.3) 6.0 5.6 7.1 (` EPS (`) % chg 149.7 18.6 23.6 (68.3) 5.8 5.3 7.1 0.4 27.3 31.2 6.2 11.1 8.1 1.3 (` EPS (`) FY11 2.4 95.0 92.2 77.9 43.2 28.6 4.3 FY12E 2.1 106.2 116.5 48.7 48.0 26.9 5.5 FY13E 2.5 114.6 130.1 75.1 54.6 29.5 6.0 FY11 9.6 16.8 20.7 11.8 15.8 6.2 12.0 P/E (x) FY12E 10.9 15.0 16.4 18.9 14.2 6.6 9.5 FY13E 9.3 13.9 14.6 12.3 12.5 6.0 8.7 % chg 3QFY12E % chg 3QFY12E (` (`) 29 1,719 1,051 829 193 66 Buy
(` cr)
rge Target Reco.
Accumulate Neutral Accumulate Buy Accumulate Buy
Source: Company, Angel Research; Note: Price as on December 30, 2011, * Consolidated numbers; ^ OPM adjusted for royalty payments
Exhibit 7: Quarterly estimates Auto Ancillary

Company Apollo Tyres* Bharat Forge& Bosch# Exide Industries CMP (`) 59 251 6,778 105 Net Sales 3QFY12E 2,900 917 1,930 1,211 307 2,343 22.4 21.6 9.9 15.4 17.1 12.5 OPM (%) chg bp (303) (79) 140 (566) (104) (282) 8.5 23.5 17.8 9.6 18.8 8.6 Net Profit Profit 3QFY12E 78 97 230 72 39 79 (35.3) 16.8 9.4 (42.2) 14.1 (25.9) EPS (`) (` % chg (35.3) 16.8 9.4 (42.2) 14.1 (25.9) 1.5 4.1 73.3 0.8 23.2 2.0 EPS (`) (` FY11 8.7 12.5 273.4 7.4 73.1 9.9 FY12E 7.2 18.0 340.8 5.5 103.5 8.9 FY13E 9.3 19.9 375.7 7.7 113.3 12.0 FY11 6.7 20.2 24.8 14.1 14.3 13.6 P/E (x) FY12E 8.2 13.9 19.9 18.9 10.1 15.2 FY13E 6.3 12.6 18.0 13.6 9.2 11.2 Target rge (`) 74 299 7,514 128 1,246 169 Buy Buy % chg 3QFY12E % chg 3QFY12E
(` cr)
Reco.
Accumulate Buy Buy Buy
FAG Bearings# 1,047 Motherson Sumi* 135
Source: Company, Angel Research; Note: Price as on December 30, 2011, * Consolidated numbers; # December year ending; & Full year EPS is consolidated
Yaresh Kothari Analyst - Yaresh Kothari

10
Banking
Banking Index underperforms the Sensex
Banking stocks continued with their poor run in 3QFY2012 amid continued concerns on the credit quality front. 2QFY2012 results generated some interest in banking stocks, leading to ~15% gain in the Bankex in October; however, domestic macro concerns in the form of slowing economic and credit growth, coupled with deepening sovereign debt crisis in Europe led to heavy selling in all Indian indices, including Bankex. Expectations of cut in Cash Reserve Ratio (CRR) by the Reserve Bank of India (RBI) led to a sharp surge in banking stocks in the first week of December; however, with the RBI resorting to open market operations only to ease liquidity in the 3QFY2012 monetary policy, led to further selling in the Bankex. By the end of the quarter, the Bankex was down by 15.6% sequentially, underperforming the Sensex by 9.6%. Within our coverage universe, only LIC Housing Finance and HDFC managed to give positive returns of 4.6% and 1.7% qoq, respectively.
Credit growth slows on expected lines amid a weakening economic outlook

Credit growth for the banking sector has been on a declining trend since the beginning of FY2011. Credit growth as of December 16, 2011, dropped to its lowest level since April 2010 (20 months) to below 18% (at 17.1%) because of slowing economy as well as a high base effect (23.9% yoy growth). Incremental credit in FY2012 YTD is lower by 17.9% yoy compared to FY2011 YTD; however, deposit accretion continues to be healthy with incremental YTD deposits growing by 49.3% yoy. Despite increasing deposit growth rates, liquidity pressures increased in 3QFY2012, compared to 2QFY2012 (LAF borrowings averaged ~`86,500cr in 3QFY2012 vs. ~`42,800cr in 2QFY2012) as the widening fiscal deficit led to a substantial increase in government borrowing requirements.
Exhibit 2: Deposits increase, while credit offtake slows

(` cr)
500,000 400,000 399,781 467,890
Exhibit 1: 3QFY2012 stock performance

(%) LIC Housing Finance HDFC Sensex Federal Bank HDFC Bank South Indian Bank Yes Bank Bank of Baroda Indian Bank State Bank of India Bank of India Bankex Jammu & Kashmir Bank Bank of Maharashtra Corp Bank Vijaya Bank Canara Bank Punjab National Bank Axis Bank Indian Overseas Bank ICICI Bank IDBI Bank Allahabad Bank UCO Bank Union Bank of India Oriental Bank of Commerce Syndicate Bank Andhra Bank Central Bank Of India Dena Bank United Bank of India Source: Bloomberg, Angel Research Returns (qoq) 4.6 1.7 (6.1) (8.5) (8.7) (9.7) (12.4) (12.7) (13.5) (15.3) (15.5) (15.6) (15.8) (16.5) (17.0) (17.2) (17.9) (18.1) (20.7) (20.8) (21.8) (24.0) (27.1) (30.4) (30.6) (32.8) (34.3) (35.4) (35.9) (37.3) (37.5) Returns (yoy) 13.3 (10.5) (24.6) (15.2) (9.0) (16.8) (23.7) (25.8) (25.1) (42.4) (41.0) (31.6) (13.7) (42.0) (45.0) (55.6) (44.8) (36.1) (40.1) (50.0) (40.2) (52.8) (49.1) (60.8) (51.1) (51.6) (46.6) (46.9) (57.4) (58.1) (53.2)
300,000 200,000 100,000 -
328,324
313,401
Credit offtake (` cr)
Deposit mobilisation (` cr)
FY2011#
FY2012*
Source: RBI, Angel Research; Note: #Between March 26, 2010 and December 17, 2010, * Between March 25, 2011 and December 16, 2011
Considering the slowing growth momentum, we expect credit growth to slow down to 16-17% for FY2012-13.
Exhibit 3: Average LAF borrowings higher in 3QFY2012

(` bn) 1,000 500 (500) (1,000) (1,500) (2,000)
Aug-11 Sep-11 Oct-11 Nov-11 Mar-11 May-11 Dec-11 Feb-11 Jun-11 Jan-11 Apr-11 Jul-11
Source: RBI, Angel Research
While most large banks chose not to raise their deposit rates over the past quarter, few mid-size banks increased them by 15-25bp. On the advances side as well, most banks kept their lending rates constant over the last quarter with a few banks increasing their base rates by 25-50bp. Amongst banks under our coverage, Jammu and Kashmir Bank had the highest average base rate increase (39bp), followed by Yes Bank (38bp) and Federal Bank (36bp).
11
Banking
Exhibit 4: 2QFY2012 and 3QFY2012 Lending and deposit rates
Avg. Avg. Base rates Bank 2QFY12 3QFY12 10.31 10.43 10.52 10.70 10.00 10.00 10.75 10.75 10.75 10.75 10.00 10.75 10.75 10.75 10.75 10.75 10.75 10.75 10.70 10.50 10.75 10.75 10.75 10.60 10.65 10.00 10.65 BP change 39 38 36 33 26 26 25 25 25 25 24 23 22 21 20 20 20 20 18 18 18 17 17 16 13 13 11 2QFY12 14.50 19.75 17.25 15.00 18.50 14.75 15.00 15.25 14.25 15.00 18.75 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.75 19.00 15.00 15.00 15.00 14.85 15.00 17.75 15.00 J&KBK 9.92 YESBK 10.05 FEDBK 10.16 BOM 10.37 HDFCBK 9.74 SBI 9.74 CENTBK 10.50 IDBI 10.50 PNB 10.50 UCOBK 10.50 ICICIBK 9.76 UNBK 10.52 BOI 10.53 ALLBK 10.54 INDBK 10.55 BOB 10.55 OBC 10.55 ANDHBK 10.55 DENABK 10.52 SIB 10.32 SYNBK 10.57 IOB 10.58 CANBK 10.58 UTDBK 10.44 CRPBK 10.52 AXSB 9.88 VIJAYA 10.54 Source: Company, Angel Research BPLR rates 3QFY12 15.00 20.00 17.75 15.00 18.50 14.75 15.00 15.25 14.25 15.00 18.75 15.50 15.00 15.00 15.00 15.00 15.00 15.00 15.75 19.00 15.00 15.50 15.00 14.85 15.00 17.75 15.00 BP change 50 25 50 50 50 2QFY12 9.50 9.60 9.90 9.35 9.25 9.25 9.40 9.50 9.40 9.50 9.25 9.25 9.25 9.50 9.25 9.35 9.75 9.40 9.60 9.75 9.35 9.25 9.25 9.25 9.50 9.25 9.35 FD rates 3QFY12 9.50 9.60 9.50 9.35 9.25 9.25 9.40 9.50 9.40 9.50 9.25 9.25 9.25 9.50 9.50 9.35 9.75 9.40 9.60 9.75 9.35 9.50 9.25 9.25 9.65 9.25 9.35 BP change (40) 25 25 15 -
Overall, we expect large private banks to post 16.2% yoy growth in net interest income, while PSU banks are expected to register 10.8% yoy growth. Large private banks are expected to outperform on the pre-provisioning profit front also with growth of 13.7% yoy compared to 12.3% yoy for PSU banks. While large private banks are expected to report healthy 19.3% yoy growth on the net profit front, PSU banks are likely to post weak 2.6% yoy growth (growth of 0.3% yoy only excluding SBI) due to higher provisioning expenses.
Axis Bank (~`230cr), Yes Bank (~`90cr) and South Indian Bank (~`81cr), overall slippages remained contained for private banks under our coverage. The incremental increase in base rates by banks, trailing the hikes in repo rates by the RBI over the past year (average increase of 250-300bp in base rates), coupled with the slowdown in economic activity over the same period, evidenced from the GDP growth slowing to below 7% for 2QFY2012 and IIP contracting for the first time in more than two years by 5.1% yoy in October 2011, is expected to have made debt servicing more challenging for borrowers. Moreover, on account of high (albeit cooling) inflation as well as high fiscal and current account deficits, interest rates are expected to remain high until the onset of FY2013. Also, with sectors such as infra, real estate and exports continuing to face macro headwinds, asset-quality concerns are expected to linger. However, that said, incremental provisioning expenses in the current fiscal by banks on account of switchover to system-based NPA recognition and to meet the increase in NPA prudential norms and the mandated provision coverage ratio of 70% have led to a high base. Hence, the percentage increase in actual provisioning expenses in the P&L is not expected to increase significantly, even though genuine slippages are expected to increase going forward.
Asset quality to be the key monitorable for banks going forward

Most PSU banks witnessed asset-quality stress and reported higher slippages (11 out of 21 PSU banks reporting more than a 20% qoq increase in their absolute net NPA levels) in 2QFY2012, primarily on account of completion of transition to system-based NPA recognition. Apart from slippages arising due to the switchover to system-based NPA recognition platform, delinquencies from the SME and agri books further aggravated asset-quality pressures and led to higher provisioning expenses for most banks during 2QFY2012. While broadly asset quality deteriorated for PSU banks, private banks on the contrary, which have sharply improved their asset quality over the past two years, remained comfortable on the asset-quality front. Apart from some concerns from the MFI segment, which led to higher restructuring during 2QFY2012 for ICICI Bank (~`740cr),
12
Banking
Exhibit 5: Gross NPA trends (%) Private vs. PSU
3.60 3.30 3.00 2.70 2.40 2.10 1.80 1.50 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 2.32 2.53 2.56 2.64 2.58 2.59 2.61 2.55 2.45
0.70 0.50 0.30 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12
Exhibit 6: Net NPA trends (%) Private vs. PSU

1.70 1.53 1.31 1.39 1.27 1.15 1.22 1.04 1.26 1.05 0.90 0.78 0.62 0.62 0.59 1.21 1.18 1.26 1.28 1.50
3.19 2.96
3.12
3.20 3.06 2.89 2.65 2.71 2.96
1.30 1.10 0.90
Pvt Banks
PSU Banks
Pvt Banks
PSU Banks
Source: Company, Angel Research
Exhibit 7: Gross NPA trend (%) for the banking industry

3.60 3.30 3.00 2.70 2.40 2.10 1.80 1.50
2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12
Exhibit 8: Net NPA trend (%) for the banking industry

1.70 1.50 1.28 1.16 1.06 1.09 1.08 1.07 1.00 0.98 1.04
2.73 2.37 2.46 2.36 2.43 2.47 2.40 2.43 2.27
1.30 1.10 0.90 0.70 0.50 0.30
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
Apart from higher absolute NPAs, another major concerning factor for banks in the coming quarters would be the recent build-up in their restructured books. With banks preferring the restructuring route currently to minimize provisioning expenses and considering the downside risks to economic growth, slippages could start flowing from these accounts and aggravate the asset-quality situation once the moratorium period ends.
Bond yields ease after hitting three-year high during the quarter
The 10-year G-sec yields continued their uptick and reached a three-year high (9%) in the first fortnight of November, as inflationary expectations, weakening INR and rising fiscal deficit hurt bond market sentiments. With the government mostly set to exceed its annual fiscal deficit target, bond yields continued to harden until the RBI reassured bond market investors by injecting liquidity into the system through its open market operations. Inflation figures for November eased significantly
and the RBI's dovish stance concerning interest rates helped aid in further easing bond yiels to 8.3% towards the end of December. The 10-year G-sec yields rose sharply again by ~25bp in the last week of December to end at 8.6% for CY2011. Most banks have already booked MTM losses on bond yields to upwards of 8.5% for 2QFY2012 and, hence, are expected to report only marginal MTM losses (particularly for banks carrying a relatively higher modified duration investment book) in 3QFY2012 results. Also, considering the sharp movement in yields during the quarter, several banks could report trading gain as well.
Outlook and valuation

The broad lending and deposit rates seem to have settled down. Further, with interest rates only poised to start declining from FY2013, we expect margins of banks to remain at relatively similar levels for 2HFY2012, as witnessed in 2QFY2012.
Exhibit 9: Corporate and G-Sec bond yields

(%) 10.0
Exhibit 10: 10-year G-sec yields movement

9.2 9.0
9.5
8.8
9.0 8.5 8.0
9.60 9.54 9.55 9.58 9.51 9.52 9.56 9.42 8.43 8.43 8.32 8.44 8.38 8.53
8.6 8.4 8.2

8.42 8.57
7.5 7.0
8.0
30-Sep-11 7-Oct-11 4-Nov-11 11-Nov-11 19-Nov-11 25-Nov-11 14-Oct-11 21-Oct-11 28-Oct-11 2-Dec-11 9-Dec-11 16-Dec-11 23-Dec-11 30-Dec-11
AAA 1 Yr
AAA 3 Yr
AAA 5 Yr AAA 10 Yr Gsec 1Yr Gsec 5Yr
Gsec 7Yr Gsec 10Yr
29-Sep-11
30-Dec-11
Source: Bloomberg, Angel Research Refer to important Disclosures at the end of the report
2QFY12
13
Banking
Exhibit 11: PSU banks price band (P/ABV)*
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 -
Exhibit 12: Large Pvt. banks price band (P/ABV)

4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 -
Feb-07
Jun-02
Sep-07
Nov-08
Jun-09
Apr-08
Apr-01
Jan-10
Nov-01
Aug-10
Jul-06
Mar-11
Jan-03
Aug-03
Mar-04
Oct-04
Dec-05
Oct-11
Feb-07
Apr-08
Nov-08
Jun-09
Apr-01
Jan-10
Nov-01
Aug-10
Mar-11
Jun-02
Jan-03
Aug-03
Mar-04
Oct-04
May-05
Dec-05
May-05
Source:C-line, Angel Research, Note:* For PSU banks , excl. SBI and IDBI
Source:C-line, Angel Research
However, leftover upward deposit re-pricing coupled with increased saving deposit rates in cases of some banks could result in marginal NIM contraction. With interest rates having been at the higherend for quite some time now and macro headwinds continuing to hit sectors such as power, textile and real estate where banks have significant exposures material asset-quality concerns have started to emerge. While NPA ratios of most PSU banks were expected to deteriorate during 2QFY2012 on account of switchover to system-based NPA recognition, fresh slippages from agri-based and SME segments and higher NPAs from metals and Exhibit 13: Quarterly estimates
Company CMP (`) AXSB FEDBK HDFCBK ICICIBK SIB YESBK ALLBK ANDHBK BOB BOI BOM CANBK CENTBK CRPBK DENABK IDBI INDBK IOB J&KBK OBC PNB SBI SYNBK UCOBK UNBK UTDBK VIJAYA HDFC LICHF 807 338 427 685 20 239 115 80 661 266 39 364 66 349 49 78 184 74 677 197 784 1,620 69 46 170 47 45 649 222 Operating Income 3QFY12E 3,428 636 4,468 4,544 319 610 1,700 1,169 3,454 2,758 789 2,817 1,737 1,132 659 1,683 1,457 1,711 538 1,307 4,568 14,584 1,581 1,289 2,272 788 650 1,553 458 % chg 19.0 11.7 14.4 11.9 25.3 25.9 29.9 12.6 16.4 4.7 22.3 (3.0) 3.3 2.3 11.0 1.9 13.3 15.5 15.2 3.6 12.5 18.0 15.9 1.0 7.7 11.7 1.9 17.0 (16.1) Profit Net Profit 3QFY12E 1,012 203 1,419 1,644 100 234 452 303 1,208 624 146 912 237 371 166 488 458 332 201 302 1,274 3,113 316 296 530 138 170 1,047 275 % chg 13.5 42.0 30.5 14.4 33.2 22.2 8.7 (8.3) 13.0 (4.4) 61.4 (17.5) (41.2) (3.1) 6.9 7.4 (6.8) 43.5 19.5 (26.1) 16.9 10.1 23.2 (1.7) (8.4) (15.1) 12.1 17.5 28.6 FY11 82.5 34.3 16.9 44.7 2.6 20.9 29.9 22.6 108.0 45.5 6.2 90.9 27.7 95.4 18.3 16.8 38.8 17.3 126.9 51.5 139.9 130.1 18.3 12.6 39.6 13.3 8.8 24.1 20.5 (` EPS (`) FY12E 93.5 43.1 22.2 53.8 3.3 26.8 38.4 22.4 118.4 42.9 9.6 77.4 13.5 99.0 20.3 18.9 40.0 17.7 157.0 39.4 156.6 168.7 21.8 14.9 36.7 13.2 9.8 28.3 20.5 FY13E 109.3 43.8 28.9 63.5 3.3 29.0 35.9 20.5 129.0 45.5 9.0 78.6 15.9 92.1 19.2 20.3 41.8 19.9 167.4 44.2 161.2 206.7 23.1 15.5 39.4 14.4 9.5 31.2 27.2
export-oriented sectors led to higher-than-estimated provisioning expenses for most banks under our coverage. Accordingly, we prefer banks with a more conservative asset-quality profile, especially among mid caps (for instance, relatively lower yield on advances and moderate credit growth) this includes banks such as Bank of Baroda amongst PSU large caps as well as Syndicate Bank and Bank of Maharashtra. Also, from a medium-term perspective, we continue to prefer large private banks with a strong structural investment case within which we prefer Axis Bank and ICICI Bank from a valuation perspective. (` ( ` cr)
BVPS (` Adj BVPS (`) FY11 462.5 298.3 109.1 478.3 15.0 109.3 160.5 116.0 534.4 287.1 57.3 401.1 126.4 481.5 103.5 128.5 184.4 128.4 717.4 350.0 628.1 116.1 67.6 203.3 101.2 65.3 118.1 87.8 FY12E 524.4 332.7 126.2 508.3 17.6 132.6 190.2 124.5 625.6 289.9 68.3 444.4 115.9 537.6 121.1 138.6 215.7 143.3 837.2 359.1 756.0 132.7 76.1 223.0 101.9 72.8 129.3 104.2 FY13E 607.8 367.2 148.4 544.0 20.2 157.0 217.9 134.3 724.9 305.7 68.4 486.0 120.9 599.6 137.5 153.2 248.2 156.0 965.1 387.1 882.3 150.6 82.2 246.9 107.5 72.4 159.3 126.0 FY11 9.8 9.8 25.3 15.3 7.8 11.4 3.9 3.5 6.1 5.9 6.3 4.0 2.4 3.7 2.7 4.6 4.7 4.2 5.3 3.8 5.6 12.4 3.7 3.6 4.3 3.5 5.2 26.9 10.8 P/E (x) FY12E 8.6 7.8 19.3 12.7 6.1 8.9 3.0 3.6 5.6 6.2 4.0 4.7 4.9 3.5 2.4 4.1 4.6 4.2 4.3 5.0 5.0 9.6 3.1 3.1 4.6 3.5 4.6 23.0 10.8 FY13E 7.4 7.7 14.8 10.8 6.2 8.2 3.2 3.9 5.1 5.8 4.3 4.6 4.1 3.8 2.5 3.8 4.4 3.7 4.0 4.5 4.9 7.8 3.0 2.9 4.3 3.2 4.8 20.8 8.1 P/ABV P/ABV (x) FY11 FY12E FY13E 1.7 1.1 3.9 1.4 1.3 2.2 0.7 0.7 1.2 0.9 0.7 0.9 0.5 0.7 0.5 0.6 1.0 0.6 0.9 0.6 1.2 1.7 0.6 0.7 0.8 0.5 0.7 5.5 2.5 1.5 1.0 3.4 1.3 1.1 1.8 0.6 0.6 1.1 0.9 0.6 0.8 0.6 0.6 0.4 0.6 0.9 0.5 0.8 0.5 1.0 1.5 0.5 0.6 0.8 0.5 0.6 5.0 2.1 0.9 2.9 1.3 1.0 1.5 0.5 0.6 0.9 0.9 0.6 0.7 0.5 0.6 0.4 0.5 0.7 0.5 0.7 0.5 0.9 0.5 0.6 0.7 0.4 0.6 4.1 1.8 Target (`) Buy - Neutral 482 Accum. 954 298 Buy Buy - Neutral 131 Accum. - Neutral 797 48 Buy Buy 290 Accum. 413 Accum. - Neutral 390 Accum. - Neutral 84 Accum. 199 Accum. 82 Accum. 724 Accum. 213 Accum. 926 90 Buy Buy Buy Reco.
Sep-07
1.3 1,216
967.6 1,067.2 1,237.9
1.3 2,029
- Neutral 191 Accum. 54 Buy - Neutral - Neutral - Neutral
Source: Company, Angel Research; Note: Price as on December 30, 2011
Vaibhav Agrawal/ l/Shrinivas Bhutda Varm arma Analyst - Vaibhav Agrawal/ Shrinivas Bhutda / Varun Varma
Oct-11
Jul-06
14
Capital Goods
Capital Goods - Despair continues
For 3QFY2012, we expect companies in our capital goods (CG) universe to post moderate top-line growth of 12.7% yoy. However, on the bottom-line front, the picture is mixed, with most companies in our coverage universe posting a decline mainly on account of margin pressure and, in some cases, due to higher interest cost.
Crompton Greaves (CMP/TP: `126/`146) (Rating: Buy)

