Avendus Strategy Jan12

7/29/2019 Avendus Strategy Jan12

1/32Pleaserefertothedisclaimertowardstheendofthedocument.

IndiaEquityResearc

January09,2012

Strategy

Earlyraysofarecoveryarevisible

Amidstthepervasivegloom, a fewsignsare pointing tobettertime

returningsoonerratherthan later.TherapidfalloftheNiftyPEGha

broughtit

to

within

10%

of

the

band

where

it

stabilized

in

2009,

before

the next rally began. A timecorrection could pull down the PEG to

0.7x in1Q2012.Theyieldgap isdowntonear itsthreeyearmean.In

therealeconomy,twoleadindicatorsElectricitygenerationandLCV

arepointingtoarebound inManufacturing.Themissingelement

lower interestratesmaybebacksoon,asseen intherecentfall in

bond yields. Shifts in earnings momentum suggest that sectors with

stronglinkstotherecoveryaremorelikelytooutperformin2012.We

advise cuts in allocations to Twowheelers and Consumer, and

increases in Commercial vehicles, Passenger vehicles, Cement

Pharmaceuticals,Telecom,MetalsandITServices.

Steepfallinvaluation;Niftywithin10%,threemonthsofstablelevel

Afterfallingfrom2.0xto0.8xinninemonths,theNiftyPEGiswithin10%ofthe

rangewheretheNiftystabilized in2009,beforethenextrallybegan. Ifprice

and FY13 earnings forecasts stay at endDec11 levels, the timecorrection

couldpushdownthePEGtothatrangewithinthreemonths.Theyieldgapto

the1yeargovernmentbondtoohasfallenclosetoitsthreeyearmean,partly

duetothefallintheNifty,butmoreduetothelargefallinthebondyielditself

Latentsignssuggestmanufacturingrecoverymaybeimpending

PreviouscyclessawtheElectricitysegmentoftheIIPreboundaboutsixmonth

beforeManufacturing.AstrongreboundinElectricityhasnowbeenunderway

for14months.AnothersimilarleadindicatorhasbeengrowthinsalesofLCVs

Despitethe

leading

indicators

being

flashed,

the

rebound

in

Manufacturing

ha

notcommenced.Webelievethemissingelement inthiscycle,thatwasactive

in thepreviouseconomiccycle, isa low interest rate regime.The fall in food

inflation inDec11 issignificantasthefoodsegmentcontributedoverhalfthe

rise in wholesale inflation during 2011. The fall in the oneyear governmen

bondyieldhasbeenastrongindicatorofthefallintheRepo.

Tiltawayfromdefensivesmayhavebegun

Late2011sawsectoralperformancesbegintoshiftfromprevioustrends.There

isatiltawayfromdefensivesectorsandtowardsstockswithstrongerlinkage

to the next rebound. These changes are linked to the shifts in earning

momentumandhavesignaled the revivalof normalsectorssuchasCemen

and Commercial vehicles. For 2012, we advise cuts in allocations to Two

wheelers and Consumer and increases in Commercial vehicles, Passenge

vehicles,Cement,Pharmaceuticals,Telecom,MetalsandITServices.Ourtop10

stocksfor2012areBhartiAirtel(BHARTIIN,Buy),HindalcoIndustries(HNDLIN

Buy),HCLTechnologies(HCLTIN,Buy),ICICIBank(ICICIBCIN,Buy),Larsenand

Toubro (LT IN,Hold),LICHousingFinance (LICHF IN,NR),MarutiSuzuki (MSI

IN,NR),StateBankofIndia(SBININ,Buy),SunPharmaceuticals(SUNPIN,Add

andUltraTechCement(UTCEMIN,Add).

1m 3

m 6

m

Sensex(INR) 15,868 5.6% 0.5% 15.3%

Sensex(USD) 301 7.8% 8.9% 29.3%

Nifty(INR) 4,754 5.7% 0.1% 15.5%

Nifty(USD) 90 7.9% 9.3% 29.4%

BSEMidcap(INR) 5,259 8.7% 10.5% 24.5%

BSEMidcap(USD) 100 10.6% 17.7% 36.8%

Keyindices

January06,

2012

(%)

yoy Contribution Jan12 Proposed

Automobiles 13.9 9.5 8.1 8.8

2Wh 12.4 1.9 2.5 2.3

CV 9.9 3.4 2.6 3.0

PV 22.1 4.2 3.0 3.5Cement 9.8 1.6 2.6 3.0

Construction 16.0 4.5 4.5 4.5

Consumer 17.5 5.6 10.3 8.0Engineering 8.3 1.2 1.8 1.5

Financials 20.2 33.0 24.9 23.5

PSU 23.7 10.9 3.7 4.7

Privatebanks 20.5 17.0 14.3 12.5

NBFC 14.8 5.1 6.9 6.3

ITServices 15.6 10.6 15.7 17.0Metals 12.8 10.2 7.1 7.5

Oil&Gas 8.1 9.2 13.1 13.0Pharma. 21.5 3.7 4.4 5.0

Telecom 56.1 7.3 3.0 3.7

Utilities 11.1 3.2 4.1 4.0

RealEstate 18.9 0.4 0.4 0.5Total 15.5 100.0 100.0 100.0

Source:Bloomberg,AvendusResearch

FY13EPS +/ Sectorweight

Sectorearningsgrowthandweights

AnandShanbhag,+9102266842851

[email protected]


2/32

India Equity Research Strategy

2

Investmentsummary

ThesteepfallintheNiftyPEGduring2011makesitcheaperthanatendof2008,despiteasmallerfallintheindex.At

0.83x,itiswithin10%oftherangewheretheNiftystabilizedin2009,beforethenextrallybegan.ThePEGcouldreach

thatrangewithinthreemonthsevenifpricesstayconstant,andifFY13earningsforecastsholdstable.Thelargefallin

bondyieldsinrecentweekshaspusheddowntheyieldgapnearitsthreeyearmean.Twopromisingsignsfromthereal

economyarethereboundingrowthofLCVsandofElectricityproduction.BothhaveledtherecoveryofManufacturing

byaboutsixmonthsinpreviouscycles.Themissingelementinthiscycle lowinterestrates islikelytobeusheredin

by the fall in inflation. Though the concerns over equity valuation and economic growth persist, late 2011 saw a tilt

awayfromdefensivesandtowardsstockswithstronger linkagestothenextrebound.Revisionstoearningsforecasts

have signaled the revival of normal sectors such as Cement and Commercial vehicles. For 2012, we advise cuts in

allocations to Twowheelers and Consumer and increases in Commercial vehicles, Passenger vehicles, Cement,

Pharmaceuticals,Telecom,MetalsandITServices.

SteepfallinPEG,yieldgapbringNiftytowithin10%ofstablelevel

Thec18%fallintheNiftyduringAug11Dec11mayappearmildincomparisonwiththe36%fallduring

Aug08Dec08.However,theP/EatendDec11wasonlyabitabovethatinDec08.ThePEGhasdropped

steeplyin

the

past

nine

months

to

an

estimated

0.83x

at

end

Dec11,

lower

than

the

PEG

at

end

Dec08.

Assuming the forecasts for FY13 growth of the Nifty stabilize near the current level of 15.5%, the

potentialdownsidetotheNiftywouldbe10%.ShouldtheNiftystayunchangedatitsendDec11level,

theP/EandPEGwoulddriftdownto11.0xand0.7xbyendMar12.Thismeansthatbytheendofthe

firstquarter of 2012,theNiftyPEGcould reachthemiddleoftherange where ithadstabilizedafter

thesharpcorrectionin20082009.TheyieldgaptoopointstoarapidfallinthevaluationoftheNifty.

Itisdownbyc1%,closertoitsthreeyearmeanpartlyduetothelargefallintheoneyeargovernment

bondyieldaleadindicatorofachangeintheRepo.

IIPpoisedtorise;Electricity,interestratesmaycatalyzerebound

Two indicators from the real economy suggest a recovery in industrial production may be round the

corner. The growth of Electricity production and sales of light commercial vehicles (LCV) begin their

reboundabout

six

months

before

the

turning

point

in

Manufacturing.

For

some

time

now,

both

have

signaled that a recovery is due. Electricity growth is likely to stay in high single digits till FY13f. The

missing element, that was active in the previous economic cycle, is a low interest rate regime. The

recentfallinfoodinflationissignificantasoverhalftheriseinpricesin2011wasdrivenbyfooditems.

Exhibit1:GrowthinElectricityandLCVs

2%

5%

8%

11%

Oct06 Nov07 Nov08 Nov09 Dec10 Dec11

8.0%

11.0%

30.0%

49.0%Electricity

LCV (RHS)

Source:Bloomberg,SIAM,AvendusResearch

Exhibit2:NiftyPEG

0.70

1.40

2.10

Dec05 Dec07 Dec09 Jan12


Niftymaybewithin10%

orthreemonthsof

bottomingout.

Yieldgappusheddown

closertoitsthreeyear

meanafterthelargefallin

theoneyearbondyield.

ReboundinElectricityand

LCVsimplyarecoveryin

Manufacturingisdue.The

missing

element,

low

interestrates,couldbe

providedbytheincipient

declineininflation.

Electricityproductionand

LCVsaleshavebeen

growingafterSep10and

Jun11,respectively.In

previouscyclestheyhave

ledtheinflectionpointsin

Manufacturing.

NiftyPEG

down

sharply

afterApr11.


3/32


3

Revisionstoearningsforecastspointtoneedtochurnallocations

Even asconsensus forecasts forgrowth in FY12and FY13earnings continue to fall, thereare sectors

suchasCementwheretheforecastshavebeenholdingfirm,orarebeingraised.Thetrendofadecline

hasreversedinafewsectorsduringthelasttwoquartersof2011.Wemeasuretheseshiftsinearnings

momentum and find they correlate with and are often the lead indicators of the performance of

sectors within the Nifty. Within Automobiles, the outlook for Commercial vehicles and Passenger

vehicleshas

brightened

even

as

that

for

Two

wheelers

appears

to

have

plateaued.

The

best

sector

of

2011,Consumer,appearslesspromisinggiventheforecastdeclineinitsearningsmomentum.

Tiltawayfromdefensivesbeginningtobevisibleinlate2011Our study of three spells of large fall and two spells of large rise from Jul11 to Dec11 reveals that

outperformers during both phases were concentrated in large value, relatively high P/E stocks.

Dividendyielddidnothaveasignificantlinkwithperformanceduringtherisingspells.Neitherdidthe

proportionofcash/marketvaluehaveasignificantlink.Duringtherisingspell,relativeoutperformance

was seen in a group of large value stocks with high net gearing, i.e. low cash. Large value stocks in

Consumer, Cement, Pharmaceuticals and Telecom outperformed in the falling periods, but

underperformed in the rising spells. Large value Financials weretheprominent outperformers in the

risingspells(SeeAnnexure1).

2012outperformers

may

be

dispersed

across

sectors

Relative to the sector weights within the Nifty, we advise higher allocations mainly in Automobiles

(excluding Twowheelers), Cement, Pharmaceuticals, Telecom, Metals and IT Services. We advise

pruning of allocations to Twowheelers and Consumer. We stay cautious on Construction and

Financials,despiteforecastspointingtoarevivalorextensionofearningsmomentum.

