Weekly Wrap

Investment Ideas
Cairn India BUY CMP `325 ITC
January 24, 2014

BUY CMP `325

Sequential production uptick from Rajasthan asset

Cairn India recorded net sales of `50bn for Q3 FY14 which was higher than our estimates. Crude realizations for Rajasthan field were at a discount of 12.5% to Brent price. On a yoy basis the topline grew by 16.9% mainly on back of 1) higher production and 2) Steep depreciation in rupee. During the quarter, working interest production volumes increased to 140,830boepd v/s 128,058boepd in Q3 FY13 and 132,862boepd in Q2 FY14. Rajasthan gross average production for the quarter was at 186,359boepd (+6.2% qoq). Management apprised of the current rate of production at Rajasthan field being 190,000boepd.

Cigarette & other-FMCG segment drives revenue growth

OPM falls 298bps yoy

ITC surpassed our revenue expectations of `84bn by recording 13.1% yoy growth at `86.2bn during Q3 FY14 driven by strong growth in cigarette and other-FMCG business. Despite steep price hikes, ITC managed to restrict cigarette volume decline at ~2% yoy, partly aided by higher contribution of 64mm cigarettes (~8-9%). Paper & packaging segment recorded 18.5% yoy to `12.6bn driven by recent capacity additions in paperboards and packaging. Impacted by economic slowdown, hotels segment registered mere ~2% yoy growth (on a high base). A slower 10% yoy growth agri segment restricted topline growth.

Operating margins were lower by 298bps yoy. The decline in OPM on a yoy basis was mainly on account of higher personnel costs which were up by 334bps yoy as a percentage of sales. However, the jump was primarily due to one-time hit of `1.5bn taken for revaluation of outstanding option liabilities due to change of valuation methodology. Sans this, OPM would have expanded by 12bps. Operating expenses were also higher by 133bps yoy as a percentage of sales. In terms of US$/boe, it was at US$3.7 v/s US$3.1 in Q3 FY13 and US$4 in Q2 FY14. Company reported foreign exchange fluctuation loss of `1.3bn as rupee appreciation resulted MTM losses on dollar denominated investments. PAT at `28.8bn was lower than our expectations.

Lower raw material & overhead cost cushion operating profit magins

Maintain BUY rating with a target price of `370

The aggressive development and exploration drilling program started by the company in Rajasthan field has helped in trending the production higher and is a positive sign. With additional rigs being deployed, intensified drilling program is lined up in H2 FY14 which we believe will help the company to move towards its target FY14 exit rate of 200,000boepd from the Rajasthan block. Additionally, over the next one year, possible announcements such as reserve estimates in Sri Lanka block, new discoveries in Rajasthan field, utilization of huge cash on the balance sheet will be the triggers for the stock. We maintain our BUY recommendation with a price target of `370.

OPM expanded by 50bps to 36.9% aided by ~50bps decline in raw material (outsourcing cost as % of net sales declined by 150bps to 7%) and ~20bps decline in overhead cost. Cigarette EBIT margins expanded by 180bps to 34.6%. Other-FMCG segment posted a profit of `104mn at EBIT level against a loss of `240mn in Q3 FY13 aided by improved profitability in the foods segment and is expected to break-even in the current fiscal. Hotels segment registered 12% yoy growth at `622mn after seven quarters of decline in EBIT, aided by superior performance by ITC Grand Chola. Paperboards division witnessed a 1.4% yoy increase in profit while agri business reported ~19% yoy increase in profit at EBIT level on a low base.

Dominance to continue maintain Buy

ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. ITC is gaining traction in non-cigarette businesses as well, making it a well-diversified growth company. We expect ITC to witness 19.8% EPS CAGR over FY13-15, driven by margin expansion in the cigarettes business and rising profitability of the other-FMCG business. Since the Budget will be delayed to June14 due to elections, we do not expect any bad news for the company in the near future. We maintain Buy with a 9-mth price target of `384.