For 3QFY2012, we project Crompton Greaves to report moderate top-line growth of 10.5% yoy to `2,649cr, mainly aided by a favorable currency translation gain for its international revenue (thereby overshadowing persistent weakness in the power system segment, which has remained a drag since the past few quarters). On the EBITDA front, the company's margin is expected to decline sharply by ~470bp yoy to 9.5%. However, we expect an uptick of 110bp qoq in the companys margin, factoring in the cooling of commodity prices (read copper). PAT for the quarter is expected to drop by 42.6% yoy to `133.6cr.
ABB India (CMP/TP: `584/`427) (Rating: Sell)

For 4QCY2011, we expect ABB India (ABB) to post strong top-line growth of 16.4% yoy to `2,412cr, driven by the company's balanced performance across all segments. EBITDA margin is likely witness a sharp uptick of 352bp yoy to 5.1% (4QCY2010 margins were suppressed by higher provisioning on account of rural electrification projects). Also, on a qoq basis, we expect margins to improve by ~120bp. Aided by strong prior-year revenue growth and an extremely low base of the prior-year eight-fold period, ABB's bottom line is expected to jump eight-fold to 61.9cr. `61.9cr.
Jyoti Structures (CMP/TP: `39/`49) (Rating: Buy)

For 3QFY2012, we expect Jyoti Structures to post decent top-line growth of 18.4% yoy to `652.7cr. We expect the company's EBITDA margin to marginally contract by ~91bp yoy to 10.5%. Interest cost is expected to increase due to higher working capital borrowings. Against this backdrop, the company's PAT is expected to decline by 16.0% yoy to `20.8cr.
Areva T&D (CMP/TP: `164/-) (Rating: Neutral)

For 4QCY2011, Areva T&D is expected to post subdued top-line growth of 4.2% yoy to `1,383cr, mainly on account of lower volumes, pricing pressures and execution slowdown. Consequently, EBITDA margin is expected to compress by ~443bp yoy to 9.0%, although we expect a sequential improvement of ~100bp due to slight easing of pricing pressures. Led by muted growth and dip in margin, Areva's 56.8cr. PAT is expected to decline by 35.5% yoy to `56.8cr.
KEC International (CMP/TP: `36/`45) (Rating: Buy)

For 3QFY2012, KEC International (KEC) is expected to register strong growth of 18.2% yoy to `1,266cr on the back of execution of its robust order book. On the EBITDA front, despite increased contribution from SAE Towers, the company's margin is expected to contract by ~313bp yoy to 8.5% due to margin pressures faced by the company in the domestic business. Interest cost is expected to remain at elevated levels, but it is likely to be offset by an extraordinary gain of `70cr (sale of land), which will possibly boost the company's PAT by 48.1% yoy to `85.9cr.
BHEL (CMP/TP: `239/-) (Rating: Neutral)

We expect BHEL to post top-line growth of 20.5% yoy to `10,873cr for 3QFY2012. This growth is on the back of its strong order book of ~`1.6tn, which provides revenue visibility. On the EBITDA front, the company's margin is expected to compress by ~296bp yoy to 20.0%. Hence, the companys company s bottom-line growth is expected to be subdued at 1,465cr. 4.4% yoy to `1,465cr.
Thermax (CMP/TP: `395/`457) (Rating: Buy)

For 3QFY2012, we expect Thermax to report a 3.0% yoy decline in its top line to `1,204cr, as high base effect created in 3QFY2011 and weak order inflows since the last couple of quarters will keep the company's revenue under strict check. The company's EBITDA margin is likely to compress by ~110bp yoy to 10.7% due to higher contribution of low-margin EPC contracts in the aggregate revenue. Lower revenue and margin contraction are expected to drag down the company's PAT by 10.8% yoy to `89.4cr.
BGR Energy (CMP/TP: `179/-) (Rating: Neutral)

We expect BGR Energy's (BGR) top line to be under pressure due to high base created in 3QFY2011 and partly due to execution delays. The top line is expected to decline by 28.3% yoy to `901.1cr. On the operating front, EBITDA margin is expected to come at 12.0%. Interest cost is expected to stretch further (owing to hike in interest rates and enhanced working capital debt levels); which, along with slumped revenue, is likely to drag the bottom line down by 46.1% yoy to `47.2cr. 47.2cr.
15
Capital Goods
Capital Goods Index Leap from the valley into the well
During 3QFY2012, the Capital Goods (CG) Index was one of the worst performers, falling 25% compared compared to the 6.1% fall of the Sensex. Broader markets witnessed a steep slide on the back of global crisis and sluggish domestic industrial growth, led by elevated interest rates and stubbornly high inflation. The discouraging economic indicators and chronic lack of confidence among investors led to extremely bearish sentiments for CG stocks. All companies in our CG universe performed miserably, with BGR Energy, KEC International and Jyoti Structures emerging as major losers, nosediving 40-45% in absolute terms and underperforming the Sensex by 34-38%. Rest of the companies in our universe lost around 10-27%.
Key developments
T&D space on gradual recovery; PGCIL ordering gathers momentum
After a dry spell in the initial part of the year, PGCIL's ordering has intensified considerably. YTD FY2012 orders (April-November) grew magnificently by 157% yoy to ~`9,000cr, largely driven by a spectacular surge in October 2011 (orders worth `4,074cr were tendered during the month). Orders were dominated by the transmission towers segment (34.4%), followed by the sub-stations (25%) and conductors (21.8%) segments.
Exhibit 3: PGCILs ordering on an uptick...

4,500 4,000 3,500 3,000
Exhibit 1: 3QFY2012 Sensex vs. CG stocks

Abs. Returns (%) BSE Sensex BSE Cap Goods ABB Areva T&D BHEL BGR Energy Sys. Crompton Greaves Jyoti Structures K E C Intl. Thermax Source: C-line, Angel Research (6.1) (24.9) (15.7) (24.7) (27.0) (44.4) (17.4) (41.9) (40.8) (10.4) Relative to Sensex (%)
(` cr)
(18.8) (9.7) (18.6) (20.9) (38.4) (11.3) (35.8) (34.7) (4.4)
2,500 2,000 1,500 1,000 500 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
Source: C-line, Angel Research
Competition intensifies
The T&D space is getting extremely competitive with market leaders (KEC International, Kalpataru and Jyoti Structures, among others) being invaded on their turf, mainly by industry players and new entrants. In the tower EPC space, Electrical Manufacturing Company (EMC) has clearly surprised by pocketing orders worth `970cr YTD in FY2012 (30% of the segment's orders), thereby comfortably surpassing the market leaders. Notably, KEC International has struggled to secure orders from PGCIL and has bagged only one order worth `70cr YTD in FY2012 (vs. `740cr orders won last year). In the 765kV sub-station segment, after the exclusion of the circuit breaker in the scope of contract in early FY2012, new entrants such as L&T, EMC, Crompton Greaves and Techno Electric have rushed to capture the pie of this lucrative high-voltage segment as general products and civil works constitute a major portion of the sub-station contract. These new entrants have posed a tough competition to traditional T&D majors such as ABB, Areva and Siemens (which together commanded 100% market share in the previous year) and have already captured ~71% market share YTD in FY2012. The transformer market is largely controlled by domestic players YTD in FY2012. During this period, market share of Crompton Greaves remained fairly stable at 22% and Transformers and
16
Exhibit 2: CG index Relative returns to the Sensex

60.0 50.0 40.0 30.0 17.2 9.4 0.6 (0.6) (6.2) (14.1) (9.7) (7.1) (10.7) 3.5 8.2 48.6
(%)
20.0 10.0 0.0 (10.0) (20.0) (30.0)
(4.6) (5.8)
(9.0)
(10.1) (18.8)
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
We believe investment activity is likely to remain subdued in the near-to-medium term. Acceleration in awarding of road projects and improved ordering in the T&D space are few silver linings in the otherwise dampened investment climate. Overall, a substantial pick-up in the implementation of big-ticket economic reforms, growth impulse and anticipated easing of monetary policy will remain key drivers for CG stocks, in our view.
3Q12
Capital Goods
Rectifier (TRIL) emerged as a leader in transformer orders, pocketing 44% of the orders. Overall, the outlook remains challenging: A handful of positives, especially in the T&D space, does very little to warrant a change in our pessimistic view. Against the backdrop of economic slowdown, we believe the overall picture remains gloomy for market leaders (read BHEL, ABB and Crompton Greaves, among others) as well as for mid-size companies (such as Jyoti Structures, KEC International and BGR). While the government is speeding up its efforts to resolve the key issues in the power sector, we believe it will take a while for the sector to witness dramatic improvements. Given this, we expect the slowdown to continue for the next couple of quarters. Therefore, companies catering to the power sector will witness a high degree of discomfort unless the core concerns soothe. Valuations have come to attractive levels: Most companies in our coverage universe have witnessed a sharp fall in stock prices over the past couple of months, which was in-line with our negative stance on the sector. This fall has brought stocks to attractive levels, considering the latent opportunities offered by these companies. Hence, we believe investors with a medium to long-term view should start considering accumulating quality large and mid-cap companies. Considering this, we prefer companies with diversified revenue streams, healthy return ratios, strong balance sheet and compelling valuations (on the back of subdued expectations). Therefore, we like Crompton Greaves and Thermax in the large - cap space and mid-cap For BHEL, Jyoti Structures in the mid-cap space. For BHEL, we continue to maintain our negative stance, owing to structural issues heightened competition, margin erosion and slowing of order inflows.
...However, BTG space remains in doldrums

With numerous headwinds surmounting the power sector (inadequate coal supplies, land acquisition issues and huge losses at SEB levels), the BTG space has come to a virtual standstill. As per the corporate announcements made so far in 3QFY2012, no major order is booked in the BTG space. Instead, management commentaries suggest further sluggishness in the sector, owing to slowdown in the economy. Given the below-expectation ordering and domestic players progressing to set up BTG manufacturing facilities through JVs (seven players in total vs. the previous monopoly of BHEL), we believe competition in the BTG space is set to intensify and predatory pricing is imminent. Depreciating INR will have a mixed impact: The sudden and substantial deprecation of the INR will certainly have its bearing on companies in our CG universe. INR depreciation will help reducing competition, especially from Chinese/Korean players in the BTG and T&D space, as imported equipment (BTG or T&D) will now turn expensive and will likely narrow the price differential with domestic equipment. In contrast, the INR slide weighs on operating costs for companies such as ABB, Areva and BGR, who import sizable quantity of raw materials (18-40%). Companies such as Crompton Greaves, Thermax, Jyoti Structures and KEC International will be moderately affected, as their major raw materials (steel and copper) are global commodities.
Exhibit 4: Quarterly estimates

Company ABB* Areva* BHEL BGR CMP 584 164 239 179 Net Sales 2,412 1,383 10,873 901.1 2,649 652.7 1,266 1,204 16.4 4.2 20.5 (28.3) 10.5 18.4 18.2 (3.0) OPM (%) 5.1 9.0 20.0 12.0 9.5 10.5 8.5 10.7 352 (443) (296) 29 (469) (91) (314) (110) Profit Net Profit 61.9 56.8 1,465 47.2 133.6 20.8 85.9 89.4 815.0 (35.5) 4.4 (46.1) (42.6) (16.0) 48.1 (10.8) (` EPS (`) % chg 815.0 (35.5) 4.4 (46.1) (42.6) (16.1) 48.1 (10.8) FY11 3.0 7.8 24.7 44.8 14.4 12.1 8.0 32.0 2.9 2.4 6.0 6.5 2.1 2.0 3.3 7.5 (` EPS (`) FY12E 8.9 7.2 28.7 36.0 8.1 14.2 6.7 34.6 FY13E 17.8 8.4 26.0 33.6 12.2 12.2 8.9 35.6 FY11 195.6 21.0 9.7 4.0 8.7 3.2 4.5 12.3 P/E (x) FY12E 65.7 22.8 8.3 5.0 15.5 2.7 5.3 11.4 FY13E 32.8 19.5 9.2 5.3 10.3 3.2 4.0 11.1 arg Target (` (`) 427 146 49 45 457 (`) 3QFY12E % chg 3QFY12E chg bp 3QFY12E % chg 3QFY12E
( ` cr)
Reco. Sell Neutral Neutral Neutral Buy Buy Buy Buy
Crompt. Greav. 126 Jyoti Structures# 39 Kec Intl' Thermax 36 395
Source: Company; Angel Research; Note: Price as on December 30, 2011; * December year ending; For KEC, we expect an extraordinary income worth `70cr for 3QFY2012E.
Kanani Analyst - Shailesh Kanani / Hemang Thaker

17
Cement
Cement dispatches growth at decent 8.4% yoy in October-November 2011
Cement demand, after growing moderately (3.1% yoy) in 1HFY2012, showed some signs of improvement and grew by decent 8.4% yoy in October-November 2011. For 8MFY2012, cement demand growth remained low at 4.4% yoy, as high interest rates and policy inaction on the government's part affected construction demand. In all, we expect cement demand growth to be at ~5% for FY2012E. During October-November 2011, JP Associates was the top performer among large players with 27.1% yoy growth in its dispatches; while, Ambuja Cements (Ambuja) reported dispatch growth of 14.1% yoy. Dispatch growth for both the players was on account of capacity addition and minimum/no exposure to southern India, where a low-demand scenario continues.
Exhibit 3: Cementstocksperformanceintheboursesin3QFY2012
Ultratech Shree Cements Madras Cements JK Lakshmi India Cements Ambuja ACC Sensex (12.0) (7.0) (6.1) (2.0) 3.0 (%) 8.0 13.0 18.0 (11.5) (9.2) 4.6 3.5 2.0 18.2 2.3
Source: BSE, Angel Research
Price situation
All-India average cement prices, after increasing during the end of the previous quarter, continued their upward movement and increased by `5-15/bag and `8-10/bag in October and November, respectively. However, push-up in sales by calendar year-ending companies has led to a `5-10/bag decline in average prices from earlier levels during mid-December. Southern region: Although demand in the region remains sluggish, prices in the region have held ground due to the strong production discipline amongst players in the region. Prices at the start of the quarter were at `270-280/bag, and they are now at `275-285/bag. Northern region: Prices in the northern region, which had increased on an average by `9-10/bag at the end of the last quarter and witnessed an increase of `5-10/bag and `10-15/bag during October and November, respectively, in anticipation of demand pick-up after the end of monsoons, corrected during mid-December on an average by `15-20/bag as improvement in demand was lower than expected. Prices are currently quoting at `255-275/bag . Eastern region: In the eastern region, prices are currently in the broad range of `300-330/bag, up `50-60/bag from `245-265/bag at the end of 2QFY2012. This sharp increase in prices was because of strong demand after the festivital season. Western region: Prices in the western region stood at `230-275/bag during mid-September. Sand availability issues prevalent in Maharashtra in the last quarter were sorted out during 3QFY2012, which along with upbeat infrastructure growth in Gujarat aided demand pick-up in the region. On the back of good demand, prices moved upwards during the quarter and are currently at `275-295/bag. Central region: Prices in the central region, which were at `225-240/bag at the beginning of the quarter, increased by ~`35/bag during the first two months of the quarter. However, prices have fallen by `10-15/bag since then and are currently at `250-265/bag as demand in the region continues to be moderate.
Exhibit 1: Trend in cement dispatches

25 20 15 10 5 0
Apr-10 May-10 Aug-10 Sept-10 Oct-10 Jun-10 Jul-10 Nov-10 Dec-10
25 20 15 10 5 0 (5)
Feb-11 Mar-11 Apr-11 May-11 Aug-11 Jan-11 Sept-11 Oct-11 Jun-11 Jul-11 Nov-11
(10)
Total Despatches in Mn Tns - LHS
yoy (%) -RHS
Source: CMA, Company, Angel Research
Exhibit 2: Cement dispatches (in mt) for the top four players
OctOctUltraTech ACC Ambuja JP Asso. Total 6.28 3.80 3.61 3.10 16.79 OctOctyoy(%) 8MFY12 8MFY11 yoy(%) 3.3 3.8 14.1 27.1 9.4 24.89 15.37 13.35 12.77 66.37 24.69 13.69 12.93 10.72 62.03 0.8 12.3 3.2 19.1 7.0 6.08 3.66 3.17 2.44 15.34 Company Nov 11 Nov 10
Cement stocks Performance on the bourses

During 3QFY2012, the large-cap cement stocks in our coverage universe outperformed the Sensex, which lost 6.1%. Shree Cements was the biggest gainer, up 18.2%. Ambuja, ACC and UltraTech rose by 4.6%, 3.5% and 2.0%, respectively. JK Lakshmi, however, was the biggest loser, falling by 11.5%.
18
Cement
Higher coal prices to exert margin pressures in this quarter
Cement companies are expected to face margin pressures due to higher yoy power and fuel costs due to increased domestic and international coal prices and INR depreciation. During March 2011, Coal India hiked the price of coal supplied by it to non-core sectors by ~30%. Average prices of the New Castle Mckloksey 6,700kc coal were higher by 6.2% on a yoy basis. However, on a sequential basis, average coal prices in USD terms were down by 5.3%, but ~11% qoq depreciation in average INR/USD rates, negated the fall and average coal prices in INR terms were higher by 4.5% on a qoq basis. 13.7% improvement in realization and 8.4% growth in dispatches. Shree Cements is expected to post the highest top-line growth of 38.8%, aided by higher cement dispatches and higher revenue from the power division. However, cement manufacturers are expected to face cost pressures on account of higher coal and freight costs. We expect Shree Cements to post the highest margin expansion amongst our coverage stocks. Exhibit 5: 3QFY2012 OPM change yoy to be a mixed bag
Company (%) ACC^ Ambuja^
9000 8000 7000 6000 5000 4000 3000 2000 1000 0
3QFY12E 17.3 21.2 14.3 13.4 27.0 25.8
3QFY11 17.4 20.1 12.1 7.9 26.2 19.5
chg bp (yoy) (6) 104 220 550 81 628
2QFY12 chg bp (qoq) 14.8 17.7 18.6 11.6 32.6 23.4 247 348 (426) 176 (555) 237 157
Exhibit 4: Global thermal coal prices

250 200 150 100 50 0 coal prices up in INR terms
India Cements JK Lakshmi Madras Cements Shree Cements
UltraTech 18.3 19.7 (148) 16.7 Source: Company, Angel Research; Note: ^Year ending December
Aug-11
Dec-11
Apr-11
US $/tonne- LHS
`/tonne - RHS
3QFY2012 expectations Healthy top-line growth; but cost pressures to be felt

We expect all the cement companies under our coverage to report top-line growth of 11-39% yoy, primarily on account of substantial improvement in realization and higher dispatches. Amongst the pure cement players under our coverage, Ambuja Cements is expected to post the highest top-line growth of 23.2%, aided by
Outlook and valuation: In our view, the cement sector's valuations in terms of EV/sales and EV/tonne when compared to utilization levels are almost 23% more expensive than historical valuations during periods of similar utilization levels. But, despite this, cement companies have maintained relatively healthy pricing due to production discipline amongst them, which has led to high valuations currently. However, in our view, this is a thin investment thesis to rely on, as there exists persistent risk of a breakdown in production discipline. Hence, we remain Neutral on the sector. That said, we maintain our Buy recommendation on JK Lakshmi due to its attractive valuations as it is trading at EV/tonne of US$36 on current capacity.
Dec-05
Aug-06
Aug-07
Aug-08
Aug-09
Dec-06
Dec-07
Dec-08
Dec-09
Apr-06
Apr-07
Apr-08
Apr-09

Company ACC^ Ambuja^ India Cements JK Lakshmi CMP (`) 1,136 155 66 37 Net Sales 3QFY12E 2,325 2,204 922 351 710 1,082 4,180 18.7 23.2 18.0 11.4 22.6 38.8 12.5 OPM (%) chg bp (6) 104 220 550 81 628 (148) 17.3 21.2 14.3 13.4 27.0 25.8 18.3 Profit Net Profit 3QFY12E 219 286 26 9 60 76 352 (14.5) 10.9 19.2 92.0 38.9 175.1 10.4 (` EPS (`) % chg (14.5) 10.9 19.2 92.0 38.9 175.1 10.4 FY11 59.6 8.2 2.2 4.8 8.9 60.2 51.2 11.6 1.9 0.8 0.7 2.5 21.6 12.8 (` EPS (`) FY12E 57.1 7.9 8.4 5.9 14.8 70.8 69.3 FY13E 67.5 9.2 9.2 7.8 15.2 124.5 80.2 FY11 19.1 18.9 29.7 7.7 11.6 36.0 22.6 P/E (x) FY12E 19.9 19.7 7.8 6.3 6.9 30.6 16.8 FY13E 16.8 16.9 7.2 4.8 6.7 17.4 14.5 arg Target (`) 51 % chg 3QFY12E % chg 3QFY12E
Aug-10
Dec-10
Apr-10
(` cr)
Reco. Neutral Neutral Neutral Buy Neutral Neutral Neutral
Madras Cem. 102 Shree Cem. 2,167 UltraTech 1,160
Source: Company, Angel Research; Note: Price as on December 30, 2011; ^December year ending
Taparia Analyst - V Srinivasan / Sourabh Taparia

19
FMCG
For 3QFY2012, we expect our FMCG universe to post revenue growth of 18% yoy, aided by modest volume growth coupled with price hikes taken by companies. Despite significant macroeconomic challenges, growth in the industry remained resilient during the quarter due to the inherent demand for FMCG products. However, with constant price hikes, companies now face a risk of slowdown in volume growth and have limited scope for further price hikes due to rising competitive pressures in most categories (particularly home and personal care).
Exhibit 2: Input cost trend

CMP (`) (` Wheat (`/quintal) Barley (`/quintal) Sugar (`/ quintal) Tea (`/kg) Coffee (US cent/LB) Cocoa (US$/MT) Milk Liquid (`/ltr) Palm Oil (MYR/tonne) Copra (`/quintal) Safflower (`/ quintal) Soyabean Oil (`/10kg) Groundnt Oil (`/MT) 1,178 1,200 3,051 170 222 2,361 23 3,132 5,300 3,000 678 98,500 8,060 5,000 110 1,780 42 1,000 245 197 yoy (%) 2 2 5 (19) (10) (25) (30) 4 (8) 9 7 9 (10) (7) (1) 11 24 (13) qoq (%) (10) (6) (11) 8 (29) (8) (15) (5) 26 19 30 (5) (33) 17 37 5 55 82
Exhibit 1: 3QFY2012E revenue growth (yoy, %)

30.0 24.7 25.0 20.0 15.0 10.0 5.0 Britannia ITC HUL Asian Paints Colgate Dabur GCPL GSKCH Marico Nestle TGBL
22.7
22.5 20.1 19.7 19.5 17.8 17.7 15.7 15.1 8.3
Coconut Oil (`/quintal) Rice Bran Oil (`/MT) Crude (US$/ barrel) Caustic Soda (`/kg) Sorbitol (`/kg) Soda Ash (`/kg) TiO2 -Rutile (` kg) TiO2 -Anantese (` kg)
Source: Company; Angel Research; Note: Nestle, GSKCHL figures 4QCY2011
INR depreciation negates possible input cost softening