Exhibit3:EarningsgrowthofNiftysectorsandweights FY12f FY13f Weight

Earnings

growth

Contributionto

Niftygrowth

Earnings

growth

Contributionto

Niftygrowth

Jan12 Recommended

Automobiles 0.5 0.7 13.9 9.5 8.1 8.8

TwoWheelers 20.3 5.3 12.4 1.9 2.5 2.3

Commercial

Vehicles

4.2

3.1 9.9 3.4

2.6 3.0

PassengerVehicles 6.8 2.9 22.1 4.2 3.0 3.5

Cement 3.1 1.0 9.8 1.6 2.6 3.0

Construction 1.6 1.0 16.0 4.5 4.5 4.5

Consumer 17.8 9.9 17.5 5.6 10.3 8.0

Engineering 9.2 2.4 8.3 1.2 1.8 1.5

Financials 18.0 51.7 20.2 33.0 24.9 23.5

PSUbanks 24.5 18.8 23.7 10.9 3.7 4.7

Privatebanks 16.5 24.4 20.5 17.0 14.3 12.5

NBFCs 13.7 8.6 14.8 5.1 6.9 6.3

ITServices 17.7 21.1 15.6 10.6 15.7 17.0

Metals 11.3 21.0 12.8 10.2 7.1 7.5

Oil&Gas 14.8 30.2 8.1 9.2 13.1 13.0

Pharmaceuticals 15.9 4.9 21.5 3.7 4.4 5.0

Telecom 6.2 1.8 56.1 7.3 3.0 3.7

Utilities 5.6 3.2 11.1 3.2 4.1 4.0

RealEstate 0.8 0.0 18.9 0.4 0.4 0.5

Total 8.1 100.00 15.5 100 100 100


Shiftsinearnings

momentumareseenin

bothdefensiveand

normalsectors.Theyare

leadindicatorsofrelative

outperformanceand

underperformance.

LargevalueandhighP/E

stocksdidwellinboth

risingandfallingperiods.

Dividendyieldandcash

hadlittleinfluence.

Overweight:

Commercialvehicles

Passengervehicles

Pharmaceuticals

Cement

Telecom

Metals

ITServices

Underweight:

Twowheelers

Consumer

Toppicks:

1. BhartiAirtel(Buy)2. HindalcoInds.(Buy)3. HCLTech.(Buy)4. ICICIBank(Buy)5. Larsen&Toubro(Hold)6. LICHousingFin.(NR)7. MarutiSuzuki(NR)8. StateBkOfIndia(Buy)9. SunPharma(Add)10.UltraTechCem.(Add)


4/32


4

TableofContentsInvestmentsummary......................................................................................................................... 2

SteepfallinPEG,yieldgapbringNiftytowithin10%ofstablelevel....................................................2IIPpoisedtorise;Electricity,interestratesmaycatalyzerebound.......................................................2Revisions

to

earnings

forecasts

point

to

need

to

churn

allocations......................................................3

2012outperformersmaybedispersedacrosssectors .........................................................................3SteepfallinPEG,yieldgapbringNiftytowithin10%ofstablelevel................................................ 5

RelativelygentledeclineinP/E,butsteepfallinPEG ...........................................................................5YieldgappushedfurtherdownbyfallinbondyieldinearlyJan12......................................................6Significantpotentialupsideover2012..................................................................................................6

Driversofearningsrevisionsarechangingandshapingperformance.............................................. 7Downgradesextend,butafewchangesindrivers................................................................................7Sectorperformancesareinsyncwithearningsmomentum ................................................................8

IIPpoisedtorise;electricity,interestratesmaycatalyzerebound................................................. 11Leadindicatorssuggestindustrialrecoverymayberoundthecorner ...............................................11Inflation

engine

is

finally

cooling

off....................................................................................................12ImpendingfallininterestratescouldreviveManufacturing ..............................................................13

Annexure1:PerformanceduringriseandfallfromJul11toDec11................................................ 14Annexure2:AssumptionsforElectricitygrowthinFY12fFY13f ..................................................... 16Annexure3:ContributiontoSensexandNiftypointsandFIIactivity............................................. 17Automobiles..................................................................................................................................... 18Banks................................................................................................................................................ 19Cement ............................................................................................................................................ 20Construction .................................................................................................................................... 21Engineering...................................................................................................................................... 22ITServices ........................................................................................................................................ 23

MetalsandMining........................................................................................................................... 24NonbankingFinancials.................................................................................................................... 25Oil&Gas .......................................................................................................................................... 26Pharmaceuticals............................................................................................................................... 27Telecom ........................................................................................................................................... 28

Utilities............................................................................................................................................. 29


5/32


5

SteepfallinPEG,yieldgapbringNiftytowithin10%ofstablelevel

ThefallintheNiftyinAug11Dec11mayappeardeceptivelyslower,ifitissimplycomparedwiththatin2008.Whilethe

indexfellfasterinthelastfourmonthsof2008,thefallin2011issteeperifmeasuredbythePEG.TheNiftyPEGwasin

declinefromApr11andthesteepfallinthepastninemonthshasbroughtitwithin10%ofabottom.Wefindthatifthe

NiftystaysunchangedatitsendDec11level,theforecastgrowthinFY13earningswouldpulldownthePEGto0.7xat

end Mar12.This is wellbelowthe levelwhere the market stabilized in2009. The largefall in bond yieldsalso makes

equitiescheaper.Theoneyeargovernmentbondyieldhasfallenbyc70bpafterendofNov11.Togetherwiththefallin

theNiftyP/E,itpushesdowntheyieldgapclosetoitsthreeyearmean.

Exhibit4:NiftyandtheP/E

900

2,700

4,500

6,300

Dec05 Dec06 Ja n08 Ja n09 Ja n10 Ja n11 Ja n12

7

14

21

28

Nifty

P/E(RHS)


Exhibit5:NiftyP/EandPEG

9.0

15.0

21.0

27.0

Dec05 Dec06 Jan08 Ja n09 Ja n10 Ja n11 Ja n12

0.7

1.4

2.1

PE

PEG


RelativelygentledeclineinP/E,butsteepfallinPEG

Acomparisonofthefallinequityvaluesin2H2011with2H2008indicatesthatthefallwasrapid(36%

betweenAug08

and

Dec08)

in

the

latter

case

compared

with

2011

(17.9%).

However,

the

erosion

in

P/Ein2011islargerthantheerosioninmarketcapitalization.ThePEGhasfallensteeplyin2011andis

nowwithin10%oftherangewherethePEGstabilizedin2009.

Within10%ofthesupportlevelforthePEGin2009Exhibit6:ChangeinNifty,P/EandPEGbetweenAugustandDecember

2008 2011

Nifty NiftyP/E NiftyPEG Nifty NiftyP/E NiftyPEG

11Aug 4,620 18.4 2.0 22Jul 5,634 15.0 1.42

31Dec 2,959 11.1 0.92 30Dec 4,624 11.5 0.83

Change 36.0% 39.8% 1.08 Change 17.9% 22.8% 0.59


At

end

Dec11,

the

Nifty

(4,624)

had

an

estimated

oneyear

rolling

forward

P/E

of

11.5x

and

a

correspondingPEGof0.83x.AsseeninExhibit3,theP/Eafterfivemonthsofcorrectionisclosetothat

attheendofDec08,despitethe largerfall intheNiftyback in2008.ThePEGatendDec11 iswithin

10%oftherange(0.63to0.99)wherethePEGstabilizedin2009.

Couldalsobereachedinthreemonths,ifearningsgrowthstabilizesShould the Nifty stay unchanged at its endDec11 level, the P/E and PEG would drift down over the

courseofthenext12monthstoreachanestimated11.2xand0.71x,respectively.Thismeansthatby

endofthefirstquarterof2012,thevaluationoftheNiftywouldreachthemiddleoftherangewhereit

hadstabilizedafterthesharpcorrectionin20082009.

PEGisdownfrom2.1xto

0.8xin

eight

months.

PEGisnowatthelevel

wheretheNiftystabilized

in2009.

ThePEGwouldfallto0.7x

atendMar12,evenifthe

Niftystayedatitsend

Dec11level.


6/32


6

Exhibit7:EstimatedP/EandPEG,iftheNiftyweretostayattheendDec11levelforallof2012Dec11 Jan12 Feb12 Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep12 Oct12 Nov12 Dec12

P/E 11.6 11.8 11.3 11.2 11.0 10.9 10.8 10.7 10.5 10.4 10.3 10.2 10.1

growth 13.8% 14.3% 14.9% 15.5% 15.4% 15.3% 15.2% 15.1% 15.0% 14.9% 14.8% 14.7% 14.6%

PEG(RHS) 0.84 0.82 0.76 0.72 0.72 0.71 0.71 0.71 0.70 0.70 0.70 0.69 0.69

Source:AvendusResearch

Exhibit8:Yieldgap:OneyeargovernmentbondandSensex

0.33

0.69

Jan12,

(0.0

8)

Dec10

1.66

Nov07, 3.93 Jul08, 4.06

9.0

4.5

0.0

4.5

Jan01 Apr03 Jun05 Aug07 Oct09 Dec11

5yearmean

3year

mean


Exhibit9:Yieldgap:OneyeargovernmentbondandNifty

0.17

0.68

Jan12,

(0.3

8)

Dec10

1.57

Jul08, 3.63Dec07, 3.44

9.0

4.5

0.0

4.5

Jan01 Apr03 Jun05 Aug07 Oct09 Dec11

5yearmean

3year

mean


YieldgappushedfurtherdownbyfallinbondyieldinearlyJan12

Thegapbetweentheoneyeargovernmentbondyield(8.47%atendDec11,afterrisingby118bpfor

theyear)andtheyieldontheNifty(inverseofP/E)hadstayednear1.5%fromApr11toJul11.Despite

thelargefallinAug11andSep11,itstayedaboveitsfiveyearmean.ThereboundinOct11lifteditto

1.3%,butthefallinDec11pulleditbelowthefiveyearmean.

Thefall

in

Dec11

was

also

the

result

of

a

29

bp

fall

in

the

bond

yield.

The

anticipation

of

a

cut

in

the

ReporatebytheRBIhaspulleddownthebondyieldevenmoreinthefirstweekofJan12.Thistakes

theyieldgapclosesttoitsthreeyearmeanafterJun10.

Significantpotentialupsideover2012

Exhibit10:SensexforecastsatvariousP/Es

14,761

17,713

20,665

12,000

15,000

18,000

21,000

Jan12 Apr12 Jul 12 Oct12 Dec12

12x

14x

10x


Exhibit11:NiftyforecastsatvariousP/Es

4,588

5,506

6,423

3,600

4,600

5,600

6,600

Jan12 Apr12 Jul 12 Oct12 Dec12

12x

14x

10x


Thelargefallintheone

yearbondyieldinearly

Jan12haspusheddown

theyieldgapclosertoits

threeyearmean.

AnendDec12,aP/Eof

12.0xwouldimplya

potentialupsideof15%to

19%intheSensexandthe

Nifty.


7/32


7

Driversofearningsrevisionsarechangingandshapingperformance

EvenastheconsensusforecastsforgrowthinFY12andFY13earningscontinuetofall,therearesectorssuchasCement

whereforecastshavebeenholdingfirm,orarebeingraised.Thetrendofadeclinehasreversedinafewsectorsduring

the last two quarters of 2011. We measure these shifts in earnings momentum and find they correlate with and are

oftenthe lead indicatorsofperformanceofsectorswithintheNifty.WithinAutomobiles,theoutlookforCommercial

vehicles and Passenger vehicles has brightened, even as that for Twowheelers appears to have plateaued. The best

sectorof2011,Consumer,appearslesspromising,giventheforecastdeclineinitsearningsmomentum.

