Market Strategy 2012 - ICICI Direct by icestar

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									Market Strategy
    2012
                                                 Table of Content
                                                 House View...................................................................... 3
                                                   Has anything gone wrong with India’s growth therapy ..............5
                                                 Global concerns ............................................................... 9
                                                   Euro – Unity in adversity ..........................................................10
                                                   US – First among equals ..........................................................14
                                                   Japan’s ageing growth & population – a cause for concern ...16
                                                   Even BRIC letting us down… ...................................................17
                                                      High inflation overwhelms BRIC…...................................................................18
                                                      Slowing GDP…................................................................................................18

                                                 Indian economy – better or worse ................................. 19
                                                   Indian economy – getting better… ..........................................20
                                                      Cooling inflationary expectation a key positive… ............................................21
                                                      Interest rates peaking… ..................................................................................23
                                                      Consumption juggernaut again saves the day! ................................................24
                                                      Unattractiveness of other investment avenues to help equities.......................26
                                                      Rupee depreciation – Impact on trade deficit ..................................................29
                                                   Indian economy – getting worse… ..........................................31
                                                      GDP growth .....................................................................................................31
                                                      Fiscal deficit.....................................................................................................32
                                                      Current Account Deficit....................................................................................33
                                                      Infra spend tapering down ...............................................................................34
                                                      Corporate profitability heading southward… ...................................................38
                                                      Capitulation – Are we close to the bottom?? ...................................................39

                                                 Outlook 2012.................................................................. 42
                                                   Watch not only valuations but other variables also… ..............42
                                                   Sectoral Outlook .......................................................................51
                                                 Flashback – The year that was ...................................... 80




ICICI Securities Ltd. | Retail Equity Research                                                                                                            Page ii
Market Strategy 2012
                                                                                                            December 30, 2011


                                                     House View
                                                     The year 2011 had one theme consistent across various asset classes i.e.
                                                     safety first. Risk aversion remained at elevated levels forcing investors to
                                                     dump sovereign bonds of troubled European countries in favour of
                                                     relatively safer US bonds, thereby driving their yields to historically lower
                                                     levels. Within commodities, gold remained in a sweet spot due to
                                                     perceived benefits of hedge. The emerging equity markets including the
                                                     BRIC brigade slumped with Indian equities at the bottom of the league.

                                                     CY12 would be an equally challenging year and is likely to be a
                                                     rollercoaster ride for the investors. Politically, this year would be a mega
                                                     carnival of leadership changes in major economies such as the US, China
                                                     and France among others. Policy responses in the US and Europe region
                                                     would be directed towards applying the liquidity balm to iron out current
                                                     issues while solvency issue would be postponed. Emerging economies
                                                     would spend their time and energy towards preservation of growth as
                                                     higher inflation and interest rates eat up growth. In addition, global growth
                                                     faces risk from higher crude prices due to Iran-Israel induced tension,
                                                     political uncertainty in the Arab world, North Korea, Afghanistan and Iraq
                                                     among others. Commodity markets may crumble under the Chinese
                                                     slowdown fears. Domestically, the Indian economy could spot relief in
                                                     terms of interest rate cuts and lower inflation while higher fiscal deficit,
                                                     currency volatility and crude oil could still knock off a few basis points from
                                                     our economic growth. In addition, perceived policy paralysis and gloom
                                                     associated with it would continue to lead to procrastination in our thoughts
                                                     and capture headlines.

                                                     We expect the Indian equity markets to witness time based correction.
                                                     Hence, we expect the Sensex to be boxed in the range of 15442 (14x FY12
                                                     Sensex EPS of 1103) – 17822 (14x FY13 Sensex EPS of 1273, upside of
                                                     14%) in line with earnings growth of 15% in FY13 and historical average
                                                     multiples of 14x. The fortunes of equities are also tied to the relative
                                                     attractiveness of fixed income, gold and real estate. Any deterioration in
   Investors should lap up either 15% growth in
                                                     risk return trade off in these asset classes would be a blessing in disguise
   earnings or 15% cut in the Indices whichever is
                                                     for equities else equity markets may continue to be sidelined. In the
   earlier
                                                     event of an unlikely global sell off, Sensex multiples could shrink to 10-
                                                     11x FY13 earnings, implying a downside of ~15%. The long term case for
                                                     investments in Indian equity markets still remains intact through periodic
                                                     investments while investors should grab any opportunity arising due to
                                                     sharp sell off where multiples contract further to 10-11x. Otherwise,
                                                     investors should look at the next year end as a buying opportunity as by
                                                     then we would have captured FY13 growth and a likely double digit
                                                     growth in FY14 on the anvil, which would limit downsides from thereon.

                                                     Parallel levels on the Nifty are 4637 on the lower side and 5351 on the
                                                     higher side.

                                                     We believe that relatively safer sectors would continue to lure investors as
                                                     the capital preservation despite lower returns theme is unlikely to fade
                                                     away. Accordingly we continue to prefer IT (rupee to benefit though
                                                     valuation expensive), pharma (rupee & patent expiry to benefit yet
                                                     valuation seems expensive), telecom (financials to improve, reducing
                                                     regulatory uncertainty) and auto (lower base, lower commodity, peaking
                                                     interest rates).




  ICICI Securities Ltd. | Retail Equity Research
                                                 We are neutral on FMCG (expensive valuation, pressure on margins),
                                                 banking (NPA concerns mounting, valuation cheap), oil & gas (elevated
                                                 crude prices, limiting pricing headroom).

                                                 We have a negative bias on capital intensive sectors such as infra (highly
                                                 leveraged, valuations a trap), capital goods (order-book growth concerns,
                                                 valuations attractive), metals (muted demand, Chinese slowdown fears),
                                                 hospitality (single digit RoEs, demand growth), real estate (heavy leverage,
                                                 tepid demand), cement (supply overhang, large caps remain expensive
                                                 while balance sheets of midcaps are leveraged), shipping (long term
                                                 visibility poor, valuations cheap), aviation (highly leveraged, elevated crude
                                                 prices). We would be revisiting our view on these in mid 2012 post visibility
                                                 on rate cuts, cooling of commodity prices, demand revival and other factors.




ICICI Securities Ltd. | Retail Equity Research                                                                      Page 4
                                                 Has anything gone wrong with India’s growth therapy
                                                 Indian current economic growth and corporate woes continue to mount and
                                                 multiply forcing all of us to ponder whether we have digressed from our
                                                 long term growth trajectory. The world today is more complex and
                                                 interconnected and every major economy has lost sheen and is staring at
                                                 limited options to prevent the current downward spiral. There are mountain
                                                 of worries domestically with alarming decibel levels thereby confusing all of
                                                 us between a signal and a noise.

                                                 Domestically blame game has been running smooth and has become a
                                                 breeding ground for collective pessimism and for everything which is not
                                                 working in our respective interest. The participating members of this game
                                                 are politicians, corporates, economist, bureaucrats, intellectuals, analyst and
                                                 other stakeholders. While these are beyond doubt challenging times for us
                                                 but the current situation also paints high expectations, misguided
                                                 assumption, poor due diligence by corporates, hysteria, suspicion,
                                                 scepticism etc.

                                                 We attempt revisiting of crucial growth phases, challenges, policy actions
                                                 which have shaped our growth so far without seeking pointers for future or
                                                 a silver bullet to all our current woes.

                                                 We believe the ongoing rough patch is reminiscing of the earlier bumps
                                                 which our economy had faced in early 90s and early 2000. Marco-Economic
                                                 woes such as GDP tapering down to 6.9%, WPI inflation hovering above
                                                 8%, Fiscal Deficit inkling closer to ~6% and interest rates are at peak have
                                                 depleted the confidence and investment climate like it did in the past. In
                                                 addition, usual snail pace of policy responses to current and past concerns
                                                 is also creating dissonance in our abilities to sustain the long term growth.

                                                 Elevated criticism over government's decisions like putting FDI in Retail at
                                                 the back-burner Lokpal Bill, uncertainly over implementation of GST, Land
                                                 acquisition delays and uproar over mining bill has added to the collective
                                                 gloom. However, faced with difficult situation earlier, government has taken
                                                 landmark policy decision in past whether it is opening up the economy in
                                                 early 90s or aggressive disinvestment in early 2000s, which has proved to
                                                 be catalyst for the structural long term growth. In early 90s, GDP growth fell
                                                 below 5%, fiscal deficit was above 7%, Indian rupee devalued by 19% and
                                                 average inflation was above 9%. Similarly in early 2000s, GDP growth fell
                                                 below 5% and fiscal deficit shot up above 6%. However, subsequent
                                                 reforms and policy changes led to the robust GDP growth for the next 4-5
                                                 years and concomitantly fiscal deficit going down below 5% and 3% in 1996
                                                 and 2007. We believe current concerns about slowdown in GDP, higher
                                                 fiscal deficit and sticky high inflation, though valid, but overdone.




ICICI Securities Ltd. | Retail Equity Research                                                                       Page 5
Exhibit 1: BSE Sensex performance during 1991-1996                                                                                                                                                            Exhibit 2: BSE Sensex performance during 2000-2006

    5000                                                                                                                                                                                                                  25000
    4500
    4000                                                                                                                                                                                                                  20000
    3500
    3000                                                                                                                                                                                                                  15000
    2500
    2000                                                                                                                                                                                                                  10000
    1500
    1000                                                                                                                                                                                                                  5000
     500
       0                                                                                                                                                                                                                       0




                                                                                                                                                                                                                                   Jan-00

                                                                                                                                                                                                                                   Oct-00

                                                                                                                                                                                                                                   Aug-01



                                                                                                                                                                                                                                   Oct-02

                                                                                                                                                                                                                                   Aug-03



                                                                                                                                                                                                                                   Oct-04




                                                                                                                                                                                                                                   Oct-06
                                                                                                                                                                                                                                   May-00

                                                                                                                                                                                                                                   Mar-01

                                                                                                                                                                                                                                   Jan-02
                                                                                                                                                                                                                                   May-02

                                                                                                                                                                                                                                   Mar-03

                                                                                                                                                                                                                                   Dec-03
                                                                                                                                                                                                                                   May-04

                                                                                                                                                                                                                                   Mar-05
                                                                                                                                                                                                                                    Jul-05
                                                                                                                                                                                                                                   Dec-05
                                                                                                                                                                                                                                   May-06

                                                                                                                                                                                                                                   Mar-07
                                                                                                                                                                                                                                    Jul-07
                                                                                                                                                                                                                                   Dec-07
                                                                                                                                                       Nov-95




                                                                                                                                                                                     Nov-96
           Jan-91


                              Oct-91


                                                       Aug-92
                                                                   Jan-93




                                                                                                                           Oct-94
                    May-91


                                             Feb-92




                                                                              May-93
                                                                                           Sep-93
                                                                                                     Feb-94
                                                                                                                Jun-94


                                                                                                                                    Mar-95
                                                                                                                                              Jul-95


                                                                                                                                                                 Mar-96
                                                                                                                                                                            Jul-96
                                                                                                     BSE Sensex                                                                                                                                                                 BSE Sensex


Source: Bloomberg, ICICIdirect.com Research                                                                                                                                                                   Source: Bloomberg, ICICIdirect.com Research



Exhibit 3: GDP Growth has slowed down due to macro headwinds; very similar to the slowdown in 1991-1992 and 2001-2003
      12.0%
                                                                                                                                                                                                                                                           9.5% 9.7%
      10.0%                                                                                                                                                                                                                                                                     9.0%
                                                                                                                                                                                                                                       8.5%
                                                                                                                                       8.0%                                                                                                                                                            8.0% 8.3%
                                                                                                                     7.3%                                                                                                                        7.5%
       8.0%                                                                                                                                                           6.7% 6.4%                                                                                                            6.7%                                 7.0%
                                                                                                    6.4%
                                                             5.4% 5.7%                                                                                                                                        5.8%
       6.0%              5.3%
                                                                                                                                                       4.3%                                        4.4%
                                                                                                                                                                                                                            3.8%
       4.0%
                                         1.4%
       2.0%

       0.0%
                         1990-91

                                             1991-92

                                                                 1992-93

                                                                                      1993-94

                                                                                                      1994-95

                                                                                                                         1995-96

                                                                                                                                         1996-97

                                                                                                                                                       1997-98

                                                                                                                                                                          1998-99

                                                                                                                                                                                        1999-00

                                                                                                                                                                                                    2000-01

                                                                                                                                                                                                                2001-02

                                                                                                                                                                                                                             2002-03

                                                                                                                                                                                                                                       2003-04

                                                                                                                                                                                                                                                 2004-05

                                                                                                                                                                                                                                                           2005-06

                                                                                                                                                                                                                                                                     2006-07

                                                                                                                                                                                                                                                                                2007-08

                                                                                                                                                                                                                                                                                           2008-09

                                                                                                                                                                                                                                                                                                       2009-10

                                                                                                                                                                                                                                                                                                                   2010-11

                                                                                                                                                                                                                                                                                                                                2011-12
Source: RBI, ICICIdirect.com Research



Exhibit 4: Fiscal Deficit reached above 7%+ levels twice in past two decades

   9.00
               7.8
   8.00
                                                                            7.0
   7.00                                                                                                                                                             6.5                                       6.2                                                                                         6.4
                                                                                                                                                   5.8                                                                      5.9                                                              6.0                                    6.0
                                   5.6                                                          5.7                                                                                               5.7
   6.00                                                5.3                                                                                                                           5.4                                                                                                                              5.1
                                                                                                                 5.1                4.8
   5.00                                                                                                                                                                                                                                4.5
                                                                                                                                                                                                                                                 3.9       4.0
   4.00                                                                                                                                                                                                                                                               3.3
   3.00                                                                                                                                                                                                                                                                          2.6

   2.00
   1.00
   0.00
               1990-91

                                   1991-92

                                                       1992-93

                                                                            1993-94

                                                                                                1994-95

                                                                                                                 1995-96

                                                                                                                                    1996-97

                                                                                                                                                   1997-98

                                                                                                                                                                    1998-99

                                                                                                                                                                                     1999-00

                                                                                                                                                                                                  2000-01

                                                                                                                                                                                                              2001-02

                                                                                                                                                                                                                            2002-03

                                                                                                                                                                                                                                       2003-04

                                                                                                                                                                                                                                                 2004-05

                                                                                                                                                                                                                                                           2005-06

                                                                                                                                                                                                                                                                      2006-07

                                                                                                                                                                                                                                                                                 2007-08

                                                                                                                                                                                                                                                                                             2008-09

                                                                                                                                                                                                                                                                                                         2009-10

                                                                                                                                                                                                                                                                                                                      2010-11

                                                                                                                                                                                                                                                                                                                                    2011-12E




Source: RBI, ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                                                                         Page 6
Exhibit 5: WPI Inflation is above 8% presently mirroring similar challenges faced during 1991-1992

    18.0%

    16.0%

    14.0%

    12.0%

    10.0%

     8.0%

     6.0%                                                                                                                                  `

     4.0%
                         Average inflation                                                                                                                                                                                                        Average inflation
     2.0%                during 1991-1996                                                                                                                                                                                                         during 2006-2011
                         was 9.2%                                                                                                                                                                                                                 was 6.6%
     0.0%
                         1991

                                     1992

                                                1993

                                                          1994

                                                                      1995

                                                                                      1996

                                                                                                  1997

                                                                                                             1998

                                                                                                                        1999

                                                                                                                                   2000

                                                                                                                                               2001

                                                                                                                                                          2002

                                                                                                                                                                          2003

                                                                                                                                                                                          2004

                                                                                                                                                                                                      2005

                                                                                                                                                                                                                  2006

                                                                                                                                                                                                                             2007

                                                                                                                                                                                                                                       2008

                                                                                                                                                                                                                                                      2009

                                                                                                                                                                                                                                                                  2010

                                                                                                                                                                                                                                                                                  2011
Source: MOSPI, ICICIdirect.com Research



Exhibit 6: Crude Prices have seen Sharp increase in past ( US $ per barrel)

    160

    140

    120

    100

     80

     60

     40

     20

         0
                Oct-99

                          Apr-00

                                     Oct-00

                                              Apr-01

                                                       Oct-01

                                                                 Apr-02

                                                                             Oct-02

                                                                                         Apr-03

                                                                                                    Oct-03

                                                                                                              Apr-04

                                                                                                                         Oct-04

                                                                                                                                  Apr-05

                                                                                                                                           Oct-05

                                                                                                                                                      Apr-06

                                                                                                                                                                 Oct-06

                                                                                                                                                                                 Apr-07

                                                                                                                                                                                             Oct-07

                                                                                                                                                                                                        Apr-08

                                                                                                                                                                                                                   Oct-08

                                                                                                                                                                                                                             Apr-09

                                                                                                                                                                                                                                      Oct-09

                                                                                                                                                                                                                                                 Apr-10

                                                                                                                                                                                                                                                             Oct-10

                                                                                                                                                                                                                                                                         Apr-11

                                                                                                                                                                                                                                                                                         Oct-11
Source: Bloomberg, ICICIdirect.com Research



Exhibit 7: FDI inflow during FY91-96                                                                                                                  Exhibit 8: Disinvestment during FY00-06 (| crore)

                  20000                                                                                                                                        20000
                                                                                                    16133              16327
                  15000                                                           13026                                                                        15000
    (| crore)




                  10000                                                                                                                                        10000
                                                                                                                                                                                                                                           16953
                                                                                                                                                               5000
                    5000
                                                                 1713                                                                                                                                   3646                                                    4424
                                    185            326                                                                                                                              2125                                    3151                                                         1581
                                                                                                                                                                    0
                         0
                                                                                                                                                                                    FY01                FY02                FY03               FY04             FY05                     FY06
                                   1990-91 1991-92 1992-93                       199-94            1994-95 1995-96

                                                                                                                                                                                                                 Disinvestments during 2000-2006
                                                                          FDI inflow

Source: Ministry of Finance, ICICIdirect.com Research                                                                                                 Source: Department of Disinvestment, ICICIdirect.com Research




        ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                             Page 7
Exhibit 9: Movement of | vs. US$
 55.00                                                         During 1997-                                                              During 2007-
                                                               1999, rupee                                                               2009, rupee
 50.00                                                         depreciated by                                                            depreciated by
                                                               19% against US                                                            17% against US
 45.00                                                         $                                                                         $
            During 1991-
 40.00      1993, rupee
            depreciated by                                                                                                                                   Currently rupee
 35.00      39% against US                                                                                                                                   depreciatied
            $                                                                                                                                                14% against US
 30.00                                                                                                                                                       $

 25.00

 20.00
          1991

                  1992

                          1993

                                   1994

                                          1995

                                                 1996

                                                        1997

                                                                  1998

                                                                         1999

                                                                                2000

                                                                                       2001

                                                                                              2002

                                                                                                      2003

                                                                                                              2004

                                                                                                                       2005

                                                                                                                                 2006

                                                                                                                                        2007

                                                                                                                                               2008

                                                                                                                                                      2009

                                                                                                                                                             2010

                                                                                                                                                                    2011
Source: Bloomberg, ICICIdirect.com Research




Exhibit 10: Important reforms during 1990-1996                                                  Exhibit 11: Important Bills passed during 2000-2006
D e-reservation of many public reserved areas                                                    T he Madhya P radesh R eorganisation B ill, 2000
D e-licensing, axing general ceiling of 40% foreign equity under F E R A                         T he U ttar P radesh R eorganisation B ill, 2000
D oing away with registration under MR T P A                                                     T he B iological D iversity B ill, 2000
E xpanding the tax base by including services                                                    T he Motor V ehicle (Amendment) B ill, 2000
R educing rates of direct tax for individuals & corporations                                     T he C ompetition B ill, 2001
Abolishing most export subsidies                                                                 T he E lectricity B ill, 2001
L owering import duties                                                                          T he Insurance (Amendment) B ill, 2002
R ationalising sales tax & reducing cascading effect of indirect taxes                           T he P revention of T errorism (Amendment) B ill, 2003
P rovided tax incentives for infrastructure & export oriented sectors                            T he S ecurities L aws (Amendment) B ill, 2004
Introduction of U nited E xchange R ate S ystem (U E R S )                                       T he R ight to Information B ill, 2004
C urrency entered a regime of floating exchange rate                                             T he F ood S afety and S tandard B ill, 2005
Source: ICICIdirect.com Research                                                                Source: Parliament of India, ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                       Page 8
                                                 Global concerns
                                                 CY 2011 has been a volatile year where factors such as the ongoing Euro
                                                 zone sovereign debt crisis, slowdown fears in the US and higher than
                                                 anticipated jump in inflation in BRIC countries impinged the global growth
                                                 ecosystem. Also, spike in key commodities such as crude due to political
                                                 instability in Middle East and Japanese tsunami disrupting global supply
                                                 chain etc. kept markets on their toes. CY2012 is likely to be an equally
                                                 challenging year as climax of eurozone issues would toss up volatility across
                                                 global financial system. US, on the other hand, may attempt laying down
                                                 steps for bridging the fiscal deficit while BRIC countries would shift gears to
                                                 strike an optimum balance between managing growth and monetary
                                                 tightening stance. Key commodities such as crude may gyrate on potential
                                                 build up of Iran- Israel tension while base/industrial metals may take cues
                                                 from the vociferousness of slowdown in China. Additionally political
                                                 calendar, across the globe, is very tight as elections in US, France, Russia,
                                                 Greece and leadership changes in China would ensure anxiety and
                                                 nervousness across global markets.




ICICI Securities Ltd. | Retail Equity Research                                                                       Page 9
                                                                                 Euro – Unity in adversity
                                                                                 The year 2011 saw the 17 member Euro zone bloc desperately working to
                                                                                 work out a feasible solution to save the bloc from collapsing even as the
                                                                                 sovereign debt crisis shifted to the core from the periphery. While the crisis
                                                                                 has been richly debated and suggests a Euro zone break-up could increase
                                                                                 the debt liability of peripheral nations by almost 200-250%, we believe
Euro zone appears better off as a unified entity as                              predicting the outcome of sovereign default is difficult. Hence, we have
the breakup costs could be bigger and unaffordable                               analysed key economic indicators of the Euro zone and the US to highlight
                                                                                 the advantages that the bloc can reap from remaining a unified entity. On a
                                                                                 consolidated basis, the debt/GDP ratio for the Euro zone stands at ~86% for
                                                                                 CY10, compared with ~94% for the US. Also, the fiscal deficit for the Euro
                                                                                 zone stands at 6% vs. 10.3% for the US. Further, the average 10-year bond
                                                                                 yields in the US continue to be 2.8% vs. 5.3% and 5.5% for Italy and Spain.
                                                                                 With the backing of the European Central Bank (ECB), similar to the Fed in
                                                                                 the US, borrowing costs for the bloc could ease. Note, these steps could
                                                                                 only alleviate liquidity concerns but structural or solvency concerns still
                                                                                 persist. That said, we believe the likelihood of a default by any peripheral
                                                                                 nation followed by the partial or total break-up of the Euro seems limited.


Exhibit 12: Fiscal deficit as a percentage of GDP                                                   Exhibit 13: Debt/GDP ratio for Euro zone is relatively better than the US
                                                                                                                   9,200                                             94.4              96
                               2010                     2011E                    2012E
                        0
                                                                                                                   8,800                                                               92
                                                                                                       $ billion




                        -4
         As % of GDP




                                                                              -3.1                                 8,400               85.8                                            88




                                                                                                                                                                                            %
                                                      -4.1
                             -6.0                                                                                  8,000                                                               84
                        -8
                                                                                     -7.9
                                                                                                                                     8,284.8                       9,035.0
                                                             -9.6                                                  7,600                                                               80
                       -12          -10.3
                                                                                                                                    Euro Zone                        US
                                                     Euro Zone      US                                                              Central Govt. debt           Gross debt to GDP

Source: International Monetary Fund (IMF) estimates , ICICIdirect.com Research                      Source: OECD, IMF, ICICIdirect.com Research
                                                                                                    Data as of CY10




Exhibit 14: GDP at current prices for Euro Area and the US                                          Exhibit 15: Flight to safety kept the US yields artificially low

         16,000
                                                                              15,065                               6.0                                   5.3           5.5
                                            14,527

         14,000                                                      13,355                                        4.0      3.3
                                                                                                                                          2.7                                         2.8
 $ billions




                                                                                                         %




                              12,168                                                                               2.0
         12,000

                                                                                                                   0.0
         10,000                                                                                                            France       Germany          Italy        Spain           US
                                      2010                               2011E
                                               Euro Zone            US                                                                        Avg 10-year bond yields YTD

Source: IMF estimates, ICICIdirect.com Research                                                     Source: Bloomberg, ICICIdirect.com Research




              ICICI Securities Ltd. | Retail Equity Research                                                                                                                         Page 10
                                                      Exhibit 16: GDP forecasts continue to be revised downwards

                                                                 4

                                                                 3

                                                                 2




                                                          %
In September 2011, IMF revised its CY11E, CY12E
GDP forecast downwards for a majority of countries               1

                                                                 0




                                                                         CY11E
                                                                                 CY12E
                                                                                         CY11E
                                                                                                 CY12E
                                                                                                          CY11E
                                                                                                                  CY12E
                                                                                                                           CY11E
                                                                                                                                     CY12E
                                                                                                                                               CY11E
                                                                                                                                                        CY12E
                                                                                                                                                                 CY11E
                                                                                                                                                                          CY12E
                                                                                                                                                                                  CY11E
                                                                                                                                                                                          CY12E
                                                                                                                                                                                                  CY11E
                                                                                                                                                                                                            CY12E
                                                                                                                                                                                                                    CY11E
                                                                                                                                                                                                                            CY12E
                                                                                                                                                                                                                                    CY11E
                                                                                                                                                                                                                                             CY12E
                                                                                                                                                                                                                                                      CY11E
                                                                                                                                                                                                                                                              CY12E
                                                                                                                                                                                                                                                                      CY11E
                                                                                                                                                                                                                                                                              CY12E
                                                                         June'11 Sept'11 June'11 Sept'11 June'11 Sept'11 June'11 Sept'11 June'11 Sept'11 June'11 Sept'11

                                                                             Euro Area                             France                              Germany                                Italy                          Spain                               UK

                                                                                                                                                             GDP Growth Forecasts


                                                      Source: International Monetary Fund estimates, ICICIdirect.com Research



                                                      Exhibit 17: Historical fiscal deficit/surplus and forecast

                                                                                         2002-06 avg                                         2007-11 avg                                             2011E                                             2012E
                                                                     2
                                                                                                 0.6




Fiscal health deteriorated for most European                         0
countries                                                         -2




                                                                                                                                                                                                                                                               -1.0
                                                                                                                                                             -1.7




                                                                                                                                                                                                                                               -2.3
                                                                  -4
                                                                                                        -3.0
                                                                                                       -3.2
                                                                                                       -3.3
                                                                                  -3.6




                                                                                                                                            -3.7
                                                                                 -3.9




                                                                                                                                                                                            -4.0
                                                          %




                                                                                                                                                                                                                                        -4.5
                                                                  -6
                                                                                                                                                                   -5.3




                                                                                                                                                                                                                                                                      -5.3
                                                                                                                                                                                       -5.8



                                                                                                                                                                                                          -5.8
                                                                                                                                                                                                          -5.8
                                                                                          -5.9




                                                                                                                                                                                                                                                         -5.9
                                                                                                                                                       -5.9
                                                                                                                                  -6.5




                                                                                                                                                                                                        -6.6
                                                                  -8




                                                                                                                                                                                                                                                      -7.0
                                                                                                                                                                         -7.8




                                                                                                                                                                                                                                                                           -7.8
                                                                                                                                                                                                  -8.9
                                                                 -10




                                                                                                                                                                                                                         -9.4
                                                                                                                                                -10.3




                                                                 -12

                                                                                                            Portugal                   Italy             Greece                   Spain             Germany                    France                 UK

                                                      Source: Reuters, European Commission Estimates, ICICIdirect.com Research



                                                      Exhibit 18: Unemployment data for Europe


                                                          30.0
                                                                                                                                                                                    22.1
Implementation of austerity measures seems
                                                          20.0
difficult, given the high rates of unemployment                                                                                                                                                                                                         12.4
                                                                                                            9.8                                                                                     11.0
                                                                         8.1                                                  7.0                  7.0                                                                 8.2
                                                          10.0                            6.0                                                                       5.0                                                                 5.0
                                                                                                                                                                                                                                                                          2.0
                                                           0.0
                                                                                     unemployed(mln)




                                                                                                                          unemployed(mln)




                                                                                                                                                                unemployed(mln)




                                                                                                                                                                                                  unemployed(mln)




                                                                                                                                                                                                                                    unemployed(mln)




                                                                                                                                                                                                                                                                      unemployed(mln)
                                                                     Unemployment




                                                                                                         Unemployment




                                                                                                                                              Unemployment




                                                                                                                                                                                  Unemployment




                                                                                                                                                                                                                    Unemployment




                                                                                                                                                                                                                                                      Unemployment
                                                                        rate (%)




                                                                                                            rate (%)




                                                                                                                                                 rate (%)




                                                                                                                                                                                     rate (%)




                                                                                                                                                                                                                       rate (%)




                                                                                                                                                                                                                                                         rate (%)
                                                                                         People




                                                                                                                              People




                                                                                                                                                                    People




                                                                                                                                                                                                      People




                                                                                                                                                                                                                                        People




                                                                                                                                                                                                                                                                          People




                                                                                  UK                              France                            Germany                               Spain                               Italy                           Portugal



                                                      Source: Bloomberg, ICICIdirect.com Research




     ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                           Page 11
                                                                      Exhibit 19: Break up of Euro zone central government debt (~$8.3 trillion)
                                                                                                                                                            Spain
                                                                                                         France                                              9%
                                                                                                          21%                                                             Belgium
                                                                                                                                                                            4%                                              Austria
                                                                                                                                                                                                                             3%
                                                                                                                                                                                 Greece
                                                                                                                                                                                   4%                                       Ireland
                                                                                                                                                                                                                              2%
                                                                                                                                                                                                                            Portugal
                                                                                                                                                                                  Other                                       2%

                                                                                                                                                                                                                       Other Euro zone
                                                                                               Italy
                                                                                                                                                                                                                             6%
                                                                                               23%

                                                                                                                                                                      Germany
                                                                                                                                                                        26%



                                                                      Source: Reuters, European commission, ICICIdirect.com Research



                                                                      Exhibit 20: Peripheral debt repayment schedule

                                                                                         500

                                                                                         400
Portugal, Italy, Greece and Spain (PIGS) countries
                                                                          Euro billion




have combined principal and interest debt payments                                       300
of € 29.8 billion, € 382 billion, € 57.9 billion & €                                     200
169.7 billion respectively in CY12E
                                                                                         100

                                                                                          0
                                                                                                 CY12E

                                                                                                           CY13E

                                                                                                                    CY12E

                                                                                                                                          CY13E

                                                                                                                                                    CY12E

                                                                                                                                                              CY13E

                                                                                                                                                                         CY12E

                                                                                                                                                                                   CY13E

                                                                                                                                                                                            CY12E

                                                                                                                                                                                                     CY13E

                                                                                                                                                                                                              CY12E

                                                                                                                                                                                                                           CY13E

                                                                                                                                                                                                                                   CY12E

                                                                                                                                                                                                                                           CY13E
                                                                                                  Germany              Spain                            Italy              France             Greece                  UK              Portugal

                                                                                                                                                                      Principal      Interest


                                                                      Source: Bloomberg, ICICIdirect.com Research

                                                                      Though Germany and France have maintained fiscal discipline, French
                                                                      exposure to PIGS’ debt stands at $718 billion while the same for Germany
                                                                      stands at $495 billion. Rising yield spreads could mean that new money
                                                                      would come at a higher cost.

Exhibit 21: Debt exposure by country to PIGS                                                                       Exhibit 22: Debt exposure by country to PIGS
               400.0                                                                                                                      160.0

               300.0                                                                                                                      120.0
 US$ billion




                                                                                                                            US$ billion




               200.0                                                                                                                        80.0

               100.0                                                                                                                        40.0

                 0.0                                                                                                                          0.0
                        PS     Banks    NBPS         PS       Banks         NBPS                                                                             PS           Banks            NBPS          PS           Banks            NBPS
                              Germany                         France                                                                                                        UK                                          US
                                  Portugal   Italy   Greece    Spain                                                                                                        Portugal         Italy     Greece          Spain

PS- Public sector, NBPS - Non-Banking Private Sector                                                               PS- Public sector, NBPS - Non-Banking Private Sector
Source: Reuters, European commission, ICICIdirect.com Research                                                     Source: Reuters, European commission, ICICIdirect.com Research




               ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                      Page 12
                                                                Exhibit 23: Yield spreads relative to German Bunds
Debt issuance schedule in the near term
Country    Type of issuances     Issuance date                         6                                                                                              35
Spain      Bills                 17-Jan, 24-Jan
                                                                       5                                                                                              30
           Bonds                 12-Jan, 19-Jan
Italy      Bills                 12-Jan, 27-Jan, 13-Feb                                                                                                               25
                                                                       4
                                 27-Feb, 13-Mar, 28-Mar                                                                                                               20
           Bonds                 13-Jan, 26-Jan, 30-Jan,               3




                                                                 (%)




                                                                                                                                                                           (%)
                                                                                                                                                                      15
                                 14-Feb, 24-Feb, 24-Feb
                                                                       2
                                 28-Feb, 14-Mar, 27-Mar                                                                                                               10
                                 29-Mar                                1
                                                                                                                                                                      5
           Notes                 26-Jan, 24-Feb, 27-Mar
                                                                       0                                                                                              0
Source: Bloomberg, ICICIdirect.com Research
                                                                        Jan-01        Jan-03            Jan-05           Jan-07           Jan-09           Jan-11
                                                                       -1                                                                                             -5

                                                                                               France            Italy      Spain           Greece (RHS)


                                                                Source: Bloomberg, ICICIdirect.com Research


EU electoral calendar for 2012
                                                                Exhibit 24: Chronological sequence of downgrades in Europe
Country                                  Event      Schedule
Finland                Parliamentary Elections      Jan /Feb    Date                        Country                       Rating Agency              Rating assigned
Croatia                            Referendum       Jan /Feb    Jan-11                      Greece                        Fitch                      Junk
Greece                 Parliamentary Elections            Feb   May-11                      Greece                        S&P                        B from BB-
Slovakia               Parliamentary Elections         March    Jun-11                      Greece                        S&P                        CCC from B
France                   Presidential Elections    April /May   Jul-11                      Portugal                      Moody's                    Junk
France                    Legislative Elections          June   Jul-11                      Ireland                       Moody's                    Junk
Slovenia                 Presidential Elections           Oct   Jul-11                      Spain                         Moody's                    Watch for downgrade
Lithuania              Parliamentary Elections            Oct   Sep-11                      Italy                         S&P                        A from A+
Czech Republic            Legislative Elections           Oct   Oct-11                      Italy                         Moody's                    A2 from Aa2
Romania                Parliamentary Elections            Nov   Oct-11                      Spain                         Fitch                      AA-
Source: Bloomberg, ICICIdirect.com Research                     Oct-11                      Italy                         Fitch                      A+
                                                                Dec-11                      15 Euro zone nations          S&P                        Watch for downgrade
                                                                Source: Bloomberg, ICICIdirect.com Research



                                                                Analysing the chronological sequence of events suggests that the European
                                                                Union (EU) leaders conducted as many as 16 high profile meetings in CY11
                                                                to cope with the crisis, which deteriorated substantially. Note, we have seen
                                                                as many as 11 sovereign rating downgrades and resignations of as many as
                                                                five country heads (Ireland, Portugal, Greece, Italy and Spain). The Euro
EU leaders continue to initiate multiple damage                 zone members agreed upon various measures to tackle the crisis including
control steps                                                   the formation of European Stability Mechanism (ESM) – to lend €500 billion
                                                                from 2013, and raising the temporary bailout funds firepower to €1 trillion
                                                                which could complement European Financial Stability Facility (EFSF) and
                                                                European Financial Stabilisation Mechanism (EFSM) initiated in 2010. Finally,
                                                                in December 2011, Euro governments under a new deal called Fiscal
                                                                Compact added €200 billion to their war chest. The real concern is that these
                                                                austerity measures suggested by the EU members could be termed as harsh
                                                                and difficult to implement given the rising levels of unemployment.
                                                                However, they seem realistic when compared with known and unknown
                                                                consequences of partial or complete break-up of the Euro zone.