Financial summary
Y/e 31 Mar (` m) Revenues yoy growth (%) Operating profit OPM (%) Reported PAT yoy growth (%) EPS (`) P/E (x) Price/Book (x) EV/EBITDA (x) Debt/Equity (x) RoE (%) RoCE (%) FY13 175,242 47.8 134,880 77.0 119,197 50.2 62.4 5.3 1.3 4.3 0.0 24.8 25.8 FY14E 187,444 7.0 140,899 75.2 117,816 (1.2) 61.7 5.4 1.1 3.5 0.0 22.4 23.8 FY15E 199,214 6.3 148,461 74.5 124,581 5.7 65.2 5.1 0.9 2.9 0.0 20.0 21.2 FY16E 199,795 0.3 147,176 73.7 119,499 (4.1) 62.6 5.3 0.8 2.4 0.0 16.7 17.7

Financial summary
Y/e 31 Mar (` m) Revenues yoy growth (%) Operating profit OPM (%) Reported PAT yoy growth (%) EPS (`) P/E (x) Price/Book (x) EV/EBITDA (x) Debt/Equity (x) RoE (%) RoCE (%) FY13 2,96,056 19.4 1,06,275 35.9 74,184 20.4 9.4 34.6 11.5 23.8 0.0 36.1 49.7 FY14E 3,50,056 18.2 1,27,886 36.5 91,144 22.9 11.5 28.2 10.0 19.7 0.0 38.0 52.4 FY15E 4,05,195 15.8 1,48,978 36.8 1,06,542 16.9 13.5 24.1 8.7 16.9 0.0 38.6 53.6 FY16E 4,76,281 17.5 1,76,365 37.0 1,25,469 17.8 15.9 20.5 7.5 14.2 0.0 39.3 54.8

Source: Company, India Infoline Research

Source: Company, India Infoline Research

India Infoline Weekly Wrap

Market Outlook
After indices hit calendar year closing highs during the week, the Indian equity markets were unable to build on the momentum. Investors preferred to take some profit off the table ahead of the vital RBI policy meet scheduled to be held on 28 January. F&O expiry would also be tracked closely. Sentiment was also hit after the Indian rupee weakened against the US Dollar. The Indian unit depreciated 1.5% during the week. Nifty continues to move in a tight band of 200 points. Whether the markets will get the much-needed spark would hinge on the outcome of the events mentioned above. We expect RBI governor Raghuram Rajan to maintain status quo again because of moderation in recent inflation figures. Also, recently a RBI panel has recommended sweeping changes to how the central bank runs policy, including setting a long-term inflation target of 4%, with wiggle room of 2% in either direction. Although some of the results announced have been impressive, any disappointment from results could affect specific counters. The main indices are showing resilience but the undertone remains extremely cautious.

Technical View
Indian markets ended lower on Friday tracking weakness in the global markets and lack of follow-up buying also failed to carry Nifty beyond its previous peak. With Fridays decline, Nifty is back near important support of its 50-DMA placed at 6,220 and move below same could puncture the medium term uptrend. Hence caution is advised in coming days unless Nifty manages to form higher high above 6,360.

F&O View
Nifty was unable to maintain gains registered during the early part of week due to unfavorable global cues. Till Thursday, Nifty 6200 and 6300 put witnessed sharp jump in OI. On Friday, pressure in markets led to huge unwinding of 6300 put. Rollover have started early this expiry with nifty rolls at 26% (4 days left to expiry). We believe expiry week is most likely to remain rangebound with support at 6220 and resistance close to 6330. However, a break of this range on closing basis can lead to a high volatility on the expiry day.