3QFY2012 witnessed a sharp depreciation in INR (depreciated ~9%) against the USD, causing key input costs for FMCG companies to further inch upwards. Any possible softening in key raw-material prices has been negated due to currency fluctuations. For most FMCG companies, raw-material cost denominated in foreign currency and crude-linked derivatives formed a significant portion of input costs. Asian Paints, Colgate, HUL, Marico and GCPL will be the most negatively impacted companies due to INR depreciation. ITC, Dabur, Nestle and GSKCH will be less impacted. Prices of agri commodities such as wheat, barley and sugar have been benign during 3QFY2012 and showing signs of softening. Prices of tea, coffee, cocoa and milk liquid witnessed a decline during the quarter. Prices of edible oils showed a mix trend during the quarter, with palm oil prices sliding down by ~15% yoy; copra and coconut prices down by ~5% each; and rice bran oil prices down by ~33% yoy. However, with INR depreciation, the impact of price softening gets nullified. Prices of safflower oil, soyabean oil and groundnut oil increased during the quarter. Prices of crude and crude-linked raw materials are still high, as crude price remained high in 3QFY2012.
Source: Bloomberg, C-Line, Angel Research; Note: Prices as on December 28, 2011
Macroeconomic concerns and a highly competitive scenario The major headwinds

FMCG companies have been resilient to the current unfavorable macroeconomic scenario. FMCG companies have been able to grow at a healthy pace in the recent past, with consistent price hikes (to combat input cost inflation) and steady volume growth. However, companies have started witnessing softening in volume growth due to the persistent high inflationary scenario. In addition, price hikes during the past few quarters have heightened the competitive intensity in the sector, thus making it difficult for companies to carry out any further price hikes. Most FMCG companies under our coverage maintained caution in terms of their expenses towards new product launches and increased ad spends due to high raw-material cost pressure.
Outperformance across the sector

3QFY2012 witnessed outperformance by FMCG companies (all stocks in our universe except Asian Paints) aiding the BSE FMCG Index outperform the Sensex by 6.4% during the quarter. The sector clearly reflected a defensive nature and outperformed
20
FMCG
the benchmark indices, as the overall economic scenario during the quarter remained gloomy. Amongst heavyweights, HUL delivered robust returns buoyed by strong results, while ITC outperformed the benchmark by ~8%. In mid caps, TGBL, GSKCH and Marico registered significant outperformance; however, Asian Paints underperformed the Sensex. and better product mix. Top-line growth coupled with cut in ad spends will aid in margin expansion for HUL, leading to 15.7% yoy growth in earnings. We expect ITC to register robust 17.8% yoy top-line growth and 21% yoy earnings growth. We expect all business units to perform well for the company.
Exhibit 3: Relative outperformance to the Sensex (3QFY2012)

BSE FMCG TGBL Nestle Marico ITC HUL GSKCH GCPL Dabur Colgate Britannia Asian Paints (17.5) (20.0) 0.3 (1.1) 6.4 11.5 5.4 5.0 6.8 0.8 7.8 1.7 9.3 (3.7) (2.9) (4.2) (10.0) 2.4 3.2 1.2 1.8 7.3
Valuations at peak; Recommend Underweight

Most FMCG companies have witnessed a rally during 3QFY2012 and are currently trading at peak valuations. Moreover, we highlight that FMCG companies have significantly outperformed the Sensex (remained flat in 3QFY2012E), thereby widening the premium valuation gap. While the long-term consumption story for the FMCG industry remains intact, any further re-rating from current valuations seems less likely given the near-term concerns over 1) high inflationary scenario, 2) further INR depreciation and 3) spike in input costs. Hence, we maintain our Underweight stance on sector. the FMCG sector. HUL, Amongst heavyweights, post the significant rally in HUL, we maintain our Neutral view on the stock and recommend ITC. Accumulate on ITC. In mid caps, we maintain Accumulate on Dabur, TGBL. We Britannia, Dabur, GCPL and TGBL. We maintain our Neutral Paints, view on Asian Paints, Nestle, Marico and Colgate due to their rich valuations and wait for better entry opportunities.
19.9 15.4
25.9
(11.4)
10.0
20.0
30.0
Relative to Sensex (%)
Absolute (%)
Mixed performance across the sector

For 3QFY2012, we expect our FMCG universe to report revenue growth of 18% and earnings growth of 19%, as we expect margin expansion for HUL, ITC, Nestle and GCPL. However, we expect margins of Britannia, GSK Consumer and Marico to remain flat, whereas Asian Paints and Dabur are expected to report a dip in their margins. HUL is expected to report impressive 15.7% yoy top-line growth, driven by price hikes

Company CMP (`) Asian Paints ^ 2,595 Britannia Colgate GCPL GSKCHL * HUL ITC Marico ^ Nestle * TGBL 448 992 385 2,541 408 201 145 4,173 90 Net Sales 3QFY12E 2,509 1,271 643 1,347 1,202 610 5,815 6,427 1,002 2,000 1,735 19.5 17.7 15.1 24.7 22.7 20.1 15.7 17.8 22.5 19.7 8.3 OPM (%) chg bp (72) 11 76 (64) 67 24 107 39 107 (77) 15.7 5.2 14.1 18.8 17.8 11.8 13.1 36.5 12.2 20.8 9.9 Net Profit Profit 3QFY12E 239.2 44.7 81.7 182.0 154.6 62.9 663.5 1,680.7 81.8 278.3 64.5 8.5 19.6 23.3 17.9 30.1 17.9 15.7 21.0 17.6 36.8 (10.5) EPS (`) (` % chg 8.5 19.6 23.3 17.9 30.1 17.9 15.7 21.0 17.6 36.8 (10.5) FY11 87.9 12.2 29.6 3.3 14.9 71.2 9.7 6.4 3.9 84.9 3.4 24.9 3.7 6.0 1.0 4.8 15.0 3.0 2.2 1.3 28.9 1.0 EPS (`) (` FY12E 102.5 15.4 32.3 3.8 16.5 82.7 11.7 7.5 5.0 101.3 5.4 FY13E 126.3 22.5 37.8 4.6 21.5 98.3 13.3 8.8 6.4 122.6 6.9 FY11 29.6 37.1 33.5 30.5 25.9 35.7 42.0 31.4 37.5 49.1 26.4 P/E (x) FY12E 25.3 29.1 30.8 26.1 23.3 30.7 34.9 27.0 29.3 41.2 16.6 FY13E 20.6 19.9 26.3 21.9 17.9 25.9 30.6 22.8 22.8 34.0 13.0 Target arg (`) 495 110 430 219 102 % chg 3QFY12E % chg 3QFY12E
(` cr) `
Reco. Neutral Accumu. Neutral Accumu. Accumu. Neutral Neutral Accumu. Neutral Neutral Accumu.
Dabur India ^ 100
Source: Company, Angel Research; Note: Price as on December 30, 2011; * December year ending; ^Consolidated
.V.S Analyst: Sreekanth P .S .V

21
Infrastructure
Cold winds continue to gust from all sides
For 3QFY2012, we expect our coverage universe to report 9.6% yoy top-line growth (as depicted in the chart below). However, this growth is largely skewed towards three companies, namely ABL, ITNL and SEL, which contribute significantly to the overall growth of the universe. Barring these companies, average growth for 3QFY2012 comes at poor 5.8%.
3QFY2012 expectations
ABL (CMP/TP: `190/`245) (Rating: Buy)
Ashoka Buildcon (ABL) is expected to post robust growth of 52.5% yoy on the consolidated revenue front to `360.6cr on the back of under-construction captive road BOT projects, which will drive its E&C revenue. The E&C segment will continue to dominate the companys revenue by contributing `268.4cr (74.4%), while the BOT segment's share is expected to be `92.2cr. EBITDAM is expected to come in at 21.5% (23.9%), registering a dip of 239bp yoy. We are expecting 26.0% yoy growth at the earnings level to `21.0cr, led by revenue growth. Change in TP/Earnings: No change
9.6
Exhibit 1: Average yoy revenue growth (%)

30.0 25.5 25.0 19.8 20.0 15.0 10.0 5.0 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12E 12.6 18.2
CCCL (CMP/TP: `16/-) (Rating: Neutral)

Consolidated Construction Consortium (CCCL) is expected to post modest 8.0% yoy growth in its top line to `535.9cr, given the slow-moving infra orders forming ~40% of its total order book. On the EBITDA front, we expect the company to continue to report a dismal performance and register a dip of 654bp yoy to 3.2%, in-line with management's guidance. Against this backdrop, the bottom line is expected to post a loss of `5.2cr in 3QFY2012 vs. profit of `16.7cr in 3QFY2011. Change in TP/Earnings: We expect CCCL to post loss of `20cr for FY2012 and profit of `29.7cr for FY2013 (earlier estimates profit of `27.8cr and `65.8cr) at the earnings front, as we factor in lower EBITDAM than expected before. However, given the sharp fall in the stock price, we change our recommendation from Reduce to Neutral.
Source: Company, Angel Research; Note: For our analysis, we have selected 12 companies, as detailed in Exhibit 6
As the case in recent times, we expect earnings to falter. We project a 16.1% yoy decline on the earnings front for our coverage universe for 3QFY2012, with ~67% of companies expected to post declines. This would be primarily led by subdued top-line growth for most companies (as explained above), margin pressure (~83% of companies are likely to post a decline in OPM) and higher interest outgo (the full impact of the last rate hike was not experienced in 2QFY2012 and increased debt levels in 3QFY2012).
Exhibit 2: Earnings expected to be under pressure (%)

20.0 14.2 15.0 10.0 5.0 3QFY11 (5.0) (10.0) (16.1) (15.0) (20.0) 4QFY11 1QFY12 8.2
HCC (CMP/TP: `17/-) (Rating: Neutral)

For Hindustan Construction Company (HCC), we project a 2.0% yoy decline in revenue for 3QFY2012 to `982.4cr due to the slowdown of execution on account of drying up of orders for HCC in the last few quarters and slow-moving order book. On the EBITDA front, we expect a marginal dip of 66bp yoy to 11.9%. Hence, on the bottom-line front, we expect loss of `25.5cr in 3QFY2012 vs. profit of `7.9cr in 3QFY2011. Change in TP/Earnings: No change
0.4 (1.9) 2QFY12 3QFY12E
Source: Company, Angel Research; Note: For our analysis, we have selected 12 companies, as detailed in Exhibit 6
IRB Infra (CMP/TP: `130/`182) (Rating: Buy)

IRB Infra (IRB) is expected to post a poor set of numbers on a quarterly basis. We expect a 15.3% yoy decline and 14.2% yoy growth in C&EPC (`395.1cr) and BOT (`244.3cr) revenue, respectively, leading to overall top-line decline of 4.4% to
22
Infrastructure
`639.5cr. Dip in the E&C segment would be due to completion of Surat Dahisar and Kolhapur road projects and remaining under-construction projects being at a nascent stage. We expect higher EBITDA margin at 45.9%, a jump of 205bp yoy, due to higher share of the high-margin BOT segment. Depreciation is expected to be higher at `74.4cr, owing to completion of the Surat Dahisar project. We project net profit before tax and after tax (post minority interest) at `109.3cr and `81.5cr, respectively, after factoring a blended tax rate of 23.2% for the quarter. Change in TP/Earnings: No change Change in TP/Earnings: We have revised our earnings downwards by 26.5% and 20.8% for FY2012 and FY2013, respectively, owing to expectation of poor OPM in the cement segment and volatility from the construction segment in the medium term. We continue to maintain our Buy recommendation on the stock with a target price of `83.
L&T (CMP/TP: `995/`1,453) (Rating: Buy)

For 3QFY2012, we expect Larsen and Toubro (L&T) to report revenue of `12,171cr, registering 6.6% yoy growth. This subdued growth is on account of high base (3QFY2011 reported top-line growth of 40.5% yoy). We expect OPM to be flat at 11.1%. We project net profit at `866.6cr, marginally up 3.1% yoy. We believe the company would end the quarter with a total order inflow of ~`10,000cr (`13,366cr). An important thing to watch out for would be management's commentary on the outlook for the sector and how things pan out on the margin front going ahead. We do not expect INR depreciation to have a major impact on L&T's margins (L&T has foreign currency loans), given the company generates decent revenue from its international operations. Change in TP/Earnings: We have reduced our order inflow estimates to `75,781cr and `83,543cr (from `79809cr and `92,236cr earlier) for FY2012 and FY2013, respectively, to build in a likely sharper decline in incremental order booking versus earlier estimates. We retain our Buy rating on the stock with a target price of `1,453 lowered PE multiple for parent to 16x FY2013E earnings (earlier 18x).
ITNL (CMP/TP: `145/`227) (Rating: Buy)

We expect IL&FS Transportation Networks (ITNL) to post a strong set of numbers for 3QFY2012 on account of higher number of projects in hand. The companys revenue is expected to grow strongly by 78.0% yoy to `1,306cr, led by under-construction road BOT projects. We expect the company to register EBITDAM of 27.3%, down 279bp yoy, owing to higher contribution of the comparatively low-margin E&C segment. Strong revenue growth is expected to reflect in the companys earnings, which are expected to surge by 94.2% yoy to `119.7cr. Change in TP/Earnings: No change
IVRCL (CMP/TP: `28/`42) (Rating: Buy)

For 3QFY2012, we expect IVRCL to post a 3.0% yoy decline in its revenue to `1,374cr. On the EBITDA margin front, we expect a 70bp yoy dip to 9.2%. On the earnings front, we expect a steep decline of 46.5% yoy to `22.6cr, primarily due to higher interest costs for the quarter and a decline in the top line. Change in TP/Earnings: We have revised our earnings downwards by 10.7% and 23.9% for FY2012 and FY2013, respectively, as macro headwinds faced by the sector will keep execution pace at subdued levels. We continue to maintain our Buy view on the stock with a revised target price of `42.
MPL (CMP/TP: `51/`77) (Rating: Buy)

Madhucon Projects (MPL) is expected to report decent top-line growth of 24.1% yoy to `436.8cr for 3QFY2012. We expect the companys EBITDA margin to marginally dip by ~136bp yoy to 11.4%. Earnings are expected to be under pressure due to higher interest cost for the quarter and are expected to decline by 84.7% yoy to `1.8cr. Change in TP/Earnings: We have lowered our earnings estimates to `32.7cr and `34.7cr (from `39.2cr and `38.8cr earlier) for FY2012 and FY2013, respectively, to build in a likely decline in margin and higher interest cost versus earlier estimates. We continue to maintain our Buy rating on the stock with a revised target price of `77.
JAL (CMP/TP: `52/`83) (Rating: Buy)

We expect Jaiprakash Associates (JAL) to post modest top-line growth of 12.1% yoy to `3,304cr for the quarter. We expect flat C&EPC revenue at `1,264cr. On the cement front, we expect JAL to post revenue of `1,543cr volume of 4.7mt with realization of `3,250/tonne for the quarter. The real estate sector is expected to post top-line growth of 5.0% yoy to `446.8cr. Overall, we expect JAL to post OPM of 21.2%, down 749bp yoy, on account of abysmal OPM of 11.0% expected in the cement segment. The bottom line is expected to come in at `69.5cr, registering a yoy decline of 70.1% for 3QFY2012.
NCC (CMP/TP: `33/`52) (Rating: Buy)

We expect subdued performance from Nagarjuna Construction (NCC) for this quarter. On the top-line front, NCC is expected
23
Infrastructure
to post a yoy decline of 9.0% to `1,215cr. EBITDA margin is expected to be flat at 9.5%. On the earnings front, we expect NCC to post a decline of 65.4% yoy to `14.0cr for the quarter. This would be primarily due to burgeoning interest cost (yoy jump of ~73.2%) and a decline in the companys top line. Change in TP/Earnings: We have revised our earnings downwards by 35.4% and 30.8% for FY2012 and FY2013, respectively, as macro headwinds faced by the sector will keep execution pace at subdued levels. We continue to maintain our Buy rating on the stock with a revised target price of `52. Some rationality finally sinking in the bidding activity: During the last few quarters, players in the road segment witnessed enhanced competition due to scarcity of order inflow across sectors (except road), as evident from the huge difference in the bidding amount of players and the all-time high participation of players. However, recent bid results throw a mixed picture (refer exhibit below), as few bids witnessed sensible bidding. As shown in the table below, the difference between L1 and L2 has narrowed down significantly in some cases. We believe this moderation is due to tight liquidity situation and projects facing difficulty in achieving financial closure, as banks are getting skeptical in lending to aggressively won projects. However, NHAI is emerging as the winner in this highly competitive environment, with bidders offering a premium much higher than NHAI's expectations. Further, we believe competition is here to stay, considering the general slowdown in the economy and lack of opportunities in other segments. However, considering the tough liquidity environment, better financial discipline on the bidding front from players is also expected.
SEL (CMP/TP: `104/`150) (Rating: Buy)

We expect Sadbhav Engineering (SEL) to post robust 50.0% growth to `714.3cr on the top-line front, owing to pick-up in the execution of captive road BOT projects. EBITDA margin is expected to witness a marginal fall of 40bp yoy to 10.7% for the quarter. On the earnings front, the company is expected to post healthy growth of 47.3% yoy to `38.9cr, owing to strong performance at the revenue level. Change in TP/Earnings: No change
Exhibit 3: Bidding trend in recently awarded road projects

Project Length (Km) Raipur Bilaspur Mah/KNT-Sangareddy Agra Etawah Bakhtiyarpur Khagaria Cuttack Angul Hospet Chitradurga Etawah Chakeri Rampur Kathgodam 126.0 145.0 125.0 113.0 112.0 120.0 160.0 93.0 TPC (Rs cr) 1,220 1,273 1,207 1,635 1,124 1,045 1,573 790 IVRCL L&T Ramky Winner Premium/(Grant) Premium/(Grant) (` L1 (` cr) 45.5 80.0 128.1 (` L2 (` cr) 43.0 75.1 121.9 (568.0) 51.2 45.0 68.1 Diff. Diff. No of (%) bidders 5.7 6.6 5.1 5.5 19.3 40.0 34.9 33 37 33 27 27 37 35 24
Simplex (CMP/TP: `180/`233) (Rating: Buy)

For Simplex, we project decent top-line growth of 15.7% yoy to `1,348cr for 3QFY2012. We expect EBITDA margin to remain under pressure at 8.6%, given its exposure to foreign currency loans. Therefore, the bottom line is expected to be under pressure due to increased interest cost (yoy expected jump of ~50.0%), resulting in a yoy decline of around 41.4% to `13.6cr for the quarter. Change in TP/Earnings: We have lowered our earnings estimates to `94.0cr and `128.6cr (from `102.9cr and `149.1cr earlier) for FY2012 and FY2013, respectively, to build in a likely decline in margin and higher interest cost versus earlier estimates. We retain our Buy rating on the stock with a revised target price of `233.
Essar/KNR (537.0) Ashoka Ramky Oriental Era 61.1 63.0 91.9 34.0
5.4 529.6
Source: NHAI, Angel Research
Outlook
High interest rates continue to dent profitability
Consistent hike in repo rates by the RBI (to contain inflation) has accentuated the already high interest cost for companies in the sector. High interest cost (owing to a high interest rate regime and increased debt levels) resulted in a decline in the bottom line of most companies under our coverage.
Key developments Road sector

NHAI on track to award ~7,000km in FY2012: NHAI has set itself an aggressive target of awarding ~9,371km (originally 7,300km + 2,071km added after PM intervention) of road projects in FY2012 against ~5,000km awarded in FY2011. NHAI has done a commendable job by handing out ~4,000km so far in the current fiscal and is looking on track to achieve over ~7,000km of project awarding in FY2012.
24
Infrastructure
Exhibit 4: Avg. interest cost as a % to revenue
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12E 5.3 6.1 6.2 5.1 7.0 8.3 8.2
signs of reversal of trends, we continue with our view that the performance of the sector will remain subdued. In the current uncertain times, we remain positive on companies having 1) comfortable leverage position (L&T and SEL); 2) strong order book position (L&T, IVRCL and SEL); 3) undemanding valuations (IVRCL); 4) superior return ratios (L&T and SEL); and 5) less dependence on capital markets for raising equity for funding projects (L&T and SEL). Hence, we maintain L&T, IVRCL and SEL as our top picks in the E&C space and recommend IRB in the development space (exhibit below).
However, the recent RBI commentary indicates a pause in further interest rate hikes. Therefore, in our business models, we have factored in no further hikes here on and interest cost would enhance primarily due to increased debt levels. Further, going ahead, we are penciling in some respite on the interest rate front in FY2013, giving infrastructure companies the much needed relief.
Exhibit 5: L&T, SEL and IRB enjoy higher returns on equity as compared to its peers (FY2013E)
18 16 14 12
ITNL
SEL IRB
L&T
Simplex IVRCL MPL
ABL
(RoAE)
10 8 6
JAL CCCL NCC

0.0 3.0 6.0 9.0 12.0 15.0 P/E 18.0 21.0
Valuation
Rising interest rates, policy paralysis and lack of investment in infrastructure projects have resulted in a downward spiral for infrastructure stocks in the past one year. Further, given no visible
4 2 0
HCC
24.0 27.0

Company ABL^ CCCL HCC IRB Infra^ ITNL^ IVRCL JAL L&T MPL NCC SEL Simplex In. CMP (`) 189 16 17 130 146 28 52 995 50 33 100 176 Net Sales 3QFY12E 360.6 535.9 982.4 639.5 1,305.9 1,374.3 3,304.1 12,171.2 436.8 1,215.3 714.3 1,348.4 52.5 8.0 (2.0) (4.4) 78.0 (3.0) 12.1 6.6 24.1 (9.0) 50.0 15.7 OPM (%) chg bp (239) (654) (66) 205 (279) (70) (749) 22 (136) (5) (40) (53) 21.5 3.2 11.9 45.9 27.3 9.2 21.2 11.1 11.4 9.5 10.7 8.6 Net Profit Profit 3QFY12E 21.0 26.0 EPS (`) (` % chg 26.0 4.0 EPS (`) (` FY11 19.2 2.5 1.2 13.6 22.3 5.9 5.5 54.3 5.6 6.4 8.0 21.5 FY12E 21.0 (1.1) 1.1 11.9 24.4 3.8 2.7 64.2 4.4 3.6 9.1 18.9 FY13E 24.7 1.6 1.6 13.1 25.7 4.6 4.2 71.0 4.7 3.8 9.0 25.9 FY11 9.9 6.4 14.4 9.5 6.5 4.8 9.5 18.3 9.1 5.2 12.5 8.2 P/E (x) FY12E 9.0 10.9 6.0 7.5 19.2 15.5 11.4 9.4 10.9 9.3 FY13E 7.6 10.2 10.6 10.0 5.7 6.1 12.5 14.0 10.7 8.7 11.1 6.8 Target arg (`) 245 182 227 42 83 1,453 77 52 150 233 % chg 3QFY12E % chg 3QFY12E
(` cr) `
Reco. Buy Neutral Neutral Buy Buy Buy Buy Buy Buy Buy Buy Buy
(5.2) (131.0) (25.5) (421.1) 81.5 119.7 22.6 69.5 866.6 1.8 14.0 38.9 13.6 (38.7) 94.2 (46.5) (70.1) 3.1 (84.7) (65.4) 47.3 (41.4)
(0.3) (131.0) (0.4) (421.1) 2.5 6.2 0.8 0.3 14.1 0.2 0.5 2.6 2.7 (38.7) 94.2 (46.5) (70.1) 3.1 (84.7) (65.4) 47.3 (41.4)
Source: Company, Angel Research; Note: Price as on December 30, 2011, Target prices are based on SOTP methodology; ^Consolidated numbers
Kanani Analyst: Shailesh Kanani / Nitin Arora