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                Page 13
                                                             US – First among equals
                                                             CY12 could be a year of anxiety for the US led by elections in November
                                                             2012. Note, the November 2010 mid-term elections saw the Republicans
                                                             gain majority in the House of Representatives with the Democrats
  Political disagreement in the US could dampen fiscal
                                                             maintaining their lead in the Senate. This is the first Congress since the
  discipline initiatives
                                                             Congress of 2001–2003 in which the House and Senate are controlled by
                                                             different parties. Noticeably, there continues to be a discomfort over the
                                                             fiscal policies of the US led by differences in the Congress over key issues
                                                             such as reducing fiscal deficit or discontinuing existing tax rebates for
                                                             wealthy Americans. Political gridlock in Washington against this backdrop
                                                             remains a concern. In CY10, the US government had a fiscal deficit of $1.4
                                                             trillion with social security, Medicare, Medicaid and Defence accounting for
                                                             over 60%. On the positive side, treasury yields continue to be low, led by
                                                             aggravated global concerns and flight to safety. Further, better-than-
                                                             expected economic data such as housing starts & retail sales and fall in the
                                                             unemployment rate to 8.6% vs. CY11 YTD average of 9% suggests a
                                                             modest recovery. Against this backdrop, we believe, Congressional
                                                             consensus coupled with economic recovery in the US would bode well for
                                                             global financial stability.

Exhibit 25: Break up of the US annual income (~USD 2.1 trillion for CY10)                                   Exhibit 26: Break up of the US annual spend (~USD 3.4 trillion for CY10)
                    Other
                     7%                                                                                                Medicare
     Excise Taxes                                          Individual                                                   15%                                                                                 Social security
          3%                                             Income Taxes                                                                                                                                            20%
                                                              41%
        Social
    Insurance and                                                                                                     Medical aid
      Retirement                                                                                                         8%
       Receipts
         40%
                                                    Corporation                                                        Defence                                                                               Others
                                                   Income Taxes                                                         20%                                                                                   37%
                                                        9%


Source: whitehouse.goi, ICICIdirect.com Research                                                            Source: whitehouse.goi, ICICIdirect.com Research



                                                             Exhibit 27: US fiscal health continues to be under pressure
                                                                                                                                                                                                                  -10.0 2011E


                                                                                                                                                                                                                                   -9.3 2012E
                                                                                              -4.0 2002


                                                                                                          -5.0 2003


                                                                                                                         -4.4 2004


                                                                                                                                     -3.3 2005


                                                                                                                                                 -2.2 2006


                                                                                                                                                                -2.9 2007


                                                                                                                                                                            -6.6 2008


                                                                                                                                                                                        -11.6 2009


                                                                                                                                                                                                     -10.7 2010




                                                                                         0

                                                                                         -3
                                                                  As % of Nominal GDP




                                                                                         -6

                                                                                         -9

                                                                                        -12

                                                                                        -15

                                                                                                                                                             Fiscal Deficit


                                                             Source: OECD estimates, ICICIdirect.com Research




     ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                             Page 14
                                                                                                                  Earlier in the year, US lawmakers had agreed to raise the nation’s USD 14.3
                                                                                                                  trillion debt ceiling and put in place a plan to enforce USD 2.4 trillion in
                                                                                                                  spending reductions over the next 10 years. Recall, the public debt has
                                                                                                                  increased by USD 500 billion every year since FY03, with increases of USD 1
                                                                                                                  trillion, USD 1.3 trillion and USD 1.7 trillion each in FY08, FY09 and FY10,
                                                                                                                  respectively. Though the bipartisan committee failed to conclude the
                                                                                                                  quantum of reduction, the built-in clause led to an automatic cut in fiscal
                                                                                                                  spending by as much as USD 1.2 trillion from January 2013.

Exhibit 28: US GDP growth has been revised downwards                                                                                          Exhibit 29: Yield spread relative to US treasury

                             2.5                           2.7
          3                                                                                                                                               6
                                                                                                                         1.8                              5
          2                                                                                 1.5
                                                                                                                                                          4
    %




          1                                                                                                                                               3




                                                                                                                                                   (%)
          0                                                                                                                                               2
                            CY11E                       CY12E                         CY11E                             CY12E                             1
                                                                                                                                                          0
                            June 2011 projections                                       Sept. 2011projections
                                                                                                                                                         -1
                                                                                                                                                          Jan-01              Jan-03              Jan-05                 Jan-07             Jan-09            Jan-11
                                                                          US                                                                             -2

                                                           GDP Growth Forecasts                                                                                                 France                     Germany                          Italy               Spain

Source: IMF, ICICIdirect.com Research                                                                                                         Source: Bloomberg, ICICIdirect.com Research

                                                                                                                  Exhibit 30: US unemployment continues to be a cause for concern
                                                                                                                           20

                                                                                                                           15

                                                                                                                           10                                                                                                                                                       8.6

                                                                                                                               5

                                                                                                                               0
                                                                                                                                     Jan-02
                                                                                                                                     May-02
                                                                                                                                     Sep-02
                                                                                                                                     Jan-03
                                                                                                                                     May-03
                                                                                                                                     Sep-03
                                                                                                                                     Jan-04
                                                                                                                                     May-04
                                                                                                                                     Sep-04
                                                                                                                                     Jan-05
                                                                                                                                     May-05
                                                                                                                                     Sep-05
                                                                                                                                     Jan-06
                                                                                                                                     May-06
                                                                                                                                     Sep-06
                                                                                                                                     Jan-07
                                                                                                                                     May-07
                                                                                                                                     Sep-07
                                                                                                                                     Jan-08
                                                                                                                                     May-08
                                                                                                                                     Sep-08
                                                                                                                                     Jan-09
                                                                                                                                     May-09
                                                                                                                                     Sep-09
                                                                                                                                     Jan-10
                                                                                                                                     May-10
                                                                                                                                     Sep-10
                                                                                                                                     Jan-11
                                                                                                                                     May-11
                                                                                                                                     Sep-11
                                                                                                                                                 Percent of civilian labor force unemployed 15 weeks and over
                                                                                                                                                 Unemployment Rate - Job Losers
                                                                                                                                                 Umemployment rate
                                                                                                                                                 All of U3 plus discouraged workers
                                                                                                                                                 All of U4 plus all other marginally attached workers
                                                                                                                                                 All of U5 plus total employed part time for economic reasons


                                                                                                                  Source: Bureau of Labour statistics, ICICIdirect.com Research

Exhibit 31: Euro CLI points towards lackluster economic activity                                                                              Exhibit 32: US CLI suggest tepid economic activity

    110                                                                                                                                            110

    105                                                                                                                                            105

    100                                                                                                                                            100
                                                                          Nov-09




                                                                                                                                                                                                                          Nov-09
          Dec-06
                   May-07
                             Oct-07
                                      Mar-08
                                               Aug-08
                                                        Jan-09
                                                                 Jun-09


                                                                                   Apr-10




                                                                                                               Aug-11
                                                                                             Sep-10
                                                                                                      Feb-11


                                                                                                                         Dec-2011E




                                                                                                                                                         Dec-06



                                                                                                                                                                           Oct-07

                                                                                                                                                                                    Mar-08

                                                                                                                                                                                             Aug-08

                                                                                                                                                                                                      Jan-09

                                                                                                                                                                                                                Jun-09



                                                                                                                                                                                                                                   Apr-10




                                                                                                                                                                                                                                                              Aug-11
                                                                                                                                                                  May-07




                                                                                                                                                                                                                                            Sep-10

                                                                                                                                                                                                                                                     Feb-11



                                                                                                                                                                                                                                                                        Dec-2011E




     95                                                                                                                                             95

     90                                                                                                                                             90

     85                                                                                                                                             85

                                                                 CLI                 IIP                                                                                                                       CLI                 IIP

CLI – Composite lead indicator,, Source: OECD, ICICIdirect.com Research                                                                       Source: OECD, ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                   Page 15
Population over 65 years (as % of total
population)                                                                                          Japan’s ageing growth & population – a cause for concern
                                                              2000            2010                   Japan is ageing faster than any other nation in the world with as high as
Developed Nations                                                                                    23% of the population in the 65 years and above age group. As the share of
Japan                                                            17               23                 the working population continues to de-grow, the economic growth of the
Germany                                                          16               20                 country has practically stagnated. Consequently, the savings rate is also on
United States of America                                         12               13                 a downtrend and the country will have to resort to more external funds,
France                                                           16               17                 which will weigh on the fiscal position. This will further impact the Japanese
United Kingdom                                                   16               17                 stock markets, lower business investment and, thereby, impede economic
                                                                                                     growth for the nation.
BRIC Nations
Brazil                                                            6                7                 Exhibit 33: Percentage of population over 65 years of age
Russia                                                           12               13                                                       1970       1980        1990         2000      2010    2025E       2040E    2055E
India                                                             4                5                  % of population over 65 years         7.0        9.0        12.0         17.0      23.1     30.5        36.5     40.5
China                                                             7                8                 Source: Japan Statistics Bureau , ICICIdirect.com Research
Source: World Bank, ICICIdirect.com Research
                                                                                                     The Japanese economy has been ageing faster than any other nation in the
                                                                                                     world and there are predictions that the situation is likely to worsen with the
                                                                                                     rising share of population over 65 years of age. In Japan, 23% of the
                                                                                                     population is above the age of 65 (as on 2010) as compared to 20%, 13%,
                                                                                                     17% and 17% in Germany, the US, France and the UK, respectively. While
                                                                                                     the overall Japanese population is expected to de-grow, the only segment in
                                                                                                     which growth is expected is the 65 years and above segment.
Exhibit 34: Dwindling GDP growth…                                                                                                Exhibit 35: …and rising debt to GDP ratio

              25                                                                              4.1                    5                    250
                    2.9                                                     2.4                                                                                                                                 228
              23                                              2.0                                                    3                    230
                                                                                                             24                                                                                        200
                           0.2                  2.7                                                  23              1
              21                                       1.9                                     23            2.3                          210                                                   193
                                         1.4
                                                                              22 22                                  -1
                                                                                                                                      %
     %




                                                                                                                          %




                                  0.3                                 21                                                                  190                            178
              19                                              20                                     -0.5
                                                       20                    -1.2                                    -3                                                            170 172
              17                         19 19                                                                                            170     155 164    158
                                  18                                                                                 -5
                    17     18                                                                -6.3
              15                                                                                                     -7                   150
                                                                                                                                             2003    2004    2005    2006         2007   2008   2009     2010   2011E
                    2000
                           2001
                                  2002
                                         2003
                                                2004
                                                       2005
                                                              2006
                                                                     2007
                                                                             2008
                                                                                      2009
                                                                                              2010
                                                                                                     2011E
                                                                                                             2012E




                             % of population over 65 years                          GDP growth (RHS)                                                                           Debt to GDP

Source: Bloomberg, World Bank, IMF, ICICIdirect.com Research                                                                     Source: Bloomberg, ICICIdirect.com Research

                                                                                                     During 2000-2010, the economy had grown at a CAGR of 0.7% to $5.5
                                                                                                     trillion (2010) and is expected to de-grow by 0.5% to $5.4 trillion in 2011.
                                                                                                     This is primarily due to declining proportion of working population and
Increasing life expectancy & decreasing birth rate
                                                                                                     dwindling productivity. A decreasing birth rate further worsened the
of Japan…
                                                                                                     Japanese economic situation. Japan's economy is still challenged by rising
               19                                                     83                             commodity prices — the country imports most of its food and oil — and a
         85                                                                       20
                                                        81                                           shrinking labour pool, as its population ages.
                                           79
         80                                                                       15
                                76                                                                   Like the US, much of Japan's debt resulted from efforts to stimulate its
                                                                                                     economy out of a 20-year deflationary period and recession. Consequently,
 Years




                                14
                                                                                       Nos




         75        72                                                             10
                                           10                                                        Japan’s debt to GDP ratio has also risen from 155% in 2003 to 200% in 2010
                                                         9
         70                                                           7           5                  and is likely to further increase to 228% in 2011 (see Exhibit: 35). With an
                                                                                                     increasingly aged population and lower economic growth, the household
         65                                                                       0                  savings rate came down from as high as ~15% in the early 1990s to slightly
                   1970      1980        1990          2000          2010                            over 2% in 2010. If the current situation continues for a number of years,
                                  Life Expectancy                                                    there is a risk that rising interest rates and reductions in net savings will
                                  Birth Rate (per 1000 people)                                       bring Japan’s current account surplus to an end. The rising fiscal deficit and
Source: World Bank, ICICIdirect.com Research
                                                                                                     debt will make the national savings negative, which would impact business
                                                                                                     investment and economic growth.




         ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                      Page 16
                                                                            Even BRIC letting us down…
                                                                            With the financial and debt crisis, the global economy is facing the threat of
                                                                            a recession, far serious than that in the past few years. The BRIC nations
                                                                            represent the growth engines of the global economy and are expected to
                                                                            propel the world out of the claws of the impeding recession. However, all
                                                                            BRIC countries have started to feel the heat of the current slowdown as the
                                                                            world economies have become increasingly interlinked and dependent on
                                                                            each other.
Exhibit 36: Macroeconomic overview of BRIC nations

               Inflation (%)                                      Interest Rate (%)                                       IIP growth (%)                                         GDP growth (%)

 15                                                 14                                                    30                                                         15
                                                    12
 10                                                                                                       20                                                         10
                                                    10
  5                                                  8                                                    10                                                         5
                                                    6
  0                                                                                                        0                                                          0
                                                    4
  Nov-09 May-10 Nov-10 May-11 Nov-11                                                                       Nov-09 May-10 Nov-10 May-11                                Dec-09 Jun-10 Dec-10 Jun-11
                                                    Nov-09 May-10 Nov-10 May-11 Nov-11                   -10                                                         -5



                                        Rising Inflation                           High interest rates leading to lower                          Lower industrial ouput is
                                 lead to monetary tightening                      investments and thus IIP contraction                         reflected in GDP slowdown



                                           Benchmark Indices (indexed)                                                                     Index 1 year forward PE


               115                                                                                             25
                                                                   All the factors leading to                                                            Benchmark indices are trading
               110
                                                                   ~20% YoY fall across BRIC                                                              below their 4 year average
               105                                                                                             20
               100
                                                                                                               15
                95
                90
                                                                                                               10
                85
                80                                                                                              5
                75
                70                                                                                              0
                 Dec-10        Feb-11      Apr-11        Jun-11        Aug-11         Oct-11                    Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11



                                                     Currency depreciation coupled with resilient commodity prices leading to reducing current
                                                               A/c surplus in China, Russia and widening deficit in Brazil and India



        Currency movement (vs $)                                                                                    Current A/c Balance ($ Bn)                            China Current A/c Balance ($ Bn)
                                                          Commodity Prices (indexed)
 60                                  2.5         200                                                       40
 50                                                                                                        30                                                    400
                                     2           150
 40                                                                                                        20                                                    300
                                     1.5         100
 30                                                                                                        10                                                    200
                                     1              50
 20                                                                                                         0                                                    100
 10                                  0.5
                                                    0                                                     -10
                                                                                                            Sep-09 Mar-10 Sep-10 Mar-11                              0
  0                                  0              Nov-09 May-10 Nov-10 May-11 Nov-11                                                                                Dec-09 Apr-10 Aug-10 Dec-10 Apr-11
                                                                                                          -20
  Nov-09 May-10 Nov-10 May-11 Nov-11                               Copper         Crude




Source: Bloomberg, ICICIdirect.com Research

                                                                            BRIC nations recovered quickly from the 2008-09 global financial crisis.
                                                                            However, a majority of them are currently subject to inflationary pressures
                                                                            and growth prospects seem dampened by global market instability.




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                                            Page 17
                                                           High inflation overwhelms BRIC…
                                                           Among BRIC nations, we can clearly observe a strong uptrend in inflation
India’s inflation (9.1% YoY in November 2011), grew        among India and China and, to a slightly lesser extent, Brazil and Russia. The
at a rapid pace during H2FY10 touching a peak of           current inflation rates viz. Brazil (6.6%), Russia (6.8%), India (9.1%) and
10.9% in April 2010. China’s inflation rate touched a      China (4.2%) remain an overhang on credit disbursement and economic
three-year high of 6.5% in July                            growth.

Consumer prices had soared in Russia during
H2CY10 after a drought damaged Russia’s harvest            Slowing GDP…
pushing inflation to 8.8%. However, Russia's inflation      The slowdown in the world economy has led IMF to downgrade its forecast
rate in November slipped for the sixth consecutive         made in April 2011 for all the BRIC nations in September 2011. The GDP
month to 6.8% on the back of a shortage of cash in         growth rates for Brazil, Russia, India and China were estimated at 4.5%,
the economy and weaker food-price growth.                  4.8%, 9.6% and 8.2% for CY11 and 4.1%, 4.5%, 9.5% and 7.8% for CY12,
Inflation in Brazil was clocked at 6.4% in November        respectively, in April. These were later downgraded to 3.8%, 4.3%, 9.5%
2011 driven by higher food prices. The current             and 7.8% for CY11 and 3.6%, 4.1%, 9.0% and 7.5% for CY12, respectively,
inflation rate is significantly higher than the official   in September. The estimated GDP growth rate for Russia in CY11 was
government target of 4.5%                                  further downgraded in December to 4.1%

                                                           Exhibit 37: Real GDP forecasts
                                                           Country                        Apr 11 Outlook                 Sep 11 Outlook         Actual GDP Growth
                                                                                          2011E          2012E            2011E         2012E       Jan- Sep 2011
                                                           India                             8.2           7.8              7.8           7.5                 7.5
                                                           China                             9.6           9.5              9.5           9.0                 9.4
                                                           Russia *                          4.8           4.5              4.3           4.1                 4.1
                                                           Brazil                            4.5           4.1              3.8           3.6                 3.2
                                                           World                             4.4           4.5              4.0           4.0


                                                           Source: IMF, ICICIdirect.com Research
                                                           *- Russia’s Real GDP forecast has been again moderated in December 2011



                                                           Knowing the third quarter GDP numbers of the BRIC nations, the GDP
                                                           growth forecast made by the IMF in September seems improbable. During
                                                           the first nine months of CY11, the GDP growth rate in China was 9.4% while
                                                           those in India, Brazil and Russia were 7.5%, 3.2% and 4.1%, respectively.




  ICICI Securities Ltd. | Retail Equity Research                                                                                                      Page 18
                                                 Indian economy – better or worse
                                                 India after being the poster boy of the global markets with its decade best
                                                 performance slumped to the bottom of the performance table in CY11 due
                                                 to a confluence of domestic and global concerns. Medium term concerns on
                                                 the domestic front such as high fiscal deficit, slippery GDP growth, currency
                                                 depreciation, mounting NPAs, evaporating infra spend and corporate
                                                 confidence, high interest rates and lack-luster policy responses in
                                                 addressing these issues is sending vibes that we may have digressed from
                                                 our long term growth trajectory. In all this overwhelming negatives there are
                                                 few bright spots such latest food inflation coming down to six year lows of
                                                 0.42%, consumption still resilient, currency depreciation benefiting the
                                                 export sector, domestic consumption centric economy, gold imports
                                                 dipping in Q3 CY11 providing cushion to current account deficit, improved
                                                 rate cuts prospects among others etc.




ICICI Securities Ltd. | Retail Equity Research                                                                     Page 19
                                                 Indian economy – getting better…
                                                 Indian economy after clocking 8-9% economic growth under its belt in the
                                                 past 5 years is witnessing medium term turbulence in its growth equilibrium.
                                                 We believe the long term growth trajectory would remain intact due to its
                                                 unique consumption model, favourable demographics, less dependency on
                                                 exports (15.7% of nominal GDP in FY11), lower credit to GDP ratio (~52%)
                                                 besides others. Medium term concerns such as high fiscal deficit, low
                                                 growth, higher inflation & interest rates may get self addressed in the event
                                                 of rate cuts, lower crude and commodity prices to a great extent.

                                                 Better monsoons, a key ingredient for the prosperity of rural India has
                                                 remained favourable since last year. This also had its positive ruboff on food
                                                 inflation which has seen a sharp dip to a four year low of 1.8% on a weekly
                                                 reading in December 2011. The series of rate hikes of 375 bps done in last
                                                 21 months is expected to achieve its desired effect of moderating demand
                                                 side inflation as already experienced in slowing IIP and GDP numbers. But
                                                 while walking the tight rope of balancing inflation and GDP growth various
                                                 monetary policy actions had been taken, now inflation fear seems to be
                                                 cooling off and growth concerns have risen. This may lead to a strong case
                                                 for interest rate cuts coming around Q1FY13E.

                                                 Also, India’s consumption story has weathered the current slowdown in
                                                 economy quite strongly. This is evident from the fact that private final
                                                 consumption expenditure (PFCE) has remained relatively strong contributor
                                                 to H1FY12 GDP growth at 6.1%. PFCE contribution to GDP has remained
                                                 stable while Gross Fixed Capital Formation (GFCF) has fallen by ~| 50,000
                                                 crore on a quarterly basis from Q2FY09 (370 bps dip in contribution to GDP).
                                                 Thereby we believe, with consumption remaining the strength area of the
                                                 country, the government would have to boost PFCE, GFCF through
                                                 monetary policy tools as the room for Government final consumption
                                                 expenditure (GFCE) has become limited with already high fiscal deficit. Also
                                                 GFCF reaching near its six year low of 30.5% of GDP is also a indicator of an
                                                 imminent rate cut, which may turn beneficial for FY13E GFCF, PFCE growth.

                                                 Widenening of trade deficit due to depreciating rupee is experienced in the
                                                 short term as India remains to be a net importer. Crude is the major concern
                                                 which constituted ~58% of trade deficit in FY11. However, sectors like IT
                                                 and pharma, smaller export oriented units tend to benefit from rupee
                                                 weakness.

                                                 We remain believers of school of thoughts of Indian economic growth to
                                                 revive faster than estimated and interest rate cuts to start by Q1FY13.




ICICI Securities Ltd. | Retail Equity Research                                                                      Page 20
                                                       Cooling inflationary expectation a key positive…
                                                       Inflation has been a cause for concern for the last two calendar years,
                                                       hovering over 9%. In 2010, it was food inflation, which led the price rise
                                                       while in 2011 it is fuel and manufactured products inflation, which remains
                                                       high. With better monsoons, favourable base effect and decelerating
                                                       demand, inflationary expectations have started to taper down.
                                                       Exhibit 38: Food trending down, manufactured goods moderating and fuel still high

                                                                   23.0
                                                                   20.0
                                                                   17.0
                                                                   14.0
                                                                   11.0
                                                           (% )     8.0
                                                                    5.0
                                                                    2.0
                                                                   -1.0
                                                                             N ov -06

                                                                                           Mar-07

                                                                                                       Jul-07

                                                                                                                  N ov -07

                                                                                                                               Mar-08

                                                                                                                                         Jul-08

                                                                                                                                                    N ov -08

                                                                                                                                                                Mar-09

                                                                                                                                                                          Jul-09

                                                                                                                                                                                   N ov -09

                                                                                                                                                                                              Mar-10

                                                                                                                                                                                                         Jul-10

                                                                                                                                                                                                                   N ov -10

                                                                                                                                                                                                                              Mar-11

                                                                                                                                                                                                                                         Jul-11

                                                                                                                                                                                                                                                     N ov -11
                                                                   -4.0
                                                                   -7.0
                                                                  -10.0
                                                                  -13.0

                                                                          WPI                          Primary A rticles                                       Fuel G roup                              Manuf atcured goods

                                                       Source: CSO, Bloomberg, ICICIdirect.com Research


                                                       Food inflation to correct on the back of good harvest
                                                       In the current year, south-west monsoon being 1% above the LPA (long
                                                       period average), Kharif produce during 2011-12 is estimated to be 3.1%
                                                       higher than record produce of 120.2 million tones achieved during 2010-11.
                                                       With increase in supply, as the Kharif produce is getting marketed and on
                                                       account of high base effect of last year, food inflation has started to decline.
Food inflation for the week ended December 10,
declined sharply to a four-year low helped by better   Exhibit 39: Food inflation dips to four year low in first half of December…
monsoons and as seasonal decline in vegetables
and food grain prices.                                            22.0                                                                                                                                                           Sharp fall in food
                                                                  20.0                                                                                                                                                         inflation seen in first
                                                                  18.0                                                                                                                                                           half of December
                                                                  16.0
                                                                  14.0
                                                                  12.0
                                                                  10.0
                                                           (%)




                                                                   8.0
                                                                   6.0
                                                                   4.0
                                                                   2.0
                                                                   0.0
                                                                  -2.0
                                                                         Nov-06




                                                                                                                Nov-07




                                                                                                                                                   Nov-08




                                                                                                                                                                                   Nov-09




                                                                                                                                                                                                                     Nov-10




                                                                                                                                                                                                                                                         Nov-11
                                                                                        Mar-07

                                                                                                    Jul-07



                                                                                                                             Mar-08

                                                                                                                                        Jul-08



                                                                                                                                                               Mar-09

                                                                                                                                                                         Jul-09



                                                                                                                                                                                               Mar-10

                                                                                                                                                                                                          Jul-10



                                                                                                                                                                                                                                Mar-11

                                                                                                                                                                                                                                            Jul-11




                                                                  -4.0


                                                                                                                                                 Food Articles                        Mfg. Ex Food

                                                       Source: CSO, Bloomberg, ICICIdirect.com Research

                                                       Exhibit 40: Hike in MSPs has been very high which also has contributed to the food inflation

                                                       MSP*                                      2004-05                       2005-06                         2006-07                    2007-08                      2008-09                        2009-10
                                                       Rice                                            590                              600                             610                      675                           880                               980
                                                       Wheat                                           640                              650                             750                    1000                           1080                              1100

                                                       Source: Ministry of Agriculture, ICICIdirect.com Research
                                                       * | per quintal




     ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                               Page 21
                                                          Exhibit 41: Relation between south-west monsoon and food inflation
  During 2010, India witnessed very high food inflation                                                                                                                                                Food inflation reaching normal
                                                                                                  Severe drought condition
  due to a drought in 2009, which led to lower                       25                                                                                                                                scenario followed by normal 25
                                                                                                  fueling food inflation
  production and hike in MSPs of major produce. In                   20                                                                                                                                rainfall                    20
  2010, normal monsoons led to the Kharif and Rabi                   15                                                                                                                                                            15
  production getting restored to average levels.                     10                                                                                                                                                            10
                                                                      5                                                                                                                                                            5




                                                              (%)




                                                                                                                                                                                                                                                                     (%)
                                                                      0                                                                                                                                                            0




                                                                            Jan-06


                                                                                              Sep-06
                                                                                                         Jan-07


                                                                                                                             Sep-07
                                                                                                                                      Jan-08


                                                                                                                                                         Sep-08
                                                                                                                                                                     Jan-09


                                                                                                                                                                                         Sep-09
                                                                                                                                                                                                   Jan-10
                                                                                                                                                                                                            May-10
                                                                                                                                                                                                                      Sep-10
                                                                                                                                                                                                                                Jan-11
                                                                                                                                                                                                                                         May-11
                                                                                                                                                                                                                                                   Sep-11
                                                                                     May-06




                                                                                                                  May-07




                                                                                                                                               May-08




                                                                                                                                                                              May-09
                                                                     -5                                                                                                                                                            -5
  With better monsoons in the current year, we                      -10                                                                                                                                                            -10
  believe a further hike in MSPs in CY12 may not be                 -15                                                                                                                                                            -15
                                                                    -20                                                                                                                                                            -20
  as sharp as in the past, thereby reducing food
  inflation expectation even in the coming months
                                                                                                          SW % Departure from LPA (RHS)                                                           Food articles (%) (LHS)

                                                          Source: IMD, ICICIdirect.com Research




                                                          Fuel group inflation continues to remain beyond control…
                                                          Fuel group contribute 25% to the headline inflation. 58% of the total fuel
                                                          index is decontrolled which is now driven by the rising crude oil prices.
                                                          Exhibit 42: Break-up of fuel group inflation
                                                          Category                                                Weightage Category                                                                            Weightage                                                Total
                                                          Controlled                                                            42% Decontrolled                                                                               58%                                    100%
Brent Crude oil prices have remained at elevated          LPG                                                                    6% Coal                                                                                       14%
levels (averaging more than USD 90/barrel over last       Kerosene                                                               5% Electricity (domestic)                                                                     23%
couple of years). This has kept fuel inflation higher     High Speed Diesel                                                     31% Petrol                                                                                      7%
and beyond the control of the policy makers.                                                                                        Aviation turbine fuel                                                                       2% Follows international
                                                                                                                                          Naphtha                                                                               5% crude oil and coal
                                                                                                                                          Light diesel oil                                                                      1%        prices
                                                                                                                                          Bitumen                                                                                 1%
                                                                                                                                          Furnace oil                                                                             3%
                                                                                                                                          Lubricants                                                                              1%
                                                          Source: Bloomberg ICICIdirect.com Research



                                                          Demand side inflation to moderate with slowdown in aggregate demand
                                                          Manufacturing Ex Food products, i.e. the core inflation to moderate in
                                                          coming months as demand has started to decline indicated by lower IIP
                                                          print and declining GDP growth numbers

                                                          Exhibit 43: Rate hikes to pull down demand side inflation…

                                                                     15                                                                                                                                                                                              10

                                                                     10                                                                                                                                                                                              8
We have seen growth cooling off due to rate hike
and thereby pulling down manufactured products                         5                                                                                                                                                                                             6
                                                              (%)




                                                                                                                                                                                                                                                                           (%)




inflation…
                                                                       0                                                                                                                                                                                             4
                                                                                                             Oct-09
                                                                           Apr-09

                                                                                     Jun-09

                                                                                                Aug-09



                                                                                                                           Dec-09




                                                                                                                                                                         Aug-10

                                                                                                                                                                                       Oct-10




                                                                                                                                                                                                                                                            Oct-11
                                                                                                                                      Feb-10

                                                                                                                                                Apr-10

                                                                                                                                                            Jun-10




                                                                                                                                                                                                  Dec-10

                                                                                                                                                                                                             Feb-11

                                                                                                                                                                                                                         Apr-11

                                                                                                                                                                                                                                     Jun-11

                                                                                                                                                                                                                                                  Aug-11




                                                                     -5                                                                                                                                                                                              2

                                                                    -10                                                                                                                                                                                              0

                                                                                                         Manufactured Products Inflation                                                        IIP(LHS)                       Interest Rate


                                                          Source: Bloomberg, ICICIdirect.com Research




     ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                           Page 22
                                                                                                                  Interest rates peaking…
                                                                                                                  The Indian economy is walking on a tight rope with inflation and growth
                                                                                                                  being the two major sides to be balanced. We have seen inflation hovering
                                                                                                                  above 9% for nearly two years and repo rate hikes of 375 bps done in the
                                                                                                                  last 21 months resulting in contracting IIP and GDP growth numbers. An
                                                                                                                  increase in the gap between inflation and repo rate leads to the tightening of
                                                                                                                  monetary policies while the reverse results in a gradual cut in repo rates
                                                                                                                  with a lag as depicted in the chart. Thus, we believe that as inflation and
                                                                                                                  expected GDP growth converges near 7% by March 2012, a possibility of
  As stated by RBI “further rate hikes might not be
                                                                                                                  rate cuts will emerge must faster and may start in Q1FY13 or even earlier.
  warranted. In view of the moderating growth
  momentum and higher downside risks to growth,
                                                                                                                  We analysed the trend of 1yr spreads between AAA corporate bonds and G-
  this guidance is being reiterated. From this point on,
                                                                                                                  Sec and also 5 year spreads between the same, the decline in spreads is
  monetary policy actions are likely to reverse the
                                                                                                                  quite steep for 1yr as against increase in 5 yr spreads. 1 yr spreads
  cycle, responding to the risks to growth.”
                                                                                                                  corrected from over 100bps to 74bps in last 2 months, whereas for 5 yr
                                                                                                                  spreads rose from 88 bps to 100 bps during the same period.

                                                                                                                  Foreign investors have shown huge                                                                            interest in government securities
                                                                                                                  auction paying higher premium for                                                                              securing right to subscribe to
                                                                                                                  government securiities and they have                                                                         been net buyers of around |4000
                                                                                                                  crores in later part of 2011 indicating                                                                       that they are also seeing current
                                                                                                                  interest rates attractive.