Exhibit12:ConsensusforecastsgrowthinNiftynetprofits

8.1%

Jun11

15.0%

Dec10

21.6%

8.0%

12.0%

16.0%

20.0%

24.0%

May1 0 Au g1 0 No v1 0 Jan1 1 Ap r1 1 Ju l1 1 Sep 11 Dec 11

FY11 FY12 FY13


Exhibit13:ConsensusforecastsgrowthinSensexnetprofits

9.0%

Jun11

14.9%

Dec10,20.9%

8.5%

12.0%

15.5%

19.0%

22.5%

May1 0 Au g1 0 No v1 0 Jan1 1 Ap r1 1 Jul1 1 S ep 11 Dec 11

FY11 FY12 FY13


Downgradesextend,butafewchangesindrivers

4Q2011endedwithconsensusforecastsforgrowthofFY12earningsoftheNiftyfallingto8.2%.Each

quarterof2011sawearningsgrowthforecastsfallby3.4%.However,thecontributorstotheerosionin

FY12earnings

forecasts

have

changed.

Exhibit14:LargestcontributorstoerosioninFY12fearnings Dec10 Jun11 Jul11 Sep11 Oct11 Dec11

Contribution Weight Contribution Weight Contribution Weight

Metals 35.5% 6.9% Metals 33.0% 6.9% Metals 59.0% 6.9%

Privatebanks 14.3% 13.7% Comm.Vehicle 24.4% 2.4% Oil&Gas 16.9% 13.2%

Construction 13.9% 4.2% P SUbank 12.9% 3.7% PSUbanks 14.4% 3.7%

NBFC 11.4% 6.9% Oil&Gas 11.0% 13.2% Pass.Vehicle 9.7% 3.1%

Comm.Vehicle 7.9% 2.4% Telecom 9.5% 3.3% Construction 6.8% 4.2%

Pass.Vehicle 6.8% 3.1% ITServices 7.9% 15.8% Utilities 1.8% 4.1%

Utilities 5.6% 4.1% Construction 5.2% 4.2%


Upgradesin

a

select

few

sectors

f1H2011hadseenupgradestoFY12earningsforecastsforConsumer,PSUbanksandOil&Gas.f3Q2011sawupgradesinPrivatebanksandNBFCs.f4Q2011 saw upgrades to forecasts for Twowheelers, Commercial vehicles, Cement, Consumer,

Privatebanks,NBFCsandITServices.

Metals,PSUbanksand

Constructionhave

contributed60%to90%of

theerosioninNiftyFY12f

earningsoverthepast

twoquarters.

Earningsmomentum

reversesinCommercial

vehiclesandCement.

SignificantupgradeinIT

Services.


8/32


8

Exhibit15:Assessmentofearnings,P/EandpricechangesintheNiftysectorsduring2011Earnings

Contributionto

Niftygrowth

Revisions Relative

toNiftyweight

P/E Marketcapitalisation(+/)

Automobiles

TwoWheelers Supportat14x Outperformancepeakedin3Q2011,continuedin4Q2011

Comm.Vehicles

FelltillSep11,reboundin4Q2011 Underperformanceoverin3Q2011,large

outperformancein4Q2011

Passenger

Vehicles

NolongeratdiscounttoNifty Mixedtrend;largeo/pin3Q2011reversedin4Q2011

Cement Reboundfor2quartershasinjectedpremiumoverNiftyP/E

Largeo/pin2H2011afteru/pin1H2011

Construction ExtendederosionhaspulledP/EbelowNifty U/pintensifiedin2H2011Consumer Stableatc25xallthrough2011;nowlarge

premiumtoNiftyP/E

O/pindeclinein2H2011

Engineering ExtendederosionhaspulledP/EbelowNiftyin4Q2011

U/pintensifiedin2H2011

Financials PSUbanks DiscounttoNiftyhasexpanded U/pintensifiedin2H2011Privatebanks ExtendederosionhaspulledP/EbelowNifty

in4Q2011

Smallo/pin1H2011,butlargeu/pin2H2011

NBFCs PremiumtoNiftyerodedin4Q2011 U/ppeakedin3Q2011,smallo/pin4Q2011ITServices PremiumtoNiftyexpandedin4Q2011 Largeo/pin4Q2011,afteru/pin2Q2011and

3Q2011

Metals FelltillSep11,reboundin4Q2011 U/ppeakedin3Q2011,butpersistsOil&Gas Stable,c20%discounttoNiftyP/E Mixedtrend;mildu/pin2011Pharma. DeclineinabsoluteP/E,butsteadyrisein

premiumoverNiftyP/E

Sustainedandrisingo/pafter1Q2011

Telecom P/EexpansiontillJun11reversedin2H2011,butpremiumoverNiftyexpands

Outperformancein2Q2011and3Q2011;

reversedin4Q2011

Utilities Steadyfallin2011haspulledP/EtoasmalldiscountrelativetoNifty

Mixedtrend;mildu/pin2011

RealEstate P/Eseeminglystablein2011;createspremiumoverNifty

O/pinallquartersof2011,except3Q2011


Sectorperformancesareinsyncwithearningsmomentum

ContributiontoNiftyearningsgrowthisanindicatorofmomentumAclassicexampleofashift inearningsmomentum,forthebetter, isCement.AtendDec10,Cement

was forecast to contribute 0.4% of the growth in FY12 earnings of the Nifty. By end Sep11, this

contributionwasforecasttoriseto0.7%(seeExhibit16).ByendDec11,thiscontributionwasforecast

toriseevenfurtherto1.0%.ThecontributiontoFY13earningsgrowthoftheNifty isforecasttorise

evenhigherto1.6%.Thetrendsintheseforecastspointtotheimprovingassessmentofthesector.

The contribution to forecast earnings growth, and revisions, depend upon revisions to earnings

forecastsofallsectorswithintheNifty.Therelativeandabsolutechangesinpricesofstocks inthese

sectorsare

noticeably

influenced

by

these

revisions.

Two other indicators we study in our assessment of earnings momentum are the actual revisions to

forecastsand the extent to which the contributiontoearnings growth variesfromthe weight ofthe

sectorintheNifty.

AlsovisiblewithinAutomobilesandinTelecom

Commercial vehicles and Passenger vehicles, within Automobiles, are both forecast to expand their

contributiontoFY13 earnings growth ofthe Niftywell abovetheirrespectivecontributionsforFY12.

Telecom too is forecast to have a large rise in its contribution. In all three of these cases, the FY13

contributionisforecasttoexceedthecurrentweightoftherespectivegroupintheNifty.

Cementisaclassic

exampleofearnings

momentumrevival

precedingthe

outperformanceofthe

sector.


9/32


9

MayalsobealeadindicatorofwaningoutperformanceinasectorConsumer has been the best performer within the Nifty with an estimated 20.8% rise during 2011,

compared with a 23.8% fall in the Nifty. Its P/E held in a stable band near 24x all through the year,

while the P/E of every other sector dropped by up to 50%. However, the earnings momentum of

Consumer is less promising. Even though forecasts for earnings for FY12 and FY13 have both been

raisedallthrough2011,thecontributiontoearningsgrowthfortheseyearswasforecastat9.8%and

5.5%, respectively, at end Dec11. Not only is the contribution forecast to fall sharply, both these

numbersarelowerthantheweightofthesector(10.7%atendDec11).

MaynotalwaysapplyinallsectorsFinancials,inparticular,isanotablesectorwherethereportedearningsgrowthhasusuallystayedwell

abovethatoftheNiftyandthecontributiontoNiftyearningsgrowthstayswellabovetheweightinthe

Nifty.However,thevaluationofthesestocksissignificantlyinfluencedbyothermeasuressuchasbook

value,NPLsandrestructuredloans.

A few sectors may also be in the midst of earnings revisions that are not fully implemented. This is

partlytheresultoflargechangesinexternalparameterssuchasexchangeratesandinterestrates.At

times,thismayalsoreflectalongerlagbetweenthechangeinsuchaparameteranditbeingreflected

inconsensusforecasts.

Exhibit16:ContributiontoFY12andFY13earningsgrowthandrevisions(%) FY12 FY13

Indexweight End

of

Sep11

+/

9mths Dec11 +/

3mths End

of

Sep11 +/

9mths

Dec11 +/

3mths

Automobiles 8.1% 0.1 8.2 0.7 0.8 8.0 2.0 9.5 1.5

Twowheelers 2.5% 2.3 0.7 5.3 3.1 1.5 0.4 1.9 0.4

CommercialVehicle 2.6% 3.1 7.3 3.1 0.0 3.1 1.6 3.4 0.3

PassengerVehicle 3.0% 0.9 1.6 2.9 3.9 3.4 0.0 4.2 0.9

Cement 2.6% 0.7 0.3 1.0 0.4 1.6 0.8 1.6 0.1

Construction 4.5% 1.4 3.8 1.0 2.4 5.4 1.2 4.5 0.9

Consumer 10.3% 6.3 2.9 9.9 3.6 4.8 0.4 5.6 0.8

Engineering 1.8% 2.3 1.5 2.4 0.2 2.0 0.1 1.2 0.8

Financials 24.9% 42.9 14.9 51.7 8.7 32.8 4.7 33.0 0.3

PSUBanks 3.7% 17.8 7.3 18.8 1.0 11.0 0.1 10.9 0.1

Privatebanks 14.3% 18.1 5.0 24.4 6.2 16.1 4.0 17.0 0.8

NBFC 6.9% 7.1 2.6 8.6 1.5 5.6 0.8 5.1 0.5

ITServices 15.7% 11.4 2.3 21.1 9.7 9.9 1.3 10.6 0.7

Metals 7.1% 0.6 15.3 21.0 20.3 10.6 3.4 10.2 0.3

Oil&Gas 13.1% 26.9 9.7 30.2 3.3 10.6 0.1 9.2 1.5

Pharmaceuticals 4.4% 3.5 1.3 4.9 1.3 2.9 0.3 3.7 0.8

Telecom 3.0% 2.2 1.4 1.8 3.9 6.9 1.7 7.3 0.5

Utilities 4.1% 2.8 0.6 3.2 0.4 4.3 0.9 3.2 1.1

RealEstate 0.4% 0.2 0.6 0.0 0.2 0.4 0.7 0.4 0.0

Total 100% 100.0 0.0 100.0 0.0 100.0 0.0 100.0 0.0



10/32


10

Exhibit17:Rolling12monthforwardearningsgrowth,rollingP/EandchangeinmarketcapitalisationRolling12mthsfwd.earningsgrowth Rolling12mthsforwardP/E Pricechange(2011)

Dec10 Mar11 Jun11 Sep11 Dec11 Dec10 Mar11 Jun11 Sep11 Dec11 1Q 2Q 3Q 4Q

Automobiles 24.1 15.0 9.7 6.2 10.3 12.2 10.5 9.4 9.7 9.1 8.9 6.1 1.6 2.6

Twowheelers 15.9 14.7 13.6 11.8 14.2 16.3 13.9 14.6 15.4 14.0 12.1 5.6 6.4 1.0

CommercialVehicle 36.0 14.7 9.0 1.7 6.2 8.6 7.4 5.7 5.1 5.5 5.2 20.4 21.3 13.1

PassengerVehicle

13.4

15.7

8.4

10.0 14.5 15.3 13.7 12.4 13.2 11.5

9.2

3.6 5.3

15.3

Cement 1.2 4.5 5.6 6.4 8.2 16.1 13.6 11.1 12.2 12.5 1.3 11.8 12.8 4.7

Construction 26.6 21.3 10.1 11.4 11.5 22.8 18.8 19.6 14.7 11.1 15.8 6.8 23.4 26.9