FIIs/MFs activity
600 500 400 300 200 100 0 (100) (200) (Rs cr) Net FIIs inflow Net MFs Inflows

Advance/Decline
2,100 1,800 1,500 1,200 900 600 300 0 (No of stocks)
Advance Decline

17-Jan

20-Jan

21-Jan

22-Jan

17-Jan

20-Jan

21-Jan

22-Jan

Global performance
Shanghai Nasdaq Sensex Nifty Dow Jones Nikkei Hangseng (4.0) (3.0) (3.0) (2.0) (1.0) 0.0 1.0 2.0 (1.6) (2.2) 0.5 0.3 0.1 1.9

Sectoral performance
BSE IT BSE Bank BSE Pharma BSE-200 BSE Metal BSE FMCG BSE Small-Cap BSE Auto BSE Cap Goods BSE Power BSE Realty BSE Oil & Gas (1.4) (1.5) (1.5) (2.0) (1.5) (1.0) (0.5) 0.0 0.5 1.0 1.5 (0.1) (0.3) (0.4) (0.5) (0.6) (0.7) 0.2 0.6 1.4

23-Jan

India Infoline Weekly Wrap

Technical Check
Nifty 50 & CNX 500 top 10 gainers
NSE Nifty Company Axis Bank Wipro Hcl Tech Hindalco Inds ICICI Bank Sun Pharma TCS HDFC Bank HUL Sesa Ster CMP (`) 1,205 573 1,412 114 1,058 604 2,249 673 566 203 % Chg Company 4.5 Abg Shipyard 4.2 Opto Circuits 2.6 Dr. Datson 2.4 Torrent Pharma 2.3 Dewan Housing 1.6 Pvr 1.6 Gati 1.3 Blue Dart 1.2 Ess Dee Alum 1.0 Kaveri Seed CNX 500 CMP (`) 307 31 82 537 233 628 64 3,906 656 2,038 % Chg 20.1 15.8 14.4 14.1 12.9 9.4 12.7 7.9 7.8 7.6 Company Ranbaxy Labs Kotak Bank Coal India Ambuja Cem. BHEL Tata Power ACC Asian Paints PNB BOB

Nifty 50 & CNX 500 top 10 Losers

NSE Nifty CMP (`) 336 685 258 163 165 76 999 478 582 603 % Chg Company (17.2) Jm Financial (5.8) Supreme P. (5.2) Prakash Ind. (4.1) Godrej Ind. (4.0) FT (3.4) Kansai Nero. (2.7) Mcleod Russel (2.7) Gammon India (2.5) Shrenuj (2.4) REC Ltd CNX 500 CMP (`) 26 55 34 269 291 1,043 266 14 91 180 % Chg (8.4) (7.8) (7.7) (7.6) (7.4) (7.3) (7.1) (7.0) (6.9) (6.8)

Technically strong
CMP (`) 803 233 250 3247 421 10 days Moving Average (`) 788 229 245 3213 403 Total Traded Qty (lacs) 1.1 0.8 3.0 0.0 7.4 10 days Average Traded Qty (lacs) 0.5 0.7 1.9 0.0 6.6

Technically weak
CMP (`) 38 36 48 57 67 10 days Moving Average (`) 39 36 49 58 68 Total Traded Qty (lacs) 1.3 16.5 0.7 1.1 965.0 10 days Average Traded Qty (lacs) 0.9 10.2 0.7 0.8 10.1

Company UBL HPCL Adani Ent. OFSS Auropharma

Company Vijaya Bank Sintex Ind Central Bk Essar Ports Reliance Power

Bulk deals
Date 20-Jan 20-Jan 21-Jan 23-Jan Institution HDFC MF FID Funds Mauritius Elara India Fund Baring India PE Fund Scrip name Ganesh Housing South Indian Bank Tree House Vardhman Holdings B/S S S B B Qty (lacs) 2.6 276.6 6.0 0.2 Price (`) 72.0 21.0 239.0 475.0

Book closure and record date

Company TCS Corporation Bank D B CORP MRF NTPC Shree Cement Date 27 Jan 2014 28 Jan 2014 30 Jan 2014 30 Jan 2014 31 Jan 2014 31 Jan 2014 Purpose 3rd Interim Dividend - `.4.00 Interim Dividend - `.4.50 Interim Dividend - `.3.00 Final Dividend - `.24.00 Interim Dividend Interim Dividend