25
Metals
In our view, the steel space will continue to face challenges (as witnessed in 2QFY2012) amid high raw-material costs, low demand and ongoing European debt crisis. Although global steel prices have come off by 12-20% in the past three months, domestic steel prices have remained flat due to the impact of INR depreciation against the USD. For 3QFY2012, coking coal prices have settled at lower levels of US$235/tonne (down 16.1% qoq). Even iron ore contract prices for 4QFY2012 are expected to decline qoq, as spot iron ore prices have declined steeply during the past three months. Steel consumption in India grew by only 1.8% yoy in 1HFY2012 on account of subdued demand. Looking ahead, although we expect steel consumption to pick up, there are some concerns owing to slowdown in the capex cycle, higher interest rates and slowdown in construction and auto demand, among others. Base metal prices declined steeply in 3QFY2012 on account of escalating Eurozone debt crisis. Going forward, we do not expect base metal prices to spike meaningfully due to slowdown in global growth and slowdown in China. Nevertheless, INR depreciation against the USD would partially offset the impact of lower LME prices for domestic players. The BSE Metal Index posted a negative return of 15.5% in 3QFY2012. Steel stocks have declined during 3QFY2012 mainly on account of lower-than-expected 2QFY2012 profitability, subdued demand, and weak macro-economic environment globally in the wake of escalating European debt crisis. SAIL declined by 22.9% in 3QFY2012 on account of disappointing results, capex delays and the anticipated cost-overruns. Coal India declined by 9.8% as the company lowered its FY2012 production targets. Tata Steel and JSW Steel declined by 19.3% and 14.3%, respectively, due to weak sentiment in global metal stocks. Sterlite, Nalco and Hindalco declined by 21.1%, 17.6% and 11.9%, respectively, due to lower LME metal prices and high coal prices. NMDC and Sesa Goa fell by 29.2% and 18.5%, respectively, due to a steep decline in international iron ore prices.
Key events
Coal India lowers production target
Coal India lowered its production target for FY2012 to at least 440mn tonnes from the previous estimate of 452mn tonnes on account of lower-than-expected production in 1HFY2012. The company's 1HFY2012 production stood at 176mn tonnes against its target of 196mn tonnes as heavy rains during August-September 2011 resulted in lower production. Although the company has not lowered its sales volume guidance, we continue to believe it would be challenging for the company to meet its sales volume targets, given the lower-than-expected production and insufficient availability of railway rakes. In addition, Coal India diverted 4.0mn tonnes of monthly quota meant for e-auction to power generation utilities during October 2011. However, Coal India witnessed sluggish response from power utilities for the diverted coal, as utilities were not in a position to lift coal from Coal India's mines due to infrastructural bottlenecks. During November 2011, Coal India resumed e-auction sales.
Sesa Goa acquires additional 1.5% stake in Cairn India

Sesa Goa and, its subsidiary, Sesa Resources has acquired 24.3mn and 4.5mn equity shares, respectively, of Cairn India, representing ~1.5% of the total paid-up share capital of Cairn India from Cairn UK Holdings at an average price of `325/share during 3QFY2012. With this acquisition, Sesa Goa along with Sesa Resources holds 20% of the share capital of Cairn India. This transaction is expected to have an insignificant impact on Sesa Goa's financials.
Ferrous sector
During October-December 2011, steel prices in India remained flat qoq, despite a 12-20% decline in global steel prices. Domestic steel prices have remained flat on account of INR depreciation against the USD, which increases the landed cost of imported steel in India. World average HRC prices decreased by 11.9% qoq and 2.0% yoy to US$673/tonne, while average Chinese domestic prices declined by 8.6% qoq and 7.6% yoy to RMB4,219/tonne, though up 14.8% yoy. Average HRC prices in India were flat qoq at ~`40,241/tonne, though up by 9.4% yoy.
Exhibit 1: Metal stock performance 3QFY2012

NMDC SAIL Sterlite Tata Steel MOIL Nalco BSE Metal Index Sesa COAL Hindalco JSW HZL (35.0) (30.0) (25.0) (20.0) (%) (15.0) (10.0) (5.0) 0.0
Exhibit 2: World HRC prices declined qoq

1,000 900
(US$/tonne)
800 700 600 500 400
Feb-11
Jun-11
Aug-11
Jan-11
Sep-11
May-11
Mar-11
World HRC price
USA Domestic HRC price
CIS export HRC price
Nov-11
Dec-11
Jul-11
Apr-11
Oct-11
26
Metals
Exhibit 3: Domestic HRC prices flat qoq
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
ban in Karnataka, stringent measures in issuing export permits in Odisha, a sharp decline in international iron ore price and increased export duty. As per FIMI, total iron ore exports during FY2012 are estimated to be 60mn tonnes compared to its previous estimate of 75mn tonnes.
(`/tonne)
Exhibit 5: Indian iron ore exports to China down

Sep-09 Sep-10 May-11 May-10 May-09 Sep-11 Jul-09 Jul-10 Jul-11
12
Nov-10
Nov-09
Mar-10
Mar-11
Nov-11
Jan-10
Jan-11
10
Indian HRC price
(mn tonnes)
8 6 4 2 0
Feb-11
May-11
Dec-10
Jan-11
Jun-11
Jul-11
Mar-11
Aug-11
Sep-11
Apr-11
Oct-11
Iron ore prices remained firm in 1HFY2012. However, during the past three months, iron ore prices have declined sharply from US$179/tonne on September 30, 2011 to US$144/tonne as on December 31, 2011. Declining supplies from India were more than offset by rising exports from Brazil. Brazil exported 31.8mn tonnes (+28.5% yoy and +14.2% mom) in November 2011. During the quarter, average spot iron ore prices for 63.5% Fe grade (CFR, China) declined by 20.0% qoq to US$148/ tonne (down 10.6% yoy). Hence, iron ore contract prices for 4QFY2012 are likely to decline on a qoq basis. However, domestic iron ore prices declined modestly qoq on account of lower production from Karnataka. Media reports suggest that coal miner Anglo American has settled a coking coal contract with South Korean steelmaker Posco at US$235/tonne FOB Australia (down 16.1% qoq) for the January-March 2012 quarter. However, INR has depreciated against the USD by over 8.5% during 3QFY2012, which will neutralize the impact of lower coking coal prices for domestic steel makers.
China iron ore imports-India
Outlook
Margin improvement to remain muted: Slowdown in the capex cycle and high interest rates are expected to hurt steel demand in the next two quarters. Steel prices in India are expected to remain flat in the near term. Despite the steep decline in international iron ore prices, domestic iron ore prices declined modestly on account of mining issues in Karnataka. Although coking coal prices have declined, INR depreciation against the USD has neutralized its impact. According to World Steel, global crude steel production for September and October was higher by 9.7% and 6.2% yoy to 124mn tonnes and 124mn tonnes, respectively. Global capacity utilization levels during September and October stood at 79% and 77%, respectively. Given the high production levels coupled with subdued demand in developed countries, we do not expect any significant rise in steel prices in the near term. Nevertheless, INR depreciation against the USD should increase landed cost of steel in India, thereby supporting domestic steel prices. 3QFY2012 expectations: For 3QFY2012, on a yoy basis, we expect net sales to increase, aided by higher realization. Thus, we expect steel companies' top line under our coverage to grow by 10-48% yoy. However, due to relatively higher raw-material costs, margins of steel companies are likely to contract. For Sesa Goa, net sales are expected to decline on account of no production from Karnataka mines and decline in iron ore prices. Further, higher iron ore royalty is expected to result in net profit declining by 47.5% yoy. For Coal India, we expect 39.% yoy growth in net profit on account of price increase taken during February 2011. We remain positive on Tata Steel and Tata Sesa Goa.
Exhibit 4: Iron ore prices and inventory in China

195 175
(US $/tonne)
155 135 115 95

China iron ore fines CFR 63.5% Fe China Iron ore fines CFR 58% Fe
Iron ore exports from India continued to decline

As per Federation of Indian Mineral Industries (FIMI), iron ore exports from India have declined by 25.2% to 35.4mn tonnes from April-October 2011. The declined was on account of export
Nov-11
Iron ore prices finally cooled off, while coking coal prices continued to slide
27
Metals
Non-ferrous sector
During the quarter, base metal prices declined steeply on account of further deterioration in European debt crisis. However, the impact of the decline in spot prices is expected to be partially offset by INR depreciation against the USD. Domestic aluminium companies continued to suffer on account of rising coal prices. (TcRc) Treatment and refining charges (TcRc) up 12.4% for CY2012: Leading companies, Jiangxi Copper and Freeport-McMorgan Copper Gold have reached an agreement to raise TcRc by 12.4% yoy to US$63/tonne and 6.35c/lb, respectively, for CY2012. The increase in TcRc is expected to benefit copper smelters, Sterlite Industries and Hindalco. On a sequential basis, average copper, aluminium and zinc prices declined by 16.3%, 13.0% and 14.2%, respectively, on account of escalating debt crisis in Europe. On a yoy basis, average copper, aluminium, and zinc prices decreased by 12.8%, 9.6% and 17.6%, respectively.
Exhibit 7: Inventory chart

230 200 170 140 110 80 50 Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Copper
Aluminium
Zinc
Outlook
Although base metal prices are likely to remain under pressure in the near term due to growth concerns, high cost of production should lend support to prices. While the copper market is struggling with supply constraints, downside for aluminium prices is capped due to high energy cost. Zinc and lead prices are unlikely to see any major upside as the market remains in surplus. We expect non-ferrous companies to register flat top line yoy, owing to a decline in LME prices. Further, we expect an 85-583bp yoy dip in margins on account of lower LME prices and higher costs of coal. We remain positive on Sterlite, HZL and Hindalco.
Exhibit 6: Average base metal prices (US$/tonne)

3QFY12 Copper Aluminium Zinc 7,530 2,115 1,906 3QFY11 8,631 2,341 2,314 yoy % (12.8) (9.6) (17.6) 2QFY12 8,992 2,430 2,221 qoq % (16.3) (13.0) (14.2)
On a yoy basis, inventory levels at the LME warehouse for copper, aluminium and zinc decreased by 10.4%, 6.5% and 12.5%, respectively. However, on a qoq basis, copper and zinc inventory increased by 12.7%, and 19.8%, respectively, while aluminium inventory declined by 2.1%.

Company Coal India Hindalco* Hind. Zinc JSW Steel MOIL Nalco NMDC SAIL Sesa Goa Sterlite Inds Tata Steel CMP (`) 301 116 119 507 228 51 161 81 163 90 335 Net Sales 3QFY12E 17,664 5,909 2,574 8,843 248 1,770 2,745 12,239 1,775 8,798 30,992 39.2 (0.1) (1.1) 48.2 (2.1) 24.2 4.7 9.8 (29.4) 6.1 6.5 OPM (%) chg bp (264) (155) (583) 209 120 (1,034) 58 (211) (669) (85) (276) 24.5 10.0 51.0 18.5 47.0 17.0 77.5 14.0 48.0 23.0 9.0 Net Profit Profit 3QFY12E 3,650 480 1,288 279 106 224 1,757 1,083 562 771 729 39.0 4.3 (0.1) (4.4) 0.4 (12.4) 15.7 (2.2) (47.5) (30.2) (35.1) EPS (`) (` % chg 39.0 4.3 (0.1) (13.5) 0.4 (12.4) 15.7 (2.2) (47.5) (30.2) (35.1) 5.8 2.5 3.0 12.5 6.3 0.9 4.4 2.6 9.0 0.3 7.6 EPS (`) (` FY11 17.2 12.8 11.6 78.6 35.0 4.1 16.4 11.8 47.5 14.3 77.5 FY12E 23.5 17.5 14.1 68.3 26.4 3.9 20.1 9.2 30.6 14.6 59.3 FY13E 24.6 20.1 15.2 117.1 28.8 4.7 22.6 12.3 31.7 18.5 77.3 FY11 17.5 9.0 10.3 6.5 6.5 12.3 9.8 6.9 3.4 6.3 4.3 P/E (x) FY12E 12.8 6.6 8.4 7.4 8.6 13.2 8.0 8.8 5.3 6.1 5.7 FY13E 12.3 5.8 7.8 4.3 7.9 10.8 7.1 6.6 5.1 4.8 4.3 Target arg (`) 322 151 142 699 231 195 121 510 % chg 3QFY12E % chg 3QFY12E
cr ( ` cr )
Reco. Accum. Buy Buy Buy Neutral Neutral Buy Neutral Buy Buy Buy
Source: Company, Angel Research; Note: Price as on December 30, 2011; EPS calculation based on fully diluted equity; Denotes consolidated numbers; * Denotes standalone numbers
Analyst : Bhavesh Chauhan

28
Oil & Gas

During 3QFY2012, Brent crude oil price decreased by 3.2% qoq on the expectation of increased supply and weaker macro-economic environment. However, Indian crude oil basket increased as INR depreciation against the USD offsetted the decline in crude oil price. During December 2011, oil marketing companies (OMCs) continued to lose `388cr per day on account of selling diesel, kerosene and domestic LPG at subsidized rates. During December 2011, OMCs continued to lose `11.5/liter, `28.6/liter and `287/cylinder on diesel, kerosene and domestic LPG, respectively. WTI crude oil price rose by 5.1% on the back of lower inventory levels in the US. Henry Hub natural gas price declined by 19.2% qoq on the back of weak macro-economic environment in the US. Similarly, prices of petrochemical products declined during November-December 2011 after rising in October 2011. During December 2011, IEA cut its CY2011 and CY2012 projections for global oil demand. It also lowered global oil demand forecast for CY2011 and CY2012 by 160,000/bpd and 200,000/bpd, respectively. IEA now projects global oil demand to average 89.0mnbpd in CY2011 and 90.3mnbpd in CY2012.
Exhibit 2: Petchem prices increased qoq in 3QFY2012

120 100 80
(`/kg)
60 40 20 0
Dec-09
Feb-10
Jun-09
Jun-10
Dec-10
Jun-11
Aug-09
Aug-10
Aug-11
PTA
MEG
CHIPS
POY
Source: Industry sources, Angel Research
Oil supply from Organization of Petroleum Exporting Countries (OPEC) continued to improve in 3QFY2012 on account of higher production from Libya, Saudi Arabia and Angola, among others.
Exhibit 3: OPEC oil supply improved in 3QFY2012

31 31 30
(mnbpd)
30 29 29 28 28
Feb-11 Aug-11 Jan-11 Jun-11 Mar-11 Sep-11 May-11 Nov-11 Jul-11 Apr-11 Oct-11
Brent crude remains steady in 3QFY2012

Brent crude oil price average stood at US$110/bbl in 3QFY2012 compared to US$114/bbl in 2QFY2012. WTI crude increased to average US$94/bbl in 3QFY2012 compared to US$90/bbl in 2QFY2012 on the back of a decline in US inventory. Weaker macro-economic environment coupled with rising supply from OPEC muted the rise in Brent crude oil price in 3QFY2012.
IEA cuts its forecast for oil demand

During December 2011, IEA cut its CY2011 and CY2012 projections for global oil demand. It also lowered global oil demand forecast for CY2011 and CY2012 by 160,000/bpd and 200,000/bpd, respectively. IEA now projects global oil demand to average 89.0mnbpd in CY2011 and 90.3mnbpd in CY2012.
Exhibit 1: Crude remained steady in 3QFY2012

140 130
(US$/bbl)
120 110 100 90 80

May -11 Feb -11 Jun -11 Jul -11 Aug -11 Sep -11 Jan -11 Oct -11 Mar -11 Dec -10 Nov -11 Apr -11
Spread between WTI and Brent narrowed during 3QFY2012

Although the spread between WTI crude and Brent crude has remained insignificant historically, Brent crude had traded at a premium of 20% over WTI during 1HFY2012. However, the spread narrowed during 3QFY2012. Nymex crude rose by 5.1% qoq due to a decline in inventories in the US, while Brent crude price declined by 3.2% qoq during 3QFY2012.
Petrochemical prices increase qoq in 3QFY2012

Average prices of petrochemical products were higher qoq in 3QFY2012 after declining in 2QFY2012. However, although petrochemical prices rose in October 2011, prices declined moderately in November-December 2011.
29
Dec-11
Feb-11
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Oil & Gas

Exhibit 4: WTI Brent crude oil spread narrows
125 105
Key developments
Cairn India strikes gas in Sri Lankan block
During 3QFY2012, Cairn Lanka, a fully owned subsidiary of Cairn India, discovered natural gas in CLPL-Dorado-91H/1z well in the block of SL 2007-01-001, Mannar Basin of Sri Lanka. However, as per the company, further drilling will be required to establish the commercial feasibility of the discovery. The company plans to invest US$100mn to explore commercial hydrocarbon deposits in the 3,000sq. km block in depths upto 1,800 meters.
(US$/bbl)
85 65 45 25
Feb-11
Apr-11
Jun-11
Aug-11
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-08
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Brent crude oil spot price
WTI crude oil spot price
Gas prices decline on macro concerns

Natural gas price average stood at US$3.33/mmbtu in 3QFY2012 compared to US$4.12/mmbtu in 2QFY2012. The qoq price decline was mainly on the back of escalating debt crisis in Europe and weak macro-economic environment in the US.
Dec-10
Oct-11
GAIL signs agreement for LNG supplies

GAIL has signed a Sales and Purchase Agreement (SPA) to buy 3.5mn tonnes of LNG per year for 20 years with US-based Sabine Pass Liquefaction. The supplies are expected to commence from CY2016. The pricing of gas will be based on contractual provisions on a Henry Hub (US gas benchmark) basis after transfer of custody on FOB. This move is a part of GAIL's long-term strategy to secure gas supplies to meet rising demand in India. This deal will not have a major impact on GAIL's financials over the next two years.
Exhibit 5: Natural gas prices declined in 3QFY2012

6.0
5.0
(US $/mmbtu)
4.0
3.0
Vedanta completes Cairn India takeover

2.0
Feb-11
Dec-10
Jun-11
Aug-11
May-11
Sep-11
Jan-11
Jul-11
Oct-11
Mar-11
Nov-11
Apr-11
Exhibit 6: Crude inventory decreased in 3QFY2012

380 370 360 350 340 330 320 310 300 290
DOE crude oil inventory
During 3QFY2012, ONGC issued a no-objection certificate to Britain's Cairn Energy for sale of a majority stake in Cairn India, its Indian unit, to Vedanta Resources. Post this, Vedanta announced closure of the deal. Vedanta now holds 58.5% stake in Cairn India, of which 20% is held by Vedanta's subsidiary Sesa Goa. The transaction was held up since August 2010, mainly over the disagreement on royalty payments. The government had imposed a few conditions, including undertaking from Cairn India, that, alongside ONGC, it will share the burden of royalty payments on a pro-rata basis (which were earlier paid only by ONGC) and withdrawal of arbitration on taxes. Cairn India conducted a postal ballot where these conditions were accepted by majority shareholders.
(mn bbls)
Dec-10
Feb-11
May-11
Jan-11
Jul-11
Mar-11
Aug-11
Sep-11
Jun-11
Nov-11
Apr-11
Oct-11
Exhibit 7: Motor gasoline inventory increased in 3QFY2012

250 240 230
ONGC notifies two new discoveries

During 3QFY2012, ONGC declared two new discoveries, namely Exploratory Well B-127E-1 and North Kadi-472 (NKXV); these discoveries have been notified to Directorate General of Hydrocarbons (DGH). The B-127E-1 well was taken up for drilling with the objective of exploring the potential of sands within Panna Formation to the east of B-127 area. The NKXV well was drilled as an exploratory well with an objective to explore the hydrocarbon potential of Kalol, Kadi and Linch Formations. However, the exact size of the reserves will be known
30
(mn bbls)
220 210 200 190 180
Dec-10
Feb-11
May-11
Jul-11
Mar-11
Aug-11
Sep-11
Jan-11
Apr-11
Jun-11
Oct-11
DOE motor gasoline inventory
Source: Bloomberg, Angel Research Refer to important Disclosures at the end of the report
Nov-11
Oil & Gas

only after further tests. With these two discoveries, ONGC's discoveries for FY2012 now stand at 11. Separately, the company's board has approved the integrated development of B-127 cluster alongside the development of B-55 field for an estimated capex of `2,060cr. B-127 cluster has total in-place hydrocarbon of 24.6mtoe, of which 15.4mtoe is considered for current development.
For 3QFY2012, we expect RIL and GAILs net sales to increase by 15-31% yoy mainly on the back of higher prices coupled with volume growth. However, we expect ONGC's net sales to decline by 17.3% yoy. For RIL, we expect top-line to grow by 31.0% on the back of rise in prices of petrochemical products. RIL's bottom line is expected to increase by 22.2% yoy. GAIL is expected to report steady growth of 14.6% yoy in its net sales on the back of higher volumes, while its net profit is expected to increase by 5.2% yoy. Cairn India's net sales are expected to decline by 5.8% yoy, although its bottom line is expected to increase by 0.6% yoy.
Cairn India outperformed in 3QFY2012

A broad decline in the stock market led to a dip in the overall BSE Oil and Gas Index in 3QFY2012. Gas stocks declined during 3QFY2012 on account of INR depreciation against the USD, which makes imported gas costlier. RIL's stock declined by 14.3% during 3QFY2012, as gas production at KG D6 basin continued to slide during the quarter, reaching 38mmscmd during December 2011. GAIL and ONGC stock prices declined by 6.6% and 3.6% in 3QFY2012, respectively. Cairn India rose by 15.3% during 3QFY2012 on the back of INR depreciation against the USD (it results in higher INR realization for Cairn India) coupled with closure of the Cairn-Vedanta deal.
Exhibit 8: 3QFY2012 stock performance

15.0 10.0 5.0
(%)
0.0 (5.0) (10.0)

Cairn ONGC GAIL
(15.0)

Company Cairn India GAIL ONGC ^ RIL ^ CMP (`) 313 384 257 693 Net Sales 3QFY12E 2,917 9,587 17,200 78,364 (5.8) 14.6 (17.3) 31.0 OPM (%) chg bp (344) (44) (1,354) (279) 81.0 15.5 51.5 13.2 Profit Net Profit 3QFY12E 2,023 1,018 4,454 6,274 0.6 5.2 (37.1) 22.2 (` EPS (`) % chg 0.6 5.2 (37.1) 22.2 10.7 8.0 5.2 19.2 (` EPS (`) FY11 33.3 28.1 26.2 58.0 FY12E 31.9 31.7 31.2 70.5 FY13E 40.5 35.6 33.3 78.2 FY11 9.4 13.7 9.8 12.0 P/E (x) FY12E 9.8 12.1 8.2 9.8 FY13E 7.7 10.8 7.7 8.9 arg Target (`) 499 324 1,006 % chg 3QFY12E % chg 3QFY12E
BSE O&G Index
RIL
(` cr) `
Reco. Neutral Buy Buy Buy
Source: Company, Angel Research; Note: Price as on December 30, 2011; ^Standalone numbers for the quarter and consolidated numbers for the full year
Analyst: Bhavesh Chauhan