Consumerproducts 15.9 17.1 16.1 16.1 17.6 25.7 24.3 26.1 24.7 24.7 0.4 13.6 1.6 7.7

Engineering 43.2 21.0 14.0 13.4 8.5 20.3 17.3 15.6 12.7 9.7 7.7 0.2 16.8 26.2

Financials 23.0 21.9 21.0 20.8 20.0 17.9 16.4 15.3 12.5 10.7 1.9 3.8 15.3 12.3

PSUbanks 25.4 26.7 35.7 27.7 23.9 9.9 9.5 8.2 6.7 5.7 3.7 31.1 47.6 39.6

Privatebanks 22.8 18.9 17.7 19.1 20.1 21.1 18.8 18.1 14.6 11.8 0.1 2.2 34.5 36.8

NBFC 19.3 22.3 9.7 16.1 14.5 24.3 21.8 19.7 15.5 15.1 16.5 4.6 34.5 2.3

ITServices 18.4 21.7 17.2 14.9 16.0 23.5 21.4 19.7 16.9 17.4 1.6 5.8 14.0 11.0

Metals 33.7 21.6 10.1 6.5 6.8 9.6 8.9 8.3 6.3 6.6 6.8 8.3 27.5 13.6

Oil&Gas 15.1 17.5 18.0 13.7 9.9 13.1 12.6 11.0 10.1 9.1 4.4 9.8 7.2 7.7

Pharmaceuticals 25.4 17.0 17.3 17.2 19.2 22.2 20.2 20.6 18.3 18.3 11.3 7.4 7.6 3.2

Telecom 3.7 22.6 27.4 29.9 39.8 16.3 16.0 17.0 15.6 14.6 5.0 7.5 6.7 8.5

Utilities 13.4 15.7 12.0 11.3 9.8 15.8 15.1 14.0 11.4 10.9 4.9 3.6 15.4 4.3

RealEstate 36.4 24.0 21.8 13.7 14.7 17.5 19.5 16.9 19.2 16.4 8.0 21.6 4.0 16.3

Total 21.4 19.2 15.6 14.0 13.9 16.4 15.0 14.1 12.3 11.5 4.6 3.9 11.9 5.7



11/32


11

IIPpoisedtorise;electricity,interestratesmaycatalyzerebound

Twoindicatorsfromtherealeconomysuggestarecoveryinindustrialproductionmayberoundthecorner.Thegrowth

in Electricity production and sales of LCVs begin their rebound about six months before the turning point in

Manufacturing.Forsometimenow,bothhavesignaledthatarecoveryisdue.Electricitygrowthislikelytostayinhigh

singledigitstillFY13f.Themissingelement,thatwasactiveinthepreviouseconomiccycle,isalowinterestrateregime.

The recent fall in food inflation is significant as over half the rise in prices in 2011 was driven by food items. Lead

indicatorsarealreadysignalingafallintheReporate.

Exhibit18:TTMgrowthofElectricityandManufacturing

3%

5%

13%

21%

Mar07 Apr08 Apr09 Apr10 May11

2.0%

4.5%

7.0%

9.5%

Manufacturing Electricity

8m

6m

6m

Source:http://mospi.nic.in,AvendusResearch

Exhibit19:TTMgrowthofLCVsandManufacturing

3%

5%

13%

21%

Oct06 Nov07 Nov08 Nov09 Dec10 Dec11

8.0%

11.0%

30.0%

49.0%

Manufacturing

LCV7m

5m

8m

Source:http://mospi.nic.in,AvendusResearch

Leadindicatorssuggestindustrialrecoverymayberoundthecorner

ReboundinElectricityprecedesrecoveryinManufacturingThetrailingtwelvemonths(TTM)growthofElectricity(weightof10.2%)hasbeena lead indicatorof

theinflection

points

in

the

growth

of

the

Manufacturing

segment,

which

has

a

weight

of

79.4%.

Exhibit

18indicatesthatthepeakandtroughinElectricitygrowthhaveprecededthoseinManufacturingby6

8 months. Electricity growth bottomed out at 4.6% in Sep10 and has since risen to 8.1% in Oct11.

Manufacturinggrowthreachedapeakof10.7%inNov10(sixmonthsafterElectricity).However,inthe

current cycle, Manufacturing growth has continued to fall for 15 months after the recovery in

Electricity.

ManufacturingreboundfollowswithinsevenmonthsofthatinLCVsAnother lead indicator of past inflection points in the Manufacturing segment has been the TTM

growthinsalesofLCVs.ThepeakintheTTMgrowthofLCVsinFeb07andJun10werefollowed,within

eightmonths,byapeakintheManufacturingsegmentwithintheIIP.ThebottominLCVsalesgrowth

inMar09wasfollowed,aftersevenmonths,byareboundinManufacturing.Themostrecentbottom

inLCVsaleswasinJun11.

Electricitygrowthlikelytostaynear8%inFY12fandFY13fThe momentum in Electricity generation is likely to extend till the end of FY13f. We estimate the

growth for FY12f to be 8.6% and that for FY13f to be between 7.1% and 7.7% (see Exhibit 30). The

sustainedreboundintheElectricitysegmentoftheIIPfollowstheaccelerationingenerationcapacity

that began in FY08. While the pace of implementation of several projects has lagged expectations,

enough of the new capacity is now being commissioned to sustain high growth in generation. Our

estimatesindicatethatdespitethewellknownconstraintsinproductionofcoalfromlocalmines,the

productionofelectricitywouldgrowthankstoimportofcoal(SeeAnnexure2).

GrowthintheElectricity

segmenthasbeenonthe

upswingafterOct10.In

previouscycles,thiswas

followedbyareboundin

Manufacturingwithin8

months.

LCVstoohaveledthe

inflectionpointsin

Manufacturingby58

months.

Largeadditionsto

generationcapacityare

likelytosustainhigh

growthinElectricityin

FY13.


12/32


12

Exhibit20:ChangeinFoodArticlesitemwithinWPI(yoy)

0%

8%

16%

24%

02Jan10 01May10 28Aug10 25Dec10 23Apr11 20Aug11 17Dec11

Source:http://eaindustry.nic.in

Exhibit21:ContributionoffoodtoriseinWPI(%)

48

12

24

60

Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11

14.0%

3.0%

8.0%

19.0%

ContributionofFood

+/ WPI(annualised)

+/ Food(RHS)

Source:http://eaindustry.nic.in,AvendusResearch

Inflationengineisfinallycoolingoff

Close to 90% of the rise in the wholesale price index (WPI) during 2011 was contributed by two

categories within the WPI, viz. Food (combined weight of 24.3%) and Fuel (15.8%). Late 2011 saw a

sharpfallinfoodinflation.Thoughpartlytheresultofthehighbaseinthepreviousyear,thereisalsoa

distinct longerterm trend of a decline in wholesale food inflation. There is also a decline in fuel

inflation.FoodarticlesandfoodproductscontributedoverhalftheriseintheWPI.

Thevery largepartofthehigh inflation(measuredbyWPI) inthepasttwoyearswascontributedby

foodarticles(14.3%weightinWPI)andfoodproducts(10.0%weight);seeExhibit21.Intwoofthepast

sixquarters,theFoodbasket(includingfoodproductsandfoodarticles)contributedoverhalfthetotal

rise in the WPI. Hence, the fall in food inflation starting from midNov11 is likely to exert a cooling

effectontheoverallriseintheWPI.

Contributionto

inflation

from

fuel

is

high,

but

in

decline

During2011,Fuel&Power(14.9%)andCrude(0.9%)togethercontributedbetween30%and40%of

theriseintheWPI.Theannualizedriseinthepricesofthisgrouphasfallenfromc20%inmid2011to

themidteensbyDec11.

Exhibit22:ContributionofFuel,PowerandCrudetotheriseintheWPI(%)

0

12

24

36

48

Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11

0.0%

5.5%

11.0%

16.5%

22.0%

ContributionofFuel &Power(incl.crude)

AnnualisedchangeinFuel&Power(incl.crude)(RHS)

Source:http://eaindustry.nic.in,AvendusResearch

FoodandFuelcategories

contributedc90%

of

rise

in

theWPIin2011.The

sharpfallinfoodinflation

islikelytoholddown

wholesaleinflationin

2012.


13/32


13

Exhibit23:Yieldon1yeargovernmentbondandReporate

4.0

6.0

8.0

10.0

Ja n0 1 Au g0 2 Ma r0 4 O ct0 5 Ap r0 7 Nov 08 Ju n1 0 Dec 11

1y Repo


Exhibit24:Yieldson1year,10yearsGOIbondsandReporate

3.2

6.4

9.6

Jan04 Ma r05 Ma y06 Jun07 Aug08 Sep09 No v10 D ec 11

4

6

8

10

1y

10y

Repo(RHS)


ImpendingfallininterestratescouldreviveManufacturing

LeadindicatorsalreadyreflectthelikelyfallinratesTheyieldontheoneyeargovernmentbondhasbeenaleadindicatorofthelikelychangeintheRepo

over the past decade. Dec11 saw the oneyear bond yield fall 29bp to 8.47%,just below the Repo

(8.50%).Another lead indicatorofan inflectionpoint intheRepohasbeentheconvergenceofyields

onthe1yearand10yeargovernmentbonds.

DeclineinratescouldcatalyzeaManufacturingrecoveryA key enabling element of a recovery in the Manufacturing sector in 2009 was the prevalence of

relativelylowinterestrates.InMar09,whenthegrowthofLCVsbottomedout,theRepohadbeencut

by400bpintheprecedingsixmonths.Thisperiodhadalsoseentheyieldonthe1yearBBBbondfall

by270bp.

Thisis

the

missing

element

of

the

past

six

months.

The

yield

on

the

BBB

bond

has

stayed

near

12%

in

thesecondhalfof2011,about180bphigher thanthat inMar09.Moresignificant istheuncertainty

overrates,largelycausedbythestubbornlyhighinflation.Theslowlyvisiblesignsofthelongawaited

fall in inflationmaybegintorestoretheconditionsthatcouldsupportarevival intheManufacturing

sector.

Exhibit25:GrowthofManufacturingintheIIP,yieldonBBBoneyearbondandRepo

3.0%

5.0%

13.0%

21.0%

Mar07 Mar08 Feb09 Feb10 Jan11 Dec11

3.5%

7.0%

10.5%

14.0%

BBB1y

Manufacturing

Repo(RHS)

Source:http://mospi.nic.in,Bloomberg,AvendusResearch

Recoveryin

Manufacturingin2009

wassupportedby

relativelylowinterest

rates.Incontrast,ratesin

2H2011werec200bp

higher.


14/32


14

Annexure1:PerformanceduringriseandfallfromJul11toDec11

TheperiodfromJul11toDec11sawthreespellsofa largefallintheSensexandtwoofa largerise.Theywere25Jul

25Aug(14.5%),5Oct28Oct(+12.7%),28Oct25Nov(11.8%),25Nov7Dec(+7.5%)and7Dec28Dec(10.1%).Exhibits26

to29studythechangeinmarketcapitalizationofstocksacrosssegmentsdefinedbythesectors,marketcapitalization,

P/E(trailing),dividendyieldandcash/MCap.Largestocksoutperformedsmallstocksinbothphasesandacrosssectors.