Nifty Future VWAP*

6350 Nifty Futs Close Nifty Vwap

Bank Nifty Future VWAP*

11400 11300 Bank Nifty Futs Close Bank Nifty Vwap

6300
11200

6250

11100 11000

6200
10900

6150 8-Jan 9-Jan 10-Jan 13-Jan 14-Jan 15-Jan 16-Jan 17-Jan

* Current week VWAP charts unavailable due to technical reason

10800 8-Jan 9-Jan 10-Jan 13-Jan 14-Jan 15-Jan 16-Jan 17-Jan

India Infoline Weekly Wrap

Commodity Corner
Base metals
LME base metals struggled this week, as short term interest rates spiked higher in the Chinese money markets. In this respect, key inter-bank lending rate hit a six-month high on account of seasonal cash demand ahead of the Chinese Lunar New Year holiday, which begins on January 31st. However, short term rates have moderated now after China's central bank injected US$42.13bn into the money markets to support both larger commercial banks and smaller institutions. The seven-day repo rate has softened to 5.55%% from 6.59% at the beginning of this week. On Chinese macroeconomic cues, the countrys Q4 GDP rose 7.7% on yoy basis. For the complete year (2013), growth expanded at 7.7%, moderately higher than the government target of 7.5%. On the manufacturing side, HSBC reported that Chinas Preliminary PMI for January came in at 49.6, contracting for the first time in six months. This figure is well below the Decembers final reading of 50.5. The indicator also showed slowdown in new export orders and employment. In terms of short-term outlook, we are not expecting much to happen during next few days as markets will be deprived of cues considering the fact that Chinese markets will remain closed for more than one week in observance of New Year holidays.

Precious metals
Gold prices inched higher this week, as weakness in the greenback provided the necessary boost. US dollar weakened substantially against Euro, as European preliminary manufacturing PMI jumped to 53.9 in January from 52.7 during the prior month, exceeding the market expectations. Conversely, US preliminary manufacturing PMI for January fell to 53.7, as compared with a reading of 54.4 during last month. Effectively, US dollar index has scaled back well below 81 levels. US dollar also came under pressure on account of rising short-term money market rates in the Eurozone. In India, there is an increasing probability of gold supply being eased after Congress President Sonia Gandhi has requested the government to gradually roll back the import restrictions on gold. During the next week, the pack is expected to tread water as the focus will shift back to US Federal Reserve policy meeting. Improving macroeconomic backdrop in US has reinforced the perception of Fed further tapering the monetary stimulus. In this respect, IMF has projected the US economy to grow by 2.8% in 2014, up from its previous estimate of 2.6%.

Note: This market commentary is written at 12:00 PM IST

LME prices
Base Metals (US$/ton) Copper Nickel Zinc Aluminium Lead Precious Metals (US$/ounce) Gold Silver * Last Traded Price High 7,365 14,825 2,102 1,825 2,230 High 1,267 20.4 Low 7,190 14,316 2,041 1,763 2,147 Low 1,232 19.7 LTP* 7,206 14,670 2,046 1,763 2,153 LTP* 1,259 20.0 Chg(%) (1.8) (0.2) (1.6) (3.2) (2.5) Chg(%) 0.4 (1.7)

Weekly inventory update

Tons Copper (LME) Nickel (LME) Zinc (LME) Aluminium (LME) Lead (LME) Tin (LME) Shanghai Copper Shanghai Zinc Shanghai Aluminium 327,400 261,396 870,925 5,459,775 207,950 9,170 140,913 244,387 199,551 Abs Chg. (8,375) 948 (17,125) (24,600) (1,800) (300) 9,350 (1,137) 4,170 Chg (%) (2.5) 0.4 (1.9) (0.4) (0.9) (3.2) 7.1 (0.5) 2.1

LME Copper
10500 9500 8500 7500 6500 5500 US$/ ton Copper (LME)