                                                                                                                  Exhibit 44: As gap between inflation and repo rate narrows, interest rates are peaking…..
                                                                                                                                 12.0
                                                                                                                                 10.0
                                                                                                                                  8.0
  The spread between corporate bonds and
  government securities have narrowed down across                                                                                 6.0
  the yield curve indicating that investors are not                                                                               4.0
                                                                                                                           (%)




  contemplating rise in yield in corporate segment as                                                                             2.0
  they believe that interest rates have peaked and are                                                                            0.0
  preferring corporate bonds despite historic low
                                                                                                                                         Dec-00

                                                                                                                                                  Sep-01

                                                                                                                                                           Jun-02

                                                                                                                                                                     Mar-03

                                                                                                                                                                               Dec-03

                                                                                                                                                                                           Sep-04

                                                                                                                                                                                                         Jun-05

                                                                                                                                                                                                                      Mar-06

                                                                                                                                                                                                                                 Dec-06

                                                                                                                                                                                                                                           Sep-07

                                                                                                                                                                                                                                                        Jun-08

                                                                                                                                                                                                                                                                      Mar-09

                                                                                                                                                                                                                                                                                  Dec-09

                                                                                                                                                                                                                                                                                            Sep-10

                                                                                                                                                                                                                                                                                                      Jun-11

                                                                                                                                                                                                                                                                                                                   Mar-12
                                                                                                                                 -2.0
  spreads
                                                                                                                                 -4.0
                                                                                                                                 -6.0

                                                                                                                                                                                  Inflation                       Gap (Inf - Repo)                               Repo rate

                                                                                                                  Source: RBI, ICICIdirect.com Research


Exhibit 45: One year spread between corporate bond and G-sec plunges                                                                                       Exhibit 46: Five year spread is comparatively stable

          11                                                                                                               250                                            11                                                                                                                         160
          10                                                                                                                                                              10                                                                                                                         140
           9                                                                                                               200
                                                                                                                                                                           9                                                                                                                         120
           8
                                                                                                                                 (bps)




                                                                                                                                                                                                                                                                                                           (bps)




                                                                                                                           150                                                                                                                                                                       100
    (%)




                                                                                                                                                                    (%)




           7                                                                                                                                                               8
           6                                                                                                                                                                                                                                                                                         80
                                                                                                                           100                                             7
           5                                                                                                                                                                                                                                                                                         60
           4                                                                                                               50                                              6                                                                                                                         40
               Feb-10


                                 Jun-10
                                          Aug-10


                                                            Dec-10




                                                                                                                                                                                                             Aug-10
                                                                     Feb-11


                                                                                       Jun-11
                                                                                                Aug-11


                                                                                                                  Dec-11




                                                                                                                                                                               Feb-10


                                                                                                                                                                                                    Jun-10




                                                                                                                                                                                                                                 Dec-10
                                                                                                                                                                                                                                          Feb-11


                                                                                                                                                                                                                                                             Jun-11
                                                                                                                                                                                                                                                                         Aug-11


                                                                                                                                                                                                                                                                                            Dec-11
                        Apr-10




                                                   Oct-10




                                                                              Apr-11




                                                                                                         Oct-11




                                                                                                                                                                                        Apr-10




                                                                                                                                                                                                                        Oct-10




                                                                                                                                                                                                                                                    Apr-11




                                                                                                                                                                                                                                                                                   Oct-11




                    AAA rated Corporated bond                                      Gsec yield                                                                                       AAA rated Corporated bond                                            Gsec yield
                    1 Year Spread (R.H.S.)                                                                                                                                          5 Year Spread (R.H.S.)

Source: Bloomberg, ICICIdirect.com Research                                                                                                                Source: Bloomberg, ICICIdirect.com Research




     ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                                                  Page 23
                                                                Consumption juggernaut again saves the day!
                                                                The Indian consumption “Elephant” has been one of the shining beacons of
                                                                our monumental rise for long. FY12 has been another challenging year with
                                                                the GDP growth rate falling below 7% in more than two years. The PFCE
                                                                (proxy to consumption) has remained steadfast even as the GFCF (proxy to
                                                                capital expenditure) contribution has fallen by 370 bps in the last 12
                                                                quarters. To emphasize its magnanimity, even though in H1FY12 PFCE
                                                                growth has witnessed a divergence of -210 bps from its last 6-year full year
                                                                mean however relatively outperformed both GFCF,GFCE growth which
                                                                witnessed a “free fall” with declines of -590 bps,-690 bps respectively.

Exhibit 47: Consumption continues to bail out GDP in trying times…
                                 Growth rateYoY (%)                                6-year mean(%)               Growth rateYoY(%)      Divergence of H1FY12 from mean (%)
             FY06        FY07     FY08       FY09     FY10      FY11        Full year basis     H1 basis            H1FY12           Full year basis           H1 basis
GDP           9.3         9.3      9.8        4.9      9.1       8.6              8.5             8.4                  7.6                 -0.9                  -0.8
GFCE          8.9         3.7      9.5       10.7     16.4       4.8              9.0             10.1                 3.1                 -5.9                  -7.1
PFCE          8.5         8.3      9.3        7.7      7.3       8.4              8.3             8.8                  6.1                 -2.1                  -2.7
GFCF         16.2        13.8     16.2        1.5      7.3       7.5              10.4            10.6                 3.5                 -6.9                  -7.1
Source: Company, ICICIdirect.com Research

                                                                The slowdown in the investment cycle has led GFCF reach worrying close to
                                                                its six year low contribution levels at 30.5% to GDP. However the slowdown
                                                                in the investment cycle has been covered for by the strong PFCE and rise in
                                                                exports during the same period. We believe the government would have to
                                                                boost PFCE, GFCF through monetary policy tools as the room for GFCE has
                                                                become limited with already high fiscal deficit.
Exhibit 48: Contribution of PFCE & GFCF towards GDP expenditure side…
        36                                                                                                                                                           64

        35                                                                            34.2
                                                                                                                                                                     62
                                                                                                                                                              59.5
        34
                                                                                                                                                                     60
        33
                                                                                      59.6                                                                           58
  (%)




        32




                                                                                                                                                                       (%)
                                                                                                                                                                     56
        31
                                                                                                                                                                     54
        30                                                                        Steep declines in capex                                                     30.5
                                                                                  cycle, resilience of
        29                                                                                                                                                           52
                                                                                  consumption clearly visible

        28                                                                                                                                                           50
              Q1    Q2    Q3    Q4   Q1     Q2   Q3   Q4   Q1   Q2     Q3   Q4   Q1    Q2    Q3    Q4      Q1     Q2    Q3   Q4     Q1   Q2   Q3    Q4   Q1    Q2

                     FY06                     FY07               FY08                   FY09                        FY10                  FY11             FY12
                                                                    GFCF (LHS)          PFCE (RHS)

Source: Bloomberg, ICICIdirect.com Research

                                                                The Indian consumer class has witnessed a very challenging CY11 with high
                                                                inflation, interest rates, fuel prices burning a bigger hole in their pockets.
                                                                However even with higher spends the rise in nominal per capita incomes
                                                                (8.1%CAGR-FY08-11) across both urban, rural classes has helped maintain
                                                                the demand growth albeit at a slower pace. This has been reflected through
                                                                the best segmental IIP performance by consumer segment which upped by
                                                                6.1%(till Oct’11CY11) on an average against 3.4% for ex-consumers for the
                                                                same period. Vindication of demand strength can also be highlighted from
                                                                the fact that FMCG majors like Hindustan Unilever, Nestle Inc has seen
                                                                topline rise ~16%,~20% in H1FY12, even discretionary spends like



        ICICI Securities Ltd. | Retail Equity Research                                                                                                            Page 24
                                                 Automobiles, Air-travel have witnessed volume growth of ~15%,~16%
                                                 FY12YTD respectively. The growth rates are slightly more tepid than
                                                 previous years however this should be taken with a “pinch of salt” as this is
                                                 even after manufacturers kept passing commodity pressures to consumers
                                                 incessantly. This kind of “gargantuan resilience” indicators in such trying
                                                 times has provided us enough substance towards reiterating our long term
                                                 faith on the India consumption story. However we still believe as elucidated
                                                 above (Exhibit: 48) that the investment cycle would need to be boosted for a
                                                 more balanced growth.




ICICI Securities Ltd. | Retail Equity Research                                                                     Page 25
                                                         Unattractiveness of other investment avenues to help equities
                                                         The year CY2011, saw investments flowing to safer assets like Gold and
                                                         Fixed income investments yielding higher returns while on other hand
                                                         equities taking a plunge as risk aversion increased on account of global
                                                         concerns and deteriorating domestic macro economic conditions. Gold
                                                         considered as hedge against inflation delivered 34% YTD return in rupee
                                                         terms while high interest rates led to fixed income investment yielding
                                                         return of over 9% p.a. As we enter CY2012, incremental returns in these
                                                         avenues may taper down making risk reward unfavorable for them.

                                                         Corporate bonds have been issued at over 13% pa interest. Even Bank Fixed
                                                         deposits and fixed maturity plans have been offering interest rates over 9%
                                                         p.a and therefore have been preferred investment avenues with HNIs and
                                                         retail investors. FIIs have also increased their investment in Indian debt
                                                         market as yield curve shifted upwards.
                                                         Exhibit 49: Upward shift in yield curve….                                                                        Exhibit 50: ...Increased FII debt investment
G sec yield curve has been flat and yields across the                  9.0                8.59                                  8.34               8.38
                                                                                                             8.22




                                                                                                                                                                                                                                                          10050
curve have been over 8% as a result of rate hike by                    8.5                                                                                                                 12000
RBI and additional government borrowing to meet                        8.0                                                                                                                 10000




                                                                                                                                                                                                                                                                        8238
                                                                       7.5
the fiscal deficit target.                                             7.0                                                                                                                   8000
                                                           Yield (%)




                                                                                                                                                                              Million $
                                                                       6.5
                                                                       6.0                                                                                                                   6000
India’s debt quota auction for FIIs was                                5.5




                                                                                                                                                                                                                              2704
                                                                                                                                                                                                              2425
oversubscribed by 30% and FIIs paid a higher                                                                                                                                                 4000
                                                                       5.0




                                                                                                                                                                                                                                          1160
premium to secure the right to invest in government                    4.5                                                                                                                   2000
                                                                       4.0
securities indicating their strong appetite for Indian                                                                                                                                              0
                                                                                          1yr                3yr                5yr                10 yr
debt instruments.




                                                                                                                                                                                                              2007

                                                                                                                                                                                                                              2008

                                                                                                                                                                                                                                          2009

                                                                                                                                                                                                                                                          2010

                                                                                                                                                                                                                                                                        2011
                                                                             Dec-11                             Dec-10                             Dec-09

                                                         Source: Bloomberg, ICICIdirect.com Research                                                                      Source: Bloomberg, ICICIdirect.com Research


                                                         Fixed income investment return to squeeze as interest rates peak out...
                                                         RBI in its Mid Quarter Monetary Policy Review has indicated a pause in rate
                                                         hike and stated it will now focus more on growth. With focus shifting to
                                                         growth RBI may start cutting rates in second half of CY12. If that happens,
                                                         decline in interest rate will provide an opportunity for existing debt investor
                                                         to reap capital gains. However, with decline in interest rates the earnings
                                                         yield gap will be lower making equities more favorable avenue for
                                                         investment over debt.
                                                         Exhibit 51: Yield Gap above its historic average

                                                                             4                                                                                                                                                                                      25000
                                                                             3
                                                                             2                                                                                                                                                                                      20000

Interest rates may start coming down from Q1FY13,                            1
                                                                                                                                                                                                                                                                    15000
which shall bring down the differential further,                             0
                                                                  (%)

                                                                                 Dec-05
                                                                                           Apr-06
                                                                                                    Aug-06
                                                                                                              Dec-06
                                                                                                                       Apr-07
                                                                                                                                Aug-07
                                                                                                                                          Dec-07
                                                                                                                                                   Apr-08
                                                                                                                                                            Aug-08
                                                                                                                                                                     Dec-08
                                                                                                                                                                              Apr-09
                                                                                                                                                                                          Aug-09
                                                                                                                                                                                                   Dec-09
                                                                                                                                                                                                            Apr-10
                                                                                                                                                                                                                     Aug-10
                                                                                                                                                                                                                               Dec-10
                                                                                                                                                                                                                                        Apr-11
                                                                                                                                                                                                                                                 Aug-11
                                                                                                                                                                                                                                                           Dec-11




making debt investment a less preferred over                             -1
                                                                                                                                                                                                                                                                    10000
equities                                                                 -2
                                                                         -3                                                                                                                                                                                         5000
                                                                         -4
                                                                         -5                                                                                                                                                                                         0

                                                                                                                                         Earnings yield differential (%)                                    Sensex

                                                         Source: Bloomberg, ICICIdirect.com Research




  ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                          Page 26
                                                      Gold glitter losing its appeal….
                                                      India has been the highest importer of Gold having a major share in gold
                                                      jewellery demand. As per World gold council report “Gold Demand Trends
                                                      Q3 2011, Indian demand for gold jewellery on a quarterly basis declined by
                                                      22% YoY signifying high prices of gold and increased volatility in the same
                                                      has started impacting the demand for Gold.

                                                      Even gold ETFs have seen profit booking in the month of November 2011 as
                                                      its prices peaked from its all time highs.
                                                      Exhibit 52: Gold imports

                                                                      350
                                                                                                271.2                                                                                   284.9 291.8
                                                                      300                                                                                  263.4               263.9                      248.3
                                                                      250                                                                        207.9                                                            203.3
                                                                                                                                                                     180.4
                                                                      200             175.1                                   164.2 179.6
                                                          Tonnes

                                                                                                          159.6
                                                                      150 107.2
                                                                      100
                                                                       50                                           24.2
                                                                        0
                                                                             Q1        Q2        Q3        Q4       Q1         Q2       Q3        Q4        Q1        Q2        Q3       Q4       Q1       Q2      Q3

                                                                                         2008                                     2009                                    2010                            2011

                                                                                                                                             Total tonnes


                                                      Source: Company, ICICIdirect.com Research



                                                      Exhibit 53: Incremental inflows in gold ETFs have started to decline

                                                                      1200                                                                                                                                 30000
                                                                                                                                                                               988
                                                                                                                                                                                                           29000
                                                                      1000
                                                                                                                                                                                                           28000
                                                                       800                                          648                                                                                    27000
                                                                                                                                        569
                                                                                                                                                                     494                                   26000
                                                          (| Crore)




Gold ETFs, have gained popularity as alternate                         600                                                                                                              455
                                                                                                                                                                                                           25000




                                                                                                                                                                                                                   (|)
avenue for investment in gold signified by a                           400                                                                        252 234
                                                                             172                                                                                                                           24000
substantial increase in the fund flows from | 265                      200             111 125                                 121                                                                         23000
                                                                                                            25
crore in FY09 to | 2810 crore in FY11. Even YTD the                                                                                                                                                        22000
                                                                        0
inflow has remained strong at | 4690 crore on                                                                                                                                                              21000
                                                                      -200                                                                                                                       -22       20000
account of increased risk aversion. However, with
                                                                             Nov-10




                                                                                                                                                                                                 Nov-11
                                                                                       Dec-10

                                                                                                 Jan-11




                                                                                                                                                                      Aug-11
                                                                                                           Feb-11

                                                                                                                     Mar-11

                                                                                                                               Apr-11



                                                                                                                                                  Jun-11

                                                                                                                                                            Jul-11




                                                                                                                                                                                        Oct-11
                                                                                                                                        May-11




                                                                                                                                                                               Sep-11




an appreciation of 115% in gold prices in last 3
years, fresh funds getting into gold ETFs have
started to decline.
                                                                                                                    Fund Flow                    Price of Gold (RHS)


                                                      Source: AMFI, ICICIdirect.com Research



                                                      Real estate prices sky high
                                                      Given the sharp rise in the property prices (1.5x-2.7x in metro cities (ex-
                                                      Bangalore)) in last 5 years, the affordability has been impacted significantly.
                                                      Consequently, the sales volume has declined sharply especially as shown in
                                                      registration numbers in Mumbai. At these higher price levels, further
                                                      appreciation in property prices seems capped. This is further accentuated
                                                      from the slowing demand which warrants a price correction of 10%-15%
                                                      leaving the real estate investments an unattractive proposition.




     ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                       Page 27
                                                                           Exhibit 54: Property price index in metro cities
                                                                               300

                                                                               250

                                                                               200

                                                                               150

                                                                               100

                                                                                50

                                                                                 0
                                                                                 Dec-07                             Dec-08                                          Dec-09                                            Dec-10


                                                                                                   Mumbai                  Delhi                      Bangalore                                Chennai                        Kolkata


                                                                           Source: NHB Residex, ICICIdirect.com Research



                                                                           Exhibit 55: Rising un-affordability

                                                                                     5.2     5.1                                                                         5.1                                                                                   60
                                                                                                                                                          5.0                             5.0
                                                                                     5.0
                                                                                                                                                                                                                                              4.8              55
                                                                                     4.8              4.7                                                                                                                    4.7
                                                                                                                                        4.6
                                                                                                                                                                                                           4.5




                                                                                                                                                                                                                                                                     (%)
Unaffordability rising as EMI rising faster than                                     4.6                                                                                                                                                                       50
                                                                               (x)




income. Property prices to annual income rose to                                     4.4                             4.3
4.8x in last three years.                                                                                                                                                                                                                                      45
                                                                                     4.2

                                                                                     4.0                                                                                                                                                                       40
                                                                                            2002     2003           2004            2005             2006              2007             2008              2009             2010             2011

                                                                                                                     Property to income                                      Unaffordability ratio (RHS)

                                                                           Source: HDFC Q2FY12 Analyst presentation, ICICIdirect.com Research



Exhibit 56: Mumbai registration data                                                                   Exhibit 57: Delhi registration data

     10000                                                                       150%                               12000                                                                                                                                      40
                                                                                 100%                                                                                                                                                                          30
         8000
                                                                                                                                                                                                                                                               20
                                                                                 50%
                                                                                                                     8000
 Units




                                                                                           YoY




         6000                                                                                                                                                                                                                                                  10
                                                                                                                                                                                                                                                                      YoY


                                                                                 0%
                                                                                                            Units




                                                                                                                                                                                                                                                               0
         4000                                                                    -50%                                                                                                                                                                          -10
                                                                                                                     4000
         2000                                                                    -100%                                                                                                                                                                         -20
                                                                                                                                                                                                                                                               -30
                                                    Aug-10
                Apr-09


                         Aug-09


                                  Dec-09


                                           Apr-10




                                                             Dec-10


                                                                      Apr-11




                                                                                                                               Apr-09
                                                                                                                                        Jun-09
                                                                                                                                                 Aug-09
                                                                                                                                                           Oct-09
                                                                                                                                                                    Dec-09
                                                                                                                                                                             Feb-10
                                                                                                                                                                                      Apr-10
                                                                                                                                                                                               Jun-10
                                                                                                                                                                                                        Aug-10
                                                                                                                                                                                                                 Oct-10
                                                                                                                                                                                                                          Dec-10
                                                                                                                                                                                                                                   Feb-11
                                                                                                                                                                                                                                            Apr-11
                                                                                                                                                                                                                                                     June-11




                                                                                                                           0                                                                                                                                   -40


Source: ICICI Property Services Group, ICICIdirect.com Research                                        Source: ICICI Property Services Group, ICICIdirect.com Research




         ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                   Page 28
                                                        Rupee depreciation – Impact on trade deficit
                                                        Trade deficit ($118.6 bn in FY11) widens in short term due to rupee
                                                        depreciation, ceteris paribus, as India is a net importer. However, in the long
                                                        term, the popular 'inverted J' curve leads us to believe that prolonged rupee
                                                        weakness initially leads the cost to outweigh the benefits, but the country
                                                        tends to benefit in long term. Exports are likely to benefit directly as rupee
                                                        depreciation provides competitive advantage over global peers. Weakening
                                                        rupee make imports dearer, thereby boosting domestic production avenues
                                                        and growth.


                                                        Electronic goods tend to benefit from rupee weakness in long term
                                                        Of our total electronic goods import, 44% is from China which has fixed
                                                        exchange rate system. Hence, these imports directly get costly by ~18%
                                                        equivalent to rupee depreciation. Domestic producers will now be better
                                                        placed to compete with cheaper China products. Coupled with this,
                                                        electronic goods are price sensitive segment and hence rupee depreciation
                                                        would boost export.
                                                        Exhibit 58: Electronic goods deficit as a % of total trade deficit continuously declining

                                                            30                                                                                                                                         49
                                                                                                                                       23                                                              47
                                                            25                                                                                               21                    21
                                                                                                                  21
                                                                                                                                                                                                       45
                                                            20                               16                        17                   16                    15                                   43
                                                            15            13                      13                                                                                    12




                                                                                                                                                                                                            |/$
India is a net importer of electronic goods worth $                            11                                                                                                                      41
                                                                                                                                                                                             9
12.2 bn in 2011                                             10                                                                                   7
                                                                                                                                                                         6                             39
                                                                                    2                  3                     4
                                                             5                                                                                                                                         37
                                                             0                                                                                                                                         35
                                                                           FY06               FY07                 FY08                  FY09                     FY10                FY11

                                                                               Imports ($ bn) (LHS)                         Deficit ($ bn) (LHS)                             Export ($ bn) (LHS)
                                                                               INR/USD (RHS)                                As % of total deficit (LHS)

                                                        Source: Ministry of Commerce, ICICIdirect.com Research




                                                        Exhibit 59: 80% revenue generation from exports to benefit Information Technology

                                                                     70                                                                                                                           49
                                                                                                                                                                                   59
                                                                     60                                                                                                                           47
                                                                                                                                  47                       50
                                                                     50                                                                                                                           45
                                                                                                           41
IT receives 80% of revenue from exports, while their                 40                 32                                                                                                        43
                                                            ($ bn)




                                                                                                                                                                                                       (|)




major expenses are in rupees. Hence, they tend to                    30                                                                                                                           41
be major beneficiary of rupee depreciation. These
                                                                     20                                                                                                                           39
export revenues, however do not picture in trade
deficit but is shown in Invisibles, thereby improving                10                                                                                                                           37
our current account deficit.                                         0                                                                                                                            35
                                                                                    FY07                   FY08                  FY09                      FY10                   FY11

                                                                                                                            IT exports               |/$

                                                        Source: Ministry of Commerce, ICICIdirect.com Research




  ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                 Page 29
                                                         Improving exports of engineering goods a positive surprise
                                                         Exhibit 60: Deficit in Engineering goods narrowing

                                                                          70                                                                             60.2                             59.8                                                    59.9
                                                                                                                                                                                                                                                     56.6
                                                                          60                                                                                                                                              49.9
                                                                          50                                                                                                      40.5
                                                                                                                    37.4                            33.7
                                                                          40          29.1                                                                                                                           32.6
                                                                                                                 26.5
                                                                          30       19.3
Costly import of machinery, iron & steel, etc. due to
                                                                          20




                                                             ($ bn)
rupee weakness could result in technological                                                                                                                                                                                                                3.3
                                                                          10
development for increasing self sufficiency, thereby                       0
improving the overall trade deficit in the long term                     -10            2006                           2007                             2008                              2009                           2010                        2011 (P)
                                                                         -20               -9.8                           -10.9
                                                                                                                                                                                                   -19.3                        -17.3
                                                                         -30
                                                                                                                                                                -26.4
                                                                         -40

                                                                                                                                              Export               Import                Trade Surplus



                                                         Source: Ministry of Commerce, ICICIdirect.com Research


                                                         Depreciating currency positive for future FDI and FII inflows
                                                         Exhibit 61: Relation of currency movement with FDI and FII flows

                                                                         40000                                                                                                                                                                             55

                                                                         30000                                                                                                                                                                             50

The rupee had depreciated from 39.4 in January                           20000                                                                                                                                                                             45
                                                             (| crore)




2008 to 51 in March 2009. After this, our country
                                                                         10000                                                                                                                                                                             40




                                                                                                                                                                                                                                                                |/$
witnessed strong FII inflow of | 1111 billion in FY10.
We have seen a similar sharp depreciation in rupee                             0                                                                                                                                                                           35
from 44.15 in July 2011 to ~53.3 currently in
                                                                                   Jun-07
                                                                                            Sep-07
                                                                                                     Dec-07
                                                                                                              Mar-08
                                                                                                                       June-08
                                                                                                                                 Sept-08
                                                                                                                                           Dec-08


                                                                                                                                                             June-09
                                                                                                                                                                       Sep-09
                                                                                                                                                                                Dec-09
                                                                                                                                                                                          Mar-10
                                                                                                                                                                                                   Jun-10
                                                                                                                                                                                                            Sep-10
                                                                                                                                                                                                                     Dec-10
                                                                                                                                                                                                                              Mar-11
                                                                                                                                                                                                                                       Jun-11
                                                                                                                                                                                                                                                Sep-11
                                                                                                                                                    March-




December                                                                 -10000                                                                                                                                                                            30

                                                                         -20000                                                                                                                                                                            25

                                                                                                                         Net FII Investment                                     FDI                  INR/USD (RHS)

                                                         Source: Ministry of commerce - DIPP, Bloomberg, ICICIdirect.com Research



                                                         Looking from foreign funds perspective, markets have become cheaper by
                                                         ~42% in last 1 year i.e. 24% sensex loss and 18% currency depreciation,
                                                         hence we could see higher portfolio allocation towards India.




  ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                         Page 30
                                                                     Indian economy – getting worse…
                                                                     CY11 saw macro headwinds engulfing the economy on multiple fronts and,
                                                                     thereby, impacting the growth, fiscal position and trade deficit. Adding to
                                                                     the woes, policy paralysis has also impacted the investment environment
                                                                     and is finally percolating to corporate performance. With the GDP growth
                                                                     rate of 6.9% (in Q2FY12) touching a nine-quarter low, high inflation (9%+
                                                                     throughout CY11) and interest rates and currency (down ~18% in CY11YTD)
                                                                     also playing spoilsport, India Inc. also saw a southward movement in their
                                                                     profitability. This is further accentuated by deteriorating fiscal deficit on
                                                                     account of increase in crude prices (unlikely to come down in near future)
                                                                     and other subsidy bills.

                                                                     However, the current trend in inflation has shown signs of moderation
                                                                     (currently at 9.1% in November, 2011 from the high of 10% in September,
                                                                     2011). Furthermore, the RBI expects it to come down to 7% by March, 2012
                                                                     on the back of easing food inflation. This would hold the key for growth
                                                                     coupled with policy reforms and state elections.

                                                                     GDP growth
                                                                     Exhibit 62: GDP growth at nine quarter low


                                                                               10                                                                            9.4
                                                                                                                                           8.6                         8.8      8.9
                                                                                9 8.5                                                                                                          8.3
                                                                                           7.8        7.5                                                                                               7.8         7.7
   India’s GDP growth for Q2FY12, which stood at                                8                                                                   7.3
                                                                                                                                                                                                                            6.9
   6.9%, was the lowest in the last nine quarters.                              7                              6.1                6.3
                                                                                                                         5.8
                                                                                6
                                                                         .




   We believe a fall in industrial production, elevated
   commodity prices and peak interest rates will                                5
                                                                         (%)




   impact in H2FY12 and pull down the GDP growth                                4
   for India to ~7%                                                             3
                                                                                2
                                                                                1
                                                                                0
                                                                                  Mar-08

                                                                                           Jun-08

                                                                                                      Sep-08

                                                                                                               Dec-08

                                                                                                                         Mar-09

                                                                                                                                  Jun-09

                                                                                                                                           Sep-09

                                                                                                                                                    Dec-09

                                                                                                                                                             Mar-10

                                                                                                                                                                       Jun-10

                                                                                                                                                                                Sep-10

                                                                                                                                                                                               Dec-10

                                                                                                                                                                                                        Mar-11

                                                                                                                                                                                                                   Jun-11

                                                                                                                                                                                                                            Sep-11
                                                                     Source: MOSPI, ICICIdirect.com Research



Exhibit 63: GDP growth and Sectoral contribution
                                                                               FY06                 FY07                FY08               FY09              FY10                  FY11                 Q1FY12                Q2FY12
GDP Growth (at factor cost)                                                     9.5                  9.6                 9.3                 6.8                 8.0                     8.5                      7.7                 6.9
Agri, forestry and fishing                                                     18.3                 17.4                16.8               15.7               14.6                  14.4                         13.6                11.1
Industry                                                                       28.0                 28.6                28.7               28.1               28.1                  27.9                         28.0                27.6
   a       Mining                                                               2.6                  2.6                 2.5                2.3                  2.3                     2.3                      2.2                 2.0
   b       Manufacturing                                                       15.3                 16.0                16.1               15.8               15.9                  15.8                         16.0                15.7
   c       Electricity Gas Water supply                                         2.1                  2.1                 2.0                 2.0                 2.0                     1.9                      2.0                 2.0
   d       Construction                                                         7.9                  8.0                 8.1                 8.0                 7.9                     7.9                      7.7                 7.8
Services                                                                       53.8                 54.0                54.5               56.2               57.3                  57.7                         58.4                61.4
   a       Trade, Hotels, Transport & Communication                            25.1                 25.6                26.0               26.1               26.6                  27.0                         27.6                27.9
   b       Financing, Insurance, real estate and business services             15.1                 15.7                16.1               17.0               17.2                  17.4                         18.3                18.8
   c       Community Social                                                    13.5                 12.7                12.4               13.1               13.6                  13.4                         12.5                14.7
Source: MOSPI, ICICIdirect.com Research




       ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                   Page 31
                                                              Fiscal deficit
Exhibit 64: Government P&L
                                                             Budget                              Actuals@
                                             Acuals       Estimates                                   Upto
                                            2010-11     2011-2012*                                 October       2011-2012E
                                                                                                      2011
                                              | crore       | crore                                 | crore                                                   Comment
   1    Revenue Receipts                    794,277       789,892                                 359,712          776,892
   2    Tax revenue (Net)                   572,790       664,457                                 291,501          664,457
                                                                                                                              Shortfall of | 13000 crore in BWA auction slated in FY12 and no clarity as
   3    Non-tax revenue                     221,487       125,435                                  68,211           112435
                                                                                                                              on date
   4    Non-debt capital receipts            35,599         55,020                                 13,653           17,751
   5    Recovery of loans                    12,752         15,020                                 10,922           15,020



                                                                                                                           Disivestment & other proceed - assumed no further receipt. However,
   6    Other receipts                       22,847         40,000                                  2,731            2,731 govt. is also planning to pledge its resources like some land & equity
                                                                                                                           holding SUUTI (holdings like L&T, ITC & Axis Bank in order to raise
                                                                                                                           resources worth | 50,000 crore. This will enable the govt. to bridge the
                                                                                                                           disinvestment proceeds gap of ~| 37000 crore. Still, we have not built
                                                                                                                           the same in our estimates pending time clarity
   7    Total receipts (1+4)                829,876       844,912                                 373,365          794,643
   8    Non-plan expenditure                821,569       816,182                                 479,181          816,182
   9    On revenue account                  726,767       733,558                                 431,709          733,558
        of which interest payments          234,739       267,986                                 144,521          267,986
  10    On capital account                   94,802        82,624                                  47,472           82,624
        of which loans disbursed              6,393           397                                  15,414              397
  11    Plan expenditure                    377,350       441,547                                 201,193          526,547
                                                                                                                           Additional subsidy burden of | 85000 crore (| 45000 crore for crude & |
                                                                                                                           40000 crore for fertilisers & others. Food subsidy increment has not been
  12    On revenue account                  312,363       363,604                                 171,015          448,604 taken as the Food Security Bill has not yet been passed. However, govt.
                                                                                                                           may issue bonds for oil subsidy, thereby taking it as off balance sheet
                                                                                                                           items
  13    On capital account                   64,987         77,943                                 30,178           77,943
        of which loans disbursed             18,592         16,754                                  8,959           16,754
  14    Total expenditure (8+11)          1,198,919      1,257,729                                680,374        1,342,729
                                                                                                                           Incremental fiscal deficit of ~| 135000 crore comprises extra expenditure
                                                                                                                           on fuel subsidy (| 45000 crore), fertiliser subsidy (| 40000 crore) and
  15    Fiscal deficit (14-7)               369,043       412,817                                 307,009          548,086
                                                                                                                           shortfall in disinvesment proceed (| 37000 crore) and BWA auction
                                                                                                                           amount (| 13000 crore)
        Fiscal Deficit as % of GDP              5.1           4.6                                                      6.0 Key upside risk to our forecast of fiscal deficit would be lower than
  16    Revenue deficit (9+12-1)            244,853       307,270                                 243,012          405,270 anticipated government expenditure and others.
  17    Primary deficit                     134,304       144,831                                 162,488          280,100
Source: Budget Documents, ICICIdirect.com Research




The major addition on the expenditure side is                 Exhibit 65: Crude under recoveries inching up adding to fuel subsidy
expected to be in the shape of subsidies. With crude                                            FY12E                                             Exchange Rate |/$
remaining above $100/barrel, the petroleum subsidy                                                   (| crore)                 46               48             50                 52               54
is expected to run up to | 70,000 crore vs. an                                                       80                   97516            101213           104910           108606           112303
                                                                      Crude levels ($/barrel)




estimate of | 23,640 crore (jump of ~190% over                                                       90                  106967            111075           115182           119290           123398
budgeted estimates)                                                                                  100                 116418            120937           125455           129974           134493
                                                                                                     105                 121143            125868           130592           135316           140040
While the government had estimated a fiscal deficit                                                  110                 125869            130799           135728           140658           145587
of 4.6% in its budget, subsidy bills and shortfall on                                                120                 135320            140660           146001           151341           156682
the income side (disinvestment target, tax revenues)                                                 130                 144771            150522           156274           162025           167777
is expected to inch up the fiscal deficit to 6%               Source: Bloomberg, ICICIdirect.com Research




       ICICI Securities Ltd. | Retail Equity Research                                                                                                                                    Page 32
                                                                Current Account Deficit
                                                                Exhibit 66: Rising crude bill impacting Current Account Deficit (CAD)


                                                                                     80                                                                                        4.0
      Import of crude oil at elevated levels (accounting for                         70                                                                                        3.5
      ~30% of total import bill) has led to expansion in the                         60                                                                                        3.0
      export bill. Consequently, CAD as a percentage of




                                                                    US$ in billion
                                                                                     50                                                                                        2.5
      GDP is expected to increase to ~3.5% in FY12E                                  40                                                                                        2.0




                                                                                                                                                                                     (%)
      from 2.6% in FY11
                                                                                     30                                                                                        1.5
                                                                                     20                                                                                        1.0
                                                                                     10                                                                                        0.5




                                                                                                           15.8




                                                                                                                         29.6




                                                                                                                                      38.4




                                                                                                                                                       44.3




                                                                                                                                                                      67.8
                                                                                              9.6
                                                                                     0                                                                                         0.0
                                                                                              FY07         FY08          FY09         FY10             FY11          FY12E

                                                                                                                   CAD           CAD as % of GDP (RHS)

                                                                Source: RBI, Ministry of Commerce, ICICIdirect.com Research



                                                                Exhibit 67: Elevated crude levels stretch import bill

                                                                                     120

      The FY12YTD average for Brent crude oil stands at                              100                                                                                       32
      $113.6/ barrel vs. average of $86.6/barrel in FY11.                            80
                                                                    US$ in billion




      Consequently, crude import as percentage of total
                                                                                     60