SimilarlyhighP/EstocksoutperformedthelowP/Estocks.Dividendyielddoesnotcorrelatewithoutperformanceand

neither does a high proportion of cash relative to market value. Outperformers in the fall periods were Consumer,

Cement, Telecom and Pharmaceuticals; most of these sectors have underperformed during the rising periods.

Financials,andparticularlythelargestocks,weresignificantoutperformersduringtheriseperiods.

Exhibit26:PerformanceacrossP/Erangesandsectors TTMPrice/Earningsranges

No.of

Stocks

Mcap

(INRbn)

%ofTotal

Mcap30 All 30 All

No.ofStocks 56 164 146 153 73 56 164 146 153 73

%ofTotalMcap 5% 8% 28% 44% 15% 5% 8% 28% 44% 15%

(ason6Jan12) FallPeriodAverageRR RisePeriodAverageRR

AllSectors 592 49,812 100% 1.2 2.8 0.6 1.6 0.3 0.5 2.8 2.7 2.1 2.0 5.2 2.4

Automobiles 30 2,835 6% 10.0 1.3 2.7 4.4 4.4 2.2 0.3 6.3 2.1 0.6 7.5 1.0

Cement 16 1,203 2% 1.4 5.2 8.6 7.3 6.4 7.0 6.9 6.4 6.9 1.8 6.5 2.4

Chemicals 33 1,079 2% 5.7 1.8 4.0 4.1 6.3 4.2 5.9 7.9 5.5 8.1 9.0 8.1

Construction 29 1,045 2% 12.4 12.2 6.4 6.7 5.9 6.9 1.5 1.7 7.9 3.7 2.4 4.0

Consumerproducts 43 4,523 9% 20.4 6.0 1.9 6.3 7.5 7.2 7.2 2.3 1.4 2.8 5.3 4.2

Engineering 43 1,914 4% 9.1 4.8 3.5 1.6 0.5 2.6 0.5 8.7 5.2 6.8 1.4 5.6

Financials 71 8,012 16% 3.7 2.4 5.2 3.1 1.6 2.6 6.2 3.9 1.9 1.3 2.0 1.2

ITServices 43 5,861 12% 12.4 4.4 4.2 2.6 0.6 2.4 5.9 0.5 4.7 0.1 6.3 0.3

Media 16 472 1% 2.2 NA 18.4 4.3 0.2 3.0 5.0 NA 2.7 4.7 8.0 4.9

Metals 31 3,795 8% 4.7 3.7 5.9 1.0 10.0 2.5 9.0 1.9 1.2 0.1 4.8 1.2

Oil&gas 21 7,416 15% 6.8 0.2 2.0 2.5 14.4 2.3 0.9 4.6 1.9 8.3 18.9 2.7

Pharmaceuticals 37 2,601 5% 0.1 3.0 5.4 6.5 5.5 5.7 8.5 6.2 6.9 6.8 4.9 6.9

RealEstate 23 776 2% NA 12.1 9.1 4.0 5.2 6.8 NA 3.2 2.6 1.8 0.7 0.9

Telecom 10 1,825 4% 7.3 2.2 1.9 3.9 10.0 3.3 0.7 9.0 NA 6.2 12.9 6.8

Textiles 14 157 0% 0.1 3.5 0.3 5.1 4.6 0.6 2.0 4.6 1.6 14.2 5.5 4.6

Utilities 21 3,307 7% 16.9 5.6 0.2 2.1 6.3 0.3 6.6 0.9 3.3 1.7 2.3 2.4

Others 111 2,991 6% 2.7 2.5 4.0 1.2 7.0 3.4 5.0 5.4 5.1 5.6 7.3 6.2

SensexReturn 12.1 10.1


Exhibit27:Performanceacrossrangesofcash/MCapandMCapranges NetCash/Mcap(%) No.of

Stocks

Mcap

(INRbn)

%ofTotal

Mcap75 All 75 All

No.ofStocks 216 149 120 30 3 180 185 131 20 2

%of

Total

Mcap

13% 34% 49% 5% 0%

13% 34%

49%

5% 0%

(ason6thJan'12) FallPeriodAverageRR RisePeriodAverageRR

Total 518 43,602 100% 3.7 0.5 3.7 2.1 2.3 1.2 1.8 3.3 3.4 4.2 6.2 3.2

INR100bn 77 34,961 80% 2.6 0.8 3.6 2.6 NA 1.5 0.1 2.4 3.0 3.0 NA 2.5




15/32


15

Exhibit28:Performanceacrossmarketcapitalizationrangeswithinsectors McapRanges(INR) No.of

Stocks

Mcap

(INRbn)

%of

Total

Mcap100bn All 100bn All

No.ofStocks 219 216 87 95 219 216 87 95

%ofTotalMcap 2% 8% 10% 80% 2% 8% 10% 80%

(ason

6

Jan12)

Fall

Period

Average

RR

Rise

Period

Average

RR

AllSectors 617 54,252 100% 3.3 1.1 0.8 0.7 0.5 5.7 6.0 4.4 1.6 2.4

Automobiles 33 2,872 5% 0.8 4.0 1.9 2.5 2.2 4.3 6.3 2.5 0.2 1.0

Cement 17 1,213 2% 2.2 0.4 10.7 8.1 7.0 3.4 4.1 7.5 1.7 2.4

Chemicals 35 1,120 2% 0.1 2.7 2.9 10.0 4.2 9.8 9.7 4.5 11.1 8.1

Construction 30 1,051 2% 9.9 8.4 2.8 6.5 6.9 3.0 6.8 2.9 3.6 4.0

Consumerproducts 43 4,523 8% 12.7 0.6 5.3 8.6 7.2 2.7 7.3 4.3 3.8 4.2

Engineering 43 1,914 4% 2.8 0.3 4.2 2.9 2.6 7.7 5.5 6.4 5.2 5.6

Financials 77 10,180 19% 0.3 2.1 3.1 2.6 2.6 5.7 4.3 1.1 2.1 1.2

ITServices 43 5,861 11% 5.4 0.5 5.0 2.5 2.4 1.8 5.0 4.0 0.1 0.3

Media 17 475 1% 9.3 1.0 4.6 5.8 3.0 5.3 7.4 3.0 4.0 4.9

Metals

34

5,867

11%5.8

5.2

1.6

2.3

2.5

8.8

5.4

9.3

0.8

1.2

Oil&gas 21 7,416 14% 5.4 4.6 3.5 2.5 2.3 6.1 1.3 10.2 2.5 2.7

Pharmaceuticals 39 2,653 5% 1.7 3.2 4.3 6.7 5.7 9.5 7.1 6.4 6.9 6.9

RealEstate 23 776 1% 7.0 3.5 7.9 7.6 6.8 2.8 3.4 0.2 5.4 0.9

Telecom 12 1,840 3% 5.2 7.4 8.8 3.8 3.3 11.6 5.0 4.8 6.8 6.8

Textiles 14 157 0% 2.4 0.2 NA NA 0.6 7.8 4.1 NA NA 4.6

Utilities 21 3,307 6% 14.1 8.3 0.5 0.0 0.3 9.1 8.3 2.4 2.1 2.4

Others 115 3,028 6% 1.1 1.2 4.1 7.7 3.4 5.9 5.6 9.1 5.3 6.2



Exhibit29:PerformanceacrossrangesofdividendyieldandMCapranges

DividendYield

(%)

No.

of

StocksMcap

(INRbn)%

of

Total

Mcap 8 All 8 All

No.ofStocks 193 146 164 77 8 193 146 164 77 8

%ofTotalMcap 27% 44% 25% 4% 0% 27% 44% 25% 4% 0%

(ason6Jan12) FallPeriodAverageRR RisePeriodAverageRR

Total 588 51,671 100% 0.8 0.5 1.9 4.6 6.1 0.5 3.5 1.6 2.6 4.1 5.5 2.5

INR100bn 93 41,305 80% 0.7 0.5 2.4 7.3 NA 0.7 2.8 1.1 2.3 2.1 NA 1.9




16/32


16

Annexure2:AssumptionsforElectricitygrowthinFY12fFY13fExhibit30:GrowthingenerationcapacityandforecastsforgrowthinElectricityproduction

Scenario1 Scenario2

Mar09 Mar10 Mar11 Mar12f Mar13f Mar13f

InstalledCapacity(GW)

Coal

77.6 84.2 93.9 108.5

116.2 119.6

Total 148.0 159.4 173.6 191.6 200.4 203.8

Capacityaddition(GW)

Coal 6.5 9.7 14.6 7.8 11.2

Total 11.4 14.2 18.0 8.8 12.2

Generation(000GWh)

Coal 480.4 514.7 535.3 582.0 638.5 643.6

Total 723.8 771.2 811.1 881.1 943.4 948.5

yoychangeingeneration(%)

Coal 7.2 4.0 8.7 9.7 10.6

Total 6.5 5.2 8.6 7.1 7.7

PLF(%)

Coal 70.6 69.8 65.1 61.2 62.7 61.4

Total

55.8 55.2 53.3 52.5

53.7 53.1

Coalrequirement(mtpa)

Domestic 309 312 331 343 343

Imported 38 56 70 94 98

Total 348 368 400 437 441

Source:AvendusResearch


17/32


17

Annexure3:ContributiontoSensexandNiftypointsandFIIactivityExhibit31:ContributionofsectorstothechangeinSensexandNifty

Sensex Nifty

Sector Jan11Mar11 Apr11Jun11 Jul11Sept11 Oct11Dec11 Total Jan11Mar11 Apr11Jun11 Jul11Sept11 Oct11Dec11 Total

Automobiles 157 124 24 23 328 46 29 7 12 94

Cement 0 0 0 0 0 1 14 14 6 6

Construction 247 103 347 275 765 68 30 86 70 194

Consumerproducts 18 215 28 134 338 1 53 8 28 74

Engineering 57 3 90 94 243 13 0 23 28 64

Financials 102 66 710 452 1,330 51 21 225 152 449

ITServices 123 251 405 300 479 41 51 105 63 134

Metals&Mining 119 92 498 185 894 40 27 126 58 251

Oil&Gas 93 377 220 256 947 33 91 64 74 262

Pharmaceuticals 32 6 55 45 35 24 9 16 9 22

Telecom 38 52 37 53 76 11 12 12 15 26

Textiles 0 0 0 0 0 0 0 0 0 0

Utilities 41 47 111 38 237 16 7 45 11 80

RealEstate 13 31 5 18 57 4 6 1 4 13

Total 1,005 615 2,519 915 5,054 345 144 702 319 1,510


Exhibit32:FIIpurchaseandsales(USDmn)acrossrangesoftheSensexSensexrange 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

20013000 157 113

30014000 889 1,998

40015000 2,774 113

50016000 1,793 5,842

60017000 2,518 3,644

70018000 3,640

80019000 1,586 18 871 1,153

900110000 1,912 1,697 1,502 1,011

1000111000 900 427 1,327

1100112000 1,341 1,458 2,051

1200113000 2,912 213 402 570

1300114000 1,254 961 1,684 1,066

1400115000 4,474 2,598 2,713

1500116000 4,277 842 2,184 444 1,749

1600117000 1,895 2,152 5,278 2,082 1,720

17001

18000

1,945

1,064

4,288

12,661

8911800119000 1,478 79 3,538 2,260

1900120000 732 1,051 3,910 1,356

2000121000 1,687 703 11,778 387

Total 732 6,679 8,474 10,782 8,087 17,236 13,428 17,313 29,362 358

Source:SEBI,AvendusResearch



IndiaEquityResearc

January09,2012

Automobiles

EarningsgrowthlikelytorecoverforCVandPVcompanies

Commercialandpassenger vehicle companies are likely towitnessa

recovery inearningsgrowth inFY13duetothepositivefalloutofthe

likelyreversal

in

the

interest

rate

cycle.