COMEX Gold
2050 1900 1750 1600 1450 1300 1150 US$/ ounce Gold

Apr-10

Apr-11

Apr-12

Apr-13

Jan-10

Jan-11

Jan-12

Jan-13

Apr-10

Apr-11

Apr-12

Apr-13

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Oct-10

Oct-11

Oct-12

Oct-10

Oct-11

Oct-12

Oct-13

Oct-13

Jan-14

Jul-10

Jul-11

Jul-12

Jul-10

Jul-11

Jul-12

Jul-13

Jul-13

1000

12

16

10

12

14

(8)

(4)

(2)

100

110

Jan-07
(%)

Inflation

Chartbook

Source: Bloomberg

Aug-07
Nov-10 Feb-11

Mar-08

Oct-08
May-11 Aug-11 Nov-11

Currency Movements

(INR/EURO) (INR/GBP)

May-09

IIP and Six core Industries

Dec-09

Jul-10
May-12 Aug-12

Feb-11

(INR/USD) (INR/JPY)

Sep-11
IIP
Nov-12 Feb-13 May-13 Aug-13 Nov-13

Apr-12

MFG Products

Nov-12

Jun-13

Jan-14

Jan-08

Dollar Index

Jul-08

Interest Rate

Jan-09

Jul-09

Crude (Brent/ Nymex)

Jan-10

10yr Gsec yield 3mth CP rate

India Infoline Weekly Wrap

Nymex Crude

Jul-10

Jan-11

Dollar Index

Jul-11

Jan-12

Brent Crude

Jul-12

Jan-13

5yr AAA bond yield

Jul-13

Jan-14

30
May-10

40

50

60

70

80

90

Mar-07
(%)

Aug-10

Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13

10 12 14 16 18

Monthly Inflation

Six core Ind.

Feb-12

100

120

140

160

180

70

75

80

85

90

95

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

20

40

60

80

Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13

(%)

6
40 45 50 55 60 65 70
100 10 20 30 40 50 60 70 80 90

PMI

10,000
Jan-08

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

5,000

Feb-11
(%)

0
Jul-08

Apr-99 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12

VIX

Apr-11

Source: Bloomberg

Mar-00
Jan-09 Jul-09

Chartbook...

Volatility Index

Sensex PE Band

Feb-01

Jan-02
India Germany
Jan-10 Jul-10 Jan-11 Jul-11

Dec-02

Nov-03

Oct-04

Sep-05 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13

China

Aug-06

Jul-07
Jan-12 Jul-12 Jan-13 Jul-13

Euro Zone US

Jun-08

May-09

Apr-10 Jun-13 Aug-13 Oct-13

200 300 400 500

Mar-11

Feb-12
Jan-14

Jan-13

21x

13x

17x

Dec-13

PE (x)

Dow Jones

PE Comparision

Nasdaq

S&P 500

US Initial Jobless Claims

FTSE

India Infoline Weekly Wrap

Cur. Yr

DAX

Hang Seng

Shanghai Comp

Initial Jobless Claims ('000)

1-Yr Fwd

Mexico Bolsa

Taiwan

Straits

Sensex

5x

9x

600

700

800

10.00

12.00

14.00

16.00

18.00

20.00

22.00

Nov-12
(Rs)

Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Sep-13

FY14

Sensex Earning Estimates

Oct-13 Nov-13 Dec-13 Jan-14

1,180

1,200

1,220

1,240

1,260

1,280

1,300

6.00

8.00

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

India Infoline Weekly Wrap

News Recap
The Reserve Bank of India barred banks from offering gold loans worth more than 75% of the value of gold jewellery and ornaments. It is felt the move is aimed at ensuring a level playing field between banks and non-banking financial companies offering such loans. (BS) The Maharashtra government announced a 20% cut in power tariffs for all industrial, agricultural, commercial and domestic consumers in the state except Mumbai. (ET) The Reserve Bank of India must retain the objective of supporting economic growth as it battles price rises, Finance Minister P Chidambaram said, signalling challenges in implementing a proposed shift to target inflation. (BS) The National Advisory Council headed by Sonia Gandhi has asked the government to look into the policy on gold imports following complaints of an alarming increase in its smuggling, a development that could lead authorities to ease the curbs imposed on gold. (ET) Credit growth in the country continues to be behind deposit growth. The Reserve Bank of Indias data shows credit grew by 14.85% y-o-y as on January 10. On a fortnight basis ending on January the credit grew by 0.59%, while deposits recorded a growth of 0.63%. (BS) As the Indian authorities clamp on clinical trials, Biocon has been forced to move various Indian projects to the US and Europe. (BS) In a validation of Reliance Industries stand, an expert committee led by former finance secretary Vijay Kelkar has said that there is little incentive for oil and gas explorers to gold plate costs or wilfully under-produce. (ET) Asian Development Banks loan to Tata Powers Coastal Gujarat Power, which owns the Mundra ultra mega power project, has come under the scanner of the multi-lateral agencys own Compliance Review Panel, which has questioned whether the funding was conforming to ADBs policies. (ET) The Environment ministry, under Moily, has cleared major Coal India (CIL) projects, including subsidiary Central Coalfields Kathara open cast mine, which had been awaiting clearance since 2008. Other CIL projects Western Coalfields Chhinda expansion, Bhakra underground and Ukni deep- opencast projects; and Bharat Coking Coals Dhanbad project will also benefit from the new rules. (BS) Wipro Ltd is facing troubled times with its telecom business. Wipro, which acquired Nokias mobile TV unit in 2009 for an undisclosed sum, has shut down this business amid lack of this technology adoption in Europe and a clash for content with telecom operators who have their own streaming services. (BL) Tech Mahindra is close to making a small acquisition in the financial space. (ET) Tata Motors launched a new Vista hatchback with enhanced features promising a superior driving experience. (BL) Aditya Birla Nuvo is in talks with a private equity consortium led by Sanjay Chakrabarty to sell its business process outsourcing firm, Minacs, for US$250mn. (BS) Tata Power Delhi Distribution Ltd, one of the three private power distribution companies in Delhi, has said the Delhi government has failed to communicate the terms of reference for its audit by the CAG despite repeated reminders. (BS) Domestic airlines flew 5.586mn passengers in December 2013 registering a growth of 3.36% over the 5.404mn passengers carried by them in December 2012. (BL)

Event Calendar
Period: 27th 31st January
US New home sales (27 Jan) Fed QE3 Pace (30 Jan) FOMC Rate Decision (30 Jan) GDP Annualized QoQ (30 Jan)

Period: 3rd 7st February

US Nonfarm Productivity (6 Feb) Change in Nonfarm Payrolls (7 Feb) Unemployment Rate (7 Feb)

India Dec Eight Infrastructure Industries (27 Jan) RBI policy meet (28 Jan) Dec Fiscal Deficit (31 Jan)

India Jan HSBC/Markit Manufacturing & Service PMI (3 Feb) China Non-manufacturing PMI (3 Feb) HSBC/Markit Services PMI (5 Feb) Europe Retail Sales YoY (5 Feb) ECB Announces Interest Rates (6 Feb)

China Industrial Profits YTD YoY (27 Jan) Europe Unemployment Rate (31 Jan) CPI Core YoY (31 Jan)

IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013 The information in this newsletter is generally provided from the press reports, electronic media, research, websites and other media. The information also includes information from interviews conducted, analysis, views expressed by our research team. Investors should not rely solely on the information contained in this publication and must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary. The materials and information provided by this newsletter are not, and should not be construed as an advice to buy or sell any of the securities named in this newsletter. India Infoline may or may not hold positions in any of the securities named in this newsletter as a part of its business. Past performance is not necessarily an indication of future performance. India Infoline does not assure for accuracy or correctness of information or reports in the newsletter.