                                                                                                                                                                                     (%)
      import increased sharply to 32.1% in H1FY12 from                                                                                                                         29
      28.5% in FY11. Given the sharp rise in crude oil                               40
      import bill, crude deficit as percentage of total trade                        20
                                                                                                                                                      105.3




                                                                                                                                                                     112.1
                                                                                              57.1
                                                                                              38.4


                                                                                                           79.8
                                                                                                           51.4


                                                                                                                         93.7
                                                                                                                         66.1


                                                                                                                                      87.1
                                                                                                                                      58.9




                                                                                                                                                      63.0




                                                                                                                                                                     68.8
      deficit also increased to 61.4% in H1 FY12 vs. 53.1%
      in FY11                                                                         0                                                                                        26
                                                                                               FY07         FY08          FY09         FY10             FY11          FY12E

                                                                                           Crude Import (LHS)        Crude Deficit (LHS)            Crude as % of total import (RHS)

                                                                Source: Bloomberg, ICICIdirect.com Research



                                                                Exhibit 68: Rise in gold & silver prices further pressurises CAD

                     FY11 (avg)   FY12 YTD (avg)   % change                          40                                                                                       15.0
Gold (US$/ounce)          1295             1635        26.3                          35
Silver (US$/ounce)         22.7             36.7       61.3                          30
                                                                                                                                                                              12.0
                                                                    US$ in billion




   Given the sharp rise in gold & silver prices, gold &                              25
                                                                                     20
                                                                                                                                                                                     (%)




   silver import (as a percentage of total import) has
   expanded to 13.6% in H1FY12 from 9% in FY11                                       15
                                                                                                                                                                              9.0
                                                                                     10
                                                                                     5
                                                                                              14.7




                                                                                                           17.7




                                                                                                                         22.4




                                                                                                                                      29.8




                                                                                                                                                       33.8




                                                                                                                                                                      31.3




                                                                                     0                                                                                        6.0
                                                                                              FY07        FY08           FY09        FY10             FY11          H1 FY12

                                                                                                            Gold & Silver Import             As % of total import

                                                                Source: Bloomberg, ICICIdirect.com Research




        ICICI Securities Ltd. | Retail Equity Research                                                                                                                               Page 33
                                                       Infra spend tapering down
                                                       Policy paralysis impacting ambitious infrastructure targets…
                                                       Exhibit 69: Ambitious infra target …
                                                                       650000                                                                                                   10

                                                                       550000
                                                                                                                                                                                8
                                                                       450000




                                                           (| crore)




                                                                                                                                                                                     (%)
A staggering infrastructure spending (| 20.54 lakh                     350000                                                                                                   6
crore) was envisaged in the 11th Plan (FY07-12) led                    250000
by investment across sectors such as power, roads,                                                                                                                              4
telecom, etc. However, policy paralysis has led to a                   150000
slowing down of activity across segments                                50000                                                                                                   2




                                                                                     FY05



                                                                                                 FY06



                                                                                                             FY07



                                                                                                                         FY08



                                                                                                                                    FY09




                                                                                                                                                            FY11E



                                                                                                                                                                     FY12E
                                                                                                                                                FY10P
                                                                                             GCF in infrastructure                            Contribution to GDP (RHS)

                                                       Source: Planning Commission, ICICIdirect.com Research



                                                       …leading to slowing down of investments in infrastructure…
                                                       Exhibit 70: Policy reforms awaited across segments impacting investments
                                                       Segment                  Policy Reforms
                                                       Airports                 Clarity on tariff fixation - whether single till or dual till method to be adopted
Delay in the key policy reforms has led to cost
                                                                                Clarity/issues pertaining to pass through on higher fuel costs, which is currently impacting power
overrun of 20% (on an average) and time overrun of                              sector. Clarity on whether the burden of increased fuel costs would be shared by the beneficiary
1-201 months                                                                    (upward revision of tariffs) or borne by the developer
                                                       Power                    Further, there is lack of clarity on go & no go area in the mining segment
                                                                                Gradual hike in tariff by SEB, which should improve SEB financials
                                                                                PPP model in distribution sector to reduce AT&C losses
                                                                                Implementation, timeline and quantum, of import duties on power equipment from abroad
                                                                                (especially Asian countries)
                                                                                Appointment of NHAI permanent chairman, which should provide stability in terms of target
                                                       Road
                                                                                monitoring and ordering process
                                                       Across                   Land Acquisition Bill and clarity over go and no-go area for environmental clearance across
                                                       Segments                 segments
                                                       Source: Company, ICICIdirect.com Research




  ICICI Securities Ltd. | Retail Equity Research                                                                                                                             Page 34
Exhibit 71: Delay in reforms & land acquisition, environmental clearances has led to 20% cost overrun & 1-201 month time delays#
                                                                      Original cost                  Anticipated cost               No. of proj with cost       No. of proj with time            Time overrun range
Sector                                          No. of projects           (| crore)                          (| crore)                           overrun                     overrun                       (months)
Atomic Energy                                                 4                   29228                        34066                                        2                      3                              11-41
Civil Aviation                                               2                    3216                          3216                                        0                      2                                7-9
Coal                                                         7                    13075                        15940                                        6                      5                              24-48
Fertilisers                                                   3                    4066                         4066                                        0                      1                                1-1
Mines                                                         1                    4092                         4402                                        1                      1                              30-30
Steel                                                         5                   37769                        64101                                        5                      2                              25-36
Petroleum                                                   37              138786                           147266                                    10                         14                              5-120
Power                                                       45              164218                           168398                                         5                     22                              10-83
Railways                                                    29                    36547                        71799                                   23                         10                          3- 201
Road                                                        13                    19910                        21090                                        1                      3                               1-16
Shipping & Ports                                              6                   10128                        10558                                        3                      3                               2-25
Telecommunications                                           3                     3637                         4190                                        1                      0                                 0
Urban Development                                            2                    15071                        30503                                        2                      2                              12-15
Water Resources                                               1                     543                         1187                                        1                      1                              60-60
Total                                                     158               480285                           580782                                    60                         69


Source: MOSPI, ICICIdirect.com Research
#List of projects with capex of over | 1000 crore



                                                                                   Consequently, investment activity has slowed down…
Exhibit 72: New investment announced (| crore)                                                                   Exhibit 73: No of projects announced

                 400,000                                                                                             1,250

                                                                                                                     1,000
                 300,000
                                                                                                                         750

                                                                                                                                                                      1,366
       | crore




                             375,254




                 200,000
                                                                                                                                      1,127




                                                                                                                                                      1,120
                                                            318,468
                                          310,529




                                                                        309,939




                                                                                                                                                                                         1,058
                                                                                                                         500
                                                                                           223,547




                                                                                                                                                                                                          845
                 100,000
                                                                                                                         250

                      0                                                                                                       0
                            Sep-10




                                                            Mar-11




                                                                                          Sep-11
                                        Dec-10




                                                                        Jun-11




                                                                                                                                     Sep-10




                                                                                                                                                                     Mar-11




                                                                                                                                                                                                         Sep-11
                                                                                                                                                     Dec-10




                                                                                                                                                                                        Jun-11



Source: CMIE, ICICIdirect.com Research                                                                           Source: CMIE, ICICIdirect.com Research




Exhibit 74: Project shelved (| crore)                                                                            Exhibit 75: No of projects shelved

                 100000                                                                                              100

                  75000                                                                                                  75
       | crore




                  50000                                                                                                  50
                                                                                           75528




                                                                                                                                                                     88




                                                                                                                                                                                                          81
                                                                                                                                  74




                                                                                                                                                    56




                  25000
                                                                                                                                                                                         54




                                                                                                                         25
                                                                        29422
                                                            27177
                           23802




                                       Dec-10 23134




                      0                                                                                                  0
                           Sep-10




                                                           Mar-11




                                                                                          Sep-11
                                                                       Jun-11




                                                                                                                                  Sep-10




                                                                                                                                                                    Mar-11




                                                                                                                                                                                                         Sep-11
                                                                                                                                                   Dec-10




                                                                                                                                                                                        Jun-11




Source: CMIE, ICICIdirect.com Research                                                                           Source: CMIE, ICICIdirect.com Research




          ICICI Securities Ltd. | Retail Equity Research                                                                                                                                            Page 35
                                                                                                                      Power sector – major contributor to infra spending – woes continue…

Exhibit 76: Capacity addition targets revised downwards due to delays & fuel shortage

                   120000                                                                                            Target for XI Plan was further revised to 62000 MW on                                                                100
                                                                                                                     account of delay in capacity additions, fuel shortages, etc                                   100000
                   100000                                                                                            In terms of target for XII Plan, it now stands at 75000 MW                                                           90
                                                                                                                     vis-à-vis 100000 envisaged earlier                                                                     75000
                   80000                                                                                                                                                                                                                  80
                                                                                                                                                                                            78700
    MW




                   60000                                                                                                                                                                                                                  70




                                                                                                                                                                                                                                                (%)
                                                                                                                                              40245                41110
                   40000                                                                                         30538                                                                                                                    60
                                           19666                                22245
                   20000                                                                                                                                                                                                                  50

                            0                                                                                                                                                                                                             40
                                            VI th Plan                          VII th Plan                          VIII th Plan              IX th Plan            X th Plan         XI th Plan (07-12)         XII Plan (12-17)

                                                                                                                         Achieved             Target          Target achieved RHS

Source: CEA, ICICIdirect.com Research



                                                                                                                      Exhibit 77: Coal India production                                                                       (in million tonnes)


                                                                                                                                        500
  Coal production is increasing at a slower pace;                                                                                       450
  Coal India’s production is likely to be around 440                                                                                    400
  million tonnes in FY12, much below expectations                                                                                       350
  in terms of demand, which has partially only been                                                                                     300
                                                                                                                                        250
                                                                                                                               MT




  met through imported coal. Given the sharp rise in
                                                                                                                                                                                                      431        431                           440
  imported coal prices, the power producers                                                                                             200                           379           404
                                                                                                                                              343           361
  (particularly for UMPP- Mundra & Krishnapatnam                                                                                        150
  which are on imported coal) may find it difficult to                                                                                  100                                                                                   177
                                                                                                                                         50
  pass on the complete hike in coal prices, which
                                                                                                                                          0
  could impact their profitability
                                                                                                                                              FY06          FY07      FY08          FY09           FY10         FY11        H1FY12          FY12E



                                                                                                                      Source: Company, ICICIdirect.com Research




Exhibit 78: International coal prices trend                                                                                                            Exhibit 79: Tariff of UMPP (| per unit)

                   150                                                                                                                                       2.5       2.26                                     2.33

                   130                                                                                                                                       2.0                                                                     1.77
                   110
    (US $/tonne)




                                                                                                                                                             1.5                             1.3
                    90
                                                                                                                                                             1.0
                    70
                                                                                                                                                             0.5
                    50
                    30                                                                                                                                       0.0
                                                                                                                                                                                              T a riff (| pe r unit)
                         Jan-09

                                  Apr-09

                                            Jul-09

                                                     Oct-09

                                                              Jan-10

                                                                       Apr-10

                                                                                 Jul-10

                                                                                          Oct-10

                                                                                                   Jan-11

                                                                                                            Apr-11

                                                                                                                      Jul-11

                                                                                                                               Oct-11




                                                                                                                                                                             Mundra        S a sa n     K rishna pa tna m     T ila iya

Source: Bloomberg, ICICIdirect.com Research                                                                                                            Source: CEA, ICICIdirect.com Research




         ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                              Page 36
                                                    Roads – second largest contributor- only segment where activity was seen…
                                                      Exhibit 80: Roads only segment, which has seen some activity

                                                                                                         While the awarding of ~3865 km
                                                              7500                                       vs. 7300 km target is lower,                8

                                                              6500                                       roads have been only segment                7
                                                                                                         where activity was seen
With the awarding of ~3865 km in FY12 YTD vs.                                                                                                        6
                                                              5500
5083 km in FY11, road is the only segment where                                                                                                      5
                                                              4500
activity has been seen. However, NHAI’s target of



                                                       (km)
                                                                                                                                                     4




                                                                                                                                                         (km)
7300 km appears to be optimistic. We expect                   3500
                                                                                                                                                     3
awarding of ~5500-6000 km each year over the                  2500
                                                                                                                                                     2
next two to three years
                                                              1500                                                                                   1
                                                               500                                                                                   -




                                                                                                                                            FY12E
                                                                         FY07



                                                                                       FY08



                                                                                                FY09



                                                                                                         FY10



                                                                                                                     FY11



                                                                                                                                  FY12YTD
                                                                                Completed      Awarded      Completed/day (RHS)


                                                      Source: NHAI, ICICIdirect.com Research




     ICICI Securities Ltd. | Retail Equity Research                                                                                             Page 37
                                                                                 Corporate profitability heading southward…
                                                                                 Exhibit 81: Rising input cost and interest costs hurt OPM and NPM, respectively

                                                                                     25.0                                                                                                                                     15.0
   In the September 2011 quarter, the margins of the                                 24.5
                                                                                     24.0                                                                                                                                     14.0
   Nifty Index companies (excluding banking &
   financial services and oil & gas companies) eroded                                23.5                                                                                                                                     13.0
                                                                                     23.0
   further and have been in the lowest range since the
                                                                                     22.5                                                                                                                                     12.0
   December 2009 quarter. Additionally, the rising                                   22.0
   interest cost has also led to the lowest PAT margins                              21.5                                                                                                                                     11.0
   since the December 2009 quarter                                                   21.0                                                                                                                                     10.0
                                                                                     20.5
                                                                                     20.0                                                                                                                                     9.0
                                                                                              Dec-09   Mar-10         Jun-10           Sep-10             Dec-10             Mar-11             Jun-11             Sep-11

                                                                                                                                        OPM                 NPM (RHS)

                                                                                 Source: Capitaline, ICICIdirect.com Research *Nifty index companies ex banks




Exhibit 82: Interest costs rising leading to a dent in NPM                                               Exhibit 83: …and interest coverage ratio has declined to lowest level

             2.3                                                                                                      15
             2.2                                                                                                      14
             2.1                                                                                                      13
             2.0
                                                                                                                      12
             1.9
       (%)




                                                                                                                (x)




                                                                                                                      11
             1.8
             1.7                                                                                                      10
             1.6                                                                                                       9
             1.5                                                                                                       8
                   Sep-10      Dec-10              Mar-11            Jun-11          Sep-11                                 Sep-10                 Dec-10                   Mar-11                    Jun-11                  Sep-11

                                        Interest Cost as a % of sales                                                                                              Interest Coverage ratio

Source: Capitaline, ICICIdirect.com Research *Nifty index companies ex banks                             Source: Capitaline, ICICIdirect.com Research *Nifty index companies ex banks




Exhibit 84: Both GNPA & NNPA in absolute terms on the rise*…                                             Exhibit 85: GNPA & NNPA ratio highest in last 10 quarters*
           80000       GNPA     NNPA                          75372
           70000                                     64279                                                            3.0                                                                                               1.5
                                   56787    58932
           60000 51711    55226                                                                                       2.8                                                                                               1.3
           50000                                                                                                      2.6                                                                                               1.1
 | Crore




                                                                                                                (%)




                                                                                                                                                                                                                              (%)




           40000
                                                                                                                      2.4                                                                                               0.9
           30000                                                  35483
           20000                                25744    27277                                                        2.2                                                                                               0.7
                     23427             24061
           10000              17349                                                                                   2.0                                                                                               0.5
               0
                                                                                                                              Q1FY10

                                                                                                                                       Q2FY10

                                                                                                                                                Q3FY10

                                                                                                                                                         Q4FY10

                                                                                                                                                                  Q1FY11

                                                                                                                                                                           Q2FY11

                                                                                                                                                                                    Q3FY11

                                                                                                                                                                                             Q4FY11

                                                                                                                                                                                                      Q1FY12

                                                                                                                                                                                                               Q2FY12
                      Q1FY11



                               Q2FY11



                                              Q3FY11



                                                            Q4FY11



                                                                        Q1FY12



                                                                                     Q2FY12




                                                                                                                                                GNPA Ratio                    NNPA Ratio (RHS)

Source: Company, ICICIdirect.com Research *I-Direct Banking coverage                                     Source: Company, ICICIdirect.com Research *I-Direct Banking coverage




           ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                               Page 38
                                                        Capitulation – Are we close to the bottom??
                                                        Given the ~23% YTD decline in benchmark indices and building up of a
                                                        consensus for a further decline, investors are now pondering about the
                                                        strategy for 2012 and, more importantly, where and when the markets will
                                                        bottom out. However, it is important to asses “whether the markets have
                                                        capitulated or not?”
                                                        To answer this question, we looked at various widely used parameters such
                                                        as a massive fall in large caps, M-cap to GDP ratio, spike in CBOE and NSE
                                                        volatility index, analyst downgrades and media as a misleading indicator.

                                                        Looking at these parameters, we believe that the markets will oscillate with
                                                        high bouts of volatility and may then complete the final leg of the current
                                                        bear leg as the correction, which began with various global and domestic
                                                        headwinds, and has now gradually skewed towards self inflicted problems.
                                                        Consequently, investors, especially domestic, are now building in dismal
                                                        growth rates be it for GDP, corporate earnings, currency movement and
                                                        have also given up on the reform process.
                                                        Exhibit 86: Relative sectoral performances …
                                                                                                                                           YTD Return (%)
                                                        BSE Realty Index                                                                            -50.4
All sectoral indices (except FMCG) have given           BSE Metal                                                                                   -46.9
negative return in CY11 YTD reflecting the somber       BSE Cap Goods                                                                               -46.3
mood across market participants (both local and         BSE Power                                                                                   -38.9
global)                                                 BSE Bankex                                                                                  -30.5
                                                        BSE Oil                                                                                     -26.0
                                                        BSE Sensex                                                                                  -23.3
The current market decline is depicting a classical     BSE Auto                                                                                    -19.8
market cycle wherein a group/clutch of sectors is       BSE IT Sector                                                                               -18.3
facing steep cuts over the other. Similarly, if one     BSE Teck                                                                                    -16.1
looks at the performance of the constituents of BSE     BSE Consumer durables                                                                       -15.8
Sensex stocks, sectors that are linked to high          BSE Healthcare                                                                              -13.4
gestation, high regulatory & policy sensitivity and     BSE FMCG Sector                                                                              10.6
global exposure have corrected in the range of 26 -     Source: Bloomberg, ICICIdirect.com Research
50% over a period of 12 months. This clearly            Note: Returns calculated as of December 28 , 2011
signifies that though steep corrections get justified
due to the above mentioned sectors, sometimes it
                                                        Exhibit 87: No. of stocks touching 52 week lows substantially higher than that in 2009 crash
overreacts

                                                            500
                                                                                                                                    421
The number of stocks touching 52-week lows has              400
nearly doubled from that of the 2008-09 market                                                     286
                                                            300
crash depicting heightened loss of investor
confidence across sectors and stocks                        200            128
                                                            100                                                  52

                                                              0
                                                                           2008                   2009          2010                2011


                                                        Source: Capitaline, ICICIdirect.com Research




  ICICI Securities Ltd. | Retail Equity Research                                                                                            Page 39
Exhibit 88: Market cap to GDP at multi-year lows…                                                                                                         Exhibit 89: … even India fares worse vis-à-vis its global peers
                                                                                                                                                                                           1.6        1.5
                 1.6
                                                                                        1.5                                                                                                1.4                                                               2010              2011
                 1.4




                                                                                                                                                                 Market cap to GDP (x)
                                                                                                                                                                                           1.2                                1.1                                                          1.1
                 1.2
                                                                                                                       1.1
                 1.0                                                                                        1.0                                                                            1.0
                                                                             0.9                                                                                                                                                          0.8           0.8
                 0.8                                                                                                                                                                       0.8                                                                                 0.7                            0.7
    (x)




                                                              0.7
                 0.6                                                                                                                                                                       0.6
                                    0.5        0.5                                                0.5                             0.5                                                                                                                                                                                           0.4
                 0.4                                                                                                                                                                       0.4
                 0.2                                                                                                                                                                                          1.2                1.0          0.6               0.6                0.5             0.5              0.5             0.4
                                                                                                                                                                                           0.2
                  -




                                                                                                                                                                                                        UK




                                                                                                                                                                                                                                                                                                                                 Germany
                                                                                                                                                                                                                               US




                                                                                                                                                                                                                                                             Brazil


                                                                                                                                                                                                                                                                                France


                                                                                                                                                                                                                                                                                             India


                                                                                                                                                                                                                                                                                                                  China
                                                                                                                                                                                                                                            Japan
                                2003 2004 2005 2006 2007 2008 2009 2010 2011


Source: Bloomberg, ICICIdirect.com Research                                                                                                               Source: Bloomberg, ICICIdirect.com Research



                                                                                                                     The impending Euro concern and global macro uncertainty is clearly
                                                                                                                     reflected in the CBOE VIX index, which is currently at the highest levels
                                                                                                                     during CY11. The same has been mimicked by India VIX, where global
                                                                                                                     factors coupled with domestic macro headwinds have led to higher bouts of
                                                                                                                     swings/volatility.

Exhibit 90: High VIX levels reflect global uncertainty

   48
   42                                                                                                                                              36
   36                                                                                                                                              31
   30
                                                                                                                                                   26
   24
                                                                                                                                                   21
   18
   12                                                                                                                                              16




                                                                                                                                                                                                                                                                                                         Nov-11
                                                                                                                                                        Jan-11




                                                                                                                                                                                                                     Apr-11




                                                                                                                                                                                                                                          Jun-11

                                                                                                                                                                                                                                                    Jul-11

                                                                                                                                                                                                                                                                      Aug-11




                                                                                                                                                                                                                                                                                          Oct-11
                                                                                                                                                                                         Feb-11

                                                                                                                                                                                                   Mar-11




                                                                                                                                                                                                                                 May-11




                                                                                                                                                                                                                                                                                 Sep-11




                                                                                                                                                                                                                                                                                                                       Dec-11
                                                                                                                       Nov-11
        Jan-11

                       Feb-11

                                 Mar-11

                                          Apr-11

                                                     May-11

                                                                    Jun-11

                                                                               Jul-11

                                                                                         Aug-11



                                                                                                            Oct-11
                                                                                                   Sep-11




                                                                                                                                 Dec-11




                                                                        CBOE VIX
                                                                                                                                                                                                                                               India VIX

Source: Times of India dated December 26,2011, ICICIdirect.com Research



                                                                                                                     Exhibit 91: Falling business confidence index echoes concerns over industrial growth

                                                                                                                         165

                                                                                                                         160
   The NCAER Business Confidence index is at the
   lowest levels in the last six quarters, thereby                                                                       155
   echoing the concerns over industrial growth,
   political deadlock and macro headwinds in the                                                                         150
   economy
                                                                                                                         145

                                                                                                                         140
                                                                                                                                                                                                                               Nov-10
                                                                                                                                Jan-10


                                                                                                                                          Mar-10


                                                                                                                                                    May-10


                                                                                                                                                                                          Jul-10


                                                                                                                                                                                                            Sep-10




                                                                                                                                                                                                                                           Jan-11


                                                                                                                                                                                                                                                             Mar-11


                                                                                                                                                                                                                                                                               May-11


                                                                                                                                                                                                                                                                                           Jul-11


                                                                                                                                                                                                                                                                                                              Sep-11




                                                                                                                     Source: NCAER, ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                                                                   Page 40
                                                                 Exhibit 92: Consensus downgrade of Sensex EPS estimate seen in CY11 …
                                                                            1500   1475     1461                                                                        1,500
                                                                                                        1455   1450
                                                                            1425
                                                                                                                         1392                                           1,425
                                                                            1350                                                1371
                                                                                                                                         1345
                                                                            1275                                                                1325           1321     1,350




                                                                      (|)




                                                                                                                                                                                (|)
                                                                            1200   1256     1244        1239   1238
                                                                                                                         1197                                           1,275
                                                                                                                                1187     1174   1175
                                                                            1125                                                                               1161

                                                                            1050                                                                                        1,200
                                                                                   Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

                                                                                                                 FY12E          FY13E (RHS)

   Consistent building up of negative domestic cues              Source: Bloomberg, ICICIdirect.com Research
   has led to a steep earnings downgrade cycle
   wherein the EPS for FY12 and FY13 has been revised
   down by 7% and 10%, respectively. If the macro                Exhibit 93: Our stance on Sensex…
   issues continue to persist, going ahead, we expect
   the downgrade cycle to continue for FY13                                 1600
                                                                                                                                                   1414
                                                                                                                                                                 1346
                                                                            1400                               1235 1209                                                1273 1321
                                                                                                                         1164            1161
                                                                            1200                 1090                             1103
                                                                      .




                                                                            1000          923
                                                                      (|)




                                                                             800   724

                                                                             600
                                                                             400
                                                                                                                       Revision 1

                                                                                                                         Revision

                                                                                                                         Revision




                                                                                                                                                                  Revision

                                                                                                                                                                  Revision
                                                                                   FY09

                                                                                          FY10

                                                                                                 FY11




                                                                                                               FY12E




                                                                                                                                                       FY13E
                                                                                                                       Consensus




                                                                                                                                                                Consesnus
                                                                                                                          FY12E

                                                                                                                          FY12E




                                                                                                                                                                   FY13E

                                                                                                                                                                   FY13E
                                                                                                                         FY12E




                                                                                                                         FY12E




                                                                                                                                                                  FY13E
                                                                 Source: Bloomberg, ICICIdirect.com Research

Exhibit 94: ILLUSIONARY correlation… For Sure!




Source: Times of India dated December 26,2011, ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                      Page 41
                                                 Outlook 2012

                                                 Watch not only valuations but other variables also…
                                                 During gloomy times, one tends to become oblivious to the fact that post a
                                                 steep correction markets do start looking very attractive as P/E ratios in
                                                 relation to market levels keep coming down, presuming earnings to remain
                                                 constant/face less downgrade. On the contrary, both market levels and
                                                 earnings growth rates are moving targets. Hence, the end results can be
                                                 highly contrary to general anticipation.

                                                 Putting the above theory in the current perspective, the markets may be
                                                 looking attractive as they are trading at 14.1x and 12.2x their FY12E and
                                                 FY13E EPS, which is 13% below their historical P/E average of 14x.
                                                 However, what the markets may be pricing in vis-à-vis the consensus is a
                                                 higher decline in EPS for FY12 and FY13 given the macro and local
                                                 headwinds the country and corporates are facing. In such an eventuality,
                                                 looking at forward P/E multiples in isolation can become hazardous.

                                                 Rather than only focusing on projected estimates, it is also prudent to watch
                                                 out for the following factors:
                                                      One year and two year forward P/E multiples coupled with standard
                                                      deviation of the same (looking at variances can cushion the deviation
                                                      in earnings estimates)
                                                      Troughing of market multiples based on Trailing Twelve Months
                                                      earnings
                                                      P/BV multiples based on TTM basis (serves as an effective valuation
                                                      tool at the time when relatively earnings visibility is not clear, thereby
                                                      rendering forward P/E multiples less effective)
                                                      Interrelation of movement of broader markets with macro variables
                                                      such as interest rates and industrial production
                                                      Correlation of markets with other financial assets like crude oil and
                                                      currency movement
                                                      Attractiveness of debt yields vis-à-vis earnings yield of the BSE Sensex
                                                 Apart from the above, we have also observed that whenever earnings
                                                 growth comes out of two or three year hibernation the markets react sharply
                                                 to that event. This phenomenon is better explained from FY03-FY11 where
                                                 the correlation strength between market returns and Sensex earnings is
                                                 strong as compared to the periods of FY92-FY11 and FY02-FY11. Hence, this
                                                 time around we believe the earnings growth trajectory would stagnate or at
                                                 best may produce single digit growth rates. However, at the same time, we
                                                 expect earnings to catch up by CY13/FY14. Therefore, the markets will also
                                                 mirror the trend, in our view.




ICICI Securities Ltd. | Retail Equity Research                                                                       Page 42
Exhibit 95: Movement in EPS growth and Sensex movement


    1600                                                                                                                                                                     1544   100

                                                                                                                                                                     1273

    1200                                                                                                                                         1090 1103                          75
                                                                                                                            964            923

       800                                                                                                                         724                                              50
                                                                                                                     682
                                                                                                             628
                                                                                                   473
                                                                                           399
       400                                                                                                                                                                          25
 (|)




                                                                                                                                                                                          (%)
                                        259         249                            290
                                              249          225
                                 194                                191     204
             80     81    113

        0                                                                                                                                                                           0
             FY93        FY95          FY97         FY99          FY2001          FY2003          FY2005           FY2007         FY2009         FY2011          FY2013E


    -400                                                                                                                                                                            -25



    -800                                                                                                                                                                            -50

                                                           EPS             EPS growth (RHS)              Sensex Return (RHS)

Source: Bloomberg, ICICIdirect.com Research



   We believe that high correlation between Sensex               Exhibit 96: Correlation matrix of BSE earnings growth vis-à-vis BSE returns
   return and EPS is high in FY03-FY11 vs. FY92-FY02                                                     Correlation of Sensex EPS growth and
   due to the following:                                           Period of Corporate Earnings                      Sensex returns                             Comments
                                                                             FY92-FY11                                     28%                                Low corelation
                                                                             FY92-FY02                                     19%                                Low corelation
   Consistency in GDP growth
                                                                             FY03-FY11                                     56%                            Reasonable correlation
   Robust growth and even disbursement of credit
   Reasonable cost of borrowings                                 Source: Bloomberg, ICICIdirect.com Research
   Consistent policy reforms
   High savings and rise in investment/capex cycle
                                                                 Exhibit 97: Cycles of earnings revision
   Rise in disposable income
   Consistent and robust growth in corporate earnings
                                                                           1600
   Declining information arbitrage in financial markets                                                                                                     1414
                                                                                                                                                                      1346
   Consistent portfolio inflows                                            1400                                    1235 1209                                                 1273 1321
                                                                                                                             1164           1161
                                                                           1200                   1090                               1103
                                                                     .




                                                                           1000            923
                                                                     (|)




                                                                            800    724

                                                                            600
                                                                            400
                                                                                                                           Revision 1

                                                                                                                             Revision

                                                                                                                             Revision




                                                                                                                                                                       Revision

                                                                                                                                                                       Revision
                                                                                   FY09

                                                                                           FY10

                                                                                                  FY11




                                                                                                                   FY12E




                                                                                                                                                             FY13E
                                                                                                                           Consensus




                                                                                                                                                                     Consesnus
                                                                                                                              FY12E

                                                                                                                              FY12E




                                                                                                                                                                        FY13E

                                                                                                                                                                        FY13E
                                                                                                                             FY12E




                                                                                                                             FY12E




                                                                                                                                                                       FY13E




                                                                 Source: Bloomberg, ICICIdirect.com Research




       ICICI Securities Ltd. | Retail Equity Research                                                                                                                          Page 43
                                                       Given the higher intensity of adverse macro variables in CY11, we have
                                                       revised down our FY12 and FY13 EPS thrice and twice, respectively,
                                                       throughout CY11. Similarly, the consensus is more aggressive and has
                                                       revised the EPS estimates for FY12 to | 1161, which implies a cut of 7%
                                                       while the number of revisions stood at five. For FY13 EPS, the cut has been
                                                       top the tune of 10% from the beginning of FY12 while the number of
                                                       revisions stood at six. Going ahead, if macro issues persist, we may be in for
                                                       further consensus downgrades for FY13 EPS. In this case, basing one’s
                                                       investment thesis on forward multiples becomes less effective.

                                                       Exhibit 98: Sensex at one year forward P/E multiples

                                                                           30000                 6x = -2 STD
                                                                                                9.9x = -1 STD
                                                                           24000
Historically, the markets have traded at 13.8x one                                          13.8x = Mean multiple
                                                           Sensex levels

                                                                           18000               17.7x = +1 STD
year forward P/E multiple. Currently, they are
                                                                                               21.7x = +2 STD
trading at 14.1x one year forward P/E multiple.
                                                                           12000
During panic situations, the markets have
historically troughed at -1 STD multiples. In                               6000
euphoric cases, they have even breached +2 STD
multiples                                                                     0
                                                                                   Apr-02


                                                                                                Apr-03


                                                                                                           Apr-04


                                                                                                                    Apr-05


                                                                                                                                   Apr-06


                                                                                                                                                   Apr-07


                                                                                                                                                             Apr-08


                                                                                                                                                                      Apr-09


                                                                                                                                                                                  Apr-10


                                                                                                                                                                                              Apr-11
                                                                                                         Sensex              6              9.9             13.8         17.7              21.7

                                                       Source: Bloomberg, ICICIdirect.com Research



                                                       Exhibit 99: Sensex at two year forward P/E multiple

                                                                           30000                  3.9x = -2 STD
                                                                                                  8.1x = -1 STD
Historically, the markets have traded at 12.3x on a                        24000              12.3x = Mean multiple
                                                           Sensex Levels




two year forward P/E multiple. Currently, they are                                               16.4x = +1 STD
                                                                           18000
trading at 12.2x two year forward P/E multiple. We                                              20.6x = +2 STD
believe that, going forward, the markets will be re-                       12000
rated on the clear visibility of earnings growth
                                                                           6000
rather than correction in debasement of earnings
multiples                                                                     0
                                                                                   Apr-02


                                                                                                Apr-03


                                                                                                           Apr-04


                                                                                                                    Apr-05


                                                                                                                                   Apr-06


                                                                                                                                                   Apr-07


                                                                                                                                                             Apr-08


                                                                                                                                                                      Apr-09


                                                                                                                                                                                  Apr-10


                                                                                                                                                                                              Apr-11




                                                                                                         Sensex              3.9             8.1             12.3          16.4             20.6

                                                       Source: Bloomberg, ICICIdirect.com Research



                                                       The important factor for investors to watch out for in CY12 would be
                                                       possibilities of steep corrections and opportunities for right levels to buy.
                                                       India’s fixed capital expenditure, interest rates, commodity prices, inflation
                                                       and government policy action would be the key variables. Historically, we
                                                       have seen that Indian markets troughing at 10x-11x trailing 12 M multiples.




  ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                  Page 44
                                                         Exhibit 100: Sensex on trailing 12M multiples generally troughs at 10-11x during “Black Swans”
                                                                                                          During Harshad Mehta Scam (1992-94)                                                          During the 2008 crisis, defaults in
                                                            70                                            and Technolgy bust/Ketan Parekh Scam                                                         the US banking system (which was
                                                            60                                            (1999-00), broader market multiples were                                                     an unanticipated event) led to a
                                                                                                          debased savagely and troughed at 10x-                                                        savage sell-off in equities. Indian
                                                            50                                            11x on the P/E multiples front                                                               markets tumbled by 62% from its
The Indian markets have bottomed at 10x trailing
12M multiples during the 90s, IT sector bust and            40                                                                                                                                         highs and traded at 10x on P/E
2008 financial crisis. A sharp correction from current                                                                                                                                                 multiples at the trough
                                                            30
levels should be used for buying from a three to five
                                                            20
year perspective
                                                            10
                                                              0



                                                                   Dec-90
                                                                             Dec-91
                                                                                      Dec-92
                                                                                               Dec-93
                                                                                                        Dec-94
                                                                                                                   Dec-95
                                                                                                                            Dec-96
                                                                                                                                     Dec-97
                                                                                                                                              Dec-98
                                                                                                                                                         Dec-99
                                                                                                                                                                   Dec-00
                                                                                                                                                                            Dec-01
                                                                                                                                                                                     Dec-02
                                                                                                                                                                                              Dec-03
                                                                                                                                                                                                         Dec-04
                                                                                                                                                                                                                  Dec-05
                                                                                                                                                                                                                           Dec-06
                                                                                                                                                                                                                                    Dec-07
                                                                                                                                                                                                                                               Dec-08
                                                                                                                                                                                                                                                         Dec-09
                                                                                                                                                                                                                                                                  Dec-10
                                                                                                                                                                                                                                                                           Dec-11
                                                         Source: BSE, ICICIdirect.com Research




                                                         Exhibit 101: Market price/book value at trailing 12M multiples

                                                             7

                                                             6
                                                             5
  The Indian markets are trading at 3.1x TTM
                                                             4
  price/book value against historical mean valuations
  of 3.7x                                                    3
                                                             2

                                                             1
                                                                 Apr-02


                                                                                      Apr-03


                                                                                                          Apr-04


                                                                                                                                Apr-05


                                                                                                                                                       Apr-06


                                                                                                                                                                            Apr-07


                                                                                                                                                                                                Apr-08


                                                                                                                                                                                                                     Apr-09


                                                                                                                                                                                                                                             Apr-10


                                                                                                                                                                                                                                                                  Apr-11
                                                                            Oct-02


                                                                                               Oct-03


                                                                                                                     Oct-04


                                                                                                                                          Oct-05


                                                                                                                                                                  Oct-06


                                                                                                                                                                                     Oct-07


                                                                                                                                                                                                            Oct-08


                                                                                                                                                                                                                                Oct-09


                                                                                                                                                                                                                                                        Oct-10


                                                                                                                                                                                                                                                                           Oct-11
                                                                                                                                         Price/Book Value                                     Average

                                                         Source: BSE, ICICIdirect.com Research




     ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                               Page 45
Sensitivity of policy rates and growth in consumer     Rate cuts
durable segment is significantly high. A steep YoY
                                                       Sticky inflation throughout CY11 impelled the RBI to hike policy rates 13
growth rate in the consumer durable segment
                                                       times throughout CY11. It was only in the last policy meeting that the RBI
from February 2009 to January 2010 was
                                                       signalled a pause. Going ahead, we expect the same to start declining from
witnessed post interest rate cuts from September
                                                       H1CY12, which will be a huge cyclical positive for the economy. Hence, we
2008 - April 2009. Going by the last policy
                                                       believe that the impact of rate cuts will be back ended in CY12 and would
meeting and steep decline in food inflation, we
                                                       start exhibiting a positive rub off on consumption and may lead to
expect consumer durables growth to be back on
                                                       bottoming out of the capex cycle. Also, historically, it has been observed
track once interest rate easing commences
                                                       that a declining rate cycle is a good cyclical catalyst for a market up move.


                                                       Exhibit 102: Sensitivity of BSE sectoral indices to change in repo rates

                                                           BSE Sectoral Indicies   20000                                                                                                                                                                            10


Interest rate cuts by the RBI would be positive for                                15000
                                                                                                                                                                                                                                                                    8
rate sensitive sectors like banks, capital goods,
                                                                                   10000




                                                                                                                                                                                                                                                                         (%)
auto, etc
                                                                                                                                                                                                                                                                    6
                                                                                   5000

                                                                                          0                                                                                                                                                                         4
                                                                                                 Apr-07

                                                                                                          Aug-07



                                                                                                                                  Apr-08

                                                                                                                                           Aug-08



                                                                                                                                                                  Apr-09

                                                                                                                                                                            Aug-09



                                                                                                                                                                                                    Apr-10

                                                                                                                                                                                                               Aug-10



                                                                                                                                                                                                                                       Apr-11

                                                                                                                                                                                                                                                  Aug-11
                                                                                                                     Dec-07




                                                                                                                                                        Dec-08




                                                                                                                                                                                           Dec-09




                                                                                                                                                                                                                            Dec-10
The period of FY03-FY08 witnessed the BSE
Sensex delivering a CAGR of 38% during which the                                                          BANK                         Capital Goods                        Auto                    Metals                           Repo rate (RHS)
spread of earnings yield over G-Sec yield averaged
~2%                                                    Source: Bloomberg, ICICIdirect.com Research
The above average moved into the negative zone of
-1.1% over FY08-09 (overvaluation of markets in
                                                       Exhibit 103: Spread of earnings over G-Sec yield vis-à-vis market movement
early FY08 followed by a spike in bond yields due
to global financial crisis coupled with a short-term                               15
spook in crude oil prices in 2009)
                                                                                   12
However, in FY10 and FY11, contrary to belief,
negative spreads have persisted between the                                         9
                                                                (%)




earnings yield and G-sec yield as lot of monetary
                                                                                    6
easing by western world and developing nations
resulted in a rise in inflationary levels while                                     3
subsequent tightening resulted in negative spreads                                                                   8 3%               1 6%            74 %               16 %               20%                                81 %             11 %
                                                                                    0
However, given the correction that Indian markets
                                                                                        Apr-02




                                                                                                                              Apr-04



                                                                                                                                               Apr-05




                                                                                                                                                                                  Apr-07
                                                                                                            Apr-03




                                                                                                                                                                 Apr-06




                                                                                                                                                                                                    Apr-08



                                                                                                                                                                                                                        Apr-09



                                                                                                                                                                                                                                         Apr-10



                                                                                                                                                                                                                                                           Apr-11


                                                                                                   - 12 %
have witnessed in CY11, spreads are again                                                                                                                                                                    - 3 8%
converging. Hence, equities are again entering the
                                                                                                                              G- Se c Y ie ld                      E ar nin gs Y iel d
fair valuation zone
                                                       Source: Bloomberg, ICICIdirect.com Research,
                                                       Note: Bar Graphs represents the returns delivered by BSE Sensex on YoY basis and are not scaled to any of the
                                                       axis.




  ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                           Page 46
                                                                                            Exhibit 104: Implied P/E (inverse of G-sec yield) and trailing P/E a good market timing indicators

                                                                                                            30

                                                                                                            25
                                                                                                                                             Area of Overvaluation
                                                                                                            20
                                                                                                                                                                                   Reasonable/Inexpensive Valuation
                                                                                                            15




                                                                                                   x
                                                                                                                                                                                   Area of Undevaluation
                                                                                                            10

                                                                                                             5

                                                                                                             0



                                                                                                                  Jan-01


                                                                                                                               Jan-02


                                                                                                                                                 Jan-03


                                                                                                                                                              Jan-04


                                                                                                                                                                          Jan-05


                                                                                                                                                                                            Jan-06


                                                                                                                                                                                                          Jan-07


                                                                                                                                                                                                                        Jan-08


                                                                                                                                                                                                                                          Jan-09


                                                                                                                                                                                                                                                        Jan-10


                                                                                                                                                                                                                                                                   Jan-11


                                                                                                                                                                                                                                                                                  Jan-12
                                                                                                                                                                                Implied P/E                         Trailing P/E

                                                                                            Source: Bloomberg, ICICIdirect.com Research

Exhibit 105: |/$ exchange rate depicts strong correlation with movement in BSE Sensex

    60                                                                                                                                                                                         Sensex again tops out at 20664 levels                                       23000
                   Sensex tops out at 21206 levels in                                                                                                                                          in November 2010
                                                                                                                     The dollar exchange rate peaks at |
                   early 2008                                                                                                                                                                                                                                              21000
                                                                                                                     52/$
    55
                                                                                                                                                                                                                                                                           19000

    50                                                                                                                                                                                                                                                                     17000

                                                                                                                                                                                                                                                                           15000
    45
                                                                                                                                                                                                                                                                           13000

    40                                                                                                                                                                                                                                                                     11000

                                                                                                                                                                                                          The dollar exchange rate rallies                                 9000
    35                       The dollar exchange rate bottoms                                                                                                                                             after consolidating at | 43
                                                                                                                     Sensex bottoms out at ~ 8000                                                         levels                                                           7000
                             at | 39/$                                                                               levels in March 2009
    30                                                                                                                                                                                                                                                                     5000
         Jan-06

                  Apr-06

                           Jun-06

                                    Sep-06

                                             Dec-06

                                                      Mar-07

                                                               Jun-07

                                                                        Sep-07

                                                                                 Dec-07

                                                                                          Mar-08

                                                                                                   Jun-08

                                                                                                                 Sep-08

                                                                                                                           Dec-08

                                                                                                                                        Mar-09

                                                                                                                                                     Jun-09

                                                                                                                                                              Sep-09

                                                                                                                                                                       Dec-09

                                                                                                                                                                                   Mar-10

                                                                                                                                                                                                 Jun-10

                                                                                                                                                                                                           Sep-10

                                                                                                                                                                                                                      Dec-10

                                                                                                                                                                                                                                 Mar-11

                                                                                                                                                                                                                                               Jun-11

                                                                                                                                                                                                                                                         Sep-11

                                                                                                                                                                                                                                                                  Dec-11


                                                                                                            |/$               BSE Sensex (RHS)

Source: Bloomberg, ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                  Page 47
                                                        Exhibit 106: Trends in FII flows and market performance
                                                                    150000                                                           133050           100
                                                                                                                                                      80
                                                                    100000                                               84502
                                                                                                      74903                                           60
                                                                              48061
One significant risks that market faces at this point                50000             37603                                                          40




                                                         | crores
in time is the FII redemption. If such a scenario                                                                                                     20
                                                                                                                                              -3027
materializes than markets may face deeper cuts,                          0                                                                            0
going ahead into CY12                                                         CY05     CY06           CY07     CY08       CY09       CY10     CY11
                                                                                                                                                      -20
                                                                     -50000
                                                                                                               -56757                                 -40
                                                                    -100000                                                                           -60

                                                                                                         FII    Sensex Return(RHS)

                                                        Source: Bloomberg, ICICIdirect.com Research




     ICICI Securities Ltd. | Retail Equity Research                                                                                               Page 48
                                                                    Investors in catch-22 situation; expensive getting more expensive, cheap
                                                                    getting cheaper…

                                                                    Going into CY12, a classic dilemma that investors will face in terms of
                                                                    stock picking is to determine whether underperforming stocks would
                                                                    continue to do the same or there will be a reversal in their fortunes and
                                                                    whether the stocks that have remain resilient in CY11 will repeat their
                                                                    performance. Our sense is that due to heightened volatility and
                                                                    uncertainty, outperforming sectors of CY11 will continue to shine at least
                                                                    in H1CY12 and it will be the second half that will decide, with turn of
                                                                    events, whether worst is over for the CY11 underperforming sectors.

Exhibit 107: Performance of top 5 and worst 5 stocks in FY11 and TTM (Q2FY12) on basis of P/E ratios, Stock returns and RoE’s

                     FY11                                                                 40


                                                                                          30
   P/E ratio




                                                                                          20


                                                                                          10


                                                                                           0
               -60          -50     -40           -30           -20            -10             0               10            20          30          40   50         60
                                                                                      Stock return (%)
                                  SBI     L&T    DLF     Hindalco     Reliance Ind     Bharti Airtel     ITC        Bajaj Auto    TCS   Sun Pharma



                     TTM                                                                  40


                                                                                          30
   P/E ratio




                                                                                          20


                                                                                          10


                                                                                           0
               -60          -50     -40           -30           -20            -10             0               10            20          30          40   50         60
                                                                                      Stock return (%)
                                  SBI     L&T    DLF     Hindalco     Reliance Ind     Bharti Airtel     ITC        Bajaj Auto    TCS   Sun Pharma



Source: Bloomberg, Company, ICICIdirect.com Research
Note: Size of the bubble represents the ROE’s generated by the stocks over that period, For TTM Chart returns are calculated on CY11YTD basis.




          ICICI Securities Ltd. | Retail Equity Research                                                                                                       Page 49
                                                 Exhibit 108: Range of Sensex in CY12

                                                    22000                                                         14x FY13E-17822 (Base Case)

                                                    20000

                                                    18000

                                                    16000

                                                    14000

                                                    12000                                                                                    14x FY12E-15442
                                                    10000                                                                                      (Bear Case)

                                                     8000




                                                                                                                           Nov-10
                                                            Dec-07




                                                                              Oct-08




                                                                                                Aug-09
                                                                     May-08




                                                                                       Mar-09




                                                                                                         Jan-10


                                                                                                                  Jun-10




                                                                                                                                    Apr-11


                                                                                                                                               Sep-11


                                                                                                                                                           Feb-12


                                                                                                                                                                    Jul-12


                                                                                                                                                                             Dec-12
                                                                                                    BSE Sensex (LHS)                                    Bear case

                                                 Source: Bloomberg, ICICIdirect.com Research



                                                 How to play equities in 2012 ? – The SIP way…
                                                 We believe the at least H1CY12 will be a volatile one as the markets would
                                                 witness huge swings to the news emanating from emerging and western
                                                 world. Also, the markets will react sharply to any surprise coming from
                                                 within the country on the political/economical front. Such bouts of volatility
                                                 will provide a platform to accumulate equities in staggered manner as we
                                                 expect H2CY12 to be more trending one as lot of macro issues might get
                                                 subsiding. In such a scenario, we recommend buying equities systematically
                                                 in a staggered manner without bothering about the market levels.

                                                 Don’t time …rather accumulate quality
                                                 We expect more of a time based correction and expect the markets to
                                                 oscillate in a broad trading range till the time reasonable clarity emerges
                                                 from the various local and global macro headwinds.

                                                 In case of a negative outlier event, the markets may fall further in the wake
                                                 of panic selling. However, we do not expect the markets to sustain at such
                                                 levels. In such an environment, timing the markets would become extremely
                                                 difficult. We believe that any sharp cuts should be bought into from a three
                                                 to five years perspective. Buying is recommended in large caps and
                                                 selective quality mid-caps.




ICICI Securities Ltd. | Retail Equity Research                                                                                                                         Page 50
Preferred picks                                          Sectoral Outlook
                 Sector          Stocks                  High macro uncertainties will create visibility issues for most of the
Outperform       Auto            Tata Motors             sectors and we expect CY12 (at least H1CY12) to be the year where stock
                 Pharma          Lupin                   specific actions will prevail. We may however see some sector specific
                 IT              TCS
                                                         momentum in the latter half on account of subsiding of macro economic
                 Telcom          Bharti Airtel
Neutral          Banking         HDFC Bank
                                                         headwinds.
                 FMCG            ITC
                 Media                                   For CY12 we are positive on sectors that exhibit high revenue visibility,
                 Oil & Gas       Cairn India             stable cash flows, exhibit pristine balance sheets (low gearing and
                 Textiles                                marginal exposure to foreign liabilities) and will benefit from cyclical turn
                 Retail                                  of macro variables like interest rates and commodity prices. Hence we are
Underperform Capital Goods                               positives on sectors such as Automobiles (Monetary and commodity price
                 Power           NTPC                    reversal to provide earnings and valuation upgrade), Technology (Market
                 Real Estate                             share gains and depreciating rupee to aid valuations), Pharma (High
                 Infrastructure
                                                         growth visibility and players with diversified geo mix to benefit), and
                 Metals
                                                         Telecom (Improving key metrics and regulatory clarity)
                 Hotels
                 Cement
                 Shipping                                On the neutral side, sectors that stack the list include Banking (Asset
Source: ICICIdirect.com Research                         quality issues to neutralise monetary reversal coupled with low
                                                         valuations), FMCG (expensive valuations albeit improved realisations),
                                                         Media (Ad growth to moderate), Oil & Gas (Attractive valuations to get
                                                         subdued by regulatory uncertainties), Retail & Textile (Inexpensive
                                                         valuations discounting moderation in consumption).

                                                         As far as negative sectors are concerned we believe that Murphy’s Law
                                                         will prevail at least in the H1CY12. Therefore the list include sectors that
                                                         are more concerned with government actions, Capex intensive sectors and
                                                         sectors with highly geared balance sheets. Hence we expect
                                                         Infrastructure/Power & Capital Goods/ Real Estate to underperform
                                                         (Leveraged balance sheets, Regulatory hurdles; stressed investment cycle
                                                         to outweigh benefits arising from softening of interest rates and low
                                                         valuations). The list also includes Metals (Uncertain global environment
                                                         rendering haziness on demand outlook amidst attractive valuations),
                                                         Cement (Utilisation rates to remain tepid, Tier 1 companies commanding
                                                         rich valuations), Hotels (Incremental supply will hurt utilisations rates and
                                                         ARR’s)




        ICICI Securities Ltd. | Retail Equity Research                                                                     Page 51
                                                             Auto (Can’t get any worse)                                                                         Outperform
                                                             The year gone by has been a mixed tale for the Indian auto-sector marked
                                                             by CV resilience even as the PV segment cracked under the pressure of
                                                             higher rates, petrol prices and labour issues. Two-wheelers continued to
                                                             ride the rural tide aided by deferred demand during the lull period of FY07-
                                                             09.
                                                             Exhibit 109: How FY12 was different from FY09? A historical perspective…
The macro picture looks mixed with inflation                     10                                                                                                            75
seemingly peaking out. Expectations of rate cuts by                             Avg Repo rate          Petrol prices        Demand fall in cars was
                                                                  9                                                                                                            70
Q1FY13E are not completely unfounded. However,                                                                              worse than 2008 due to
                                                                                                                            twin impact of high                                65
on petrol prices, the outlook remains uncertain as                8




                                                                                                                                                                                   (|/ltr)
                                                                                                                            repo rate & fuel prices                            60
along with global crude oil prices the INR                        7
                                                                                                                                                                               55
                                                                 (%)
depreciation has become an additional negative
                                                                  6
                                                                                                                                                                               50
We estimate an outperformance from the PV                         5                                                                                                            45
segment (partially aided by a lower base) along with              4                                                                                                            40
sentiment boost through rate cuts
                                                                 290        PV & MHCV sales witnessed pent up           High interest rates & fuel prices                      200
                                                                          demand in FY10-11 as the decline in fuel      adversely impacted PV & MHCV
The MHCV segment has practically braved the                      240                                                                                                           160
                                                                           prices and interest rates cooled off pior     segments, 2Ws remain least
“Murphy’s law”- "Anything that can go wrong will                 190                                                                                                           120
go wrong" with mining bans, interest rate hikes and              140                                                                                                           80
fuel prices all hurting it. We believe it could see a
                                                                 90                                                                                                            40
bump up as macro improves, going ahead
                                                                 40                                                                                                            0
The LCV segment will continue to benefit from the                      Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
last mile requirements of the rising rural India and                        FY07               FY08               FY09             FY10           FY11                FY12
will remain the outperforming segment.                                                    PV sales (LHS)          MHCV sales (LHS)      2-Wheeler (RHS)

                                                             Source: Bloomberg, ICICIdirect.com Research The sales volume have been indexed to 100 with Q1FY07 as base
The two-wheeler space though not highly impacted
by interest rates and petrol price hikes has shown
                                                             We believe FY13E may not mimic a ‘V–shaped recovery’, as we expect
early signs of a slowdown. We believe the growth
                                                             modest ~11-13% growth. The rationale of the assumption on a segmental
rates may taper off, going forward, on a higher base
                                                             basis has been elucidated in the exhibit below. On a relative basis, our
                                                             spectrum is most positive on PV segment while two-wheelers remain the
                                                             least favoured.

Exhibit 110: Key segmental growth estimates…
     Major segments         Growth est. FY13E   FY12YTD growth                                                 Assumption rationale
                                                                  In FY13E, we believe PV segment would be a relative outperformer across the segments. The non-existent
                                                                  growth till now is expected to aid FY13E through its low base.Issue of higher interest rates had hit the small
Passenger vehicles              14%-16%              2.7%         car segment the most, which could also rebound in a similar fashion post probable rate cuts. FY12 was also
                                                                  marred by labour issues at market leader Maruti, which has recently been resolved and FY13E could see a
                                                                  higher ramp-up in the same, thereby aiding volume growth
                                                                  CY11 marked industrial investment climate at its weakest since "Lehman" in 2008.We believe the segment
Medium & heavy
                                12%-15%              8.4%         will continue to rise above the consensus outlook on the back of better monetary policy, rising business
commercial vehicle
                                                                  confidence and improving investment climate
                                                                  This segment has remained the shining beacon in the automotive space. It hardly witnessed any meaningful
                                                                  impact of rising rates as demand for last mile transportation continued to burgeon with rising rural
Light commercial vehicle        16%-18%             30.9%
                                                                  penetration. We believe, lack of effective govternment transportation services would continue to aid the
                                                                  demand for this segment albeit at a lower pace
                                                                  We believe the low growth demand phase of FY07-09 for two-wheelers was instrumental in the >20%
                                                                  growth rates since FY10. Two-wheelers could decline to normalised growth as deferred demand seems
Two wheelers                    10%-12%             17.9%
                                                                  exhausted. We remain cautious on the segment and expect domestic growth for listed players to slow down
                                                                  significantly with strong capacity expansion by foreign challengers
Source: SIAM, ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                Page 52
                                                      Exhibit 111: Probable outliers that could impact our estimates…
                                                                                                                                        Segmental impact
                                                      Probable gamechangers
                                                                                                              PV                     MHCV              LCV                            2-W
                                                      Aggressive rate cuts of more
                                                      than ~100 bps in CY12E


                                                      Fall in global crude oil
                                                      prices/sharp appreciation of the
                                                      rupee leading to a decline in
                                                      petrol / diesel prices
                                                      Additional diesel duty / tax on
                                                      passenger vehicles


                                                      Clarity on mining clearance
                                                      across various regions


                                                      Source: ICICIdirect.com Research
                                                      Note: Size of symbol represents degree of impact



                                                      Exhibit 112: How demand kept slipping against Siam’s revised forecasts of PV sales
Siam has lowered its growth estimate for the
                                                                    3.0                                                                3rd revision in October of a
domestic PV segment for the third time in FY12 as                                                         2nd forecast in
                                                                                                                                             tepid 4% growth
sales were heavily suppressed by multiple                           2.8                                    July trimmed
                                                                          Growth forecasted at the       growth to 10-12%
headwinds. The downward revision from 18-20%
                                                                    2.6   beginning of year 18-20%
growth in April to ~4% growth in October reflects
                                                       Lakh units




the muted consumer demand. We expect sales to                       2.4
grow by 3% for December-March 2012 and could end
                                                                    2.2
the year with a tepid 0.5% YoY growth over FY11. We
expect an industry wide growth rate of ~11-13% for                  2.0
FY13E
                                                                    1.8
                                                                                                                                                Nov-11
                                                                                                     Jul-11


                                                                                                                   Aug-11




                                                                                                                                      Oct-11




                                                                                                                                                                  Jan-12
                                                                          Apr-11




                                                                                            Jun-11




                                                                                                                            Sep-11




                                                                                                                                                         Dec-11
                                                                                   May-11




                                                                                                                                                                           Feb-12


                                                                                                                                                                                       Mar-12
                                                                           April SIAM forecast                July SIAM forecast               October SIAM forecast                FY12E Sales*

                                                      Source: SIAM, ICICIdirect.com Research, * refers to YTD sales till Nov and our estimates for Dec-Mar’12




  ICICI Securities Ltd. | Retail Equity Research                                                                                                                                Page 53
QoQ movement of asset quality, credit and PAT
growth                                                                                                                    Banking (Recovery to be elongated)                                                                Neutral
                                                                                                                          Banking sector has grossly underperformed the index in CY11. Bankex has
       3.0                                                                                                   30           underperformed the Sensex by ~7% YTD. Advances break-up dictated the
       2.5                                                                                                   25           valuation given commanded by banks. Banks with retail exposure were
                                                                                                             20           spared while the ones having exposure to troubled sectors like Infra, power,
       2.0                                                                                                   15           Iron and steel, agriculture and textiles took heavy beating. We expect this
       1.5                                                                                                   10
 (%)




                                                                                                                    (%)
                                                                                             2.8                          trend to continue and valuation divergence to sustain.
                 2.5                2.4               2.3                 2.5                                5
       1.0                                                                                                                      Asset quality to be watched…
                                                                                                    1.3      0
       0.5                              1.0                    1.0                1.0
                     0.8                                                                                     -5                 The industry has seen an increase in GNPA ratio from 2.3% on March,
       0.0                                                                                                   -10                2011 to 2.8% on September, 2011. In absolute terms, this is a 26% jump
                 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12                                                                             during H1FY12 to ~| 1180 billion. We expect asset quality to deteriorate
                                                                                                                                further with fresh slippage ratio staying above 2%. However, net GNPA
             GNPA ratio                                                           NNPA ratio                                    additions may be lesser due to following three reasons – (a) from hereon
             Credit growth YOY (R.H.S)                                            PAT growth YoY (R.H.S)                        most of the large ticket loans are likely to get restructured first (b)
                                                                                                                                shifting 100% accounts to system based NPA recognition completed
Source: RBI, Company, ICICIdirect.com Research                                                                                  and (c) recoveries to be slightly higher.

Asset quality deteriorated drastically in H1FY12                                                                                We expect restructuring to stay high in FY13E for banks with exposure
                                                                                                                                to SEBs, textile, iron & steel. Total restructured assets amounted to ~|
                                                                                                                                107 billion i.e. ~2.7% of outstanding credit as on FY11. Agriculture has
           850                                                                                      17.3 22                     been one of the major contributors in slippages with 44% of incremental
           650                                                                                               17                 NPAs for domestic banks in FY11. Even on YTD basis, proportion is high
                           10.7
                                                                                                                                due to expiry of Farm loan waiver scheme term, post which all such
  (| bn)




           450                      8.4                                                    9.1               12
                                                                                                                  (%)




                                             6.6 6.1 6.8
                                                                                                                                accounts were taken to NPA.Total credit by banks to power SEBs /
           250                                                           2.8 3.8                             7
                                                                                                                                discoms (State Electricity Board) stands close to | 75000 crore (1.8% of
           50                                                                                                2                  total credit). If the same or part of this sum goes for restructuring, the
                  Q1FY10
                           Q2FY10
                                    Q3FY10
                                             Q4FY10
                                                      Q1FY11
                                                                Q2FY11
                                                                         Q3FY11
                                                                                  Q4FY11
                                                                                           Q1FY12
                                                                                                    Q2FY12




                                                                                                                                2% provision impact may not be high but the expected slippage in the
                                                                                                                                asset post restructuring may create further downsides in stocks.
                       GNPA                           GNPA growth QoQ (R.H.S.)                                            Exhibit 113: Sectoral exposure
Source: RBI, Company, ICICIdirect.com Research                                                                            Sectors                         Infra           Power            Textiles          CRE#          Iron & steel
* ICICI Direct coverage universe                                                                                          % of advances               FY11        FY10   FY11     FY10    FY11    FY10     FY11     FY10   FY11     FY10
                                                                                                                          BOB                             8          8      3         2      4         4      3        3      4           4
                                                                                                                          BOI                             6          6      3      NA        4         4      3        4      5           5
                                                                                                                          Dena Bank                      28        26     20         16      3         3      1        1      4           4
                                                                                                                          IOB                            11        12       7         1      5         5      6        9      6           6
                                                                                                                          OBC                            19        21     11         11      5         5      6        7      6           6
                                                                                                                          PNB                            15        13       7         5      3         3      7        8      7           5
                                                                                                                          SBI                            13        10       4         3      8         7      2        2      7           8
                                                                                                                          Syndicate Bank                 12        11       8      NA       2          2     2        3       3           3
                                                                                                                          Union Bank                     11          5    NA       NA        3         4      2        2      4           4


                                                                                                                          Axis Bank                      10          9      4         4      3         3      6        5      5           4
                                                                                                                          City Union                      1          1    NA       NA      11         12      6        4      5           4
                                                                                                                          DCB                             0        NA     NA          3      2         2      3        2      1           1
                                                                                                                          Dhanlaxmi                      14        23       6         7      2         3      4        2     NA       NA
                                                                                                                          Federal Bank                   13        11     NA       NA       3          3     2        2       4       NA
                                                                                                                          HDFC Bank                     NA         NA       2         1      1         1    NA       NA       2           2
                                                                                                                          Kotak Mahindra                  7          3    NA       NA      NA         NA    10         8      0           1
                                                                                                                          South Indian                    2          3      0         0      4         4      1        1      3           4
                                                                                                                          Yes Bank                       20        21       7         8      1         1      6        6      4           3
                                                                                                                          N/A: not available
                                                                                                                          Source: Company Annual Reports, ICICIdirect.com Research
                                                                                                                          #CRE- Commercial Real Estate




                 ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                            Page 54
                                                                Credit growth to be sluggish …….
                                                                Credit growth which stands at 17.8% YoY (December 2nd 2011) is
                                                                expected to moderate at ~16% for FY12E. With GDP likely to grow at
                                                                similar pace, FY13 credit growth may mimic FY12 growth.

                                                           Exhibit 114: Credit growth at 2.5-3x real GDP, GNPA ratio off from earlier peaks ;uptick seen
                                                           again

                                                                                                                                  GNPA had been 5% if all
                                                                     37                                                                                                12
                                                                                                                                  restructured assets slipped          11
                                                                     34
                                                                     31                                                                                                10
                                                                     28                                                                                                9
                                                                     25                                                                                                8
                                                                                                                                                                       7
                                                                     22
                                                               (%)




                                                                                                                                                                            (%)
                                                                                                                                                                       6
                                                                     19                                                                                                5
                                                                     16                                                                                                4
                                                                     13                                                                                                3
                                                                     10                                                                                                2
                                                                      7                                                                                                1
                                                                           FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E

                                                                              Credit Growth YoY            GDP (R.H.S.)          GNPA (R.H.S.)        Repo rate (R.H.S.)

                                                           Source: Bloomberg, ICICIdirect.com Research
                                                           * For FY12E, GNPA ratio of HYFY12E has been taken


                                                                NIM seems to be capped from hereon …….
                                                                We believe interest rate cycle has peaked and rate reversal should
                                                                happen around Q1FY13E. However, slowing growth coupled with high
                                                                cost term deposits and deregulation of saving rate and NRE interest
                                                                rates would keep NIM under check. We expect saving rate deregulation
                                                                to impact margins in the long term for all banks but high CASA banks
                                                                like SBI, HDFC Bank and Axis Bank will bear a larger hit of 20-30 bps.
                                                           Exhibit 115: Analysing impact of saving rate deregulation
                                                                                                               Impact on NIM (bps)*                  Impact on PAT (%)*
Increase in saving rate also causes the base rate to
                                                           Banks                                                  FY12E               FY13E            FY12E            FY13E
increase and hence, margins may not deteriorate            SBI**                                                   -14.5               -29.8            -12.1            -21.4
radically                                                  BOB                                                     -10.0               -20.0             -5.3            -10.4
                                                           PNB                                                     -13.0               -26.0             -7.0            -13.6
Banks are likely to wait before increasing saving rate     HDFC Bank                                               -14.0               -29.0             -4.9             -9.7
as credit offtake is sluggish and interest rate cycle is   Axis Bank                                               -10.0               -20.0             -3.8             -7.8
peaking, thus postponing the impact by a year or so        Yes Bank                                                 -1.0                -2.0             -0.4             -0.8

                                                           *Assuming savings rate hike of 50 bps in FY12E and 100 bps in FY13E
                                                           ** Standalone
                                                           Source: Company, ICICIdirect.com Research




     ICICI Securities Ltd. | Retail Equity Research                                                                                                                Page 55
                                                                                    Valuations and outlook
The midcap PSB space marred by asset quality
concerns and lower RoA (FY13E) (top left corner of                                  In the absence of major positive triggers, we believe the sector will be in
the grid) is trading below 1x FY13E P/ABV. Private                                  a consolidation phase from here on as concerns over NPA would persist
banks like HDFC Bank, Yes Bank, City Union Bank                                     while interest rate cuts (expected in Q1FY13E) and contraction in
and South Indian Bank, which have healthy asset                                     multiples would limit downside. Banks with higher exposure to power
quality and higher RoA, continue to get a premium                                   (SEB), infra, iron & steel and textile like SBI, PNB, IOB, OBC and Dena
(although the entire sector is now trading at below                                 Bank may continue to take a beating.
one year average multiples).

Exhibit 116: Higher RoA and better asset quality stay in right bottom quadrant, quality stocks still enjoy premium
                 2.5
                                                       UBI              BOI             SBI
                                            OBC
                 2.0

                 1.5          Dena Bank              IOB      DCB
                                                                      PNB
      NNPA (%)




                 1.0
                                                  Syndicate             Federal Bank
                 0.5                                                                        Axis Bank
                                                                        CUB
                 0.0                                                                        Yes Bank                                                HDFC Bank      Kotak
                                     Dhanlaxmi
                                                                SIB   BOB
                 -0.5

                 -1.0
                        0.0    0.2    0.4     0.6     0.8      1.0    1.2     1.4     1.6      1.8       2.0    2.2   2.4   2.6   2.8   3.0   3.2    3.4   3.6   3.8    4.0
                                                                                                        P/ABV (x)

Source: Company, ICICIdirect.com Research
Size of bubble represents RoA




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                   Page 56
  Current Valuations mirroring FY08-09
                                                                          Capital Goods (Order inflow outlook gets murkier)                                               Underperform
                                     Price/Earnings
                        3Y Low      3Y Median 3Y High Current             The BSE Capital Goods Index has lost ~46% YTD owing to issues like fuel
   Larsen & Toubro       13.0          22.0       33.0 13.9               linkages, rising coal prices, regulatory clearances and high interest rates,
   Kalpataru              3.7          20.1       81.8  6.9               which has severely impacted capex decisions in the power sector, reckoned
   Jyoti Structures       2.9          12.4       18.7  2.9               to as the biggest order inflow contributor. Order inflows from the process
   KEC                    6.4          15.0       26.4  8.4               sectors have weakened as well. Hence, as of H1FY12, capital good
   BGR Energy             4.0          20.5       35.3  4.2               companies under our coverage (including L&T) have witnessed a decline in
   Sterlite Tech          2.8          12.7       32.0  7.4               order inflows by 17% YoY, which raises questions on revenue visibility of
   Hindor                 3.9          15.3       51.0  4.5               FY14E revenues and have lead to tapering down growth rates in FY13E
   Thermax                6.3          22.2       42.0 12.5
                                                                          revenues and profitability. We remain cautious on the sector and prefer
                                                                          owning/buying large cap stocks on dips from a three year perspective as the
                                                                          sector is expected to languish in the medium term.