Robust

sales

volume

growth

in

diesel vehicles is likely to positively impact earnings for passenge

vehicle companies. Twowheeler companies are likely to witness a

moderation in earnings growth in FY13 due to lower sales volume

growthintheruralsegmentandincreasingcompetition.Ourtoppick

are Maruti Suzuki India (NR) and Tata Motors (NR) for the next 12

months.Risk factorsareadverse foreignexchangerates,government

policiesondieselvehiclesandhighinterestratesandinputcosts.

Twowheelercompaniesmaywitnessmoderationinearningsgrowth

Twowheeler companies have outperformed themarket by7% in theDec11

quarter

on

account

of

strong

sales

volume

growth.

Going

forward,

thesecompaniesmay not outperform due tomoderation in earnings growth. Thi

moderation is likely to be on account of lower demand growth in the rura

segmentand increasingcompetition.Earningsgrowth is likelytomoderateto

12%inFY13,afterlikelygrowthof20%inFY12,basedonconsensusestimates

Risingvaluationsarealsoaconcern; twowheelercompanieswere tradinga

14.0xoneyearforwardP/E,whichishigherthan11.5xand5.5xforpassenge

vehicle (PV) and commercial vehicle (CV) companies, respectively, based on

consensusestimatesatendDec11.

EarningsgrowthtorecoverforCVandPVcompanies

In theDec11quarter,PVcompanieshaveunderperformed themarketby9%

duetoweaksalesvolumegrowth,whereasCVcompanieshaveoutperformed

themarket

by

19%

due

to

recovery

in

sales

volume

growth.

Going

forward,

CV

and PV companies are likely to outperform the market over the next 12

months, ledbystrongearningsgrowth.Earningsgrowth is likelytorecoverto

10%and22% inFY13,aftera likely fallof4%and7% inFY12 forCVandPV

companies, respectively, based on consensus estimates. This recovery is the

positive fallout of the likely reversal in the interest rate cycle. Robust sale

volumegrowth indieselvehicles is likely topositively impactearnings forPV

companies.

MSILandTTMTarethetoppicksfornext12months

Toppicksforthenext12monthsareMarutiSuzukiIndia(MSILIN,NR)andTata

Motors(TTMT IN,NR).Earningsgrowth is likelytorecoverto31%and10% in

FY13,afteralikelyfallof19%and4%inFY12forMSILandTTMT,respectively

basedon

consensus

estimates.

MSILs

sales

volume

growth

is

likely

to

rebound

on launchesandhigherproductionofdieselvehicles inthenext fewmonths

TTMTs overseas subsidiary, Jaguar and Land Rover, is likely to continue

witnessing robust volume growth led by growing demand from developing

countries and a healthy order book. Robust growth in Tata Ace is likely to

continuedrivingCVvolumes.Risk factorsareadverse foreignexchangerates

governmentpoliciesondieselvehiclesandhighinterestratesandinputcosts.

Topsectorpicksandallocation

Company Rating MCAP FFAllocation

withinsector

(INRbn) (%) (%)

MarutiSuzuki NR 274 36 35

TataMotors NR 596 57 25

AshokLeyland NR 62 50 20

EicherMotors NR 40 36 20

Source:Bloomberg, AvendusResearch

Stockvaluations(Bloombergconsensus)

Company CMP P/E EPSCAGR(%)

(INR) FY13f FY13fFY14f

MarutiSuzuki 949.8 11.2 25.6

TataMotors 203.6 6.7 8.6

AshokLeyland 23.5 8.5 16.8

EicherMotors* 1,493.7 11.4 15.7

Source:Bloomberg

*FY13correpsponds to2012

Stockperformanceason06Jan12(%)

Company 1m 3m 1yr

MarutiSuzuki 5.0 12.5 30.9

TataMotors 6.3 38.1 19.3

AshokLeyland 11.3 4.7 28.0

EicherMotors 5.6 7.6 23.5

BSEAutoIndex 7.1 1.1 17.7

Source:Bloomberg

SriRaghunandhanNL,+9102266842863

[email protected]

18



IndiaEquityResearc

January09,2012

BanksNPLtrendtostaylargestinfluenceonstockperformance

ThecontinuingdowngradestoconsensusforecastsforFY12andFY13

earningsoftheCNXPSBKcreateasignificantobstacleforareboundin

valuation.During

the

past

12

months,

consensus

net

profit

growth

o

PSBs for FY12 has been lowered by 13%.A reversal in the earning

trend, driven by improvement in asset quality, is likely to be the

largest influenceonthevaluationofbanks.Areversal inthe interes

ratesislikelytobeaneartermtrigger.Whilenewbanksaresuperio

in asset quality, their underperformance in 2011 was driven by

concerns on its sustainability. The gap in the net NPL/networth

betweenPSBsandnewbanks isat itswidest infouryearsandrising

WepreferICICIBank(Add),AxisBank(Buy),StateBankofIndia(Buy

andPunjabNationalBank(Buy),whileHDFCBank(Add)continuesto

stayaneartermdefensive.

ValuationgapofCNXPSBKwiththeNiftyat2.5yearhigh

AtendDec11, thepremiumof theNiftyP/Eover theCNXPSBK increased to

143.9%,a2.5yearhigh.Also, thevaluationgapbetween theSensexand the

Bankex, at c41%, was widest in the past 12 months. While the extent o

underperformanceofPSBs fell inthepastthreemonths, it increased fornew

banks.Sustainingthetrendwouldrequireareversalintheearningstrend;thi

dependsonstabilizationofassetquality.Consensusnetprofitgrowthforecast

of theCNXPSBK forFY12 fellby13% in2011.Newbanks saw theirearning

downgradedtoalesserextent,by8%.

Reversalininterestratescycleaneartermtrigger

Thefallinginterestrateislikelytostaytheneartermtriggerforbankingstocks

Whilethe

positive

impact

on

asset

quality

may

be

visible

with

alag,

an

increase

in the trading gains is likely to support the profitability in the nearterm

However, a fall inNIM in the initial phase of falling ratesmay partly offse

tradinggains.

NPLtrendmaycontinuetostaylargestinfluenceonstockperformance

NPLtrendmaybea larger influenceonstocksthan interestrates.Thegap in

thenetNPL/networthbetweenPSBsandnewbanksiscurrentlyatitswidestin

fouryearsandrising.PSBssawa3.3%sequentialriseintheirnetNPL/networth

to16.7%,while it remained stable fornewbanksat2.9%atendSep11.The

recent underperformance of new banks has been driven by concerns on

sustainabilityoftheirsuperiorassetquality.Stockperformance inthenext12

monthsislikelytoaligntotheassetqualitytrendinthebanksegments.

Largepotentialupsideover12monthhorizon

Over the next sixmonths, stocks with relatively superior asset quality and

consistentgrowth inprofitabilityaremore likelytowithstandnegativeforces

Weprefer ICICIBank (ICICIBC IN,Add),AxisBank (AXSB IN,Buy)amongnew

banks;StateBankof India (SBIN IN,Buy)andPunjabNationalBank (PNB IN

Buy)amongPSBs.HDFCBank (HDFCB IN,Add)continues to stayanear term

defensive.



withinsector

(INRbn) (%) (%)

ICICIBank Buy 866 57 30

AxisBank Buy 352 90 25

StateBankofIndia Buy 1,062 32 15

ShriramTransportFin Buy 109 53 10

LICHousingFinance NR 107 59 10

HDFC NR 988 90 5

PunjabNationalBank Buy 257 37 5





ICICIBank 751.7 10.8 15.7

AxisBank 853.5 7.2 20.9

StateBank

of

India 1,672.8 6.3 16.8

ShriramTransportFin 480.8 6.8 14.4

LICHousingFinance 225.3 8.1 29.4

HDFC 670.4 20.5 18.1

PunjabNationalBank 812.3 4.4 16.7

Source:Bloomberg


Company 1m 3m 1yr

ICICIBank 3.6 3.5 28.6

AxisBank 17.3 10.3 34.6

StateBankofIndia 12.5 2.7 36.2



HDFC 1.2 7.3 5.2


BSEBankIndex 8.2 2.7 24.5

NBFCIndex

4.6 1.8

15.7


ChandanaJha,+9102266842854

[email protected]

19



IndiaEquityResearc

January09,2012

Cement

PricingpowerlikelytoprevailinallregionsbesidesSouth

TheCementindexhasoutperformedtheNiftyby9.2%during4Q2011

Theoutperformancehasbeendrivenbycompanieswithapresencein

thenorthern

and

the

western

market

as

consumption

growth

o

34.7%yoyinNov11wasbetterthan industrygrowthof21.3% and

improvementincementrealizations.Withutilizationofc80%ormore

in all regions except the Southwe do not estimate average cemen

pricestoweakeninFY13f.Consumptionislikelytoincreaseby7.0%in

FY13fand8.2%inFY14f,drivenbyareversalintheinterestratetrend

in 2012.We prefer ACC (Hold) and UltraTech Cement (Add) due to

theirlowervaluationscomparedtoAmbujaCements(Hold).

Outperformanceduetohighercementpricesandvaluations

TheCement indexoutperformed theNiftyby9.2%during4Q2011due toan

increase

in

cement

prices

by

up

to

INR40/bag

since

Oct11.

The

outperformancehasbeendrivenbycompanieswithapresenceinthenorthernandthewestern

market as consumption growth of 34.7% yoy in Nov11 was better than

industrygrowthof21.3%.Consumptionincreasedby3.3%yoyduringApr11

Nov11

Likelyimprovementincapacityutilizationtoprovidepricingpower

Capacityutilization for the industry stood at70.5% duringApr11Nov11.We

forecastutilizationto improvefrom72.1% inFY12to73.8% inFY13duetoan

improvement in utilization across all regions. However, the improvement i

likely to be largely driven by the western region, with utilization increasing

from81%inFY12ftoc86%inFY13f.Weestimatepricingpowertoprevailina

regionsexcepttheSouthinFY13fasithasthelowestutilization(c61%).

Likelyreversal

of

interest

rate

cycle

to

spur

demand

AnincreaseininterestratessinceDec10hasledtoaslowdowninConstruction

and Housing activities. Housing, construction and infrastructure togethe

constituteover 90%of cement demand. The likely trend reversal in interes

ratesduring2012 is likelytoprovideafilliptoconstructionand infrastructure

activities,boostingdemand for thecementsector.Weestimateconsumption

toincreaseby7.0%inFY13fandby8.2%inFY14f.