31
Pharmaceutical
Pharmaceutical sector continues its outperformance
During 3QFY2012, the BSE Healthcare (HC) Index continued to outperform on the bourses. The performance of the sector can be attributed to lackluster performance of the broader indices, which reeled under the economic slowdown and hardening of interest rates.
be based on the weighted average price of the top three brands by value. However, on the negative side, the scope of the policy now covers at least 60% of the drugs in value terms from the earlier 10-20% and includes combination drugs, which were not covered in National List of Essentials Medicines (NLEM) 2011.
The draft is now open for comments from the industry post which a new DPCO would come into existence. While the financial impact appears benign, given the cost competitiveness of the markets, companies are, however, wary that this may trigger greater regulatory oversight on the industry going forward. USFDA USFDA issues resolve on Ranbaxy issue: Ranbaxy has signed a consent decree with the USFDA regarding the ongoing cGMP issues. We note that the consent decree lays out a plan of action as agreed by the two parties to resolve the outstanding issues. However, the timeline regarding the resolution is still unclear. As per Ranbaxys management, the company has taken corrective actions, as suggested by a consultant, and has been working closely with the USFDA to resolve the issues. Further, the company will be provisioning US$500mn, as potential civil and criminal liabilities that could arise from the DoJ investigation. Though, the move is positive, the contours of the deal are not yet fully disclosed, so we have not incorporated the same in our estimates. We continue to maintain our Buy view on the stock with a target price of `577. Ranbaxy Labs Finally gets the much-awaited Lipitor approval: Labs Finally Post USFDAs approval, Ranbaxy launched Lipitor in 4QCY2012. The approval was granted from Ranbaxy's Ohm Labs facility in New Jersey. Given the size of the opportunity (IMS sales: US$7.8bn), Lipitor's generic was the most keenly awaited opportunity for Ranbaxy. The company will also be sharing a portion of its profits with Teva; however, details of the partnership are not disclosed. The partnership is valid for only 180 days. Ranbaxy has also launched the authorized generic version of Caduet. The company also has FTF para IV on 5/10mg, 20mg, 40mg and 10/10, 20, 80mg. Mylan was FTF Para IV on 2.5mg and 10/40mg and para IV on rest of the strengths. Mylan has already launched the drug on November 30; however, Ranbaxy launched it on December 6 due to delay in approval from USFDA. Caduet reported sales of US$339mn in the US in 2011. We expect the drug to contribute around `3/share to the company's EPS in CY2011. For the opportunity, we assign a value of `52/share to the overall value. We maintain our Buy recommendation on Ranbaxy with a target price of `577.
Exhibit 1: BSE HC Index vs. the Sensex

10.0
5.0
0.0
(%)
(5.0)
(10.0)
(15.0)
3QFY2011
4QFY2011
1QFY2012
2QFY2012
3QFY2012
The upward rally during the quarter was mainly driven by large caps Sun Pharma, Cipla and Dr. Reddy's (DRL) gained 7.6%, 13.0% and 6.6%, respectively. However, Ranbaxy Labs (Ranbaxy), Cadila and Lupin, lost 21.1%, 6.8% and 5.4%, respectively, during 3QFY2012. Among the MNC pack, Glaxo Pharmaceuticals (Glaxo) fell by 7.3%, while Aventis Pharmaceuticals (Aventis) remained flat. Among mid caps, IPCA Labs was the major gainer, up 6.8%, as the stock had fallen greatly in 2QFY2012. However, Aurobindo Pharmaceuticals (APL), Orchid Chemicals (Orchid) and Alembic Pharmaceuticals (Alembic) declined by 31.5%, 19.9% and 14.3%, respectively. In CRAMS, Dishman Pharmaceuticals (Dishman) was hammered down by 35.2% during 3QFY2012.
Key developments
National Pharmaceuticals Pricing Policy (NPPP): After a long Pricing Policy wait of over five years, the NPPP draft has been taken up for discussion. The NPPP-2011 draft entails significant changes as compared to 1994 Drug Policy Control Order (DPCO). The key differences between NPPP-2011 vs. DPCO 1994 are a) essentiality of drugs vs. economic criteria/market share principle; b) market and cost-based pricing; and c) control of formulation prices vs. control starting from API level.
The draft is a shift from cost-based pricing to marketbased pricing, which is a step in the right direction. Under market-based pricing, the ceiling price would
32
Pharmaceutical
Lupin acquires Japan-based I'rom Pharmaceutical
Lupin will acquire a 100% stake in I'rom Pharmaceutical for an undisclosed amount through its Japanese subsidiary, Kyowa Pharmaceutical Industry Co. Ltd. (Kyowa). This will strengthen Lupins presence in Japan. I'rom Pharmaceutical produces injection-based medicines and is a unit of the integrated healthcare provider I'rom Holdings Co. Ltd. I'rom Pharmaceutical's strong presence in the diagnosis procedure combination (DPC) hospital segment in Japan, through its line of injectable products, is an ideal fit with Lupin's existing oral business portfolio in Japan. I'rom Pharmaceutical reported revenue of Yen5.4bn in the year ended March 2011. This is Lupin's second acquisition in Japan after it bought Kyowa in 2007 for US$100mn. The acquisition is a good development for Lupin, given the opportunity in the Japanese generic market. Further, it would aid in scaling up the company's sales in Japan, which already is a major component of Lupin's overall sales. Though the cost of acquisition is not known, the company has a low D/E. Currently, Currently, we are not changing our estimates on the back of We the same. We continue to maintain our Buy recommendation on the stock with a target price of `593. Teva and DRL launch generic Zyprexa in the US: During US: 3QFY2012, Teva and DRL launched Olanzapine Tablets, the generic version of Eli Lilly's Zyprexa. Zyprexa reported annual sales of ~US$3.2bn in the US as of September 2011, based on IMS sales data. Teva's Olanzapine Tablets are available in 2.5mg, 5mg, 7.5mg, 10mg and 15mg; and DRLs Olanzapine Tablets are available in 20mg. Each of these drugs has been awarded a 180-day period of marketing exclusivity in the US. DRL will be supplying the 20mg version of the product, following the April 2011 commercialization, manufacture and supply agreement with Teva. In addition, as per the terms of the agreement, DRL will launch 2.5mg, 5mg, 7.5mg, 10mg, 15mg and 20mg tablets of Olanzapine tablets upon expiration of the 180-day exclusivity period. We maintain our Buy rating on DRL with a target price of `1,920. Among large caps, Sun Pharma is expected to post 18.7% yoy sales growth. Cipla is expected to post net sales growth of 10.7% yoy. Other players, namely DRL, Lupin and Cadila are expected to report 20.0%, 39.0% and 12.6% yoy growth in net sales, respectively. Amongst small caps, Indoco Remedies is expected to post 18.5% yoy growth. Amongst the MNC pack, Aventis is likely to post 15.7% yoy growth in its net sales, while Glaxo is likely to report 17.5% yoy sales growth.
Exhibit 2: Sales growth for 3QFY2012E

50.0 39.0 40.0 30.0 40.4
(%)
20.0 10.0 0.0
18.7 10.7
20.1
Sun Pharma
Lupin
Cipla
Ranbaxy
DRL
Sales growth
Among large caps, Cipla and Cadila to outperform

Among large caps, for 3QFY2012, Sun Pharma is likely to report 18.7% yoy growth on the sales front, mainly on the back of integration of Taro, which will drive the companys export formulation sales during the period. On the domestic front, Indian formulation sales are expected to report a muted performance. Despite strong top-line growth due to the integration, the companys OPM is expected to expand by 690bp yoy to ~34.4%. Net profit is expected to report 21.4% yoy growth during the quarter. Lupin, on the other hand, is expected to register 39.0% yoy sales growth. The company's OPM is expected to expand by 10bp yoy during the period. This would lead to 62.9% yoy growth in the company's net profit in 3QFY2012. DRL is expected to post strong results with top-line growth of 20.1% yoy to `2,301cr, majorly driven by the US market. The company is expected to see strong traction in its Indian and Russian formulation businesses as well. In terms of the PSAI segment, lackluster performance is expected for 3QFY2012. The company is expected to post EBIT of 15.9%, up 60bp yoy. On the net profit front, DRL is expected to post net profit of `320.4cr, 9.4% yoy growth over 3QFY2011. Cipla is expected to post net sales growth of 10.7% yoy to `1,662cr, driven by domestic and exports performance. OPM (excluding technical know-how fees) is expected to come
3QFY2012 Result expectations

The Indian pharmaceutical sector is expected to post robust numbers for 3QFY2012. We expect our coverage universe to register 25% yoy top-line growth. On the operating front, margins are expected to expand by 450bp yoy, which would aid the net profit to grow by 27.5% yoy.
33
Pharmaceutical
in at 21.8%, registering an expansion of 410bp yoy. Further, net profit is expected to increase by 26.8% yoy to `295cr. Ranbaxy is expected to post 40.4% yoy growth, with sales coming in at `2,900cr during 4QCY2011, mainly on the back of Lipitor, which would aid the company's OPM to expand to 33.2% vs. 9.1% in 4QCY2010. Net profit for the quarter is expected to come in at `589cr. Cadila is expected to post yet another strong quarter with 12.6% yoy growth in its net sales to `1,278cr because of robust growth on the domestic formulation and exports fronts. On the OPM front, we expect Cipla's OPM to dip by 160bp yoy to 21.3% on the back of favorable product mix. Net profit is expected to increase by 19.1% yoy to `193cr, driven by top-line growth. For 3QFY2012, APL is expected to post net sales growth of 20.8% yoy, led by formulation exports. OPM is likely to dip to 12.1%, which will lead to net profit of `98.5cr. Indoco Remedies is expected to report top-line growth of 18.5% yoy to `135cr for 3QFY2012. OPM is expected to expand by 90bp yoy to 12.5%, driven by growth in domestic formulation sales. As a result, net profit is expected to increase by 28.4% yoy to `11.3cr on the back of improvement in OPM.

With the expected earnings CAGR of 21% over FY2011-13E for our universe of stocks, we remain overweight on the sector, maintaining our positive future outlook and earnings growth. In the generic segment, we prefer Sun Pharma, Dr. Reddys,Cipla, Lupin, Cadila Healthcare, APL and Indoco. In CRAMS, though the segment is currently witnessing some pressure, there have been indications of gradual recovery and ramp-up from most CRAMS players. Thereby, with the valuations rendering attractive, we recommend Dishman Pharma in this segment.
Mid caps to report muted numbers

We estimate Ipca Laboratories' top line to grow by 26.7% yoy to `588cr for 3QFY2012. The company's OPM is expected to expand by 170bp yoy to 20.7%, led by higher other expenses. Overall, adjusted net profit is expected to decline by 11.3% yoy.

Company Alembic* Aventis Cadila Cipla Dishman Dr. Reddys Glaxo
# #
(` cr) `
OPM (%) chg bp 640 (650) 160 410 (520) 60 (530) 90 170 10 2,410 690 14.0 Profit Net Profit 3QFY12E 31.9 40.8 98.5 193.0 295 19.8 320.4 116 11.3 56.8 261.5 57.0 589.0 425.1 39.7 (49.2) 19.1 26.8 890.0 17.4 (20.5) 28.4 (11.3) 62.9 16.8 21.4 (` EPS (`) % chg 39.7 (49.2) 19.1 26.8 890.0 17.4 (20.5) 28.4 (11.3) 62.9 16.8 21.4 FY11 4.5 67.3 18.1 33.8 12.0 9.9 63.8 66.2 41.5 20.9 19.3 22.2 35.5 17.5 1.7 17.7 3.4 9.4 3.7 2.5 19.0 13.8 9.2 4.5 6.0 8.1 14.0 4.1 (` EPS (`) FY12E 6.3 85.5 11.8 37.7 14.9 9.3 87.9 72.0 42.5 20.0 22.4 28.4 29.4 20.3 FY13E 7.7 89.7 13.8 48.2 18.4 11.1 96.0 86.9 55.5 27.5 29.7 37.3 52.8 25.9
#
CMP (`) 35 2,320 85 705 320 37 1,578 1,937 422 275 447 405 497
Net Sales 3QFY12E 389 332 1,295 1,278 1,662 305 2,301 577 135 588 1,755 555 2,900 1,900 15.7 20.8 12.6 10.7 4.6 20.1 17.5 18.5 26.7 39.0 20.0 40.4 18.7
P/E (x) FY11 7.9 34.5 4.7 20.8 26.6 3.7 24.8 29.3 10.2 13.2 23.2 5.7 11.4 28.3 FY12E 5.6 27.1 7.2 18.7 21.4 4.0 17.9 26.9 9.9 13.7 20.0 4.5 13.8 24.5 FY13E 4.6 25.9 6.2 14.6 17.3 3.3 16.4 22.3 7.6 10.0 15.1 3.4 7.7 19.2
arg Target (`) 77 1,937 166 965 369 68 1,920 555 358 593 270 577 569
Reco. Buy Sell Buy Buy Buy Buy Buy Neutral Buy Buy Buy Buy Buy Accum.
% chg 3QFY12E 13.5 12.1 21.3 21.8 17.9 15.9 30.6 12.5 20.7 19.7 24.0 33.2 34.4
% chg 3QFY12E
Aurobindo
Indoco Rem. Ipca Lab. Lupin Ranbaxy Lab Sun Pharma.
Orchid Chem.* 127

#
Source: Company, Angel Research; Note: Price as on December 30, 2011; Our numbers do not include MTM on foreign debt. consolidated numbers
4QCY2011,* Non availability of 3QFY2011
Kour Analyst: Sarabjit Kour Nangra

34
Power
All-India power generation highlights
During October-November 2011, overall power generation in India rose by 9.7% yoy to 144.3BU (131.5BU). Even for 8MFY2012, it rose by 9.5% yoy to 575.6BU (525.6BU). Higher power generation was aided by increased operational capacity. During 8MFY2012, the country's thermal power generation rose by 6.3% yoy to 453.8BU. The plant load factor (PLF) of thermal plants for 8MFY2012 stood at 71.6% 350bp higher than the targeted 68.1%. During 8MFY2012, hydro power generation increased substantially by 20.8% yoy to 100.6BU, while nuclear power generated grew sharply by 37.3% yoy to 21.2BU on account of a low base effect. Generation for companies under coverage: During 8MFY2012, NTPCs power generation stood at 142.34BU, registering a decline of 1.2% yoy. GIPCL's generation (excluding 145MW Baroda Plant) grew by 10.3% yoy to 2.44BU; while for CESC, it stood flat yoy at 6.26BU. (Source: CEA)
Power-deficit situation continues

India's overall and peak power-deficit levels during 8MFY2012 stood at 7.3% and 10.6%, respectively, as against 8.9% and 10.2% reported in 8MFY2011. The country continues to face power deficit due to the delay in commissioning of new capacities, fuel shortage and deficiencies in the T&D system. Region wise, the western region witnessed the highest power deficit in the country. During 8MFY2012, the region's power deficit stood at 10.4%. Maharashtra, the highest power consuming state in the country, reported overall power deficit of 16% and peak deficit of 20.7%. The eastern region reported the lowest power deficit in the country at 4.2%.
Exhibit 2: India A power-deficit scenario

(%)
20.0 16.0 12.2 12.0 8.0 8.8 4.0 0.0
8MFY2012 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011
16.6 11.2 11.7 12.3 13.8 12.0 12.7 9.8 9.6 9.9 11.0 10.1 8.5
10.6
Capacity addition reasonable in the Eleventh Plan

India has added 44,784MW of generation capacity since the beginning of the Eleventh Plan (FY2007-12), which is a decent 71.8% of the target (revised) of 62,374MW. During 8MFY2012, 10,308MW of capacity has been added, of which thermal has been 9,127MW and hydro has been 1,181MW. Exhibit 1: Generation capacity addition: Targeted vs. achieved
(MW) 25,000 20,000 15,000 10,000 5,000 0 (%) 100.0 80.0 60.0 40.0 20.0 0.0
7.1
7.3
8.4
7.3
Overall
Peak
Source:CEA, Angel Research
Fuel security Key concern for the sector

Around 55% of India's existing power capacity and a major portion of the upcoming power capacity are based on coal. Fuel security remains a key concern for the Indian power sector. Domestic coal production is not sufficient to meet the requirement and imported coal has become dearer on account of the recent regulation by the Indonesian Government (referencing price of Indonesian coal exports to international benchmark rate). INR depreciation during the last four months has further increased the cost of imported coal. As per the Ministry of Coal, India's total coal production is expected to be 554mt in FY2012,which is lower than FY2011 estimate of 572mt. The Coal Ministry expects coal demand-supply gap (which was 83mt in FY2011) to effectively rise to 114mt in the current fiscal, after taking into account 28mt of coal liquidation by Coal India from its pithead mines which, however, is subject to availability of rakes. Coal availability situation in power stations fell to alarmingly low levels in mid-October (on October 19, 2011, 51 thermal power stations (TPS) out of the 89 monitored by the CEA had fuel stock for less than seven days) due to rains and the strike in Singareni coal mines because of the Telangana issue. However, the situation has improved marginally since then due to improved coal supply. As of December 22, 2011, 46 TPS had coal stocks for less than
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Target (T) LHS
Achievement (A) LHS
A as a % of T (RHS)
Source: CEA, Angel Research
Transmission lines
During 8MFY2012, 6,117 circuit kilometers (ckm) were added to the 400kV transmission lines, as against the targeted 6,187ckm. Total addition to the 220kV transmission line categories stood at 3,144ckm, as against the targeted 3,919ckm.
Transmission sub-stations
During 8MFY2012, total addition to the 220kV transmission sub-station category was 6,302MW, as against the targeted 5,660MW.
8MFY12
35
Power
seven days. Thus, post mid-October, on an average, at least 44 TPS had coal stocks for less than seven days. Coal shortage in power stations has been majorly on account of lower receipt from domestic suppliers (both CIL and SCCL), and in some cases because of logistical issues, lower imports and higher utilization.
Key industry developments during the quarter

The poor financial position of SEBs (aggregate losses, excluding subsidy, were reported to be `63,548cr in FY2010 and are estimated to have increased substantially since then) has led to several instances of backing down by SEBs, which has affected power plants operating under the regulated RoE model as well as the merchant route. For instance, NTPC, India's single largest power producer, lost ~9.2bn units of generation in 1HFY2012 due to backing down by SEBs. Shunglu panel, which was constituted by the planning commission to suggest measures to improve the financial position of SEBs, recently gave its recommendations. The panel suggested creation of an SPV (owned majorly by the RBI and funded by the RBI only) for taking over the distressed loans of banks (which have been already restructured once subject to fulfillment of certain conditions), creation of a monitoring cell to facilitate one-time clearance of arrears, computerization of accounting system to enable automatic inter unit reconciliation and timely commencement of audit, among others.
Global coal prices in 3QFY2012

For 3QFY2012, spot global coal prices were higher by 6.2% on a yoy basis. Average prices of the New Castle Mckloksey 6,700kc coal stood at US$114/tonne in 3QFY2012 vs. US$107/tonne in 3QFY2011. However, on a qoq basis, average coal prices were down by 5.3%, but the ~11% qoq depreciation in average INR/USD rates negated the fall, and average coal prices in INR terms were higher by 4.5% on a qoq basis. Exhibit 3: Global thermal coal prices
250 200 150 100 50 0 coal prices up in INR terms 9000 8000 7000 6000 5000 4000 3000 2000 1000 0
For 3QFY2012, we expect NTPC to record a 20.6% yoy increase in its top line to `16,187cr, aided by commencement of new capacities and higher tariffs. However, OPM is expected to decline by 380bp yoy to 24.2%. Net profit is expected to decrease by 6.3% yoy to `2,223cr due to lower other income and higher interest and depreciation costs. CESC is expected to register 25.6% yoy growth in its standalone top line to `1,157cr, aided by higher sales volume and better realization. OPM is expected to be flat at 27.6%, while net profit is expected to increase by 33.9% yoy to `147cr during 3QFY2012. We expect GIPCL to register a 15.5% yoy increase in its revenue in 3QFY2012, primarily on the back of higher volumes from 250 SLPP station II. OPM is set to expand by 633bp to 33.1% due to higher availability of Surat II station. The bottom line is expected to improve by 52.6% yoy to `37cr in 3QFY2012.
Apr-11
Aug-11
Dec-05
Aug-09
Aug-06
Dec-06
Aug-08
Aug-07
Dec-07
Dec-08
Dec-09
Apr-07
Apr-08
Apr-10
Aug-10
US $/tonne- LHS
`/tonne - RHS
Power stocks - Performance on the bourses

Barring NTPC, all other power stocks under our coverage as well as BSE power index underperformed the Sensex.
Exhibit 4: Power stocks performance in the bourses in 3QFY2012

NTPC GIPCL CESC BSE Power Sensex (30.0) (25.0) (20.0) (15.0) (%) (10.0) (5.0) (4.0) (19.3) (26.5) (15.5) (6.1) 0.0
Dec-10
Dec-11
Apr-06
Apr-09
Source: BSE, Angel Research
Outlook: With the power sector currently facing many headwinds such as fuel shortage and increasing fuel prices, we believe players with cost-plus return models and assured fuel supply are better placed than others. We maintain our Buy view on NTPC, GIPCL and CESC.
(` cr) `

Company CESC GIPCL NTPC CMP (`) 203 65 161 Net Sales 3QFY12E 1,157 353 16,187 25.6 15.5 20.6 OPM (%) chg bp 9 633 (380) 27.6 33.1 24.2 Profit Net Profit 3QFY12E 147 37 2,223 33.9 52.6 (6.3) (` EPS (`) % chg 33.9 52.6 (6.3) FY11 38.9 10.8 11.3 11.7 2.5 2.7 (` EPS (`) FY12E 40.7 10.2 11.8 FY13E 41.8 11.0 12.9 FY11 5.2 6.1 14.2 P/E (x) FY12E 5.0 6.4 13.6 FY13E 4.9 6.0 12.4 arg Target (`) 304 95 200 % chg 3QFY12E % chg 3QFY12E
Reco. Buy Buy Buy
V. Taparia Analyst - V. Srinivasan / Sourabh Taparia

36
Real Estate
For 3QFY2012, we expect residential volumes to report negative to flat growth on a sequential basis on account of weak demand due to high interest rates and elevated property prices. Revenue of real estate companies is expected to be largely driven by sale of plotted land and execution of existing projects, though execution delays remain a cause of concern. Companies such as DLF are expected to continue to see sustainability in officeleasing volumes on a sequential basis. Accordingly, we believe commercial rentals have bottomed out, and we do not foresee any material uptick until inventory levels come down. In our universe of stocks, we expect DLF's revenue to be largely driven by the sale of plotted properties in Gurgaon. For ARIL, we expect revenue to be driven by the residential segment and rental income. HDIL is expected to report flat growth qoq in Transfer of Development Rights (TDR) volumes and prices, given low inventory of TDRs left on account of earlier stoppage of the MIAL project, which has restarted but the company does not foresee any material uptick in the generation and sale of TDR. HDIL is also expected to continue to book partial revenue from the 2mn sq. ft. (msf) FSI sale (worth ~`1,400cr) in 3QFY2012.
Residential absorbtion expected to remain low