                                                                                In terms of performance, we expect CY12 to be disappointing as
A boost in GFCF from FY07 to FY08 pulled the capital
                                                                                H1CY12 would see tepid order inflows even though revenue growth
goods IIP up, with BSE CG following them
                                                                                would be reasonable, whereas H2CY12 would witness a decline in
With a slowdown in FY09 and new investments drying                              growth rates as dull order inflows in CY11 would reflect on the
up, stock prices of major capital goods companies fell                          financial performance. Also, order inflows in H2CY12 would be a
sharply. However, with policy stimulus and reduced                              function of how fast interest rates decline, pace of implementation of
interest rates, investment demand picked up                                     reforms in power sector (fuel issues & SEB reforms) and movement in
subsequently in FY10, leading to a steep price                                  policy reforms
appreciation
                                                                                We believe order inflows in the transmission sector will be relatively
Post FY10, with RBI adopting an anti-inflationary stance                        strong as we expect PowerGrid to maintain its awarding momentum,
and increasing policy rates, coupled with a deteriorating                       though competition will persist. Order inflows for the generation side
macro environment, new private sector investments                               and other industrial sectors are expected to remain tepid until macro
slowed considerably, leading to a de rating of the sector                       headwinds recede
At present, with the RBI refraining from further rate                           Valuations of most of the companies in the capital goods sector are at
hikes and softening inflation numbers, possible rate cuts                       rock bottom levels but we expect the pain to continue at least in
in FY13 should revive investment demand and PAT                                 H1CY12, until signs of capex revival are not perceived
margins


  Exhibit 117: Gross capital formation and capital goods performance (YoY growth)
            140                                                                                               121.0
            120
            100
            80                                                     60.7
                                              57.0
            60
                                                     33.6                                                                     35.5
            40                                                                      27.4
                                    17.4                    16.2
      (%)




            20                9.9                                                                                  10.4 7.3                     7.1         7.3
                      3.0                                                                  1.5                                                                             3.5
                                                                                                                                                      7.5
             0
            -20             FY07                      FY08                           FY09                             FY10               -7.1    FY11                  FYTD12
                                                                                                 -14.2                                                                -17.0   -14.3
            -40
            -60                                                                                                                                                   -39.8
                                                                            -52.0
            -80


                                                      BSE CG Index        Order infow Growth             Gross Fixed Capital Formation   CG IIP Index



  Source: RBI, Bloomberg, Company, ICICIdirect.com Research




        ICICI Securities Ltd. | Retail Equity Research                                                                                                                           Page 57
                                                          Exhibit 118: Increasing interest burden…

                                                                    60                                                                                           9
                                                                                                                                                                 8
                                                                    50
                                                                                                                                                                 7
   Rising working capital debts, combined with higher               40                                                                                           6
   interest rates eat away a significant chunk of                                                                                                                5
                                                                    30




                                                              (%)




                                                                                                                                                                     (%)
   EBITDA as interest outgo. From 16% levels in FY10                                                                                                             4
   and FY11, it has risen to around 29% for FYTD12                  20                                                                                           3
                                                                                                                                                                 2
                                                                    10
                                                                                                                                                                 1
                                                                    0                                                                                            0
                                                                             FY07          FY08         FY09            FY10             FY11        FYTD12

                                                                                     Repo Rate (RHS)          Interest/EBITDA*          Debt Equity Ratio*



                                                          Source: Company, ICICIdirect.com Research
                                                          * Ex Bhel




Exhibit 119: Outlook matrix for coverage companies in FY13E
Company                FY11-FY13E Topline CAGR      Margins              Interest/EBITDA     FY11-FY13E EPS CAGR                 Debt/Equity            Debtors/Sales
                                                 FY11     FY13E          FY11       H1FY12                                  FY11          H1FY12       FY11      FY12E
BGR Energy                      -2%              11.3      11.8          11%         24%                -8%                  1.5            2.2        67%        89%
Thermax                          7%              11.6      11.3           0%          1%                 9%                  0.0            0.1        20%        19%
KEC International               16%              10.6       9.3          23%         38%                 3%                  1.5            1.7        55%        49%
Jyoti Structures                13%              11.5      11.4          35%         42%                -4%                  0.8            0.9        46%        47%
Kalpataru Power                 14%              11.5      11.3          24%         34%                 7%                  0.5            0.4        50%        49%
Sterlite Tech                   21%              11.5      11.8          18%         47%                17%                  0.5            0.6        28%        31%
Hindustan Dorr                  -1%               9.6      10.3          24%         72%               -15%                  0.5            1.2        31%        34%


Source: Company, ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                          Page 58
Capacity surplus & subdued demand to keep
utilisation rates under pressure…                                                                     Cement (Margin pressure to continue)                                                                Underperform
                                                                                                      Cement demand has been sluggish in the past 20 months (growth of 4.4% in
                   50                                                                      95         FY11 and 4% in YTDFY12) due to muted offtake from construction activities.
                                                                                                      We find that cement demand growth has a high correlation with gross fixed
                                                                                           90
                   40                     89
                                                      87
                                                                                                      capital formation (GFCF) growth as it captures the construction activities.
                                                                                                      GFCF declined 0.6% in Q2FY12 on account of a slowdown in infrastructure
 Million tonnes




                                                                                           85
                   30
                                                                                     77    80         investments, keeping cement demand under pressure. We expect cement


                                                                                                 %
                                                             77                75
                   20                                                75                               demand to grow by 4.5% in FY12E and 8% in FY13E.
                                                                                           75
                   10                                                                      70                Capacity utilisation has been low during the current year on account of
                                                                                                             low demand and stabilisation of newly installed capacities. Effective
                        0                                                                  65
                                                                                                             capacity addition of ~26 MT against incremental demand of ~17 MT
                                 FY09          FY10        FY11 FY12E FY13E FY14E
                                                                                                             would keep the utilisation rate under pressure
                                                      Incremental capacity                                   All-India average cement prices picked up in YTDFY12 with ~7% YoY
                                                      Incremental demand                                     increase, mainly because of supply discipline and price hikes post
                                                      Capacity utilisation (RHS)                             monsoons in anticipation of a pick-up in demand. As the demand
                                                                                                             remained muted even after monsoons, prices have started showing
Source: CMA, ICICIdirect.com Research                                                                        weakness again. We expect prices to remain under pressure, going
                                                                                                             forward, on account of pressure on utilisation rates
                                                                                                             Increase in input costs has been a major dragger for erosion in
                                                                                                             operating margins. Shortage of domestic coal with depreciation of the
                                                                                                             rupee is keeping fuel costs higher. Also, rising railway freight charges
                                                                                                             adds to the increase in cost structure. Thus, we expect the increase in
                                                                                                             input costs coupled with subdued realisations would keep margins
                                                                                                             under pressure in FY12E and FY13E.
         Exhibit 120: Premium valuations of Large caps on strong balance sheet…                                                            Exhibit 121: Rise in gearing inflates EV; deflates midcaps valuations

                          100%                                                                                 10000                           100%                                                                 6,000
                                80%                                                                            8000                             80%                                                                 5,000




                                                                                                                                                                                                                            | per tonne
                                60%                                                                                                                                                                                 4,000
                                                                                                                        | per tonne




                                                                                                               6000                             60%
                                                                                                                                                                                                                    3,000
                                40%                                                                                                             40%
                                                                                                               4000                                                                                                 2,000
                                20%                                                                                                             20%                                                                 1,000
                                0%                                                                             2000
                                                                                                                                                 0%                                                                 -
                            -20%                                                                               0                                         FY08          FY09       FY10          FY11     FY12E
                                               FY08           FY09           FY10         FY11       FY12E
                                                       Mcap               Net Debt        EV/Tonne (RHS)                                                        Mcap          Net Debt          EV/Tonne (RHS)


         Source: Company, ICICIdirect.com Research                                                                                         Source: Company, ICICIdirect.com Research
         Note: cumulative of ACC, Ambuja Cement & UltraTech Cement                                                                         Note: cumulative of Shree Cement, India Cement, JK Cement, JK Lakshmi, Orient Paper,
                                                                                                                                           Heidelberg Cement, Mangalam Cement

       Exhibit 122: Peak EBITDA/tonne level of FY10 yet to be achieved

                                4000
                                3000
                  | per tonne




                                2000
                                1000
                                      0
                                          FY12E
                                          FY13E




                                                                  FY12E
                                                                  FY13E




                                                                                     FY12E
                                                                                     FY13E




                                                                                                     FY12E
                                                                                                     FY13E




                                                                                                                    FY12E
                                                                                                                    FY13E




                                                                                                                                            FY12E
                                                                                                                                            FY13E




                                                                                                                                                             FY12E
                                                                                                                                                             FY13E




                                                                                                                                                                               FY12E
                                                                                                                                                                               FY13E




                                                                                                                                                                                                 FY12E
                                                                                                                                                                                                 FY13E




                                                                                                                                                                                                                 FY12E
                                                                                                                                                                                                                 FY13E
                                           FY10
                                           FY11




                                                                   FY10
                                                                   FY11




                                                                                      FY10
                                                                                      FY11




                                                                                                      FY10
                                                                                                      FY11




                                                                                                                     FY10
                                                                                                                     FY11




                                                                                                                                             FY10
                                                                                                                                             FY11




                                                                                                                                                              FY10
                                                                                                                                                              FY11




                                                                                                                                                                                FY10
                                                                                                                                                                                FY11




                                                                                                                                                                                                  FY10
                                                                                                                                                                                                  FY11




                                                                                                                                                                                                                  FY10
                                                                                                                                                                                                                  FY11




                                                  ACC             Ambuja Cement Ultratech Cem        Shree Cement      India Cement            JK Cement        JK Lakshmi       Orient Paper      Mangalam      Heidelberg
                                                                                                                                                                  Cement                            Cement        Cement
                                                                                                                                  EBITDA    Total Cost

       Source: Company, ICICIdirect.com Research
       Note: dotted line indicates Q2FY12 average EBITDA/tonne of our cement coverage universe




                                ICICI Securities Ltd. | Retail Equity Research                                                                                                                                   Page 59
Raw material cost and EBITDA margins                                                FMCG (Price led growth, margins to shrink)                                                                                                                Neutral
                                                                                    FMCG companies would continue to witness strong topline growth, which
   55.0                                                                      22.0
   54.0                                                                      20.0
                                                                                    would largely be led by price increases. We believe a moderation in
   53.0                                                                      18.0   volumes in slowing down the economy is inevitable. With the rising cost
   52.0                                                                      16.0   pressure, margins for companies would remain under pressure. Valuations
   51.0                                                                      14.0   for the FMCG sector remain stretched and risk-reward is unfavourable.
   50.0                                                                      12.0   However, in case of a sharper sell-off in markets, FMCG being a defensive
   49.0                                                                      10.0
                                                                                    sector is not as vulnerable as others.
            Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12
                                                                                         The key raw materials (palm oil-20%, copra-30%, sunflower oil-5%,
                   RM to Sales (%)               EBITDA Margins (%)                      titanium dioxide-50%, sugar-12%, and tea-~15/kg) witnessed a
Source: Company, ICICIdirect.com Research                                                significant rise in H1CY11 (YoY), which impacted the gross margins of
                                                                                         FMCG companies from Q2CY11 onwards. Hence, the companies
                                                                                         undertook calibrated price increases (~15-20%) in H2CY11 and
Rupee depreciation                                                                       simultaneously reduced their advertisement expenses to ward off the
                                                                                         impact of input cost inflation. Though raw material prices have
     55                              Rupee / US $                                        stabilised, the impact of currency depreciation (15%) is playing
     53                                                                                  spoilsport from Q3CY11. With majority of the volumes of raw materials
                                                                                         (palm oil, crude linked derivatives-LAB, titanium dioxide) being
     51
                                                                                         imported, we believe the margins of companies like Dabur, Marico,
     49                                                                                  Asian Paints and Godrej Consumer Products, would continue to remain
     47                                                                                  under pressure until the currency stabilises and raw materials prices
     45                                                                                  start declining
                                                  Nov-11

                                                           Nov-11
          Sep-11

                   Sep-11

                            Oct-11

                                        Oct-11




                                                                    Dec-11




                                                                                         With the continuous price hikes, the branded FMCG players witnessed a
                                                                                         moderation in volume growth since Q3CY11. Topline growth in H2CY11
                                       Rupee / US $
                                                                                         had been largely price led (~15% YoY in hair oils, 10-12% YoY in soaps
                                                                                         & detergents, 8-10% in cigarettes). With the prevailing high inflationary
Source: Bloomberg, ICICIdirect.com Research                                              scenario and a second round of price hikes looking inevitable (due to
                                                                                         rupee depreciation), we believe a moderation in volume growth in
                                                                                         highly competitive and price sensitive sectors (soaps, hair oils,
Imported Raw material as % of sales                                                      detergents and biscuits) would take place in CY12 also. We believe,
Company                           Imported RM (as % to Sales)                            volume growth would also take a set back due to down-trading in
ITC                                                           4.2                        demand by \consumers at the end of the pyramid (rural consumers) who
Godrej                                                          9                        already face higher inflationary challenges. However, we believe low
Nestle                                                        5.1                        penetrated categories, specifically in foods or oral care, would be less
Marico                                                        1.9
                                                                                         prone to demand deterioration and margins pressures
Source: Company, ICICIdirect.com Research
                                                                                    Exhibit 123: CNX Nifty vs. CNX FMCG Index

                                                                                        12000                                                                                                                                                             6500

                                                                                        11000                                                                                                                                                             6000
                                                                                        10000
                                                                                                                                                                                                                                                          5500
                                                                                         9000
                                                                                                                                                                                                                                                          5000
                                                                                         8000

                                                                                         7000                                                                                                                                                             4500

                                                                                         6000                                                                                                                                                             4000
                                                                                                           2-Feb-11




                                                                                                                                                                                                         23-Sep-11
                                                                                                4-Jan-11




                                                                                                                      3-Mar-11

                                                                                                                                 31-Mar-11

                                                                                                                                             3-May-11

                                                                                                                                                         31-May-11

                                                                                                                                                                     28-Jun-11




                                                                                                                                                                                             24-Aug-11




                                                                                                                                                                                                                     24-Oct-11

                                                                                                                                                                                                                                 24-Nov-11

                                                                                                                                                                                                                                              23-Dec-11
                                                                                                                                                                                 26-Jul-11




                                                                                                                                                        CNX FMCG                        CNX Nifty

                                                                                    Source: Bloomberg,, ICICIdirect.com Research




              ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                 Page 60
FTA arrivals in India
                                                                                                                     Hotels (RevPar growth to remain tepid)                                                  Underperform
                                                                                                                     Hotel industry witnessed turbulent time in the past two years on account of
                                                                                                                     global economic turmoil, higher inflation and political disturbance in the
                                      FTA to grow by ~10% in CY12E                                                   domestic market. Although, our coverage universe witnessed a topline
                                                                                                                     growth of ~18% YoY in FY11 (mainly backed by new room additions), the
                8000
                                                                                                                     growth in RevPAR (revenue per room) remained muted due to excess
                7000
                                                                                                                     supply. FTAs (Foreign Tourist Arrivals) that are major revenue contributor
                6000
                                                                                                                     for premium hotel rooms recorded 9% YoY jump during FY11. However,
                5000
                                                                                                                     due to lower corporate spending on travel as result of economic slowdown
    (in '000)




                4000                                                                                 6736            and higher room supply, occupancy levels for FY11 (61%) remained lower
                                                                                    5606



                3000
                                                                                            5420
                                                                   5283
                                                                           5134
                                                            5082




                                                                                                                     compared to FY09 (63%). Though, it was up by 300bps YoY due to low base
                                                     4100
                                             3603




                2000
                                      2933




                                                                                                                     effect. The average room rate (ARR) growth also remained subdued (~1.3%
                               2454




                1000
                   0
                                                                                                                     YoY) especially across major business destinations such as NCR, Mumbai,
                                                                                                                     Chennai and Hyderababd mainly due to oversupply of rooms. With
                               2003
                                      2004
                                             2005
                                                     2006
                                                            2007
                                                                   2008
                                                                           2009
                                                                                    2010
                                                                                            2011
                                                                                                     2012E




                                                                                                                     increased room supply and moderate demand growth, we expect FY11-13E
                                                                                                                     topline CAGR of 12% of our coverage universe, supported by new room
Source: MoT, ICICIdirect.com Research                                                                                additions and marginal growth in occupancy (by~100 bps YoY in FY13E).
                                                                                                                          Supply overhang to keep ARR growth under pressure
Occupancy and ARR growth to remain subdued                                                                                In CY11, the demand for hotel rooms was primarily driven by both
                                                                                                                          business and leisure travellers on international events such as cricket
                9000                                                                          80                          world cup. As a result, the occupancy level witnessed a 200 bps YoY
                8000                                                                          70
                                                                                                                          jump on the back of increase in international tourist arrivals by 11%
                                                                                                                          during H1CY11. However, addition of new rooms across the regions hit
                7000                                                                          60                          the ARR growth, thereby restricting RevPAR growth to the extent of 2-
                6000
                                                                                              50                          3% during the same period. We believe supply of premium rooms to
                5000                                                                                                      grow at a CAGR of ~11% in FY11-FY13E, keeping pace with same kind
                                                                                              40
                                                                                                     (%)
    (|)




                4000                                                                                                      of demand growth during the same period. This would keep the
                                                                                              30                          occupancy level under pressure with flat ARR growth.
                3000
                                                                                              20
                2000                                                                                                      Margin to remain under pressure
                1000                                                                          10
                                                                                                                          The occupancy led recovery that started from H2CY10 was on account
                    0                                                                         0                           of improving FTA across business and leisure destination followed by
                              FY07

                                      FY08

                                              FY09

                                                       FY10

                                                               FY11

                                                                          FY12E

                                                                                    FY13E




                                                                                                                          international events. However, absence of international events in FY12
                                                                                                                          and FY13 in India, we expect the ARR growth to remain subdued. Also
                                              ARR             Occupancy                                                   high fixed costs in FY13E will keep EBITDA margin under pressure
                                                                                                                          (down by ~200 bps from FY11). Despite this financial backdrop, we
                                                                                                                          believe the companies under our coverage are trading at distress
                                                                                                                          valuations (trading at average 1.5x FY13E book value as against five
                                                                                                                          years historical one year forward average book value of 3x).
    Exhibit 124: FY07-08 PAT level yet to be achieved                                                                                      Exhibit 125: Low return ratios keep valuations at discount
                              900                                                                                              1.6
                              800                                                                                                                    25                                                                 1.8
                                                                                                                               1.4
                              700                                                                                                                                                                                       1.6
                                                                                                                               1.2                   20
                              600                                                                                                                                                                                       1.4
                                                                                                                               1.0                                                                                      1.2
                  (| crore)




                              500                                                                                                                    15
                                                                                                                               0.8
                                                                                                                                     (x)




                              400                                                                                                                                                                                       1.0
                                                                                                                                               (%)




                                                                                                                                                                                                                              (x)




                                                                                                                               0.6                                                                                      0.8
                              300                                                                                                                    10
                              200                                                                                              0.4                                                                                      0.6
                              100                                                                                              0.2                   5                                                                  0.4
                                0                                                                                              0.0                                                                                      0.2
                                                                                                                                                     0                                                                  0.0
                                        F07


                                                     FY08


                                                                   FY09


                                                                                  FY10


                                                                                              FY11


                                                                                                             FY12E


                                                                                                                       FY13E




                                                                                                                                                          F07


                                                                                                                                                                  FY08


                                                                                                                                                                               FY09


                                                                                                                                                                                       FY10


                                                                                                                                                                                              FY11


                                                                                                                                                                                                     FY12E


                                                                                                                                                                                                              FY13E




                                                              Net Profit                     D/E (RHS)                                                                   RoE          RoCE       P/BV (RHS)

    Source: Company, ICICIdirect.com Research                                                                                              Source: Company, ICICIdirect.com Research




                  ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                      Page 61
                                                                                                                 Infrastructure (Structural overhang)                                                                                   Underperform
                                                                                                                 CY11 saw Construction & Infrastructure stocks underperforming the broader
                                                                                                                 indices on account of tightening policy rates, muted order inflows across
                                                                                                                 segments (except roads) & rising commodity prices affecting execution and
   We maintain our cautious view on the sector on                                                                margins. At the onset of CY12, we are at the cusp of regime where rate cut
   account of policy stance on various issues which                                                              is expected (impact to be seen from H2CY12 onwards in financials) and
   would outweigh the cyclical benefits such as                                                                  commodity may cool off bringing down the project cost for developer &
   interest rate cut & possible commodity cool off.                                                              working capital for contractors. However, we maintain our cautious view
                                                                                                                 due to policy stance on various issues such as fixation of aero charges for
                                                                                                                 airports, delay in environment clearance & land acquisition issues.


Exhibit 126: Sector snapshot for CY11
                                                                                           Financial charges Impact                               Policy Reforms Deadlock                              Commodity prices high
   9                                      Repo Rate
                                                                                           RBI has increased the policy rate            Clarity on tariff fixation in airports                  Key raw materials like steel and
   8
                                                                                           from 6.25% to 8.5% during CY11               Clarity/issues pertaining to pass                     cement up ~11% & 15%,
 (%)




   7                                                                                       leading to increase in interest              through on higher fuel costs currently                respectively, in the last 18 months
                                                                                           costs (refer exhibit on next page            impacting economics of         power                  leading to cost overruns (refer to
   6                                                                                       for details)                                                                                       exhibit on next page for details)
                                                                                                                                        business
       Dec-10
                 Feb-11
                           Apr-11
                                        Jun-11
                                                   Aug-11
                                                            Oct-11




                                                                                                                                        Land Acquisition Bill & clarity over go &
                                                                                                                                        no-go area for env. clearance



                          Rate cut of 50/100 bps by H1CY12E would lead to                                                                                                                              Commodity cool- off on the
                          earnings upgrade of 5-60% purely on interest rate                                                                                                                            back of global macro
                          savings. Additionally, it would lead to a pick-up in                                                                                                                         concerns & slowdown
                          execution and improvement in working capital cycle                                                                                                                           holds key for margin
                                                                                                                                                                                                       improvement
                                                                                                                                                Delays in Investment decisions

New investments slowing down                                                                                                            Projects Shelved

                  400,000                                                                                                   100,000
                                                                                                                                                                             75528
                  300,000                                                                                                    75,000
                                                                                                                  | crore
       | crore




                                                  375254




                  200,000                                                                                                    50,000
                                                                       318468




                                                                                                                                                           27177 29422
                                                             310529




                                                                                  309939




                                                                                                                                       23802      23134
                                                                                               223547




                  100,000                                                                                                    25,000
                                                                                                                                  -
                                    -
                                                                                                                                       Sep-10




                                                                                                                                                           Mar-11




                                                                                                                                                                              Sep-11
                                                                                                                                                  Dec-10




                                                                                                                                                                    Jun-11
                                                 Sep-10



                                                                      Mar-11



                                                                                              Sep-11
                                                            Dec-10



                                                                                 Jun-11




                                 Underperformance of developers                                                                                                                        Underperformance of contractors

                    125                                                                                                                                                                 110
                                                                                                                                                                                         90
                    100
                                                                                                                                Stretched       working                                  70
                          75                                                                                                    capital,    delay     in
                                                                                                                                                                                         50
                          50                                                                                                    execution & delay in
                                                                                                                                order inflows                                            30
                          25                                                                                                                                                             10
                               Dec-10

                                                 Feb-11

                                                             Apr-11

                                                                        Jun-11

                                                                                     Aug-11

                                                                                                    Oct-11




                                                                                                                                                                                              Dec-10

                                                                                                                                                                                                         Feb-11

                                                                                                                                                                                                                      Apr-11

                                                                                                                                                                                                                               Jun-11

                                                                                                                                                                                                                                        Aug-11

                                                                                                                                                                                                                                                     Oct-11




                                         IRB Infra                                     JP Associates                                                                                                              Sensex                         IVRCL
                                         GMR                                           GVK                                                                                                                        HCC                            NCC
                                         Sensex                                                                                                                                                                   Simplex


Source: Company, CMIE, Bloomberg, RBI, ICICIdirect.com Research




        ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                              Page 62
Exhibit 127: Rising policy rates leading to rise in interest cost as a % of revenues both for contractors & developers
                                                                                                           Interest cost as percentage of topline



                                                                                                                7                                   6.3
                                                                                                                6                                          5.8
                                                                                                                5
           9                                                                                                                    3.4




                                                                                                                                                                  Contractors
                                       Repo Rate                                                                4                     3.4     4.2




                                                                                                          (%)
                                                                                                                3
           8                                                                                                    2        2.9
     (%)




                                                                                                                1
           7                                                                                                    -



           6                                                                                                    15                                  14.4
               Dec-10




                                                                     Oct-11
                            Feb-11


                                       Apr-11


                                                Jun-11


                                                          Aug-11




                                                                                                                14
                                                                                                                                                           13.7
                                                                                                                13




                                                                                                                                                                  Developers
                                                                                                                                      11.6 12.1
                                                                                                                12      12.9




                                                                                                          (%)
                                                                                                                11
                                                                                                                                9.8
                                                                                                                10
                                                                                                                9
                                                                                                                8

Source: RBI, Company, ICICIdirect.com Research
Contractors universe – IVRCL, NCC, Simplex Infrastructure, Unity Infrastructure & Hindustan Construction
Developers universe – JP Associates, GMR Infra, GVK Power & IRB Infrastructure



Exhibit 128: Rising commodity prices & policy paralysis causing delays and cost overruns across projects

                        Rising commodities prices and
                        wage inflation leading to cost                                                                                        Policy paralysis causing delays
                        overruns                                                                                                              in investments across segments




                                                                               Original cost     Anticipated No. of proj with No. of proj with Time overrun
                                     Sector                  No. of projects       (| crore)   cost (| crore)  cost overrun     time overrun range (months)
                                     Atomic Energy                        4          29228            34066                 2                3       11-41
                                     Civil Aviation                       2           3216             3216                 0                2          7-9
                                     Coal                                 7          13075            15940                 6                5       24-48
                                     Fertilisers                          3           4066             4066                 0                1          1-1
                                     Mines                                1           4092             4402                 1                1       30-30
                                     Steel                                5          37769            64101                 5                2       25-36
                                     Petroleum                           37         138786           147266               10               14        5-120
                                     Power                               45         164218           168398                 5              22        10-83
                                     Railways                            29          36547            71799               23               10        3- 201
                                     Road                                13          19910            21090                 1                3         1-16
                                     Shipping & Ports                     6          10128            10558                 3                3         2-25
                                     Telecommunications                   3           3637             4190                 1                0            0
                                     Urban Development                    2          15071            30503                 2                2       12-15
                                     Water Resources                      1             543            1187                 1                1       60-60
                                     Total                              158         480285           580782               60               69



Source: MOSPI, ICICIdirect.com Research




ICICI Securities Ltd. | Retail Equity Research                                                                                                                                  Page 63
Scenario build for CY12E                                             IT (off-shoring market share gains, currency)                                         Outperform
Worst case - Macro worsens                                           The IT sector had a favourable year in CY11 as the year-to-date BSE IT index
Positives:                                                           outperformed the Sensex. BSE IT declined 18.3% vs. a 23.3% decline in the
1.Rupee depreciation will lever the rupee                            Sensex led in part by INR depreciation, volume growth, a healthy balance
  revenues and EBIT margins
                                                                     sheet and cash flow generation. As for CY12, depreciating rupee, tapering
2.Attrition could be light in FY13
                                                                     attrition, likely lower wage inflation, steady volume (offshoring market share
3.Wage hikes could be subdued
                                                                     gains) could be likely positives while macro uncertainty, delay in budgeting
Negatives:                                                           cycle, discretionary spending, pricing, expensive valuations could be
1.Likely delay in CY12E IT budgets cycles                            negatives. During the previous recession, Tier-I IT vendors bottomed at
2.Discretionary spending remains under pressure                      trailing 12 month PE range of 6-13x. Consequently, we assembled likely
3.Pricing continues to be pressure in CY12                           positives/negatives in our scenario builder. We believe the positives
4.Large deals signing significantly reduces                          outweigh negatives excluding debt crisis in Europe, the outcome of which is
                                                                     indeterminate. Conversely, the macro remains uncertain and sell-offs
Best case - Macro improves                                           triggered due to “Lehman” like events in Europe could offer a buying
Positives:
                                                                     opportunity in quality names for long-term investors.
1. CY12E IT budgets are concluded on time
2. Discretionary spending helps lift volumes
3. Cost-of-living-adjustments (COLA) price increases                 Rupee depreciation may lift rupee revenues/operating margins
4. Deal signing improves & Indian vendors earn market share
                                                                     The Indian rupee depreciated ~14% since mid September 2011 and could
Negatives:
                                                                     benefit the topline, operating margin & earnings depending on the hedged
1. Rupee appreciates with significant FII inflows                    positions of respective companies. Table below highlights the likely impact
   as macro uncertainity concerns alleviate                          of rupee depreciation on FY12E & FY13E revenue estimate & operating
2. Attrition increases. Wage hikes higher than                       margins
   the current 10-12% offshore and 2-4% onsite                       Exhibit 129: Analysis of favourable currency movement
Source: ICICIdirect.com Research                                                      Current est       |/$ @ 50.8 |/$ @ 52 Current est            |/$ @ 50.8 |/$ @ 52
                                                                                        |/ $    FY12E             FY12E    FY12E   |/ $    FY13E         FY13E        FY13E
Hedging details as of Q2FY12                                         Infosys           47.0                                        45.3
                                                                     Revenues                  33,851            34,763   34,980          36,405        40,833       41,789
                                            Hedges O/S ($ million)
                                                                     EBIT                       9,688            10,146   10,255          10,129        14,066       14,905
TCS                                                       2,900
Infosys                                                     742      EBIT margin(%)             28.6%             29.2%    29.3%           27.8%         34.4%        35.7%
Wipro                                                     1,700
HCL tech                                                      713    TCS               45.1                                        44.7
Source: Company, ICICIdirect.com Research                            Revenues                  44,670            46,152   46,995          50,513        57,417       58,762
                                                                     EBIT                      12,067            12,972   13,197          13,469        16,833       17,489
                                                                     EBIT margin(%)             27.0%             28.1%    28.1%           26.7%         29.3%        29.8%


                                                                     Wipro             45.3                                        45.3
                                                                     Revenues                  36,116            37,009   37,587          40,823        44,515       45,312
                                                                     EBIT                       6,889             7,478    7,859           7,444         9,781       10,285
                                                                     EBIT margin(%)             19.1%             20.2%    20.9%           18.2%         22.0%        22.7%


                                                                     HCL Tech          44.7                                        44.3
                                                                     Revenues                  19,188            20,188   20,315          21,663        24,875       25,457
                                                                     EBIT                       2,823             3,271    3,328           3,095         4,621        4,898
                                                                     EBIT margin(%)             14.7%             16.2%    16.4%           14.3%         18.6%        19.2%
                                                                     Source: Company, ICICIdirect.com Research



                                                                     Visibility, pricing deteriorate sharply in CY08-CY09
                                                                     Discussions with Tier I vendors point to unanimous rhetorics such as “no
                                                                     project cancellation yet”, “positive discussions on CY12E budgets but deal
                                                                     signing low”, “uncertainty level high”, “off-shoring could benefit eventually”,
                                                                     no pricing pressure” and “modest decision making delay”. Though we
                                                                     acknowledge that Indian IT vendors gain in offshoring irrespective of
                                                                     increase/decrease in IT budgets and could lead to stable volumes, we
                                                                     highlight that the timing of budget finalisation is crucial. The rationale is
                                                                     management commentary on CY08 IT budgets turned circumspect only in



         ICICI Securities Ltd. | Retail Equity Research                                                                                                          Page 64
                                                 April 2008, during the previous recession, despite January-March quarter
                                                 being the budgeting quarter. Finally, pricing weakness during 2008 makes
                                                 us cautious despite optimistic management commentary.

                                                 Exhibit 130: Blended pricing trends                                     Exhibit 131: Onshore/offshore pricing trends

                                                   4.0                                                                       6.0


                                                                                                                             3.0
                                                   0.0




                                                          Jun-08

                                                                   Dec-08

                                                                            Jun-09

                                                                                     Dec-09

                                                                                              Jun-10

                                                                                                       Dec-10

                                                                                                                Jun-11
                                                                                                                             0.0




                                                                                                                          %
                                                  %




                                                                                                                                    Sep-09
                                                                                                                                             Dec-09
                                                                                                                                                      Mar-10
                                                                                                                                                               Jun-10
                                                                                                                                                                        Sep-10
                                                                                                                                                                                 Dec-10
                                                                                                                                                                                          Mar-11
                                                                                                                                                                                                   Jun-11
                                                                                                                                                                                                            Sep-11
                                                   -4.0
                                                                                                                             -3.0


                                                   -8.0                                                                      -6.0
                                                                        TCS              Infosys Blended                                Wipro Onsite                             Wipro Offshore

                                                 Source: Company, ICICIdirect.com Research                               Source: Company, ICICIdirect.com Research




                                                 Sell-offs from “Lehman” like events present buying opportunities
                                                 During Lehman crisis, large caps TCS, Infosys bottomed at an average TTM
                                                 PE multiple of 10x. Though these were one-off cases, we believe, repeat of
                                                 similar events represents aggressive buying opportunities.