PreferUltraTechCementandACC

WepreferACC (ACC IN,Hold)andUltraTechCement(UTCEM IN,Add)dueto

their lower valuations compared to Ambuja Cements (ACEM IN, Hold). The

premiumvaluationforACEMaccountsforitsdominantpositioninthewestern

and northernmarkets and better capacity utilization compared to its peers

ACCand

UTCEM

trade

at

an

EV/tonne

of

USD114

(2012f)

and

USD127

(FY13f

withNov11capacityutilizationof72%and75%,respectively,providingitwith

anopportunity togrow faster than the industry in caseof revival in cemen

demand.ReducedpoliticaluncertaintyinAndhraPradeshisalsolikelytoboos

consumption. Weak cement prices and lower than estimated consumption

growtharelikelytoadverselyimpactvaluationsandstockperformance.



withinsector

(INRbn) (%) (%)

UltratechCement Add 315 34 70

ACC Hold 207 39 30





UltratechCement 1,150.6 13.8 14.4

ACC* 1,103.1 16.1 17.2

Source:Bloomberg

*FY13correpspondsto2012


Company 1m 3m 1yr

UltratechCement 3.3 4.0 13.8

ACC 8.4 0.4 8.7

CementIndex 4.3 3.1 5.5


JimeshSanghvi,+9102266842859

[email protected]

20



IndiaEquityResearc

January09,2012

ConstructionRatereversalwithoutpolicypushmaybeinadequate

Facing a tough operating environment, the construction secto

continuedtounderperformin4Q2011.Risinginterestcostshaveputa

largedent

in

profitability.

A

sharp

rate

reversal

may

alleviate

pressure

onnetmarginsand lead toa rebound inearningsof smallandmid

sizedcompaniesinFY13.Orderinflowgrowthislikelytoremaintepid

which may see competitive intensity remain at elevated levels and

revenue growth subdued for the next 12months. For the sector to

revive/accelerate, mere rate reversal is likely to be inadequate and

additionallyrequireaspeedupingovernmentapprovalsandrenewed

policypush in the infrastructuresector. Intheabsenceof theabove

valuationsremainsusceptibledespitethesharpcorrection.Larsenand

Toubro(Hold), IRB InfrastructureDevelopers(Add)andNCC(Buy)are

ourtoppicksinthesector.

Profitabilitydentedbyfallinggrowthandrisinginterestcosts

The sector has been mired by multiple headwinds. The lack of governmen

focusoninfrastructurespendinghasledtoadecliningrateofinvestmentinthe

economy.Rising interest rateshaveput a largedent inprofitability,even a

companieshavebeengrapplingwith slowingexecutionandbloatingworking

capital. New policies in the works such as the Lokpal bill and the Land

Acquisitionbill raise concernsofa further slide in the investment rate.Even

though the rolling 12month forward earnings growth (based on consensu

estimates)indicatesbottomingoutofgrowth,valuationscontinuetoshrink.

FY13earningsmayreboundafterthecapitulationandlowFY12base

ManysmallandmidsizedconstructioncompaniesareseeingalargefallinPAT

mainly

on

account

of

an

increase

in

interest

costs.

A

rate

reversal

may

help

arrestthe fall innetmarginsand leadtoarebound inearningsonavery low

base.Overall,sectorearningsgrowth,though,mayremaindepressedas large

projectcompaniessufferonaccountoforderandexecutionslowdown.Orde

inflow growth is likely to remain tepid, leading to competitive intensity

remainingatelevated levels.Resolutionofsomeofthecurrentpolicy logjam

andalargethrustoninfrastructurespendingcouldhelpimprovetheoperating

environment.

Preferlessgearedcompaniestillthesectorturnsarounddecisively

Manystocksappeardeepinvaluecomparedtohistoricalvaluations.However

in the absence of adequate policy push, the operating environment may

continuetodeteriorateandvaluationsremainsubdued.Wepreferstockswith

adequateresilienceorwithvaluationsatadiscount.LarsenandToubro(LTIN

Hold), IRB InfrastructureDevelopers (IRB IN,Add)andNCC(NJCC IN,Buy)are

our top picks in the sector. LT has a commanding market share and

comfortablegearing. IRBenjoysstablecashflowearningsfrom itsportfolioo

operating assets. NJCC is the preferred pick amongst similarsized large

contractorsgiven itsdiversifiedportfolioand largevalue inBOTassets,which

arecurrentlyundervalued.



withinsector

(INRbn) (%) (%)

Larsen&Toubro Hold 662 68 80

IRBInfrastructure Add 41 24 10

NCC Buy 9 52 10





Larsen&Toubro 1,081.5 12.1 15.5

IRBInfrastructure 124.5 7.7 10.0

NCC 35.3 5.1 28.8

Source:Bloomberg


Company 1

m 3

m 1

yrLarsen&Toubro 17.8 19.5 42.4

IRBInfrastructure 20.1 23.2 45.9

NCC 11.0 38.8 75.0

BSECapitalGoodsIndex 13.8 17.9 43.2

Source:Bloomberg

DevangPatel,+9102266842861

[email protected]

21



IndiaEquityResearc

January09,2012

Engineering

EarningstodeceleratefurtherinFY13

The engineering sectors underperformance has accelerated on the

backoflackofpolicydirectionthathasledtofurtherdeepeningofthe

sectorslowdown.

The

project

pipeline

has

shrunk

significantly;

this

i

likelytoresultinafurtherslowdowninrevenuegrowthinthecoming

12months and raises the riskof yoy earnings decline.Despite the

sharpfall,valuationsmayremainunderpressureduetodeteriorating

earningsgrowth.Asharpfallininterestratesmayimprovesentiment

butmaynotsignificantlyimprovethesectorsgrowth,whichismarred

bybroaderpolicylinkedslowdown.BharatHeavyElectricals(Reduce)

CromptonGreaves(Buy)andThermax(Hold)areourtoppicks.

Newprojectactivityweakonaccountofpolicyuncertainties

Theweakoperatingenvironmenthasextended frompowerprojects toothe

industrial

projects

due

to

uncertainty

on

the

policy

front

and

deterioratingmacro cues. Issues of fuel availability have brought new power projec

developmentactivity toagrindinghaltandhaveraisedtheexecution risk fo

projectscurrentlyunderconstruction.TheIIPforCapitalGoodsswungsharply

into the red (26% yoy) for themonth ofOct11, indicating the deepenin

slowdown in thesector.Therolling12monthforwardearningsgrowthbased

on consensus estimates continues to trend down. The sectors relative

underperformancehascontinuedand increased inmagnitudeon thebacko

weakearningsandcontinuingrisksoffurtherdecline.

Growthdecelerationtocontinueasprojectpipelineshrinks

Withaslowdown innewproject takeoffs,theprojectpipeline forthesecto

hasbeendecliningraisingthe likelihoodofayoydecline inearningsgoing

forward.In

addition,

power

projects

currently

under

execution

are

likely

to

face

delays,primarilyonaccountoffuelunavailability.Onaccountoftheabove,the

sector is likelytofacefurtheraslowdown inrevenuegrowthoverthecoming

12months.Acontinuingslowdown inconsumerspendingmayfurtherreduce

thedemandforengineeringgoods.Theinterestratereversalmayimprovethe

sentiment, butmay not increase new project take offs if the lack of policy

directioncontinues.INRdepreciation is likelytoexertpressureonmarginsfo

many companies. The continuing slide inearnings growth is likely to sustain

pressureonthesectorsvaluations.

Prefercompanieswithalargerdiscountonvaluations

Wepreferstockswherevaluationshavecorrectedsignificantlyorwhichcould

surprise intheneartermonearningsgrowth.OurtoppicksareBharatHeavy

Electricals(BHEL

IN,

Reduce),

Crompton

Greaves

(CRG

IN,

Buy)

and

Thermax

(TMXIN,Hold).BHELsearningsarecomparativelybetterinsulatedfromgloba

events; it istradingata largediscounttoother largecompanies inthesector

CRGstandstogainfrom INRdepreciationas itearnsc50%of itsconsolidated

revenuefromoverseasthehighestamongstpeers.TMXenjoyscomparatively

higherearningsgrowthcurrentlyandwithitsdiversifiedpresence,wouldbean

earlybeneficiaryofanyturnaroundindemandforthesector.



withinsector

(INRbn) (%) (%)

BharatHeavyE lect ri cal s R ed uce 6 11 2 6 60

CromptonGreaves Buy 81 52 30

Thermax Hold 50 34 10





BharatHeavyElectricals 249.6 8.6 1.9

CromptonGreaves 126.4 10.8 24.1

Thermax 415.9 11.3 8.2

Source:Bloomberg


Company 1m 3m 1yr

BharatHeavyElectricals 13.6 20.4 45.9

CromptonGreaves 7.7 14.4 58.5

Thermax 12.1 1.4 50.5

BSECapitalGoodsIndex 13.8 17.9 43.2

Source:Bloomberg

DevangPatel,+9102266842861

[email protected]

22



IndiaEquityResearc

January09,2012

ITServices

Opportunitiesfromglobalcrisismayoutweighrisks

The CNXIT Index outperformed theNifty in the past threemonths

drivenpartlybyINRdepreciationandlargelybyrelativelystablegloba

demand.The

relative

stability

of

consensus

forecasts

of

S&P500

earnings in2011suggeststhattherisksare lowercomparedto2008

Indianfirmsarelikelytocontinueaddingtotheirglobalmarketshare

astheybenefitfromseculartrendssuchasariseinoffshoringinSIand

Consulting.Thepotentiallystrongerearningsgrowthandtheincreased

contribution of the CNXIT toNifty profits are likely to drive furthe

outperformancebytheCNXIT,withseculartrendsfavoringTierIfirms

HCL Technologies (Buy) is our preferred pick, given the attractive

valuationsrelativetotheearningsgrowthpotential.

Opportunitiesfromtheglobalcrisisoutweightherisks

Therelative

stability

of

consensus

forecasts

of

the

S&P500

in

2011

suggest

thatrisksarelowercomparedto2008.KeysectorsintheUSsuchasFinancial

andManufacturing,thatdriverevenuesofthe Indian IT industry,haveshown

greater resilience. Consensus earnings forecasts of the FTSE and Stoxx also

suggest a better outlook for Europe than in 2008. The changing attitude

towardsoutsourcingbyEuropeanfirmsmayprovideanopportunityforIndian

IT.The20082009recessionhadseen Indian IT firmsaddanestimated2%to

their globalmarket share against global peers. Themarket share is likely to

expandeven further as Indian firms continue to benefit from secular trend

such as vendor consolidation and deal churn, owing to their large scale and

diverse offerings. Indian vendors are wellpoised to gain from a rise in

offshoring inSystem Integration (SI)andConsulting.A tilt in the revenuemix

towardsnon

linear

pricing

models

is

also

likely

to

help

sustain

pricing

and

overcomecostpressures.

INRweaknesspartlydrivesrally,businessoutlookastrongerforce

TheoutperformanceoftheCNXIT in late2011 is largelyattributedtothec8%

depreciation in the INR in thepast threemonths.Webelieve thatwhile it i

partlytrue,therelativestability inglobaldemand isa largerforce.SimilarINR

depreciation in 2008 was followed by underperformance of the CNXIT

Moreover, therehasnotbeenanymeaningfulupward revision inEPS in the

past threemonths.These two factors indicate thataweak INRcannotoffse

theweaknessinultimatedemand.