Residential property sales in Mumbai have plummeted by over 70% since their peak of 2007, as high prices and rising interest rates have dented demand. Mumbai registrations declined by 20% yoy and were at their 31-month low in November 2011. According to Knight Frank, a global real estate consultant, unsold inventory levels are estimated to be approximately 27% of the under-construction stock. Further, the investors segment, which makes up approximately 20% of the market demand, has been observed to be actively reducing its real estate portfolio, thereby adding significant supply into the market. In Mumbai and Delhi, residential prices are currently ruling 15-20% above their 2008 peak levels; whereas prices in most other markets are still 10-15% lower than their last peak levels. This has resulted in tapering of volumes in regions such as Mumbai and NCR. India's top two real estate players DLF and Unitech have stated that slower sales are leading to a build-up of inventory and, thus, they may see some price correction, leading to margin pressures. On the back of sluggish demand, HDFC and SBI have also seen a drop in their mortgage loan transactions. We believe FY2012 will see consolidation with residential prices remaining soft in Mumbai and Gurgaon (may see a correction of 15-20% in some overheated areas), with a modest to flat 5% decline expected in other markets. Exhibit 2: Absorbtion level to remain low
60
55.1
Exhibit 1: 3QFY2012E Revenue and PAT yoy growth

30 25 20 15
(%)
25.9
9.6 3.1 (0.5)
10 5 0 (5) (10) (15) Revenue
PAT
(mn. sq.ft.)
50
42.5
40.5
32.9 32.0
22.8 22.3
20 10 0
28.8 28.8
Low liquidity and high interest rates continue to be a cause of concern

Currently, the real estate industry is facing a liquidity crunch and even if companies manage to raise funds, the cost is very high. Banks have become very strict in giving out loans to the sector and even private equity funding has dried up. Exposure of banks to the sector has reduced from 3.7% in July 2009 to just 3.0% in November 2011. Foreign direct investment in the sector has been continuously falling from FY2009 and is at its four-year low as a percentage of the total FDI in the country. Apart from the liquidity crunch, rise in interest rates has also resulted in a slump in demand. In November 2011, on a yoy basis, Mumbai witnessed a decline in residential registration by 20% and is at its 31-month low. Higher interest rates may further compel buyers to postpone their purchases or investments in new houses going ahead, which may further dampen sales.
CY05
CY06
CY07
CY08
CY09
19.6
CY10
30.5
ARIL
DLF
HDIL
33.1
30
CY11E
35.9
(11.1)
CY12E
39.0
CY13E
New Completion
Net Absorbtion
Source: Real Estate Intelligence Service (JLL), 2Q11
Commercial demand to pick up after 12-15 months

After registering a sharp decline in the past few quarters, capital values started to strengthen and registered a marginal appreciation across most micro markets. The commercial sector is expected to get a huge supply by 2HCY2011 according to JLL. CY2011 would see 55.1msf of office space to be operational, with only 35.9msf estimated to be absorbed. Vacancy is estimated to be above 20%, which will keep commercial rates stagnant over the coming quarters. JLL expects vacancy to remain above 22.9% in CY2012 and gradually reduce in CY2013. Industry participants have indicated that the surge in leasing enquiries has come on the back of renewed interest shown by the IT industry, which contributed to 41% of the total leasing activity in 1QFY2012.
37
43.5 40.9
41.6
(7.3)
40
57.7
Real Estate
DLF Continues with non-core asset monetization
DLF which had planned to reduce its burgeoning debt (which , stood at `25,450cr at the end of 2QFY2012) by monetizing its non-core assets, seems to be putting its plan into action. DLF sold 28 acres of land in Gurgaon for `440cr and is planning to sell its 17.5 acres of land in NTC mill land in Central Mumbai, which is estimated to be worth `2,500cr-`3,500cr and could be one of the biggest land deals in the country. The company, which was seeking approval from the Board of Approvals for SEZs to sell the shares of its IT SEZ in Pune, has finally sold its 67% stake stake in the SEZ to PE player Blackstone for ~`540cr. DLF is also expected to complete selling its IT park in Noida to IDFC for `512cr. DLF has a 71% stake in this project; the remaining 29% stake is held by 3C. Overall, if these deals go through, the company could significantly reduce its mounting debt over the coming few quarters. The company has also bought 26% stake from Hilton in its joint venture for an estimated `120cr, mainly to take complete ownership of the company and its underlying assets, including unbuilt hotel sites, with a view to monetize them in future. The company also plans to sell Aman Resorts and has started accepting bids from interested clients.
Exhibit 3: 3QFY2012 Coverage vs. Sensex performance

0 (5) (10) (15) (20)
(%)
(6.1) (16.4) (22.0) (31.2)
(25) (30) (35) (40) (45) (50) BSE Sensex DLF
BSERealty
ARIL
(45.5) HDIL
Sensex vs. realty stocks

During 3QFY2012, the BSE Realty Index widely underperformed the Sensex by 1,590bp on the back of 1) corporate governance issues, 2) restricted credit flow to the sector and 3) increase in cost of funding for future projects. Moreover, high interest rates have led to a significant slowdown in demand, as reflected in the recent correction in stock prices. However, we believe this gives a good entry opportunity to investors on account of 1) companies trading at a significant discount to our one-year forward NAV, 2) stability in volumes and 3) comfortable balance sheet position unlike that in 2008. We believe HDIL and ARIL are best placed in our coverage of stocks in the sector.
Outlook and valuation: The BSE Realty Index (down 22.0% yoy) is currently ruling near its life-time low seen in 2008. Short-term prospects for the sector look bleak due to project delays, low cash flow generation, high debt and rising interest costs. Further, refinancing of loans from banks has become difficult with rising interest cost and the banks having a cautious view on the sector. Having said that, we believe absorption and not price appreciation will drive residential growth over the next six quarters. Given the scenario, new projects have been launched at 10-15% discount to prevailing market rates, which would help developers to achieve higher booking, thereby generating higher cash flows. Further, high inventory is still hampering commercial recovery, though there has been an uptick in absorption levels. We expect rentals to remain firm at current levels with an uptick likely over the next 12-15 months. We believe stock performances are related to macro factors interspersed with company-specific issues such as the CCI penalty on DLF We are positive on the long-term outlook of the . realty sector, taking into account growing disposable income, shortage of 25mn houses in India and reasonable affordability. We prefer companies with visibility in cash flow, low leverage and strong project pipeline with attractive valuations. Our top ARIL, picks are HDIL and ARIL, which are trading at ~60% and NAVs, respectively. We ~64% discount to their NAVs, respectively. We maintain our DLF, Neutral view on DLF owing to concerns of weak operating , flow, cash flow, increasing gearing and just ~10% discount to our one-year NAV one-year forward NAV.

Company CMP (`) DLF Anant Raj Ind HDIL 183 40 53 Net Sales 3QFY12E 2,719 128 573 OPM (%) chg bp (377) (316) (270) Profit Net Profit 3QFY12E 414 50 234 (` EPS (`) % chg (11.1) (0.5) (7.3) FY11 9.7 5.7 19.9 (` EPS (`) FY12E 9.2 6.1 20.3 FY13E 11.3 9.1 24.9 FY11 18.9 7.0 2.7 P/E (x) FY12E 19.9 6.5 2.6 FY13E 16.2 4.4 2.1 arg Target ) (`) 75 95 % chg 3QFY12E 9.6 3.1 25.9 43.7 58.9 55.8 % chg 3QFY12E (11.1) (0.5) (7.3) 2.4 1.7 5.6
(` cr) `
Reco.
Neutral Buy Buy
Analyst - Sharan Lillaney

38
Software
Macro data points hint slowdown in developed economies
In June 2011, the IMF forecasted that global GDP is set to grow by 4.3% and 4.5%, respectively, for CY2011 and CY2012. However, rising sovereign debt due to quantitative easing (QE) measures and bailouts led to gross debt to GDP of developed economies such as US, UK and Eurozone surge to an alarmingly uncomfortable zone. Further, as the effect of QE measures is gradually fading, economic data points for developed economies are also moving back into the alarming zone. As a result, the IMF has marginally downgraded its global GDP growth forecast to 4.2% and 4.3% for CY2011 and CY2012, respectively. This forecast is again expected to be downgraded further, given the contraction in manufacturing activities across the globe. The downgrade has, however, been steep for the US, from 2.5% and 2.7% for CY2011 and CY2012 to 1.6% and 2.0%, respectively. In case of Eurozone, the forecast has been trimmed marginally from 2.0% and 1.7% to 1.9% and 1.4% for CY2011 and CY2012, respectively. For November 2011, data points for the US economy have emerged largely negative. For instance, 1) manufacturing index stood flat mom at 52.0; 2) nonmanufacturing index fell to 52.0 from 52.9 in October 2011; 3) industrial production came in at -0.2% as against 0.7% in October 2011; 4) consumer confidence index stood flat mom at 56; 5) retail sales growth rate stood merely at 0.2% (flat mom); and 6) 3QCY2011 GDP growth came in lower than expected at 1.8% yoy (estimated: 2%). However, there were some positive indications from data related to unemployment rate, which decreased to 8.6% from 9.0% in October 2011, leading to an increase in consumer confidence index to 56. Globally, large selective banks have announced planned layoffs to curb costs, such as UBS (3,500 employees, 5% of its global staff), Credit Suisse (2,000, employees, 4% of its global staff), HSBC (30,000 employees, 10% of its global staff by CY2013) and Bank of America (30,000 employees, 10% of its global staff by CY2014). the health of the technology sector, as the company's new software sales grew by merely 2% yoy because of delays in decision making by clients, which led to deals not being closed. We expect moderation in IT budgets for CY2012 and expect volume growth for Indian IT companies to scale down to sub15% from 20% plus. However, we have not built in any pricing erosion because, post CY2008, the current pricing is still at a discount to the peak levels.
Exhibit 1: Relative performance to the Sensex

(2.9) 8.0 14.4 (10.1) (12.5) (7.4) (0.1) (4.7) 17.0 11.9 9.3 9.0 (6.1) (16.0) (8.0) 0.0 8.0 16.0 KPIT Cummins Persistent Mindtree Hexaware Mphasis Mahindra Satyam Tech Mahindra HCL Tech Wipro TCS Infosys BSE IT Index Sensex 24.0
(%)
Utilization to be a mixed bag

In 3QFY2012, we expect the utilization level (including trainees) of Infosys and TCS to increase by merely 10bp qoq each to 70.3% and 76.5%, respectively, as 3Q typically has lower number of working days as compared to all other quarters due to the holiday season onsite. In case of Wipro, we expect utilization level (including trainees) to increase by 90bp qoq to 77.0%, as freshers hired in the last two quarters are expected to start getting billed. However, for HCL Tech, we expect utilization level (including trainees) to drop by 90bp qoq to 75.7% on the back of absorption of a higher number of freshers. In case of tier-II Indian IT companies, utilization levels of most companies are expected to move down primarily because these companies are chasing to achieve the flattening of their employee pyramids by hiring freshers. Most of the campus hires joined the companies in 2QFY2012 and will be on the training period in 3QFY2012. Hence, we expect utilization levels of Hexaware, KPIT Cummins, Mahindra Satyam and Persistent to slip by 10bp, 30bp, 20bp and 40bp qoq, respectively. However, in case of Tech Mahindra, we expect utilization level to rebound by 40bp qoq because of fresher hiring done in 1QFY2012, which will turn billable in 3QFY2012.
Slowdown in the west may cause CY2012 IT budgets to go soft

In CY2008, Lehman Bankruptcy was the starting point when clients revisited their spending on IT and reduced most of their discretionary spending. Layoffs in the form of pink slips were sudden to pull the lever of variable costs, as revenue dipped. In CY2011, the S&P downgraded US credit rating from AAA to AA for the first time ever in the history of US. This led to panic selling in IT stocks during August 2011, as developed economies are the key markets for IT companies. However, henceforth since the past four months, the INR depreciated sharply against USD, giving a boost to INR revenue, operating margins and overall profitability of all IT companies. Hence, the IT index rose by 9.0% in 3QFY2012 in anticipation of higher growth. The recent financial results of Oracle, the global enterprise giant for the quarter ending November 2011, raised questions about
Cyclically a weak quarter but with modest volume growth

Traditionally, 3Q is a weak quarter for IT companies as the number of working days is less compared to the other quarters, due to the holiday season at the client site. For 3QFY2012, we expect volume growth to remain at 2.7-4.9% qoq for tier-I IT companies, with Infosys leading the pack and Wipro at the fag end of the range. For tier-II companies, we expect growth to be modest at 2.0-4.0% qoq,
39
Software
as utilization is expected to remain almost flat qoq, as higher number of freshers came on board in 2QFY2012 and most of them will be in the training period during 3QFY2012. Hexaware and Mahindra Satyam are expected to be the leading tier-II companies, whereas Mphasis is expected to be at the bottom. For 3QFY2012, on the back of modest volume growth, stable pricing and unfavorable cross-currency movement, we expect USD revenue to grow moderately by 1.7-4.0% qoq. For tier-II IT companies, USD revenue growth is expected to be 0-4.1% qoq, with Hexaware and Persistent leading the pack.
Exhibit 2: Trend in volume growth (qoq) Tier-I

8 6 4
(%)
INR revenue to shoot up, courtesy sharp INR depreciation

4.6
6.8 5.7 4.9 4.0 3.1 2.9 1.5 1.9
7.4 6.3 6.0 5.1 4.9
3.9
4.5
4.3 2.7
2 0 (2)
1.8
3QFY2012 witnessed one of the most volatile seasons as far as the currency is concerned. During 3QFY2012, INR depreciated by ~11% qoq against USD, which will result in surge in INR revenue growth vs. USD revenue growth and boost the operating margins of IT players by 350-400bp qoq. In INR terms, revenue growth is expected to be whopping at 11.3-14.0% qoq for tier-I IT companies due to depreciation of INR against USD on a qoq basis, with average USD/INR rate at 50.8 for 3QFY2012 as against 45.8 in 2QFY2012.
(1.4) 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12E
Infosys
TCS
HCL Tech
Wipro*
Source: Company, Angel Research; Note: *For the IT services segment
USD revenue to grow, albeit at a slower pace

The cross-currency movement, which had proved to be a boon since 2QFY2011-1QFY2012, has turned into a bane since the last quarter. In 3QFY2012 again, it has turned into a spoilsport with the USD appreciating by 4.6%, 2.4% and 3.7% qoq against the Euro, GBP and AUD, respectively. This will negatively affect USD revenue of Infosys, TCS, Wipro and HCL Tech by 0.9%, 0.9%, 1.0% and 1.2% qoq, respectively. Amongst the entire IT pack, Tech Mahindra is expected to be the highest loser due to unfavorable cross-currency movement by 1.8-2.0% qoq.
Exhibit 5: Trend in INR revenue growth (qoq) Tier-I

16 14 12 10
(%)
13.9
14.0 13.2 11.3
8 6 4 2.3 2 0 3QFY11 4.9 4.1 5.1 3.5 2.0
6.4 5.7 3.2
6.3 3.9 1.8
8.2 8.2 7.7 6.6
4QFY11
1QFY12
2QFY12
3QFY12E
Infosys
TCS
HCL Tech
Wipro*
Exhibit 3: Trend in USD revenue growth (qoq) - Tier-I

8 7 6 5
(%)
7.5 7.0 5.9 5.8 5.6 4.7 4.2 4.3
7.5
5.3 4.7 4.6 4.5 4.1
For tier-II IT companies, INR revenue growth is expected to be 6.5-15.6% qoq, with MindTree and Hexaware leading the pack.
4.0 3.4 3.4 1.7
4 3 2 1 0 3QFY11 4QFY11 1QFY12 2QFY12 1.1 0.5
Exhibit 6: Trend in INR revenue growth (qoq) Tier-I

20 15.6 15 13.3 8.8 6.5 5 13.8 13.0 12.4
(%)
3QFY12E
10
Infosys
TCS
HCL Tech
Wipro*
Exhibit 4: Trend in USD revenue growth (qoq) - Tier-II

10 8 6 4.1
(%)
0 4QFY11 1QFY12 2QFY12 3QFY12E
Tech Mahindra Persistent
Mahindra Satyam Hexaware
Mphasis KPIT Cummins
MindTree
4 2
2.9 2.7 2.6 2.2 0.5 (0.2) 4QFY11 1QFY12 2QFY12 3QFY12E
Margins to improve
We expect EBITDA margin of the entire tier-I IT pack to improve because of sharp INR depreciation against USD. Infosys is expected to record margin expansion of 159bp qoq to 32.6% despite the flowing in of the negative impact of promotions given during the quarter. TCS and Wipro are expected to record margin improvement of 164bp and 137bp qoq to 30.7% and
40
0 (2)
Tech Mahindra Persistent
Mahindra Satyam Hexaware
Mphasis KPIT Cummins
MindTree
Source: Company, Angel Research Refer to important Disclosures at the end of the report
Software
24.5%, respectively. For HCL Tech, we expect EBITDA margin to improve by 255bp qoq to 19.6% as the negative impact of wage hikes given in the last quarter will get absorbed in 3QFY2012 along with INR depreciation. For tier-II IT companies (excluding Mahindra Satyam), we expect efficiency gains, INR depreciation and moderate volume growth to push EBITDA margins higher on a qoq basis. EBITDA margin of Tech Mahindra, MindTree, Persistent, Hexaware and KPIT Cummins is expected to grow by 209bp, 299bp, 287bp, 140bp and 313bp qoq to 17.4%, 15.9%, 21.9%, 20.1% and 16.8%, respectively. In case of Mahindra Satyam, wage hikes were given in 3QFY2012, so the company is expected to record a 45bp qoq decline in its EBITDA margin to 14.9% (low impact as INR depreciation absorbed most of the effect). Exhibit 7: EBITDA margin profile Tier-I
35 33.3 33.3 32.1 29.1 29.9 30.2 30.4 28.1 29.1 24.5 30.7 32.6 31.0
Amongst mid-tier IT companies, profitability of Hexaware, KPIT Cummins, Infotech Enterprises and Mphasis is expected to grow by 5.1%, 2.2%, 15.3% and 17.1% qoq, respectively, majorly because of strong improvement in their margins (due to INR depreciation) and hedges turning into in-the-money (ITM). For Mahindra Satyam, profitability is expected to fell by 20.3% qoq to `190cr due to wage hikes given during 3QFY2011. In case of MindTree and Persistent, profitability is expected to fall by 24.4% and 22.7% qoq, respectively, due to lower other income during 3QFY2012.

The global macro data is pointing towards a bleak outlook for future global corporate profits, though currently S&P 500 quarterly profits have ticked in a lifetime high. Further, there is now cautiousness coming from few IT players in terms of IT budgets for CY2012. However, as per TPI's recent report, deal pipelines of IT companies are expected to be higher in 2HCY2011, as indicated by the managements of selective companies such as HCL Tech and Infosys. This indicates disconnect between the macro picture and client behavior. Thus, we expect tier-I IT companies (except Wipro) to replicate growth of 20% plus in FY2012. Further, we expect moderation in volumes to sub-15% only in FY2013. However, in INR terms, we expect growth to be higher as we have revised our USD/INR assumption for FY2013 to be at 49, following a steep 12% depreciation against USD over the three months. We remain cautiously optimistic on the IT sector due to looming macro concerns as on one hand lot of global as well as domestic uncertainties are prevailing while on the other hand software companies are deriving benifits from steep INR depreciation against USD. We prefer diversified players such as Infosys, TCS and HCL Tech (top pick) in tier-I IT companies. In case of tier-II IT companies, we like Mahindra Satyam and Hexaware.
30
(%)
25 25.2 20 16.3 15 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 16.3 17.3 25.2 25.1 25.0 23.2 18.5 17.1
19.6
3QFY12E
Infosys
TCS
HCL Tech
Wipro*
Source: Company, Angel Research; Note: *For IT services segment
Earnings growth to be a mixed bag

On the back of absorption of wage hikes, which were undertaken in 1HFY2012, and sharp INR depreciation, profitability of tier-I companies such as TCS, Infosys and Wipro is expected to rebound by 20.4%, 15.3% and 14.3% qoq, respectively, in 3QFY2012. For HCL Tech, profitability is expected to surge by 26.6% as the effect of wage hikes will be absorbed and BPO losses will likely reduce in 4QCY2011.