ICICI Securities Ltd. | Retail Equity Research                                                                                                                                               Page 65
Ad revenue growth of media companies
                                                                                           Media (Ad growth to moderate)                                         Neutral
                                                                                           CY11 was a year of economic slowdown characterised by a slowdown in ad
                  6,000                       22.4                          25             revenue growth across all sections of the media industry. With corporates
                  5,000                                                     20             curtailing ad spends in the event of rising input costs and subdued
                  4,000                                          13.4                      economic growth expected in the next few quarters, ad revenue would grow
                                  12.4                                      15
     (| crore)




                                                       11.1                                moderately at 10-12% in the next fiscal. Expected rate cuts in mid 2012
                  3,000




                                                                                    (%)
                                                                            10             would boost economic activity, which may lead to a spurt in ad spends in
                  2,000
                                                                                           the second half of the next fiscal.
                                                                            5
                                  3,611


                                               4,420


                                                        4,912


                                                                 5,569


                  1,000
                                                                                              The government has mandated digitisation with March 31, 2014 set as
                           0                                                0
                                                                                              the sunset date for analogue cable. This opens up a huge opportunity
                                  FY10


                                               FY11


                                                        FY12E


                                                                 FY13




                                                                                              for the digital cable and DTH industry. Broadcasters also stand to gain
                                                                                              due to plugging of subscription revenue leakages. Currently, there are ~
                               Total Ad revenue - LHS           Growth (RHS)                  67 million analogue cable households, which will have to move to either
                                                                                              digital cable or DTH by March 31, 2014. However, digitisation will need
Source: Company, ICICIdirect.com Research
                                                                                              huge upfront investment. The DTH industry is relatively well funded and
                                                                                              has the distribution infrastructure in place.
Dish TV subscriber and ARPU
                                                                                              We expect subscriber addition of 13.5 million for the DTH industry and
                                                                                              3.1 million subscribers for Dish TV in FY13E without considering the
                  18           171                                 162          200           effect on mandatory digitisation. The company imports set top boxes,
                  16                                   154
                                             140                                              which could dampen the profitability in case of currency depreciation.
                  14                                                            150
                  12
                                                                                              We expect revenue growth of by 23.9% and the company to turn
    In Millionn




                  10                                                                          positive PAT in FY13.
                                                                                       |




                                                                                100
                   8                                               16.2
                   6                                   13.2                                   CY11 witnessed progressive launches while CY12 would be a year of
                                            10.4
                   4           6.9
                                                                                50            consolidation wherein companies would focus on gaining further
                   2                                                                          inroads in new markets entered in the last fiscal. Revenue growth would
                   0                                                            0             be backed by price hikes and increasing circulation. Margins across the
                               FY10



                                             FY11E



                                                       FY12E



                                                                    FY13E




                                                                                              print companies are expected to improve in CY12 due to the absence of
                                                                                              cost related to any new launches. Newsprint prices may remain a
                                       Subscribers       ARPU (RHS)
                                                                                              concern especially with the depreciation of the rupee. However, most
Source: Company, ICICIdirect.com Research                                                     companies have increased the proportion of domestic newsprint to
                                                                                              counter this. We expect print media companies to grow in revenues by
Households Data of C&S Industry                                                               9.9% in FY13 and in PAT by 25.0% primarily due to improving margins.

(Mn Households)                             CY10 CY11E                          CY12E         CY11 was marked by a very subdued ad revenue growth. National
C&S                                          102    112                           123         advertisers had initially caught up with their local counterparts but in the
Analogue                                      68     67                            66         latter half of the year they felt the effect of the slowing economy and cut
DTH                                           28     38                            48         down their ad spends. However, we expect national advertisers to catch
Digital                                        6      7                             9         up with their local counterparts in CY12.
Source: FICCI report 2011, ICICIdirect.com Research
                                                                                              The radio industry would see Phase III auctions in CY12 wherein over
With mandatory digitisation 68 million analogue cable                                         700 licenses will be up for grabs. Radio companies are operating at peak
households will move to either DTH or digital cable                                           capacities and revenue growth will primarily be through price hikes until
                                                                                              more capacity is created. ENIL, with its huge cash reserve, is in the best
                                                                                              position to capitalise on the auctions. We expect 12.9% growth in
ATP and occupancy in Multiplexes
                                                                                              revenues and 28.4% growth in PAT in FY13 for ENIL without taking into
                                                                                              consideration the Phase III auction.
                                                        30
                  200                                                       31
                                                                            30                CY11 has seen better occupancy than that in CY10 for multiplexes albeit
                                 29                                29       30                at slightly lower ATPs. The multiplexes would focus on property
                  150
                                                                            29
                                                                            29                additions with stable ATP to maintain revenue growth. We expect 44
                  100                        27                             28                screen additions in our multiplex universe in FY13. However, we expect
                                                                                     (%)
    (|)




                                169          173                            28
                                                       143       141                          the ATPs to reduce ~ 2% and occupancy to reduce by ~150 bps across
                                                                            27
                   50                                                                         multiplexes in FY13 due to expansion in smaller cities. We expect
                                                                            27
                                                                            26                multiplexes revenue to grow by 9.0%.
                       0                                                    26
                                FY10



                                             FY11E



                                                       FY12E



                                                                   FY13E




                                            ATP        Occupancy

Source: Company, ICICIdirect.com Research


                   ICICI Securities Ltd. | Retail Equity Research                                                                                              Page 66
Prices of steel & primary raw materials                                                                                                                     Metals and Mining (Tough road ahead)                                                                                                    Underperform
                                                                                                                                                            CY11 was a challenging year for the metals and mining sector on the back of
              500                                                                                                            45000
                                                                                                                                                            a muted demand scenario, elevated raw material costs and restriction of
              400                                                                                                            40000                          mining of iron ore in certain areas. During the first nine months of CY11,




                                                                                                                                       (|/tonne)
 ($/tonne)




              300                                                                                                            35000                          prices of key raw materials such as iron ore and coking coal were on an
              200                                                                                                            30000                          upward trend while in Q4CY11 along with a decline in raw materials costs
              100                                                                                                            25000                          steel prices also tapered off resulting in no respite for steel companies. As a
                  0                                                                                                          20000
                                                                                                                                                            result, on the back of elevated cost structure the operating margins of steel
                                                                                                                                                            players remained under pressure for CY11. Going forward, on the back of
                            Q2FY11


                                              Q3FY11


                                                                  Q4FY11


                                                                                    Q1FY12


                                                                                                         Q2FY12




                                                                                                                                                            global uncertainty and a muted demand scenario, we expect global steel
                          Iron Ore                              Coking Coal                                    HRC (RHS)
                                                                                                                                                            demand to remain subdued in CY12.
                                                                                                                                                            Exhibit 132: Bird’s eye view of operating performance of major steel companies                                                                     (last 5 quarter)
Source: Bloomberg, ICICIdirect.com Research

                                                                                                                                                                          60000                                                  Contraction seen in EBITDA per tonne of steel
Prices of Copper & Aluminium on LME
                                                                                                                                                                                                                                 players over last couple of quarters on the back of
                                                                                                                                                                                                                                 higher operating costs
        11000                                                                                                                     3400


              9000                                                                                                                2600                                    40000
                                                                                                                                               in $/tonne
 in $/tonne




                                                                                                                                                                |/tonne




              7000                                                                                                                1800


              5000                                                                                                                1000                                    20000
                       Apr-10
                                Jun-10
                                         Aug-10
                                                    Oct-10
                                                             Dec-10




                                                                                                      Aug-11
                                                                                                                Oct-11
                                                                       Feb-11
                                                                                Apr-11
                                                                                          Jun-11



                                                                                                                         Dec-11




                                         Copper (LHS)                                    Aluminium (RHS)

Source: Bloomberg, ICICIdirect.com Research                                                                                                                                  0
                                                                                                                                                                                  Q2FY11

                                                                                                                                                                                           Q3FY11

                                                                                                                                                                                                     Q4FY11
                                                                                                                                                                                                              Q1FY12

                                                                                                                                                                                                                       Q2FY12



                                                                                                                                                                                                                                 Q2FY11
                                                                                                                                                                                                                                          Q3FY11

                                                                                                                                                                                                                                                   Q4FY11

                                                                                                                                                                                                                                                            Q1FY12
                                                                                                                                                                                                                                                                     Q2FY12



                                                                                                                                                                                                                                                                                  Q2FY11

                                                                                                                                                                                                                                                                                           Q3FY11
                                                                                                                                                                                                                                                                                                    Q4FY11

                                                                                                                                                                                                                                                                                                             Q1FY12

                                                                                                                                                                                                                                                                                                                      Q2FY12
Prices of zinc & lead on LME
                                                                                                                                                                                                    Tata Steel                                        SAIL                                          JSW

                  3050                                                                                                                                                                              RM Costs              Power costs          Employee cost                  Other costs            EBITDA/Tonne
     in $/tonne




                  2300                                                                                                                                      Source: Company, ICICIdirect.com Research
                                                                                                                                                            *- Standalone numbers are used for comparison purpose
                  1550

                   800                                                                                                                                           The ongoing slow down in global economy is expected to keep demand
                                                                                                                                                                 for industrial metals under pressure. The recent decline seen in the base
                           Apr-10
                                     Jun-10
                                                  Aug-10
                                                             Oct-10
                                                                       Dec-10




                                                                                                                    Aug-11
                                                                                                                              Oct-11
                                                                                 Feb-11
                                                                                             Apr-11
                                                                                                         Jun-11




                                                                                                                                       Dec-11




                                                                                                                                                                 metal prices has brought the prices close to marginal cost of production.
                                                                      Zinc                      Lead                                                             Going forward we believe that movement in base metal prices would be
                                                                                                                                                                 a function of global economic factors.
Source: Bloomberg, ICICIdirect.com Research
                                                                                                                                                                 The metal sector is currently facing headwinds in the form of muted
Steel demand in recent years                                                                                                                                     demand and elevated cost structure. The ongoing debt concern in
                                                                                                                                                                 Europe coupled with signs of slow down in global economy has
                                                                                                                                                                 adversely impacted the overall demand. On the domestic front the slow
                  20                                                                                                                                             down in infrastructure spending & delay in implementation of capex
                                                                                                                                                                 plans has led to domestic steel consumption growing by merely 3.9%
                  15
                                                                                                                                                                 during the first 8 months of FY’12, as compared to CAGR of ~9.0% over
   YoY (%)




                  10                                                                                                                                             the last five years . Going forward we believe that the ongoing slow
                                                                                                                                                                 down in global economy is expected to keep demand for metals under
                  5                                                                                                                                              pressure. In current scenario, we believe companies having backward
                  0
                                                                                                                                                                 integration and better product portfolio are better placed.
                                FY08



                                                           FY09



                                                                                  FY10



                                                                                                               FY11



                                                                                                                                  FY12 (P)
                                                                                                                                    YTD




Source: JPC, Ministry of Steel, ICICIdirect.com Research
* YTD FY12(P) Provisional



                       ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                                            Page 67
Brent crude oil prices and exchange rates
                                                                                                                                                          Oil & Gas (Uncertainty of regulatory reforms offsets opportunity from
                   120                                                                                                                  55                cheap valuations)                                                 Neutral
                   100                                                                                                                  50                The oil & gas sector reported a tepid performance in CY11 on lack of
                    80
                                                                                                                                                          regulatory reforms, uncertainty about government policies and lower
 US$




                                                                                                                                        45




                                                                                                                                                      |
                    60
                                                                                                                                                          domestic gas production. In CY12, we believe elevated Brent crude oil
                    40                                                                                                                  40
                                                                                                                                                          prices on geo-political tensions and remote possibility of petroleum
                    20                                                                                                                  35                products’ pricing deregulations would continue to remain a drag on the
                                 F Y 04
                                          F Y 05
                                                    F Y 06
                                                                F Y 07
                                                                          F Y 08
                                                                                        F Y 09
                                                                                                   F Y 10
                                                                                                              F Y 11
                                                                                                                        F Y 12E
                                                                                                                                                          OMCs for H1CY12. We prefer to play the oil & gas sector through the PSU
                                                                                                                                                          upstream companies on account of lower valuations (BSE oil and gas index
                        C rude oil prices (L H S )                                                  E xchange rate (R H S )                               has been trading near historical lows of 10-12x PE multiple) and gas utility
Source: Bloomberg, ICICIdirect.com Research
                                                                                                                                                          companies as defensive bets within the sector.
Gross oil under-recoveries at US$ 52/bbl                                                                                                                     Geo-political tensions would continue to mount upward pressure on
                                                                                                                                                             crude oil prices and limit the downside in crude oil prices caused by
                                                                                                                                                             weaker demand forecasts. We have revised our FY12 Brent crude oil
                   2500
                                                                                                                                                             price estimate to US$105 per barrel and expect average Brent crude oil
                   2000                                                                                                                       2059
                                                                                                                                                             prices to remain at US$100 in FY13
                                                                                                                       1353                   1673
                   1500
 (| bn)




                                                                             1033 782                                                         1287           We believe that pressure from a depreciating currency and high Brent
                   1000                                                                                                                        900
                                                                         771    461                                                                          crude prices would lead to record high under-recovery of ~ | 135000
                    500                                                                                                                                      crore in FY12. With state elections round the corner and crude prices
                                                        494
                                          400
                           0                                                                                                                                 remaining firm at current levels, price reforms remain a remote
                                      F Y 06

                                                   F Y 07

                                                                F Y 08

                                                                               F Y 09

                                                                                             F Y 10

                                                                                                            F Y 11




                                                                                                                                                             possibility in the near term. We believe that price controls and delayed
                                                                                                                         F Y 12E

                                                                                                                                        F Y 13E




                                     $90                          $100                                $110                                  $120             payment of subsidy from the government would continue to burden the
Source: PPAC, ICICIdirect.com Research                                                                                                                       PSU OMCs for H1CY12 and offsets the positives such as valuations
                                                                                                                                                             hovering around their 2008 levels
Oil under-recoveries subsidy sharing (|)
                                                                                                                                                             The share of Indian government, downstream and upstream companies
                                                                                                                                                             w.r.t. crude oil gross under-recoveries stood at 52.5%, 8.8% and 38.7%,
                     1500                                                                               1353                                                 respectively, in FY11. We assume the same share in future with total
                                                                                                                                   1287
                     1250                                                                                      119                     113                   gross under-recoveries remaining at ~|135000 crore and ~|128500
                                                1033
                     1000                      0                                                                                                             crore, in FY12 and FY13, respectively. Even at 38.7% subsidy sharing,
                                                                                         782                   710                     676                   PSU upstream companies are trading at ~10x, ~9x and ~8x FY11,
            | bn




                         750                                                             69
                                           713                                                                                                               FY12E and FY13E EPS, respectively. We believe current valuations
                                                                   461
                         500                                                            410
                                                                  56                                                                                         would offer good upsides from the current levels
                         250                                     260                                           524                     498
                                           320
                                                                 144
                                                                                        303                                                                  We expect private upstream companies to benefit from rupee
                                 0
                                                                                                                                                             depreciation with Cairn India benefiting from higher realisations and
                                          FY09                  FY10                FY11E                   FY12E                   FY13E
                                                                                                                                                             Reliance from refining margins. We believe Singapore Gross Refining
                                                                                                                                                             Margins (GRMs) would remain at the current levels of ~US$5-8 per
                                           Upstream companies                                      Government                         OMC's
                                                                                                                                                             barrel in the next year on increased heavy-light crude oil spreads
Source: PPAC, ICICIdirect.com Research
                                                                                                                                                             The Fukushima nuclear disaster in March 2011 led to higher imports of
Oil under-recoveries subsidy sharing (%)                                                                                                                     LNG in Japan, thus boosting spot LNG prices in Asia to US$14-18 per
                                                                                                                                                             mmbtu in the last year. Lower domestic gas production has contributed
                F Y 09      F Y 10 F Y 11E                                                                    F Y 12E                       F Y 13E
 U pstre a m     31.0        31.3      38.7                                                                      38.7                          38.7
                                                                                                                                                             to increased import of LNG in India, thereby increasing the raw material
 G ovt.          69.0        56.5      52.4                                                                      52.5                          52.5          costs for companies. We believe it would be difficult for companies to
 O MC 's           0.0       12.2       8.8                                                                        8.8                           8.8         continue passing on increase in prices for the second year in a row and,
 T ota l        100.0      100.0     100.0                                                                      100.0                         100.0          hence, their margins would decline. Nonetheless, the recent correction
Source: PPAC, ICICIdirect.com Research                                                                                                                       in prices of gas utility companies offers a defensive investment
Singapore gross refining margins                                                                                                                             opportunity

                   10
  US$ per barrel




                    8
                    6
                    4
                    2
                    0
                        Dec-99
                                 Dec-00
                                          Dec-01
                                                   Dec-02
                                                             Dec-03
                                                                      Dec-04
                                                                               Dec-05
                                                                                          Dec-06
                                                                                                   Dec-07
                                                                                                             Dec-08
                                                                                                                       Dec-09
                                                                                                                                   Dec-10
                                                                                                                                             Dec-11




Source: Reuters, ICICIdirect.com Research



                           ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                  Page 68
Domestic performance: I-Direct Universe
                                                                                      Pharmaceuticals (US to remain key growth driver)                                                 Outperform
Company                            Market Share (%) MAT Nov'11 Gr(%)
                                                                                      In CY11, the BSE Healthcare index outperformed Sensex by ~10%. This, we
Sun Pharma                         4.5                                          23
                                                                                      believe, was on account of the defensive nature of the sector, resilience
Cadila Healthcare                  3.9                                          15
                                                                                      shown by majority of the players by way of a healthy performance on the
Lupin                              3.0                                          20
                                                                                      back of strong exports growth to advanced countries like the US, EU and
Glenmark                           1.8                                          17    Japan and stable growth in the domestic formulation business.
Ipca Labs                          1.7                                          17        • We expect the domestic formulations market to grow at 13-14% per
Torrent Pharma                     1.5                                          14            annum mainly driven by chronic therapies. However, overall growth
Elder Pharma                       1.1                                           8            in the domestic market would be lower as we expect mid single digit
Unichem Labs                       1.1                                           3            growth in acute therapies. We expect pricing pressure in some acute
Indoco Remedies                    0.8                                           7            therapies such as anti-infectives and gastrointestinals (GI). The
Source: AIOCD data base, ICICIdirect.com Research                                             domestic formulation growth in 2012 would be driven by volume
MAT Nov: TTM numbers as of Nov’11                                                             rather than price hikes
                                                                                          • The US government’s endeavour to push for more healthcare
                                                                                              reforms in order to control healthcare spend augurs well for Indian
                                                                                              generic players but more so for integrated players that can fathom
                                                                                              the pressure in realisation. On the flip side, increased scrutiny from
                                                                                              the USFDA conversant with its zero tolerance policy is likely to delay
                                                                                              the approvals. More importantly, it will also compel Indian players to
                                                                                              maintain highest quality standards. The count of shortage drugs in
                                                                                              the US market has increased in the last couple of months due to
                                                                                              regulatory issues at leading global generic players such as Hospira
                                                                                              and Teva. This would help Indian players to improve the market
                                                                                              share in the US.
                                                                                          • We also see good opportunities in the Pharmerging economies
                                                                                              especially Brazil, Mexico and Russia as these economies more or
                                                                                              less possess the same market dynamics as India. In the CRAMS
                                                                                              space, we see a visible revival in fortunes on account of the pause in
                                                                                              de-stocking at the clients end and adoption of more dynamic JIT
                                                                                              approach by most of the clients
                                                                                          • On the profitability front, we expect some margin pressure on
                                                                                              account of (1) fall in realisations across all geographies and (ii) high
                                                                                              attrition rate
                                                                                          • Depreciation of the rupee can improve realisation to some extent.
                                                                                              As per our calculation, for every one rupee depreciation vis-à-vis the
                                                                                              dollar, there will be margin accretion in the range of 17-55 bps.
                                                                                              However, companies like Aurobindo Pharma, Glenmark Pharma and
                                                                                              Strides also own foreign currency loans, which limit overall benefits.

    Exhibit 133: Domestic formulations-Therapy wise growth in CY11                                        Exhibit 134: Domestic formulations-expected therapy wise growth in CY12

                      30                                                                                                   30
                                                                         Anti-Diabetics                                                                                    Anti-Diabetics
                      25            CVS                                          25                                        25                                                     25
                                                                                                                                       CVS                                              Dermatology
                                                  Vitamins                             Dermatology                                                  Vitamins
                      20             20                                                                                    20                                         Gyneacology
                                                                  Gyneacology                                                            18                                                    18
                                                                                                               Growth(%)
          Growth(%)




                                                    17                                      16
                      15                                                 15            15                                  15                          15            15    15           15
                                             12              12    13                                                                                          12
                              11                                                      CNS                                                                           Respiratory        CNS
                      10                                          Respiratory                                              10                  10
                                                     Pain mgt                                                                      8                    Pain mgt
                                             GI
                      5    Anti-Infectives                                                                                 5                   GI
                                                                                Industry growth 14.8%                           Anti-Infectives                     Expected Industry growth 13.5%
                      0                                                                                                    0

    Source: AIOCD database, ICICIdirect.com Research                                                      Source: ICICIdirect.com Research




           ICICI Securities Ltd. | Retail Equity Research                                                                                                                                    Page 69
                                                                                     Key events to watch in 2012
Focus on therapies
                                                                                     New Pharma pricing policy: We may see some impact on account of the likely
                                                                                     implementation of the new PPP, which will increase price control to over
         Indoco                                                                      60% of the drugs from the current ~20%. Although the policy is still under
       Unichem                                                                       discussion, if implemented, we may see some negative impact for some top
          Elder                                                                      brands. As per AIOCD data, the impact would be around | 1500 crore.
         Torrent
      Ipca Labs
                                                                                     Generic Drug User Fee Act: Approval for Generic Drug User Free Act (GDUFA)
      Glenmark
                                                                                     in the US would be an important event for Indian companies. Under the act,
           Lupin
                                                                                     companies need to pay fees when they are filing ANDA or seeking approval
          Cadila
                                                                                     for manufacturing facilities. The USFDA is aiming to collect US$ 1.5 billion
    Sun Pharma
                                                                                     for five years from all generic players, which would be used to expedite
                   0         20        40          60        80          100         ANDA approvals and reduce time for inspection of new/existing
                                             (%)                                     manufacturing facilities.

                                     Acute         Chronic                           US guidelines for Biosmiliars: The USFDA will take public comments on
                                                                                     Biosmiliar guidelines and user free act for the US market till the middle of
Source: AIOCD database, Company, ICICIdirect.com Research
                                                                                     January and submit the final agreement to the United States Congress.

ANDA approvals from USFDA                                                            We remain positive about the outlook for the pharma and healthcare sectors
                                                                                     for 2012. Our belief is based on the capabilities that most of the players have
  200
                                                                  36                 developed over the years to cope with challenges in a particular geography.
  150
              33
                                                                                     We expect players with optimum geographical mix to perform better than
                              24                                  49
              32                                   30                                players with focused markets. The US will remain the key market to conquer
  100                         39
                                                   30             63                 on account of impending patent cliff and, hence, opportunities in both FTF
              52              30
   50                                              42                                and generics. Brands worth ~$25-30 billion are expected to lose patent
              37              48
                                                   26             46                 exclusivity in 2012 itself. Although we remain positive about the sector
    0
                                                                                     outlook, we may not see outright outperformance of the Healthcare index
             2008             2009             2010               2011
                                                                                     vis-à-vis the Sensex on account of substantial valuation premium (~30%
                              Q1     Q2      Q3         Q4
                                                                                     currently). We may, however, see select pharma companies outperforming
Source: USFDA, ICICIdirect.com Research                                              the broader index.
                                                                                     Exhibit 135: One year forward PE graph
Drugs going off patent in 2012
                                                                                               35
Drug                   Therapeutic                            Brand sales
                                                                                               30                                                                                                                                               30% premium
Plavix                 Anti-coagulants                                         6.0
                                                                                               25
Seroquel               CNS                                                     3.7
                                                                                               20
                                                                                         (x)




Singulair              Anti -asthma                                            3.2
Actos                  Anti-diabetes                                           3.2             15
Diovan                 Anti-hypertensive                                       2.5
                                                                                               10
Lexapro                CNS                                                     2.3
                                                                                               5
Avapro                 Anti-hypertensive                                       1.2
                                                                                                                      Nov-06




                                                                                                                                                 Nov-07




                                                                                                                                                                            Nov-08




                                                                                                                                                                                                        Nov-09




                                                                                                                                                                                                                                   Nov-10




                                                                                                                                                                                                                                                              Nov-11
                                                                                                    Mar-06

                                                                                                             Jul-06



                                                                                                                               Mar-07

                                                                                                                                        Jul-07



                                                                                                                                                          Mar-08

                                                                                                                                                                   Jul-08



                                                                                                                                                                                     Mar-09

                                                                                                                                                                                              Jul-09



                                                                                                                                                                                                                 Mar-10

                                                                                                                                                                                                                          Jul-10



                                                                                                                                                                                                                                            Mar-11

                                                                                                                                                                                                                                                     Jul-11




Viagra                 Erectile Dysfunction                                    1.0
Eloxatin               Anti-cancer                                             1.0
 Provigil            Anti-analeptic                                            1.0                                                                                  Healthcare                         Sensex
Sales in US$ billion
Source: ICICIdirect.com Research                                                     Source: BSE,,ICICIdirect.com Research




            ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                           Page 70
                                                                                       Power (Too many uncertainties warrant caution)                                                                                                                      Underperform
Capacity addition – Year wise in 11th plan
                                                                                       The power sector in CY11 was characterised by robust capacity addition
   90000                                                                    80         (12737 MW-taking total capacity to 1,85,496 MW), tariff hikes, fuel shortages,
                                                                            70
   72000                                                                               back down by SEBS, change in Indonesian coal law and rise in interest
                                                                            60
   54000                                                                    50         rates. We expect capacity addition to be robust in CY12 (our bottom up
                                                                                       analysis suggests that ~ 9400 MW can be added in CY12). We are cautious
 MW




                                                                            40




                                                                                 (%)
   36000                                                                    30         as structural issues like policy reforms and fuel shortages are more critical
                                                                            20
   18000
                                                                            10
                                                                                       than cyclical factors like falling interest rates. One should stick to regulated
          0                                                                 0          entities like NTPC, NHPC (regulated players, less fuel risk, high Actual
               FY08    FY09     FY10 FY11E FY12E           YTD XI th plan              Contract Quantity from Coal India, sustainable earnings growth via capacity
                                                               estmates                addition).
          Achievement              Target             % achievement (RHS)                             Tepid production growth by Coal India and declining gas output from
                                                                                                      Reliance (KGD6 basin) has resulted in fuel shortages leading to newly
                                                                                                      commissioned power capacities operating at 30-50% PLFs. In 2012, we
Tariff hike by SEBs in FY12 till date                                                                 expect policy initiatives on coal sourcing and mining in terms of coal
                                                                                                      block auctions and clarity on go – no go area in coal blocks to be
                                            Power tariff                                              highly crucial for a revival of interest
Date (Month)          State                 hike (%)               Status
                                                                                                      Elevated coal prices coupled with rupee depreciation have kept
Apr-11                Rajasthan                 20%                Hiked
May-11                Punjab                     9%                Hiked
                                                                                                      imported coal expensive though thermal coal prices have declined
Jun-11                Bihar                     11%                Hiked                              18% YTD. International benchmarking of coal prices in Indonesia will
                                                              Hiked , roll back                       pose stiff challenges for a pass through as initial bid documents did
Jul-11                Assam                  56 paise            demanded                             not account for such law changes- a significant headwind for power
Aug-11                Delhi                    22%                 Hiked                              utilities that rely on imported coal (PPAs with partial pass through)
Aug-11                Haryana                   1%                 Hiked
                                                                                                      Merchant rates are expected to remain at | 4 – 4.5/kwhr in FY13E
Aug-11                Jharkhand                19%                  Hiked
Sep-11                Gujarat                   4%                  Hiked
                                                                                                      mainly on account of cost push and rising peak power deficits (> 11%
                                             40% / 45                                                 in last 3 months).
Sep-11                Maharashtra             paisa                 Hiked
                                                                                                      Losses of SEB in FY10 have increased to | 62700 crore. In FY12, till
                                             30 paise
                                                                                                      date 11 SEBs have announced tariff hikes ranging from 1% - 40%.
Oct-11                Karnataka                /7%                  Hiked
Nov-11                Tamil Nadu               40%                Proposed
                                                                                                      Rising losses would necessitate tariff hikes, back down and investment
                                                                                                      in distribution (bringing down AT & C losses) in CY12
Valuations
                                                                                                      We expect M&A in power utilities in CY12 where fuel scarcity and
                                RoE(%)                           P/B                                  environment clearance forces smaller players to cash out. There have
                              FY12E         FY13E          FY12E        FY13E                         been instances in the past like CESC’s acquisition of Dhariwal Infra and
NTPC                           13.4           13.0            2.0            1.8                      Essar’s acquisition of Navbharat Power project
NHPC                            9.2            9.4            0.8            0.8
                                                                                       Exhibit 136: Project announcements have grown 50% YoY while projects under implementation
Neyveli                         9.1           10.0            1.0            0.9
                                                                                       have declined 30% ( | 77973 crore) as on June 2011
Tata Power                     11.1           12.3            1.5            1.3
JPVL                           20.2            9.8            1.7            0.7                      180,000
Lanco                           6.3            7.1            0.5            0.5                      160,000
PTC                             5.8            5.9            0.5            0.5                      140,000
                                                                                                      120,000
                                                                                                      100,000
                                                                                             crore)




                                                                                                       80,000                                                                                                                              S E B L oss : |68643
                                                                                           (|




                                                                                                                                                                             S E B L oss :|62780
                                                                                                       60,000               S E B L oss :                                            crore                                                          crore
                                                                                                       40,000              52623 crore
                                                                                                                           |
                                                                                                       20,000
                                                                                                            0
                                                                                                                                            D ec-08

                                                                                                                                                      F eb-09




                                                                                                                                                                                                     D ec-09
                                                                                                                                                                                                               F eb-10




                                                                                                                                                                                                                                                               D ec-10
                                                                                                                                                                                                                                                                         F eb-11
                                                                                                                Jun-08
                                                                                                                         Aug-08

                                                                                                                                  O ct-08




                                                                                                                                                                         Jun-09

                                                                                                                                                                                  Aug-09
                                                                                                                                                                                           O ct-09




                                                                                                                                                                                                                                  Jun-10
                                                                                                                                                                                                                                            Aug-10
                                                                                                                                                                Apr-09




                                                                                                                                                                                                                         Apr-10




                                                                                                                                                                                                                                                     O ct-10




                                                                                                                                                                                                                                                                                   Apr-11
                                                                                                                                                                                                                                                                                            Jun-11




                                                                                                          P rojects Announced                                        P rojects under implementation                                                  P rojects Abandoned



                                                                                       Source: CMIE, PFC, Govt. documents, ICICIdirect.com Research




              ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                             Page 71
Falling output from KG D6 basin
                                                                           Exhibit 137: Sluggish Coal India production – impacting PLF of thermal power plants

     65                                                                                                                                        377                     395            389                      396
                63                                                                                         400            353                                                                                                                              90
                          62                                                                                                                                                                    82




                                                                                 Million tonne / USD per
     60                                                                                                                           77                                            76                                      77                                 72
                                   58                                                                      300                                           68
     55
                                                                                                                                                                                                                                             66
                                           54                                                                                                                                                                                                              54




                                                                                           tonne
     50
                                                   51
                                                                                                           200                                                                                                                      160




                                                                                                                                                                                                                                                                %
                                                            48                                                                                                               107               128                   120                    120            36
                                                                                                                                99                      94
     45
                                                                                                           100                                                                                                                                             18
     40
           Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12                                                  0                                                                                                                                              0
                                                                                                                           FY08                   FY09                  FY10             FY11                   FY12                H1FY12
              Gas Production (Mmscmd) Monthly average
                                                                                                                                Thermal Coal production by Coal India - Yearly(million tonne)
                                                                                                                                International Coal price - 6700 kcal (USD/ tonne) (LHS)
                                                                                                                                Thermal PLFs (%) (RHS)

                                                                           Source: Coal India, Bloomberg, ICICIdirect.com Research



                                                                           Exhibit 138: No of plants with coal stock < 7 days have increased in two last months

                                                                               50                                                                                                                                                                          47 48

                                                                               40
                                                                                                                                         32                                                    32                                                 31
                                                                                                                                28                      27 27    27                                   29 28                   27
                                                                               30                          24                                  24 25 25       24                                                     24                     22
                                                                                            21                   19 17                                                                                                             18
                                                                               20

                                                                               10

                                                                                 0
                                                                                                                                                              Sep-10




                                                                                                                                                                                                                                                  Sep-11
                                                                                           Jan-10


                                                                                                                 Mar-10


                                                                                                                                May-10


                                                                                                                                               Jul-10




                                                                                                                                                                                      Jan-11
                                                                                                                                                                             Nov-10




                                                                                                                                                                                                      Mar-11


                                                                                                                                                                                                                     May-11


                                                                                                                                                                                                                                   Jul-11




                                                                                                                                                                                                                                                                Nov-11
                                                                           Source: CEA, ICICIdirect.com Research




 Exhibit 139: Outlook for coverage companies
                  Capacity                                                                                                                    Exposure                 Business                                 Working capital                  Exposure to
 Company       commissioning Fuel Linkages                                                                                                    to merchant              Mix                     Leverage         risk                             troubled SEBs
                FY12E FY13E
 NTPC           3,120 4,160 Higher actual contract quantity (ACQ)                                                                             NIL                      Regulated               Low              Low                              Medium
                              from Coal India
 NHPC             515     690 No fuel risk since water is fuel source                                                                         NIL                      Regulated               Low              Low                              Medium
 Neyveli          250 1,140 Captive mines                                                                                                     NIL                      Regulated               Low              High                             High
 Tata           1,325 2,125 Relatively safe in current operational projects but project in Maithon                                            Miniscule                Regulated &             Medium           High                             Low
 Power                        (1050 MW) hinges on coal provided by Coal India and Mundhra UMPP                                                                         Merchant
                              impacted by change in Indonesian coal law
 JPVL            1,250         250 Relatively secure since all operational projects are hydro but future                                      Partial                  Regulated &             High             Low                              Low
                                   expansion depends on coal given by Coal India                                                                                       Merchant
 Lanco                0 670 The company buys coal from e- auction (higher prices). The current and Partial                                                             Regulated &             High             High                             High
                             future expansion projects are impacted by falling output from KG D6                                                                       Merchant
                             basin
 Source: Company, ICICIdirect.com Research




        ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                     Page 72
                                                                                                                                       Real Estate (Leveraged balance sheet)                                                                                                                                    Underperform
                                                                                                                                       BSE Realty underperformed the Sensex in CY11 due to drying up of the
                                                                                                                                       funding (moderation in bank credit and non conducive capital market).
   Higher interest expenses on account of rising                                                                                       Furthermore, sales volume has slowed down due to rising un-affordability
   gearing would keep their bottom line under                                                                                          and high home loan rates. Given the challenging macro headwinds &
   pressure. Hence, we expect sector to                                                                                                stretched balance sheet in the sector, the property prices could correct
   underperform in CY12                                                                                                                sharply. At the same time, wage inflation & higher interest expenses on
                                                                                                                                       account of rising gearing would keep their bottom line under pressure.
                                                                                                                                       Hence, we expect sector to underperform in CY12.