Sectoroutperformancelikelytocontinue

TheCNXITIndexhasoutperformedtheNiftyby16.0%inthepastthreemonth

andthe

contribution

of

IT

Services

to

Nifty

earnings

growth

for

FY12

has

gone

upby9.7% sinceAug11.Thepotentially strongerearningsgrowth is likely to

supporttheoutperformanceoftheCNXIT IndexrelativetotheNifty.Wealso

believethatTierIcompaniesarelikelytooutperformtheirmidcappeers,both

in terms of earnings growth as well as P/E valuation. We prefer HC

Technologies(HCLTIN,Buy)aswebelievethecompanyislikelytobenefitfrom

its focus on the highgrowing IMS segment, and its leadership position in

ProductEngineeringandEnterpriseApplicationServices.



withinsector

(INRbn) (%) (%)

TataConsultancyServ Add 2,289 23 35

HCLTechnologies Buy 288 29 20





TataConsultancyServ 1,169.4 18.6 15.3

HCLTechnologies 417.6 11.2 15.3

Source:Bloomberg


Company 1m 3m 1yr

TataConsultancyServ 1 .0 1 2.1 0.2

HCLTechnologies

2.6 6.1

12.2

BSEITIndex 3.0 14.5 13.8

Source:Bloomberg

PriyaSunder,+9102266842862

[email protected]

23



IndiaEquityResearc

January09,2012

MetalsandMining

Policyactionlikelytoboostearnings,reducecost

TheMetal index continued its underperformance in 4Q2011 due to

earningsdowngradeandcontractioninvaluationmultiplesonaccoun

ofrising

uncertainty

on

growth.

The

sectors

underperformance

i

likely to reverse in case of government action such as environment

clearance for projects and resolution of the mining ban. Easing o

interestrates,whichhavean inversecorelationtometaldemand, i

likely to be an additional driver for future growth in earnings. We

preferHindalco Industries (Buy) andMOIL (Add) due to their strong

cashflowgenerationandbalancesheetstrength.

Underperformancedrivenbyc15%downgradeinearningssinceSep11

TheMetal indexhasunderperformed theNiftyby9% in4Q2011onaccounto

earningsdowngradeandcontractioninvaluationmultiples.Riseininputcostand

lower

than

estimated

realizations

adversely

impacted

consensus

earningforecasts, which declined by c15% since Sep11. Increased uncertainty on

procurementofrawmaterialforproductionoffinishedgoodsanddelayinprojec

clearanceshasledtouncertaintyongrowthforthenexttwoyears.

Governmentpolicyactionlikelytotriggerfuturegrowth

Delay inreceiptofenvironmentalclearances forgreenfieldprojectshas ledtoa

delay in project commissioning and adversely affected volume estimates

Resolutionoftheminingbanandincreaseinexportdutyonironorearelikelyto

reduce inputcosts fordomesticnonintegratedproducers.Revival in thegloba

demand,mainlyintheUSandEurope,couldbeanadditionaltriggerthatislikely

toboostdemandandinvestmentinthesector.Thesectorsunderperformancei

likelytoreverseincaseofgovernmentactionsuchasenvironmentalclearancefo

projectsand

resolution

of

the

mining

ban.

Impendingfallininterestrateslikelytoboostdemandformetal

DemandformetalsisdrivenbyAutomobiles,CapitalGoods,Infrastructureand

ConsumerDurables. Likely fall in interest rates is likely toboostdemand fo

metals.Thesedemanddrivershavean inversecorelationwith interestrates

andhencetheriseininterestratessinceDec10hasadverselyaffecteddemand

during 2Q20113Q2011. Domestic steel consumption has increased by 3.9%

yoy to45mn tonnesoverApr11Nov11 compared to10.3%yoygrowth in

FY11,reflectingthelikelyimpactofinterestratesonmetaldemand.

PreferHindalcoIndustriesandMOIL

Hindalco Industries (HNDL IN,Buy)overseasoperations contributes c60%o

consolidated EBITDA and isunlikely tobe adversely impactedby commodity

pricevolatility.

Capacity

addition

in

domestic

operations

over

FY13f

FY14f

i

likelytocushionthedownsiderisktoearningsduetoweakaluminiumprices

MOIL(MOILIN,Add)islikelytohavecashandcashequivalentsofcINR22bna

endMar12,representingc57%ofitscurrentmarketcapitalization.Thisislikely

torestrictthedownside invaluations.Hence,wepreferHNDLandMOIL.JSW

Steel(JSTLIN,Hold)islikelytobepreferred,iftheuncertaintyontheKarnataka

miningban is resolved.Risk factors includeweak aluminiumandmanganese

orepricesandadelayinprojectcommissioning.


Company Rating MCAP FF

Allocation

withinsector

(INRbn) (%) (%)

HindalcoIndustries Buy 227 70 70

MOIL Add 40 20 30





HindalcoIndustries 118.7 6.9 14.1

MOIL 237.2 8.0 0.7

Source:Bloomberg


Company 1m 3m 1yr

HindalcoIndustries 13.0 1.2 52.8

MOIL 2.7 9.5 47.1

BSE

Metal

Index

9.3

5.2

44.8Source:Bloomberg

JimeshSanghvi,+9102266842859

[email protected]

24



IndiaEquityResearc

January09,2012

NonbankingfinancialsEarningsmomentuminselectsegmentsmaystaystrong

The underperformance of NBFCs waned over the past three months

due to receding regulatory headwinds. Consensus earnings forecast

havedeclined

by

c1%

during

the

past

three

months,

and

are

likely

to

moderate.Our forecastsamply reflecttheseadversities.Despite these

headwinds, profitability of NBFCs is likely to stay above some banks

drivenbystructurallyhigherNIMsand loweroperatingcosts.TheP/B

premiumofNBFCsimprovedfrom 5%atendJun11to6%atendDec11

The P/B premium of NBFCs is likely to sustain. Within NBFCs, selec

pocketssuchasHousingandRetailFinancialsmayextend theirstrong

earnings momentum. We prefer Housing Financials such as Housing

Development Finance Corporation (NR) and LIC Housing Finance (NR

andShriramTransportFinance(Buy)amongRetailFinancials.

Waningunderperformance

on

receding

regulatory

risks

TheunderperformanceofNBFCswanedduringthepastthreemonths,driven

by receding regulatoryheadwinds.Consensus forecasts forFY13netprofito

NBFCs have declined by c1% between endSep11 and endDec11.While the

earningsmomentum is likely to furthermoderatebasedonacombinationo

cyclicalandregulatoryfactors,theprofitabilityofNBFCsmaycontinuetostay

abovethatofsomebanks.

Profitabilitytomoderate,thoughlikelytostayabovebanks

Despitehigher incrementalNPLs, slowergrowthandmoderation inearnings

theprofitabilityofNBFCsislikelytostaywellabovesomebanks,drivenbythe

structurally higher NIMs than banks that most of them enjoy. With thei

operating cost structure lower than most banks, the ROA for NBFCs may

moderaterelative

to

their

recent

past,

though

it

is

likely

to

stay

above

that

fo

somenewprivatebanks.

P/BpremiumofNBFCslikelytosustain

NBFCstypicallytradeatapremiumtobanksgiventheirhigherprofitabilityand

return profile. In recent months, this premium has shrunk on increased

regulatory risks.While theCentralbank couldpotentially further tighten the

operating framework for NBFCs, profitability is unlikely to be impacted

materially.TheP/BpremiumofNBFCstobankshasshrunkfromapeakof60%

to 5%during Jun11and6%asatendDec11.With reducingheadwinds, the

trendofariseintheP/BpremiumofNBFCsislikelytosustain.

Earningsmomentuminselectsegmentsmaystaystrong

WithinNBFCs, select segments such asHousingmay continue to see strong

earningsmomentumdrivenbystrong ruralcash flowsand latentdemand fo

credit in rural areas.These segmentshave seen strongoutperformanceove

thepastthreemonths.WecontinuetopreferselectHousingFinancialssucha

Housing Development Finance Corporation (HDFC IN, NR) and LIC Housing

Finance(LICHFIN,NR)andRetailFinancialssuchasShriramTransportFinance

(SHTF IN, Buy). Underperformance of SHTF may reverse as regulatory

headwindsrecedeandthecorestrengthsofSHTFreceiveattention.


Company Rating MCAP FF Allocation

withinsector

(INRbn) (%) (%)

ICICIBank Buy 866 57 30

AxisBank Buy 352 90 25

StateBankofIndia Buy 1,062 32 15

ShriramTransportFin Buy 109 53 10

LICHousingFinance NR 107 59 10

HDFC NR 988 90 5

PunjabNationalBank Buy 257 37 5

Source:Bloomberg, AvendusResearch

Stockvaluations (Bloombergconsensus)



ICICIBank 751.7 10.8 15.7

AxisBank 853.5 7.2 20.9

StateBankofIndia 1,672.8 6.3 16.8

ShriramTransport

Fin 480.8 6.8 14.4


HDFC 670.4 20.5 18.1


Source:Bloomberg


Company 1m 3m 1yr

ICICIBank 3.6 3.5 28.6

AxisBank 17.3 10.3 34.6

StateBankofIndia 12.5 2.7 36.2



HDFC 1.2 7.3 5.2


BSEBankIndex 8.2 2.7 24.5

NBFCIndex 4.6 1.8 15.7

Source:Bloomberg,

Avendus

Research

JayneeShah,+9102266842868

[email protected]

25



IndiaEquityResearc

January09,2012

Oil&GasAttractivevaluationsaftertheunderperformance

Sector underperformance in 4Q2011, along with rising oil under

recoveriesduetodepreciatingINRanddropinrefiningmargins,hasled

toattractive

valuations

at

the

start

of

2012.

However,

with

earnings

growthexpectedtoslowoverFY13,weremainneutralonthesector

WepreferReliance Industries (NR)andoilmarketing companiesove

thenext1215months.WithinOMCs,ourtoppickisBharatPetroleum

Corporation(NR)dueto itshighestrefining/marketing ratioaswella

theupsidepotentialfromitsnaturalgasportfolio.

Underperformancelesseningduetoupstreamcompanies

WhiletheoilandgassectorcontinuedtounderperformtheNiftyin4Q2011on

thebackofconcernsoffallingrefiningmarginsandrisingunderrecoveriesfo

oil marketing companies (OMCs) due to the depreciating INR, the

underperformancehaslessenedwithupstreamcompanies,namelyCairnIndia

(CAIR IN,NR)andOilandNaturalGasCorporation (ONGC IN,NR)performing

well with crude prices remaining strong and the depreciating INR helping

realizationsfurther.

Valuationslikelytooutweighfallingearningsgrowth

At end Dec11, the sector was trading at 9.3x 12month forward earning

comparedwith13.1xatendDec10.Webelievethatthiscanbeattributedto

the fact that the rolling 12month forward earnings growth expectation ha

dropped from 15.1% yoy to 9.9% yoy during Dec10Dec11 (based on

consensusestimates).However,webelievesubsidyconcernsforOMCsseemto

be overdone and valuations look attractive. The government is likely to

compensateOMCsatendFY12 through cash transferandhigher share from

upstreamcompanies

for

most

of

the

under

recoveries

during

the

year,

in

ou

view.Asaconsequence,webelievethe lossesreportedbythethreeOMCs in

1HFY12arelikelytobereversed,leadingtooutperformance.

DepreciatingINRbiggestrisktoOMCs

ThedepreciatingINRalongwiththegovernmentpolicyoffixingthepriceofkey

oilproducts suchasdiesel,keroseneand LPG isestimated to forceOMCs to

incurcINR1,330bnofunderrecoveriesforFY12.Inaddition,withtheupcoming

ele

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Avendus Strategy Jan12