Company TCS Infosys Wipro HCL Tech* Mah. Satyam Mphasis^ Hexaware# Mindtree Persistent Infotech Entp. CMP (`) 1,161 2,765 399 388 65 300 75 402 329 109 Net Sales 3QFY12E 13,256 9,222 9,829 5,263 1,511 1,716 1,400 416 528 269 365 419 14.0 13.9 8.1 13.2 13.3 8.8 6.5 13.8 15.6 13.0 12.4 12.5 OPM (%) chg bp 164 159 148 255 209 (45) 368 140 299 287 313 128 30.7 32.6 20.6 19.6 17.4 14.9 21.5 20.1 15.9 21.9 16.8 17.0 Profit Net Profit 3QFY12E 2,936 2,197 1,487 629 265 190 214 68 41 25 37 35 20.4 15.3 14.3 26.6 (8.7) (20.3) 17.1 5.1 (24.4) (22.7) 2.2 15.3 (` EPS (`) % chg 20.4 15.3 14.3 26.6 (8.7) (20.3) 17.1 5.1 (24.4) (22.7) 2.2 15.3 FY11 44.5 119.5 21.7 24.5 49.3 4.2 39.2 2.9 24.9 34.9 11.4 12.6 15.0 38.5 6.1 9.0 20.1 1.6 10.2 2.3 10.2 6.3 4.1 3.2 (` EPS (`) FY12E 55.3 142.0 23.1 36.2 84.5 7.3 39.1 8.2 43.7 29.6 15.3 12.5 FY13E 64.7 166.1 27.0 40.9 83.3 7.4 36.8 8.7 45.3 34.1 16.3 15.6 FY11 26.1 23.1 18.4 15.9 11.6 15.4 7.7 26.0 16.1 9.4 12.8 8.7 P/E (x) FY12E 21.0 19.5 17.3 10.7 6.8 8.9 7.7 9.1 9.2 11.1 9.6 8.7 FY13E 18.0 16.6 14.8 9.5 6.9 8.7 8.2 8.6 8.9 9.6 8.9 7.0 arg Target (`) % chg 3QFY12E % chg 3QFY12E
(` cr) `
Reco. 1,294 Accumulate 2,990 Accumulate 535 666 82 368 96 Neutral Buy Buy Buy Buy Buy Neutral
Tech Mahindra 573
453 Accumulate 163 Accumulate 120 Accumulate
KPIT Cummins 146
Source: Company, Angel Research; Note: Price as on December 30, 2011; *June ending, so 2QFY2012 estimates; ^October ending, so 1QFY2012 estimates; #December ending, so 4QCY2011 estimates; Change is on a qoq basis
Analyst - Ankita Somani

41
Telecom
During 3QFY2012, share prices of Bharti Airtel (Bharti) and Idea Cellular (Idea) plunged by 9.1% and 16.4%, respectively, due to increasing concerns on the regulatory front and added cash outgo burden on telecom companies due to INR depreciation against USD by ~12% qoq as there is huge forex debt in their books, which leads to higher interest outgo in domestic currency terms. TRAI released the much-awaited new telecom policy in October 2011, which was a qualitative extension of the proposed draft in February 2011. The draft just laid the background for the forthcoming strategies to be adopted by the Department of Telecom (DoT); however, it lacked details on spectrum and license-related issues as well as on M&A policies in the sector.
VLR data points favorable for tier-I companies

As per the recent VLR data released for October 2011, of the total 881.40mn subscribers, 71.04% (626.18mn subscribers) were active subscribers on the date of peak VLR. Service provider wise, Idea leads the tally with a share of 92.0%, followed by Bharti with 88.8%, Vodafone with 82.8% and RCom with 64.6%, whereas S Tel is at the bottom with 35.1%.
Exhibit 3: VLR data of incumbents

100 89.9 90 80
(%)
93.3 88.8 81.5 82.8
92.0
Exhibit 1: Stock return analysis of leading Indian TSPs

30 20 10 0
(%)
70 62.5 60 53.0 50 Bharti Vodafone Idea Rcom BSNL Aircel 52.2 54.5 64.6 55.3
20.9
Jul-11
Aug-11
Sep-11
Oct-11
(10) (20) (30) (40) (50) (60) (9.1)
(3.9) (16.4)
(2.4)
Source: TRAI, Angel Research
Exhibit 4: Active subscribers (October 2011)

(49.4) Bharti Idea RCom
Active subscribers (mn) Bharti Vodafone Idea RCom BSNL Aircel MTNL 154.3 120.8 93.7 96.5 47.8 33.3 1.9
Active subscribers' market share (%) 25.49 19.97 15.49 15.94 7.91 5.51 0.32
Active subscribers' Reported subscribers' market share (%) market share (%) -August 2011 25.24 19.30 14.90 15.26 7.91 5.13 0.33 20.19 16.95 11.83 17.36 10.64 7.00 0.62
Chg. (3 months)
Chg. (1 year)
MNP recording a secular trend

Since the launch of MNP in January 2011, a secular trend is emerging in which incumbents such as Vodafone, Idea and Bharti are proving to be net gainers in the mentioned pecking order; whereas, the highest net looser has been RCom, both for its GSM and CDMA subscriber base. Until October 2011, the Indian mobile market has seen ~23.2mn users opting for MNP which is insignificant at ~2.6% of subscriber base, but , this emerging trend clearly suggests that the above-mentioned players are proving to be the front-runners in gaining market share.
RMS vs. SMS

As per the revenue market share (RMS) data for 2QFY2012, Bharti leads at 30.8% with subscriber market share (SMS) of 19.9%, whereas Idea has its RMS and SMS at 14.0% and 11.5%, respectively. RMS for Bharti and Idea is higher than SMS, which indicates that the quality of subscribers added by these companies is good. On the contrary, in case of RCom, SMS is at 16.9%, which is much ahead of RMS that is only at 8.2%. This is evident from the ARPU profile of these companies; also, RCom has peak VLR of merely 63.5% (in September 2011) as posed to its peers Bharti, Idea and Vodafone the peak VLR of these varies from 80-92% (for September 2011). Thus, though the pace of subscriber addition sported by each of the companies remains modest, additions made by Bharti and Idea are value additions, whereas those for RCom are more of volume addition. Amongst unlisted companies, Vodafone is also part of the BhartiIdea clan with higher RMS at 21.0% and SMS at 16.7%, whereas incumbents such as BSNL and Aircel are part of RCom's clan with SMS higher than RMS.
42
Exhibit 2: Trend in churn due to MNP

27 24 21
(mn)
2.64 2.38 2.10 1.82 1.54 1.26 15.5 13.0 10.6 18.1 20.6 23.2
3.0 2.7 2.4 2.1 1.8 1.5 1.2 0.9 0.6

(%)
18 15 12 9 6 May-11 Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Total subscribers opting for MNP (mn)
Share in total subscriber base (%)
Telecom
Exhibit 5: RMS vs. SMS of incumbents (as of 2QFY2012)
35 30 25 19.9
(%)
MOU to firm up
In 2QFY2012, the declining trend in minutes of usage (MOU) continued for Bharti (excluding Africa), Idea as well as RCom. For 3QFY2012, we expect MOU of Bharti (excluding Africa), Idea and RCom to increase by 2.0%, 1.5% and 1.0% to 432min, 370min and 229min, respectively. This is because 3Q is a seasonally modest quarter for MOU of telecom players on the back of the festive season as well as low base effect because of the weak 2Q.
30.8
21.0 16.7 14.0 11.5 10.5 7.7 4.9 6.9 16.9
20 15 10 5 0 Bharti
Vodafone
Idea RMS
Rcom SMS
BSNL
Aircel
Exhibit 7: Trend in MOU per month per subscriber

500 454 449 449 445 423 400
(min)
Momentum in net subscriber additions declines

Over September-November 2011, subscriber net addition was weak (lowest since the last few years) across all telecom operators. Indian subscriber base grew at an average rate of merely 0.7% mom, led by incumbents such as Idea, which added 3.8mn subscribers from September-November 2011. Idea was followed by RCom, Bharti, Vodafone and Aircel, which added 2.0mn, 1.9mn, 1.8mn and 1.2mn subscribers over SeptemberNovember 2011, growing at an average rate of 0.7%, 0.6%, 0.6% and 1.0% mom, respectively. Amongst new entrants, Uninor emerged as a surprise by adding 4.5mn subscribers over September-November 2011, leaving behind all the other telecom players. Although subscriber base grew for all telecom players, net addition run rate slided steeply for every player in November 2011. However, we have already priced this in our our estimates. Thus, a trend was spotted with most incumbents (Bharti, Vodafone, Idea, BSNL and Aircel) maintaining their subscriber market share over September-November 2011. However, Idea's subscriber market share grew to 11.8% in November 2011 from 11.5% in September 2011.
432
394
401
397
391 364 370
300 251 276 200 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12E 241 233 227 229
Bharti (ex-Africa)
Idea
RCom
VAS share to grow

We expect VAS share in the mobility revenue of Bharti and Idea to grow on a qoq basis to 15.0% and 13.3%, respectively, on account of the festival season, which led to higher exchange of text and other value-added services.
Exhibit 8: Trend in VAS share as a % of mobility revenue

17 15.0 15.0 14.6 13.8 12.9 13 12.7 11 13.0 12.1 12.1 13.2 13.3 14.5
(% of mobility revenue)
15
Exhibit 6: Total subscriber base

Company (mn) Bharti RCom Vodafone BSNL Idea TTSL Aircel MTNL Loop Mobile HFCL Shyam Telelink S Tel Uninor Videocon DB Etisalat Jun-11 169.2 143.3 141.5 88.5 95.1 91.0 58.0 5.2 3.2 1.4 11.7 3.3 26.3 6.9 1.4 Jul-11 170.7 144.8 143.0 90.2 96.1 88.3 58.6 5.3 3.2 1.4 12.3 3.5 27.4 7.0 1.4 Aug-11 Aug-11 171.8 146.1 144.1 90.6 98.4 88.6 59.2 5.3 3.2 1.4 12.8 3.4 27.7 6.4 1.5 Sep-11 Sep-11 172.8 147.1 145.0 91.1 100.2 88.7 59.8 5.3 3.2 1.2 13.3 3.5 29.7 6.3 1.5 868.5 Oct-11 Oct-11 Nov-11 173.7 148.1 145.9 91.6 101.8 87.7 60.3 5.4 3.2 1.2 14.0 3.5 32.3 6.1 1.6 876.4 174.7 149.1 146.8 92.1 104.0 83.3 61.0 5.4 3.2 1.2 14.5 3.6 34.2 5.5 1.6 880.1
9 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12E
Bharti (ex-Africa)
Idea
ARPM to inch up
Average revenue per minute (ARPM), which has been falling for most of the telecom players since the past 10 quarters, witnessed a slight uptick in 2QFY2012 because of tariff hikes undertaken by telecom players. In 2QFY2012, partial impact of tariff hikes came in the financials of telecom players, as these tariff hikes were applicable only after the existing vouchers of subscribers expired. Therefore, for 3QFY2012, we expect ARPM to inch up on a qoq basis for Bharti (excluding Africa), Idea and RCom to `0.44/min, `0.43/min and `0.45.min, respectively.
Total 845.9 853.2 860.7 Source: COAI, AUSPI, Angel Research
43
Telecom
Exhibit 9: Trend in ARPM
0.46 0.45 0.44 0.44
(`/min)
0.45
0.44 0.44
0.44
0.44 0.43 0.44 0.43
0.44
0.43 0.42 0.42 0.42 0.41
0.43
0.43
0.41 0.40 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12E
Bharti (ex-Africa)
Idea
RCom
ARPUs to improve
For 3QFY2012, we expect the combination of increasing MOU and ARPM to push average revenue per user (ARPU) of Bharti (excluding Africa), Idea and RCom by 2.7%, 2.2% and 1.1% qoq to `188/month, `159/month and `103/month, respectively.
On the EBITDA margin front, we expect margins of Bharti, Idea and RCom to improve by 40bp, 42bp and 83bp to 34.1%, 26.1% and 29.1%, respectively, on the back of higher revenue growth. We believe industry dynamics point toward a possible consolidation in the long run and expect only select few operators, including Bharti, Vodafone, RCom, Idea, BSNL, Aircel and Uninor, to be the survivors out of the current 15 operators. Bharti continues to be our preferred pick amongst telcos due to its low-cost integrated model (owned tower infrastructure), potential opportunity to scale up in Africa, established leadership in revenue and subscriber market share, and relatively better KPIs. However, overall we remain Neutral on the sector.
Key concerns
Uncertain regulatory environment: The telecom sector is currently surrounded by a number of policy uncertainties related to spectrum and license fee payments. The Telecom Regulatory Authority of India (TRAI) has deemed that any spectrum held beyond 6.2MHz in a circle market is 'excess spectrum' and has levied a one-time fee on the excess spectrum held by any operator based on a market-based value of the spectrum for each circle. As per TRAI's recommendations, the liability for Bharti due to the above-said issue stands at ~`2,870cr, i.e., per share impact of `8.7; while for Idea, the impact boils down to ~`1,085cr, i.e., per share impact of `3.3. Also, telecom licenses in India were issued with a validity of 20 years; so licenses will start coming for renewals from 2014, which will again pose a huge financial liability for telecom companies. In FY2015 and FY2016, license renewals for Bharti and Idea are due in eight and nine circles, respectively. These renewals, as per TRAI's recommendations, will require Bharti and Idea to shell out `5,500cr and `5,300cr, respectively, for the contracted spectrum (upto 6.2MHz). Adverse forex movement: Players in the telecom sector (especially Bharti) continue to be haunted by sharp INR depreciation against USD due to huge forex debt in their books. Bharti has foreign currency denominated loans worth ~US$11.5bn in its books. Given the recent INR depreciation against USD, the company will suffer from higher interest outgo and principal repayment, which will negatively affect its profitability.
Exhibit 10: Trend in ARPU per month

250 202 200
(`/month)
198 168
194
190
183 160
188 159
167 150
161
155
100
122
111
107
103
102
103
50 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12E
Bharti (ex-Africa)
Idea
RCom
EPM to marginally increase

For 3QFY2012, we expect EBITDA per minute (EPM) for Bharti and Idea to increase by 0.5% and 0.7% qoq to `0.15/min and `0.11/min, respectively.

For 3QFY2012, we expect revenue growth to be modest on the back of improvement in KPIs and decent growth in subscriber base. Amongst the top three operators, we expect Bharti and Idea to post revenue growth of 5.0% and 5.2% qoq, respectively. RCom is expected to post revenue growth of merely 3.7% qoq.

Company Bharti Idea Rcom CMP (`) 343 82 70 Net Sales 3QFY12E 18,133 4,858 4,969 5.0 5.2 3.7 OPM (%) chg bp 40 42 83 34.1 26.1 29.1 Net Profit Profit 3QFY12E 1,445 154 144 14.1 45.3 (42.9) EPS (`) (` % chg 14.1 45.3 (42.9) 3.8 0.5 0.7 EPS (`) (` FY11 15.9 2.7 6.5 FY12E 14.0 2.1 3.5 FY13E 22.2 3.1 5.8 FY11 21.6 30.1 10.7 P/E (x) FY12E 24.5 39.2 20.2 FY13E 15.4 26.5 12.1 Target rge (`) % chg 3QFY12E % chg 3QFY12E
(` cr) `
Reco. Neutral Neutral Neutral
Source: Company, Angel Research; Note: Price as on December 30, 2011; Change is on a qoq basis
Analyst - Ankita Somani

44
Stock Watch
45
Watch Stock Watch | January 2012

Company Name Agri / Agri Chemical Rallis United Phosphorus Auto & Auto Ancillary Amara Raja Batteries Apollo Tyres# Ashok Leyland Automotive Axle^ Bajaj Auto Bharat Forge# Bosch India* CEAT Exide Industries FAG Bearings* Hero Motocorp JK Tyre Mah. and Mah. Maruti Suzuki Motherson Sumi# Subros Tata Motors# TVS Motor Banking Allahabad Bank Andhra Bank Axis Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank Corporation Bank Dena Bank Federal Bank HDFC HDFC Bank ICICI Bank IDBI Bank Indian Bank Reco CMP (`) 121 127 203 59 23 340 1,593 251 6,778 74 105 1,047 1,905 61 683 920 135 21 178 52 115 80 807 661 266 39 364 66 349 49 338 649 427 685 78 184 Target Price (`) 176 180 250 74 29 409 1,719 299 7,514 104 128 1,246 89 829 1,051 169 193 66 131 1,216 797 290 48 413 390 482 954 84 199 Mkt Cap (` cr) 2,346 5,850 1,734 2,969 6,053 514 46,090 5,854 21,283 252 8,929 1,739 38,046 249 41,938 26,581 5,231 128 48,017 2,466 5,481 4,474 33,284 25,875 14,553 1,855 16,107 4,264 5,162 1,627 5,775 95,692 99,950 78,905 7,660 7,916 Sales (` cr) FY12E FY13E 1,342 6,935 2,179 11,819 12,394 1,138 19,618 6,022 8,187 4,403 4,953 1,272 22,863 7,011 29,108 32,503 9,800 1,016 144,712 7,383 6,588 4,655 13,215 13,390 10,886 3,150 10,866 6,921 4,485 2,577 2,442 6,247 17,356 17,664 6,787 5,730 1,570 7,424 2,514 13,296 14,059 1,285 22,660 6,793 9,402 5,111 5,688 1,478 26,260 8,167 33,641 37,992 11,119 1,166 162,453 8,425 7,232 5,129 15,998 15,612 12,265 3,559 12,409 7,628 4,988 2,872 2,610 7,220 21,563 21,645 7,889 6,265 OPM (%) FY12E FY13E 18.4 19.7 14.3 8.9 10.2 11.7 19.6 15.8 18.6 3.9 13.0 19.9 14.5 4.2 12.4 5.3 8.5 8.7 12.0 6.8 3.4 3.3 3.1 2.7 2.1 3.3 2.2 2.7 2.0 2.8 3.5 3.6 4.2 2.5 1.8 3.5 17.4 19.7 13.8 9.4 10.2 11.8 19.1 15.5 18.0 5.0 15.5 18.8 14.1 5.1 12.6 7.5 9.2 8.5 11.6 6.5 3.3 3.1 3.1 2.7 2.1 3.3 2.2 2.7 2.1 2.9 3.1 3.5 4.2 2.6 1.8 3.4 EPS (`) FY12E FY13E 8.3 14.9 20.9 7.2 2.1 45.1 106.2 18.0 340.8 3.8 5.5 103.5 116.5 11.3 48.0 48.7 8.9 3.3 26.9 5.5 38.4 22.4 93.5 118.4 42.9 9.6 77.4 13.5 99.0 20.3 43.1 28.3 22.2 53.8 18.9 40.0 9.8 16.0 23.8 9.3 2.5 52.4 114.6 19.9 375.7 20.8 7.7 113.3 130.1 22.2 54.6 75.1 12.0 4.1 29.5 6.0 35.9 20.5 109.3 129.0 45.5 9.0 78.6 15.9 92.1 19.2 43.8 31.2 28.9 63.5 20.3 41.8 PER (x) FY12E FY13E 14.5 8.5 9.7 8.2 10.9 7.5 15.0 13.9 19.9 19.2 18.9 10.1 16.4 5.4 14.2 18.9 15.2 6.5 6.6 9.5 3.0 3.6 8.6 5.6 6.2 4.0 4.7 4.9 3.5 2.4 7.8 23.0 19.3 12.7 4.1 4.6 12.3 7.9 8.5 6.3 9.3 6.5 13.9 12.6 18.0 3.5 13.6 9.2 14.6 2.7 12.5 12.3 11.2 5.2 6.0 8.7 3.2 3.9 7.4 5.1 5.8 4.3 4.6 4.1 3.8 2.5 7.7 20.8 14.8 10.8 3.8 4.4 P/BV (x) FY12E FY13E 3.6 1.4 2.1 1.1 2.1 1.8 7.4 2.4 4.1 0.4 3.0 2.4 8.8 0.3 3.5 1.7 3.0 0.5 2.4 2.1 0.6 0.6 1.5 1.1 0.9 0.6 0.8 0.6 0.6 0.4 1.0 5.0 3.4 1.3 0.6 0.9 2.9 1.2 1.8 0.9 1.9 1.7 5.8 2.1 3.4 0.4 2.6 1.9 6.3 0.3 2.9 1.5 2.5 0.5 1.8 1.8 0.5 0.6 1.33 0.9 0.9 0.6 0.7 0.5 0.6 0.4 0.9 4.1 2.88 1.3 0.5 0.7 RoE (%) FY12E FY13E 27.3 17.1 24.6 12.2 13.7 25.7 55.3 19.3 20.7 2.0 16.3 26.3 63.7 5.5 25.7 9.5 20.6 8.3 39.4 24.1 21.9 18.1 19.2 20.4 13.9 15.1 17.8 12.6 19.0 18.0 13.7 39.7 18.8 13.2 13.9 20.4 25.9 16.1 22.7 14.8 15.1 26.9 46.7 17.9 19.0 10.9 20.1 22.9 50.2 10.4 25.2 12.9 24.3 10.0 33.9 22.5 17.6 14.6 19.2 19.1 13.3 15.6 15.8 11.4 15.5 14.9 12.5 34.0 21.0 14.4 13.4 18.4 EV/Sales (x) FY12E FY13E 1.6 1.0 0.8 0.5 0.6 0.5 2.0 1.1 2.2 0.3 1.5 1.0 1.4 0.3 1.2 0.6 0.6 0.4 0.5 0.3 1.3 1.0 0.6 0.4 0.5 0.4 1.7 0.9 1.9 0.3 1.2 0.8 1.1 0.3 1.0 0.5 0.6 0.3 0.4 0.3 -
Buy Buy Buy Buy Buy Buy Accumulate Buy Accumulate Buy Buy Buy Neutral Buy Buy Accumulate Buy Neutral Accumulate Buy Accumulate Neutral Buy Buy Accumulate Buy Accumulate Neutral Accumulate Neutral Neutral Neutral Accumulate Buy Accumulate Accumulate
Please refer to important disclosures at the end of this report.
46