Exhibit 140: Reeling Realty …
                                                        Interest rate                                                                                                     Rising property prices                                                                                                  Bank Credit
                                                                                                                                                                                                                                                                Given the bribery scam in November, 2010 and
                Given the sticky inflation and agrressive rate                                                                                 Property prices have risen to 1.5x-2.7x in all metro                                                             stringent RBI policies towards commercial real estate
                tightening, home loan rates have inched up                                                                                     cities (ex-Bangalore) impacting the overall                                                                      developers, bank credit (the last funding avenue) for
                significantly                                                                                                                  affordability, especially in Mumbai                                                                              sector is also drying up.
                                           HDFC Floating rate (%)                                                                                                           Property price index                                                                                   Bank credit to developers
                                                                                                                                                   300
                11                                                                                                                                 250                                                                                                                Sep-11
                                                                                                                                                   200
                10                                                                                                                                                                                                                                                                                              (| in crore)
                                                                                                                                                   150                                                                                                                Mar-11
          (%)




                                                                                                                                                   100
                 9
                                                                                                                                                    50                                                                                                                Sep-10
                 8                                                                                                                                   -
                                                                                                                                                         Dec-07

                                                                                                                                                                       Jun-08

                                                                                                                                                                                  Dec-08

                                                                                                                                                                                                  Jun-09

                                                                                                                                                                                                             Dec-09

                                                                                                                                                                                                                           Jun-10

                                                                                                                                                                                                                                        Dec-10

                                                                                                                                                                                                                                                 Jun-11
                                                                                                                                                                                                                                                                      Mar-10
                     Apr-09

                              Aug-09

                                           Dec-09

                                                        Apr-10

                                                                      Aug-10

                                                                                  Dec-10

                                                                                                 Apr-11

                                                                                                              Aug-11

                                                                                                                              Dec-11




                                                                                                                                                                                                                                                                                 0                10000        20000           30000
                                                                                                                                                                                 Mumbai                                        Delhi
                                                                                                                                                                                 Bangalore                                     Chennai
  Given the rising interest rate cycle &
  sharp increase in the property price,
  the affordability (EMI/net income) has
  deteriorated and has converged
                                                                                                           Affordability Measurement
  towards 2008 levels
                                                                                                                                                                                                                                                                     Given the muted enviroment in the equity
                                                                                                                                                                                                                                                                     market & moderating bank credit, developers are
                                                                       5.5                                                                                              60                                                                                           finding it difficult to hold on to their large
                                                                                                                                                                        55                                                                                           inventories
                                                                           5
                                                                                                                                                                        50
                                                                                                                                                                                (%)
                                                             (x)




                                                                       4.5                                                                                              45                                  Given the slowdown in the sales
                                                                                        5.1




                                                                                                                              4.5

                                                                                                                                             4.7

                                                                                                                                                         4.8
                                                                                                           5




   With worsening affordability,                                           4                                                                                            40                                  volume coupled with drying up of
   the sales volume has been                                                            2007               2008           2009               2010       2011                                                funding avenues, developers are finding
   adversely affected, especially in                                              Property to income                                           Affordability ratio (RHS)                                    difficult to hold on to their inventories.
   Mumbai                                                                                                                                                                                                   This has led to underpeformance of the
                                                                       Mumbai reigsteration                                                    Delhi Registeration
                                                                                                                                                                                                            sector


                                                                                                                                                                                                                                                                                        BSE Realty v/s Sensex
                                          Mumbai Registration data                                                                                                       Delhi Registration data
                                                                                                                                                                                                                                                                         100
                      10000                                                                                                    150                 12000                                                                                         40                       90
                                                                                                                                                                                                                                                                          80
                         8000                                                                                                  100                                                                                                               20
                                                                                                                                                    8000                                                                                                                  70
                                                                                                                               50
                                                                                                                                                                                                                                                      YoY (%)




                                                                                                                                                                                                                                                                          60
                                                                                                                                   YoY (%)
                Units




                                                                                                                                                Units




                         6000                                                                                                                                                                                                                    0
                                                                                                                               0                                                                                                                                          50
                         4000                                                                                                                       4000                                                                                                                  40
                                                                                                                               -50                                                                                                               -20
                                                                                                                                                                                                                                                                                                                               Nov-11
                                                                                                                                                                                                                                                                               Jan-11

                                                                                                                                                                                                                                                                                         Mar-11

                                                                                                                                                                                                                                                                                                   May-11

                                                                                                                                                                                                                                                                                                            Jul-11

                                                                                                                                                                                                                                                                                                                     Sep-11




                         2000                                                                                                  -100
                                                                                                                                                                                Oct-09




                                                                                                                                                                                                                      Oct-10
                                                                                                                                                              Apr-09
                                                                                                                                                                       Jul-09


                                                                                                                                                                                         Jan-10
                                                                                                                                                                                                   Apr-10
                                                                                                                                                                                                            Jul-10


                                                                                                                                                                                                                               Jan-11
                                                                                                                                                                                                                                        Apr-11




                                                                                                                                                          0                                                                                      -40
                                                    Oct-09




                                                                                        Oct-10
                                 Apr-09
                                           Jul-09


                                                             Jan-10
                                                                      Apr-10
                                                                               Jul-10


                                                                                                  Jan-11
                                                                                                            Apr-11
                                                                                                                     Jul-11




                                                                                                                                                                                                                                                                                                  Sensex                 BSE Realty
Source,: Bloomberg, Residex, ICICI Property Service Group, HDFC Q2 FY12 presentation & ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                                                                          Page 73
                                                                                                                                 Retail (Upsetting SSSG; FDI to be the game changer)                                                                                                                   Neutral
                                                                                                                                 The year 2011 was an eventful year for the retail sector considering that
   Industry experts expect investments to the tune of                                                                            opening up of the sector was in discussion. The government permitted
   $8-10 billion, if foreign direct investment in retail
                                                                                                                                 foreign direct investment in multi-brand retail up to 51% and also raised the
   sector is opened up. This could also lead to creation
                                                                                                                                 limit for single brand retail from 51% to 100% in November 2011. However,
   of over 80 lakh jobs
                                                                                                                                 due to severe opposition from other political parties the government was
                                                                                                                                 forced to put the decision on hold.

Exhibit 141: Favourable demographics                                                                                                                                          Exhibit 142: BMI expects the sector to grow to $825 billion by 2015

               40,000                                                                                                                       65                                                                                                                                      12.4
                                                                                                                                                                                              1,000                                                                                                    14
                                                                                                                              35,917                                                                                                                                                                   12
               30,000                                                                                                                       63                                                    800
                                                                                                                     33,731
                                                                                                            31,801



                                                                                                                                                                                                                                                                                                       10
                                                                                                                                                                                                  600




                                                                                                                                                                                  $ billion
               20,000                                                                                                                       61                                                                            5.7                          5.5                                             8
                                                                                                   24,295




                                                                                                                                                 %
     |




                                                                                          22,580




                                                                                                                                                                                                                                                                                                            %
                                                                                20,868




                                                                                                                                                                                                                                                                                    825                6
                                                                       19,331




                                                                                                                                                                                                  400
                                                              18,301
                                                     17,109
                                            16,769
                                   16,173
                          15,881




               10,000                                                                                                                       59                                                                                                                                                         4
                                                                                                                                                                                                  200                     353                          422
                                                                                                                                                                                                                                                                                                       2
                  -                                                                                                                         57                                                     -                                                                                                   0
                          2000
                                   2001
                                            2002
                                                     2003
                                                              2004
                                                                       2005
                                                                                2006
                                                                                          2007
                                                                                                   2008
                                                                                                            2009
                                                                                                                     2010
                                                                                                                              2011




                                                                                                                                                                                                                          2010                         2011                     2015E

                        Per capita income                                       Population in the age 15 - 64                                                                                               Indian Retail Sector                         Organised Retail Penetration

Source: Company, ICICIdirect.com Research                                                                                                                                     Source: Business Monitor International, ICICIdirect.com Research

                                                                                                                                 According to Business Monitor International (BMI), the Indian retail sector is
                                                                                                                                 expected to grow from $422 billion in 2011 to $825 billion in 2015E. It also
                                                                                                                                 expects the organised retail penetration to more than double from 5.5% to
   BMI expects the Indian retail sector to grow from
                                                                                                                                 12.4%. While India’s demographics in terms of growing disposable income,
   $422 billion in 2011 to $825 billion in 2015E. As per
                                                                                                                                 larger share of the population in the working age group do work in favour of
   BMI’s estimates, organised retail penetration is
                                                                                                                                 the India consumption story, concerns on the slowing down of consumption
   likely to more than double from 5.5% to 12.4%.
                                                                                                                                 due to higher interest rates and increasing inflation remain. Over the last two
                                                                                                                                 quarters, we have seen the same store sales growth (SSSG - revenue
                                                                                                                                 growth of stores in existence for a year) for retailers coming down and
                                                                                                                                 hovering around the low levels of 2009.
Exhibit 143: Revenue and space trend                                                                                                                                          Exhibit 144: SSSGs are again on a downward trend
                                                                                                                                15.2                                                                                                     SSSGs - falling to the lows of 2009
               11500                                                                                                                            16                                  30
                                                                                                                 13.0
                                                                                                                                                14
                                                                                                                                   11,012




               9500                                                                                                                                                                 20
                                                                                                                                                12
                                                                                                                                                        million square feet




                                                                                                    9.7
                                                                                                                     8,926




               7500                                                                 8.0                                                                                             10
                                                                                                                                                10
     | crore




               5500                                                                                                                             8                                       0
                                                                                                                                                                                %
                                                                                                      6,342




                                                                       5.2
                                                                                                                                                                                              Sep-08

                                                                                                                                                                                                       Dec-08



                                                                                                                                                                                                                            Jun-09

                                                                                                                                                                                                                                     Sep-09

                                                                                                                                                                                                                                              Dec-09



                                                                                                                                                                                                                                                                  Jun-10

                                                                                                                                                                                                                                                                           Sep-10

                                                                                                                                                                                                                                                                                     Dec-10



                                                                                                                                                                                                                                                                                                       Jun-11

                                                                                                                                                                                                                                                                                                                Sep-11
                                                                                                                                                                                                                 Mar-09




                                                                                                                                                                                                                                                         Mar-10




                                                                                                                                                                                                                                                                                              Mar-11




                                                                                                                                                6
                                                                                         5,049




               3500                                                                                                                                                               -10
                                       1.9            2.5                                                                                       4
                                                                       3,237




                                                                                                                               2,361




               1500      1.0                                                                                                                                                      -20
                                                                                                                                            2.3 2
                                                1.6 1.8
                -500        0.6 0.8 1.0 1.2                                                                                                     -                                 -30
                        FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
                                                                                                                                                                                                                Shoppers Stop                                                PRIL - Lifestyle
                  SS - Sales                         PRIL - Sales                                  Shoppers Stop                                 PRIL                                                           PRIL - Value                                                 PRIL - Home


Source: Company, ICICIdirect.com Research                                                                                                                                     Source: Company, ICICIdirect.com Research
Note: PRIL refers to Pantaloon Retail; Space for Shoppers Stop is that of the                                                                                                 Note: PRIL refers to Pantaloon Retail
departmental stores only

                                                                                                                                 Considering the slowdown in the consumption, retailers are forecasting
Retailers with healthy balance sheets are                                                                                        SSSGs will remain in the range of 8–12% for the coming year, as compared
maintaining their space addition plans. However,                                                                                 to the highs of 18-22% in December 2010.
players with higher leverage will need to hold their
growth plans as revenue growth slows down and                                                                                    FDI to be game changer: Opening up of the retail sector to FDI will prove to
the cost of raising fresh capital rises                                                                                          be a game changer for the sector as it will bring in the much needed capital
                                                                                                                                 to fund growth.



       ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                                                                              Page 74
Dry bulk indices                                                                                                                    Shipping (Supply overhang; profitability muted)                                  Underperform
           10000
                                                                                                                                    The shipping industry is currently passing through a downturn, which is
                                                                                                                                    likely to be prolonged. A moderation in demand and substantial increase in
             8000                                                                                                                   supply on account of new vessel additions is expected to keep freight rates
                                                                                                                                    subdued.
             6000
                                                                                                                                         Global dry bulk fleet capacity is ~ 540 million dwt and an additional 256
  Index




             4000                                                                                                                        million dwt i.e. 47 % of the existing fleet is likely to be added over the
                                                                                                                                         next two years. Global tanker capacity is ~ 470 million dwt and an
             2000                                                                                                                        additional 122 million dwt i.e. 26% of the existing fleet is likely to be
                                                                                                                                         added over same period. Hence, there will be a substantial overhang
                   0
                                                                                                                                         from large fleet additions over the next couple of years
                       Nov-08




                                                           Nov-09




                                                                                          Nov-10




                                                                                                                      Nov-11
                                        May-09




                                                                             May-10




                                                                                                        May-11




                                                                                                                                         China has been the main driver of commodity demand. Though Chinese
                                                                                                                                         demand for coal has sustained, with China’s iron ore inventory at an all-
                                                 BDI                           BCI                     BPI
                                                                                                                                         time high level of 96.9 million tonne (MT), iron ore demand could see
Source: Bloomberg, ICICIdirect.com Research                                                                                              moderation over the next three or four quarters. Any slowdown in the
Tanker indices                                                                                                                           Chinese commodity offtake could lead to subdued demand for dry bulk
                                                                                                                                         carriers and thereby keep a tab on the up move in freight rates
            2500
                                                                                                                                         The US and Europe are the main drivers of crude and refined oil
            2000                                                                                                                         products demand. As the recovery in both countries is likely to be
                                                                                                                                         modest, the demand for crude/product carriers is also likely to be
            1500
                                                                                                                                         subdued
  Index




            1000
                                                                                                                                         Freight rates are expected to be under constant pressure on account of
              500                                                                                                                        demand moderation and supply overhang. Hence, the operating
                                                                                                                                         performance of shipping companies is expected to be subdued.
                  0
                                                                                                                                         Companies with high debt and lower fleet utilisation could also report
                      Nov-08




                                                  Nov-09




                                                                                 Nov-10




                                                                                                        Nov-11
                                     May-09




                                                                    May-10




                                                                                           May-11




                                                                                                                                         reduction in profitability
                                                                                                                                         However, the offshore shipping segment offers the best play in the
                                          Baltic clean tanker index
                                                                                                                                         entire shipping space on account of firmness in crude oil prices. In
                                          Baltic dirty tanker index
                                                                                                                                         CY11, average crude prices have been at $111/barrel, which should lead
Source: Bloomberg, ICICIdirect.com Research                                                                                              to higher expenditure on exploration & processing leading to higher
BPR Shipbuilding index                                                                                                                   requirement of oil drilling assets and offshore vessels. Utilisation levels
                                                                                                                                         for most categories of rigs have sustained above 80% for major part of
                                                                                                                                         CY11. Average utilisation during H2CY11 for drillship, semisub and jack
                                                                                                                                         up has been 81%, 87%, and 80%, respectively. Sustained high
                  1000
                                                                                                                                         utilisation levels are expected to have a positive impact on vessel day
                   800                                                                                                                   rates
                   600                                                                                                              Exhibit 145: ICICIdirect Coverage Universe – Debt/equity and return on networth
          Index




                   400                                                                                                                                                                                 1.7
                                                                                                                                        1.8                                                                                           7
                   200                                                                                                                  1.7                                                                                6.5
                                                                                                                                                              6.2                                                                     6
                                                                                                                                        1.7                                            5.3
                        0                                                                                                                                                                                                             5
                                                                                                                                        1.6
                            Nov-08




                                                               Nov-09




                                                                                              Nov-10




                                                                                                                           Nov-11
                                              May-09




                                                                                 May-10




                                                                                                             May-11




                                                                                                                                                                                 1.5                          4.3
                                                                                                                                        1.6                                                                                           4
                                                                                                                                                                                                                     1.5
                                                                                                                                        1.5            1.5                                                                            3
                                                                                                                                        1.5
Source: Bloomberg, ICICIdirect.com Research                                                                                                                                                                                           2
                                                                                                                                        1.4
                                                                                                                                        1.4                                                                                           1
                                                                                                                                        1.3                                                                                           -
                                                                                                                                                       FY10                  FY11                     FY12E         FY13E

                                                                                                                                                                                       Debt/ Equity     RoE

                                                                                                                                    Source: Company,, ICICIdirect.com Research




                  ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                 Page 75
North India and Export Tea Prices                                             Soft commodities (Balance sheet woes)                                                    Underperform
                                                                              In the agri-commodity sector, sugar stocks have seen a sharp correction in
  250
                                                                              the last one year due to subdued sugar prices, continuous increase in
  200                                                                         sugarcane cost and uncertain export policy. On the other hand, tea stocks
                                                                              were holding well throughout the year due to strong export prices. We
  150                                                                         believe sugar stocks have come to distress valuations levels, close to
                                                                              October-December 2008. Though we believe earning would continue to
  100                                                                         suffer in FY12 a decline in sugarcane area would result in lower sugar
                                                                              production in SY13, which should firm up sugar prices from current levels
    50
                                                                                   Sugar production in season 2012 is expected to be more than 26 MT.
     0                                                                             We believe production has peaked out in the current year considering
             Jan Feb Mar Apr May Jun Jul Aug Sep Oct                               production in Maharashtra is close to the 2008 peak of 9.2 MT and
                  Tea Prices (| per kg)            Export Prices (| per kg)        production in UP is also near its peak after a 10% increase in production
                                                                                   this year. However, a continuous increase in sugarcane minimum
Source: Tea board of India, ICICIdirect.com Research                               support prices (MSP) has resulted in the cost of production increasing
Actual sugarcane cost and SAP                                                      higher than sugar prices. We believe the sugar segment would continue
                                                                                   to be in losses until sugar prices increase by 5-8% from current levels.
  300                                                                              Simultaneously, global sugar prices have fallen from the peak of 36
                                                         241          240
                                                                                   cents /lb in February 2011 to 22 cents in November 2011 as production
  250                                                           216                in Russia, Thailand and India recouped. We believe prices would remain
                                                                      240
                                                                                   subdued until March 2012. However, price movements post April would
  200                                                                              depend on sugar production in 2012 in Brazil
                                                  153           205
                                  227                                              Tea production in 2011 in India has increased from 966 million kg in
  150                     128             121
                                                         165                       2010 to ~1000 million kg led by the recovery in the production in North
             95     97
                                          c       140                              India. Export prices have been robust throughout the year due to lower
  100                                     125
                          107    115                                               production in Kenya. We believe production in Kenya will recover in
             95     95
   50                                                                              2012 above 300 million kg as normal rainfall is expected in the current
                                                                                   year. Simultaneously, Indian production would also remain at ~1000
    0                                                                              million kg in the current year. This, in turn, would lead to a decline in
             SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11 SY12E                         export prices. Tea companies could face some margin pressure in 2012,
                                                                                   though it should still remain as high
                   Cane cost (|/qtl) (LHS)               SAP (|/qtl) (LHS)
                                                                                   Most of the balance sheets of sugar companies is stretched due to very
Source: Company, ICICIdirect.com Research
                                                                                   high working capital debt and losses in the current year resulting in low
Debt and EBITDA (| crore)                                                          repayments or restructuring on long term debts. Considering the
                                                                                   negative margins in the sugar segment, debt levels would continue to
  20000                                                           4000             remain high even in the current year. On the other hand, balance sheets
                                          14287         15139
  15000                                                           3000             of tea companies are much better with debt to equity below 0.5x.
  10000           7363      7085.5                                2000
                                                                              Exhibit 146: Global raw sugar prices and domestic white sugar prices
   5000                                                           1000
                                                                                    40.0                                                                                        12.0
         0                                                        0
                  FY08       FY09          FY10          FY11                                                                                                                   8.0
                                                                                    30.0
                                                                                               11.0
                                Debt            EBITDA                                                                                                                          4.0
                                                                                    20.0                           2.8                                                    3.0
                                                                                                                                                       1.7                      0.0
Source: Company, ICICIdirect.com Research                                                                                             -3.5
                                                                                    10.0
                                                                                                                                                                                -4.0
                                                                                     0.0                                                                                        -8.0
                                                                                           Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

                                                                                             SY08          SY09               SY10              SY11              SY12E


                                                                                                          World (+/-)        Raw sugar (c/lb)     Delhi sugar (|/kg)


                                                                              Source: Bloomberg,, ICICIdirect.com Research




              ICICI Securities Ltd. | Retail Equity Research                                                                                                                Page 76
                                                             Telecom (Improving key metrics & regulatory outlook)                                                                Outperform
                                                             The telecom stocks have largely underperformed since early 2008, when the
                                                             new licenses were issued, followed by increasing competitive intensity
                                                             (visible in rising net adds and declining ARPMs). However, they have
                                                             outperformed the Sensex in the last year, in spite of the continuous
                                                             downgrade of their EPS (due to higher interest and amortisation cost
                                                             relating to 3G related debt). The regulatory framework has improved with
                                                             the new telecom minister assuming office and competitive intensity has
                                                             declined resulting in stable ARPMs, which is also reflected in the stock price
                                                             movement.
                             Phase 1: New licenses
                                                             Exhibit 147: Telecom Performance thus far
                             issued; markets respond                                                                                   Phase 3: 3G auction leads to huge outgo;
                             to threat of price wars                                  500                Bharti         Idea           hyper competitive environment leading to           160
                                                                                                                                       lower tariffs and declines in profitability, Draft
                                                                                      450                                              of NTP released - damps investor confidence 140

                                                                                                                                                                                         120
                                                                                      400
                                                                                                                                                                                         100
                                                                 (|)




                                                                                                                                                                                                (|)
                                                                                      350
                                                                                                                                                                                         80

                                                                                      300
                                                                                                                                                                                         60

                                                                                      250                                                                                                40
                                                                                        Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11

                                                                                                 Phase 4: Regulatory scenario positive than earlier, Investor sentiment
                                                                                                 returns; slowing competitive intensity relected in lower net subscriber adds
                                                                                            25   per month & tariff hike; 3G launch, stocks rise despite decline in profitability         0.9
                                                                                            23
                                                                                            21                                                                                            0.8
Falling ARPM and rising monthly net adds signify high
competitive intensity. Post December 2010, the net adds                                     19
                                                                      Million Subscribers




have started to decline while ARPM has stabilised. This is                                  17                                                                                            0.7




                                                                                                                                                                                                ARPM (|)
also reflected in the stock price movement.                                                 15
                                                                                            13                                                                                            0.6
                      Phase 2: Stocks recovering from                                       11
                      the global meltdown; Slight
                                                                                            9                                                                                             0.5
                      uptick in ARPM also reflected in
                      the stock price                                                       7
                                                                                            5                                                                                             0.4
                                                                                            Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11
The stocks have shown a high correlation with the ARPMs
of the operators. Going forward, we expect the ARPMs to
                                                                                                                  Monthly Net adds         Bharti ARPM             Idea ARPM
improve on account of the recent price hike and higher 3G
uptake                                                       Source: ICICIdirect.com Research

                                                             Going forward, we expect the ARPMs to increase on account of the price
                                                             hike taken recently, the full effect of which is yet to reflect in the ARPMs and
                                                             a higher 3G uptake.
                                                             Exhibit 148: Future projections - 3G and ARPM
                                                                                                         ARPM (|)                    Net 3G revenues (| Crore)        3G Subscribers (Mn)
                                                                                                  FY11      FY12E         FY13E           FY12E           FY13E          FY12E         FY13E
                                                             Bharti                               0.44       0.43          0.46            604.2         1685.8            3.5            7.7
                                                             Idea                                 0.43       0.43          0.44            311.5           796.2           1.7            3.8
                                                             RCom                                 0.44       0.45          0.45            451.3           918.4           2.3            5.0
                                                             Source: ICICIdirect.com Research




   ICICI Securities Ltd. | Retail Equity Research                                                                                                                                    Page 77
                                                 Moreover, all the incumbents are already past their peak capex cycle and
                                                 are expected to generate free cash flow in subsequent years. We expect
                                                 Bharti Airtel to generate sufficient cash flow to repay its debt comfortably in
                                                 the coming years, resulting in huge savings in terms of interest outgo.

                                                 Although some of the guidelines of the draft of the NTP 2011 (like one time
                                                 spectrum fees, spectrum renewal charges, and higher spectrum usage
                                                 charges) could hurt the profitability of the incumbents in the near term,
                                                 provisions like liberal M&A norms and spectrum sharing will have a positive
                                                 bearing on the stocks. Though the draft of NTP looks more balanced, there
                                                 is still lack of clarity on various fronts and the implementation timeline.

                                                 The telecom operators have grown by 17.9% in revenues in H1FY12 but de
                                                 grown by 45.0% in PAT due to high depreciation and interest cost relating to
                                                 3G debt. However, going forward, we expect the revenues and PAT to grow
                                                 by 12.4% and 60.2% in FY13 on account of a decreasing interest cost in
                                                 FY13 as the companies start repaying their debt.

                                                 The sector is expected to outperform the broader index on the back of
                                                 improving ARPMs, 3G uptick and lower capex. We may see further upside
                                                 dependent on the timing and various aspects of policy announcement.

                                                 Exhibit 149: Impact of NTP on Incumbents and New operators
                                                 NTP Guidelines                           Impact on Incumbents   Impact on New Operators
                                                 One time spectrum fees                   Negative               Neutral
                                                 Higher spectrum usage charges            Partially Negative     Neutral
                                                 License Fee of 8%                        Neutral                Negative
                                                 IP1 Licensing                            Negative               Neutral
                                                 Liberal M&A Guidelines                   Positive               Positive
                                                 Reduction in Termination Charges         Negative               Positive
                                                 Spectrum Sharing                         Positive               Positive
                                                 Spectrum refarming                       Negative               NA
                                                 Source: TRAI, ICICIdirect.com Research




ICICI Securities Ltd. | Retail Equity Research                                                                                    Page 78
                                                                                                           Textiles (Depreciating rupee - a two sided coin)                                                                                         Neutral
                                                                                                           The year 2011 was a mixed bag for the Indian textiles sector. While cotton
                                                                                                           and cotton yarn prices rose in the first half of the calendar year, prices fell
   Domestic textile prices corrected from over                                                             substantially in the second half. Textile players incurred heavy inventory
   ~|62,000 per candy in March 2011 to | 34,000 –                                                          losses on account of this. Domestic textile players were struck by a double
   35,000 per candy (December 2011). Consequently,                                                         whammy of lower demand and falling realisations.
   cotton yarn prices too fell from |260 – 270 per kg to                                                   The year 2012 is also likely to be a lull year for the Indian textile industry.
   | 163 per kg (December 2011)                                                                            While a depreciating rupee would work in favour of textile companies, they
                                                                                                           are also facing foreign currency losses due to foreign currency debt on their
                                                                                                           books. On the back of this, larger domestic players would be more
                                                                                                           comfortable with the currency staying in the range of |47-48 / dollar.
Exhibit 150: Spreads between cotton & cotton yarn prices (Annual)                                                                          Exhibit 151: Spreads between cotton & cotton yarn prices (Monthly)
                                                       Spreads at 6 year high                                                                                                       Spreads on an up-trend over the
                     200                                                                                         80                                                                        last five months                                         60
                                                                                                                 70                                     250
                                                                                                                                                                                                                                                    50
                     150                                                                                         60                                     200
                                                                                                                                                                                                                                                    40
                                                                                                                 50




                                                                                                                                               | / kg




                                                                                                                                                                                                                                                         | / kg
                                                                                                                                                        150                                                                                         30
     | / kg




                                                                                                                         | / kg


                     100                                                                                         40
                                                                                                                 30                                     100                                                                                         20
                          50                                                                                     20                                         50                                                                                      10
                                                                                                                 10                                     -                                                                                           -
                      -                                                                                          -




                                                                                                                                                                                                                                         Nov-11
                                                                                                                                                                  Apr-11




                                                                                                                                                                                                           Aug-11
                                                                                                                                                                           May-11

                                                                                                                                                                                       Jun-11

                                                                                                                                                                                                Jul-11




                                                                                                                                                                                                                    Sep-11

                                                                                                                                                                                                                                Oct-11
                                  CS01
                                         CS02
                                                CS03
                                                       CS04
                                                              CS05
                                                                     CS06
                                                                            CS07
                                                                                    CS08
                                                                                           CS09
                                                                                                   CS10
                                                                                                          CS11




                              Cotton Prices              Cotton Yarn Prices                       Spread (|/kg) (RHS)                                        Cotton Prices                  Cotton Yarn Prices                   Spread (|/kg) (RHS)

Source: Bloomberg, ICICIdirect.com Research                                                                                                Source: Bloomberg, ICICIdirect.com Research

                                                                                                           With rising cotton inventories and higher global output, cotton prices are
India’s cotton closing stock                                                                               likely to be range bound. However, production in China, the biggest cotton
                                                                                                           producer, is estimated to be 4% lower as compared to the previous season.
                                                                                                           Therefore, global cotton prices are likely to hold up at current levels thereby
                     100                                                                                   cushioning Indian prices from falling.
                                                                                   78.5
                     80           71.5
                                                                                                           Man-made fibres to witness lower demand
     In lakh bales




                     60                                          47.5
                                                  40.5                                                     The ratio of cotton yarn price to polyester oriented yarn price has come
                     40                                                                                    down from a high of 2.1x in April 2011 to 1.5x in October 2011. This
                     20                                                                                    indicates lower demand for man-made fibre as cotton prices have now
                                                                                                           corrected. This will lower the substitution demand as manufacturers and
                          0
                                                                                                           customers are again likely to shift to pure cotton fabrics, thereby impacting
                                2008-09 2009-10               2010-11 2011-12
                                                                                                           the margins of these players.
                                                               (P) *   (P) *
                                                                                                           Exhibit 152: Price differential between polyester and cotton yarn
Source: Textile Commissioner of India, ICICIdirect.com
                                                                                                                                                        Narrowing gap between the prices will lead to lower demand for
Research                                                                                                                300        254                                       man-made fibres
* Provisional
                                                                                                                        250                    213
                                                                                                                                                                  180
                                                                                                                        200                                                           158                                     156                 161
                                                                                                                                                                                                          152
                                                                                                                 |/kg




                                                                                                                        150

                                                                                                                        100
                                                                                                                                   121         110                                                                            110                 110
                                                                                                                                                                  109                 105                 105
                                                                                                                        50

                                                                                                                           0
                                                                                                                                  Apr-11     May-11              Jun-11              Jul-11              Aug-11              Sep-11           Oct-11

                                                                                                                                                             POY Prices                Cotton Yarn Prices

                                                                                                           Source: Tecoya Trend, ICICIdirect.com Research




            ICICI Securities Ltd. | Retail Equity Research                                                                                                                                                                                        Page 79
                                                                     Flashback – The year that was
Exhibit 153: Flashback 2011
 21000
                   Geo political risk                                                                    Greece
                   in Egypt, Syria                                            Commodities                bailout, US
                   emerge. Oil rises                                          were on fire.              debt ceiling
                   to $115/bbl                                                Safe haven                 raised
                                                                              demand rose
 20000

                                                                                                                                                     ECB rate
                                                                                                                          Harakiri as
                                                                                                                                                     cuts,EFSF &
                                                                                                                          S&P cuts
                                                                                                                                                     greek haircut
                                                                                                                          US rating
 19000                                                                                                                                               spur markets


                                                                                                                                                                     Anticipation
                                                                                                                                                                     of concrete
                                                                                                                                                                     EU summit
 18000                                                                                                                                                               spurs
                                                           Markets slide                                                                                             market
                                                           under NPAs
             Rate hikes                                    concerns,
             Tsunami,                                      estimates
 17000       Rating cuts                                   missed
             hurt

                                                                                                           China,India-
                                                                                                          Inflation,                                   Sovereign
                                                                                Euro debt                 rate hikes.                                  ratings
                                                                                concerns. US              Markets                                      cut,weak
 16000
                                                                                GDP outlook               shocked                        INR           eco-data
                                                                                weakens                                                 slides,        spook
                                                                                                                                        MTM            markets          IIP,rate
                                                                                                                                        losses                          shock

 15000
             We stumbled at the start line                    The lull before the storm                 Worst performance in a decade                 Hoping against "Hope"

                           Q1CY11 (-5.2%)                             Q2CY11 (-3.1%)                                Q3CY11 (-12.7%)                         Q4CY11 (-2.7%)

                                                        Global commodity prices rose on economic US raises debt ceiling limit by USD 2.1 trn      ECB changed stance and cut rates
          Political uncertainty in Middle east          recovery in US                            amid downgrade and repayment concerns           amid weak data points
          Rate hike in India and China on inflation     PIIGS debt concerns rise with CDS spreads                                                 EU announces 50% haircut on Greek
          concerns                                      rising sharply                            Moody's downgrade Portugal and Greece           debt
                                                                                                                                                  EU increases EFSF corpus to Euro 1
          Oil rises to USD 115/bbl(38% up in 4          S&P cuts Italy outlook, Moody's sends                                                     tn and announced strengthening of
          months)                                       downgrade warnings for UK banks                Greece bailout package of Euro 109bn       capital base for European banks
          DM outperform on EM particularly India on     Risk aversion seen as Gold prices rose
          incrementally improved US economic data       close to USD1550/ounce, US 10 year G-          China continues to raise rates to combat   Slew of rating cuts for Spain
          like GDP, consumer confidence etc.            Sec yield fell below 3%,                       record high inflation                      Portugal, Belgium and Hungary

          Japan Tsunami acts as a shock to markets      Weak domestic data prints viz. lower IIP, RBI shocks market by raising rates by           Contagion fears rise as German and
          slide                                         high inflation and slowing credit growth  50bps                                           French yields spike
                                                        Q4FY11 results disappoints as RIL,Infosys
                                                        and SBI miss estimates. Earnings                                                          Chinese PMI fell below 49, first time
          Moody cut ratings for Spain and Portugal      downgrade concerns emerge                 IMF cuts global growth forecast for CY11,12     in 3 years, cut rates

          FII buying during march end as global                                                        S&P downgrades US AAA rating,Moody and Indian IIP fell sharply to -5.1%,
          markets rebound                                 US Fed lowered GDP outlook for CY11,12       S&P cut Italy rating by 3 notches          lowest since march 2009
          ECB raises rates for the first time since 2008- Asset quality concerns come to fore in the   US Fed promises to keep rates low till mid INR touched 54.24, record low levels
          09                                              domestic banking sector                      2013                                       against USD
                                                                                                       Rupee depreciates sharply by ~7.0% to |
          Strong domestic export growth the only        PBOC hikes rates twice in the quarter to       49 levels,corporates face MTM on foreign EU leaders decide on stricter fiscal
          major positive                                arrest inflation expectations                  debt                                       norms
Source: ICICIdirect.com Research




      ICICI Securities Ltd. | Retail Equity Research                                                                                                                       Page 80
Pankaj Pandey                            Head – Research                                   pankaj.pandey@icicisecurities.com

                                         ICICIdirect.com Research Desk,
                                         ICICI Securities Limited,
                                         1st Floor, Akruti Trade Centre,
                                         Road No 7, MIDC
                                         Andheri (East)
                                         Mumbai – 400 093
                                         research@icicidirect.com




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   ICICI Securities Ltd. | Retail Equity Research                                                                                             Page 81

								
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