Company Name IOB J & K Bank LIC Housing Finance Oriental Bank Punjab Natl.Bank South Ind.Bank St Bk of India Syndicate Bank UCO Bank Union Bank United Bank Vijaya Bank Yes Bank Capital Goods ABB* Areva* BGR Energy BHEL Blue Star Crompton Greaves Jyoti Structures KEC International LMW Thermax Cement ACC* Ambuja Cements* India Cements J K Lakshmi Cements Madras Cements Shree Cements UltraTech Cement Construction Ashoka Buildcon Consolidated Co Hind. Const. IRB Infra ITNL IVRCL Infra Jaiprakash Asso. Larsen & Toubro Reco Accumulate Accumulate Neutral Accumulate Buy Neutral Buy Buy Neutral Accumulate Buy Neutral Buy Sell Neutral Neutral Neutral Neutral Buy Buy Buy Buy Buy Neutral Neutral Neutral Buy Neutral Neutral Neutral Buy Neutral Neutral Buy Buy Buy Buy Buy CMP (`) 74 677 222 197 784 20 1,620 69 46 170 47 45 239 584 164 179 239 171 126 39 35 1,478 395 1,136 155 66 37 102 2,167 1,160 189 16 17 130 146 28 52 995 Target Price (`) 82 724 213 926 2,029 90 191 54 298 427 146 49 45 2,780 457 51 245 182 227 42 83 1,453 Mkt Cap (` cr) 4,551 3,280 10,519 5,740 24,838 2,277 102,838 3,927 2,858 8,890 1,602 2,141 8,397 12,367 3,923 1,290 58,498 1,537 8,057 320 909 1,665 4,710 21,334 23,832 2,026 454 2,438 7,551 31,803 996 301 1,022 4,319 2,827 753 11,143 60,885 Sales FY12E 6,727 2,129 1,860 5,318 17,977 1,206 57,626 6,165 4,921 8,925 3,126 2,550 2,368 7,661 4,431 4,196 51,482 3,304 10,962 2,831 5,407 2,350 5,826 9,493 8,484 4,032 1,483 3,060 4,260 17,482 1,627 2,350 4,152 3,037 5,169 5,598 13,763 53,503 (` cr) FY13E 7,624 2,376 2,219 5,765 20,705 1,312 66,702 6,977 5,593 10,073 3,406 2,889 2,800 8,895 5,021 4,513 51,689 3,667 11,953 2,762 6,204 2,883 5,896 10,777 9,635 4,224 1,751 3,254 5,205 19,595 1,831 2,451 4,633 3,781 6,609 6,458 16,017 60,090 OPM (%) FY12E FY13E 2.7 2.6 3.4 3.5 2.8 2.7 2.4 2.4 3.5 3.4 2.9 2.7 3.4 3.4 3.1 3.0 2.4 2.5 2.8 2.8 2.7 2.7 2.3 2.4 2.5 2.5 5.0 9.0 12.5 19.8 4.9 9.0 11.0 8.6 14.7 10.8 20.3 24.0 18.6 16.5 30.5 23.5 21.7 21.7 3.5 12.4 43.3 27.5 8.8 24.5 11.9 7.6 9.0 11.5 18.3 6.4 11.1 11.0 9.0 14.8 10.1 21.3 24.5 18.4 17.2 28.3 25.1 21.9 23.1 5.5 12.6 40.4 23.7 9.2 24.4 12.1 EPS (`) FY12E FY13E 17.7 19.9 157.0 167.4 20.5 27.2 39.4 44.2 156.6 161.2 3.3 3.3 168.7 206.7 21.8 23.1 14.9 15.5 36.7 39.4 13.2 14.4 9.8 9.5 26.8 29.0 8.9 7.1 36.0 28.7 8.7 8.1 14.2 6.7 176.7 34.6 57.1 7.9 8.4 5.9 14.8 70.8 69.3 21.0 (1.1) (1.0) 11.9 24.4 3.8 2.7 64.2 17.8 8.4 33.6 26.0 16.4 12.2 12.2 8.9 235.5 32.6 67.5 9.2 9.2 7.8 15.2 124.5 80.2 24.7 1.6 0.6 13.1 25.7 4.6 4.2 71.0 PER (x) FY12E FY13E 4.2 3.7 4.3 4.0 10.8 8.1 5.0 4.5 5.0 4.9 6.1 6.2 9.6 7.8 3.1 3.0 3.1 2.9 4.6 4.3 3.5 3.2 4.6 4.8 8.9 8.2 65.7 23.0 5.0 8.3 19.6 15.5 2.7 5.2 8.4 11.4 19.9 19.7 7.8 6.3 6.9 30.6 16.8 9.0 10.9 6.0 7.5 19.2 15.5 32.8 19.5 5.3 9.2 10.4 10.3 3.2 4.0 6.3 12.1 16.8 16.9 7.2 4.8 6.7 17.4 14.5 7.6 10.2 26.2 10.0 5.7 6.1 12.5 14.0 P/BV (x) FY12E FY13E 0.5 0.5 0.8 0.7 2.1 1.8 0.5 0.5 1.0 0.9 1.1 1.0 1.5 1.3 0.5 0.5 0.6 0.6 0.8 0.7 0.5 0.4 0.6 0.6 1.8 1.5 4.8 3.5 1.1 2.3 3.0 2.2 0.5 0.9 1.7 2.9 3.0 2.9 0.6 0.4 1.2 3.4 2.6 1.0 0.5 0.7 1.6 1.1 0.4 1.1 2.4 4.3 3.1 1.0 2.0 2.6 1.9 0.4 0.7 1.4 2.5 2.7 2.6 0.6 0.4 1.0 2.9 2.3 0.9 0.5 0.7 1.4 0.9 0.3 1.1 2.1 RoE (%) FY12E FY13E 12.8 13.0 20.2 18.6 21.4 23.6 10.8 11.1 22.6 19.7 20.4 17.2 16.6 17.9 17.5 16.3 17.0 15.4 16.3 15.4 12.1 12.1 13.3 11.6 22.2 20.1 7.6 16.1 25.0 30.8 15.2 15.1 18.5 24.9 22.6 28.0 15.7 15.7 7.5 6.7 18.6 11.8 16.6 11.7 15.2 19.2 5.0 6.1 16.9 13.9 16.8 20.1 23.0 25.3 19.9 13.7 26.6 25.2 21.9 16.7 16.5 8.0 8.3 16.5 18.2 16.7 12.2 4.9 2.8 14.7 17.4 5.8 8.8 16.3 EV/Sales (x) FY12E FY13E 1.6 1.1 1.0 1.0 0.6 0.8 0.4 0.5 0.3 0.7 2.0 2.5 0.9 0.6 1.7 1.6 1.8 1.9 0.4 1.3 3.1 2.0 0.6 2.3 1.3 1.4 0.9 0.8 0.9 0.5 0.7 0.2 0.4 0.1 0.6 1.6 2.1 0.9 0.4 1.4 1.2 1.5 2.4 0.3 1.0 2.8 1.9 0.6 2.0 1.2
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Company Name Madhucon Proj Nagarjuna Const. Patel Engg. Punj Lloyd Sadbhav Engg. Simplex Infra FMCG Asian Paint Britannia Colgate Dabur India GlaxoSmith Con* Godrej Consumer HUL ITC Marico Nestle* Tata Global IT HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam Mindtree Mphasis NIIT Persistent TCS Tech Mahindra Wipro Media D B Corp HT Media Jagran Prakashan PVR Sun TV Network Buy Buy Buy Accumulate Neutral 188 127 96 129 274 274 170 137 143 3,449 2,985 3,041 335 10,810 1,413 2,010 1,336 507 2,090 1,586 2,255 1,447 577 2,321 27.6 17.9 27.6 16.6 78.4 28.5 17.8 28.2 16.7 78.4 13.1 8.6 6.7 8.0 20.6 15.5 9.5 7.6 9.8 22.8 14.3 14.8 14.5 16.1 13.3 12.2 13.4 12.6 13.1 12.0 3.5 2.0 4.4 1.0 3.5 2.9 1.8 4.1 0.9 2.9 26.4 14.4 30.2 6.2 30.0 26.0 13.9 33.8 7.2 27.3 2.4 1.2 2.2 0.8 4.3 2.0 1.0 2.1 0.6 3.6 Buy Buy Accumulate Accumulate Buy Accumulate Buy Buy Neutral Buy Neutral 388 75 109 146 65 397 300 36 329 573 399 531 96 2,990 120 163 82 453 368 55 1,294 666 26,819 2,196 158,774 1,217 1,294 7,637 1,615 6,304 602 1,314 227,282 7,292 98,030 20,859 1,435 34,327 1,560 1,409 6,477 1,936 5,679 1,184 1,014 49,281 5,629 37,495 23,976 1,772 39,912 1,784 1,672 7,365 2,236 6,030 1,084 1,174 58,337 6,215 41,690 19.2 17.4 31.5 15.0 15.2 15.1 14.3 19.7 13.6 21.1 29.7 17.3 20.1 18.4 18.7 30.8 15.8 15.4 14.8 14.7 16.6 16.3 22.4 29.0 16.8 19.7 36.2 8.2 142.0 12.5 15.3 7.3 43.7 39.1 5.5 29.6 55.3 84.5 23.1 40.9 8.7 166.1 15.6 16.3 7.4 45.3 36.8 8.0 34.1 64.7 83.3 27.0 10.7 9.1 19.5 8.7 9.6 8.9 9.1 7.7 6.6 11.1 21.0 6.8 17.3 9.5 8.6 16.6 7.0 8.9 8.7 8.8 8.2 4.6 9.6 18.0 6.9 14.8 2.6 1.9 4.8 1.0 1.6 1.4 1.7 1.3 0.8 1.5 7.2 1.7 3.5 2.2 1.7 3.9 0.9 1.4 1.2 1.5 1.2 0.7 1.3 5.7 1.4 3.0 24.8 21.9 24.5 11.8 18.8 15.7 18.7 17.2 11.9 13.9 34.2 24.0 20.2 23.2 19.8 23.4 12.9 16.9 13.8 16.4 14.2 15.6 14.0 31.9 20.0 20.0 1.3 1.2 4.0 0.4 0.9 0.9 0.7 0.7 0.3 1.0 4.4 1.4 2.4 1.0 0.9 3.3 0.3 0.7 0.7 0.6 0.6 0.1 0.8 3.7 1.1 2.0 Neutral Accumulate Neutral Accumulate Neutral Accumulate Neutral Accumulate Neutral Neutral Accumulate 2,595 448 992 100 2,541 385 408 201 145 4,173 90 495 110 430 219 102 24,878 5,353 13,488 17,377 10,687 12,465 88,127 156,937 8,921 40,232 5,572 9,092 5,014 2,550 5,179 2,723 4,470 21,886 24,706 3,779 7,536 6,522 10,608 5,858 2,931 5,919 3,174 5,503 24,662 29,294 4,341 9,040 7,109 17.0 5.8 19.8 17.8 16.4 17.5 13.6 34.0 12.7 19.7 9.2 17.6 7.1 20.3 18.4 16.9 18.1 14.0 34.2 13.3 19.9 10.1 102.5 15.4 32.3 3.8 82.7 16.5 11.7 7.5 5.0 101.3 5.4 126.3 22.5 37.8 4.6 98.3 21.5 13.3 8.8 6.4 122.6 6.9 25.3 29.1 30.8 26.1 30.7 23.3 34.9 27.0 29.3 41.2 16.6 20.6 19.9 26.3 21.9 25.9 17.9 30.6 22.8 22.8 34.0 13.0 9.0 10.2 33.6 10.2 9.1 5.8 28.1 8.0 7.5 31.3 1.4 7.0 8.3 24.5 8.3 7.5 4.8 24.4 6.5 5.9 20.9 1.3 39.6 37.8 111.7 43.1 32.6 36.6 87.5 32.7 29.9 91.3 8.4 38.3 46.0 108.0 42.0 31.8 29.4 85.3 31.5 29.0 73.8 10.2 2.6 1.1 5.1 3.4 3.6 3.1 3.9 6.0 2.4 5.2 0.7 2.2 0.9 4.4 2.9 3.0 2.5 3.4 5.0 2.1 4.3 0.7 Reco Buy Buy Neutral Neutral Buy Buy CMP (`) 50 33 78 40 100 176 Target Price (`) 77 52 150 233 Mkt Cap (` cr) 372 856 542 1,313 1,501 873 Sales (` cr) FY12E FY13E 1,952 5,095 3,271 9,585 2,602 5,562 2,503 5,749 3,586 10,592 2,585 6,485 OPM (%) FY12E FY13E 11.2 9.5 14.2 8.3 10.4 9.4 10.2 9.4 13.1 8.4 10.6 9.5 EPS (`) FY12E FY13E 4.4 3.6 14.0 1.9 9.1 18.9 4.7 3.8 14.5 2.9 9.0 25.9 PER (x) FY12E FY13E 11.4 9.4 5.5 20.9 10.9 9.3 10.7 8.7 5.4 13.6 11.1 6.8 P/BV (x) FY12E FY13E 0.6 0.4 0.4 0.4 2.0 0.7 0.6 0.3 0.3 0.4 1.6 0.7 RoE (%) FY12E FY13E 5.2 3.8 6.6 2.1 19.7 8.3 5.3 4.0 6.5 3.1 15.7 10.5 EV/Sales (x) FY12E FY13E 0.8 0.7 0.9 0.6 0.8 0.5 0.7 0.7 0.9 0.6 0.7 0.5
Accumulate 2,765
Accumulate 1,161
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Company Name Metal Bhushan Steel Coal India Hind. Zinc Hindalco JSW Steel MOIL Monnet Ispat Nalco NMDC SAIL Sesa Goa Sterlite Inds Tata Steel Oil & Gas Cairn India GAIL ONGC Reliance Industries Pharmaceuticals Alembic Pharma Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dishman Pharma Dr Reddy's GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Power CESC GIPCL NTPC# Buy Buy Buy 203 65 161 304 95 200 2,541 986 132,422 4,533 1,384 63,970 4,880 1,437 71,871 24.2 33.3 24.5 23.5 30.9 25.0 40.7 10.2 11.8 41.8 11.0 12.9 5.0 6.4 13.6 4.9 6.0 12.4 0.5 0.7 1.8 0.5 0.6 1.6 11.3 10.8 13.5 10.5 10.8 13.5 1.1 1.4 2.5 1.0 1.1 2.5 Buy Buy Sell Buy Buy Buy Buy Neutral Buy Buy Buy Buy Buy Accumulate 35 85 2,320 705 320 37 1,578 1,937 422 275 447 127 405 497 77 166 1,937 965 369 68 1,920 555 358 593 270 577 569 668 2,479 5,344 14,428 25,657 299 26,741 16,403 518 3,453 19,972 894 17,102 51,171 1,370 4,519 1,224 5,235 7,006 1,115 8,721 2,447 587 2,207 6,817 2,143 10,196 7,416 1,576 5,243 1,401 6,343 8,164 1,282 9,584 2,788 734 2,548 8,272 2,508 12,023 9,272 14.5 14.8 14.9 19.8 20.0 17.5 25.2 35.5 14.7 20.5 18.3 21.8 17.0 34.1 15.0 14.6 15.3 19.0 21.2 17.9 25.1 35.5 15.2 21.5 19.7 21.8 24.0 35.1 6.3 11.8 85.6 37.7 14.9 9.3 87.9 72.0 42.5 20.0 22.4 28.4 29.4 20.3 7.7 13.8 89.9 48.2 18.4 11.1 96.0 86.9 55.5 27.5 29.7 37.3 52.8 25.9 5.6 7.2 27.1 18.7 21.4 3.7 17.9 26.9 9.9 13.7 20.0 4.5 13.8 24.5 4.6 6.2 25.8 14.6 17.3 3.2 16.4 22.3 7.6 10.0 15.1 3.4 7.7 19.2 1.9 0.8 4.7 5.1 3.4 0.3 4.6 7.3 1.4 2.7 5.3 0.9 2.6 4.7 1.6 0.7 4.2 4.1 2.9 0.3 3.8 6.4 1.2 2.3 4.2 0.7 2.1 4.0 36.5 17.1 18.3 31.0 16.8 8.6 28.6 21.1 14.3 21.8 28.2 19.3 20.1 22.4 37.0 15.1 17.1 31.1 18.2 9.2 25.2 30.7 16.9 24.9 30.8 23.4 25.9 22.4 0.7 0.9 3.8 2.8 3.7 1.1 3.2 5.8 1.0 1.7 3.1 1.3 1.7 6.5 0.6 0.8 3.3 2.3 3.1 0.9 2.9 5.0 0.9 1.5 2.5 1.1 1.2 5.1 Neutral Buy Buy Buy 313 384 257 693 499 324 1,006 59,647 48,722 219,833 226,899 11,487 32,459 125,242 316,591 13,630 34,080 138,164 328,147 74.2 19.2 43.9 12.9 77.7 19.5 42.3 13.5 31.9 31.7 31.3 70.5 40.5 35.6 33.3 78.2 9.8 12.1 8.2 9.8 7.7 10.8 7.7 8.9 1.3 2.2 1.6 1.2 1.1 1.9 1.4 1.0 14.0 19.3 21.5 14.0 15.3 18.7 19.9 13.8 4.7 0.4 1.4 0.7 3.4 0.0 1.2 0.6 Reduce Accum. Buy Buy Buy Neutral Buy Neutral Buy Neutral Buy Buy Buy 311 301 119 116 507 228 362 51 161 81 163 90 335 293 322 142 151 699 528 231 195 121 510 6,600 190,028 50,302 22,161 11,314 3,826 2,328 13,054 63,772 33,498 14,132 30,112 32,158 8,717 63,100 11,775 76,285 32,667 939 1,973 6,853 12,701 46,170 7,979 36,843 123,172 9,233 67,324 12,743 79,080 41,440 986 2,960 8,954 14,304 54,932 9,073 43,285 142,958 29.9 26.8 53.4 10.3 17.0 54.5 26.3 19.0 79.9 13.6 41.5 23.0 12.4 31.7 25.7 52.8 11.3 19.6 55.3 29.5 21.7 80.0 17.1 40.9 25.1 13.4 37.9 23.5 14.1 17.5 68.3 26.4 47.3 3.9 20.1 9.2 30.6 14.6 59.3 39.0 24.6 15.2 20.1 117.1 28.8 63.5 4.7 22.6 12.3 31.7 18.5 77.4 8.2 12.8 8.4 6.6 7.4 8.6 7.7 13.1 8.0 8.8 5.3 6.2 5.7 8.0 12.3 7.8 5.8 4.3 7.9 5.7 10.8 7.1 6.6 5.1 4.8 4.3 1.0 4.2 1.8 0.7 0.7 1.6 1.0 1.1 2.5 0.8 0.9 0.7 0.7 0.9 3.3 1.5 0.6 0.6 1.4 0.8 1.0 2.0 0.7 0.8 0.6 0.6 12.8 37.8 23.7 11.0 10.0 19.4 13.7 8.6 35.8 15.7 19.3 11.2 24.0 11.7 30.5 20.9 11.3 15.3 18.4 16.7 9.9 31.0 15.1 17.0 12.6 15.5 2.9 2.1 2.6 0.5 0.7 1.8 2.2 1.1 3.2 1.0 1.5 0.5 0.7 2.7 1.9 1.9 0.5 0.6 1.4 1.7 0.7 2.5 0.9 1.5 0.4 0.6 Reco CMP (`) Target Price (`) Mkt Cap (` cr) Sales (` cr) FY12E FY13E OPM (%) FY12E FY13E EPS (`) FY12E FY13E PER (x) FY12E FY13E P/BV (x) FY12E FY13E RoE (%) FY12E FY13E EV/Sales (x) FY12E FY13E
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Company Name Real Estate Anant Raj DLF HDIL Telecom Bharti Airtel Idea Cellular Rcom Others Bajaj Electrical CRISIL Finolex Cables Graphite India Greenply Page Industries Sintex Siyaram Silk Mills SpiceJet Taj GVK Reco CMP (`) 40 183 53 343 82 70 152 888 30 70 148 2,391 63 232 17 64 Target Price (`) 75 95 51 102 284 150 426 121 Mkt Cap (` cr) 1,173 31,086 2,233 130,217 27,121 14,417 1,515 6,300 466 1,359 357 2,667 1,717 218 744 404 Sales (` cr) FY12E FY13E 532 10,466 2,240 71,094 19,093 19,740 3,223 819 2,081 1,721 1,426 658 5,296 982 4,165 310 742 11,702 2,803 80,835 22,440 22,978 3,659 990 2,341 2,053 1,574 822 6,256 1,150 5,489 360 OPM (%) FY12E FY13E 54.4 43.6 50.1 33.8 26.0 29.4 7.7 34.0 8.0 18.9 8.1 18.6 18.3 12.7 (6.1) 35.5 54.9 44.5 49.3 35.2 26.7 32.8 8.5 34.3 8.5 22.6 9.4 18.6 17.4 12.1 (0.5) 36.3 EPS (`) FY12E FY13E 6.1 9.2 20.3 14.0 2.1 3.5 14.0 29.4 5.5 9.6 22.4 64.0 20.8 64.8 (6.6) 7.9 9.1 11.3 24.9 22.2 3.1 5.8 18.2 34.6 8.5 13.4 35.6 79.1 23.6 70.9 (2.7) 10.1 PER (x) FY12E FY13E 6.5 19.9 2.6 24.5 39.2 20.2 10.8 30.2 5.5 7.3 6.6 37.4 3.0 3.6 8.1 4.4 16.2 2.1 15.4 26.5 12.1 8.4 25.6 3.6 5.2 4.2 30.2 2.7 3.3 6.4 P/BV (x) FY12E FY13E 0.3 1.2 0.2 2.4 2.1 0.3 2.1 13.2 0.6 0.8 1.0 18.1 0.6 0.8 4.6 1.1 0.3 1.2 0.2 2.1 1.9 0.3 1.8 11.3 0.5 0.8 0.8 14.9 0.5 0.7 17.6 1.0 RoE (%) FY12E FY13E 4.8 6.3 8.5 9.9 5.3 1.7 21.3 47.8 11.2 11.9 15.5 55.8 19.3 24.9 14.6 6.7 7.5 9.4 13.7 7.3 2.8 23.6 47.3 15.6 15.3 20.8 56.4 18.1 22.5 16.4 EV/Sales (x) FY12E FY13E 3.2 5.2 2.9 2.8 2.0 2.3 0.5 7.4 0.2 1.0 0.6 4.2 0.6 0.5 0.3 1.7 2.6 4.7 2.4 2.3 1.7 1.7 0.4 6.0 0.1 0.9 0.5 3.3 0.5 0.4 0.3 1.3
Buy Neutral Buy Neutral Neutral Neutral Neutral Neutral Buy Buy Buy Neutral Buy Buy Neutral Buy
Source: Company, Angel Research, Note: ^Sept. year end; *December year end; #Consolidated; Price as on December 30, 2011
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Ratings (Returns) :
Buy (> 15%) Reduce (-5% to -15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
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Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Shailesh Kanani Bhavesh Chauhan Sharan Lillaney V Srinivasan Yaresh Kothari Shrinivas Bhutda Sreekanth P .V.S Hemang Thaker Nitin Arora Ankita Somani Varun Varma Saurabh Taparia Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Simran Kaur Dilip Patel Research Editor Production simran.kaur@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Dealer mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Infrastructure Metals & Mining Mid-cap Research Associate (Cement, Power) Research Associate (Automobile) Research Associate (Banking) Research Associate (FMCG, Media) Research Associate (Capital Goods) Research Associate (Infra, Real Estate) Research Associate (IT, Telecom) Research Associate (Banking) Research Associate (Cement, Power) sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com shailesh.kanani@angelbroking.com bhaveshu.chauhan@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com shrinivas.bhutda@angelbroking.com sreekanth.s@angelbroking.com hemang.thaker@angelbroking.com nitin.arora@angelbroking.com ankita.somani@angelbroking.com varun.varma@angelbroking.com Sourabh.taparia@angelbroking.com
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3QFY2012ResultPreview January2012

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3QFY2012ResultPreview January2012

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3QFY2012 Results Preview | January 3, 2012

3QFY2012 Results Preview | January 3, 2012

Exhibit 1: Sensex earnings summary

Refer to important Disclosures at the end of the report

3QFY2012 Results Preview | January 3, 2012

Earnings growth of Angel coverage universe likely to moderate to ~4%.

Refer to important Disclosures at the end of the report

3QFY2012 Results Preview | January 3, 2012

Exhibit 2: Angel universe estimates summary

Valuations de-rated due to slowdown fears

Exhibit 3: India's underperformance vs global markets in CY2011

Source: Bloomberg, Angel Research

Refer to important Disclosures at the end of the report

3QFY2012 Results Preview | January 3, 2012

Sensex 1 year forward P/E

Source: IMF, Angel Research

Exhibit 5: Earnings yield vs. Bond yield

Exhibit 7: BFSI, Oil & Gas and IT to dominate growth

10Yr G-Sec Yield

Source: IMF, Angel Research

Oil & Gas

Source: Angel Research

Exhibit 6: FY2012 EPS growth to be sub-10%

Source: Angel Research

Refer to important Disclosures at the end of the report

3QFY2012 Results Preview | January 3, 2012

Source: Angel Research; Note: based on free-float weightages

Refer to important Disclosures at the end of the report

3QFY2012 Results Preview | January 3, 2012

3QFY2012 Sectoral Outlook

Refer to important Disclosures at the end of the report

3QFY2012 Results Preview | January 3, 2012

Exhibit 1: Interest rates vs. auto sales

80.0 60.0 40.0

0.0 (20.0) (40.0)

yoy change in CV+PV volume (RHS)

Source: Bloomberg, Angel Research

Auto Index outperforms the Sensex

Exhibit 2: Stock price performance

10.7 15.0 20.0 25.0

Relative to Auto index (%)

Source: Bloomberg, Angel Research

Interest rates and fuel prices continued their upward trend

Strong demand for LCVs driving CV sales

Refer to important Disclosures at the end of the report

3QFY2012 Results Preview | January 3, 2012

Exhibit 4: MSIL and MM Quarterly volumes

9MFY11 9MFY11 % chg

Exhibit 3: TTMT and AL Quarterly volumes

9MFY11 9MFY11 % chg

Automotive - domestic 117,402

Source: Company; Angel Research

Two-wheeler sales volume remains strong

Source: Company; Angel Research

Festive season fails to boost PV sales

9MFY11 9MFY11 % chg

Source:Company, Angel Research

Refer to important Disclosures at the end of the report

3QFY2012 Results Preview | January 3, 2012

Exhibit 6: Quarterly estimates Automobile

Accumulate Neutral Accumulate Buy Accumulate Buy

Exhibit 7: Quarterly estimates Auto Ancillary